ACNB CORP - Annual Report: 2022 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
| (Mark One) | |||||
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year-ended December 31, 2022
OR
| ☐ | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 1-35015
ACNB CORPORATION
(Exact name of registrant as specified in its charter)
| Pennsylvania | 23-2233457 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
16 Lincoln Square, Gettysburg, Pennsylvania | 17325 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (717) 334-3161
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $2.50 par value per share | ACNB | The NASDAQ Stock Market, LLC | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | ☒ | Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||||||||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by nonaffiliates of the registrant at June 30, 2022, was approximately $248,708,346.
The number of shares of the registrant’s common stock outstanding on March 3, 2023, was 8,514,970.
Documents Incorporated by Reference
Portions of the registrant’s 2023 definitive Proxy Statement are incorporated by reference into Part III of this report.
ACNB CORPORATION
Table of Contents
| Page | ||||||||
| Part I | ||||||||
| Part II | ||||||||
| Part III | ||||||||
| Part IV | ||||||||
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PART I
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-K may contain forward-looking statements. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of Management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Corporation’s market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. Forward-looking statements are subject to certain risks and uncertainties such as national, regional and local economic conditions, competitive factors, and regulatory limitations. Actual results may differ materially from those projected in the forward-looking statements. Such risks, uncertainties, and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: short-term and long-term effects of inflation and rising costs on the Corporation, customers and economy; effects of governmental and fiscal policies, as well as legislative and regulatory changes; effects of new laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and their application with which the Corporation and its subsidiaries must comply; impacts of the capital and liquidity requirements of the Basel III standards; effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters; ineffectiveness of the business strategy due to changes in current or future market conditions; future actions or inactions of the United States government, including the effects of short-term and long-term federal budget and tax negotiations and a failure to increase the government debt limit or a prolonged shutdown of the federal government; effects of economic conditions particularly with regard to the negative impact of lingering effects of Coronavirus Disease 2019 (COVID-19) and any other pandemic, epidemic or health-related crisis and the responses thereto on the operations of the Corporation and current customers, specifically the effect of the economy on loan customers’ ability to repay loans; effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; inflation, securities market and monetary fluctuations; risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate protection agreements, as well as interest rate risks; difficulties in acquisitions and integrating and operating acquired business operations, including information technology difficulties; challenges in establishing and maintaining operations in new markets; effects of technology changes; effects of general economic conditions and more specifically in the Corporation’s market areas; failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities; acts of war or terrorism or geopolitical instability; disruption of credit and equity markets; ability to manage current levels of impaired assets; loss of certain key officers; ability to maintain the value and image of the Corporation’s brand and protect the Corporation’s intellectual property rights; continued relationships with major customers; and, potential impacts to the Corporation from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses. We caution readers not to place undue reliance on these forward-looking statements. They only reflect Management’s analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
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ITEM 1—BUSINESS
ACNB CORPORATION
ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, is the financial holding company for the wholly-owned subsidiaries of ACNB Bank (Bank), Gettysburg, Pennsylvania, and ACNB Insurance Services, Inc., formerly Russell Insurance Group, Inc., Westminster, Maryland. Originally founded in 1857, ACNB Bank serves its marketplace with banking and wealth management services, including trust and retail brokerage, via a network of 26 community banking offices and three loan offices located in the Pennsylvania counties of Adams, Cumberland, Franklin, Lancaster and York and the Maryland counties of Baltimore, Carroll, and Frederick. ACNB Insurance Services, Inc., the Corporation’s insurance subsidiary, is a full-service agency with licenses in 44 states. The agency offers a broad range of property, casualty, health, life and disability insurance serving personal and commercial clients through office locations in Westminster and Jarrettsville, Maryland, and Gettysburg, Pennsylvania.
ACNB Corporation was formed in 1982, then became the bank holding company for Adams County National Bank (now ACNB Bank) in 1983. The Corporation purchased Russell Insurance Group, Inc. (now ACNB Insurance Services, Inc.), its insurance subsidiary, in 2005. On July 1, 2017, ACNB Corporation completed the acquisition of New Windsor Bancorp, Inc. and its wholly-owned subsidiary, New Windsor State Bank, a Maryland state-chartered, FDIC-insured community bank headquartered in Taneytown, Maryland. On January 11, 2020, ACNB completed its acquisition of Frederick County Bancorp, Inc. (FCBI) and its wholly-owned subsidiary, Frederick County Bank, a Maryland state-chartered, FDIC-insured community bank headquartered in Frederick, Maryland. On February 28, 2022, ACNB Insurance Services, Inc. completed the acquisition of the business and assets of Hockley & O’Donnell Insurance Agency, LLC, Gettysburg, PA.
ACNB’s major source of unconsolidated operating funds is dividends that it receives from its subsidiaries. ACNB’s unconsolidated expenses consist principally of losses from low-income housing investments. Dividends that ACNB pays to stockholders consist of dividends declared and paid to ACNB by the subsidiary bank, ACNB Bank.
ACNB and its subsidiaries are not dependent upon a single customer or a small number of customers, the loss of which would have a material adverse effect on the Corporation. ACNB does not depend on foreign sources of funds, nor does it make foreign loans.
The common stock of ACNB is listed on The NASDAQ Capital Market under the symbol ACNB.
BANKING SUBSIDIARY
ACNB Bank
ACNB Bank is a full-service commercial bank operating under charter from the Pennsylvania Department of Banking and Securities. The Bank’s principal market areas include Adams County, Pennsylvania, and its environs in southcentral Pennsylvania, as well as Carroll County and Frederick County, Maryland, in northern Maryland. This geographic area depends on agriculture, industry, tourism, education and healthcare to provide employment for its residents. No single sector dominates the area’s economy. At December 31, 2022, ACNB Bank had total assets of $2,487,000,000, total gross loans of $1,539,000,000, total deposits of $2,201,000,000, and total equity capital of $226,000,000. In October 2010, the Bank converted from a national banking association to a Pennsylvania state-chartered bank and trust company.
The main community banking office of the Bank is located at 16 Lincoln Square, Gettysburg, Pennsylvania. In addition to its main office, as of December 31, 2022, the Bank has a total of 16 community banking offices in Pennsylvania, including 9 offices in Adams County, five offices in York County, one office in Cumberland County, and one office in Franklin County. There are also loan production offices situated in Lancaster and York, Pennsylvania, and Hunt Valley, Maryland. NWSB Bank, a division of ACNB Bank, serves its local marketplace via a network of five community banking offices located in Carroll County, Maryland. FCB Bank, a division of ACNB Bank, serves its marketplace via a network of four community banking offices located in Frederick County, Maryland. Effective January 1, 2023, NWSB Bank and FCB Bank, formally adopted the ACNB Bank name and brand identity in the counties of Carroll and Frederick in northern Maryland, respectively. The Bank’s service delivery channels for its customers also include the ATM network, Customer Contact Center, and Online, Telephone and Mobile Banking. The Bank is subject to regulation and periodic examination by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (FDIC). The FDIC, as provided by law, insures the Bank’s deposits.
Commercial lending includes commercial mortgages, real estate development and construction loans, accounts receivable and inventory financing, and agricultural and governmental loans. Consumer lending programs include home equity loans and lines of credit, automobile and recreational vehicle loans, manufactured housing loans, and personal lines of credit. Mortgage lending programs include personal residential mortgages, residential construction loans, and investment mortgage loans.
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A trust is a legal fiduciary agreement whereby ACNB Bank, through its Trust & Investment Services function, is named as trustee of financial assets. As trustee, ACNB Bank invests, protects, manages and distributes financial assets as defined in the agreement. Estate settlement governed by the last will and testament of an individual constitutes another line of business for ACNB Bank Trust & Investment Services. One purpose of having a will is to name an executor to settle the estate. ACNB Bank has the knowledge and expertise to act as executor. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, powers of attorney, custodial accounts, and investment management and advisory accounts. Total trust assets under management were $310,600,000 at December 31, 2022.
In addition to ACNB Bank Trust & Investment Services, under the umbrella of ACNB Wealth Management, the Bank offers retail brokerage services through a third-party provider as a result of the acquisition of New Windsor State Bank effective July 1, 2017. This third-party provider is a broker/dealer, unaffiliated with ACNB Bank. At December 31, 2022, total assets under management with the broker/dealer were $208,200,000.
NONBANKING SUBSIDIARIES
ACNB Insurance Services, Inc.
On January 6, 2022, ACNB Corporation announced the name change and rebranding of the insurance subsidiary to ACNB Insurance Services, Inc. from Russell Insurance Group, Inc. effective January 1, 2022. This rebranding reinforces the common ownership by ACNB Corporation of both ACNB Bank and the insurance agency, as well as makes this affiliation more visible for businesses and consumers in order to leverage cross-selling opportunities in the shared communities served.
On February 28, 2022, ACNB Insurance Services, Inc. completed its acquisition of Hockley & O’Donnell Insurance Agency, LLC, located in Gettysburg, Pennsylvania.
ACNB Corporation’s wholly-owned subsidiary, ACNB Insurance Services, Inc., is a full-service insurance agency that offers a broad range of property, casualty, health, life and disability insurance to both commercial and individual clients with licenses in 44 states. Based in Westminster, Maryland, ACNB Insurance Services, Inc., has served the needs of its clients since its founding as an independent insurance agency by Frank C. Russell, Jr. in 1978. The agency was purchased by the Corporation in 2005. ACNB Insurance Services, Inc. operates additional locations in Jarrettsville, Maryland, and Gettysburg, Pennsylvania. Total assets of ACNB Insurance Services, Inc. as of December 31, 2022, were $20,154,000.
ACNB Insurance Services, Inc. is managed separately from the banking and related financial services that the Corporation offers and is reported as a separate segment. Financial information on this segment is included in the Notes to Consolidated Financial Statements, Note S — “Segment and Related Information”.
MARKET AREA ECONOMIC FEATURES AND CONDITIONS
ACNB Corporation’s major operations are in the more rural and small town areas of the Harrisburg-Carlisle MSA and the York-Hanover MSA in Pennsylvania, along with all of Adams County, Pennsylvania, parts of Franklin County, Pennsylvania, and all of Carroll County and Frederick County, Maryland. Major types of employers include those focused on manufacturing, education, healthcare, agriculture, tourism, and transportation/warehousing, as well as local governments. A material amount of land surrounding Gettysburg, Pennsylvania, is under the control of the National Park Service, limiting certain types of development. Unemployment figures in the subsidiary bank’s market recently, and historically, have been better than those for Pennsylvania and Maryland as a whole, and similar to the United States. Per capita and household incomes are generally under Pennsylvania averages. The unemployment rate during 2022 averaged 3.24% in the subsidiary bank’s six-county marketplace, while it was 4.13% overall in Pennsylvania and Maryland, and 3.64% in the United States.
COMPETITION
The financial services industry in ACNB’s market area is highly competitive, including competition for similar products and services from commercial banks, thrifts, credit unions, finance and mortgage companies, and other nonbank providers of financial services. Several of ACNB’s competitors have legal lending limits that exceed those of ACNB’s subsidiary bank, as well as funding sources in the capital markets that exceed ACNB’s availability. The high level of competition has resulted from changes in the legal and regulatory environment, as well as from the economic climate, customer expectations, and service alternatives via the internet.
SUPERVISION AND REGULATION
Regulation of Bank Holding Company and Subsidiaries
BANK HOLDING COMPANY ACT OF 1956 — ACNB is a financial holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956. Bank holding
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companies are required to file periodic reports with and are subject to examination by the Federal Reserve.
The Federal Reserve has issued regulations under the Bank Holding Company Act that require a financial holding company to serve as a source of financial and managerial strength to its subsidiary bank. As a result, the Federal Reserve may require ACNB to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity. In addition, the Federal Reserve may require a financial holding company to end a nonbanking business if the nonbanking business constitutes a serious risk to the financial soundness and stability of any banking subsidiary of the financial holding company.
The Bank Holding Company Act prohibits ACNB from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any bank, or substantially all of the assets of any bank, or merging with another bank holding company, without the prior approval of the Federal Reserve. The Bank Holding Company Act allows interstate bank acquisitions and interstate branching by acquisition and consolidation in those states that had not elected to opt out by the required deadline. The Pennsylvania Department of Banking and Securities also must approve any similar consolidation. Pennsylvania law permits Pennsylvania financial holding companies to control an unlimited number of banks.
Further, the Bank Holding Company Act restricts ACNB’s nonbanking activities to those that are determined by the Federal Reserve Board to be financial in nature, incidental to such financial activity, or complementary to a financial activity. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbanking subsidiaries of financial holding companies.
GRAMM-LEACH-BLILEY ACT OF 1999 (GLBA) — The Gramm-Leach-Bliley Act of 1999 eliminated many of the restrictions placed on the activities of bank holding companies that become financial holding companies. Among other things, the Gramm-Leach-Bliley Act repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the Bank Holding Company Act to permit bank holding companies that are financial holding companies to engage in activities, and acquire companies engaged in activities, that are: financial in nature (including insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities); incidental to financial activities; or, complementary to financial activities if the Federal Reserve determines that they pose no substantial risk to the safety or soundness of depository institutions or the financial system in general.
REGULATION W — Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act, and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules, but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. ACNB Corporation and ACNB Insurance Services, Inc. are considered to be affiliates of ACNB Bank.
USA PATRIOT ACT OF 2001 (USA PATRIOT Act) — In October 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The USA PATRIOT Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The impact of the USA PATRIOT Act on financial institutions of all kinds is significant and wide ranging. The USA PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
SARBANES-OXLEY ACT OF 2002 (SOA) — In 2002, the Sarbanes-Oxley Act of 2002 became law. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly-traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities law.
The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, or the Exchange Act.
The SOA includes very specific additional disclosure requirements and corporate governance rules, as well as requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance, and other related rules. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
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The SOA addresses, among other matters:
•Audit committees for all reporting companies;
•Certification of financial statements by the chief executive officer and the chief financial officer;
•The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement;
•A prohibition on insider trading during pension plan blackout periods;
•Disclosure of off-balance sheet transactions;
•A prohibition on personal loans to directors and officers;
•Expedited filing requirements for SEC Forms 4;
•Disclosure of a code of ethics and filing an SEC Form 8-K for a change or waiver of such code;
•“Real time” filing of periodic reports;
•Formation of a public accounting oversight board;
•Auditor independence; and,
•Increased criminal penalties for violations of securities laws.
The SEC has been delegated the task of enacting rules to implement various provisions of the SOA with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.
BANK SECRECY ACT (BSA) — Under the Bank Secrecy Act, banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which a bank is aware in any one day that aggregate in excess of $10,000 and to report suspicious transactions under specified criteria. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA, or for filing a false or fraudulent report.
The Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. Effective May 11, 2018, the Bank began compliance with the new Customer Due Diligence Rule, which clarified and strengthened the existing obligations for identifying new and existing customers and includes risk-based procedures for conducting ongoing customer due diligence. All financial institutions are also required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Corporation’s banking subsidiary has a BSA and USA PATRIOT Act compliance program commensurate with its risk profile and appetite.
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK) — In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Dodd-Frank was intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally created a new independent federal regulator to administer federal
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consumer protection laws. Dodd-Frank has had and will continue to have a significant impact on ACNB’s business operations as its provisions take effect. It is expected that, as various implementing rules and regulations are released, they will increase ACNB’s operating and compliance costs and could increase the Bank’s interest expense. Among the provisions that are likely to affect ACNB are the following:
Holding Company Capital Requirements
Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets as of December 31, 2009. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion, consistent with safety and soundness. For further information, please refer to Regulatory Capital Changes in Management’s Discussion and Analysis.
Deposit Insurance
Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions, and credit unions to $250,000 per depositor. Dodd-Frank also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank required the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Dodd-Frank also eliminated the federal statutory prohibition against the payment of interest on business checking accounts.
Corporate Governance
Dodd-Frank requires publicly-traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by stockholders. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Prohibition Against Charter Conversions of Troubled Institutions
Dodd-Frank prohibits a depository institution from converting from a state to a federal charter, or vice versa, while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.
Interstate Branching
Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.
Limits on Interstate Acquisitions and Mergers
Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition—the acquisition of a bank outside its home state—unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.
Limits on Interchange Fees
Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over
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$10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
Consumer Financial Protection Bureau
Dodd-Frank created the independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE — Pursuant to Dodd-Frank as highlighted above, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine the consumer’s ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and, (8) credit history. Alternatively, the mortgage lender can originate “qualified mortgages”, which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages and, as a result, generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g., subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g., prime loans) are given a safe harbor of compliance. The impact of the final rule, and the subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential effects on the Corporation’s business.
DEPARTMENT OF DEFENSE MILITARY LENDING RULE — In 2015, the U.S. Department of Defense issued a final rule which restricts pricing and terms of certain credit extended to active duty military personnel and their families. This rule, which was implemented effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage rate of 36% and restricts other fees. The rule requires financial institutions to verify whether customers are military personnel subject to the rule. The impact of this final rule, and any subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential effects on the Corporation’s business.
FEDERAL DEPOSIT INSURANCE CORPORATION ACT OF 1991 — Under the Federal Deposit Insurance Corporation Act of 1991, any depository institution, including the subsidiary bank, is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy the minimum capital requirement.
FEDERAL RESERVE ACT — A subsidiary bank of a bank holding company is subject to certain restrictions and reporting requirements imposed by the Federal Reserve Act, including:
•Extensions of credit to the bank holding company, its subsidiaries, or principal stockholders;
•Investments in the stock or other securities of the bank holding company or its subsidiaries; and,
•Taking such stock or securities as collateral for loans.
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COMMUNITY REINVESTMENT ACT OF 1977 (CRA) — Under the Community Reinvestment Act of 1977, the FDIC is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community, including low- and moderate-income neighborhoods, which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, merger, or acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the FDIC make publicly available the evaluation of a bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. This evaluation includes a descriptive rating like “outstanding”, “satisfactory”, “needs to improve” or “substantial noncompliance” and a statement describing the basis for the rating. These ratings are publicly disclosed.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA) — The Federal Deposit Insurance Corporation Improvement Act requires that institutions be classified, based on their risk-based capital ratios, into one of five defined categories, as follows and as illustrated below: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized.
| Total Risk-Based Ratio | Tier 1 Risk-Based Ratio | Tier 1 Leverage Ratio | Under a Capital Order or Directive | ||||||||||||||||||||
| Capital Category | |||||||||||||||||||||||
| Well capitalized | ≥10.0 | % | ≥6.0 | % | ≥5.0 | % | NO | ||||||||||||||||
| Adequately capitalized | ≥8.0 | % | ≥4.0 | % | ≥4.0 | %* | |||||||||||||||||
| Undercapitalized | <8.0 | % | <4.0 | % | <4.0 | %* | |||||||||||||||||
| Significantly undercapitalized | <6.0 | % | <3.0 | % | <3.0 | % | |||||||||||||||||
| Critically undercapitalized | <2.0 | % | |||||||||||||||||||||
_______________________________
* 3.0% for those banks having the highest available regulatory rating.
In the event an institution’s capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including the institution of a capital restoration plan and a guarantee of the plan by a parent institution and the placement of a hold on increases in assets, number of branches, or lines of business. If capital reaches the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management, and, in critically undercapitalized situations, appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention when the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards established by Federal Reserve Board regulations.
In July 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 began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:
•A minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%.
•A minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%.
•A minimum ratio of total capital to risk-weighted assets of 8.0%.
•A minimum leverage ratio of 4.0%.
In addition, the final rules established a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.
A discussion of how these capital rules affect ACNB Corporation appears under Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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JUMPSTART OUR BUSINESS STARTUPS ACT (JOBS ACT) — In 2012, the JOBS Act became law. The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes:
•Raising the threshold requiring registration under the Securities Exchange Act of 1934 (Exchange Act) for banks and bank holding companies from 500 to 2,000 holders of record;
•Raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;
•Raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws;
•Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
•Allowing private companies to use “crowd funding” to raise up to $1 million in any 12-month period, subject to certain conditions; and,
•Creating a new category of issuer, called an “Emerging Growth Company”, for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity initial public offering (IPO) and complying with public company reporting obligations for up to five years.
To date, the JOBS Act has not had an immediate application to the Corporation, and has had no material impact to the Corporation, its assets or its operations. Management will continue to monitor the implementation rules for potential effects which might benefit the Corporation.
Dividends
ACNB is a legal entity separate and distinct from its subsidiary bank. ACNB’s revenues, on a parent company only basis, result primarily from dividends paid to the Corporation by its subsidiaries. Federal and state laws regulate the payment of dividends by ACNB’s subsidiary bank and state laws effect dividends by ACNB’s insurance subsidiary. For further information, please refer to Regulation of Bank below.
Regulation of Bank
The operations of the subsidiary bank are subject to statutes applicable to banks chartered under the banking laws of Pennsylvania, to state nonmember banks of the Federal Reserve, and to banks whose deposits are insured by the FDIC. The subsidiary bank’s operations are also subject to regulations of the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC.
The Pennsylvania Department of Banking and Securities, which has primary supervisory authority over banks chartered in Pennsylvania, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. The subsidiary bank is also subject to examination by the FDIC for safety and soundness, as well as consumer compliance. These examinations are designed for the protection of the subsidiary bank’s depositors rather than ACNB’s stockholders. The subsidiary bank must file quarterly and annual reports to the Federal Financial Institutions Examination Council, or FFIEC.
Monetary and Fiscal Policy
ACNB and its subsidiary bank are affected by the monetary and fiscal policies of government agencies, including the Federal Reserve and FDIC. Through open market securities transactions and changes in its discount rate and reserve requirements, the Board of Governors of the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. The nature and impact of monetary and fiscal policies on future business and earnings of ACNB cannot be predicted at this time. From time to time, various federal and state legislation is proposed that could result in additional regulation of, and restrictions on, the business of ACNB and the subsidiary bank, or otherwise change the business environment. Management cannot predict whether any of this legislation will have a material effect on the business of ACNB.
ACCOUNTING POLICY DISCLOSURE
Disclosure of the Corporation’s significant accounting policies is included in Note A — “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements. Some of these policies are particularly sensitive
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requiring significant judgments, estimates and assumptions to be made by management. Additional information is contained in Management’s Discussion and Analysis for the most sensitive of these issues, including the provision and allowance for loan losses which is located in Note D — “Loans and Allowance for Loan Losses” in the Notes to Consolidated Financial Statements.
Management, in determining the allowance for loan losses, makes significant judgments. Consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan review, financial and managerial strengths of borrowers, adequacy of collateral if collateral dependent or present value of future cash flows, and other relevant factors.
STATISTICAL DISCLOSURES
The following statistical disclosures are included in Management’s Discussion and Analysis, Item 7 hereof, and are incorporated by reference in this Item 1:
•Interest Rate Sensitivity Analysis
•Interest Income and Expense, Volume and Rate Analysis
•Investment Portfolio
•Loan Maturity and Interest Rate Sensitivity
•Loan Portfolio
•Allocation of Allowance for Loan Losses
•Deposits
•Short-Term Borrowings
AVAILABLE INFORMATION
The Corporation maintains a website on the Internet at investor.acnb.com. The Corporation makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Corporation’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or other SEC filings. The information available at the Corporation’s Internet address is not part of this Form 10-K or any other report filed by the Corporation with the SEC. The Corporation’s SEC filings can also be obtained on the SEC’s website on the Internet at https://www.sec.gov.
EMPLOYEES
As of December 31, 2022, ACNB had 397 full-time equivalent employees. None of these employees are represented by a collective bargaining agreement, and ACNB believes it enjoys good relations with its personnel.
ACQUISITIONS
ACNB Corporation and its subsidiaries have pursued organic and inorganic growth strategies. In pursuit of the inorganic growth strategy, on July 1, 2017, ACNB acquired New Windsor Bancorp, Inc. and its wholly-owned subsidiary, New Windsor State Bank, headquartered in Taneytown, Maryland. Additionally, on January 11, 2020, ACNB acquired Frederick County Bancorp, Inc. and its wholly-owned subsidiary, Frederick County Bank, headquartered in Frederick, Maryland.
On February 28, 2022, ACNB Insurance Services, Inc., the wholly owned insurance subsidiary of ACNB Corporation, acquired Hockley & O’Donnell Insurance Agency, LLC, located in Gettysburg, Pennsylvania. The purchase price was $7,800,000 and was funded with all cash and no additional contingent payments were required.
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ITEM 1A—RISK FACTORS
CREDIT RISKS
ACNB IS SUBJECT TO INTEREST RATE RISK.
ACNB’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond ACNB’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the amount of interest ACNB receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) ACNB’s ability to originate loans and obtain deposits, (ii) the fair value of ACNB’s financial assets and liabilities, and (iii) the average duration of ACNB’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, ACNB’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on ACNB’s results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on ACNB’s financial condition and results of operations.
ACNB IS SUBJECT TO CREDIT RISK.
As of December 31, 2022, approximately 70% of ACNB’s loan portfolio consisted of commercial and industrial, construction, and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because ACNB’s loan portfolio contains a significant number of commercial and industrial, construction, and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on ACNB’s financial condition and results of operations.
ACNB’S ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT.
ACNB maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of the following: industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and, unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires ACNB to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of ACNB’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review ACNB’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Further, if charge-offs in future periods exceed the allowance for loan losses, ACNB will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income, and possibly capital, and may have a material adverse effect on ACNB’s financial condition and results of operations.
BUSINESS RISKS
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT ACNB’S PROFITABILITY.
ACNB’s banking subsidiary faces substantial competition in originating both commercial and consumer loans. This competition comes principally from other banks, credit unions, mortgage banking companies, and other lenders. Many of its competitors enjoy advantages, including greater financial resources with higher lending limits, wider geographic presence, more branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, and lower
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origination and operating costs. This competition could reduce the Corporation’s net income by decreasing the number and size of loans that its banking subsidiary originates and the interest rates it may charge on these loans.
In attracting business and consumer deposits, its banking subsidiary faces substantial competition from other insured depository institutions such as banks, savings institutions, and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of ACNB’s competitors enjoy advantages, including greater financial resources, wider geographic presence, more aggressive marketing campaigns, better brand recognition, more branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, and lower origination and operating costs. These competitors may offer higher interest rates than ACNB, which could decrease the deposits that it attracts or require it to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect the subsidiary’s ability to generate the funds necessary for lending operations. As a result, it may need to seek other sources of funds that may be more expensive to obtain and could increase its cost of funds.
ACNB’s banking subsidiary also competes with nonbank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance companies and agencies, and governmental organizations which may offer more favorable terms. Some of its nonbank competitors are not subject to the same extensive regulations that govern ACNB’s banking operations. As a result, such nonbank competitors may have advantages over ACNB’s banking subsidiary in providing certain products and services. This competition may reduce or limit ACNB’s margins on banking services, reduce its market share, and adversely affect its earnings and financial condition.
THE BASEL III CAPITAL REQUIREMENTS MAY REQUIRE ACNB TO MAINTAIN HIGHER LEVELS OF CAPITAL, WHICH COULD REDUCE ACNB’S PROFITABILITY.
Basel III targets higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over future years and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support the Corporation’s business risk profile prior to final implementation of the Basel III standards. If ACNB and the subsidiary bank are required to maintain higher levels of capital, ACNB and the subsidiary bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to ACNB and the subsidiary bank and adversely impact ACNB’s financial condition and results of operations.
THE CORPORATION’S OPERATIONS OF ITS BUSINESS, INCLUDING ITS TRANSACTIONS WITH CUSTOMERS, ARE INCREASINGLY DONE VIA ELECTRONIC MEANS, AND THIS HAS INCREASED ITS RISKS RELATED TO CYBERSECURITY.
The Corporation is exposed to the risk of cyberattacks in the normal course of business. In addition, the Corporation is exposed to cyberattacks on vendors and merchants that affect the Corporation and its customers. In general, cyber incidents can result from deliberate attacks or unintentional events. The Corporation has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible security breach of its information systems. While ACNB maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. While the Corporation has not incurred any material losses related to cyberattacks, nor is it aware of any specific or threatened cyber incidents as of the date of this report, it may incur substantial costs and suffer other negative consequences if it falls victim to successful cyberattacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; disruption or failures of physical infrastructure, operating systems or networks that support ACNB’s business and customers resulting in the loss of customers and business opportunities; additional regulatory scrutiny and possible regulatory penalties; litigation; and, reputational damage adversely affecting customer or investor confidence.
ACNB’S CONTROLS AND PROCEDURES MAY FAIL OR BE CIRCUMVENTED.
Management regularly reviews and updates ACNB’s internal controls, disclosure controls, and procedures, as well as corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any
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failure or circumvention of ACNB’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on ACNB’s business, financial condition, and results of operations.
ACNB’S ABILITY TO PAY DIVIDENDS DEPENDS PRIMARILY ON DIVIDENDS FROM ITS BANKING SUBSIDIARY, WHICH ARE SUBJECT TO REGULATORY LIMITS AND THE BANKING SUBSIDIARY PERFORMANCE.
ACNB is a financial holding company and its operations are conducted by its subsidiaries. Its ability to pay dividends depends on its receipt of dividends from its subsidiaries. Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of its subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures, and other cash flow requirements. There is no assurance that its subsidiaries will be able to pay dividends in the future or that ACNB will generate adequate cash flow to pay dividends in the future. ACNB’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.
NEW LINES OF BUSINESS OR NEW PRODUCTS AND SERVICES MAY SUBJECT ACNB TO ADDITIONAL RISKS.
From time to time, ACNB may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, ACNB may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of ACNB’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on ACNB’s business, financial condition, and results of operations.
ACNB MAY NOT BE ABLE TO ATTRACT AND RETAIN SKILLED PEOPLE.
ACNB’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by ACNB can be intense, and ACNB may not be able to hire people or to retain them. The unexpected loss of services of one or more of ACNB’s key personnel could have a material adverse impact on ACNB’s business because the Corporation would no longer have the benefit of their skills, knowledge of ACNB’s market, as well as years of industry experience, and it would be difficult to promptly find qualified replacement personnel. ACNB and/or one of its subsidiaries currently has employment agreements, including covenants not to compete, with the following named executive officers: its President & Chief Executive Officer; Executive Vice President/Secretary & Chief Governance Officer; Executive Vice President/Treasurer & Chief Financial Officer; and, the Executive Vice President/Chief Lending & Revenue Officer of ACNB Bank.
ACNB IS SUBJECT TO CLAIMS AND LITIGATION PERTAINING TO FIDUCIARY RESPONSIBILITY.
From time to time, customers make claims and take legal action pertaining to ACNB’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to ACNB’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to ACNB, they may result in significant financial liability and/or adversely affect the market perception of ACNB and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on ACNB’s business, which, in turn, could have a material adverse effect on ACNB’s financial condition and results of operations.
IF ACNB CONCLUDES THAT THE DECLINE IN VALUE OF ANY OF ITS AVAILABLE FOR SALE OR HELD TO MATURITY INVESTMENT SECURITIES IS AN OTHER-THAN-TEMPORARY IMPAIRMENT, ACNB IS REQUIRED TO WRITE DOWN THE VALUE OF THAT SECURITY THROUGH A CHARGE TO EARNINGS.
ACNB reviews its investment securities portfolio at each quarter-end to determine whether the fair value is below the current carrying value. When the fair value of any of its investment securities has declined below its carrying value, ACNB is required to assess whether the decline is an other-than-temporary impairment. If ACNB determines that the decline is an other-than-temporary impairment, it is required to write down the value of that security through a charge to earnings for credit related impairment. Non-credit related reductions in the value of a security do not require a write down of the value through earnings unless ACNB intends to, or is required to, sell the security. Changes in the expected cash flows related to the credit related piece of the investment of a security in ACNB’s investment portfolio or a prolonged price decline may result in ACNB’s
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conclusion in future periods that an impairment is other than temporary, which would require a charge to earnings to write down the security to fair value. Due to the complexity of the calculations and assumptions used in determining whether an asset has an impairment that is other than temporary, the impairment disclosed may not accurately reflect the actual impairment in the future.
ACNB IS SUBJECT TO POTENTIAL IMPAIRMENT OF GOODWILL AND INTANGIBLES.
ACNB has certain long-lived assets including purchased intangible assets subject to amortization 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.
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.
Goodwill, which has an indefinite useful life, is evaluated pursuant to ASC Topic 350, Intangibles — Goodwill and Other, 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. 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. ACNB performs an annual evaluation to determine if there is goodwill impairment.
ACNB IS SUBJECT TO ENVIRONMENTAL LIABILITY RISK ASSOCIATED WITH LENDING ACTIVITIES.
A significant portion of ACNB’s banking subsidiary loan portfolio is secured by real property. During the ordinary course of business, ACNB may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, ACNB may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require ACNB to incur substantial expense and may materially reduce the affected property’s value or limit ACNB’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase ACNB’s exposure to environmental liability. Although ACNB has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on ACNB’s financial condition and results of operations.
ACNB’S INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY.
ACNB relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in ACNB’s customer relationship management, general ledger, deposit, loan and other systems. While ACNB has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Although ACNB maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. The occurrence of any failures, interruptions or security breaches of ACNB’s information systems could damage ACNB’s reputation adversely affecting customer or investor confidence, result in a loss of customer business, subject ACNB to additional regulatory scrutiny and possible regulatory penalties, or expose ACNB to civil litigation and possible financial liability, any of which could have a material adverse effect on ACNB’s financial condition and results of operations.
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STRATEGIC AND EXTERNAL RISKS
ACNB’S PROFITABILITY DEPENDS SIGNIFICANTLY ON ECONOMIC CONDITIONS IN ITS MARKET AREA AND IN THE COMMONWEALTH OF PENNSYLVANIA AND THE STATE OF MARYLAND.
ACNB’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania, the State of Maryland, and the specific local markets in which ACNB operates. Unlike larger national or other regional banks that are more geographically diversified, ACNB provides banking and financial services to customers primarily in the southcentral Pennsylvania and northern Maryland region of the country. The local economic conditions in these areas have a significant impact on the demand for ACNB’s products and services, as well as the ability of ACNB’s customers to repay loans, the value of the collateral securing the loans, and the stability of ACNB’s deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences and instability, unemployment, changes in securities markets, epidemics and pandemics (such as COVID-19) and governmental responses thereto, or other factors could impact these local economic conditions and, in turn, have a material adverse effect on ACNB’s financial condition and results of operations.
THE EARNINGS OF FINANCIAL SERVICES COMPANIES ARE SIGNIFICANTLY AFFECTED BY GENERAL BUSINESS AND ECONOMIC CONDITIONS.
ACNB’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which ACNB operates, all of which are beyond ACNB’s control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values, and a decrease in demand for ACNB’s products and services, among other things, any of which could have a material adverse impact on ACNB’s financial condition and results of operations.
The regulatory environment for the financial services industry is being significantly impacted by financial regulatory reform initiatives in the United States and elsewhere, and regulations promulgated to implement them, including Dodd-Frank.
Dodd-Frank, which was signed into law on July 21, 2010, comprehensively reforms the regulation of financial institutions, products and services. Dodd-Frank requires various federal regulatory agencies to implement numerous rules and regulations. Because the federal agencies are granted broad discretion in drafting these rules and regulations, many of the details and the impact of Dodd-Frank may not be known for many months or years.
While much of how Dodd-Frank and other financial industry reforms will change ACNB’s current business operations depends on the specific regulatory reforms and interpretations. It is clear that the reforms, both under Dodd-Frank and otherwise, will have a significant effect on the entire industry. Although Dodd-Frank and other reforms will affect a number of the areas in which ACNB does business, it is not clear at this time the full extent of the adjustments that will be required and the extent to which ACNB will be able to adjust its businesses in response to the requirements. Although it is difficult to predict the magnitude and extent of these effects at this stage, ACNB believes compliance with Dodd-Frank and implementing its regulations and initiatives will negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and it may also limit ACNB’s ability to pursue certain business opportunities.
THE TRADING VOLUME IN ACNB’S COMMON STOCK IS LESS THAN THAT OF OTHER LARGER FINANCIAL SERVICES COMPANIES.
ACNB’s common stock trades on NASDAQ, and the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of ACNB’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which ACNB has no control. Given the lower trading volume of ACNB’s common stock, significant sales of ACNB’s common stock, and the expectation of these sales, could cause ACNB’s stock price to fall.
ACNB OPERATES IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY AFFECTED BY CHANGES IN FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS.
ACNB, primarily through its banking subsidiary, is subject to extensive regulation, supervision and/or examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on ACNB and its operations. Additional legislation and regulations that could significantly affect ACNB’s powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on its financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank and financial holding companies in the performance of
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their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on ACNB’s financial condition and results of operations.
Like other financial holding companies and financial institutions, ACNB must comply with significant anti-money laundering and anti-terrorism laws. Under these laws, ACNB is required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports. While ACNB has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
THE SOUNDNESS OF OTHER FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT ACNB.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. ACNB has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and institutional clients. Many of these transactions expose ACNB to credit risk in the event of a default by a counterparty or customer. In addition, ACNB’s credit risk may be exacerbated when the collateral held by ACNB cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to ACNB. Any such losses could have a material adverse effect on ACNB’s financial condition and results of operations.
MARKET VOLATILITY AND OTHER CONDITIONS AND FACTORS MAY HAVE MATERIALLY ADVERSE EFFECTS ON ACNB’S LIQUIDITY AND FINANCIAL CONDITION.
The capital and credit markets have experienced extreme volatility and disruption. Over the last several years, in some cases, the markets have exerted downward pressure on stock prices, security prices, and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. In addition, other conditions and factors that could materially adversely affect ACNB’s liquidity and funding including a lack of market or customer confidence in, or negative news about, ACNB or the financial services industry generally which also may result in a loss of deposits and/or negatively affect ACNB’s ability to access the capital markets; the loss of customer deposits to alternative investments; counterparty availability; interest rate fluctuations; general economic conditions; and the legal, regulatory, accounting and tax environments governing ACNB’s funding transactions. Many of the above conditions and factors may be caused by events over which ACNB has little or no control. There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Further, ACNB’s customers may be adversely impacted by such conditions, which could have a negative impact on ACNB’s business, financial condition and results of operations.
ACNB MAY NEED OR BE COMPELLED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHICH COULD DILUTE STOCKHOLDERS OR BE UNAVAILABLE WHEN NEEDED OR AT UNFAVORABLE TERMS.
ACNB’s regulators or market conditions may require it to increase its capital levels. If ACNB raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and would likely dilute the per share book value and earnings per share of its common stock. Furthermore, it may have an adverse impact on ACNB’s stock price. New investors may also have rights, preferences and privileges senior to ACNB’s current stockholders, which may adversely impact its current stockholders. ACNB’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, ACNB cannot be assured of its ability to raise additional capital on terms and/or in time frames acceptable to it, or to raise additional capital at all. If ACNB cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect ACNB’s operations, financial condition, and results of operations.
PENNSYLVANIA BUSINESS CORPORATION LAW AND VARIOUS ANTI-TAKEOVER PROVISIONS UNDER ACNB’S ARTICLES AND BYLAWS COULD IMPEDE THE TAKEOVER OF ACNB.
Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire ACNB, even if the acquisition would be advantageous to stockholders. In addition, ACNB has various anti-takeover measures in place under its articles of incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered Board of Directors, and the absence of cumulative voting. Any one or more of these measures may impede the takeover of ACNB without the approval of the Board of Directors and may prevent stockholders from taking part in a transaction in which they could realize a premium over the current market price of ACNB common stock.
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THE SEVERITY AND DURATION OF A FUTURE ECONOMIC DOWNTURN AND THE COMPOSITION OF THE BANKING SUBSIDIARY’S LOAN PORTFOLIO COULD IMPACT THE LEVEL OF LOAN CHARGE-OFFS AND THE PROVISION FOR LOAN LOSSES AND MAY AFFECT ACNB’S NET INCOME OR LOSS.
Lending money is a substantial part of ACNB’s business through its banking subsidiary. However, every loan that ACNB makes carries a certain risk of non-payment. ACNB cannot assure that its allowance for loan losses will be sufficient to absorb actual loan losses. ACNB also cannot assure that it will not experience significant losses in its loan portfolio that may require significant increases to the allowance for loan losses in the future.
Although ACNB evaluates every loan that it makes against its underwriting criteria, ACNB may experience losses by reasons of factors beyond its control. Some of these factors include changes in market conditions affecting the value of real estate and unexpected problems affecting the creditworthiness of ACNB’s borrowers.
ACNB determines the adequacy of its allowance for loan losses by considering various factors, including:
•An analysis of the risk characteristics of various classifications of loans;
•Previous loan loss experience;
•Specific loans that would have loan loss potential;
•Delinquency trends;
•Estimated fair value of the underlying collateral;
•Current economic conditions;
•The views of ACNB’s regulators;
•Reports of internal auditors;
•Reports of external auditors;
•Reports of loan reviews conducted by independent organizations; and,
•Geographic and industry loan concentrations.
Local economic conditions could impact the loan portfolio of ACNB. For example, an increase in unemployment, a decrease in real estate values, or increases in interest rates, as well as other factors, could weaken the economies of the communities ACNB serves. Weakness in the market areas served by ACNB could depress the Corporation’s earnings and, consequently, its financial condition because:
•Borrowers may not be able to repay their loans;
•The value of the collateral securing ACNB’s loans to borrowers may decline; and/or,
•The quality of ACNB’s loan portfolio may decline.
Although, based on the aforementioned procedures implemented by ACNB, management believes the current allowance for loan losses is adequate, ACNB may have to increase its provision for loan losses should local economic conditions deteriorate which could negatively impact its financial condition and results of operations.
CHANGES IN REAL ESTATE VALUES MAY ADVERSELY IMPACT ACNB’S BANKING SUBSIDIARY LOANS THAT ARE SECURED BY REAL ESTATE.
A significant portion of ACNB’s banking subsidiary loan portfolio consists of residential and commercial mortgages, as well as consumer loans, secured by real estate. These properties are concentrated in Adams County, Pennsylvania. Real estate values and real estate markets generally are affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates, the availability of loans to potential purchasers, changes in the tax laws and other government statutes, regulations and policies, and acts of nature. If real estate prices decline, particularly in ACNB’s market area, the value of the real estate collateral securing ACNB’s loans could be reduced. This reduction in the value of the collateral
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could increase the number of non-performing loans and could have a material adverse impact on ACNB’s financial condition and results of operations.
ACNB CONTINUALLY ENCOUNTERS TECHNOLOGICAL CHANGE.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. ACNB’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in ACNB’s operations. Many of ACNB’s competitors have substantially greater resources to invest in technological improvements. ACNB may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on ACNB’s business and, in turn, ACNB’s financial condition and results of operations.
FINANCIAL SERVICES COMPANIES DEPEND ON THE ACCURACY AND COMPLETENESS OF INFORMATION ABOUT CUSTOMERS AND COUNTERPARTIES.
In deciding whether to extend credit or enter into other transactions, ACNB may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. ACNB may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on ACNB’s business and, in turn, ACNB’s financial condition and results of operations.
CONSUMERS MAY DECIDE NOT TO USE BANKS TO COMPLETE THEIR FINANCIAL TRANSACTIONS.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation”, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on ACNB’s financial condition and results of operations.
FUTURE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT SECONDARY SOURCES OF LIQUIDITY.
In addition to primary sources of liquidity in the form of deposits and principal and interest payments on outstanding loans and investments, ACNB maintains secondary sources that provide it with additional liquidity. These secondary sources include secured and unsecured borrowings from sources such as the Federal Reserve Bank, Federal Home Loan Bank of Pittsburgh, and third-party commercial banks. However, market liquidity conditions have been negatively impacted by past disruptions in the capital markets and could, in the future, have a negative impact on ACNB’s secondary sources of liquidity.
SEVERE WEATHER, NATURAL DISASTERS, ACTS OF WAR OR TERRORISM, GEOPOLITICAL RISKS/EVENTS, AND OTHER EXTERNAL EVENTS COULD SIGNIFICANTLY IMPACT ACNB’S BUSINESS.
The unpredictable nature of events such as severe weather, natural disasters, acts of war or terrorism (international or domestic), geopolitical risks/events, and other adverse external events could have a significant impact on ACNB’s ability to conduct business. If any of its financial, accounting, network or other information processing systems fail or have other significant shortcomings due to external events, ACNB could be materially adversely affected. Third parties with which ACNB does business could also be sources of operational risk to ACNB, including the risk that the third parties’ own network and information processing systems could fail. Any of these occurrences could materially diminish ACNB’s ability to operate one or more of the Corporation’s businesses, or result in potential liability to customers, reputational damage, and regulatory intervention, any of which could materially adversely affect ACNB. Such events could affect the stability of ACNB’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, impair ACNB’s liquidity, cause significant property damage, result in loss of revenue, and/or cause ACNB to incur additional expenses.
ACNB may be subject to disruptions or failures of the financial, accounting, network and/or other information processing systems arising from events that are wholly or partially beyond ACNB’s control, which may include, for example, computer viruses, electrical or telecommunications outages, natural disasters, disease pandemics, damage to property or physical assets, or terrorist acts. ACNB has developed a comprehensive business continuity plan which includes plans to maintain or resume operations in the event of an emergency, such as a power outage or disease pandemic, and contingency plans in the event that
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operations or systems cannot be resumed or restored. The business continuity plan is updated as needed, periodically reviewed, and components are regularly tested. ACNB also reviews and evaluates the business continuity plans of critical third-party service providers. While ACNB believes its business continuity plan and efforts to evaluate the business continuity plans of critical third-party service providers help mitigate risks, disruptions or failures affecting any of these systems may cause interruptions in service to customers, damage to ACNB’s reputation, and loss or liability to the Corporation.
CHANGES IN CONTROL OF THE UNITED STATES GOVERNMENT AND ISSUES RELATING TO DEBT AND THE DEFICIT MAY ADVERSELY AFFECT THE CORPORATION.
Changes in elected officials in the federal government could result in significant changes or uncertainty in governmental policies, regulatory environments, spending sentiment, and many other factors and conditions, some of which could adversely impact the Corporation’s business, financial condition, and results of operations. In addition, as a result of past difficulties of the federal government to reach agreement over federal debt and issues connected with the debt ceiling, certain rating agencies placed the United States government’s long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade. The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises in which the Corporation invests and receives lines of credit on negative watch, and a downgrade of the Unites States government’s credit rating would trigger a similar downgrade in the credit rating of these government-sponsored enterprises. Furthermore, the credit rating of other entities, such as state and local governments, may also be downgraded should the United States government’s credit rating be downgraded. The impact that a credit rating downgrade may have on the national and local economy could have an adverse effect on ACNB’s financial condition and results of operations.
ACNB’S BANKING SUBSIDIARY MAY BE REQUIRED TO PAY HIGHER FDIC INSURANCE PREMIUMS OR SPECIAL ASSESSMENTS WHICH MAY ADVERSELY AFFECT ITS EARNINGS.
Poor economic conditions and the resulting bank failures increased the costs of the FDIC and adversely impacted its Deposit Insurance Fund. Any additional bank failures may prompt the FDIC to increase its premiums or to issue special assessments. ACNB is generally unable to control the amount of premiums or special assessments that its banking subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on ACNB’s financial condition and results of operations.
THE INCREASING USE OF SOCIAL MEDIA PLATFORMS PRESENTS NEW RISKS AND CHALLENGES AND THE INABILITY OR FAILURE TO RECOGNIZE, RESPOND TO, AND EFFECTIVELY MANAGE THE ACCELERATED IMPACT OF SOCIAL MEDIA COULD MATERIALLY ADVERSELY IMPACT ACNB’S BUSINESS.
There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to ACNB’s business. Consumers value readily-available information concerning businesses and their goods and services, and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to ACNB’s interests and/or may be inaccurate. The dissemination of information online could harm ACNB’s business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording ACNB an opportunity for redress or correction.
Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about ACNB’s business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by ACNB’s employees or customers could result in negative consequences such as remediation costs including training for employees, additional regulatory scrutiny, and possible regulatory penalties, litigation, or negative publicity that could damage ACNB’s reputation adversely affecting customer or investor confidence.
A NEW ACCOUNTING STANDARD MAY REQUIRE ACNB TO INCREASE ITS ALLOWANCE FOR LOAN LOSSES AND MAY HAVE A MATERIAL ADVERSE EFFECT ON ACNB’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (CECL) model. The
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new CECL model became effective for ACNB on January 1, 2023, and for interim periods for that year. Under the CECL model, ACNB will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current generally accepted accounting principles (GAAP), which delays recognition until it is probable a loss has been incurred. Accordingly, ACNB expects that the adoption of the CECL model will materially affect how ACNB determines the allowance for loan losses and could require ACNB to significantly increase the allowance. Moreover, the CECL model may create more volatility in the level of ACNB’s allowance for loan losses. If ACNB is required to materially increase the level of allowance for loan losses for any reason, such increase could adversely affect ACNB’s business, financial condition and results of operations.
Nevertheless, ACNB continues to evaluate the impact the CECL model will have on the accounting for credit losses, but ACNB expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. ACNB cannot yet determine the magnitude of such one-time cumulative-effect adjustment or of the overall impact of the new standard on ACNB’s business, financial condition and results of operations.
LITIGATION AND REGULATORY ACTIONS, INCLUDING POSSIBLE ENFORCEMENT ACTIONS, COULD SUBJECT ACNB AND ITS SUBSIDIARIES TO SIGNIFICANT FINES, PENALTIES, JUDGMENTS, OR OTHER REQUIREMENTS RESULTING IN INCREASED EXPENSES OR RESTRICTIONS ON BUSINESS ACTIVITIES.
In the normal course of business, from time to time, ACNB or its subsidiaries may be named as a defendant in various legal actions, arising in connection with current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. Further, ACNB or its subsidiary bank may in the future be subject to consent orders or other formal or informal enforcement agreements with regulators. They may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding current and/or prior business activities. Any such legal or regulatory actions may subject ACNB or its subsidiaries to substantial compensatory or punitive damages, significant fines, penalties, obligations to change business practices, or other requirements resulting in increased expenses, diminished income, and damage to their reputation. Involvement in any such matters, whether tangential or otherwise, and even if the matters are ultimately determined in their favor, could also cause significant harm to their reputation and divert management attention from the operation of their business. Further, any settlement, consent order, other enforcement agreement or adverse judgment in connection with any formal or informal proceeding or investigation by governmental agencies may result in litigation, investigations or proceedings as other litigants and governmental agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on ACNB’s business, financial condition, and results of operations.
POTENTIAL ACQUISITIONS MAY DISRUPT ACNB’S BUSINESS AND DILUTE STOCKHOLDER VALUE.
ACNB regularly evaluates opportunities to acquire and invest in banks and in other complementary businesses. As a result, ACNB may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on ACNB’s operating results and financial condition, including short- and long-term liquidity and capital structure. ACNB’s acquisition activities could be material to ACNB. For example, ACNB could issue additional shares of common stock in a purchase transaction, which could dilute current stockholders’ ownership interest. These activities could require ACNB to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with ACNB’s prior or potential future acquisitions were determined to be impaired, then ACNB would be required to recognize a charge against its earnings, which could materially and adversely affect ACNB’s results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not impact cash flow, tangible capital or liquidity but would decrease stockholders’ equity.
ACNB’s acquisition activities could involve a number of additional risks, including the risks of:
•Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions;
•Using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets;
•The time and expense required to integrate the operations and personnel of the combined businesses;
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•Creating an adverse short-term effect on ACNB’s results of operations; and,
•Losing key employees and customers as a result of an acquisition that is poorly received.
ACNB may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. ACNB’s inability to overcome these risks could have an adverse effect on ACNB’s ability to achieve its business strategy and maintain its market value.
THE STOCK MARKET CAN BE VOLATILE, AND FLUCTUATIONS IN ACNB’S OPERATING RESULTS AND OTHER FACTORS COULD CAUSE ACNB’S STOCK PRICE TO DECLINE.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies and financial institutions specifically. Market fluctuations could adversely affect ACNB’s stock price. These fluctuations have often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor confidence, interest rate changes, government shutdowns, trade wars, pandemics or epidemics, or international currency fluctuations, may negatively affect the market price of ACNB’s common stock. Moreover, ACNB’s operating results may fluctuate and vary from period to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an indication of future performance. ACNB’s stock price could fluctuate significantly in response to ACNB’s quarterly or annual results, annual projections and the impact of these risk factors on ACNB’s operating results or financial position.
Although ACNB’s common stock is quoted on the Nasdaq Capital Market, the volume of trades on any given day has been limited historically, as a result of which stockholders might not have been able to sell or purchase ACNB’s common stock at the volume, price, or time desired. From time to time, ACNB’s common stock may be included in certain and various stock market indices. Inclusion in these indices may positively impact the price, trading volume, and liquidity of ACNB’s common stock, in part, because index funds or other institutional investors often purchase securities that are in these indices. Conversely, if ACNB’s market capitalization falls below the minimum necessary to be included in any of the indices at any annual reconstitution date, the opposite could occur. Further, ACNB’s inclusion in indices may be weighted based on the size of ACNB’s market capitalization, so even if ACNB’s market capitalization remains above the amount required to be included on these indices, if ACNB’s market capitalization is below the amount it was on the most recent reconstitution date, ACNB’s common stock could be weighted at a lower level. If ACNB’s common stock is weighted at a lower level, holders attempting to track the composition of these indices will be required to sell ACNB’s common stock to match the reweighting of the indices.
WEALTH MANAGEMENT AND INSURANCE INDUSTRY RISKS
REVENUES AND PROFITABILITY FROM ACNB’S WEALTH MANAGEMENT BUSINESS MAY BE ADVERSELY AFFECTED BY ANY REDUCTION IN ASSETS UNDER MANAGEMENT AND SUPERVISION AS A RESULT OF EITHER A DECLINE IN MARKET VALUE OF SUCH ASSETS OR NET OUTFLOWS, WHICH COULD REDUCE TRUST, INVESTMENT ADVISORY AND BROKERAGE, AND OTHER SERVICING FEES EARNED.
The wealth management business derives the majority of its revenue from noninterest income which consists of trust, investment advisory and brokerage, and other servicing fees. Substantial revenues are generated from investment management contracts with clients. Under these contracts, the investment advisory fees paid to us are typically based on the market value of assets under management. Assets under management and supervision may decline for various reasons including declines in the market value of the assets in the funds and accounts managed or supervised, which could be caused by price declines in the securities markets generally or by price declines in specific market segments. Assets under management may also decrease due to redemptions and other withdrawals by clients or termination of contracts. This could be in response to adverse market conditions or in pursuit of other investment opportunities. Any reduction in assets under management and supervision may adversely impact ACNB’s profitability.
THE WEALTH MANAGEMENT INDUSTRY IS SUBJECT TO EXTENSIVE REGULATION, SUPERVISION AND EXAMINATION BY REGULATORS, AND ANY ENFORCEMENT ACTION OR ADVERSE CHANGES IN THE LAWS OR REGULATIONS GOVERNING ACNB’S WEALTH MANAGEMENT BUSINESS COULD DECREASE ACNB’S REVENUES AND PROFITABILITY.
The wealth management business is subject to regulation by a number of regulatory agencies that are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. In the event of noncompliance with an applicable regulation, governmental regulators, including
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the SEC and FINRA, may institute administrative or judicial proceedings that may result in censure, fines, civil penalties, issuance of cease-and-desist orders, deregistration or suspension of the noncompliant broker-dealer or investment advisor, or other adverse consequences. The imposition of any such penalties or orders could have a material adverse effect on the wealth management segment’s operating results and financial condition. ACNB may also be adversely affected as a result of new or revised legislation or regulations. Regulatory changes have imposed and may continue to impose additional costs, which may adversely impact ACNB’s profitability.
REVENUES AND PROFITABILITY FROM ACNB’S INSURANCE BUSINESS MAY BE ADVERSELY AFFECTED BY MARKET CONDITIONS, WHICH COULD REDUCE INSURANCE COMMISSIONS AND FEES EARNED.
The revenues of ACNB’s fee-based insurance business are derived primarily from commissions from the sale of insurance policies, which commissions are generally calculated as a percentage of the policy premium. These insurance policy commissions can fluctuate as insurance carriers from time to time increase or decrease the premiums on the insurance products sold. Due to the cyclical nature of the insurance market and the impact of other market and macroeconomic conditions on insurance premiums, commission levels may vary. The reduction of these commission rates, along with general volatility and/or declines in premiums, may adversely impact ACNB’s profitability.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
ITEM 2—PROPERTIES
ACNB Bank, including its main community banking office in Gettysburg, Adams County, Pennsylvania, had a community banking office network of 26 offices in Pennsylvania and Maryland at December 31, 2022. Including the main office, 10 community banking offices are located in Adams County, one is located in Cumberland County, one is located in Franklin County, and five are located in York County, Pennsylvania. There are also loan production offices situated in Lancaster and York Counties, Pennsylvania, as well as another loan production office in Hunt Valley, Maryland. In Maryland, there are five community banking offices located in Carroll County and four community banking offices located in Frederick County. Bank offices at 15 locations are owned, while 11 are leased. All real estate owned by the subsidiary bank is free and clear of encumbrances. All community banking offices are adequate for the purpose intended. ACNB Insurance Services, Inc. owns offices, free and clear of encumbrances, located in Carroll County and Harford County, Maryland, and leases offices in Gettysburg, Pennsylvania.
ITEM 3—LEGAL PROCEEDINGS
As of December 31, 2022, there were no material pending legal proceedings, other than ordinary routine litigation incidental to and in the ordinary course of the business, to which ACNB or its subsidiaries are a party or by which any of their assets are the subject, which could have a material adverse effect on ACNB or its subsidiaries or their results of operations. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or its subsidiaries by governmental authorities.
ITEM 4—MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ACNB Corporation’s common stock trades on NASDAQ under the symbol ACNB. At December 31, 2022 and 2021, there were 20,000,000 shares of common stock authorized, 8,838,720 and 8,795,877 shares issued, respectively, and 8,515,120 and 8,679,206 shares outstanding, respectively. As of December 31, 2022, ACNB had approximately 2,527 stockholders of record. ACNB is restricted as to the amount of dividends that it can pay to stockholders by virtue of the restrictions on the banking subsidiary’s ability to pay dividends to ACNB under the Pennsylvania Banking Code, the Federal Deposit Insurance Corporation Act, and the regulations of the FDIC. For further information, please refer to Note J — “Regulatory Restrictions on Dividends” and Note N — “Stockholders’ Equity and Regulatory Matters” in the Notes to Consolidated Financial Statements.
On May 5, 2009, stockholders approved and ratified the ACNB Corporation 2009 Restricted Stock Plan, effective as of February 24, 2009, in which awards shall not exceed, in the aggregate, 200,000 shares of common stock. As of December 31, 2022, 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 on February 24, 2019, and no further shares may be issued under the plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.
On May 5, 2009, stockholders approved and adopted the amendment to the Articles of Incorporation of ACNB Corporation to authorize up to 20,000,000 shares of preferred stock, par value $2.50 per share. As of December 31, 2022, there were no issued or outstanding shares of preferred stock.
On January 24, 2011, the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan was introduced for stockholders of record. This plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. As of December 31, 2022, there were 235,403 shares of common stock issued through the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan.
On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2022, there were 57,522 shares issued under this plan. The maximum number of shares that may yet be granted under this plan is 516,533. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2018 Omnibus Stock Incentive Plan was filed with the Securities and Exchange Commission on March 8, 2019. In addition, on March 8, 2019, the Corporation filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan to add the ACNB Corporation 2018 Omnibus Stock Incentive Plan to the registration statement.
On February 25, 2021, the Corporation announced that the Board of Directors approved on February 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 stock repurchase program replaced and superseded any and all earlier announced repurchase plans. There were 261,000 treasury shares purchased under this plan as of December 31, 2022. There were 8,773 shares purchased during the most recent quarter, effectively completing the authorization for the repurchase of shares under this program.
The following table is a summary of the Corporation’s purchases of common stock during the fourth quarter of 2022:
| Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum number of shares that may yet be purchased under the plan | ||||||||||||||||||||
| November 1 - November 30, 2022 | 8,773 | $ | 34.58 | 261,000 | 0 | ||||||||||||||||||
| Total | 8,773 | $ | 34.58 | 261,000 | 0 | ||||||||||||||||||
On June 2, 2022, the Corporation entered into an issuer stock repurchase agreement with an independent third-party
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broker under which the broker was authorized to repurchase the Corporation’s common stock on behalf of the Corporation, 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), and was effective 30 days after the date of the agreement or on July 5, 2022, and terminated, subject to certain other conditions set forth in the agreement, on July 28, 2022. The shares were 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.
On October 24, 2022, the Corporation announced that the Board of Directors approved on October 18, 2022, a new plan to repurchase, in open market and privately negotiated transactions, up to 255,575, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new common stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. As of December 31, 2022, no common stock had been repurchased under this new plan.
On November 23, 2022, ACNB Corporation entered into an issuer stock repurchase agreement with an independent third-party broker under which the broker was authorized to repurchase the Corporation’s common stock on behalf of the Corporation, 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), and commenced on December 26, 2022, and terminated, subject to certain other conditions set forth in the agreement, on January 27, 2023. The shares were to be purchased pursuant to the Corporation’s common stock repurchase program, as previously announced on October 24, 2022, 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.
There have been no unregistered sales of stock in 2022 or 2021.
ITEM 6— [Reserved]
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ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 for ACNB Corporation (the Corporation or ACNB), a financial holding company. Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein. Current performance does not guarantee, assure or indicate similar performance in the future.
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.
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EXECUTIVE OVERVIEW
| For the Year Ended December 31, | |||||||||||||||||||||||||||||
| Dollars in thousands, except per share data | 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| INCOME STATEMENT DATA | |||||||||||||||||||||||||||||
| Interest income | $ | 87,049 | $ | 78,159 | $ | 85,290 | $ | 69,558 | $ | 64,494 | |||||||||||||||||||
| Interest expense | 3,624 | 6,915 | 12,222 | 10,140 | 7,399 | ||||||||||||||||||||||||
| Net interest income | 83,425 | 71,244 | 73,068 | 59,418 | 57,095 | ||||||||||||||||||||||||
| Provision for loan losses | — | 50 | 9,140 | 600 | 1,620 | ||||||||||||||||||||||||
| Net interest income after provision for loan losses | 83,425 | 71,194 | 63,928 | 58,818 | 55,475 | ||||||||||||||||||||||||
| Other income | 21,807 | 22,776 | 20,090 | 18,169 | 15,948 | ||||||||||||||||||||||||
| Other expenses | 60,281 | 58,951 | 61,316 | 47,621 | 44,703 | ||||||||||||||||||||||||
| Income before income taxes | 44,951 | 35,019 | 22,702 | 29,366 | 26,720 | ||||||||||||||||||||||||
| Provision for income taxes | 9,199 | 7,185 | 4,308 | 5,645 | 4,972 | ||||||||||||||||||||||||
| Net income | $ | 35,752 | $ | 27,834 | $ | 18,394 | $ | 23,721 | $ | 21,748 | |||||||||||||||||||
| BALANCE SHEET DATA (AT YEAR-END) | |||||||||||||||||||||||||||||
| Assets | $ | 2,525,507 | $ | 2,786,987 | $ | 2,555,362 | $ | 1,720,253 | $ | 1,647,724 | |||||||||||||||||||
| Securities | $ | 620,250 | $ | 446,161 | $ | 350,182 | $ | 212,177 | $ | 190,835 | |||||||||||||||||||
| Loans, net | $ | 1,520,749 | $ | 1,449,394 | $ | 1,617,558 | $ | 1,258,766 | $ | 1,288,501 | |||||||||||||||||||
| Deposits | $ | 2,198,975 | $ | 2,426,389 | $ | 2,185,525 | $ | 1,412,260 | $ | 1,348,092 | |||||||||||||||||||
| Borrowings | $ | 62,954 | $ | 69,902 | $ | 92,209 | $ | 99,731 | $ | 118,164 | |||||||||||||||||||
| Stockholders’ equity | $ | 245,042 | $ | 272,114 | $ | 257,972 | $ | 189,516 | $ | 168,137 | |||||||||||||||||||
| COMMON SHARE DATA | |||||||||||||||||||||||||||||
| Earnings per share — basic | $ | 4.15 | $ | 3.19 | $ | 2.13 | $ | 3.36 | $ | 3.09 | |||||||||||||||||||
| Cash dividends declared | $ | 1.06 | $ | 1.03 | $ | 1.00 | $ | 0.98 | $ | 0.89 | |||||||||||||||||||
| Book value per share | $ | 28.78 | $ | 31.35 | $ | 29.62 | $ | 26.77 | $ | 23.86 | |||||||||||||||||||
| Weighted average number of common shares | 8,623,012 | 8,714,926 | 8,638,654 | 7,061,524 | 7,035,818 | ||||||||||||||||||||||||
| Dividend payout ratio | 25.50 | % | 32.22 | % | 47.22 | % | 29.17 | % | 28.79 | % | |||||||||||||||||||
| PROFITABILITY RATIOS AND CONDITION | |||||||||||||||||||||||||||||
| Return on average assets | 1.31 | % | 1.03 | % | 0.78 | % | 1.40 | % | 1.34 | % | |||||||||||||||||||
| Return on average equity | 14.35 | % | 10.52 | % | 7.39 | % | 13.33 | % | 13.62 | % | |||||||||||||||||||
| Average stockholders’ equity to average assets | 9.15 | % | 9.81 | % | 10.53 | % | 10.54 | % | 9.85 | % | |||||||||||||||||||
| SELECTED ASSET QUALITY RATIOS | |||||||||||||||||||||||||||||
| Non-performing loans to total loans | 0.25 | % | 0.42 | % | 0.48 | % | 0.40 | % | 0.52 | % | |||||||||||||||||||
| Net charge-offs to average loans outstanding | 0.08 | % | 0.08 | % | 0.16 | % | 0.06 | % | 0.13 | % | |||||||||||||||||||
| Allowance for loan losses to total loans | 1.16 | % | 1.30 | % | 1.23 | % | 1.09 | % | 1.07 | % | |||||||||||||||||||
| Allowance for loan losses to non-performing loans | 463.08 | % | 306.05 | % | 256.16 | % | 269.27 | % | 206.51 | % | |||||||||||||||||||
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Consolidated Condensed Statements of Income for the three months and years ended December 31, 2022 and 2021 are as follows:
| Dollars in thousands, except per share data | Three Months Ended December 31, | Years Ended December 31, | |||||||||||||||||||||
| INCOME STATEMENT DATA | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Interest income | $ | 24,894 | $ | 18,674 | $ | 87,049 | $ | 78,159 | |||||||||||||||
| Interest expense | 846 | 1,324 | 3,624 | 6,915 | |||||||||||||||||||
| Net interest income | 24,048 | 17,350 | 83,425 | 71,244 | |||||||||||||||||||
| Provision for loan losses | — | — | — | 50 | |||||||||||||||||||
| Net interest income after provision for loan losses | 24,048 | 17,350 | 83,425 | 71,194 | |||||||||||||||||||
| Other income | 5,423 | 5,633 | 21,807 | 22,776 | |||||||||||||||||||
| Other expenses | 16,673 | 17,457 | 60,281 | 58,951 | |||||||||||||||||||
| Income before income taxes | 12,798 | 5,526 | 44,951 | 35,019 | |||||||||||||||||||
| Provision for income taxes | 2,599 | 1,031 | 9,199 | 7,185 | |||||||||||||||||||
| Net income | $ | 10,199 | $ | 4,495 | $ | 35,752 | $ | 27,834 | |||||||||||||||
| Basic earnings per share | $ | 1.20 | $ | 0.52 | $ | 4.15 | $ | 3.19 | |||||||||||||||
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 its local markets, while maintaining a reasonable funding base by offering competitive deposit products and services. ACNB reported record earnings in 2022 driven by strong growth in net interest income. The 2022 net income of $35,752,000 represents a 28.4% increase over the net income results for the year ended December 31, 2021. Basic earnings per share in 2022 increased 30.1% over the earnings per share for 2021.
In 2022, the Corporation’s net interest margin increased to 3.33% compared to 2.82% in 2021. Net interest income was $83,425,000 in 2022 compared to $71,244,000 in 2021. The increase was driven by higher interest rates, deployment of excess liquidity, lower funding costs and growth in higher-yielding assets. Other income was $21,807,000 and $22,776,000 in 2022 and 2021, respectively. The decrease was primarily a result of lower income from mortgage loans held for sale, as interest rates continued to increase in 2022, and losses from the changes in fair value of equity securities. Other expenses increased to $60,281,000, or by 2.3%, in 2022, as compared to $58,951,000 in 2021. The increase was driven primarily by equipment, professional services, FDIC and regulatory, intangible assets amortization and other operating expenses partially offset by a decrease in salary and employee benefits expense. 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.
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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
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Dollars in thousands | Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||||||||||||||||
| INTEREST EARNING ASSETS | |||||||||||||||||||||||||||||||||||
| Loans | $ | 1,506,354 | $ | 70,246 | 4.66 | % | $ | 1,552,074 | $ | 71,186 | 4.59 | % | |||||||||||||||||||||||
| Taxable securities | 516,126 | 9,799 | 1.90 | % | 358,256 | 5,423 | 1.51 | % | |||||||||||||||||||||||||||
| Tax-exempt securities | 53,242 | 1,144 | 2.15 | % | 38,829 | 543 | 1.40 | % | |||||||||||||||||||||||||||
| Total Securities | 569,368 | 10,943 | 1.92 | % | 397,085 | 5,966 | 1.50 | % | |||||||||||||||||||||||||||
| Other | 427,706 | 5,860 | 1.37 | % | 578,150 | 1,007 | 0.17 | % | |||||||||||||||||||||||||||
| Total Interest Earning Assets | 2,503,428 | 87,049 | 3.48 | % | 2,527,309 | 78,159 | 3.09 | % | |||||||||||||||||||||||||||
| Cash and due from banks | 31,511 | 23,799 | |||||||||||||||||||||||||||||||||
| Premises and equipment | 29,205 | 30,742 | |||||||||||||||||||||||||||||||||
| Other assets | 175,492 | 136,035 | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (18,679) | (19,927) | |||||||||||||||||||||||||||||||||
| Total Assets | $ | 2,720,957 | $ | 2,697,958 | |||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||
| INTEREST BEARING LIABILITIES | |||||||||||||||||||||||||||||||||||
| Interest bearing demand deposits | $ | 946,864 | $ | 1,091 | 0.12 | % | $ | 872,729 | $ | 911 | 0.10 | % | |||||||||||||||||||||||
| Savings deposits | 409,839 | 167 | 0.04 | % | 367,543 | 664 | 0.18 | % | |||||||||||||||||||||||||||
| Time deposits | 370,766 | 1,303 | 0.35 | % | 494,322 | 3,437 | 0.70 | % | |||||||||||||||||||||||||||
| Total Interest Bearing Deposits | 1,727,469 | 2,561 | 0.15 | % | 1,734,594 | 5,012 | 0.29 | % | |||||||||||||||||||||||||||
| Short-term borrowings | 35,882 | 77 | 0.21 | % | 35,153 | 39 | 0.11 | % | |||||||||||||||||||||||||||
| Long-term borrowings | 24,814 | 986 | 3.97 | % | 49,935 | 1,864 | 3.73 | % | |||||||||||||||||||||||||||
| Total Interest Bearing Liabilities | 1,788,165 | 3,624 | 0.20 | % | 1,819,682 | 6,915 | 0.38 | % | |||||||||||||||||||||||||||
| Non-interest bearing demand deposits | 609,622 | 594,483 | |||||||||||||||||||||||||||||||||
| Other liabilities | 74,096 | 19,119 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 249,074 | 264,674 | |||||||||||||||||||||||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,720,957 | $ | 2,697,958 | |||||||||||||||||||||||||||||||
| NET INTEREST INCOME | $ | 83,425 | $ | 71,244 | |||||||||||||||||||||||||||||||
| INTEREST RATE SPREAD | 3.28 | % | 2.71 | % | |||||||||||||||||||||||||||||||
| NET INTEREST MARGIN | 3.33 | % | 2.82 | % | |||||||||||||||||||||||||||||||
For yield calculation purposes, nonaccruing loans are included in average loan balances. Loan fees (including PPP fees) of $2,193,000 and $6,117,000 as of December 31, 2022 and 2021, respectively, are included in interest income. Yields on tax-exempt securities and loans are not tax effected.
Table 1 presents balance sheet items on a daily average basis, net interest income, interest rate spread, and net interest margin for the years ending December 31, 2022 and 2021. 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 $83,425,000 for the year ended December 31, 2022, compared to $71,244,000 for the same period in 2021, an increase of $12,181,000, or 17.1%. Net interest income increased due to a higher net interest margin that benefited from higher interest rates, deployment of excess liquidity into securities, lower funding costs and growth in higher-yielding assets. Interest income increased $8,890,000, or 11.4%, driven by higher interest rates and a shift from cash and cash equivalents into securities. Interest expense decreased $3,291,000, or 47.6%, in 2022 from 2021. The decrease in interest expense was driven by a reduction in long-term borrowings and a reduction in deposits costs. Paycheck Protection Program (PPP) fees and purchase accounting accretion for the year ended December 31, 2022 totaled $3,768,000, compared to $8,781,000 for the year ended December 31, 2021.
Average earning assets were $2,503,428,000 in 2022, a decrease of $23,881,000, or 0.9%, from the average balance of $2,527,309,000 in 2021. Average cash and cash equivalents decreased while average total securities increased in 2022 as compared to 2021. Average interest bearing liabilities were $1,788,165,000 in 2022, down from $1,819,682,000 in 2021.
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Average deposits (including non-interest bearing) were up 0.3%, while average borrowings decreased by 28.7% due to principal paybacks. Average lower-cost transaction and savings deposits increased in 2022. The decrease in average time deposits was in part from existing customers moving to better liquidity available from transaction and savings deposits.
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
| 2022 versus 2021 | ||||||||||||||||||||
| Due to Changes in | ||||||||||||||||||||
| In thousands | Volume | Rate | Total | |||||||||||||||||
| INTEREST EARNING ASSETS | ||||||||||||||||||||
| Loans | $ | (2,119) | $ | 1,179 | $ | (940) | ||||||||||||||
| Taxable securities | 2,775 | 1,601 | 4,376 | |||||||||||||||||
| Tax-exempt securities | 246 | 355 | 601 | |||||||||||||||||
| Total Securities | 3,021 | 1,956 | 4,977 | |||||||||||||||||
| Other | (328) | 5,181 | 4,853 | |||||||||||||||||
| Total | $ | 574 | $ | 8,316 | $ | 8,890 | ||||||||||||||
| INTEREST BEARING LIABILITIES | ||||||||||||||||||||
| Interest bearing demand deposits | $ | 81 | $ | 99 | $ | 180 | ||||||||||||||
| Savings deposits | 69 | (566) | (497) | |||||||||||||||||
| Time deposits | (716) | (1,418) | (2,134) | |||||||||||||||||
| Short-term borrowings | 1 | 37 | 38 | |||||||||||||||||
| Long-term borrowings | (991) | 113 | (878) | |||||||||||||||||
| Total | (1,556) | (1,735) | (3,291) | |||||||||||||||||
| Change in Net Interest Income | $ | 2,130 | $ | 10,051 | $ | 12,181 | ||||||||||||||
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
As a result of stable loan metrics, combined with low credit losses in the portfolio, the provision for loan losses charged against earnings was $0 in 2022 compared to $50,000 in 2021. 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 losses generally does not include the loans acquired through acquisition, which were recorded at fair value as of the acquisition date. 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. 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.
Other Income
Other income was $21,807,000 and $22,776,000 in 2022 and 2021, respectively. The decrease was primarily a result of lower income from mortgage loans held for sale, as interest rates continued to increase in 2022, and losses from the changes in fair value of equity securities. Income from mortgage loans held for sale was $487,000 for the year ended December 31, 2022 compared to $3,393,000 for the year ended December 31, 2021. A $298,000 net fair value loss was recognized on local bank and CRA-related equity securities in 2022 due to normal variations in market value compared to a $439,000 net fair value gain in 2021. A net loss of $234,000 was recognized on the sale of securities in 2022, and no securities were sold in 2021. The largest source of other income is commissions from insurance sales attributable to ACNB Insurance Services, Inc. Commissions from insurance sales increased by 35.1% in 2022 to $8,307,000, driven primarily by the acquisition of the business and assets of the Hockley & O’Donnell Agency in the first quarter of 2022. Service charges on deposit accounts increased 15.8% to $4,066,000 for 2022 driven by improved customer activity. During the third quarter of 2022, additional bank-owned life
31
insurance was purchased with a cash surrender value of $12,200,000 driving the increase in 2022 as compared to 2021.
Other Expenses
Other expenses increased 2.3% to $60,281,000 for the year ended December 31, 2022. The largest component of other expenses is salaries and employee benefits, which decreased 2.3% in 2022 to $35,979,000 compared to $36,816,000 in 2021. The decrease was a result of lower incentive compensation and pension expenses. Equipment expense was $6,612,000 for the year ended December 31, 2022 compared to $6,175,000 for the prior year of 2021. The increase in equipment expense was attributable to the additional ongoing expenses related to the banking subsidiary’s core systems conversion in late 2021 and the implementation of a new loan origination system in late 2022. Professional services expense was $2,086,000 for the year ended December 31, 2022 compared to $1,304,000 for the prior year of 2021. The increase in professional services expense was a result of additional costs related to the change in the Corporation’s independent audit firm, consultants for Current Expected Credit Loss (CECL) standard readiness and purchase accounting work, loan workout costs for a large commercial loan, legal expenses, and executive recruiters to fill key roles within the organization. FDIC and regulatory and intangible assets amortization expenses were $1,128,000 and $1,492,000, respectively, for the year ended December 31, 2022 compared to $960,000 and $1,164,000 for the prior year of 2021. The increase in intangible assets amortization expense was due to the acquisition of the business and assets of the Hockley & O’Donnell Insurance Agency. Other operating expense was $6,154,000 for the year ended December 31, 2022 compared to $5,841,000 for the prior year of 2021. The increase in other operating expense was driven primarily by waived consumer loan fees, internet banking expense, and operational and customer fraud losses.
Provision for Income Taxes
ACNB recognized income taxes of $9,199,000, or 20.5% of pretax income, during 2022 as compared to $7,185,000, or 20.5%, during 2021. The variances from the federal statutory rate of 21% in the respective periods are generally due to tax-free income, which includes interest income on tax-free loans and investment securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expense. Note K — “Income Taxes”, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” includes a reconciliation of our federal statutory tax rate to the Corporation’s effective tax rate, which is a comparison between years and measures income tax expense as a percentage of pretax income.
FINANCIAL CONDITION
Total assets were $2,525,507,000 at December 31, 2022 compared to $2,786,987,000 at December 31, 2021, a decrease of 9.4%. The decrease was driven by a reduction in cash and cash equivalents of $541,970,000 as a result of investing excess cash into securities, funding loan growth and deposit outflows. Total loans outstanding were $1,538,610,000 at December 31, 2022 compared to $1,468,427,000 at December 31, 2021, an increase of 4.8%. Year-over-year, the increase was driven mainly by growth in the commercial real estate and construction loan portfolios. Excluding payoffs for PPP loans, loans grew by 6.0% from December 31, 2021 to December 31, 2022. Total securities were $620,250,000 at December 31, 2022 compared to $446,161,000 at December 31, 2021, an increase of 39.0%. Total deposits were $2,198,975,000 at December 31, 2022. Deposits decreased by $227,414,000, or 9.4%, since December 31, 2021. The decrease in deposits was a result of customers seeking higher yielding alternative investment or deposit products as market interest rates rose during 2022.
Investment Securities
ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity. The decision to change the securities portfolio in 2022 was to provide better yields on excess deposits. The investment portfolio is comprised of U.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.
At December 31, 2022, the securities balance included a net unrealized loss on available for sale securities of $52,734,000, net of taxes, on amortized cost of $617,641,000 versus a net unrealized loss of $3,474,000, net of taxes, on amortized cost of $441,565,000 at December 31, 2021. The change in fair value of available for sale securities during 2022 was driven by more investments in the available for sale portfolio and an increase in market interest rates during 2022. The changes in value are deemed to be related solely to changes in market interest rates as the credit quality of the portfolio remained strong.
At December 31, 2022, the securities balance included held to maturity securities with an amortized cost of $64,977,000 and a fair value of $58,078,000, as compared to an amortized cost of $6,454,000 and a fair value of $6,652,000 at December 31, 2021. During the second quarter of 2022, approximately $39.7 million of municipal securities were transferred from available for sale to held to maturity to mitigate the unrealized loss on available for sale securities. The held to maturity securities also
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include U.S. government pass-through mortgage-backed securities in which the full payment of principal and interest is guaranteed.
The Corporation does not own investments consisting of pools of Alt-A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments.
During 2022, the Corporation deployed excess liquidity by moving approximately $250,000,000 from cash and cash equivalents into higher-yielding securities. These new purchases were consistent with the current investment portfolio, but with higher yields to enhance the net interest margin and net interest income in future quarters. Purchases were primarily in government sponsored entities (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.
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 which is incorporated herein by reference.
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 — Investment Securities
| In thousands | 2022 | 2021 | ||||||||||||
| AVAILABLE FOR SALE SECURITIES AT FAIR VALUE | ||||||||||||||
| U.S. Government and agencies | $ | 210,999 | $ | 245,041 | ||||||||||
| Mortgage-backed securities | 295,718 | 133,496 | ||||||||||||
| State and municipal | 15,235 | 44,611 | ||||||||||||
| Corporate bonds | 31,602 | 13,950 | ||||||||||||
| $ | 553,554 | $ | 437,098 | |||||||||||
| HELD TO MATURITY SECURITIES AT AMORTIZED COST | ||||||||||||||
| Mortgage-backed securities | 3,279 | 6,454 | ||||||||||||
| State and municipal | 61,698 | — | ||||||||||||
| $ | 64,977 | $ | 6,454 | |||||||||||
| EQUITY SECURITIES WITH READILY DETERMINABLE FAIR VALUES | ||||||||||||||
| CRA Mutual Fund | $ | 915 | $ | 1,036 | ||||||||||
| Canapi Ventures SBIC Fund | 206 | — | ||||||||||||
| Stock in other Banks | 598 | 1,573 | ||||||||||||
| $ | 1,719 | $ | 2,609 | |||||||||||
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Table 4 discloses investment securities at the scheduled maturity date at December 31, 2022. Many securities have call features that make their redemption possible before the stated maturity date.
Table 4 — Securities Maturity Schedule
| 1 Year or Less | Over 1 - 5 Years | Over 5 - 10 Years | Over 10 Years or No Maturity | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Government and agencies | $ | 11,012 | 2.43 | % | $ | 148,541 | 1.68 | % | $ | 78,847 | 2.30 | % | $ | 3,067 | 4.30 | % | $ | 241,467 | 1.95 | % | |||||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | — | — | 10,936 | 0.59 | 15,037 | 2.30 | 304,841 | 2.36 | 330,814 | 2.30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| State and municipal | 285 | 2.00 | 377 | 1.34 | 16,437 | 2.67 | 59,834 | 3.52 | 76,933 | 3.32 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | — | — | 17,296 | 4.88 | 14,108 | 4.54 | 2,000 | 5.25 | 33,404 | 4.76 | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 11,297 | 2.42 | % | $ | 177,150 | 1.92 | % | $ | 124,429 | 2.60 | % | $ | 369,742 | 2.58 | % | $ | 682,618 | 2.41 | % | ||||||||||||||||||||||||||||||||||||||||
Securities are at amortized cost. Mortgage-backed securities are allocated based upon scheduled maturities.
The Corporation continues to analyze increasing investments to increase interest income, despite the possible subsequent decrease in market value if rates increase further.
Fair value of equity securities with readily determinable fair values are as follows at December 31, 2022:
| 1 Year or Less | Over 1 - 5 Years | Over 5 - 10 Years | No Maturity | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||||||||||||||||||||
| CRA Mutual Fund | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 915 | — | % | $ | 915 | — | % | |||||||||||||||||||||||||||||||||||||||
| Canapi Ventures SBIC Fund | — | — | — | — | — | — | 206 | — | 206 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock in other Banks | — | — | — | — | — | — | 598 | — | 598 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 1,719 | — | % | $ | 1,719 | — | % | ||||||||||||||||||||||||||||||||||||||||
Loans
Year over year, loans outstanding increased by $70,183,000, or 4.8%, in 2022 as compared to 2021. Year-over-year, the increase was driven mainly by growth in the commercial real estate and construction loan portfolios. Excluding payoffs for PPP loans, loans grew by 6.0% from December 31, 2021 to December 31, 2022. Commercial real estate loans increased $35,550,000, or 4.5%, in 2022 while real estate construction loans increased $30,470,000, or 60.9% in 2022. Growth in both portfolios was spread throughout the footprint and across various property types. Despite the intense competition in the Corporation’s market areas, management continues to focus on asset quality and disciplined underwriting standards in the loan origination process.
Residential real estate mortgages, which includes home equity loan and lines of credit secured by the owner’s home, increased by $4,352,000, or 1.0%. Growth was driven by an increase in home equity loans. 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 the commercial, financial and agricultural category are loans to Pennsylvania school districts, municipalities (including townships) and essential purpose authorities. In most cases, these loans are backed by the general obligation of the local municipal body. In many cases, these loans are obtained through a bid process that includes other local and regional banks. These loans are predominantly bank qualified for mostly tax-free interest income treatment for federal income taxes. These loans totaled $72,945,000 in 2022, an increase of 16.1% from $62,823,000 held at the end of 2021; these loans are especially subject to refinancing in certain rate environments.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020 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
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automatically authorized to originate PPP loans. As of December 31, 2022, the Corporation did not have any outstanding balances under the PPP program. As of December 31, 2022, the Corporation had originated an aggregate total of 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 $986,000 and $5,627,000 of PPP fees in 2022 and 2021, respectively.
Table 5 — Loan Portfolio
Loans at December 31 were as follows:
| In thousands | 2022 | 2021 | |||||||||
| Commercial, financial and agricultural | $ | 178,762 | $ | 179,567 | |||||||
| Real estate: | |||||||||||
| Commercial | 821,805 | 786,255 | |||||||||
| Construction | 80,470 | 50,000 | |||||||||
| Residential | 446,239 | 441,887 | |||||||||
| Consumer | 11,334 | 10,718 | |||||||||
| Total Loans | $ | 1,538,610 | $ | 1,468,427 | |||||||
The repricing range of the loan portfolio at December 31, 2022, and the amounts of loans with predetermined and fixed rates are presented in the tables below:
Table 6 — Loan Sensitivities
LOANS MATURING
| In thousands | Less than 1 Year | 1-5 Years | Over 5 Years | Total | |||||||||||||||||||
| Commercial, financial and agricultural | $ | 41,813 | $ | 59,583 | $ | 77,366 | $ | 178,762 | |||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Commercial | 33,306 | 86,125 | 702,374 | 821,805 | |||||||||||||||||||
| Construction | 24,670 | 17,091 | 38,709 | 80,470 | |||||||||||||||||||
| Residential | 32,454 | 30,231 | 383,554 | 446,239 | |||||||||||||||||||
| Total | $ | 132,243 | $ | 193,030 | $ | 1,202,003 | $ | 1,527,276 | |||||||||||||||
LOANS BY REPRICING OPPORTUNITY
| In thousands | Less than 1 Year | 1-5 Years | Over 5 Years | Total | |||||||||||||||||||
| Commercial, financial and agricultural | $ | 62,131 | $ | 64,136 | $ | 52,495 | $ | 178,762 | |||||||||||||||
| Real estate: | |||||||||||||||||||||||
| Commercial | 161,986 | 480,382 | 179,437 | 821,805 | |||||||||||||||||||
| Construction | 41,748 | 24,025 | 14,697 | 80,470 | |||||||||||||||||||
| Residential | 126,952 | 122,671 | 196,616 | 446,239 | |||||||||||||||||||
| Total | $ | 392,817 | $ | 691,214 | $ | 443,245 | $ | 1,527,276 | |||||||||||||||
| Loans with a fixed interest rate | $ | 95,530 | $ | 691,031 | $ | 439,840 | $ | 1,226,401 | |||||||||||||||
| Loans with a variable interest rate | 297,287 | 183 | 3,405 | 300,875 | |||||||||||||||||||
| Total | $ | 392,817 | $ | 691,214 | $ | 443,245 | $ | 1,527,276 | |||||||||||||||
Most of the Corporation’s lending activities are with customers located within the Bank’s market area of southcentral Pennsylvania and northern Maryland area. Unemployment rates in the subsidiary bank’s market recently, and historically, have been better than those for Pennsylvania and Maryland as a whole, and similar to the United States. Included in commercial real estate loans are loans made to lessors of non-residential properties that total $434,057,000, or 28.2% of total loans, at December 31, 2022. 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
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risk when compared to commercial loans in general. ACNB does not originate or hold Alt-A or subprime mortgages in its loan portfolio.
Asset Quality
The ACNB loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated through prudent and disciplined 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 ACNB’s market area of southcentral Pennsylvania and northern Maryland. 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.
As a result of stable loan risk metrics, combined with low credit losses in the portfolio, the provision for loan losses for 2022 was $0 despite solid loan growth. Non-performing loans were $3,857,000, or 0.25% of total loans, at December 31, 2022, compared to $6,219,000, or 0.42% of total loans, at December 31, 2021. Non-performing assets were $4,331,000, or 0.17% of total assets, at December 31, 2022, compared to $6,219,000, or 0.22% of total assets, at December 31, 2021. Net charge-offs for the year ended December 31, 2022 were 0.08% of total average loans, compared to 0.08% for the year ended December 31, 2021. Net charge-offs for the year were due to a few isolated credits of unrelated borrowers and were not indicative of a general weakness in the overall loan portfolio.
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 | 2022 | 2021 | ||||||||||||
| Nonaccrual loans, including TDRs | $ | 2,654 | $ | 5,489 | ||||||||||
| Accruing loans 90 days past due | 1,203 | 730 | ||||||||||||
| Total Non-Performing Loans | 3,857 | 6,219 | ||||||||||||
| Foreclosed assets | 474 | — | ||||||||||||
| Total Non-Performing Assets | $ | 4,331 | $ | 6,219 | ||||||||||
| Total Accruing Troubled Debt Restructurings | $ | 3,461 | $ | 3,574 | ||||||||||
| Ratios: | ||||||||||||||
| Non-performing loans to total loans | 0.25 | % | 0.42 | % | ||||||||||
| Non-performing assets to total assets | 0.17 | % | 0.22 | % | ||||||||||
| Allowance for loan losses to non-performing loans | 463.08 | % | 306.05 | % | ||||||||||
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 $410,000 in 2022 and $462,000 in 2021. The decrease in nonaccrual loans from 2021 to 2022 is discussed further below.
Impaired loans at December 31, 2022 and 2021, totaled $6,115,000 and $9,063,000, respectively. At December 31, 2022 and 2021, the Corporation had nonaccruing and accruing troubled debt restructurings of $3,461,000 and $3,637,000, respectively. $0 and $63,000, respectively, of the impaired loans were troubled debt restructured loans, which were also classified as nonaccrual. $3,461,000 and $3,574,000 of the impaired loans were accruing troubled debt restructured loans at December 31, 2022 and 2021, 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
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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 after modification. Loans classified as troubled debt restructurings are designated as impaired. The related allowance for loan losses on all impaired loans totaled $820,000 and $1,455,000 at December 31, 2022 and 2021, 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 $605,000 at December 31, 2022, compared to $1,725,000 at December 31, 2021.
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 $474,000, consisting of one property, at December 31, 2022 compared to $0 at December 31, 2021.
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.
Loans not tested for impairment do not require a specific reserve allocation. Management places these loans 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.
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:
•the 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;
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•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 2022 and the resulting allowance at December 31, 2022, are appropriate given management’s current analysis of the continuing level of risk in the loan portfolio. Management also believes the unallocated allowance is appropriate. The amount of the unallocated portion of the allowance decreased at December 31, 2022, as management deemed this to be reasonable. Otherwise, the assessment concluded that credit quality was stable 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, and with lessened risk from the impact of the COVID-19 crisis. The provision for 2022 was $0, compared to $50,000 for 2021. The decrease in the allowance for loan losses as a percentage of total loans of 1.30% at December 31, 2021 to 1.16% at December 31, 2022 was driven by stable to improving credit metrics in the loan portfolio.
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.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new model referred to as current expected credit losses (CECL) model, will apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments. ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, and information systems. The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model. The Corporation is continuing to conduct model comparisons and finalized policy and control framework over the adoption process. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the financial condition or results of operations.
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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 | 2022 | 2021 | ||||||||||||
| Beginning balance | $ | 19,033 | $ | 20,226 | ||||||||||
| Provision for loan losses | — | 50 | ||||||||||||
| Loans charged-off: | ||||||||||||||
| Commercial, financial and agricultural | 238 | 1,176 | ||||||||||||
| Commercial real estate and construction | 831 | — | ||||||||||||
| Residential mortgage | 36 | 22 | ||||||||||||
| Consumer | 181 | 120 | ||||||||||||
| Total Loans Charged-Off | 1,286 | 1,318 | ||||||||||||
| Recoveries: | ||||||||||||||
| Commercial, financial and agricultural | 58 | 43 | ||||||||||||
| Commercial real estate and construction | — | — | ||||||||||||
| Residential mortgage | 27 | — | ||||||||||||
| Consumer | 29 | 32 | ||||||||||||
| Total Recoveries | 114 | 75 | ||||||||||||
| Net charge-offs | 1,172 | 1,243 | ||||||||||||
| Ending balance | $ | 17,861 | $ | 19,033 | ||||||||||
| Ratios: | ||||||||||||||
| Net charge-offs to average loans | 0.08 | % | 0.08 | % | ||||||||||
| Allowance for loan losses to total loans | 1.16 | % | 1.30 | % | ||||||||||
Table 9 — Allocation of the Allowance for Loan Losses
| 2022 | 2021 | |||||||||||||||||||||||||
| Dollars in thousands | Amount | Percent of Loan Type to Total Loans | Amount | Percent of Loan Type to Total Loans | ||||||||||||||||||||||
| Commercial, financial and agricultural | $ | 2,848 | 11.6 | % | $ | 3,176 | 12.2 | % | ||||||||||||||||||
| Real estate: | ||||||||||||||||||||||||||
| Commercial | 10,016 | 53.5 | 10,716 | 53.6 | ||||||||||||||||||||||
| Construction | 1,000 | 5.2 | 616 | 3.4 | ||||||||||||||||||||||
| Residential | 3,376 | 29.0 | 3,736 | 30.1 | ||||||||||||||||||||||
| Consumer | 376 | 0.7 | 408 | 0.7 | ||||||||||||||||||||||
| Unallocated | 245 | N/A | 381 | N/A | ||||||||||||||||||||||
| Total | $ | 17,861 | 100.0 | % | $ | 19,033 | 100.0 | % | ||||||||||||||||||
The allowance for loan losses at December 31, 2022, was $17,861,000, or 1.16% of loans, as compared to $19,033,000, or 1.30% of loans, at December 31, 2021. The ratio of non-performing loans plus foreclosed assets to total assets was 0.17% at December 31, 2022, as compared to 0.22% at December 31, 2021.
Loans past due 90 days and still accruing were $1,203,000 and nonaccrual loans were $2,654,000 as of December 31, 2022. Loans past due 90 days and still accruing were $730,000 at December 31, 2021, while nonaccruals were $5,489,000.
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.
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Additional information on nonaccrual loans at December 31, 2022 and 2021, is as follows:
| Dollars in thousands | Number of Credit Relationships | Balance | Current Specific Loss Allocations | Current Year Charge-Offs | Location | Originated | |||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Owner occupied commercial real estate | 5 | $ | 1,772 | $ | 192 | $ | — | In market | 2012-2019 | ||||||||||||||||||||||||||
| Investment/rental residential real estate | 1 | 101 | — | — | In market | 2016 | |||||||||||||||||||||||||||||
| Commercial and industrial | 2 | 781 | 628 | — | In market | 2017-2018 | |||||||||||||||||||||||||||||
| Total | 8 | $ | 2,654 | $ | 820 | $ | — | ||||||||||||||||||||||||||||
| December 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 | $ | 970 | ||||||||||||||||||||||||||||
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 southcentral Pennsylvania and northern Maryland. 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 December 31, 2022.
Owner occupied commercial real estate includes five unrelated loan relationships. The merger-acquired loan relationship for a light manufacturing enterprise was paid off during the third quarter of 2022. An $859,000 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. A $255,000 commercial mortgage loan was added to this category in the third quarter of 2022. A $350,000 commercial mortgage was added to this category in the fourth quarter of 2022. The other unrelated loans in this category have balances of less than $189,000 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 2012 and 2019 and are business loans impacted by specific borrower credit situations. Collateral valuation resulted in an $191,690 specific allocation on one of the five loan relationships. 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.
The acquired commercial real estate participation loan previously included in this category was transferred to foreclosed assets held for resale. The Corporation previously recognized an $831,000 specific reserve on this loan and the $831,000 was charged-off during the third quarter of 2022.
Investment/rental residential real estate includes one loan relationship (which is deemed to be adequately collateralized) totaling $104,000 for which the real estate is collateral and the purpose of which is for speculation, rental, or other non-owner occupied uses; this relationship is making principal reductions.
A $1,795,000 commercial and industrial loan was added in the fourth quarter of 2020 after ceasing operations, with a current balance of $162,000. Liquidation is mostly complete with a specific allocation of $9,000 after a $970,000 third quarter of 2021 charge-off. A related $371,000 owner occupied real estate loan was also in nonaccrual but settled in the first quarter of 2022. A third unrelated loan relationship was added in the first quarter of 2021 with a current outstanding balance of $619,000 and a specific allocation of $619,000 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 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-
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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 $0 for 2022 and the provision for loan losses of $50,000 for 2021, was a result of an analysis and 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 2022, the $0 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
On January 12, 2022, ACNB Bank announced plans to build a full-service community banking office to serve the Upper Adams area of Adams County, PA. The Upper Adams Office opened in October 2022 and, as a result, three offices were consolidated into the new community banking office. Two of the former office buildings were subsequently transferred to Assets Held for Sale at fair market value. Also, as part of the Bank’s branch optimization program, in the third quarter of 2022, the Bank announced the planned closure of three additional community banking offices effective December 2022. As a result, two of the former branch office buildings were transferred to Assets Held for Sale at fair market value. The total of the four branch office buildings transferred to assets held for sale have a carrying value of $3,393,000 at December 31, 2022.
Foreclosed Assets Held for Resale
The carrying value of real estate acquired through foreclosure was $474,000 with one property at December 31, 2022, compared to $0 with no properties at December 31, 2021. All acquired properties are actively marketed.
Other Assets
Other assets increased $19,136,000, or 69.0%, in 2022 compared to 2021, due primarily to an increase in deferred tax assets and pension related assets, as well as normal variations in a number of non-earning asset accounts.
Deposits
ACNB relies on deposits as a primary source of funds for lending activities. Total deposits were $2,198,975,000 at December 31, 2022. Deposits decreased by $227,414,000, or 9.4%, since December 31, 2021. The decrease in deposits were in interest bearing and non-interest bearing deposits, and was a result of customers seeking higher yielding alternative investment or deposit products as market interest rates rose during 2022. Historically, deposits vary between quarters mostly reflecting different levels held by local companies, government units and school districts during different times of the year. Despite the decline in deposits in 2022, the loan-to-deposit ratio was 69.97% at December 31, 2022.
ACNB’s deposit pricing function employs a disciplined pricing approach based upon liquidity needs and 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. Given the Corporation’s funding level, the Corporation made a decision to restrain deposit rates and thereby moderate deposit costs in 2022 despite an increase in market interest rates and an increase in rates by competitors. Interest bearing deposit costs for 2022 was 0.15% compared to 0.29% for 2021.
Table 10 — Time Deposits
Maturities of time deposits exceeding $250,000 outstanding at December 31, 2022, are summarized as follows:
| In thousands | |||||
| Three months or less | $ | 22,004 | |||
| Over three through six months | 19,617 | ||||
| Over six through twelve months | 8,167 | ||||
| Over twelve months | 1,780 | ||||
| Total | $ | 51,568 | |||
Borrowings
Short-term borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As of December 31, 2022, short-term borrowings were $41,954,000, an increase of $6,752,000, or 19.2%, from the December 31, 2021, balance of $35,202,000. 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 2021, repurchase agreement balances were up due to normal
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changes in the cash flow position of ACNB’s commercial and local government customer base. There were no short-term FHLB borrowings, at December 31, 2022 and 2021. This account is used or not used due to daily fluctuation in deposits and loans. Short-term FHLB borrowings are used to even out Bank 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 for 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 $21,000,000 at December 31, 2022, versus $34,700,000 at December 31, 2021. The Corporation decreased long-term borrowings 39.5% from December 31, 2021 as excess liquidity was used to pay down higher cost funding. 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 | 2022 | 2021 | ||||||||||||
| Short-term borrowings outstanding at end of year: | ||||||||||||||
| FHLB overnight advance | $ | — | $ | — | ||||||||||
| Securities sold under repurchase agreements | 41,954 | 35,202 | ||||||||||||
| Total | $ | 41,954 | $ | 35,202 | ||||||||||
| Dollars in thousands | 2022 | 2021 | ||||||||||||
| Average interest rate at year-end | 0.12 | % | 0.12 | % | ||||||||||
| Maximum amount outstanding at any month-end | $ | 41,954 | $ | 45,681 | ||||||||||
| Average amount outstanding | $ | 35,882 | $ | 35,153 | ||||||||||
| Weighted average interest rate | 0.12 | % | 0.11 | % | ||||||||||
Capital
ACNB’s capital management strategies have been developed to provide an appropriate rate of return, in the opinion of management, to shareholders, while maintaining its “well capitalized” regulatory position in relationship to its risk exposure. Total shareholders’ equity was $245,042,000 at December 31, 2022, compared to $272,114,000 at December 31, 2021. The decline in shareholders’ equity was primarily attributable to the change in accumulated other comprehensive income due to unrealized losses in the securities portfolio resulting from the increase in market interest rates during the year.
The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During 2022, ACNB retained $26,635,000, or 74.5%, of its net income, as compared to $18,866,000, or 67.8%, in 2021.
Quarterly cash dividends paid to ACNB Corporation shareholders in 2022 totaled $9,117,000, or $1.06 per common share. Compared to prior year, ACNB Corporation paid $1.03 in total dividends per common share in 2021, which included a special dividend of $0.02 per common share paid on June 15, 2021.
ACNB Corporation has a Dividend Reinvestment and Stock Purchase Plan that provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. Cumulative to December 31, 2022, 235,403 shares were issued under this plan. Proceeds are used for general corporate purposes.
On October 24, 2022, the Corporation announced that the Board of Directors approved on October 18, 2022, a new plan to repurchase, in open market and privately negotiated transactions, up to 255,575, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new common stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. As of December 31, 2022, no common stock has been repurchased under this new plan.
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
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reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average and risk adjusted assets. Management believes, as of December 31, 2022 and 2021, 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
In July 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 began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance effective January 1, 2014. The final rules call for the following capital requirements:
•a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;
•a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%;
•a minimum ratio of total capital to risk-weighted assets of 8.0%; and,
•a minimum leverage ratio of 4.0%.
In addition, the final rules established a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.
The Corporation calculated regulatory capital ratios as of December 31, 2022, 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.
Table 11 — Risk-Based Capital
ACNB Corporation considers the capital ratios of the banking subsidiary to be the relevant measurement of capital adequacy.
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 the FDIC’s Prompt Corrective Action framework. The CBLR framework was available for banks to use in their March 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.
The banking subsidiary’s capital ratios are as follows:
| 2022 | 2021 | To be Well Capitalized under Prompt Corrective Action Regulations | |||||||||||||||
| Tier 1 leverage ratio (to average assets) | 9.50 | % | 8.81 | % | 5.00 | % | |||||||||||
| Common Tier 1 capital (to risk-weighted assets) | 14.68 | % | 16.32 | % | 6.50 | % | |||||||||||
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 14.68 | % | 16.32 | % | 8.00 | % | |||||||||||
| Total risk-based capital ratio | 15.76 | % | 17.57 | % | 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
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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, the ability to raise brokered deposits, and the ability to borrow from the FHLB and Federal Reserve Discount Window. At December 31, 2022, ACNB’s banking subsidiary could borrow approximately $821,375,000 from the FHLB of which $808,275,000 was available. At December 31, 2022, ACNB’s banking subsidiary could borrow approximately $5,619,000 from the Discount Window, of which the full amount was available. The underlying collateral at the Discount Window is made up of investment securities held in a joint-custody account under the Corporation’s name.
ACNB’s banking subsidiary maintains several unsecured Fed Funds lines with correspondent banks. As of December 31, 2022, Fed Funds line capacity at the banking subsidiary was $75,000,000, of which the full amount was available. In 2018, ACNB Corporation executed a guaranty for a note related to a $1,500,000 commercial line of credit from a local bank, with normal terms and conditions for such a line, for ACNB Insurance Services, Inc., the borrower and a wholly-owned subsidiary of ACNB Corporation. The commercial line of credit is for general working capital needs as they arise by the borrower. A subsequent draw taken was reduced to $0 in 2020 on this commercial line of credit since its inception. The liability is recorded for the net drawn amount of this line, no further liability is recorded for the remaining line as to the guarantor’s obligation as the guarantor would have full recourse from all assets of its wholly-owned subsidiary. The Corporation maintains a $5,000,000 unsecured line of credit with a correspondent bank. The line of credit remains at full capacity at year-end.
Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling $41,954,000 and $35,202,000 at December 31, 2022 and 2021, 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 shareholders 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 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.
On March 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 of March 31, 2031. The debt is redeemable by the Corporation at its option, in whole or in part, on or after March 30, 2026, and at any time upon occurrences of certain unlikely events such as receivership insolvency or liquidation of ACNB or ACNB 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. At December 31, 2022, the Corporation had unfunded outstanding commitments to extend credit of $401,786,000 and outstanding standby letters of credit of $11,429,000. 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.
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not required for smaller reporting companies.
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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the following pages:
| Page | ||||||||
Report of Independent Registered Public Accounting Firm (Crowe LLP, Washington, DC, Firm ID: 173) | ||||||||
Report of Independent Auditor (RSM US LLP, Philadelphia, PA, Firm ID: 49) | ||||||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of ACNB Corporation and Subsidiaries
Gettysburg, PA
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of condition of ACNB Corporation (the "Company") as of December 31, 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses — Qualitative Risk Factors
As more fully described in Notes A and D to the consolidated financial statements, the Company’s allowance for loan losses as of December 31, 2022 was $17.9 million. The Company estimates and records an allowance for loan losses for loans collectively evaluated for impairment by developing a loss rate based on historical losses and qualitative risk factors. Qualitative risk factors are used to adjust historical loss rates considering relevant factors such as lending policies and procedures; national, regional and local economic and business conditions; 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; and existence, effect and changes of any concentrations of credit. The application of the adjustments for qualitative risk factors to the historical loss rate calculation is subjective.
We identified three qualitative risk factor components of the allowance for loan losses as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management. These three qualitative risk factors are the nature and volume of the portfolio and terms of loans, the volume and severity of past due, classified and nonaccrual loans; and the national, regional and local economic and business conditions (the “three qualitative risk factors”).
The primary procedures performed to address this critical audit matter include:
Testing the effectiveness of internal controls over:
•The Company’s review of the three qualitative risk factors of the allowance for loan loss calculation, including:
◦the review of the judgments used in developing their methodology,
◦the relevance and reliability of the data used to develop the methodology,
◦the reasonableness of the amounts derived from each of the three qualitative risk factors
•The mathematical accuracy of the three qualitative risk factor calculations.
Substantively testing management’s estimate, which included:
•Evaluation of completeness and accuracy of the data used to determine the three qualitative risk factors and agreed to source documentation.
•Evaluation of management judgment involved in the development of the methodology for the three qualitative risk factors including the evaluation of the reasonableness and appropriateness of the magnitude of the adjustments.
•Analytical procedures to evaluate changes that occurred in the three qualitative risk factors.
/s/ Crowe LLP
We have served as the Company's auditor since 2022.
Washington, D.C.
March 3, 2023
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
ACNB Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying statement of condition of ACNB Corporation and its Subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses—Qualitative Factors
The allowance for loan losses as of December 31, 2021 was $19.0 million. As described in Notes A and D to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount which, in management’s judgement, will be adequate to absorb losses on existing loans. The allowance consists of specific and general components in the amounts of $1.5 million and $17.5 million, respectively. Specific reserves estimate potential losses on identified impaired loans with uncertain collectability of principal and interest. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for the previous twelve quarters for each of these categories of loans, adjusted for qualitative risk factors. The evaluation of the qualitative factors requires a significant amount of judgement by management and involves a high degree of subjectivity.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
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Our audit procedures related to the qualitative factors included the following, among others:
•We obtained an understanding of the relevant controls related to management’s assessment and review of the qualitative factors, and tested such controls for design and operating effectiveness, including controls over management’s establishment, review and approval of the qualitative factors and the data used in determining the qualitative factors.
•We obtained an understanding of how management developed the estimates and related assumptions, including:
–Testing completeness and accuracy of key data inputs used in forming assumptions or calculations and testing the reliability of the underlying data on which these factors are based by comparing information to source documents and external information sources.
–Evaluating the reasonableness of the qualitative factor established by management as compared to the underlying internal or external information sources.
We served as the Company’s auditor from 2018 to May 20, 2022.
/s/ RSM US LLP
Philadelphia, Pennsylvania
March 14, 2022
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ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
| December 31, | |||||||||||
| Dollars in thousands, except per share data | 2022 | 2021 | |||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 40,067 | $ | 14,912 | |||||||
| Interest bearing deposits with banks | 128,094 | 695,219 | |||||||||
| Total Cash and Cash Equivalents | 168,161 | 710,131 | |||||||||
| Equity securities with readily determinable fair values | 1,719 | 2,609 | |||||||||
| Debt securities available for sale | 553,554 | 437,098 | |||||||||
Securities held to maturity, fair value $58,078; $6,652 | 64,977 | 6,454 | |||||||||
| Loans held for sale | 123 | 2,193 | |||||||||
Loans, net of allowance for loan losses $17,861; $19,033 | 1,520,749 | 1,449,394 | |||||||||
| Assets held for sale | 3,393 | 1,093 | |||||||||
| Premises and equipment | 27,053 | 30,980 | |||||||||
| Right of use assets | 3,162 | 3,270 | |||||||||
| Restricted investment in bank stocks | 1,629 | 2,303 | |||||||||
| Investment in bank-owned life insurance | 77,993 | 64,261 | |||||||||
| Investments in low-income housing partnerships | 1,129 | 1,254 | |||||||||
| Goodwill | 44,185 | 42,108 | |||||||||
| Intangible assets, net | 10,332 | 6,101 | |||||||||
| Foreclosed assets held for resale | 474 | — | |||||||||
| Other assets | 46,874 | 27,738 | |||||||||
| Total Assets | $ | 2,525,507 | $ | 2,786,987 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Deposits: | |||||||||||
| Non-interest bearing | $ | 595,049 | $ | 623,360 | |||||||
| Interest bearing | 1,603,926 | 1,803,029 | |||||||||
| Total Deposits | 2,198,975 | 2,426,389 | |||||||||
| Short-term borrowings | 41,954 | 35,202 | |||||||||
| Long-term borrowings | 21,000 | 34,700 | |||||||||
| Lease liabilities | 3,162 | 3,270 | |||||||||
| Other liabilities | 15,374 | 15,312 | |||||||||
| Total Liabilities | 2,280,465 | 2,514,873 | |||||||||
| STOCKHOLDERS’ EQUITY | |||||||||||
Preferred stock, $2.50 par value; 20,000,000 shares authorized; no shares outstanding | — | — | |||||||||
Common stock, $2.50 par value; 20,000,000 shares authorized; 8,838,720 and 8,795,877 shares issued; 8,515,120 and 8,679,206 shares outstanding | 22,086 | 21,978 | |||||||||
Treasury stock, at cost (323,600 and 116,671 shares) | (8,927) | (2,245) | |||||||||
| Additional paid-in capital | 96,022 | 94,688 | |||||||||
| Retained earnings | 193,873 | 167,238 | |||||||||
| Accumulated other comprehensive loss | (58,012) | (9,545) | |||||||||
| Total Stockholders’ Equity | 245,042 | 272,114 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,525,507 | $ | 2,786,987 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
50
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended December 31, | |||||||||||
| Dollars in thousands, except per share data | 2022 | 2021 | |||||||||
| INTEREST AND DIVIDEND INCOME | |||||||||||
| Loans, including fees | $ | 70,246 | $ | 71,186 | |||||||
| Securities: | |||||||||||
| Taxable | 9,799 | 5,423 | |||||||||
| Tax-exempt | 1,144 | 543 | |||||||||
| Dividends | 104 | 230 | |||||||||
| Other | 5,756 | 777 | |||||||||
| Total Interest Income | 87,049 | 78,159 | |||||||||
| INTEREST EXPENSE | |||||||||||
| Deposits | 2,561 | 5,012 | |||||||||
| Short-term borrowings | 77 | 39 | |||||||||
| Long-term borrowings | 986 | 1,864 | |||||||||
| Total Interest Expense | 3,624 | 6,915 | |||||||||
| Net Interest Income | 83,425 | 71,244 | |||||||||
| PROVISION FOR LOAN LOSSES | — | 50 | |||||||||
| Net Interest Income after Provision for Loan Losses | 83,425 | 71,194 | |||||||||
| OTHER INCOME | |||||||||||
| Commissions from insurance sales | 8,307 | 6,151 | |||||||||
| Service charges on deposit accounts | 4,066 | 3,510 | |||||||||
| Income from fiduciary, investment management and brokerage activities | 3,160 | 3,169 | |||||||||
| Income from mortgage loans held for sale | 487 | 3,393 | |||||||||
| Earnings on investment in bank-owned life insurance | 1,532 | 1,408 | |||||||||
| Gain on life insurance proceeds | — | 101 | |||||||||
| Net losses on sales or calls of securities | (234) | — | |||||||||
| Net gains on sales of low income housing partnership | 421 | — | |||||||||
| Net (losses) gains on equity securities | (298) | 439 | |||||||||
| Service charges on ATM and debit card transactions | 3,322 | 3,387 | |||||||||
| Other | 1,044 | 1,218 | |||||||||
| Total Other Income | 21,807 | 22,776 | |||||||||
| OTHER EXPENSES | |||||||||||
| Salaries and employee benefits | 35,979 | 36,816 | |||||||||
| Net occupancy | 4,076 | 4,114 | |||||||||
| Equipment | 6,612 | 6,175 | |||||||||
| Other tax | 1,632 | 1,572 | |||||||||
| Professional services | 2,086 | 1,304 | |||||||||
| Supplies and postage | 823 | 718 | |||||||||
| Marketing and corporate relations | 299 | 287 | |||||||||
| FDIC and regulatory | 1,128 | 960 | |||||||||
| Intangible assets amortization | 1,492 | 1,164 | |||||||||
| Other operating | 6,154 | 5,841 | |||||||||
| Total Other Expenses | 60,281 | 58,951 | |||||||||
| Income Before Income Taxes | 44,951 | 35,019 | |||||||||
| PROVISION FOR INCOME TAXES | 9,199 | 7,185 | |||||||||
| Net Income | $ | 35,752 | $ | 27,834 | |||||||
| PER SHARE DATA | |||||||||||
| Basic earnings | $ | 4.15 | $ | 3.19 | |||||||
| Cash dividends declared | $ | 1.06 | $ | 1.03 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
51
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Years Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| NET INCOME | $ | 35,752 | $ | 27,834 | |||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||
SECURITIES | |||||||||||
Unrealized losses arising during the period, net of income taxes of $(14,499) and $(2,321), respectively | (50,192) | (8,119) | |||||||||
Reclassification adjustment for net gains included in net income, net of income taxes of $55 and $0, respectively (A) (C) | 193 | — | |||||||||
| Total unrealized loss on investment securities | (49,999) | (8,119) | |||||||||
Unrealized losses on securities transferred to held to maturity, net of income taxes of $(1,072) and $0, respectively | (3,751) | — | |||||||||
Amortization of unrealized losses on securities transferred to held to maturity, net of income taxes of $211 and $0, respectively | 739 | — | |||||||||
| Total unrealized loss remaining on investment securities held to maturity | (3,012) | — | |||||||||
| PENSION | |||||||||||
Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $90 and $280, respectively (B) (C) | 317 | 975 | |||||||||
Unrecognized net loss, net of income taxes of $15 and $944, respectively (C) | 476 | 3,237 | |||||||||
| Total unrealized loss on pension | 793 | 4,212 | |||||||||
| TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | (48,467) | (3,907) | |||||||||
| TOTAL COMPREHENSIVE (LOSS) INCOME | $ | (12,715) | $ | 23,927 | |||||||
_______________________________
(A) Gross amounts are included in net gains on sales or calls of securities on the Consolidated Statements of Income in total other income.
(B) Gross amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of Income in total other expenses.
(C) Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.
The accompanying notes are an integral part of the consolidated financial statements.
52
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2022 and 2021
| Dollars in thousands | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
| BALANCE—January 1, 2021 | $ | 21,918 | $ | (728) | $ | 94,048 | $ | 148,372 | $ | (5,638) | $ | 257,972 | |||||||||||||||||||||||
| Net income | — | — | — | 27,834 | — | 27,834 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | — | — | — | — | (3,907) | (3,907) | |||||||||||||||||||||||||||||
Common stock shares issued (23,884 shares) | 60 | — | 278 | — | — | 338 | |||||||||||||||||||||||||||||
Repurchased shares (54,071 shares) | — | (1,517) | — | — | — | (1,517) | |||||||||||||||||||||||||||||
| Restricted stock compensation expense | — | — | 362 | — | — | 362 | |||||||||||||||||||||||||||||
Cash dividends declared ($1.03 per share) | — | — | — | (8,968) | — | (8,968) | |||||||||||||||||||||||||||||
| BALANCE—December 31, 2021 | 21,978 | (2,245) | 94,688 | 167,238 | (9,545) | 272,114 | |||||||||||||||||||||||||||||
| Net income | — | — | — | 35,752 | — | 35,752 | |||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | — | — | — | — | (48,467) | (48,467) | |||||||||||||||||||||||||||||
Common stock shares issued (20,908 shares) | 52 | — | 661 | — | — | 713 | |||||||||||||||||||||||||||||
Repurchased shares (206,929 shares) | — | (6,682) | — | — | — | (6,682) | |||||||||||||||||||||||||||||
Restricted stock grants (21,935 shares) | 56 | — | 673 | — | — | 729 | |||||||||||||||||||||||||||||
Cash dividends declared ($1.06 per share) | — | — | — | (9,117) | — | (9,117) | |||||||||||||||||||||||||||||
| BALANCE—December 31, 2022 | $ | 22,086 | $ | (8,927) | $ | 96,022 | $ | 193,873 | $ | (58,012) | $ | 245,042 | |||||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
53
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 35,752 | $ | 27,834 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Gain on sales of loans originated for sale | (487) | (3,393) | |||||||||
| Gain on sales of foreclosed assets held for resale, including writedowns | — | (88) | |||||||||
| Loss on sale of premises and equipment | 41 | 26 | |||||||||
| Earnings on investment in bank-owned life insurance | (1,532) | (1,408) | |||||||||
| Loss on sales or calls of securities | 234 | — | |||||||||
| Loss (gain) on equity securities | 298 | (439) | |||||||||
| Gain on sale of low-income housing partnership | (421) | — | |||||||||
| Gain on life insurance proceeds | — | (101) | |||||||||
| Restricted stock compensation expense | 729 | 362 | |||||||||
| Depreciation and amortization | 3,796 | 3,441 | |||||||||
| Provision for loan losses | — | 50 | |||||||||
| Net amortization of investment securities premiums | 2,156 | 1,626 | |||||||||
| (Increase) decrease in accrued interest receivable | (1,395) | 1,430 | |||||||||
| Decrease in accrued interest payable | (58) | (1,325) | |||||||||
| Mortgage loans originated for sale | (36,664) | (104,633) | |||||||||
| Proceeds from sales of loans originated for sale | 39,221 | 116,867 | |||||||||
| Increase in other assets | (4,303) | (4,324) | |||||||||
| Decrease in deferred tax expense | 924 | 236 | |||||||||
| Increase in other liabilities | 910 | 5,965 | |||||||||
| Net Cash Provided by Operating Activities | 39,201 | 42,126 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Proceeds from maturities of investment securities held to maturity | 2,903 | 3,840 | |||||||||
| Proceeds from maturities of investment securities available for sale | 58,578 | 105,340 | |||||||||
| Proceeds from sales of investment securities held to maturity | 1,054 | — | |||||||||
| Proceeds from sales of investment securities available for sale | 3,129 | — | |||||||||
| Proceeds from sales of equity securities | 811 | — | |||||||||
| Purchase of investment securities available for sale | (284,336) | (216,786) | |||||||||
| Purchase of investment securities held to maturity | (22,204) | — | |||||||||
| Purchase of equity securities | (206) | — | |||||||||
| Redemption of restricted investment in bank stocks | 674 | 639 | |||||||||
| Net (increase) decrease in loans | (71,829) | 168,013 | |||||||||
| Purchase of bank-owned life insurance | (12,200) | — | |||||||||
| Proceeds from sale of low-income housing partnerships | 421 | — | |||||||||
| Acquisition of insurance agency | (7,800) | — | |||||||||
| Proceeds from life insurance death benefits | — | 649 | |||||||||
| Capital expenditures | (1,811) | (1,576) | |||||||||
| Proceeds from sale of premises and equipment | 1,093 | 213 | |||||||||
| Proceeds from sale of foreclosed real estate | — | 189 | |||||||||
| Net Cash (Used in) Provided by Investing Activities | (331,723) | 60,521 | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Net (decrease) increase in demand deposits | (28,311) | 66,694 | |||||||||
| Net (decrease) increase in time certificates of deposits and interest bearing deposits | (199,103) | 174,170 | |||||||||
| Net increase (decrease) in short-term borrowings | 6,752 | (3,262) | |||||||||
| Proceeds from long-term borrowings | 1,500 | 15,000 | |||||||||
| Repayments on long-term borrowings | (15,200) | (34,045) | |||||||||
| Dividends paid | (9,117) | (8,968) | |||||||||
| Common stock repurchased | (6,682) | (1,517) | |||||||||
| Common stock issued | 713 | 60 | |||||||||
| Net Cash (Used in) Provided by Financing Activities | (249,448) | 208,132 | |||||||||
| Net (Decrease) Increase in Cash and Cash Equivalents | (541,970) | 310,779 | |||||||||
| CASH AND CASH EQUIVALENTS — BEGINNING | 710,131 | 399,352 | |||||||||
| CASH AND CASH EQUIVALENTS — ENDING | $ | 168,161 | $ | 710,131 | |||||||
| Supplemental disclosures of cash flow information | |||||||||||
| Interest paid | $ | 3,682 | $ | 8,240 | |||||||
| Income taxes paid | $ | 7,225 | $ | 7,400 | |||||||
| Loans transferred to foreclosed assets held for resale and other foreclosed transactions | $ | 474 | $ | 101 | |||||||
| Non-cash investing activities | |||||||||||
| Investments transferred from available for sale to held to maturity | $ | 39,683 | $ | — | |||||||
| Premises and equipment transferred to assets held for sale | $ | 3,393 | $ | — | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
54
ACNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and ACNB Insurance Services, Inc., formerly Russell Insurance Group, Inc. The Bank engages in full-service commercial and consumer banking and wealth management services, including trust and retail brokerage, through its twenty-six community banking offices, including seventeen community banking office locations in Adams, Cumberland, Franklin, and York Counties, Pennsylvania, and nine community banking office locations in Carroll and Frederick Counties, Maryland. There are also loan production offices situated in Lancaster and York, Pennsylvania, and Hunt Valley, Maryland.
ACNB Insurance Services, Inc. is a full-service insurance agency based in Westminster, Maryland, with additional locations in Jarrettsville, Maryland, and Gettysburg, Pennsylvania. The agency offers a broad range of property, casualty, health, life and disability insurance to both individual and commercial clients.
On January 11, 2020, ACNB completed the acquisition of Frederick County Bancorp, Inc. (FCBI), a bank holding company based in Frederick, Maryland. In addition, Frederick County Bank, a Maryland state-chartered bank and FCBI’s wholly-owned subsidiary, merged with and into ACNB Bank. ACNB Bank now operates in the Frederick County, Maryland, market as “FCB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via the network of four community banking offices located in Frederick County, Maryland.
On July 1, 2017, ACNB completed its acquisition of New Windsor Bancorp, Inc. (New Windsor) of Taneytown, Maryland. At the effective time of the acquisition, New Windsor merged with and into a wholly-owned subsidiary of ACNB, immediately followed by the merger of New Windsor State Bank (NWSB) with and into ACNB Bank. ACNB Bank now operates in the Carroll County, Maryland market as “NWSB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via the network of five community banking offices located in Carroll County, Maryland.
On February 28, 2022, ACNB Insurance Services, Inc. completed the acquisition of the business and assets of Hockley & O’Donnell Insurance Agency, LLC, Gettysburg, PA. This insurance agency acquisition in Adams County, PA, leveraged the affiliation with ACNB Corporation and ACNB Bank in their headquarters market.
On December 19, 2022, plans for ACNB Bank to rebrand its Maryland banking divisions were announced. Effective January 1, 2023, these divisions, NWSB Bank and FCB Bank, formally adopted the ACNB Bank name and brand identity in the counties of Carroll and Frederick in northern Maryland, respectively. The goal of this rebranding initiative is to eliminate customer confusion, especially for those who bank in multiple markets, and to provide future operating and cost efficiencies. Further, this step now fully aligns the brand of ACNB Bank with that of ACNB Insurance Services, Inc., which was rebranded effective January 1, 2022, to create enhanced synergies and market recognition throughout the Corporation’s footprint in southcentral Pennsylvania and northern Maryland.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.
Basis of Financial Statements
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $518,800,000 and $537,800,000 at December 31, 2022 and 2021, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
55
Subsequent Events
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2022, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
Use of Estimates
To prepare financial statements in conformity with U.S. generally accepted accounting principles (GAAP) management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.
Cash Flows
Cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which mature within 90 days. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions are carried at cost.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity or trading are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss). Equity securities with readily determinable fair values are recorded at fair value with changes in fair value recognized in net income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Transfers of debt securities into the held to maturity category from the available for sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining expected life of the security.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income.
Mortgage loans held for sale are sold with the mortgage servicing rights released to another financial institution through a correspondent relationship. The correspondent financial institution absorbs all of the risk related to rate lock commitments. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Loans
The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.
56
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.
The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses (the allowance) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include:
•lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;
•national, regional and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;
•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.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying
57
assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.
It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third-party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third-party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, change in the condition of the real estate, change in local market and economic conditions, and other specific factors involving the collateral. Once the updated valuation is completed, the collateral value is updated accordingly.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. The Corporation orders valuations at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.
For impaired loans secured by collateral other than real estate, the Corporation considers the net book value of the collateral, as recorded in the most recent financial statements of the borrower, and determines fair value based on estimates made by management.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.
Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current
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sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.
Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.
Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.
In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.
Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.
Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.
In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.
Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.
The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.
In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.
Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.
Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
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The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.
In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s financial ability to repay the loan as agreed and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.
Residential mortgage loans are subject to risk due primarily to general economic conditions, as well as periods of weak housing markets.
Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.
Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as periods of weak housing markets.
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate markets are weak and property values deteriorate.
Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Concentration of Credit Risk
Most of the Corporation’s activities are with customers located within southcentral Pennsylvania and northern Maryland. Note C discusses the types of securities in which the Corporation invests. Note D discusses the types of lending in which the Corporation engages. Included in commercial real estate loans are loans made to lessors of non-residential dwellings that total $434,057,000, or 28.2%, of total loans at December 31, 2022. These borrowers are geographically disbursed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space and recreational facilities. Because of the varied nature of the tenants in aggregate, management believes that these loans do not present any greater risk than commercial loans in general.
Acquired Loans
Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values. The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. After acquisition, losses are recognized by an increase in the allowance for loan losses.
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Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common rick characteristics such as credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. The Corporation estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater that the carrying amount, it is recognized as part of future income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, equipment and leasehold improvements are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the assets’ estimated useful lives. Normally, a building’s useful life is 40 years, except for building remodels and additions, which are depreciated over fifteen years. Bank equipment, including furniture and fixtures, is normally depreciated over five - fifteen years depending upon the nature of the purchase. Maintenance and normal repairs are charged to expense when incurred while major additions and improvements are capitalized. Gains and losses on disposals are reflected in current operations. Amortization of leasehold improvements is computed by straight line over the shorter of the assets’ useful life or the related lease term.
Restricted Investment in Bank Stocks
Restricted investment in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of December 31, 2022 and 2021, and consists of common stock in the Atlantic Central Bankers Bank, Community Bankers Bank and Federal Home Loan Bank (FHLB).
Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Financial Services—Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank, and (4) the liquidity position of the correspondent bank.
Management believes no impairment charge was necessary related to the restricted investment in bank stocks during 2022 or 2021.
Bank-Owned Life Insurance
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans. Investment in bank-owned life insurance policies was used to finance the nonqualified compensation plans and provide tax-exempt income to the Corporation.
ASC Topic 715, Compensation—Retirement Benefits, requires a liability to be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability is based on either the post-employment benefit cost for continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Corporation’s liability is based on the post-employment benefit cost for continuing life insurance. The Corporation incurred approximately $81,000 and $86,000 of expense in 2022 and 2021, respectively, related to these benefits.
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Investments in Low-Income Housing Partnerships
The Corporation’s investments in low-income housing partnerships are accounted for using the “equity method” prescribed by ASC Topic 323, Investments — Equity Method. In accordance with ASC Topic 740, Income Taxes, tax credits are recognized as they become available. Any residual loss is amortized as the tax credits are received.
Goodwill and Intangible Assets
The Corporation accounts for its acquisitions using the acquisition accounting method required by ASC Topic 805, Business Combinations. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Generally, this results in a residual amount in excess of the net fair values, which is recorded as goodwill.
ASC Topic 350, Intangibles—Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Corporation did not identify any impairment on ACNB Insurance Services, Inc.’s outstanding goodwill from its most recent testing, which was performed as of October 1, 2022. The Corporation did not identify any impairment on the Bank’s outstanding goodwill from its most recent qualitative assessment, which was completed as of December 31, 2022. 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 to fifteen years.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are adjusted to the fair value, less costs to sell as necessary. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Outstanding foreclosed asset balance of $474,000 and $0 was held at December 31, 2022 and 2021, respectively.
Income Taxes
The Corporation accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.
Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Corporation accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense.
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Retirement Plan
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Stock-based Compensation
The ACNB Corporation 2009 Restricted Stock plan expired by its own terms after 10 years on February 24, 2019. The purpose of this plan was to provide employees and directors of the Bank who have responsibility for its growth with additional incentives by allowing them to acquire ownership in the Corporation and, thereby, encouraging them to contribute to the success of the Corporation. As of December 31, 2022, 25,945 shares were issued under the plan and all shares are fully vested. No further shares may be issued under this restricted stock plan.
On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2022, 57,522 shares were issued under this plan, of which 44,154 are fully vested and the remaining 13,368 will vest over the next one year.
Plan expense is recognized over the vesting period of the stock issued under both plans. $729,000 and $110,000 of compensation expenses related to the grants were recognized for the years ended December 31, 2022 and 2021, respectively.
Net Income per Share
The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 8,623,012 and 8,714,926 weighted average shares of common stock outstanding for 2022 and 2021, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating for this calculation.
Advertising Costs
Costs of advertising, which are included in marketing expenses, are expensed when incurred.
Off-Balance Sheet Credit-Related Financial Instruments
In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Comprehensive Income (Loss)
Comprehensive Income (Loss) consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains and losses on changes in funded status
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of the pension plan which are also recognized as separate components of equity. The components of the accumulated other comprehensive loss, net of taxes, are as follows:
| In thousands | Unrealized Gains on Securities | Pension Liability | Accumulated Other Comprehensive Loss | ||||||||||||||
| Ending Balance — December 31, 2021 | $ | (3,474) | $ | (6,071) | $ | (9,545) | |||||||||||
| December 31, 2022 | |||||||||||||||||
| Beginning balance | $ | (3,474) | $ | (6,071) | $ | (9,545) | |||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | |||||||||||||||||
| Unrealized gain on available for sale securities, net of tax | (50,192) | — | (50,192) | ||||||||||||||
| Realized losses on securities, net of tax | 193 | — | 193 | ||||||||||||||
| Amortization of unrealized losses on securities transferred to held to maturity, net of tax | 739 | — | 739 | ||||||||||||||
| Amortization of pension net loss, transition liability and prior service cost, net of tax | — | 317 | 317 | ||||||||||||||
| Unrecognized pension net gain, net of tax | — | 476 | 476 | ||||||||||||||
| Net current period other comprehensive (loss) income | (49,260) | 793 | (48,467) | ||||||||||||||
| Ending Balance | $ | (52,734) | $ | (5,278) | $ | (58,012) | |||||||||||
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note L — “Fair Value Measurements”. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rate, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Segment Reporting
While the Corporation monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporate-wide basis. Segment determination also considered organizational structure and is consistent with the presentation of financial information to the chief operation decision maker to evaluate segment performance, develop strategy, and allocate resources. The Corporation’s chief operating decision maker is the Board of Directors. Management has determined that the Corporation has two reportable segments consisting of Banking and Insurance. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Please refer to Note S — “Segment and Related Information” for a discussion of insurance operations.
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New Accounting Pronouncements
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new model referred to as current expected credit losses (CECL) model, will apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments. ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, and information systems. The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model. The Corporation is continuing to conduct model comparisons and finalized policy and control framework over the adoption process. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the financial condition or results of operations.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022.
Furthermore, in December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Reference Rate Reform (Topic 848). This ASU extends the sunset date of ASC Topic 848 (Reference Rate Reform) to December 31, 2024, in response to the United Kingdom’s Financial Conduct Authority (FCA) extension of the intended cessation date of LIBOR in the United States.
The Corporation evaluated the impact of this standard, and believes that its adoption will not have a material impact on the Corporation’s consolidated financial condition or results of operations.
ASU 2022-02
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Corporation will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective March 31, 2023, for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13. The Corporation’s current plan is to adopt ASU 2016-13 January 1, 2023 and will simultaneously implement ASU 2022-02.
NOTE B — RESTRICTIONS ON CASH AND DUE FROM BANKS
In return for services obtained through correspondent banks, the Corporation is required to maintain non-interest bearing cash balances in those correspondent banks. At December 31, 2022 and 2021, all compensating balances are met by vault cash.
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NOTE C — SECURITIES
Amortized cost and fair value of securities at December 31, 2022 and 2021, were as follows:
| In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| SECURITIES AVAILABLE FOR SALE | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| U.S. Government and agencies | $ | 241,467 | $ | — | $ | 30,468 | $ | 210,999 | |||||||||||||||
| Mortgage-backed securities, residential | 327,535 | 342 | 32,159 | 295,718 | |||||||||||||||||||
| State and municipal | 15,235 | 196 | 196 | 15,235 | |||||||||||||||||||
| Corporate bonds | 33,404 | 15 | 1,817 | 31,602 | |||||||||||||||||||
| $ | 617,641 | $ | 553 | $ | 64,640 | $ | 553,554 | ||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| U.S. Government and agencies | $ | 249,463 | $ | 503 | $ | 4,925 | $ | 245,041 | |||||||||||||||
| Mortgage-backed securities, residential | 133,697 | 1,562 | 1,763 | 133,496 | |||||||||||||||||||
| State and municipal | 44,547 | 315 | 251 | 44,611 | |||||||||||||||||||
| Corporate bonds | 13,858 | 164 | 72 | 13,950 | |||||||||||||||||||
| $ | 441,565 | $ | 2,544 | $ | 7,011 | $ | 437,098 | ||||||||||||||||
| Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Fair Value | ||||||||||||||||||||
| SECURITIES HELD TO MATURITY | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Mortgage-backed securities, residential | $ | 3,279 | $ | — | $ | 194 | $ | 3,085 | |||||||||||||||
| State and municipal | 61,698 | — | 6,705 | 54,993 | |||||||||||||||||||
| $ | 64,977 | $ | — | $ | 6,899 | $ | 58,078 | ||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Mortgage-backed securities, residential | $ | 6,454 | $ | 198 | $ | — | $ | 6,652 | |||||||||||||||
| $ | 6,454 | $ | 198 | $ | — | $ | 6,652 | ||||||||||||||||
Fair value of equity securities with readily determinable fair values at December 31, 2022 and 2021, are as follows:
| In thousands | Fair Value at January 1, 2022 | Purchases | Sales | Gains | Losses | Fair Value at December 31, 2022 | ||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| CRA Mutual Fund | $ | 1,036 | $ | — | $ | — | $ | — | $ | 121 | $ | 915 | ||||||||||||||||||||||||||
| Canapi Ventures SBIC Fund | — | 206 | — | — | — | 206 | ||||||||||||||||||||||||||||||||
| Stock in other banks | 1,573 | — | 811 | 13 | 177 | 598 | ||||||||||||||||||||||||||||||||
| $ | 2,609 | $ | 206 | $ | 811 | $ | 13 | $ | 298 | $ | 1,719 | |||||||||||||||||||||||||||
| In thousands | Fair Value at January 1, 2021 | Gains | Losses | Fair Value at December 31, 2021 | ||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| CRA Mutual Fund | $ | 1,065 | $ | — | $ | 29 | $ | 1,036 | ||||||||||||||||||
| Stock in other banks | 1,105 | 468 | — | 1,573 | ||||||||||||||||||||||
| $ | 2,170 | $ | 468 | $ | 29 | $ | 2,609 | |||||||||||||||||||
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The following table shows the Corporation’s investments’ gross unrealized and unrecognized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2022 and 2021:
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| In thousands | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| SECURITIES AVAILABLE FOR SALE | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| U.S. Government and agencies | $ | 25,426 | $ | 1,461 | $ | 185,573 | $ | 29,007 | $ | 210,999 | $ | 30,468 | |||||||||||||||||||||||
| Mortgage-backed securities, residential | 221,249 | 19,362 | 63,145 | 12,797 | 284,394 | 32,159 | |||||||||||||||||||||||||||||
| State and municipal | 6,229 | 196 | — | — | 6,229 | 196 | |||||||||||||||||||||||||||||
| Corporate bonds | 24,337 | 1,217 | 5,250 | 600 | 29,587 | 1,817 | |||||||||||||||||||||||||||||
| $ | 277,241 | $ | 22,236 | $ | 253,968 | $ | 42,404 | $ | 531,209 | $ | 64,640 | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| U.S. Government and agencies | $ | 177,107 | $ | 3,537 | $ | 34,297 | $ | 1,388 | $ | 211,404 | $ | 4,925 | |||||||||||||||||||||||
| Mortgage-backed securities, residential | 77,969 | 1,495 | 7,727 | 268 | 85,696 | 1,763 | |||||||||||||||||||||||||||||
| State and municipal | 20,289 | 224 | 2,123 | 27 | 22,412 | 251 | |||||||||||||||||||||||||||||
| Corporate bonds | 5,790 | 72 | — | — | 5,790 | 72 | |||||||||||||||||||||||||||||
| $ | 281,155 | $ | 5,328 | $ | 44,147 | $ | 1,683 | $ | 325,302 | $ | 7,011 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | Fair Value | Unrecognized Losses | ||||||||||||||||||||||||||||||
| SECURITIES HELD TO MATURITY | |||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities, residential | $ | 3,085 | $ | 194 | $ | — | $ | — | $ | 3,085 | $ | 194 | |||||||||||||||||||||||
| State and municipal | 38,086 | 3,875 | 16,907 | 2,830 | 54,993 | 6,705 | |||||||||||||||||||||||||||||
| $ | 41,171 | $ | 4,069 | $ | 16,907 | $ | 2,830 | $ | 58,078 | $ | 6,899 | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Mortgage-backed security, residential | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.
Management sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At December 31, 2022, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.
Amortized cost and fair value at December 31, 2022, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.
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| Available for Sale | Held to Maturity | ||||||||||||||||||||||
| In thousands | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| 1 year or less | $ | 11,012 | $ | 10,876 | $ | 285 | $ | 283 | |||||||||||||||
| Over 1 year through 5 years | 165,837 | 149,826 | 377 | 356 | |||||||||||||||||||
| Over 5 years through 10 years | 92,955 | 77,710 | 16,437 | 15,248 | |||||||||||||||||||
| Over 10 years | 20,302 | 19,424 | 44,599 | 39,106 | |||||||||||||||||||
| Mortgage-backed securities, residential | 327,535 | 295,718 | 3,279 | 3,085 | |||||||||||||||||||
| $ | 617,641 | $ | 553,554 | $ | 64,977 | $ | 58,078 | ||||||||||||||||
The Corporation enacted a sale of certain amortizing securities designated as held-to-maturity under the standards set forth in ASC 320. It was determined that the combination of scheduled, equal installments, principal prepayments on such securities had resulted in the collection of more than eighty-five percent of the principal outstanding at acquisition, and the non-recurrence of the event to enact a sale of such securities
The Corporation realized gross gains of $14,000 and gross losses of $248,000 on sales of securities available for sale and held to maturity during 2022. The Corporation did not sell any securities available for sale during 2021.
The Corporation reassessed classification of certain investments and effective April 1, 2022, the Corporation transferred $39.7 million of state and municipal securities from available for sale to held to maturity securities. The transfer occurred at fair value. The related unrealized loss of $4.8 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer.
At December 31, 2022 and 2021, securities with a carrying value of $342,180,000 and $353,989,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.
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NOTE D — LOANS AND ALLOWANCE FOR LOAN LOSSES
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2022 and 2021:
| In thousands | Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Originated Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 145,691 | $ | 3,239 | $ | 1,225 | $ | — | $ | 150,155 | |||||||||||||||||||
| Commercial real estate | 604,315 | 23,773 | 5,352 | — | 633,440 | ||||||||||||||||||||||||
| Commercial real estate construction | 73,538 | 1,562 | — | — | 75,100 | ||||||||||||||||||||||||
| Residential mortgage | 323,121 | 3,469 | 73 | — | 326,663 | ||||||||||||||||||||||||
| Home equity lines of credit | 70,669 | 675 | — | — | 71,344 | ||||||||||||||||||||||||
| Consumer | 10,723 | — | — | — | 10,723 | ||||||||||||||||||||||||
| Total Originated Loans | 1,228,057 | 32,718 | 6,650 | — | 1,267,425 | ||||||||||||||||||||||||
| Acquired Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | 27,746 | 796 | 65 | — | 28,607 | ||||||||||||||||||||||||
| Commercial real estate | 182,396 | 5,767 | 202 | — | 188,365 | ||||||||||||||||||||||||
| Commercial real estate construction | 5,114 | 256 | — | — | 5,370 | ||||||||||||||||||||||||
| Residential mortgage | 32,960 | 2,334 | 141 | — | 35,435 | ||||||||||||||||||||||||
| Home equity lines of credit | 12,375 | 37 | 385 | — | 12,797 | ||||||||||||||||||||||||
| Consumer | 611 | — | — | — | 611 | ||||||||||||||||||||||||
| Total Acquired Loans | 261,202 | 9,190 | 793 | — | 271,185 | ||||||||||||||||||||||||
| Total Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | 173,437 | 4,035 | 1,290 | — | 178,762 | ||||||||||||||||||||||||
| Commercial real estate | 786,711 | 29,540 | 5,554 | — | 821,805 | ||||||||||||||||||||||||
| Commercial real estate construction | 78,652 | 1,818 | — | — | 80,470 | ||||||||||||||||||||||||
| Residential mortgage | 356,081 | 5,803 | 214 | — | 362,098 | ||||||||||||||||||||||||
| Home equity lines of credit | 83,044 | 712 | 385 | — | 84,141 | ||||||||||||||||||||||||
| Consumer | 11,334 | — | — | — | 11,334 | ||||||||||||||||||||||||
| Total Loans | $ | 1,489,259 | $ | 41,908 | $ | 7,443 | $ | — | $ | 1,538,610 | |||||||||||||||||||
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| In thousands | Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Originated Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 139,908 | $ | 5,549 | $ | 2,056 | $ | — | $ | 147,513 | |||||||||||||||||||
| Commercial real estate | 500,978 | 56,462 | 8,658 | — | 566,098 | ||||||||||||||||||||||||
| Commercial real estate construction | 41,002 | 1,659 | — | — | 42,661 | ||||||||||||||||||||||||
| Residential mortgage | 299,041 | 4,961 | 75 | — | 304,077 | ||||||||||||||||||||||||
| Home equity lines of credit | 74,094 | 883 | — | — | 74,977 | ||||||||||||||||||||||||
| Consumer | 9,708 | — | — | — | 9,708 | ||||||||||||||||||||||||
| Total Originated Loans | 1,064,731 | 69,514 | 10,789 | — | 1,145,034 | ||||||||||||||||||||||||
| Acquired Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | 29,728 | 1,555 | 771 | — | 32,054 | ||||||||||||||||||||||||
| Commercial real estate | 207,937 | 11,596 | 624 | — | 220,157 | ||||||||||||||||||||||||
| Commercial real estate construction | 5,228 | 2,111 | — | — | 7,339 | ||||||||||||||||||||||||
| Residential mortgage | 39,378 | 4,175 | 1,495 | — | 45,048 | ||||||||||||||||||||||||
| Home equity lines of credit | 17,491 | 37 | 257 | — | 17,785 | ||||||||||||||||||||||||
| Consumer | 997 | — | 13 | — | 1,010 | ||||||||||||||||||||||||
| Total Acquired Loans | 300,759 | 19,474 | 3,160 | — | 323,393 | ||||||||||||||||||||||||
| Total Loans | |||||||||||||||||||||||||||||
| Commercial and industrial | 169,636 | 7,104 | 2,827 | — | 179,567 | ||||||||||||||||||||||||
| Commercial real estate | 708,915 | 68,058 | 9,282 | — | 786,255 | ||||||||||||||||||||||||
| Commercial real estate construction | 46,230 | 3,770 | — | — | 50,000 | ||||||||||||||||||||||||
| Residential mortgage | 338,419 | 9,136 | 1,570 | — | 349,125 | ||||||||||||||||||||||||
| Home equity lines of credit | 91,585 | 920 | 257 | — | 92,762 | ||||||||||||||||||||||||
| Consumer | 10,705 | — | 13 | — | 10,718 | ||||||||||||||||||||||||
| Total Loans | $ | 1,365,490 | $ | 88,988 | $ | 13,949 | $ | — | $ | 1,468,427 | |||||||||||||||||||
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
| In thousands | Year Ended December 31, 2022 | Year Ended December 31, 2021 | ||||||||||||
| Balance at beginning of period | $ | 435 | $ | 596 | ||||||||||
| Acquisitions of impaired loans | — | — | ||||||||||||
| Reclassification from non-accretable differences | 642 | 253 | ||||||||||||
| Accretion to loan interest income | (644) | (414) | ||||||||||||
| Balance at end of period | $ | 433 | $ | 435 | ||||||||||
Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as impairment through a charge to the provision for loan losses and credit to the allowance for loan losses.
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The following table summarizes information relative to impaired loans by loan portfolio class as of December 31, 2022 and 2021:
| Impaired Loans with Allowance | Impaired Loans with No Allowance | ||||||||||||||||||||||||||||
| In thousands | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | ||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 781 | $ | 781 | $ | 628 | $ | — | $ | — | |||||||||||||||||||
| Commercial real estate | 350 | 350 | 192 | 4,984 | 4,984 | ||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | — | ||||||||||||||||||||||||
| Residential mortgage | — | — | — | — | — | ||||||||||||||||||||||||
| Home equity lines of credit | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 1,131 | $ | 1,131 | $ | 820 | $ | 4,984 | $ | 4,984 | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 1,005 | $ | 1,005 | $ | 855 | $ | 482 | $ | 1,452 | |||||||||||||||||||
| Commercial real estate | 1,311 | 1,311 | 600 | 6,265 | 6,265 | ||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | — | ||||||||||||||||||||||||
| Residential mortgage | — | — | — | — | — | ||||||||||||||||||||||||
| Home equity lines of credit | — | — | — | — | — | ||||||||||||||||||||||||
| Total | $ | 2,316 | $ | 2,316 | $ | 1,455 | $ | 6,747 | $ | 7,717 | |||||||||||||||||||
The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class as of December 31, 2022 and 2021:
| Impaired Loans with Allowance | Impaired Loans with No Allowance | ||||||||||||||||||||||
| In thousands | Average Recorded Investment | Interest Income | Average Recorded Investment | Interest Income | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Commercial and industrial | $ | 991 | $ | — | $ | 2 | $ | — | |||||||||||||||
| Commercial real estate | 856 | — | 5,566 | 589 | |||||||||||||||||||
| Commercial real estate construction | — | — | — | — | |||||||||||||||||||
| Residential mortgage | — | — | — | — | |||||||||||||||||||
| Home equity lines of credit | — | — | — | — | |||||||||||||||||||
| Total | $ | 1,847 | $ | — | $ | 5,568 | $ | 589 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Commercial and industrial | $ | 1,888 | $ | — | $ | 7 | $ | — | |||||||||||||||
| Commercial real estate | 1,468 | 181 | 6,673 | 20 | |||||||||||||||||||
| Commercial real estate construction | — | 2 | 123 | — | |||||||||||||||||||
| Residential mortgage | — | — | 60 | — | |||||||||||||||||||
| Home equity lines of credit | — | — | — | — | |||||||||||||||||||
| Total | $ | 3,356 | $ | 183 | $ | 6,863 | $ | 20 | |||||||||||||||
No additional funds are committed to be advanced in connection with impaired loans.
If interest on all nonaccrual loans had been accrued at original contract rates, interest income would have increased by $410,000 in 2022 and $462,000 in 2021.
71
The following table presents nonaccrual loans by loan portfolio class as of December 31, 2022 and 2021, the table below excludes $735,000 and $4.6 million, respectively, in purchase credit impaired loans, net of unamortized fair value adjustments:
| In thousands | 2022 | 2021 | |||||||||
| Commercial and industrial | $ | 781 | $ | 1,487 | |||||||
| Commercial real estate | 1,873 | 4,002 | |||||||||
| Commercial real estate construction | — | — | |||||||||
| Residential mortgage | — | — | |||||||||
| Home equity lines of credit | — | — | |||||||||
| Total | $ | 2,654 | $ | 5,489 | |||||||
There were no loans whose terms have been modified resulting in a troubled debt restructuring during the years ended December 31, 2022 and 2021. The Corporation classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the restructuring of scheduled principal payments. The Corporation had pre-existing nonaccruing and accruing troubled debt restructurings of $3,461,000 and $3,637,000 at December 31, 2022 and 2021, respectively. All of the Corporation’s troubled debt restructured loans are also impaired loans, of which some have resulted in a specific allocation and, subsequently, a charge-off as appropriate. Included in the non-accrual loan total at December 31, 2022 and 2021, were $0 and $63,000, respectively, of troubled debt restructurings. In addition to the troubled debt restructurings included in non-accrual loans, the Corporation also has a loan classified as an accruing troubled debt restructurings at December 31, 2022 and 2021, which total $3,461,000 and $3,574,000, respectively. There were no defaulted troubled debt restructured loans as of December 31, 2022 and 2021. There were no charge-offs on any of the troubled debt restructured loans for the years ended December 31, 2022 and 2021. There were no specific allocations on any troubled debt restructured loans for the years ended December 31, 2022 and 2021. All troubled debt restructured loans were current as of December 31, 2022, with respect to their associated forbearance agreement. As of December 31, 2022, there are no active forbearance agreements. All forbearance agreements have expired or the loans have paid off.
Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2022 and 2021, totaled $1,101,000 and $399,000, respectively.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.
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The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2022 and 2021:
| In thousands | 30-59 Days Past Due | 60-89 Days Past Due | >90 Days Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable >90 Days and Accruing | ||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Originated Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 257 | $ | — | $ | 162 | $ | 419 | $ | 149,736 | $ | 150,155 | $ | — | |||||||||||||||||||||||||||
| Commercial real estate | 1,809 | — | 255 | 2,064 | 631,376 | 633,440 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | 24 | — | — | 24 | 75,076 | 75,100 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,846 | 734 | 330 | 2,910 | 323,753 | 326,663 | 330 | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 245 | 117 | 49 | 411 | 70,933 | 71,344 | 49 | ||||||||||||||||||||||||||||||||||
| Consumer | 150 | 80 | — | 230 | 10,493 | 10,723 | — | ||||||||||||||||||||||||||||||||||
| Total originated loans | 4,331 | 931 | 796 | 6,058 | 1,261,367 | 1,267,425 | 379 | ||||||||||||||||||||||||||||||||||
| Acquired Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 30 | — | — | 30 | 28,577 | 28,607 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate | 217 | 350 | — | 567 | 187,798 | 188,365 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | 5,370 | 5,370 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,123 | 236 | 375 | 1,734 | 33,701 | 35,435 | 375 | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 193 | — | 449 | 642 | 12,155 | 12,797 | 449 | ||||||||||||||||||||||||||||||||||
| Consumer | 5 | — | — | 5 | 606 | 611 | — | ||||||||||||||||||||||||||||||||||
| Total acquired loans | 1,568 | 586 | 824 | 2,978 | 268,207 | 271,185 | 824 | ||||||||||||||||||||||||||||||||||
| Total Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 287 | — | 162 | 449 | 178,313 | 178,762 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate | 2,026 | 350 | 255 | 2,631 | 819,174 | 821,805 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | 24 | — | — | 24 | 80,446 | 80,470 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 2,969 | 970 | 705 | 4,644 | 357,454 | 362,098 | 705 | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 438 | 117 | 498 | 1,053 | 83,088 | 84,141 | 498 | ||||||||||||||||||||||||||||||||||
| Consumer | 155 | 80 | — | 235 | 11,099 | 11,334 | — | ||||||||||||||||||||||||||||||||||
| Total Loans | $ | 5,899 | $ | 1,517 | $ | 1,620 | $ | 9,036 | $ | 1,529,574 | $ | 1,538,610 | $ | 1,203 | |||||||||||||||||||||||||||
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| In thousands | 30-59 Days Past Due | 60-89 Days Past Due | >90 Days Past Due | Total Past Due | Current | Total Loans Receivable | Loans Receivable >90 Days and Accruing | ||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Originated Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 20 | $ | 64 | $ | 1,397 | $ | 1,481 | $ | 146,032 | $ | 147,513 | $ | — | |||||||||||||||||||||||||||
| Commercial real estate | — | — | 2,483 | 2,483 | 563,615 | 566,098 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | 42,661 | 42,661 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 970 | 140 | 475 | 1,585 | 302,492 | 304,077 | 475 | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 239 | 42 | 255 | 536 | 74,441 | 74,977 | 255 | ||||||||||||||||||||||||||||||||||
| Consumer | 84 | 58 | — | 142 | 9,566 | 9,708 | — | ||||||||||||||||||||||||||||||||||
| Total originated loans | 1,313 | 304 | 4,610 | 6,227 | 1,138,807 | 1,145,034 | 730 | ||||||||||||||||||||||||||||||||||
| Acquired Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | — | — | — | — | 32,054 | 32,054 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate | — | 270 | — | 270 | 219,887 | 220,157 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | 7,339 | 7,339 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 210 | 950 | — | 1,160 | 43,888 | 45,048 | — | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 1,156 | — | — | 1,156 | 16,629 | 17,785 | — | ||||||||||||||||||||||||||||||||||
| Consumer | — | — | — | — | 1,010 | 1,010 | — | ||||||||||||||||||||||||||||||||||
| Total acquired loans | 1,366 | 1,220 | — | 2,586 | 320,807 | 323,393 | — | ||||||||||||||||||||||||||||||||||
| Total Loans | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 20 | 64 | 1,397 | 1,481 | 178,086 | 179,567 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate | — | 270 | 2,483 | 2,753 | 783,502 | 786,255 | — | ||||||||||||||||||||||||||||||||||
| Commercial real estate construction | — | — | — | — | 50,000 | 50,000 | — | ||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,180 | 1,090 | 475 | 2,745 | 346,380 | 349,125 | 475 | ||||||||||||||||||||||||||||||||||
| Home equity lines of credit | 1,395 | 42 | 255 | 1,692 | 91,070 | 92,762 | 255 | ||||||||||||||||||||||||||||||||||
| Consumer | 84 | 58 | — | 142 | 10,576 | 10,718 | — | ||||||||||||||||||||||||||||||||||
| Total Loans | $ | 2,679 | $ | 1,524 | $ | 4,610 | $ | 8,813 | $ | 1,459,614 | $ | 1,468,427 | $ | 730 | |||||||||||||||||||||||||||
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The following table summarizes the allowance for loan losses and recorded investment in loans:
| In thousands | Commercial and Industrial | Commercial Real Estate | Commercial Real Estate Construction | Residential Mortgage | Home Equity Lines of Credit | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance- January 1, 2022 | $ | 3,176 | $ | 10,716 | $ | 616 | $ | 3,235 | $ | 501 | $ | 408 | $ | 381 | $ | 19,033 | |||||||||||||||||||||||||||||||
| Charge-offs | (238) | (831) | — | (3) | (33) | (181) | — | (1,286) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 58 | — | — | 5 | 22 | 29 | — | 114 | |||||||||||||||||||||||||||||||||||||||
| Provisions (credits) | (148) | 131 | 384 | (208) | (143) | 120 | (136) | — | |||||||||||||||||||||||||||||||||||||||
| Ending balance- December 31, 2022 | $ | 2,848 | $ | 10,016 | $ | 1,000 | $ | 3,029 | $ | 347 | $ | 376 | $ | 245 | $ | 17,861 | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 628 | $ | 192 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 820 | |||||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 2,220 | $ | 9,824 | $ | 1,000 | $ | 3,029 | $ | 347 | $ | 376 | $ | 245 | $ | 17,041 | |||||||||||||||||||||||||||||||
| Loans receivables | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 178,762 | $ | 821,805 | $ | 80,470 | $ | 362,098 | $ | 84,141 | $ | 11,334 | $ | — | $ | 1,538,610 | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 781 | $ | 5,334 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,115 | |||||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 177,981 | $ | 816,471 | $ | 80,470 | $ | 362,098 | $ | 84,141 | $ | 11,334 | $ | — | $ | 1,532,495 | |||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance- January 1, 2021 | $ | 4,037 | $ | 9,569 | $ | 503 | $ | 3,395 | $ | 693 | $ | 648 | $ | 1,381 | $ | 20,226 | |||||||||||||||||||||||||||||||
| Charge-offs | (1,176) | — | — | — | (22) | (120) | — | (1,318) | |||||||||||||||||||||||||||||||||||||||
| Recoveries | 43 | — | — | — | — | 32 | — | 75 | |||||||||||||||||||||||||||||||||||||||
| Provisions | 272 | 1,147 | 113 | (160) | (170) | (152) | (1,000) | 50 | |||||||||||||||||||||||||||||||||||||||
| Ending balance- December 31, 2021 | $ | 3,176 | $ | 10,716 | $ | 616 | $ | 3,235 | $ | 501 | $ | 408 | $ | 381 | $ | 19,033 | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 855 | $ | 600 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,455 | |||||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 2,321 | $ | 10,116 | $ | 616 | $ | 3,235 | $ | 501 | $ | 408 | $ | 381 | $ | 17,578 | |||||||||||||||||||||||||||||||
| Loans receivables | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 179,567 | $ | 786,255 | $ | 50,000 | $ | 349,125 | $ | 92,762 | $ | 10,718 | $ | — | $ | 1,468,427 | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | 1,487 | $ | 7,576 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9,063 | |||||||||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | 178,080 | $ | 778,679 | $ | 50,000 | $ | 349,125 | $ | 92,762 | $ | 10,718 | $ | — | $ | 1,459,364 | |||||||||||||||||||||||||||||||
The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time. The aggregate amount of these loans was $5,950,000 and $5,759,000 at December 31, 2022 and 2021, respectively. During 2022, $975,000 new loans were extended and repayments totaled $784,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2022.
Loan Modifications/Troubled Debt Restructurings/COVID-19
As of December 31, 2022, the Corporation had originated an aggregate total of 2,217 loans in the amount of $223,036,703 under the PPP, resulting in approximately $9.5 million in total fee income. Of this fee income amount
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$5,627,000, before costs, was recognized in 2021 as an adjustment to interest income yield, and the remaining $986,000, before costs, was recognized in 2022. As of December 31, 2022, the Corporation did not have any outstanding balances under the PPP program.
NOTE E — PREMISES AND EQUIPMENT
Premises and equipment at December 31 were as follows:
| In thousands | 2022 | 2021 | |||||||||
| Land | $ | 5,418 | $ | 6,953 | |||||||
| Buildings and improvements | 32,515 | 33,139 | |||||||||
| Furniture and equipment | 14,598 | 16,781 | |||||||||
| Construction in process | 8 | 888 | |||||||||
| 52,539 | 57,761 | ||||||||||
| Accumulated depreciation | (25,486) | (26,781) | |||||||||
| $ | 27,053 | $ | 30,980 | ||||||||
Depreciation expense was $2,304,000 and $2,277,000 for the years ended December 31, 2022 and 2021, respectively.
NOTE F — INVESTMENTS IN LOW-INCOME HOUSING PARTNERSHIPS
ACNB Corporation is a limited partner in two partnerships, whose purpose is to develop, manage and operate residential low-income properties. At December 31, 2022 and 2021, the carrying value of these investments was approximately $1,129,000 and $1,254,000, respectively. In December 2022, ACNB Corporation sold one limited partnership resulting in a $421,000 gain on sale.
NOTE G — DEPOSITS
Deposits were comprised of the following as of December 31:
| In thousands | |||||||||||
| 2022 | 2021 | ||||||||||
| Non-interest bearing demand | $ | 595,049 | $ | 623,360 | |||||||
| Interest bearing demand | 365,034 | 320,597 | |||||||||
| Savings | 945,762 | 1,052,380 | |||||||||
Time certificates of deposit of $250,000 or less | 241,562 | 322,855 | |||||||||
| Time certificates of deposit greater than $250,000 | 51,568 | 107,197 | |||||||||
| $ | 2,198,975 | $ | 2,426,389 | ||||||||
Scheduled maturities of time certificates of deposit at December 31, 2022, were as follows:
| Years Ending | In thousands | ||||
| 2023 | $ | 218,193 | |||
| 2024 | 47,457 | ||||
| 2025 | 15,665 | ||||
| 2026 | 7,138 | ||||
| 2027 | 4,660 | ||||
| Thereafter | 17 | ||||
| $ | 293,130 | ||||
NOTE H — LEASE COMMITMENTS
The Corporation enters into noncancellable lease arrangements primarily for some of its community offices. Certain lease arrangements contain clauses requiring increasing rental payments over the lease term, which are generally contractually stipulated. Many of these lease arrangements provide the Corporation with the option to renew the lease arrangement after the
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initial lease term. These options are included in determining the lease term used to establish the right-of-use assets and lease liabilities, in accordance with ASU 2016-02, when it is reasonably certain the Corporation will exercise its renewal option. As most of the Corporation’s leases do not have a readily determinable implicit rate, the incremental borrowing rate is primarily used to determine the discount rate for purposes of measuring the right-of-use assets and lease liabilities. The Corporation’s lease arrangements do not contain any material residual value guarantees or material restrictive covenants.
The following right-of-use assets and lease liabilities are reported within the consolidated statements of condition as follows:
| In thousands | December 31, 2022 | |||||||
| Operating Leases: | ||||||||
| Right of use assets | $ | 3,162 | ||||||
| Lease liabilities | 3,162 | |||||||
| In thousands | December 31, 2021 | |||||||
| Operating Leases: | ||||||||
| Right of use assets | $ | 3,270 | ||||||
| Lease liabilities | 3,270 | |||||||
Supplemental balance sheet information related to leases was as follows for the year ended December 31, 2022:
| Operating Leases: | ||||||||
| Weighted average remaining lease term | 5.0 years | |||||||
| Weighted average discount rate | 5.42 | % | ||||||
The following summarizes the remaining scheduled future minimum lease payments for operating leases as of December 31, 2022:
| Years Ending | In thousands | ||||
| 2023 | $ | 953 | |||
| 2024 | 957 | ||||
| 2025 | 917 | ||||
| 2026 | 746 | ||||
| 2027 | 441 | ||||
| Thereafter | 779 | ||||
| Total minimum lease payments | 4,793 | ||||
| Less: Amount representing interest (1) | 1,631 | ||||
| Present value of net minimum lease payments | $ | 3,162 | |||
_______________________________
(1) Amount necessary to reduce net minimum lease payments to present value calculated at the Corporation’s incremental borrowing rate.
As of December 31, 2022, the Corporation does not have any significant additional operating or finance leases that have not yet commenced. The total rent expense for all operating leases was $1,034,000 and $967,000 for the years ended December 31, 2022 and 2021, respectively.
ACNB leased space at several of its owned offices to other unrelated organizations. Total rental income for these properties was $78,000 and $77,000 for the years ended December 31, 2022 and 2021, respectively.
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NOTE I — BORROWINGS
Short-term borrowings and weighted-average interest rates at December 31 are as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Dollars in thousands | Amount | Rate | Amount | Rate | |||||||||||||||||||
| Securities sold under repurchase agreements | $ | 41,954 | 0.12 | % | $ | 35,202 | 0.12 | % | |||||||||||||||
Under an agreement with the FHLB, the Bank has short-term borrowing capacity included within its maximum borrowing capacity. All FHLB advances are collateralized by a security agreement covering qualifying loans and unpledged U.S. Treasury, agency and mortgage-backed securities. In addition, all FHLB advances are secured by the FHLB capital stock owned by the Bank having a par value of $1,215,100 at December 31, 2022. The Corporation also has lines of credit that total $75,000,000 with correspondent banks for overnight federal funds borrowings. There were no advances on these lines at December 31, 2022 and 2021.
The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreement as of December 31, 2022 and 2021:
| Gross Amounts Not Offset in the Statements of Condition | ||||||||||||||||||||||||||||||||||||||
| Dollars in thousands | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statements of Condition | Net Amounts of Liabilities Presented in the Statements of Condition | Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Repurchase agreements | ||||||||||||||||||||||||||||||||||||||
| Commercial customers and government entities | (a) | $ | 41,954 | $ | — | $ | 41,954 | $ | (41,954) | $ | — | $ | — | |||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| Repurchase agreements | ||||||||||||||||||||||||||||||||||||||
| Commercial customers and government entities | (a) | $ | 35,202 | $ | — | $ | 35,202 | $ | (35,202) | $ | — | $ | — | |||||||||||||||||||||||||
_______________________________
(a) As of December 31, 2022 and 2021, the fair value of securities pledged in connection with repurchase agreements was $52,157,000 and $46,160,000, respectively.
A summary of long-term debt as of December 31 is as follows:
| 2022 | 2021 | ||||||||||||||||||||||
| Dollars in thousands | Amount | Rate | Amount | Rate | |||||||||||||||||||
| FHLB fixed-rate advances maturing: | |||||||||||||||||||||||
| 2022 | $ | — | — | % | $ | 11,000 | 2.69 | % | |||||||||||||||
| Loan payable variable rate | — | — | % | 2,700 | 3.32 | % | |||||||||||||||||
| Trust preferred subordinated debt | 6,000 | 3.21 | % | 6,000 | 1.69 | % | |||||||||||||||||
| Subordinated debt | 15,000 | 4.00 | % | 15,000 | 4.00 | % | |||||||||||||||||
| $ | 21,000 | 3.78 | % | $ | 34,700 | 2.69 | % | ||||||||||||||||
The FHLB advances are collateralized by the assets defined in the security agreement and FHLB capital stock described previously. The Corporation can borrow a maximum of $821,375,000 from the FHLB, of which $808,275,000 was available at December 31, 2022.
The loan payable variable rate represents a promissory note (note) issued by FCBI in July 2011 and assumed by ACNB Corporation through the acquisition. The note has been amended from time to time through change in terms agreements. Under
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the current change in terms agreement, the maturity date of the note is December 30, 2022, with the rate of interest accruing on the principal balance of 3.25% per year. The note is unsecured. The note was paid off on December 30, 2022.
The trust preferred subordinated debt is comprised of debt securities issued by FCBI in December 2006 and assumed by ACNB Corporation through the acquisition. FCBI completed the private placement of an aggregate of $6,000,000 of trust preferred securities. The interest rate on the subordinated debentures is currently adjusted quarterly to 163 basis points over three-month LIBOR. The debenture has a provision for when LIBOR is no longer available. On December 15, 2022 the most recent interest rate reset date, the interest rate was adjusted to 6.39900% for the period ending March 14, 2023. The trust preferred securities mature on December 15, 2036, and may be redeemed at par, at the Corporation’s option, on any interest payment date. The proceeds were transferred to FCBI as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual agreements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.
On March 30, 2021, ACNB Corporation (the Company) entered into Subordinated Note Purchase Agreements (Purchase Agreements) with certain institutional accredited investors and qualified institutional buyers (the Purchasers) pursuant to which the Company sold and issued $15.0 million in aggregate principal amount of its 4.00% fixed-to-floating rate subordinated notes due March 31, 2031 (the Notes). The Notes will bear interest at a fixed rate of 4.00% per year, from and including March 30, 2021 to, but excluding, March 31, 2026 or earlier redemption date. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 90-day average Secured Overnight Financing Rate (SOFR) plus 329 basis points. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than the 90-day average SOFR. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Company used the net proceeds it received from the sale of the Notes to retire outstanding debt of the Company, repurchase issued and outstanding shares of the Company, support general corporate purposes, underwrite growth opportunities, create an interest reserve for the Notes, and downstream proceeds to ACNB Bank (the Bank), to be used by the Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank’s organic growth initiatives. The Notes have a stated maturity of March 31, 2031, are redeemable by the Company at its option, in whole or in part, on or after March 30, 2026, and at any time upon the occurrences of certain events.
NOTE J — REGULATORY RESTRICTIONS ON DIVIDENDS
Dividend payments by the Bank to the Corporation are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC, including final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. As of December 31, 2022, $36,288,000 of undistributed earnings of the Bank, included in consolidated retained earnings, was available for distribution to the Corporation as dividends without prior regulatory approval. Additionally, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. Some of the undistributed earnings of the Bank were distributed to the Corporation for general corporate expenses and future shareholder dividends.
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NOTE K — INCOME TAXES
The components of income tax expense for the years ended December 31, 2022 and 2021, are as follows:
| In thousands | 2022 | 2021 | |||||||||
| Federal: | |||||||||||
| Current | $ | 7,461 | $ | 6,189 | |||||||
| Deferred | 592 | 24 | |||||||||
| 8,053 | 6,213 | ||||||||||
| State: | |||||||||||
| Current | 1,259 | 949 | |||||||||
| Deferred | (113) | 23 | |||||||||
| 1,146 | 972 | ||||||||||
| $ | 9,199 | $ | 7,185 | ||||||||
Reconciliations of the statutory federal income tax to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2022 and 2021, are as follows:
| Percentage of Income before Income Taxes | |||||||||||
| 2022 | 2021 | ||||||||||
| Federal income tax at statutory rate | 21.0 | % | 21.0 | % | |||||||
| State income taxes, net of federal benefit | 1.8 | % | 2.2 | % | |||||||
| Tax-exempt income | (1.1) | % | (1.1) | % | |||||||
| Earnings on investment in bank-owned life insurance | (0.7) | % | (0.9) | % | |||||||
| Tax credit benefits | (0.6) | % | (0.8) | % | |||||||
| Reduction of federal tax rate | — | % | — | % | |||||||
| Other | 0.1 | % | 0.1 | % | |||||||
| 20.5 | % | 20.5 | % | ||||||||
Rehabilitation and low-income housing income tax credits were $281,000, during 2022 and 2021, respectively.
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Components of deferred tax assets and liabilities at December 31 were as follows:
| In thousands | 2022 | 2021 | |||||||||
| Deferred tax assets: | |||||||||||
| Allowance for loan losses | $ | 4,128 | $ | 4,336 | |||||||
| Available for sale securities | 15,210 | 1,017 | |||||||||
| Accrued deferred compensation | 1,064 | 1,126 | |||||||||
| Lease liability | 731 | — | |||||||||
| Pension | 1,608 | 1,714 | |||||||||
| Deferred loan fees | — | 203 | |||||||||
| Other-than-temporary impairment | — | 43 | |||||||||
| Nonaccrual interest | 792 | 590 | |||||||||
| Deferred director fees | 978 | 844 | |||||||||
| Purchase accounting | 149 | (1,112) | |||||||||
| Other | 719 | 1,719 | |||||||||
| 25,379 | 10,480 | ||||||||||
| Deferred tax liabilities: | |||||||||||
| Deferred loan fees | 66 | — | |||||||||
| Accumulated depreciation | 208 | 354 | |||||||||
| Prepaid benefit cost | 4,571 | 4,148 | |||||||||
| Right of use asset | 731 | — | |||||||||
| Prepaid expenses | 179 | 131 | |||||||||
| Goodwill/intangibles | 1,462 | 1,333 | |||||||||
| 7,217 | 5,966 | ||||||||||
| Net Deferred Tax Asset included in Other Assets | $ | 18,162 | $ | 4,514 | |||||||
The Corporation did not have any uncertain tax positions at December 31, 2022 and 2021. The Corporation’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.
Years that remain open for potential review by the Internal Revenue Service are 2018 through 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income.
The tax law changes in the CARES Act did not have a material impact on the Corporation’s income tax provision.
NOTE L — FAIR VALUE MEASUREMENTS
Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the
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volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.
This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis of measurement used at December 31, 2022 and 2021, are as follows:
| Fair Value Measurements at December 31, 2022 | |||||||||||||||||||||||||||||
| In thousands | Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| U.S. Government and agencies | $ | 210,999 | $ | — | $ | 210,999 | $ | — | |||||||||||||||||||||
| Mortgage-backed securities, residential | 295,718 | — | 295,718 | — | |||||||||||||||||||||||||
| State and municipal | 15,235 | — | 15,235 | — | |||||||||||||||||||||||||
| Corporate bonds | 31,602 | — | 31,602 | — | |||||||||||||||||||||||||
| Total securities available for sale | Recurring | $ | 553,554 | $ | — | $ | 553,554 | $ | — | ||||||||||||||||||||
| Equity securities with readily determinable fair values | Recurring | $ | 1,719 | $ | 1,719 | $ | — | $ | — | ||||||||||||||||||||
| Collateral dependent impaired loans | Non-recurring | $ | 3,773 | $ | — | $ | — | $ | 3,773 | ||||||||||||||||||||
| Fair Value Measurements at December 31, 2021 | |||||||||||||||||||||||||||||
| In thousands | Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| U.S. Government and agencies | $ | 245,041 | $ | — | $ | 245,041 | $ | — | |||||||||||||||||||||
| Mortgage-backed securities, residential | 133,496 | — | 133,496 | — | |||||||||||||||||||||||||
| State and municipal | 44,611 | — | 44,611 | — | |||||||||||||||||||||||||
| Corporate bonds | 13,950 | — | 13,950 | — | |||||||||||||||||||||||||
| Total securities available for sale | Recurring | $ | 437,098 | $ | — | $ | 437,098 | $ | — | ||||||||||||||||||||
| Equity securities with readily determinable fair values | Recurring | $ | 2,609 | $ | 2,609 | $ | — | $ | — | ||||||||||||||||||||
| Collateral dependent impaired loans | Non-recurring | $ | 5,275 | $ | — | $ | — | $ | 5,275 | ||||||||||||||||||||
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The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||||||||||||||||||
| Dollars in thousands | Fair Value Estimate | Valuation Technique | Unobservable Input | Range | Weighted Average | |||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Impaired loans | $ | 3,773 | Appraisal of collateral(1) | Appraisal adjustments(2) | (10) – (50)% | (48) | % | |||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Impaired loans | $ | 5,275 | Appraisal of collateral(1) | Appraisal adjustments(2) | (10) – (50)% | (50) | % | |||||||||||||||||||||||||
_______________________________
(1)Fair value is generally determined through management’s estimate or independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, and/or age of the appraisal.
The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2022:
| December 31, 2022 | |||||||||||||||||||||||||||||
| In thousands | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and due from banks | $ | 40,067 | $ | 40,067 | $ | 6,977 | $ | 33,090 | $ | — | |||||||||||||||||||
| Interest-bearing deposits with banks | 128,094 | 128,094 | 128,094 | — | — | ||||||||||||||||||||||||
| Equity securities with readily determinable fair values | 1,719 | 1,719 | 1,719 | — | — | ||||||||||||||||||||||||
| Debt securities available for sale | 553,554 | 553,554 | — | 553,554 | — | ||||||||||||||||||||||||
| Securities held to maturity | 64,977 | 58,078 | — | 58,078 | — | ||||||||||||||||||||||||
| Loans held for sale | 123 | 123 | — | 123 | — | ||||||||||||||||||||||||
| Loans, less allowance for loan losses | 1,520,749 | 1,458,556 | — | — | 1,458,556 | ||||||||||||||||||||||||
| Accrued interest receivable | 6,915 | 6,915 | — | 6,915 | — | ||||||||||||||||||||||||
| Restricted investment in bank stocks | 1,629 | 1,629 | — | 1,629 | — | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Demand deposits and savings | 1,905,845 | 1,905,845 | — | 1,905,845 | — | ||||||||||||||||||||||||
| Time deposits | 293,130 | 276,182 | — | 276,182 | — | ||||||||||||||||||||||||
| Short-term borrowings | 41,954 | 41,954 | — | 41,954 | — | ||||||||||||||||||||||||
| Long-term borrowings | — | — | — | — | — | ||||||||||||||||||||||||
| Trust preferred and subordinated debt | 21,000 | 18,648 | — | 18,648 | — | ||||||||||||||||||||||||
| Accrued interest payable | 51 | 51 | — | 51 | — | ||||||||||||||||||||||||
| Off-balance sheet financial instruments | — | — | — | — | — | ||||||||||||||||||||||||
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The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2021:
| December 31, 2021 | |||||||||||||||||||||||||||||
| In thousands | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||
| Cash and due from banks | $ | 14,912 | $ | 14,912 | $ | 7,992 | $ | 6,920 | $ | — | |||||||||||||||||||
| Interest-bearing deposits with banks | 695,219 | 695,219 | 695,219 | — | — | ||||||||||||||||||||||||
| Equity securities with readily determinable fair values | 2,609 | 2,609 | 2,609 | — | — | ||||||||||||||||||||||||
| Debt securities available for sale | 437,098 | 437,098 | — | 437,098 | — | ||||||||||||||||||||||||
| Securities held to maturity | 6,454 | 6,652 | — | 6,652 | — | ||||||||||||||||||||||||
| Loans held for sale | 2,193 | 2,193 | — | 2,193 | — | ||||||||||||||||||||||||
| Loans, less allowance for loan losses | 1,449,394 | 1,459,900 | — | — | 1,459,900 | ||||||||||||||||||||||||
| Accrued interest receivable | 5,520 | 5,520 | — | 5,520 | — | ||||||||||||||||||||||||
| Restricted investment in bank stocks | 2,303 | 2,303 | — | 2,303 | — | ||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||
| Demand deposits and savings | 1,996,337 | 1,996,337 | — | 1,996,337 | — | ||||||||||||||||||||||||
| Time deposits | 430,052 | 428,718 | — | 428,718 | — | ||||||||||||||||||||||||
| Short-term borrowings | 35,202 | 35,202 | — | 35,202 | — | ||||||||||||||||||||||||
| Long-term borrowings | 13,700 | 13,764 | — | 13,764 | — | ||||||||||||||||||||||||
| Trust preferred and subordinated debt | 21,000 | 19,991 | — | 19,991 | — | ||||||||||||||||||||||||
| Accrued interest payable | 109 | 109 | — | 109 | — | ||||||||||||||||||||||||
| Off-balance sheet financial instruments | — | — | — | — | — | ||||||||||||||||||||||||
NOTE M — RETIREMENT PLANS
The Corporation’s banking subsidiary has a non-contributory, defined benefit pension plan. Retirement benefits are a function of both years of service and compensation. The funding policy is to contribute annually the amount that is sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act.
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A measurement date of December 31 has been used for the fiscal years ended December 31, 2022 and 2021.
| In thousands | 2022 | 2021 | |||||||||
| Change in benefit obligation: | |||||||||||
| Benefit obligation at beginning of year | $ | 39,123 | $ | 39,412 | |||||||
| Service cost | 777 | 879 | |||||||||
| Interest cost | 1,052 | 945 | |||||||||
| Actuarial loss | (9,141) | (660) | |||||||||
| Benefits paid | (1,585) | (1,453) | |||||||||
| Projected benefit obligation at end of year | 30,226 | 39,123 | |||||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | 50,218 | 45,337 | |||||||||
| Actual return on plan assets | (5,514) | 6,334 | |||||||||
| Employer contribution | — | — | |||||||||
| Benefits paid | (1,585) | (1,453) | |||||||||
| Fair value of plan assets at end of year | 43,119 | 50,218 | |||||||||
| Funded Status, included in other assets | $ | 12,893 | $ | 11,095 | |||||||
| Amounts recognized in accumulated other comprehensive loss: | |||||||||||
| Total net actuarial loss | $ | 6,887 | $ | 7,785 | |||||||
| Prior service cost | — | — | |||||||||
| Total included in accumulated other comprehensive loss (pretax) | $ | 6,887 | $ | 7,785 | |||||||
For the years ended December 31, 2022 and 2021, the assumptions used to determine the benefit obligation are as follows:
| 2022 | 2021 | ||||||||||
| Discount rate | 5.10 | % | 2.75 | % | |||||||
| Rate of compensation increase | 3.50 | % | 3.50 | % | |||||||
The discount rate assumption used to determine the benefit obligation increased since last year. This change results in a decrease in the benefit obligation.
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The components of net periodic benefit (income) cost related to the non-contributory, defined benefit pension plan for the years ended December 31 are as follows:
| In thousands | 2022 | 2021 | |||||||||
| Components of net periodic benefit cost (income): | |||||||||||
| Service cost | $ | 777 | $ | 879 | |||||||
| Interest cost | 1,052 | 945 | |||||||||
| Expected return on plan assets | (3,136) | (2,814) | |||||||||
| Recognized net actuarial loss | 407 | 1,255 | |||||||||
| Amortization of prior service cost | — | — | |||||||||
| Net Periodic Benefit (Income) Cost | (900) | 265 | |||||||||
| Net loss | (491) | (4,181) | |||||||||
| Amortization of net loss | (407) | (1,255) | |||||||||
| Amortization of prior service cost | — | — | |||||||||
| Total recognized in other comprehensive loss (income) | $ | (898) | $ | (5,436) | |||||||
| Total recognized in net periodic benefit cost (income) and other comprehensive (income) loss | $ | (1,798) | $ | (5,171) | |||||||
For the years ended December 31, 2022 and 2021, the assumptions used to determine the net periodic benefit cost (income) are as follows:
| 2022 | 2021 | ||||||||||
| Discount rate | 2.75 | % | 2.45 | % | |||||||
| Expected long-term rate of return on plan assets | 6.75 | % | 6.75 | % | |||||||
| Rate of compensation increase | 3.50 | % | 3.50 | % | |||||||
The Corporation’s comparison of obligations to plan assets at December 31, 2022 and 2021 are as follows:
| In thousands | 2022 | 2021 | |||||||||
| Projected benefit obligation | $ | 30,226 | $ | 39,123 | |||||||
| Accumulated benefit obligation | 29,150 | 37,159 | |||||||||
| Fair value of plan assets at measurement date | 43,119 | 50,218 | |||||||||
It has not yet been determined the amount that the Bank may contribute to the Plan in 2023. ACNB does not anticipate any refunds from the postretirement Plan. The Corporation reduced the future benefit accruals for the defined benefit pension plan effective January 1, 2010, in order to manage total benefit expense. The new formula is the earned benefit as of December 31, 2009, plus 0.75% of a participant’s average monthly pay multiplied by years of benefit service earned on and after January 1, 2010, but not more than 25 years. The benefit formula percentage and maximum years of benefit service were both reduced. Effective April 1, 2012, no inactive or former participant in the Plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the Plan. As of the last annual census, ACNB Bank had a combined 343 active, vested terminated, and retired persons in the Plan.
For the year ended December 31, 2022 the mortality assumption has been updated to reflect the most recently published mortality information through October 20, 2022. The assumption changes decreased the benefit obligation by $9,714,000. For the year ended December 31, 2021 the mortality assumption has been updated to reflect the historical U.S. mortality date in the MP-2021 report. The assumption changes decreased the benefit obligation by $1,509,000.
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Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are:
| Years Ending | In thousands | ||||
| 2023 | $ | 1,920 | |||
| 2024 | 1,970 | ||||
| 2025 | 2,010 | ||||
| 2026 | 2,030 | ||||
| 2027 | 2,020 | ||||
| 2028 - 2032 | 10,440 | ||||
The Corporation’s pension plan weighted-average assets’ allocations at December 31, 2022 and 2021, are as follows:
| 2022 | 2021 | ||||||||||
| Equity securities | 46 | % | 65 | % | |||||||
| Debt securities | 49 | % | 31 | % | |||||||
| Real property | 5 | % | 4 | % | |||||||
| 100 | % | 100 | % | ||||||||
The Corporation’s overall investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of assets types, fund strategies and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation’s risk tolerance on contribution levels, funded status and plan expense, and any applicable regulatory requirements. The weighted-average assets’ allocation in the above table represents the Corporation’s conclusion on the appropriate mix of investments. The specific investment vehicles are institutional separate accounts from a variety of fund managers which are regularly reviewed by the Corporation for acceptable performance.
Equity securities included Corporation common stock in amounts of $3,339,000, or 8% of total plan assets, and $2,543,000, or 5% of total plan assets, at December 31, 2022 and 2021, respectively.
Fair value measurements at December 31, 2022, are as follows:
| In thousands | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Equity securities | $ | 19,749 | $ | 3,339 | $ | 16,410 | $ | — | |||||||||||||||
| Debt securities | 21,228 | — | 21,228 | — | |||||||||||||||||||
| Real estate | 2,142 | — | 2,142 | — | |||||||||||||||||||
Fair value measurements at December 31, 2021, are as follows:
| In thousands | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Equity securities | $ | 32,909 | $ | 2,543 | $ | 30,366 | $ | — | |||||||||||||||
| Debt securities | 15,441 | — | 15,441 | — | |||||||||||||||||||
| Real estate | 1,868 | — | 1,868 | — | |||||||||||||||||||
The Corporation’s banking subsidiary maintains a 401(k) plan for the benefit of eligible employees. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Bank makes matching contributions equal to 100% of an employee’s compensation contributed to the plan up to 3% of an employee’s pay, plus 50% of an employee’s compensation contributed to the plan on the next 2% of their pay for the payroll period. Matching contributions vest immediately to the employee. Bank contributions to and expenses for the plan were $901,000 and $921,000 for 2022 and 2021, respectively.
ACNB Insurance Services, Inc. has a similar but separate 401(k) plan with the match of 6% for non-highly compensated employees and 3% match for highly compensated employees. ACNB Insurance Services, Inc.’s contributions to and expenses for the plan were $157,000 and $124,000 for 2022 and 2021, respectively.
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. The estimated present value of future benefits is accrued over the period from the effective date of the agreements until the expected retirement dates of the individuals. The balance accrued for these plans included in other liabilities as of December 31, 2022 and 2021, totaled $4,145,000 and $3,768,000, respectively. The annual expense included in salaries and benefits expense
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totaled $628,000 and $505,000 during the years ended December 31, 2022 and 2021, respectively. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans.
NOTE N — STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS
In January 2011, the Corporation offered stockholders the opportunity to participate in the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan. The plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. During 2022, 20,908 shares were issued under this plan with proceeds in the amount of $713,000. During 2021, 23,884 shares were issued under this plan with proceeds in the amount of $670,000. Proceeds are used for general corporate purposes.
The ACNB Corporation 2009 Restricted Stock Plan expired by its own terms after ten years on February 24, 2019. No further shares may be issued under this plan. Of the 200,000 shares of common stock authorized under this plan, 25,945 shares were issued. The remaining 174,055 shares were transferred to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.
On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2022, there were 57,522 shares issued under this plan. The maximum number of shares that may yet be granted under this plan is 516,533.
On October 24, 2022, the Corporation announced that the Board of Directors approved on October 18, 2022, a plan to repurchase, in open market and privately negotiated transactions, up to 255,575, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new common stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were no treasury shares purchased under this plan during the quarter ended December 31, 2022.
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 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 began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:
•a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;
•a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%;
•a minimum ratio of total capital to risk-weighted assets of 8.0%; and,
•a minimum leverage ratio of 4.0%.
In addition, the final rules established a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.
Management believes, as of December 31, 2022, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2022, the most recent notification from the federal banking regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no subsequent conditions or events that management believes have changed the Bank’s category.
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The actual and required capital amounts and ratios were as follows:
| Actual | For Capital Adequacy Purposes | To be Well Capitalized under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||||||
| Dollars in thousands | Amount | Ratio | Amount (1) | Ratio (1) | Amount | Ratio | |||||||||||||||||||||||||||||
| CORPORATION | |||||||||||||||||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to average assets) | $ | 258,468 | 9.91 | % | $ ≥104,372 | ≥4.0% | N/A | N/A | |||||||||||||||||||||||||||
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 252,468 | 15.00 | ≥75,733 | ≥4.5 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 258,468 | 15.36 | ≥100,978 | ≥6.0 | N/A | N/A | |||||||||||||||||||||||||||||
| Total risk-based capital ratio (to risk-weighted assets) | 291,421 | 17.32 | ≥134,637 | ≥8.0 | N/A | N/A | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to average assets) | $ | 249,574 | 8.91 | % | $ ≥112,027 | ≥4.0% | N/A | N/A | |||||||||||||||||||||||||||
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 243,574 | 16.08 | ≥68,174 | ≥4.5 | N/A | N/A | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 249,574 | 16.47 | ≥90,899 | ≥6.0 | N/A | N/A | |||||||||||||||||||||||||||||
| Total risk-based capital ratio (to risk-weighted assets) | 283,511 | 18.71 | ≥121,199 | ≥8.0 | N/A | N/A | |||||||||||||||||||||||||||||
| BANK | |||||||||||||||||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to average assets) | $ | 246,184 | 9.50 | % | $ ≥103,690 | ≥4.0% | $ ≥ | 129,612 | ≥5.0 | % | |||||||||||||||||||||||||
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,184 | 14.68 | ≥75,441 | ≥4.5 | ≥108,971 | ≥6.5 | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,184 | 14.68 | ≥100,588 | ≥6.0 | ≥134,118 | ≥8.0 | |||||||||||||||||||||||||||||
| Total risk-based capital ratio (to risk-weighted assets) | 264,137 | 15.76 | ≥134,118 | ≥8.0 | ≥167,647 | ≥10.0 | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to average assets) | $ | 246,259 | 8.81 | % | $ ≥111,766 | ≥4.0% | $ ≥139,708 | ≥5.0 | % | ||||||||||||||||||||||||||
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,259 | 16.32 | ≥67,906 | ≥4.5 | ≥98,086 | ≥6.5 | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,259 | 16.32 | ≥90,541 | ≥6.0 | ≥120,722 | ≥8.0 | |||||||||||||||||||||||||||||
| Total risk-based capital ratio (to risk-weighted assets) | 265,126 | 17.57 | ≥120,722 | ≥8.0 | ≥150,902 | ≥10.0 | |||||||||||||||||||||||||||||
_______________________________
(1) Amounts and ratios do not include capital conservation buffer.
NOTE O — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit (typically mortgages and commercial loans) and, to a lesser extent, standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Corporation does not anticipate any material losses from these commitments.
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Commitments to extend credit, including commitments to grant loans and unfunded commitments under lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extensions of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties. On loans secured by real estate, the Corporation generally requires loan to value ratios of no greater than 80%.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and similar transactions. The terms of the letters of credit vary and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation generally holds collateral and/or personal guarantees supporting those commitments for which collateral is deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2022 and 2021, for guarantees under standby letters of credit issued is not material.
In 2018, ACNB Corporation executed a guaranty for a note related to a $1,500,000 commercial line of credit from a local bank, with normal terms and conditions for such a line, for ACNB Insurance Services, Inc., the borrower and a wholly-owned subsidiary of ACNB Corporation. The commercial line of credit is for general working capital needs as they arise by the borrower. A subsequent draw taken was reduced to $0 in 2020 on this commercial line of credit since its inception. The liability is recorded for the net drawn amount of this line, no further liability is recorded for the remaining line as to the guarantor’s obligation as the guarantor would have full recourse from all assets of its wholly-owned subsidiary.
The Corporation maintains a $5,000,000 unsecured line of credit with a correspondent bank. The line of credit remains at full capacity at year-end.
The Corporation has not been required to perform on any financial guarantees, and has not incurred any losses on its commitments, during the past three years.
A summary of the Corporation’s commitments at December 31 were as follows:
| In thousands | 2022 | 2021 | |||||||||
| Commitments to extend credit | $ | 401,786 | $ | 365,320 | |||||||
| Standby letters of credit | 11,429 | 9,014 | |||||||||
NOTE P — CONTINGENCIES
The Corporation is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Corporation in connection with any such claims and lawsuits, it is the opinion of management that the disposition or ultimate determination of any such claims and lawsuits will not have a material adverse effect on the consolidated financial position, consolidated results of operations or liquidity of the Corporation.
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NOTE Q — ACNB CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF CONDITION
| December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| ASSETS | |||||||||||
| Cash | $ | 18,263 | $ | 13,451 | |||||||
| Investment in banking subsidiary | 225,806 | 266,983 | |||||||||
| Investment in other subsidiaries | 18,757 | 11,807 | |||||||||
| Securities and other assets | 1,797 | 2,549 | |||||||||
| Receivable from banking subsidiary | 1,508 | 1,197 | |||||||||
| Total Assets | $ | 266,131 | $ | 295,987 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Long-term debt | $ | 21,000 | $ | 23,700 | |||||||
| Other liabilities | 89 | 173 | |||||||||
| Stockholders’ equity | 245,042 | 272,114 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 266,131 | $ | 295,987 | |||||||
STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
| Years Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| Dividends from banking subsidiary | $ | 9,117 | $ | 8,968 | |||||||
| Gain on sale of securities | 13 | — | |||||||||
| Other income | 519 | 554 | |||||||||
| 9,649 | 9,522 | ||||||||||
| Expenses | 1,653 | 1,649 | |||||||||
| 7,996 | 7,873 | ||||||||||
| Income tax benefit | 516 | 511 | |||||||||
| 8,512 | 8,384 | ||||||||||
| Equity in undistributed earnings of subsidiaries | 27,240 | 19,450 | |||||||||
| Net Income | $ | 35,752 | $ | 27,834 | |||||||
| Comprehensive (Loss) Income | $ | (12,715) | $ | 23,927 | |||||||
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STATEMENTS OF CASH FLOWS
| Years Ended December 31, | |||||||||||
| In thousands | 2022 | 2021 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 35,752 | $ | 27,834 | |||||||
| Equity in undistributed earnings of subsidiaries | (27,240) | (19,450) | |||||||||
| (Increase) Decrease in receivable from banking subsidiary | (311) | 54 | |||||||||
| Gain on sale of securities | (13) | — | |||||||||
| Gain (Loss) on equity securities | 177 | (468) | |||||||||
| Gain on sale of low-income housing partnership | (421) | — | |||||||||
| Other | (308) | 555 | |||||||||
| Net Cash Provided by Operating Activities | 7,636 | 8,525 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Return on investment from subsidiary | 13,000 | — | |||||||||
| Proceeds from sale of low-income housing partnership | 421 | — | |||||||||
| Proceeds from sale of equity securities | 811 | — | |||||||||
| Net Cash Used in Investing Activities | 14,232 | — | |||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES | |||||||||||
| Proceeds from long-term debt | — | 15,000 | |||||||||
| Repayments on long-term debt | (2,700) | (6,329) | |||||||||
| Payment to repurchase common stock | (6,681) | (1,517) | |||||||||
| Proceeds from issuance of common stock | 1,442 | 343 | |||||||||
| Dividends paid | (9,117) | (8,968) | |||||||||
| Net Cash Used in Financing Activities | (17,056) | (1,471) | |||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 4,812 | 7,054 | |||||||||
| CASH AND CASH EQUIVALENTS — BEGINNING | 13,451 | 6,397 | |||||||||
| CASH AND CASH EQUIVALENTS — ENDING | $ | 18,263 | $ | 13,451 | |||||||
NOTE R — GOODWILL AND OTHER INTANGIBLES
On January 5, 2005, ACNB Corporation completed its acquisition of Russell Insurance Group, Inc. (now ACNB Insurance Services, Inc.) of Westminster, Maryland. The acquisition of ACNB Insurance Services, Inc. resulted in goodwill of approximately $6,308,000.
On July 1, 2017, ACNB Corporation completed its acquisition of New Windsor Bancorp Inc. (New Windsor) of Taneytown, Maryland. The acquisition of New Windsor resulted in goodwill of approximately $13,272,000 and generated $2,418,000 in core deposit intangibles.
On January 11, 2020, ACNB Corporation completed its acquisition of Frederick County Bancorp, Inc. (FCBI) of Frederick, Maryland. The acquisition of FCBI resulted in good will of approximately $22,528,000 and generated $3,560,000 in core deposit intangibles.
On February 28, 2022, ACNB Insurance Services, Inc. completed its acquisition of Hockley & O’Donnell Insurance Agency, LLC of Gettysburg, Pennsylvania. The purchase price was $7,800,000 and was funded with all cash and no additional contingent payments were required. The acquisition of Hockley & O’Donnell resulted in goodwill of approximately $2,077,000 and generated $5,723,000 in customer list and covenant not to compete intangibles. During the third quarter of 2022, goodwill was decreased and the customer list was increased by $587,000 due to finalizing the calculation.
The fair value of customer list intangibles was based upon an income approach which included estimated financial projections developed by the Corporation and included other fair value assumptions for attrition, present value discount rates using market participant assumptions. The fair value of the covenant not to compete intangible was based upon an income
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approach which compared the present value impact of various non-compete scenarios and other fair value assumptions including present value discount rates using market participant assumptions.
Combined goodwill included in the Corporation’s consolidated statement of condition is $44,185,000. Goodwill, which has an indefinite useful life, is evaluated for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Corporation did not identify any goodwill impairment on ACNB Insurance Services, Inc. or the Bank’s outstanding goodwill from its most recent testing. There are no impairment losses associated with goodwill as of December 31, 2022 and 2021. Additionally, there are no accumulated impairment losses associated with goodwill as of December 31, 2022 and 2021.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, customer list 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 lists are amortized over their estimated useful lives which range from eight to fifteen years.
The carrying value and accumulated amortization of the intangible assets and core deposit intangibles are as follows:
| 2022 | 2021 | |||||||||||||||||||||||||
| Dollars in thousands | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||
| ACNB Insurance Services, Inc. amortized intangible assets | $ | 16,151 | $ | 8,177 | $ | 10,428 | $ | 7,448 | ||||||||||||||||||
| New Windsor core deposit intangibles | 2,418 | 1,872 | 2,418 | 1,627 | ||||||||||||||||||||||
| FCBI core deposit intangibles | 3,560 | 1,748 | 3,560 | 1,230 | ||||||||||||||||||||||
| $ | 22,129 | $ | 11,797 | $ | 16,406 | $ | 10,305 | |||||||||||||||||||
Amortization expense was $1,492,000 and $1,164,000 for the years ended December 31, 2022 and 2021, respectively.
Amortization of the intangible assets for the five years subsequent to December 31, 2022, is expected to be as follows:
| Years Ending | In thousands | ||||
| 2023 | $ | 1,419 | |||
| 2024 | 1,233 | ||||
| 2025 | 1,104 | ||||
| 2026 | 991 | ||||
| 2027 | 846 | ||||
| Thereafter | 4,739 | ||||
| $ | 10,332 | ||||
NOTE S — SEGMENT AND RELATED INFORMATION
The Corporation has two reporting segments, the Bank and ACNB Insurance Services, Inc. ACNB Insurance Services, Inc. is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. ACNB Insurance Services, Inc. offers a broad range of property and casualty, life and health insurance to both commercial and individual clients.
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Segment information for 2022 and 2021 is as follows:
| In thousands | Banking | Insurance | Total | ||||||||||||||
| 2022 | |||||||||||||||||
| Interest income and other income from external customers | $ | 101,240 | $ | 7,616 | $ | 108,856 | |||||||||||
| Interest expense | 3,591 | 33 | 3,624 | ||||||||||||||
| Depreciation and amortization expense | 2,995 | 801 | 3,796 | ||||||||||||||
| Income before income taxes | 43,639 | 1,312 | 44,951 | ||||||||||||||
| Total assets | 2,505,353 | 20,154 | 2,525,507 | ||||||||||||||
| Capital expenditures | 1,783 | 28 | 1,811 | ||||||||||||||
| 2021 | |||||||||||||||||
| Interest income and other income from external customers | $ | 95,007 | $ | 5,928 | $ | 100,935 | |||||||||||
| Interest expense | 6,915 | — | 6,915 | ||||||||||||||
| Depreciation and amortization expense | 3,069 | 372 | 3,441 | ||||||||||||||
| Income before income taxes | 34,099 | 920 | 35,019 | ||||||||||||||
| Total assets | 2,774,449 | 12,538 | 2,786,987 | ||||||||||||||
| Capital expenditures | 1,561 | 15 | 1,576 | ||||||||||||||
NOTE T — REVENUE RECOGNITION
As of January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the cumulative effect approach. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Additional disclosures related to the Corporation’s largest sources of non-interest income within the consolidated statements of income that are subject to ASC 606 are as follows:
Income from fiduciary, investment management and brokerage activities - ACNB Bank’s Trust & Investment Services, under the umbrella of ACNB Wealth Management, provides a wide range of financial services, including trust services for individuals, businesses and retirement funds. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, power of attorney, custodial accounts and investment management and advisor accounts. In addition, ACNB’s Wealth Management Department offers retail brokerage-services through a third party provider. Wealth Management clients are located primarily within the Corporation’s geographic markets. Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statement since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $518,800,000 and $537,800,000 at December 31, 2022 and 2021, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
The majority of trust services revenue is earned and collected monthly, with the amount determined based on the investment funds in each trust multiplied by a fee schedule for type of trust. Each trust has one integrated set of performance obligations so no allocation is required. The performance obligation is met by performing the identified fiduciary service. Successful performance is confirmed by ongoing internal and regulatory control, measurement is by valuing the trust assets at a monthly date to which a fee schedule is applied. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The costs of acquiring trust customers are incremental and recognized within non-interest expense in the consolidated statements of income.
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Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within non-interest expense in the consolidated statements of income.
Service charges on ATM and debit card transactions - The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within non-interest expense in the consolidated statements of income.
Other Fees and Other Income - Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees. These fees are largely transaction-based; therefore, the Corporation’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered. Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account.
Commissions from insurance sales - Commission income is earned based on customers transactions. The commission income is recognized when the transaction is complete. The Corporation also receives a return on its investment in ACNB Insurance Services based on the income of the insurance company.
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ITEM 9—CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A—CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in periodic SEC filings.
Based on the evaluation of the effectiveness of the design and operation of the disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of December 31, 2022. The Corporation believes that the accompanying consolidated financial statements fairly present the financial condition and results of operations for the fiscal years presented in this report on Form 10-K.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes made in the Corporation’s internal control over financial reporting in connection with the fourth quarter evaluation that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ACNB Corporation (ACNB) is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and, as such, include some amounts that are based on management’s best estimates and judgments.
ACNB’s management is responsible for establishing and maintaining effective internal control over financial reporting. The system of internal control over financial reporting, as it relates to the consolidated financial statements, is evaluated for effectiveness by management and tested for reliability through a program of internal audits and management testing and review. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
The Board of Directors of ACNB, through its Audit Committee, meets regularly with management, internal auditors, and the independent registered public accounting firm. The Audit Committee provides oversight to ACNB by reviewing audit plans and results, and evaluates management’s actions for internal control, accounting and financial reporting matters. The internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee to discuss the results of their examinations.
Management assessed the effectiveness of ACNB’s internal control over financial reporting as of December 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control—Integrated Framework (2013). Based on our assessment, management concluded that as of December 31, 2022, ACNB’s internal control over financial reporting is effective and meets the criteria of the Internal Control—Integrated Framework (2013).
ACNB’s independent registered public accounting firm, which audited the consolidated financial statements included in this annual report, has issued an attestation report on ACNB’s internal control over financial reporting as of December 31, 2022 that appears in Item 8 of this Form 10-K and is incorporated into this item by reference.
| /s/ JAMES P. HELT | /s/ JASON H. WEBER | |||||||
| James P. Helt President & Chief Executive Officer | Jason H. Weber Executive Vice President/Treasurer & Chief Financial Officer | |||||||
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ITEM 9B—OTHER INFORMATION
None.
ITEM 9C—DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
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PART III
ITEM 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10, relating to directors, executive officers, and control persons, is set forth in sections “Information as to Nominees and Directors”, “Executive Officers of ACNB Corporation”, “Meetings and Committees of the Board of Directors”, “Audit Committee Report” and “Delinquent Section 16(a) Reports” of ACNB Corporation’s definitive Proxy Statement to be used in connection with the 2023 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
The Corporation first adopted a Code of Ethics that applies to directors, officers and employees of the Corporation and its subsidiaries in 2003. A copy of the Code of Ethics, as most recently approved by the Corporation’s Board of Directors on February 21, 2023, is available under the Governance Documents section of the Corporation’s Investor Relations website at investor.acnb.com. A request for the Corporation’s Code of Ethics can be made either in writing to Chief Governance Officer, ACNB Corporation, 16 Lincoln Square, P.O. Box 3129, Gettysburg, Pennsylvania 17325 or by telephone at 717-334-3161.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Corporation’s Board of Directors.
ITEM 11—EXECUTIVE COMPENSATION
Incorporated by reference in response to this Item 11 is the information appearing under the headings “Director Compensation,” “Executive Compensation” and “Potential Payments Upon Termination or Change In Control” in ACNB Corporation’s 2023 definitive Proxy Statement.
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference in response to this Item 12 is the information appearing under the heading “Share Ownership” in ACNB Corporation’s 2023 definitive Proxy Statement.
The following table provides information about shares of the Corporation’s stock that may be issued under existing equity compensation plans as of December 31, 2022:
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||||||||||
| Equity compensation plans approved by security holders | — | $ | — | 516,533 | ||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | — | $ | — | 516,533 | ||||||||||||||||
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference in response to this Item 13 is the information appearing under the headings “Transactions with Directors and Executive Officers” and “Governance of the Corporation” in ACNB Corporation’s 2023 definitive Proxy Statement.
ITEM 14—PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference in response to this Item 14 is the information appearing under the heading “Independent Auditors” in ACNB Corporation’s 2023 definitive Proxy Statement.
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PART IV
ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
•Reports of Independent Registered Public Accounting Firms
•Consolidated Statements of Condition
•Consolidated Statements of Income
•Consolidated Statements of Comprehensive Income (Loss)
•Consolidated Statements of Changes in Stockholders’ Equity
•Consolidated Statements of Cash Flows
•Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because the required information is either not applicable, not required, or is shown in the respective consolidated financial statements or in the notes thereto.
3. THE EXHIBITS FILED HEREWITH OR INCORPORATED BY REFERENCE AS A PART OF THIS ANNUAL REPORT ARE SET FORTH IN (b) BELOW.
(b)EXHIBITS
The following exhibits are included in this report:
| Exhibit 2.1 | ||||||||
| Exhibit 2.2 | ||||||||
| Exhibit 2.3 | ||||||||
| Exhibit 3(i) | ||||||||
| Exhibit 3(ii) | ||||||||
| Exhibit 4.1 | ||||||||
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| Exhibit 10.1 | ||||||||
| Exhibit 10.2 | ||||||||
| Exhibit 10.3 | ||||||||
| Exhibit 10.4 | ||||||||
| Exhibit 10.5 | ||||||||
| Exhibit 10.6 | ||||||||
| Exhibit 10.7 | ||||||||
| Exhibit 10.8 | ||||||||
| Exhibit 10.9 | ||||||||
| Exhibit 10.10 | ||||||||
| Exhibit 10.11 | ||||||||
| Exhibit 10.12 | ||||||||
| Exhibit 10.13 | ||||||||
| Exhibit 10.14 | ||||||||
| Exhibit 10.15 | ||||||||
| Exhibit 10.16 | ||||||||
| Exhibit 10.17 | ||||||||
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| Exhibit 10.18 | ||||||||
| Exhibit 10.19 | ||||||||
| Exhibit 10.20 | ||||||||
| Exhibit 10.21 | ||||||||
| Exhibit 10.22 | ||||||||
| Exhibit 10.23 | ||||||||
| Exhibit 10.24 | ||||||||
| Exhibit 10.25 | ||||||||
| Exhibit 10.26 | ||||||||
| Exhibit 10.27 | ||||||||
| Exhibit 10.28 | ||||||||
| Exhibit 10.29 | ||||||||
| Exhibit 10.30 | ||||||||
| Exhibit 10.31 | ||||||||
| Exhibit 10.32 | ||||||||
| Exhibit 10.33 | ||||||||
| Exhibit 18 | ||||||||
| Exhibit 21 | ||||||||
| Exhibit 23.1 | ||||||||
| Exhibit 23.2 | ||||||||
| Exhibit 31.1 | ||||||||
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| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
| Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase. | |||||||
| Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | |||||||
| Exhibit 101.INS | XBRL Instance Document – The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| Exhibit 101.SCH | XBRL Taxonomy Extension Schema. | |||||||
| Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |||||||
| Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |||||||
| Exhibit 104 | Cover Page Interactive Date File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
ITEM 16—FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ACNB CORPORATION | March 3, 2023 | ||||||||||
| (Registrant) | Date | ||||||||||
| By: | /s/ JAMES P. HELT | ||||||||||
| James P. Helt President & Chief Executive Officer | |||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 3, 2023, by the following persons in the capacities indicated.
| /s/ JASON H. WEBER | /s/ JAMES P. HELT | |||||||
| Jason H. Weber Executive Vice President/ Treasurer & Chief Financial Officer (Principal Financial Officer) | James P. Helt Director and President & Chief Executive Officer | |||||||
| /s/ KIMBERLY S. CHANEY | /s/ DONNA M. NEWELL | |||||||
| Kimberly S. Chaney Director | Donna M. Newell Director | |||||||
| /s/ FRANK ELSNER, III | /s/ DANIEL W. POTTS | |||||||
| Frank Elsner, III Director | Daniel W. Potts Director | |||||||
| /s/ TODD L. HERRING | /s/ D. ARTHUR SEIBEL, JR. | |||||||
| Todd L. Herring Director and Vice Chairman of the Board | D. Arthur Seibel, Jr. Director | |||||||
| /s/ SCOTT L. KELLEY | /s/ ALAN J. STOCK | |||||||
| Scott L. Kelley Director | Alan J. Stock Director and Chairman of the Board | |||||||
| /s/ JAMES J. LOTT | ||||||||
| James J. Lott Director | ||||||||
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