ACNB (ACNB) - 2020 Q4 - Annual Report

Part I Item 1. Business ACNB Corporation operates ACNB Bank and Russell Insurance Group, Inc., expanding services in Pennsylvania and Maryland through the 2020 FCBI acquisition, while navigating a competitive and highly regulated market - ACNB Corporation is the financial holding company for ACNB Bank and Russell Insurance Group, Inc. (RIG), providing banking and insurance services across multiple states[8] - On January 11, 2020, ACNB acquired Frederick County Bancorp, Inc. (FCBI) for $57.9 million, issuing 1,590,547 shares of common stock[10][63] ACNB Bank Key Financials (as of Dec 31, 2020) | Metric | Amount (in millions) | | :--- | :--- | | Total Assets | $2,541 | | Total Gross Loans | $1,638 | | Total Deposits | $2,193 | | Total Equity Capital | $252 | - The company faces intense competition from various financial institutions, many with larger lending limits and greater market share[19] - The Corporation is subject to extensive federal and state regulations, impacting operations, capital requirements, and compliance costs[20][24][33] Item 1A. Risk Factors The company faces significant risks from COVID-19 impacts, credit portfolio, interest rate volatility, competition, cybersecurity, and evolving regulations including CECL - The COVID-19 pandemic has adversely impacted business and financial results, with its ultimate impact remaining highly uncertain, potentially affecting revenue, operations, and capital ratios[65][66] - Participation in the SBA's Paycheck Protection Program (PPP) exposes ACNB to litigation risks and potential non-honor of loan guarantees by the SBA[68][69][71] - The company is subject to significant credit risk, with approximately 68% of its loan portfolio in commercial and industrial, construction, and commercial real estate loans, which generally carry higher default risk[74] - ACNB's earnings are highly sensitive to interest rate changes, which can materially impact net interest income, loan origination, and the fair value of financial assets[72][73] - The company faces substantial competition in lending and deposit-gathering from other financial institutions, many with greater resources and wider geographic presence[77][78] - The upcoming implementation of the Current Expected Credit Loss (CECL) model is expected to materially affect the allowance for loan losses, potentially requiring a significant increase and creating more volatility[132][133] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments are reported[148] Item 2. Properties As of December 31, 2020, ACNB Bank operated 32 community banking offices and several loan production offices across Pennsylvania and Maryland, with most locations owned - As of December 31, 2020, ACNB Bank operated 32 community banking offices and loan production offices in Pennsylvania and Maryland, with 23 owned and 13 leased bank office locations[148] Item 3. Legal Proceedings The company states that as of December 31, 2020, there were no material pending legal proceedings that would adversely affect its financial condition or operations - As of December 31, 2020, there were no material pending legal proceedings against ACNB or its subsidiaries, beyond ordinary routine litigation incidental to the business[149] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not Applicable[150] 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 ACNB, with 8,709,393 shares outstanding as of December 31, 2020, and the company has a stock repurchase program and a Dividend Reinvestment and Stock Purchase Plan - ACNB Corporation's common stock trades on NASDAQ under the symbol ACNB, with 8,709,393 shares outstanding and approximately 2,604 shareholders of record as of December 31, 2020[151] - A stock repurchase program, approved in October 2008, had 57,400 shares remaining for purchase at year-end 2020, superseded by a new plan approved in February 2021 to repurchase up to 261,000 shares[151][156] - The company offers a Dividend Reinvestment and Stock Purchase Plan, through which 190,611 shares have been issued as of December 31, 2020[154] Item 6. Selected Financial Data The company presents a five-year summary of key financial data, showing net income of $18.4 million in 2020, a decrease from 2019, with total assets growing to $2.56 billion due to the FCBI acquisition Selected Financial Data (2019-2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Income Statement Data | | | | Net Interest Income | $73,068 | $59,418 | | Provision for Loan Losses | $9,140 | $600 | | Net Income | $18,394 | $23,721 | | Balance Sheet Data (Year-End) | | | | Total Assets | $2,555,362 | $1,720,253 | | Loans, net | $1,617,558 | $1,258,766 | | Deposits | $2,185,525 | $1,412,260 | | Stockholders' Equity | $257,972 | $189,516 | | Common Share Data | | | | Earnings per share — basic | $2.13 | $3.36 | | Cash dividends declared | $1.00 | $0.98 | | Book value per share | $29.62 | $26.77 | | Profitability Ratios | | | | Return on average assets | 0.78% | 1.40% | | Return on average equity | 7.39% | 13.33% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the FCBI acquisition and COVID-19 on 2020 financial results, noting a decrease in net income to $18.4 million due to higher loan loss provisions and merger expenses, despite growth in net interest income and assets Executive Overview The 2020 financial results were significantly shaped by the FCBI acquisition and the COVID-19 pandemic, leading to a 22.5% decrease in GAAP net income to $18.4 million, primarily due to merger expenses and increased loan loss provisions GAAP vs. Non-GAAP Performance (2019-2020) | Metric (in thousands, except per share) | 2020 | 2019 | | :--- | :--- | :--- | | Net Income (GAAP) | $18,394 | $23,721 | | Merger-related expenses, net of tax | $4,639 | $595 | | Net Income (Non-GAAP) | $23,033 | $24,316 | | Basic EPS (GAAP) | $2.13 | $3.36 | | Basic EPS (Non-GAAP) | $2.67 | $3.44 | - Net interest margin decreased to 3.35% in 2020 from 3.81% in 2019, while net interest income increased to $73.1 million from $59.4 million over the same period[170] Results of Operations Net interest income increased by 23.0% to $73.1 million in 2020 due to the FCBI acquisition and PPP loans, despite a 46 basis point decline in net interest margin, while the provision for loan losses surged to $9.1 million and other expenses rose 28.4% due to merger costs and workforce expansion - Net interest income increased by $13.7 million (23.0%) in 2020, driven by higher loan volume from the FCBI acquisition and PPP lending, though the net interest margin decreased from 3.81% in 2019 to 3.35% in 2020[180][183] - The provision for loan losses increased significantly to $9,140,000 in 2020 from $600,000 in 2019, primarily due to specific charge-offs and a $4,100,000 qualitative factor for COVID-19 risks[189] - Other income increased by $1.8 million (9.7%) in 2020, largely due to a $1.6 million increase in income from sold mortgages, offsetting a 3.4% decrease in insurance commissions[190][192] - Other expenses increased by 28.4% in 2020, driven by a 22.5% rise in salaries and employee benefits due to the merger and $5,965,000 in merger-related expenses[196][203] Financial Condition Total assets grew 48.5% to $2.56 billion at year-end 2020, driven by the FCBI acquisition and PPP loans, with the allowance for loan losses increasing to 1.23% of total loans to reflect economic uncertainty, while non-performing assets remained stable - Total loans increased by $365.2 million (28.7%) in 2020, primarily due to the FCBI acquisition and active participation in the Paycheck Protection Program (PPP)[217] - As of December 31, 2020, the Corporation originated approximately 1,440 PPP loans totaling $160.9 million, generating approximately $6 million in fee income before costs[219][453] Non-Performing Assets (as of Dec 31) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Non-Performing Loans | $7,896 | $5,138 | | Total Non-Performing Assets | $7,896 | $5,502 | | Non-performing loans to total loans | 0.48% | 0.40% | | Non-performing assets to total assets | 0.31% | 0.32% | - The allowance for loan losses increased to $20.2 million, or 1.23% of total loans, at year-end 2020, up from $13.8 million, or 1.09% of loans, at year-end 2019[243] - As of December 31, 2020, the company had 48 temporary COVID-19 related loan modifications with principal balances totaling $36.1 million[247][248] - Total shareholders' equity increased to $258.0 million at year-end 2020 from $189.5 million in 2019, primarily due to the issuance of $57.7 million in common stock for the FCBI acquisition[262] Liquidity and Capital Resources The company maintains a strong liquidity position, primarily funded by its core deposit base, supplemented by substantial borrowing capacity with the FHLB, and robust capital levels exceeding "well capitalized" thresholds - The company's primary liquidity source is its core deposit base, supplemented by $847.9 million in borrowing capacity from the FHLB of Pittsburgh, with $791.9 million available as of December 31, 2020[279] Bank Subsidiary Capital Ratios (as of Dec 31, 2020) | Ratio | 2020 Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 leverage ratio | 9.01% | 5.00% | | Common Tier 1 capital ratio | 13.86% | 6.50% | | Tier 1 risk-based capital ratio | 13.86% | 8.00% | | Total risk-based capital ratio | 15.10% | 10.00% | - The company has unfunded commitments to extend credit of $367.6 million and standby letters of credit of $8.1 million as of December 31, 2020[284] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required for smaller reporting companies like ACNB Corporation - Not required for smaller reporting companies[287] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for ACNB Corporation for 2020 and 2019, including the independent auditor's report and detailed notes on financial position, operations, equity, and cash flows - The independent auditor's report from RSM US LLP expresses an unqualified opinion and identifies the Allowance for Loan Losses (Qualitative Factors) and the Valuation of the Acquired Loan Portfolio as Critical Audit Matters[293][298][301] Consolidated Statement of Condition Highlights (as of Dec 31) | Account (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Cash and Cash Equivalents | $399,352 | $114,356 | | Loans, net | $1,617,558 | $1,258,766 | | Goodwill | $42,108 | $19,580 | | Total Assets | $2,555,362 | $1,720,253 | | Total Deposits | $2,185,525 | $1,412,260 | | Total Borrowings | $92,209 | $99,731 | | Total Liabilities | $2,297,390 | $1,530,737 | | Total Stockholders' Equity | $257,972 | $189,516 | Consolidated Statement of Income Highlights (Year Ended Dec 31) | Account (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $73,068 | $59,418 | | Provision for Loan Losses | $9,140 | $600 | | Total Other Income | $19,934 | $18,169 | | Total Other Expenses | $61,160 | $47,621 | | Net Income | $18,394 | $23,721 | - Note T details the acquisition of Frederick County Bancorp, Inc. (FCBI) on January 11, 2020, which resulted in $22.5 million of goodwill and the issuance of 1,590,547 shares of ACNB common stock[553][555] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - No changes in or disagreements with accountants are reported[578] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting during the fourth quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2020[579][580] - Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[586] Item 9B. Other Information The company reports no other information for this item - No other information is reported for this item[588] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2021 definitive Proxy Statement[589] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2021 definitive Proxy Statement[591] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2021 definitive Proxy Statement, with 538,468 shares available for future issuance under equity compensation plans as of December 31, 2020 - Information required by this item is incorporated by reference from the registrant's 2021 definitive Proxy Statement[592] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | — | $ — | 538,468 | | Equity compensation plans not approved by security holders | — | $ — | — | | Total | — | $ — | 538,468 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2021 definitive Proxy Statement[594] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is incorporated by reference from the registrant's 2021 definitive Proxy Statement[595] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including the independent auditor's report and various organizational and contractual documents - This section lists the financial statements filed with the report, including the Report of Independent Registered Public Accounting Firm, Consolidated Statements of Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[596] - A list of exhibits filed with the report is provided, including various agreements, bylaws, compensation plans, and required certifications from the CEO and CFO[598][599][600] Item 16. Form 10-K Summary The company reports no summary for this item - No Form 10-K summary is provided[601]