ACNB (ACNB) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and related disclosures for ACNB Corporation, along with management's discussion and analysis of financial condition and results of operations ITEM 1 - FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements of ACNB Corporation, including the Statements of Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows for the quarter ended March 31, 2021, and comparative periods Consolidated Statements of Condition (Unaudited) This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific reporting dates Consolidated Statements of Condition (Unaudited) | Dollars in thousands | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :------------------- | :------------- | :---------------- | :------------- | | ASSETS | | | | | Total Cash and Cash Equivalents | $506,758 | $399,352 | $129,170 | | Debt securities available for sale | $355,008 | $337,718 | $253,048 | | Loans, net of allowance for loan losses | $1,590,481 | $1,617,558 | $1,590,187 | | Goodwill | $42,108 | $42,108 | $41,700 | | Total Assets | $2,654,617 | $2,555,362 | $2,180,065 | | LIABILITIES | | | | | Total Deposits | $2,278,622 | $2,185,525 | $1,811,357 | | Total Liabilities | $2,397,005 | $2,297,390 | $1,933,071 | | STOCKHOLDERS' EQUITY | | | | | Total Stockholders' Equity | $257,612 | $257,972 | $246,994 | | Total Liabilities and Stockholders' Equity | $2,654,617 | $2,555,362 | $2,180,065 | Consolidated Statements of Income (Unaudited) This statement details the company's revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Income (Unaudited) | Dollars in thousands, except per share data | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total Interest Income | $19,370 | $20,909 | | Total Interest Expense | $2,045 | $3,454 | | Net Interest Income | $17,325 | $17,455 | | Provision for Loan Losses | $50 | $4,000 | | Net Interest Income after Provision for Loan Losses | $17,275 | $13,455 | | Total Other Income | $5,913 | $4,166 | | Total Other Expenses | $13,787 | $19,457 | | Income (Loss) before Income Taxes | $9,401 | $(1,836) | | Provision (Benefit) for Income Taxes | $1,930 | $(613) | | Net Income (Loss) | $7,471 | $(1,223) | | Basic earnings (loss) per share | $0.86 | $(0.14) | | Cash dividends declared | $0.25 | $0.25 | Consolidated Statements of Comprehensive Income (Unaudited) This statement presents net income alongside other comprehensive income items, reflecting changes in equity not resulting from owner transactions Consolidated Statements of Comprehensive Income (Unaudited) | Dollars in thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------- | :-------------------------------- | :-------------------------------- | | NET INCOME (LOSS) | $7,471 | $(1,223) | | OTHER COMPREHENSIVE INCOME | | | | Securities: Unrealized (losses) gains arising during the period, net of income taxes | $(6,079) | $3,202 | | Pension: Amortization of pension net loss, transition liability, and prior service cost, net of income taxes | $244 | $131 | | TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | $(5,835) | $3,333 | | TOTAL COMPREHENSIVE INCOME | $1,636 | $2,110 | Consolidated Statements of Changes in Stockholders' Equity (Unaudited) This statement outlines the changes in each component of stockholders' equity over specific reporting periods Consolidated Statements of Changes in Stockholders' Equity (March 31, 2021) | Dollars in thousands | Common Stock (March 31, 2021) | Treasury Stock (March 31, 2021) | Additional Paid-in Capital (March 31, 2021) | Retained Earnings (March 31, 2021) | Accumulated Other Comprehensive Loss (March 31, 2021) | Total Stockholders' Equity (March 31, 2021) | | :------------------- | :---------------------------- | :------------------------------ | :------------------------------------------ | :--------------------------------- | :---------------------------------------------------- | :------------------------------------------ | | BALANCE – JANUARY 1, 2021 | $21,918 | $(728) | $94,048 | $148,372 | $(5,638) | $257,972 | | Net income | — | — | — | $7,471 | — | $7,471 | | Other comprehensive loss, net of taxes | — | — | — | — | $(5,835) | $(5,835) | | Common stock shares issued | $14 | — | $(195) | — | — | $(181) | | Restricted stock compensation expense | — | — | $362 | — | — | $362 | | Cash dividends declared | — | — | — | $(2,177) | — | $(2,177) | | BALANCE – MARCH 31, 2021 | $21,932 | $(728) | $94,215 | $153,666 | $(11,473) | $257,612 | Consolidated Statements of Changes in Stockholders' Equity (March 31, 2020) | Dollars in thousands | Common Stock (March 31, 2020) | Treasury Stock (March 31, 2020) | Additional Paid-in Capital (March 31, 2020) | Retained Earnings (March 31, 2020) | Other Comprehensive Loss (March 31, 2020) | Total Stockholders' Equity (March 31, 2020) | | :------------------- | :---------------------------- | :------------------------------ | :------------------------------------------ | :--------------------------------- | :---------------------------------------- | :------------------------------------------ | | BALANCE – JANUARY 1, 2020 | $17,855 | $(728) | $39,579 | $138,663 | $(5,853) | $189,516 | | Net loss | — | — | — | $(1,223) | — | $(1,223) | | Other comprehensive income, net of taxes | — | — | — | — | $3,333 | $3,333 | | Common stock shares issued | $3,964 | — | $53,309 | — | — | $57,273 | | Restricted stock compensation expense | — | — | $262 | — | — | $262 | | Cash dividends declared | — | — | — | $(2,167) | — | $(2,167) | | BALANCE – MARCH 31, 2020 | $21,819 | $(728) | $93,150 | $135,273 | $(2,520) | $246,994 | Consolidated Statements of Cash Flows (Unaudited) This statement categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows (Unaudited) | Dollars in thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------- | :-------------------------------- | :-------------------------------- | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | Net Cash Provided by Operating Activities | $9,038 | $8,416 | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | Net Cash Provided by (Used in) Investing Activities | $2,745 | $(5,120) | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | Net Cash Provided by Financing Activities | $95,623 | $11,518 | | Net Increase in Cash and Cash Equivalents | $107,406 | $14,814 | | CASH AND CASH EQUIVALENTS — BEGINNING | $399,352 | $114,356 | | CASH AND CASH EQUIVALENTS — ENDING | $506,758 | $129,170 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the consolidated financial statements, covering the basis of presentation, significant accounting policies, recent acquisitions, earnings per share, retirement benefits, guarantees, comprehensive loss, segment reporting, securities, loans, fair value measurements, borrowings, goodwill and intangible assets, revenue recognition, and new accounting pronouncements 1. Basis of Presentation and Nature of Operations This section describes the company's business activities and the accounting principles used in preparing the financial statements - ACNB Corporation provides banking, insurance, and financial services through its wholly-owned subsidiaries, ACNB Bank and Russell Insurance Group, Inc. (RIG)[18] - ACNB Bank operates 31 community banking offices in Pennsylvania and Maryland, including divisions 'NWSB Bank, A Division of ACNB Bank' and 'FCB Bank, A Division of ACNB Bank' from prior acquisitions[18][19][20] - The Corporation's primary revenue sources are interest income on loans and investment securities, and fee income on products and services[20] - The unaudited consolidated financial statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q instructions, with all adjustments being normal and recurring[21] 2. Acquisition of Frederick County Bancorp, Inc. This section details the acquisition of Frederick County Bancorp, Inc., including its financial impact and strategic rationale - ACNB completed the acquisition of Frederick County Bancorp, Inc. (FCBI) on January 11, 2020, expanding its presence in Frederick, Maryland[26] - The acquisition was accounted for as a business combination, with assets acquired and liabilities assumed recorded at estimated fair values[27] FCBI Acquisition Details (January 11, 2020) | Item | Value (in thousands) | | :-------------------------------- | :------------------- | | Total Assets Acquired | $443,400 | | Loans Acquired | $329,300 | | Deposits Acquired | $374,100 | | Goodwill Recorded | $22,500 | | ACNB Common Stock Issued | 1,590,547 shares | | Equity Portion of Purchase Price | $57,620,595 | | Total Consideration Paid | $57,908,593 | - Acquisition-related expenses for FCBI totaled $6.0 million for the three months ended March 31, 2020, covering legal, accounting, system conversion, and integration costs[40] 3. Earnings Per Share and Restricted Stock This section provides information on the calculation of earnings per share and the company's restricted stock plans Basic Earnings Per Share (EPS) Data | Period | Weighted Average Shares Outstanding | Basic EPS | | :-------------------------------- | :-------------------------------- | :-------- | | Three Months Ended March 31, 2021 | 8,710,393 | $0.86 | | Three Months Ended March 31, 2020 | 8,477,642 | $(0.14) | - The ACNB Corporation 2009 Restricted Stock Plan expired on February 24, 2019, with all 25,945 issued shares fully vested and no further shares issuable under this plan[42] - The ACNB Corporation 2018 Omnibus Stock Incentive Plan, approved May 1, 2018, authorizes up to 400,000 shares plus unissued shares from the 2009 plan, with 35,587 shares issued as of March 31, 2021[43] Restricted Stock Compensation Expense | Period | Expense (in thousands) | | :-------------------------------- | :--------------------- | | Three Months Ended March 31, 2021 | $28 | | Three Months Ended March 31, 2020 | $33 | 4. Retirement Benefits This section outlines the company's defined benefit pension plan and related periodic benefit expenses Net Periodic Benefit Expense (Income) for Defined Benefit Pension Plan | In thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------- | :-------------------------------- | :-------------------------------- | | Service cost | $220 | $188 | | Interest cost | $236 | $270 | | Expected return on plan assets | $(704) | $(687) | | Amortization of net loss | $314 | $169 | | Net Periodic Benefit Expense (Income) | $66 | $(60) | - The Corporation had not yet determined the 2021 contribution amount to the defined benefit plan as of March 31, 2021[46] 5. Guarantees This section discloses the company's commitments related to standby letters of credit and their potential financial impact - The Corporation issues standby letters of credit as conditional commitments to guarantee customer performance to third parties[48] - As of March 31, 2021, standby letters of credit totaled $8,094,000, with management believing collateral and guarantees are sufficient to cover potential future payments[48] 6. Accumulated Other Comprehensive Loss This section details the components of accumulated other comprehensive loss, net of taxes, affecting stockholders' equity Components of Accumulated Other Comprehensive Loss (Net of Taxes) | In thousands | Unrealized (Losses) Gains on Securities | Pension Liability | Accumulated Other Comprehensive Loss | | :----------- | :-------------------------------------- | :---------------- | :----------------------------------- | | BALANCE — MARCH 31, 2021 | $(1,434) | $(10,039) | $(11,473) | | BALANCE — DECEMBER 31, 2020 | $4,645 | $(10,283) | $(5,638) | | BALANCE — MARCH 31, 2020 | $4,463 | $(6,983) | $(2,520) | 7. Segment Reporting This section provides financial information broken down by the company's operating segments: Banking and Insurance - The Corporation operates in two reporting segments: Banking (ACNB Bank and related financial services) and Insurance (Russell Insurance Group, Inc. or RIG)[51] Segment Information (Three Months Ended March 31) | In thousands | Banking (2021) | Insurance (2021) | Total (2021) | Banking (2020) | Insurance (2020) | Total (2020) | | :----------- | :------------- | :--------------- | :----------- | :------------- | :--------------- | :----------- | | Net interest income and other income from external customers | $21,866 | $1,372 | $23,238 | $20,186 | $1,435 | $21,621 | | Income (Loss) before income taxes | $9,185 | $216 | $9,401 | $(2,001) | $165 | $(1,836) | | Total assets | $2,641,782 | $12,835 | $2,654,617 | $2,167,427 | $12,638 | $2,180,065 | | Capital expenditures | $76 | — | $76 | $406 | — | $406 | 8. Securities This section details the classification, valuation, and fair value of the company's debt and equity securities - Debt securities are classified as 'held to maturity' (amortized cost) or 'available for sale' (fair value with unrealized gains/losses in OCI), while equity securities with readily determinable fair values are recorded at fair value with changes recognized in net income[53] Securities Available for Sale (March 31, 2021) | In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :----------- | :------------- | :--------------------- | :---------------------- | :--------- | | U.S. Government and agencies | $199,033 | $1,378 | $4,281 | $196,130 | | Mortgage-backed securities, residential | $113,145 | $2,366 | $1,210 | $114,301 | | State and municipal | $35,899 | $225 | $418 | $35,706 | | Corporate bonds | $8,775 | $100 | $4 | $8,871 | | Total | $356,852 | $4,069 | $5,913 | $355,008 | Securities Held to Maturity (March 31, 2021) | In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :----------- | :------------- | :--------------------- | :---------------------- | :--------- | | Mortgage-backed securities, residential | $9,155 | $296 | — | $9,451 | | Total | $9,155 | $296 | — | $9,451 | - At March 31, 2021, various available-for-sale securities had unrealized losses, primarily due to changes in interest rates, but management determined none were other-than-temporarily impaired[60][61][62] 9. Loans This section provides an overview of the company's loan portfolio, including its composition and geographic concentration - The loan portfolio primarily consists of commercial, residential mortgage, home equity, and consumer loans, with a substantial portion in southcentral Pennsylvania and northern Maryland[68] - Interest accrual on residential mortgage and commercial loans is discontinued at 90 days past due, while consumer loans are typically charged off by 120 days past due[69] Allowance for Credit Losses This section details the methodology and components of the allowance for credit losses, including loan loss provisions - The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded lending commitments, established through a provision for loan losses charged to earnings[71] - The allowance is evaluated quarterly based on historical experience, portfolio nature/volume, borrower ability to repay, collateral value, and economic conditions, and consists of specific, general, and unallocated components[72][73][75] Allowance for Loan Losses (March 31, 2021) | In thousands | Commercial and Industrial | Commercial Real Estate | Commercial Real Estate Construction | Residential Mortgage | Home Equity Lines of Credit | Consumer | Unallocated | Total | | :----------- | :------------------------ | :--------------------- | :---------------------------------- | :------------------- | :-------------------------- | :------- | :---------- | :---- | | Beginning balance - January 1, 2021 | $4,037 | $9,569 | $503 | $3,395 | $693 | $648 | $1,381 | $20,226 | | Charge-offs | $(18) | — | — | — | — | $(37) | — | $(55) | | Recoveries | $8 | — | — | — | — | $8 | — | $16 | | Provisions (credits) | $476 | $(29) | $40 | $(29) | $(64) | $(11) | $(333) | $50 | | Ending balance - March 31, 2021 | $4,503 | $9,540 | $543 | $3,366 | $629 | $608 | $1,048 | $20,237 | Loan Modifications/Troubled Debt Restructurings/COVID-19 This section discusses the impact of COVID-19 on loan modifications and troubled debt restructurings - Under the CARES Act, COVID-19 related loan modifications for loans less than 30 days past due as of December 31, 2019, are not considered troubled debt restructurings (TDRs)[123] Temporary Loan Modifications (March 31, 2021) | Type of Loans | Number of Loans | Deferral Period | Balance (in thousands) | Percentage of Capital | | :------------ | :-------------- | :-------------- | :--------------------- | :-------------------- | | Commercial Purpose | 28 | Up to 6 months | $23,562,751 | 9.15% | | Consumer Purpose | 2 | Up to 6 months | $157,609 | 0.06% | | Total | 30 | | $23,720,360 | | Commercial Loans by Industry Potentially Affected by COVID-19 (March 31, 2021) | Type of Loans | Number of Loans | Balance (in thousands) | Percentage of Total Loan Portfolio | Percentage of Capital | | :------------ | :-------------- | :--------------------- | :--------------------------------- | :-------------------- | | Lessors of Commercial Real Estate | 6 | $6,105,203 | 0.38% | 2.37% | | Hospitality Industry (Hotels/Bed & Breakfast) | 5 | $13,479,711 | 0.84% | 5.24% | | Food Services Industry | 1 | $55,248 | 0.00% | 0.02% | | Other | 16 | $3,922,589 | 0.24% | 1.52% | | Total | 28 | $23,562,751 | 1.46% | 9.15% | Paycheck Protection Program This section provides details on the company's participation in the SBA Paycheck Protection Program - The Corporation actively participated in the SBA Paycheck Protection Program (PPP) under the CARES Act and Economic Aid Act, originating loans for first-time and second-time borrowers[127][128] Paycheck Protection Program (PPP) Loan Data (March 31, 2021) | Item | Amount | | :-------------------------------- | :------------- | | Applications Originated | 2,049 | | Loans Originated | $213,977,091 | | Outstanding Balance (net of repayments/forgiveness) | $142,036,347 | | Total Fee Income (before costs) | $8,700,000 | | Fee Income Recognized in 2020 | $2,800,000 | | Fee Income Recognized through March 31, 2021 | $953,000 | 10. Fair Value Measurements This section explains the company's approach to fair value measurements and the hierarchy of inputs used - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[132] - The fair value hierarchy prioritizes inputs: Level 1 (unadjusted quoted prices in active markets), Level 2 (quoted prices in inactive markets or observable inputs), and Level 3 (unobservable inputs significant to measurement)[133][134] Assets Measured at Fair Value (March 31, 2021) | In thousands | Total | Level 1 | Level 2 | Level 3 | | :----------- | :-------- | :-------- | :-------- | :-------- | | Total securities available for sale | $355,008 | — | $355,008 | — | | Equity securities with readily determinable fair values | $2,535 | $2,535 | — | — | | Collateral dependent impaired loans | $6,430 | — | — | $6,430 | Financial Instruments Carrying Amount vs. Fair Value (March 31, 2021) | In thousands | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | | :----------- | :-------------- | :--------- | :-------- | :-------- | :-------- | | Financial assets: | | | | | | | Cash and due from banks | $24,305 | $24,305 | $10,252 | $14,053 | — | | Interest-bearing deposits in banks | $482,453 | $482,453 | $482,453 | — | — | | Loans, less allowance for loan losses | $1,590,481 | $1,616,326 | — | — | $1,616,326| | Financial liabilities: | | | | | | | Demand deposits and savings | $1,816,731 | $1,816,731 | — | $1,816,731| — | | Time deposits | $461,891 | $465,265 | — | $465,265 | — | | Long-term borrowings | $54,616 | $55,329 | — | $55,329 | — | 11. Securities Sold Under Agreements to Repurchase (Repurchase Agreements) This section describes the accounting treatment and details of the company's repurchase agreements - Repurchase agreements are accounted for as collateralized financing agreements, with the obligation reflected as a liability and underlying securities remaining in asset accounts[144] Short-term Borrowings Subject to Repurchase Agreements (March 31, 2021) | In thousands | Gross Amounts Recognized Liabilities | Net of Amounts Liabilities Presented in the Statements of Condition | | :----------- | :----------------------------------- | :------------------------------------------------------------------ | | Repurchase agreements: Commercial customers and government entities | $31,282 | $31,282 | - As of March 31, 2021, the fair value of securities pledged in connection with repurchase agreements was $40,147,000[147] 12. Borrowings This section outlines the company's short-term and long-term debt, including recent issuances Long-term Debt Outstanding (in thousands) | Item | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | FHLB advances | $35,716 | $38,716 | | Loan payable to local bank | $1,200 | $1,329 | | Loan payable variable rate | $2,700 | $2,700 | | Trust preferred subordinated debt (New Windsor) | $5,000 | $5,000 | | Trust preferred subordinated debt (FCBI) | $6,000 | $6,000 | | Subordinated debt | $15,000 | — | | Total | $65,616 | $53,745 | - On March 30, 2021, ACNB Corporation issued $15.0 million in 4.00% fixed-to-floating rate subordinated notes due March 31, 2031, to retire debt, repurchase shares, support growth, and meet regulatory capital requirements[154] 13. Goodwill and Other Intangible Assets This section details the company's goodwill and other intangible assets, including their carrying values and impairment testing - Combined goodwill totaled $42,108,000, resulting from acquisitions of Russell Insurance Group, Inc. ($6.3M), New Windsor Bancorp, Inc. ($13.3M), and Frederick County Bancorp, Inc. ($22.5M)[155][156] - Goodwill is evaluated for impairment annually, with no impairment identified in the most recent testing, while other intangible assets with finite lives are amortized and subject to periodic impairment testing[156][157][159] Carrying Value and Accumulated Amortization of Intangible Assets (in thousands) | Item | Gross carrying amount | Accumulated amortization | | :--- | :-------------------- | :----------------------- | | RIG amortized intangible assets | $10,428 | $7,226 | | New Windsor core deposit intangibles | $2,418 | $1,418 | | FCBI core deposit intangibles | $3,560 | $793 | 14. Revenue Recognition This section explains the company's policies for recognizing revenue from various sources, including non-interest income - The Corporation adopted ASU 2014-09 (Topic 606) on January 1, 2018, with no material impact on revenue measurement or recognition[160] - Performance obligations are generally satisfied as services are rendered, and transaction prices are typically fixed, involving little judgment in applying Topic 606[160] - Key non-interest income sources include fiduciary, investment management, and brokerage activities (fees based on assets under management), service charges on deposit accounts (overdraft, ATM, monthly fees), and interchange revenue from debit card transactions[161][163][165] 15. New Accounting Pronouncements This section discusses the potential impact of recently issued accounting standards on the company's financial statements - ASU 2016-13 (CECL model) requires measuring credit losses over the instrument's contractual term, with the Corporation, as a smaller reporting company, expecting to defer implementation until January 1, 2023[166][168] - ASU 2019-12 simplifies income tax accounting by removing certain exceptions in Topic 740, effective for fiscal years beginning after December 15, 2020, with no material effect expected[169][170] - ASU 2020-04 (Reference Rate Reform) provides optional guidance for accounting for the transition away from LIBOR, effective March 12, 2020, through December 31, 2022, with the Corporation evaluating its impact[171] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective and analysis of ACNB Corporation's financial condition, results of operations, comprehensive income, capital resources, and liquidity Introduction and Forward-Looking Statements This section introduces the management discussion and analysis, highlighting the inherent risks in forward-looking statements - The discussion analyzes significant changes in financial condition, results of operations, comprehensive income, capital resources, and liquidity for ACNB Corporation[174] - Forward-looking statements are subject to risks and uncertainties, including local economic conditions, competitive factors, regulatory limitations, and the ongoing impact of COVID-19[175] Critical Accounting Policies This section outlines the key accounting policies that require significant judgment and estimation by management - The allowance for loan losses is a critical accounting policy, representing management's estimate of probable losses inherent in the loan portfolio, requiring significant judgment and quarterly assessment[177] - Evaluating securities for other-than-temporary impairment involves significant judgment, considering factors like fair value duration below cost, issuer financial condition, and management's intent to sell[178] - Goodwill is not amortized but tested for impairment annually or more frequently if events indicate impairment, while other intangible assets with finite lives are amortized and periodically tested for impairment[179] Results of Operations This section analyzes the company's financial performance, including detailed discussions of income, expenses, and net income Executive Summary This section provides a high-level overview of the company's financial performance and key drivers for the reporting period Key Financial Highlights (Three Months Ended March 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :----- | :------------------ | :------------------ | :-------------- | :--------- | | Net Income (Loss) | $7,471 | $(1,223) | $8,694 | 710.9% | | Basic Earnings (Loss) Per Share | $0.86 | $(0.14) | | 714.3% | | Net Interest Income | $17,325 | $17,455 | $(130) | (0.7%) | | Provision for Loan Losses | $50 | $4,000 | $(3,950) | (98.8%) | | Other Income | $5,913 | $4,166 | $1,747 | 41.9% | | Other Expenses | $13,787 | $19,457 | $(5,670) | (29.1%) | - The significant increase in net income for Q1 2021 was primarily driven by higher fee income, substantially lower loan loss provision, and the absence of one-time merger expenses present in Q1 2020[180] Net Interest Income This section analyzes the components and trends of the company's net interest income, spread, and margin - Net interest income decreased by $130,000 (0.7%) to $17,325,000 in Q1 2021, as a larger decrease in interest income (7.4%) outweighed the decrease in interest expense (40.8%)[181] - The net interest spread decreased from 3.30% in Q1 2020 to 2.81% in Q1 2021, and net interest margin decreased from 3.55% to 2.94% due to lower market yields and changes in earning asset mix[182] Average Earning Assets and Interest Bearing Liabilities (Q1) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :--- | :------------------ | :------------------ | :-------------------- | | Average Earning Assets | $2,387,000 | $1,976,000 | $411,000 | | Average Interest Bearing Liabilities | $1,721,000 | $1,455,000 | $266,000 | Provision for Loan Losses This section discusses the provision for loan losses, including factors influencing its changes and net charge-offs Provision for Loan Losses (Q1) | Period | Amount (in thousands) | | :----- | :-------------------- | | 2021 | $50 | | 2020 | $4,000 | - The Q1 2021 provision was significantly lower due to prior period provisioning for COVID-19 impacts and continued reduction in related loan modifications[184] Net Charge-offs (Q1) | Period | Amount (in thousands) | | :----- | :-------------------- | | 2021 | $39 | | 2020 | $1,983 | Other Income This section details the various sources of non-interest income and their contributions to overall revenue Other Income (Three Months Ended March 31) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :------------------ | :------------------ | :-------------- | :--------- | | Total Other Income | $5,913 | $4,166 | $1,747 | 41.9% | | Commissions from insurance sales | $1,383 | $1,440 | $(57) | (4.0%) | | Service charges on deposit accounts | $774 | $990 | $(216) | (21.8%) | | Income from fiduciary, investment management and brokerage activities | $703 | $668 | $35 | 5.2% | | Income from mortgage loans held for sale | $1,283 | $318 | $965 | 303.5% | | Net gains (losses) on equity securities | $365 | $(475) | $840 | (176.8%) | | Service charges on ATM and debit card transactions | $778 | $638 | $140 | 21.9% | - The increase in other income was primarily driven by a significant rise in income from mortgage loans held for sale (303.5%) due to refinancing demand and a shift from net losses to net gains on equity securities[186] Other Expenses This section analyzes the company's operating expenses, highlighting significant changes and their underlying causes Other Expenses (Three Months Ended March 31) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :------------------ | :------------------ | :-------------- | :--------- | | Total Other Expenses | $13,787 | $19,457 | $(5,670) | (29.1%) | | Salaries and employee benefits | $8,668 | $8,501 | $167 | 2.0% | | Net occupancy | $1,167 | $981 | $186 | 19.0% | | Professional services | $224 | $402 | $(178) | (44.3%) | | Marketing and corporate relations | $77 | $184 | $(107) | (58.2%) | | FDIC and regulatory | $232 | $41 | $191 | 465.9% | | Merger related expenses | — | $5,965 | $(5,965) | (100.0%) | - The substantial decrease in total other expenses was primarily due to the absence of $5,965,000 in merger-related expenses incurred in Q1 2020[187] - Salaries and employee benefits increased by 2.0% due to competitive labor market, staff retention for FCBI market, organic growth initiatives at RIG, and increased support functions[187][188] Provision for Income Taxes This section discusses the company's income tax provision and the factors affecting its effective tax rate Provision (Benefit) for Income Taxes (Three Months Ended March 31) | Period | Amount (in thousands) | Effective Tax Rate | | :----- | :-------------------- | :----------------- | | 2021 | $1,930 | 20.5% | | 2020 | $(613) | 33.4% | - Variances from the federal statutory rate of 21% are generally due to tax-exempt income from investments, bank-owned life insurance, and low-income housing partnerships[195] Financial Condition This section provides an in-depth analysis of the company's balance sheet, including assets, liabilities, and equity Investment Securities This section details the company's investment securities portfolio, including unrealized gains and losses Total Assets (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $2,654,617 | | December 31, 2020 | $2,555,362 | | March 31, 2020 | $2,180,065 | Net Unrealized Gains (Losses) on Available for Sale Securities (Net of Taxes) | Date | Amount (in thousands) | | :--- | :-------------------- | | March 31, 2021 | $(1,434) | | December 31, 2020 | $4,645 | | March 31, 2020 | $4,463 | - The shift to a net unrealized loss on available-for-sale securities at March 31, 2021, was due to an increase in U.S. Treasury yield curve rates, despite the Federal Reserve's Quantitative Easing program[197] Loans This section provides an overview of the company's loan portfolio, including outstanding balances and changes Loans Outstanding (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $1,610,718 | | December 31, 2020 | $1,637,784 | | March 31, 2020 | $1,606,039 | - Loans outstanding increased by 0.3% year-over-year but decreased by 1.7% from December 31, 2020, primarily due to residential mortgage sales and early payoffs, partially offset by PPP participation[200] - Commercial purpose loans increased by $6,494,000 (0.6%) from December 31, 2020, including $142,036,000 in PPP loans[200] Allowance for Loan Losses This section discusses the adequacy and composition of the allowance for loan losses and related ratios - The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses, determined quarterly through specific credit reviews, historical losses, and qualitative factors[203] Allowance for Loan Losses and Ratios | Date | Allowance (in thousands) | % of Total Loans | % of Non-Acquired Loans | | :--- | :----------------------- | :--------------- | :---------------------- | | March 31, 2021 | $20,237 | 1.26% | 1.66% | | December 31, 2020 | $20,226 | 1.23% | | | March 31, 2020 | $15,852 | 0.99% | | - Nonaccrual loans increased to $7,692,000 at March 31, 2021, from $7,041,000 at December 31, 2020, with $111,000 in troubled debt restructured loans[214] Premises and Equipment This section details the company's premises and equipment, including deferred gains and valuation of acquired properties - A deferred gain of $700,000 from a building sale and leaseback in 2016 is being recognized over the lease term, with an $18,000 reduction in lease expense in Q1 2021 and 2020[227] - The Corporation valued six buildings acquired from New Windsor at $8,624,000 (July 2017) and five properties from FCBI at $7,514,000 (January 2020)[227] Foreclosed Assets Held for Resale This section reports on the carrying value and anticipated activity related to foreclosed assets - Foreclosed assets held for resale had a carrying value of $0 at March 31, 2021, and December 31, 2020, as all properties were sold in 2020[228] - The Corporation anticipates acquiring and marketing additional foreclosed assets throughout 2021, though the total amount and timing remain uncertain[228] Deposits This section analyzes the trends and drivers of the company's deposit base and related interest expenses Total Deposits (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $2,278,622 | | December 31, 2020 | $2,185,525 | | March 31, 2020 | $1,811,357 | - Deposits increased by $467,265,000 (25.8%) year-over-year and by $93,097,000 (4.3%) from December 31, 2020, driven by PPP proceeds and increased liquidity due to COVID-19[229] - Despite increased volume, deposit interest expense decreased by 43.4% due to lower rates[229] Borrowings This section details the company's short-term and long-term borrowings, including recent debt issuances Short-term Bank Borrowings (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $31,282 | | December 31, 2020 | $38,464 | | March 31, 2020 | $26,104 | Long-term Borrowings (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $65,616 | | December 31, 2020 | $53,745 | | March 31, 2020 | $71,723 | - On March 30, 2021, ACNB Corporation issued $15 million in 4.00% fixed-to-floating rate subordinated debt due March 31, 2031, to support general corporate purposes, growth, and regulatory capital[231] Capital This section discusses the company's capital structure, including shareholders' equity, dividends, and regulatory capital ratios Total Shareholders' Equity (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $257,612 | | December 31, 2020 | $257,972 | | March 31, 2020 | $246,994 | - Shareholders' equity decreased by $360,000 in Q1 2021, primarily due to an increase in accumulated other comprehensive loss, partially offset by retained earnings[232] Dividend Payout Ratio (Three Months Ended March 31) | Period | Net Income (Loss) (in thousands) | Dividends Paid (in thousands) | Payout Ratio | | :----- | :------------------------------- | :---------------------------- | :----------- | | 2021 | $7,471 | $2,177 | 29.1% | | 2020 | $(1,223) | $2,167 | (177.2%) | Banking Subsidiary Capital Ratios (March 31, 2021) | Ratio | Amount | | :---- | :----- | | Tier 1 leverage ratio | 9.21% | | Common Tier 1 capital ratio | 14.33% | | Tier 1 risk-based capital ratio | 14.33% | | Total risk-based capital ratio | 15.58% | Liquidity This section describes the company's liquidity management strategies and available funding sources - ACNB ensures liquidity through interest-bearing deposits, securities maturities, loan repayments, core deposits, and FHLB borrowing capacity[247][248] - At March 31, 2021, the banking subsidiary had an FHLB borrowing capacity of approximately $825,196,000, with $775,330,000 available, and a practicable additional borrowing capacity of $566,000,000[248] - The parent company's liquidity is primarily from subsidiary dividends, subject to federal and state banking regulations[251] Off-Balance Sheet Arrangements This section discloses the company's off-balance sheet commitments, such as credit extensions and standby letters of credit - The Corporation uses off-balance sheet financial instruments, including commitments to extend credit and standby letters of credit, to meet customer financing needs[253] Off-Balance Sheet Commitments (March 31, 2021) | Item | Amount | | :--- | :------------- | | Unfunded outstanding commitments to extend credit | $358,944,000 | | Outstanding standby letters of credit | $8,094,000 | Market Risks This section identifies and discusses the primary market risks faced by the company, particularly interest rate risk - ACNB's primary market risk is interest rate risk, arising from managing funds purchased at various terms and rates and invested into earning assets[254] Acquisition of Frederick County Bancorp, Inc. This section reiterates the details and impact of the FCBI acquisition on the company's financial position - The acquisition of FCBI, effective January 11, 2020, expanded ACNB Corporation's consolidated assets to approximately $2.7 billion, deposits to $2.3 billion, and loans to $1.6 billion[255][257] - FCBI stockholders received 0.9900 shares of ACNB common stock for each FCBI common stock share, resulting in 1,590,547 ACNB shares issued[256] Recent Developments This section provides updates on significant regulatory and legislative changes affecting the company BANK SECRECY ACT (BSA) This section outlines the company's compliance with the Bank Secrecy Act and related anti-money laundering regulations - The BSA, as amended by the USA PATRIOT Act, mandates financial institutions to implement policies and controls to detect and report money laundering and terrorism financing[258] - Effective May 11, 2018, the Bank began compliance with the new Customer Due Diligence Rule, strengthening obligations for identifying customers and conducting ongoing due diligence[258] TAX CUTS AND JOBS ACT This section discusses the impact of the Tax Cuts and Jobs Act on the company's federal corporate tax rate and deferred tax assets - The Tax Cuts and Jobs Act, signed December 22, 2017, reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018, which is expected to reduce future federal income tax liability[259] - The Corporation revalued its net deferred tax assets in Q4 2017, resulting in an approximately $1.7 million reduction to earnings in 2017 due to the tax law changes[259] DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK) This section provides an overview of the Dodd-Frank Act and its implications for federal banking regulation and the company's operations - Dodd-Frank, signed in 2010, fundamentally restructured federal banking regulation, creating new authorities for systemic risk identification and liquidation of financial firms[260] - The Act is expected to increase ACNB's operating and compliance costs and potentially the banking subsidiary's interest expense[260] Holding Company Capital Requirements This section details the Dodd-Frank Act's impact on capital requirements for bank holding companies - Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies no less stringent than those for depository institutions, excluding trust preferred securities from Tier 1 capital unless issued before May 19, 2010, by smaller holding companies[260] Deposit Insurance This section explains the changes to deposit insurance limits and assessment bases under the Dodd-Frank Act - Dodd-Frank permanently increased maximum deposit insurance to $250,000 per depositor and broadened the base for FDIC insurance assessments to average consolidated total assets less tangible equity capital[261] Corporate Governance This section outlines the Dodd-Frank Act's mandates regarding shareholder votes on executive compensation and M&A payments - Dodd-Frank mandates non-binding shareholder votes on executive compensation (every three years) and its frequency (every six years), and on 'golden parachute' payments during M&A[263] Prohibition Against Charter Conversions of Troubled Institutions This section describes the Dodd-Frank Act's restrictions on charter conversions for troubled depository institutions - Dodd-Frank prohibits troubled depository institutions from converting charters without notice to the issuing authority and a plan to address supervisory matters, subject to agency non-objection[264] Interstate Branching This section discusses the Dodd-Frank Act's provisions allowing interstate branching for national and state banks - Dodd-Frank allows national and state banks to establish branches in other states to the same extent as a bank chartered by that state, facilitating entry into new markets[265] Limits on Interstate Acquisitions and Mergers This section details the stricter capital and management standards for interstate acquisitions and mergers under Dodd-Frank - Dodd-Frank requires bank holding companies and banks to be 'well capitalized' and 'well managed' to engage in interstate acquisitions or mergers, a stricter standard than previous 'adequately capitalized and managed'[265] Limits on Interchange Fees This section explains the Federal Reserve's authority under Dodd-Frank to regulate interchange fees for debit card transactions - Dodd-Frank granted the Federal Reserve authority to regulate interchange fees for electronic debit transactions by payment card issuers with assets over $10 billion, requiring fees to be reasonable and proportional to transaction costs[266] Consumer Financial Protection Bureau This section describes the establishment and broad powers of the CFPB under the Dodd-Frank Act - Dodd-Frank established the CFPB with broad rulemaking, supervisory, and enforcement powers over federal consumer financial protection laws, including preventing unfair practices and setting mortgage origination standards[267] ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE This section discusses the CFPB's rule requiring mortgage lenders to assess borrowers' repayment ability or originate qualified mortgages - The CFPB's Ability-to-Repay and Qualified Mortgage Rule (effective January 10, 2014) requires mortgage lenders to determine a consumer's reasonable ability to repay based on eight underwriting factors or by originating 'qualified mortgages'[268] - The rule has had little to no impact on the Corporation's lending activities or financial statements, but management continues to monitor its potential effects[268] DEPARTMENT OF DEFENSE MILITARY LENDING RULE This section outlines the Department of Defense's rule restricting credit terms for military personnel and their families - The U.S. Department of Defense's Military Lending Rule (effective October 3, 2016) restricts pricing and terms for credit extended to active duty military personnel and their families, capping interest rates at 36% APR[269] - This rule has had little to no impact on the Corporation's lending activities or financial statements, but management continues to monitor its potential effects[269] Supervision and Regulation This section describes the regulatory oversight of the company and its subsidiary bank by various federal and state authorities Dividends This section explains that the parent company's revenues are primarily from regulated subsidiary bank dividends - ACNB's parent company revenues primarily come from dividends paid by its subsidiary bank, which are regulated by federal and state laws[270] Regulation of Bank This section details the regulatory bodies and examinations governing the subsidiary bank - The subsidiary bank is subject to statutes and regulations from the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC, which conduct regular examinations[270][271] Monetary and Fiscal Policy This section discusses the influence of monetary and fiscal policies on the company's operations and financial performance - ACNB and its subsidiary bank are affected by monetary and fiscal policies, including those of the Federal Reserve and FDIC, which influence the cost and availability of funds[271] - Management cannot predict the material effect of proposed federal and state legislation on the business[273] ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section confirms that management regularly monitors and evaluates changes in market conditions - Management monitors market conditions regularly and has determined no material changes in market risks since year-end 2020[274] ITEM 4 – CONTROLS AND PROCEDURES This section details the evaluation of the Corporation's disclosure controls and procedures, confirming their effectiveness in ensuring timely and accurate reporting of material information Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and the absence of material changes to internal control over financial reporting - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2021, in timely alerting them to material information for SEC filings[275] - No material changes occurred in the Corporation's internal control over financial reporting during the quarter ended March 31, 2021[276] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements or management's discussion and analysis ITEM 1 – LEGAL PROCEEDINGS This section reports on legal proceedings, stating that as of March 31, 2021, there were no material pending legal proceedings, other than routine litigation, that could adversely affect ACNB or its subsidiaries - As of March 31, 2021, there were no material pending legal proceedings or threatened proceedings by governmental authorities that could have a material adverse effect on ACNB or its subsidiaries[278] [ITEM 1A – RISK FACTORS](i