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ACNB ACNB

Filed: 30 Apr 21, 3:12pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q 
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 2021

OR

TRANSITION 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 (I.R.S. Employer
incorporation or organization) 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 SymbolName of each exchange on which registered
Common Stock, $2.50 par value per share ACNBThe NASDAQ Stock Market, LLC
 
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 No
 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and 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 No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerSmaller 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No
 
The number of shares of the Registrant’s Common Stock outstanding on April 30, 2021, was 8,715,020.



PART I - FINANCIAL INFORMATION
 
ACNB CORPORATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
 
Dollars in thousands, except per share dataMarch 31,
2021
March 31,
2020
December 31,
2020
ASSETS   
Cash and due from banks$24,305 $23,169 $23,739 
Interest bearing deposits with banks482,453 106,001 375,613 
Total Cash and Cash Equivalents506,758 129,170 399,352 
Equity securities with readily determinable fair values2,535 1,888 2,170 
Debt securities available for sale355,008 253,048 337,718 
Securities held to maturity, fair value $9,451; $18,565; $10,7689,155 18,090 10,294 
Loans held for sale12,000 4,786 11,034 
Loans, net of allowance for loan losses $20,237; $15,852; $20,2261,590,481 1,590,187 1,617,558 
Premises and equipment, net32,491 34,506 33,013 
Right of use assets2,984 5,974 3,145 
Restricted investment in bank stocks2,798 3,701 2,942 
Investment in bank-owned life insurance63,739 62,306 63,401 
Investments in low-income housing partnerships1,349 1,474 1,380 
Goodwill42,108 41,700 42,108 
Intangible assets, net6,969 7,684 7,265 
Foreclosed assets held for resale0 798 
Other assets26,242 24,753 23,982 
Total Assets$2,654,617 $2,180,065 $2,555,362 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
LIABILITIES   
Deposits:   
Non-interest bearing$589,045 $433,923 $556,666 
Interest bearing1,689,577 1,377,434 1,628,859 
Total Deposits2,278,622 1,811,357 2,185,525 
Short-term borrowings31,282 26,104 38,464 
Long-term borrowings65,616 71,723 53,745 
Lease liabilities2,984 6,047 3,138 
Other liabilities18,501 17,840 16,518 
Total Liabilities2,397,005 1,933,071 2,297,390 
STOCKHOLDERS’ EQUITY   
Preferred stock, $2.50 par value; 20,000,000 shares authorized; 0 shares outstanding0 
Common stock, $2.50 par value; 20,000,000 shares authorized; 8,777,620, 8,732,506 and 8,771,993 shares issued; 8,715,020, 8,669,906 and 8,709,393 shares outstanding21,932 21,819 21,918 
Treasury stock, at cost (62,600 shares)(728)(728)(728)
Additional paid-in capital94,215 93,150 94,048 
Retained earnings153,666 135,273 148,372 
Accumulated other comprehensive loss(11,473)(2,520)(5,638)
Total Stockholders’ Equity257,612 246,994 257,972 
Total Liabilities and Stockholders’ Equity$2,654,617 $2,180,065 $2,555,362 
 The accompanying notes are an integral part of the consolidated financial statements.
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ACNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 Three Months Ended March 31,
Dollars in thousands, except per share data20212020
INTEREST AND DIVIDEND INCOME  
Loans, including fees$17,798 $19,035 
Securities: 
Taxable1,284 1,284 
Tax-exempt135 92 
Dividends61 90 
Other92 408 
Total Interest Income19,370 20,909 
INTEREST EXPENSE  
Deposits1,654 2,921 
Short-term borrowings10 15 
Long-term borrowings381 518 
Total Interest Expense2,045 3,454 
Net Interest Income17,325 17,455 
PROVISION FOR LOAN LOSSES50 4,000 
Net Interest Income after Provision for Loan Losses17,275 13,455 
OTHER INCOME  
Commissions from insurance sales1,383 1,440 
Service charges on deposit accounts774 990 
Income from fiduciary, investment management and brokerage activities703 668 
Income from mortgage loans held for sale1,283 318 
Earnings on investment in bank-owned life insurance338 347 
Net gains (losses) on equity securities365 (475)
Service charges on ATM and debit card transactions778 638 
Other289 240 
Total Other Income5,913 4,166 
OTHER EXPENSES  
Salaries and employee benefits8,668 8,501 
Net occupancy1,167 981 
Equipment1,291 1,284 
Other tax393 327 
Professional services224 402 
Supplies and postage163 209 
Marketing and corporate relations77 184 
FDIC and regulatory232 41 
Merger related expenses0 5,965 
Intangible assets amortization296 315 
Foreclosed real estate (income) expenses(1)75 
Other operating1,277 1,173 
Total Other Expenses13,787 19,457 
Income (Loss) before Income Taxes9,401 (1,836)
PROVISION (BENEFIT) FOR INCOME TAXES1,930 (613)
Net Income (Loss)$7,471 $(1,223)
PER SHARE DATA  
Basic earnings (loss)$0.86 $(0.14)
Cash dividends declared$0.25 $0.25 
The accompanying notes are an integral part of the consolidated financial statements.
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ACNB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 Three Months Ended March 31,
Dollars in thousands20212020
NET INCOME (LOSS)$7,471 $(1,223)
OTHER COMPREHENSIVE INCOME  
SECURITIES  
Unrealized (losses) gains arising during the period, net of income taxes of $(1,738) and $907, respectively(6,079)3,202 
Reclassification adjustment for net gains included in net income, net of income taxes of $0 and $0, respectively (A) (C)0 0 
PENSION  
Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $69 and $38, respectively (B) (C)244 131 
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME(5,835)3,333 
TOTAL COMPREHENSIVE INCOME$1,636 $2,110 
 
The accompanying notes are an integral part of the consolidated financial statements.

(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.
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ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Three Months Ended March 31, 2021 and 2020
Dollars in thousandsCommon StockTreasury StockAdditional Paid-in CapitalRetained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
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 (5,627 shares)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 
Dollars in thousandsCommon StockTreasury StockAdditional Paid-in CapitalRetained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
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 (1,590,547 shares)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 
The accompanying notes are an integral part of the consolidated financial statements.
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ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended March 31,
Dollars in thousands20212020
CASH FLOWS FROM OPERATING ACTIVITIES  
Net income (loss)$7,471 $(1,223)
Adjustments to reconcile net income to net cash provided by operating activities:  
Gain on sales of loans originated for sale(1,283)(318)
Loss on sales of foreclosed assets held for resale, including writedowns0 13 
Earnings on investment in bank-owned life insurance(338)(347)
(Gain) Loss on equity securities(365)475 
Restricted stock compensation expense362 262 
Depreciation and amortization866 959 
Provision for loan losses50 4,000 
Net amortization of investment securities premiums410 125 
Decrease (Increase) in accrued interest receivable183 (91)
Decrease in accrued interest payable(612)(153)
Mortgage loans originated for sale(46,670)(14,302)
Proceeds from sales of loans originated for sale46,987 16,290 
(Increase) Decrease in other assets(184)943 
Increase in deferred tax expense(398)(221)
Increase in other liabilities2,559 2,004 
Net Cash Provided by Operating Activities9,038 8,416 
CASH FLOWS FROM INVESTING ACTIVITIES  
Proceeds from maturities of investment securities held to maturity1,139 1,144 
Proceeds from maturities of investment securities available for sale26,693 6,087 
Purchase of investment securities available for sale(52,210)(42,404)
Redemption of restricted investment in bank stocks144 1,084 
Net decrease (increase) in loans27,027 (5,622)
Purchase of bank-owned life insurance0 (400)
Bank acquisition, net of cash acquired0 35,262 
Capital expenditures(76)(406)
Proceeds from sales of premises and equipment28 
Proceeds from sales of foreclosed real estate0 135 
Net Cash Provided by (Used in) Investing Activities2,745 (5,120)
CASH FLOWS FROM FINANCING ACTIVITIES  
Net increase in demand deposits32,379 16,054 
Net increase in time certificates of deposits and interest bearing deposits60,718 8,985 
Net decrease in short-term borrowings(7,182)(7,331)
Proceeds from long-term borrowings15,000 
Repayments on long-term borrowings(3,129)(4,023)
Dividends paid(2,177)(2,167)
Common stock issued14 
Net Cash Provided by Financing Activities95,623 11,518 
Net Increase in Cash and Cash Equivalents107,406 14,814 
CASH AND CASH EQUIVALENTS — BEGINNING399,352 114,356 
CASH AND CASH EQUIVALENTS — ENDING$506,758 $129,170 
Supplemental disclosures of cash flow information
Interest paid$2,657 $3,607 
Income taxes paid$0 $
Loans transferred to foreclosed assets held for resale and other foreclosed transactions$0 $118 
Transactions related to acquisition
Increase in assets and liabilities:
Securities$0 $22,167 
Loans0 333,967 
Premises and equipment0 11,682 
Investment in bank-owned life insurance0 10,896 
Restricted investments in bank stocks0 1,141 
Foreclosed assets held for resale0 464 
Goodwill0 22,120 
Core deposit intangible assets0 3,572 
Other assets0 2,970 
Non-interest bearing deposits0 103,492 
Interest bearing deposits0 270,566 
Trust preferred debentures0 6,000 
Long term borrowings0 3,450 
Other liabilities0 2,824 
Common shares issued0 57,909 
 The accompanying notes are an integral part of the consolidated financial statements.
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ACNB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation and Nature of Operations
 
ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and Russell Insurance Group, Inc. (RIG). The Bank engages in full-service commercial and consumer banking and wealth management services, including trust and retail brokerage, through its NaN community banking offices, including 20 community banking office locations in Adams, Cumberland, Franklin and York Counties, Pennsylvania, as of April 1, 2021. There are also loan production offices situated in Lancaster and York, Pennsylvania, and Hunt Valley, Maryland.

RIG is a full-service insurance agency based in Westminster, Maryland, with additional locations in Germantown and Jarrettsville, Maryland. The agency offers a broad range of property and casualty and group life and health insurance to both individual and commercial clients.

On July 1, 2017, ACNB completed its acquisition of New Windsor Bancorp, Inc. (New Windsor) of Taneytown, Maryland. At the effective time of the acquisition, New Windsor merged with and into a wholly-owned subsidiary of ACNB, immediately followed by the merger of New Windsor State Bank (NWSB) with and into ACNB Bank. ACNB Bank now operates in the Maryland market as “NWSB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via a network of 6 community banking offices located in Carroll County, Maryland, as of April 1, 2021.

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 a network of 5 community banking offices located in Frederick County, Maryland. Further discussion of the FCBI acquisition can be found in Note 2 of these Notes to Consolidated Financial Statements.

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.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position and the results of operations, comprehensive (loss) income, changes in stockholders’ equity, and cash flows. All such adjustments are of a normal recurring nature.
 
The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2020 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 5, 2021. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three month period ended March 31, 2021, are not necessarily indicative of the results to be expected for the full year.

ASU 2018-14

The Corporation adopted ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.

The ASU removes the following disclosures:

the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year;
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the amount and timing of plan assets expected to be returned to the employer; and,

certain related party disclosures.

The ASU clarifies the following disclosure requirements:

the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets must be disclosed; and,

the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets must be disclosed.

The ASU adds the following disclosure requirements:

the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and,

an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

The ASU is effective for public business entities in fiscal years ending after December 15, 2020. Early adoption is permitted.

The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2021, 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.

2.    Acquisition of Frederick County Bancorp, Inc.

On January 11, 2020, ACNB completed its previously announced acquisition of Frederick County Bancorp, Inc. (FCBI) of Frederick, Maryland. FCBI was a locally owned and managed institution with 5 locations in Frederick County, Maryland. The acquisition positioned ACNB Corporation for continual and profitable growth in a desirable market that is adjacent to the Corporation’s current footprint in southcentral Pennsylvania and central Maryland. ACNB transacted the merger to complement the Corporation’s existing operations, while consistent with the Corporation’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $443.4 million, loans totaled $329.3 million and deposits totaled $374.1 million.

Goodwill recorded in the merger was $22.5 million. In accordance with the terms of the Reorganization Agreement, each share of FCBI common stock was converted into the right to receive 0.9900 share of ACNB common stock. As a result of the merger, ACNB issued 1,590,547 shares of its common stock and cash in exchange for fractional shares based upon $36.43, the determined market price of ACNB common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Corporation’s Consolidated Financial Statements from the date of acquisition.

The acquisition of FCBI is being accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

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The following table summarizes the consideration paid for FCBI and the fair value of assets acquired and liabilities assumed as of the acquisition date:

Purchase Price Consideration in Common Stock
FCBI shares outstanding1,601,764 
Shares paid in cash for fractional shares150.88 
Cash consideration (per share)$36.43 
Cash portion of purchase price (cash payout of stock options and cash in lieu of fractional shares)$100,798 
FCBI shares outstanding1,601,764 
Shares paid stock consideration1,601,613 
Exchange ratio0.9900 
Total ACNB shares issued1,585,597 
ACNB’s share price for purposes of calculation$36.34 
Equity portion of purchase price$57,620,595 
Cost of shares owned by buyer$187,200 
Total consideration paid$57,908,593 
Allocation of Purchase PriceIn thousands
Total Purchase Price$57,909 
Fair Value of Assets Acquired
Cash and cash equivalents35,262 
Investment securities22,167 
Loans held for sale4,050 
Loans329,312 
Restricted stock1,141 
Premises and equipment10,959 
Core deposit intangible asset3,560 
Other assets14,446 
Total assets420,897 
Fair Value of Liabilities Assumed
Non-interest bearing deposits103,492 
Interest bearing deposits270,566 
Subordinated debt6,000 
Long term borrowings3,450 
Other liabilities2,008 
Total liabilities385,516 
Net Assets Acquired35,381 
Goodwill Recorded in Acquisition$22,528 

Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of FCBI. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The assets acquired and liabilities assumed in the acquisition of FCBI were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of
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the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Investment securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services. The Corporation’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $163,000 was recorded and will be amortized over the estimated life of the investments using the interest rate method.

Loans

Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of FCBI’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $339,577,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.
In thousands  
Gross amortized cost basis at January 11, 2020$339,577 
Interest rate fair value adjustment on pools of homogeneous loans(2,632)
Credit fair value adjustment on pools of homogeneous loans(5,931)
Credit fair value adjustment on purchased credit impaired loans(1,702)
Fair value of acquired loans at January 11, 2020$329,312 

For loans acquired without evidence of credit quality deterioration, ACNB prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $2.6 million.

Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, FCBI and peer banks. ACNB also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $5.3 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

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The following table presents the acquired purchased credit impaired loans receivable at the Acquisition Date:
In thousands
Contractual principal and interest at acquisition$4,289 
Nonaccretable difference(2,361)
Expected cash flows at acquisition1,928 
Accretable yield(354)
Fair value of purchased impaired loans$1,574 

The Corporation acquired 5 branches of FCBI. The fair value of FCBI’s premises, including land, buildings, and improvements, was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located. The Corporation prepared an internal analysis to compare the lease contract obligations to comparable market rental rates. The Corporation believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium of approximately $255,000 is being amortized into income on a level yield amortization method over the contractual life of the deposits.

Long-term Borrowings

The Corporation assumed a trust preferred subordinated debt in connection with the merger. The fair value of the trust preferred subordinated debt was determined using a discounted cash flow method using a market participant discount rate for similar instruments. The trust preferred capital note was valued at discount of $854,000, which is being amortized into income on a level yield amortization method based upon the assumed market rate, and the term of the trust preferred subordinated debt instrument.

The following table presents certain pro forma information as if FCBI had been acquired on September 30, 2019. These results combine the historical results of the Corporation in the Corporation’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on September 30, 2019. In particular, no adjustments have been made to eliminate the amount of FCBI’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of September 30, 2019. The Corporation expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
In thousandsFor the Nine Months
 Ended September 30, 2019
Total revenues (net interest income plus non-interest income)$72,281 
Net Income22,138 

Acquisition-related expenses associated with the acquisition of FCBI were $6.0 million for the three months ended March 31, 2020. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, operations integration, and employee severances, which have been expensed as incurred.

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3.    Earnings Per Share and Restricted Stock
 
The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 8,710,393 and 8,477,642 weighted average shares of common stock outstanding for the three months ended March 31, 2021 and 2020, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. The Corporation has no instruments that would create dilutive earnings per share.

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 organization’s success. As of March 31, 2021, 25,945 shares were issued under this plan and all shares were fully vested. No further shares may be issued under this restricted stock plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.

On May 1, 2018, shareholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of March 31, 2021, 35,587 shares were issued under this plan, of which 17,124 were fully vested, 11,917 vested during the quarter, and the remaining 6,546 will vest over the next year. 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.

Plan expense is recognized over the vesting period of the stock issued under both plans. $28,000 and $33,000 of compensation expenses related to the grants were recognized during the three months ended March 31, 2021 and 2020, respectively.

4.    Retirement Benefits
 
The components of net periodic benefit expense related to the non-contributory, defined benefit pension plan for the three month periods ended March 31 were as follows:
 Three Months Ended March 31, 
In thousands20212020
Service cost$220 $188 
Interest cost236 270 
Expected return on plan assets(704)(687)
Amortization of net loss314 169 
Net Periodic Benefit Expense (Income)$66 $(60)
 
The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2020, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2021. As of March 31, 2021, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 347 active, vested, terminated and retired persons in the plan.
 
5.    Guarantees
 
The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its
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standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $8,094,000 in standby letters of credit as of March 31, 2021. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of March 31, 2021, for guarantees under standby letters of credit issued is not material.

6.     Accumulated Other Comprehensive Loss
 
The components of accumulated other comprehensive loss, net of taxes, are as follows:
 
In thousandsUnrealized (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
 
The Corporation has 2 reporting segments, the Bank and RIG. RIG is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. RIG offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients.

Segment information for the three month periods ended March 31, 2021 and 2020, is as follows:
In thousandsBankingInsuranceTotal
2021   
Net interest income and other income from external customers$21,866 $1,372 $23,238 
Income before income taxes9,185 216 9,401 
Total assets2,641,782 12,835 2,654,617 
Capital expenditures76 0 76 
2020   
Net interest income and other income from external customers$20,186 $1,435 $21,621 
(Loss) Income before income taxes(2,001)165 (1,836)
Total assets2,167,427 12,638 2,180,065 
Capital expenditures406 406 

8.    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
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(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.

Amortized cost and fair value of securities at March 31, 2021, and December 31, 2020, were as follows:
 
In thousandsAmortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
SECURITIES AVAILABLE FOR SALE    
MARCH 31, 2021    
U.S. Government and agencies$199,033 $1,378 $4,281 $196,130 
Mortgage-backed securities, residential113,145 2,366 1,210 114,301 
State and municipal35,899 225 418 35,706 
Corporate bonds8,775 100 4 8,871 
 $356,852 $4,069 $5,913 $355,008 
DECEMBER 31, 2020    
U.S. Government and agencies$181,704 $2,117 $218 $183,603 
Mortgage-backed securities, residential105,327 3,529 34 108,822 
State and municipal35,930 561 36,484 
Corporate bonds8,784 41 16 8,809 
 $331,745 $6,248 $275 $337,718 
SECURITIES HELD TO MATURITY    
MARCH 31, 2021    
Mortgage-backed securities, residential$9,155 $296 $0 $9,451 
$9,155 $296 $0 $9,451 
DECEMBER 31, 2020    
Mortgage-backed securities, residential$10,294 $474 $$10,768 
$10,294 $474 $$10,768 
 
The fair value disclosures required by ASU 2016-01, Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effective January 1, 2018, are as follows:
In thousandsFair Value at January 1, 2021Unrealized
Gains
Unrealized
Losses
Fair Value at March 31, 2021
MARCH 31, 2021
CRA Mutual Fund$1,065 $0 $17 $1,048 
Stock in other banks1,105 382 0 1,487 
$2,170 $382 $17 $2,535 
In thousandsFair Value at January 1, 2020Unrealized
Gains
Unrealized
Losses
Fair Value at March 31, 2020
MARCH 31, 2020
CRA Mutual Fund$1,045 $16 $$1,061 
Stock in other banks1,318 491 827 
$2,363 $16 $491 $1,888 
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In thousandsFair Value at January 1, 2020Unrealized
Gains
Unrealized
Losses
Fair Value at December 31, 2020
DECEMBER 31, 2020
CRA Mutual Fund$1,045 $25 $$1,065 
Stock in other banks1,318 213 1,105 
$2,363 $25 $218 $2,170 

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2021, and December 31, 2020:
 
 Less than 12 Months12 Months or MoreTotal
In thousandsFair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
SECURITIES AVAILABLE FOR SALE      
MARCH 31, 2021      
U.S. Government and agencies$107,396 $4,281 $0 $0 $107,396 $4,281 
Mortgage-backed securities, residential49,943 1,209 254 1 50,197 1,210 
State and municipal16,765 418 0 0 16,765 418 
Corporate bond1,996 4 0 0 1,996 4 
$176,100 $5,912 $254 $1 $176,354 $5,913 
DECEMBER 31, 2020      
U.S. Government and agencies$32,629 $218 $$$32,629 $218 
Mortgage-backed securities, residential10,458 34 10,458 34 
State and municipal2,148 2,148 
Corporate bond1,514 16 1,514 16 
 $46,749 $275 $$$46,749 $275 
SECURITIES HELD TO MATURITY
MARCH 31, 2021
Mortgage-backed securities, residential$0 $0 $0 $0 $0 $0 
$0 $0 $0 $0 $0 $0 
DECEMBER 31, 2020
Mortgage-backed securities, 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.

At March 31, 2021, NaN available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 8% of amortized cost. None of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

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At March 31, 2021, NaN available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 5% of amortized cost. None of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At March 31, 2021, NaN available for sale state and municipal securities had unrealized losses that individually did not exceed 9% of amortized cost. None of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At March 31, 2021, 1 corporate bond had an unrealized loss that did not exceed 1% of amortized cost. This security has not been in a continuous loss position for 12 months or more. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the specific security.

In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.
 
The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing.
 
Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At March 31, 2021, 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 March 31, 2021, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.
 
 Available for SaleHeld to Maturity
In thousandsAmortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
1 year or less$54,160 $54,583 $0 $0 
Over 1 year through 5 years34,050 34,902 0 0 
Over 5 years through 10 years111,373 108,131 0 0 
Over 10 years44,124 43,091 0 0 
Mortgage-backed securities, residential113,145 114,301 9,155 9,451 
 $356,852 $355,008 $9,155 $9,451 

The Corporation did not sell any securities available for sale during the first three months of 2021 or 2020.

At March 31, 2021, and December 31, 2020, securities with a carrying value of $267,184,000 and $301,201,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

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9.    Loans
 
The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.
 
The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
 
All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for Credit Losses
 
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (the “allowance”) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for the previous twelve quarters 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;

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the nature and volume of the portfolio and terms of loans;

the experience, ability and depth of lending management and staff;

the volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,

the existence and effect of any concentrations of credit and changes in the level of such concentrations.
 
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
 
The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.
 
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.

It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third-party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third-party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, change in the condition of the real estate, change in local market and economic conditions, and other specific factors involving the collateral. Once the updated valuation is completed, the collateral value is updated accordingly.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
 
The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. The Corporation orders valuations at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.

For impaired loans secured by collateral other than real estate, the Corporation considers the net book value of the collateral, as recorded in the most recent financial statements of the borrower, and determines fair value based on estimates made by management.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.
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Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.
 
The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.
 
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
 
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.
 
Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.
 
In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.
 
Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.
 
Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.
 
In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing
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the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.
 
Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
 
Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.
 
The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.
 
In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.
 
Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.
 
Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
 
The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.
 
In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s financial ability to repay the loan as agreed and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.

Residential mortgage loans are subject to risk due primarily to general economic conditions, as well as a continued weak housing market.
 
Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.
 
Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
 
Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as a continued weak housing market.
 
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market continues to be weak and property values deteriorate.
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Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
 
Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
 
Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Acquired Loans

Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures.

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected. Acquired loans are marked to fair value on the date of acquisition. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Corporation performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Corporation will include these loans in the calculation of the allowance for loan losses after the initial valuation, and provide accordingly.

Upon acquisition, in accordance with US GAAP, the Corporation has individually determined whether each acquired loan is within the scope of ASC 310-30. The Corporation’s senior lending management reviewed the accounting seller’s loan portfolio on a loan by loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all of the contractual cash flows will be collected on the loan.

With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows resulted in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan’s acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

Over the life of the acquired ASC 310-30 loan, the Corporation continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

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Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Corporation can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Corporation does not consider acquired contractually delinquent loans to be non-accruing and continue to recognize interest income on these loans using the accretion model.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Corporation used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, environment factors to estimate the expected cash flow for each loan pool.

The following table presents 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 March 31, 2021, and December 31, 2020:
 
In thousandsPassSpecial MentionSubstandardDoubtfulTotal
MARCH 31, 2021     
Originated Loans
Commercial and industrial$267,234 $4,521 $3,368 $0 $275,123 
Commercial real estate438,258 56,452 10,269 0 504,979 
Commercial real estate construction36,030 1,552 0 0 37,582 
Residential mortgage311,659 5,319 178 0 317,156 
Home equity lines of credit76,153 496 0 0 76,649 
Consumer11,111 0 0 0 11,111 
Total Originated Loans1,140,445 68,340 13,815 0 1,222,600 
Acquired Loans
Commercial and industrial37,549 1,558 1,480 0 40,587 
Commercial real estate235,532 14,985 3,839 0 254,356 
Commercial real estate construction10,189 2,361 0 0 12,550 
Residential mortgage52,933 3,588 2,264 0 58,785 
Home equity lines of credit20,089 37 483 0 20,609 
Consumer1,231 0 0 0 1,231 
Total Acquired Loans357,523 22,529 8,066 0 388,118 
Total Loans
Commercial and industrial304,783 6,079 4,848 0 315,710 
Commercial real estate673,790 71,437 14,108 0 759,335 
Commercial real estate construction46,219 3,913 0 0 50,132 
Residential mortgage364,592 8,907 2,442 0 375,941 
Home equity lines of credit96,242 533 483 0 97,258 
Consumer12,342 0 0 0 12,342 
Total Loans$1,497,968 $90,869 $21,881 $0 $1,610,718 
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In thousandsPassSpecial MentionSubstandardDoubtfulTotal
DECEMBER 31, 2020     
Originated Loans
Commercial and industrial$270,047 $5,168 $2,688 $$277,903 
Commercial real estate414,538 54,122 10,463 479,123 
Commercial real estate construction39,462 1,746 41,208 
Residential mortgage332,632 4,327 178 337,137 
Home equity lines of credit80,560 346 80,906 
Consumer11,819 11,819 
Total Originated Loans1,149,058 65,709 13,329 1,228,096 
Acquired Loans
Commercial and industrial38,882 1,893 1,476 42,251 
Commercial real estate245,597 16,706 3,201 265,504 
Commercial real estate construction10,300 2,394 12,694 
Residential mortgage58,787 3,535 1,881 64,203 
Home equity lines of credit23,165 97 442 23,704 
Consumer1,330 1,332 
Total Acquired Loans378,061 24,625 7,002 409,688 
Total Loans
Commercial and industrial308,929 7,061 4,164 320,154 
Commercial real estate660,135 70,828 13,664 744,627 
Commercial real estate construction49,762 4,140 53,902 
Residential mortgage391,419 7,862 2,059 401,340 
Home equity lines of credit103,725 443 442 104,610 
Consumer13,149 13,151 
Total Loans$1,527,119 $90,334 $20,331 $$1,637,784 

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 thousandsThree Months Ended March 31, 2021Three Months Ended March 31, 2020
Balance at beginning of period$596 $642 
Acquisitions of impaired loans0 354 
Reclassification from non-accretable differences0 0 
Accretion to loan interest income(98)(128)
Balance at end of period$498 $868 

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 March 31, 2021, and December 31, 2020:
 
 Impaired Loans with AllowanceImpaired Loans with
No Allowance
In thousandsRecorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
MARCH 31, 2021     
Commercial and industrial$2,739 $2,739 $1,954 $0 $0 
Commercial real estate1,703 1,703 152 6,802 6,802 
Commercial real estate construction0 0 0 0 0 
Residential mortgage0 0 0 101 101 
Home equity lines of credit0 0 0 0 0 
 $4,442 $4,442 $2,106 $6,903 $6,903 
DECEMBER 31, 2020     
Commercial and industrial$2,031 $2,031 $1,224 $$
Commercial real estate2,728 2,728 158 5,861 5,861 
Commercial real estate construction
Residential mortgage101 101 
Home equity lines of credit
 $4,759 $4,759 $1,382 $5,962 $5,962 

The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class for the three months ended March 31, 2021 and 2020:
 
 Impaired Loans with
Allowance
Impaired Loans with
No Allowance
In thousandsAverage
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
MARCH 31, 2021    
Commercial and industrial$2,385 $0 $0 $0 
Commercial real estate1,703 0 6,716 54 
Commercial real estate construction0 0 128 0 
Residential mortgage0 0 101 0 
Home equity lines of credit0 0 0 0 
 $4,088 $0 $6,945 $54 
MARCH 31, 2020    
Commercial and industrial$62 $$$
Commercial real estate530 7,340 70 
Commercial real estate construction
Residential mortgage136 
Home equity lines of credit76 
 $592 $$7,552 $77 
    

No additional funds are committed to be advanced in connection with impaired loans.
 
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The following table presents nonaccrual loans by loan portfolio class as of March 31, 2021, and December 31, 2020, the table below excludes $6.0 million in purchase credit impaired loans, net of unamortized fair value adjustments: 
In thousandsMarch 31, 2021December 31, 2020
Commercial and industrial$2,739 $2,031 
Commercial real estate4,852 4,909 
Commercial real estate construction0 
Residential mortgage101 101 
Home equity lines of credit0 
 $7,692 $7,041 

There were no loans whose terms have been modified thereby resulting in a troubled debt restructuring during the three months ended March 31, 2021 and 2020. 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 $3,764,000 and $3,933,000 at March 31, 2021 and March 31, 2020, 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 March 31, 2021 and March 31, 2020, were $111,000 and $175,000, 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 restructuring at March 31, 2021 and March 31, 2020, which totaled $3,653,000 and $3,758,000, respectively. As of March 31, 2021 and 2020, there were no defaulted troubled debt restructured loans. There were no charge-offs or specific allocation on any of the troubled debt restructured loans for the three months ended March 31, 2021 and 2020. All other troubled debt restructured loans were current as of March 31, 2021, with respect to their associated forbearance agreement, except for 1 loan which has had periodic late payments. As of March 31, 2021, there are 0 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 March 31, 2021 and December 31, 2020, totaled $506,000 and $391,000, 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.

25


The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2021, and December 31, 2020:
In thousands30–59 Days Past Due60–89 Days
Past Due
>90 Days
Past Due
Total Past
Due
CurrentTotal Loans
Receivable
Loans
Receivable
>90 Days
and
Accruing
MARCH 31, 2021
Originated Loans       
Commercial and industrial$85 $1,319 $1,274 $2,678 $272,445 $275,123 $0 
Commercial real estate464 552 2,933 3,949 501,030 504,979 0 
Commercial real estate construction0 0 0 0 37,582 37,582 0 
Residential mortgage1,752 0 451 2,203 314,953 317,156 351 
Home equity lines of credit91 0 72 163 76,486 76,649 72 
Consumer30 16 0 46 11,065 11,111 0 
Total originated loans2,422 1,887 4,730 9,039 1,213,561 1,222,600 423 
Acquired Loans
Commercial and industrial14 0 0 14 40,573 40,587 0 
Commercial real estate0 0 0 0 254,356 254,356 0 
Commercial real estate construction0 0 97 97 12,453 12,550 97 
Residential mortgage823 0 145 968 57,817 58,785 145 
Home equity lines of credit0 29 10 39 20,570 20,609 10 
Consumer0 0 0 0 1,231 1,231 0 
Total acquired loans837 29 252 1,118 387,000 388,118 252 
Total Loans
Commercial and industrial99 1,319 1,274 2,692 313,018 315,710 0 
Commercial real estate464 552 2,933 3,949 755,386 759,335 0 
Commercial real estate construction0 0 97 97 50,035 50,132 97 
Residential mortgage2,575 0 596 3,171 372,770 375,941 496 
Home equity lines of credit91 29 82 202 97,056 97,258 82 
Consumer30 16 0 46 12,296 12,342 0 
Total Loans$3,259 $1,916 $4,982 $10,157 $1,600,561 $1,610,718 $675 
    
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In thousands30–59 Days Past Due60–89 Days
Past Due
>90 Days
Past Due
Total Past
Due
CurrentTotal Loans
Receivable
Loans
Receivable
>90 Days
and
Accruing
DECEMBER 31, 2020
Originated Loans       
Commercial and industrial$1,432 $$$1,432 $276,471 $277,903 $
Commercial real estate133 2,463 1,631 4,227 474,896 479,123 
Commercial real estate construction76 76 41,132 41,208 
Residential mortgage1,382 335 623 2,340 334,797 337,137 522 
Home equity lines of credit54 60 58 172 80,734 80,906 58 
Consumer98 51 149 11,670 11,819 
Total originated loans3,099 2,985 2,312 8,396 1,219,700 1,228,096 580 
Acquired Loans
Commercial and industrial122 231 353 41,898 42,251 
Commercial real estate319 220 539 264,965 265,504 
Commercial real estate construction42 97 139 12,555 12,694 97 
Residential mortgage834 349 146 1,329 62,874 64,203 146 
Home equity lines of credit196 32 228 23,476 23,704 32 
Consumer16 16 1,316 1,332 
Total acquired loans1,513 816 275 2,604 407,084 409,688 275 
Total Loans
Commercial and industrial1,554 231 1,785 318,369 320,154 
Commercial real estate452 2,683 1,631 4,766 739,861 744,627 
Commercial real estate construction42 76 97 215 53,687 53,902 97 
Residential mortgage2,216 684 769 3,669 397,671 401,340 668 
Home equity lines of credit250 60 90 400 104,210 104,610 90 
Consumer98 67 165 12,986 13,151 
Total Loans$4,612 $3,801 $2,587 $11,000 $1,626,784 $1,637,784 $855 
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    The following tables summarize the allowance for loan losses and recorded investment in loans receivable:
In thousandsCommercial
and
Industrial
Commercial
Real Estate
Commercial
Real Estate
Construction
Residential
Mortgage
Home Equity
Lines of
Credit
ConsumerUnallocatedTotal
AS OF AND FOR THE PERIOD ENDED MARCH 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(18)0 0 0 0 (37)0 (55)
Recoveries8 0 0 0 0 8 0 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 
Ending balance: individually evaluated for impairment$1,954 $152 $0 $0 $0 $0 $0 $2,106 
Ending balance: collectively evaluated for impairment$2,549 $9,388 $543 $3,366 $629 $608 $1,048 $18,131 
Loans Receivable        
Ending balance$315,710 $759,335 $50,132 $375,941 $97,258 $12,342 $0 $1,610,718 
Ending balance: individually evaluated for impairment$2,739 $8,505 $0 $101 $0 $0 $0 $11,345 
Ending balance: collectively evaluated for impairment$312,971 $750,830 $50,132 $375,840 $97,258 $12,342 $0 $1,599,373 
AS OF AND FOR THE PERIOD ENDED MARCH 31, 2020        
Allowance for Loan Losses        
Beginning balance - January 1, 2020$2,400 $6,693 $298 $2,555 $619 $650 $620 $13,835 
Charge-offs(2,017)(51)(2,068)
Recoveries70 85 
Provisions (credits)2,193 812 (67)146 (14)15 915 4,000 
Ending balance - March 31, 2020$2,646 $7,511 $231 $2,701 $605 $623 $1,535 $15,852 
Ending balance: individually evaluated for impairment$36 $42 $$$$$$78 
Ending balance: collectively evaluated for impairment$2,610 $7,469 $231 $2,701 $605 $623 $1,535 $15,774 
Loans Receivable        
Ending balance$208,859 $763,415 $44,198 $456,436 $118,603 $14,528 $$1,606,039 
Ending balance: individually evaluated for impairment$58 $8,357 $$101 $68 $$$8,584 
Ending balance: collectively evaluated for impairment$208,801 $755,058 $44,198 $456,335 $118,535 $14,528 $$1,597,455 
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In thousandsCommercial
and
Industrial
Commercial
Real Estate
Commercial
Real Estate
Construction
Residential
Mortgage
Home Equity
Lines of
Credit
ConsumerUnallocatedTotal
AS OF DECEMBER 31, 2020       
Allowance for Loan Losses        
Ending balance$4,037 $9,569 $503 $3,395 $693 $648 $1,381 $20,226 
Ending balance: individually evaluated for impairment$1,224 $158 $$$$$$1,382 
Ending balance: collectively evaluated for impairment$2,813 $9,411 $503 $3,395 $693 $648 $1,381 $18,844 
Loans Receivable        
Ending balance$320,154 $744,627 $53,902 $401,340 $104,610 $13,151 $$1,637,784 
Ending balance: individually evaluated for impairment$2,031 $8,589 $$101 $$$$10,721 
Ending balance: collectively evaluated for impairment$318,123 $736,038 $53,902 $401,239 $104,610 $13,151 $$1,627,063 

Loan Modifications/Troubled Debt Restructurings/COVID-19

The Corporation has received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and has agreed to many such deferrals or are in the process of doing so. Under Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 modifications. A financial institution can then use FASB agreed upon temporary changes to US GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Beginning the week of March 16, 2020, the Corporation began receiving requests for temporary modifications to the repayment structure for borrower loans. The modifications are grouped into deferred payments of no more than six months, interest only, lines of credit only and other. As of March 31, 2021, the Corporation had 30 temporary modifications with principal balances totaling $23,720,360.

Details with respect to actual loan modifications are as follows:    
Type of LoansNumber of LoansDeferral PeriodBalancePercentage of Capital
Commercial Purpose28 Up to 6 months$23,562,751 9.15 %
Consumer PurposeUp to 6 months157,609 0.06 
30 $23,720,360 

The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and ACNB’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Corporation’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.

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The following table provides information with respect to the Corporation’s Commercial loans by industry at March 31, 2021 that may have suffered, or are expected to suffer, greater losses as a result of COVID-19.
            
Type of LoansNumber of LoansBalancePercentage of Total Loan PortfolioPercentage of Capital
Lessors of Commercial Real Estate$6,105,203 0.38 %2.37 %
Lessors of Residential Real Estate
Hospitality Industry (Hotels/Bed & Breakfast)13,479,711 0.84 5.24 
Food Services Industry55,248 0.00 0.02 
Other16 3,922,589 0.24 1.52 
28 $23,562,751 1.46 %9.15 %

Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans.

On December 27, 2020, President Trump signed H.R. 133, the Consolidated Appropriations Act, 2021, into law (Economic Aid Act). Congress appropriated approximately $285 billion to the SBA to reopen the PPP for first-time and second-time borrowers. The Economic Aid Act reopened the PPP for first-time borrowers (First Draw PPP Loan) and allows for a second draw of PPP funds (Second Draw PPP Loan) for small businesses with 300 or fewer employees that have sustained a 25% drop in revenue in any quarter of 2020 when compared to the same quarter in 2019. To receive a second draw PPP loan, a business must use or have used the full amount of their first PPP loan. The maximum second-draw loan amount is $2 million. Second Draw PPP Loans will have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity; and (c) principal and interest payments deferred until ten months following the last day of the covered period.

An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs, or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred until ten months following the last day of the covered period. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP, so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As of March 31, 2021, the Corporation had originated approximately 2,049 applications for $213,977,091 of loans under the PPP. Fee income was approximately $8.7 million, before costs. The Corporation recognized $2.8 million of PPP fee income in 2020 and $953,000 of PPP fee income through March 31, 2021. The remaining amount will be recognized in future quarters.
    
10.    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.
 
30


Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
 
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.
 
This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
 
Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
 
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis of measurement used at March 31, 2021, and December 31, 2020, are as follows:
March 31, 2021
In thousandsBasisTotalLevel 1Level 2Level 3
U.S. Government and agencies $196,130 $0 $196,130 $0 
Mortgage-backed securities, residential 114,301 0 114,301 0 
State and municipal 35,706 0 35,706 0 
Corporate bonds 8,871 0 8,871 0 
Total securities available for saleRecurring$355,008 $0 $355,008 $0 
Equity securities with readily determinable fair valuesRecurring$2,535 $2,535 $0 $0 
Collateral dependent impaired loansNonrecurring$6,430 $0 $0 $6,430 
 
31


December 31, 2020
In thousandsBasisTotalLevel 1Level 2Level 3
U.S. Government and agencies $183,603 $$183,603 $
Mortgage-backed securities, residential 108,822 108,822 
State and municipal 36,484 36,484 
Corporate bonds 8,809 8,809 
Total securities available for saleRecurring$337,718 $$337,718 $
Equity securities with readily determinable fair valuesRecurring$2,170 $2,170 $$
Collateral dependent impaired loansNonrecurring$7,498 $$$7,498 

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 thousandsFair Value EstimateValuation TechniqueUnobservable InputRangeWeighted Average
March 31, 2021
  Impaired loans$6,430 Appraisal of collateral(a)Appraisal adjustments(b) (10) – (50)%(54)%
December 31, 2020
  Impaired loans$7,498 Appraisal of collateral(a)Appraisal adjustments(b)(10) – (50)%(52)%
(a) 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.

(b) 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. 

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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 as of March 31, 2021:
March 31, 2021
In thousandsCarrying AmountFair ValueLevel 1Level 2Level 3
Financial assets:
Cash and due from banks$24,305 $24,305 $10,252 $14,053 $0 
Interest-bearing deposits in banks482,453 482,453 482,453 0 0 
Equity securities available for sale2,535 2,535 2,535 0 0 
Investment securities available for sale355,008 355,008 0 355,008 0 
Investment securities held to maturity9,155 9,451 0 9,451 0 
Loans held for sale12,000 12,000 0 12,000 0 
Loans, less allowance for loan losses1,590,481 1,616,326 0 0 1,616,326 
Accrued interest receivable6,767 6,767 0 6,767 0 
Restricted investment in bank stocks2,798 2,798 0 2,798 0 
Financial liabilities:
Demand deposits and savings1,816,731 1,816,731 0 1,816,731 0 
Time deposits461,891 465,265 0 465,265 0 
Short-term borrowings31,282 31,282 0 31,282 0 
Long-term borrowings54,616 55,329 0 55,329 0 
Trust preferred subordinated debt11,000 9,914 0 9,914 0 
Accrued interest payable822 822 0 822 0 
Off-balance sheet financial instruments0 0 0 0 0 
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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 as of December 31, 2020:
December 31, 2020
In thousandsCarrying AmountFair ValueLevel 1Level 2Level 3
Financial assets:
Cash and due from banks$23,739 $23,739 $12,436 $11,303 $
Interest-bearing deposits in banks375,613 375,613 375,613 
Equity securities available for sale2,170 2,170 2,170 
Investment securities available for sale337,718 337,718 337,718 
Investment securities held to maturity10,294 10,768 10,768 
Loans held for sale11,034 11,034 11,034 
Loans, less allowance for loan losses1,617,558 1,662,342 1,662,342 
Accrued interest receivable6,950 6,950 6,950 
Restricted investment in bank stocks2,942 2,942 2,942 
Financial liabilities:
Demand deposits and savings1,708,868 1,708,868 1,708,868 
Time deposits476,657 481,138 481,138 
Short-term borrowings38,464 38,464 38,464 
Long-term borrowings42,745 43,669 43,669 
Trust preferred subordinated debt11,000 9,902 9,902 
Accrued interest payable1,434 1,434 1,434 
Off-balance sheet financial instruments

11.    Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Corporation could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third-party financial institution in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Corporation in a segregated custodial account under a tri-party agreement.

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The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreement as of March 31, 2021, and December 31, 2020:
Gross Amounts Not Offset in the Statements of Condition
In thousandsGross Amounts of Recognized LiabilitiesGross Amounts Offset in the Statements of ConditionNet Amounts of Liabilities Presented in the Statements of ConditionFinancial InstrumentsCash Collateral PledgedNet Amount
March 31, 2021
Repurchase agreements
Commercial customers and government entities(a)$31,282 $0 $31,282 $(31,282)$0 $0 
December 31, 2020
Repurchase agreements
Commercial customers and government entities(a)$38,464 $$38,464 $(38,464)$$

(a) As of March 31, 2021, and December 31, 2020, the fair value of securities pledged in connection with repurchase agreements was $40,147,000 and $54,680,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2021:
Remaining Contractual Maturity of the Agreements
In thousandsOvernight
and Continuous
Up to 30 Days30 – 90 DaysGreater than 90 DaysTotal
Repurchase agreements and repurchase-to-maturity transactions
U.S. Treasury and agency securities$31,282 $0 $0 $0 $31,282 
Total$31,282 $0 $0 $0 $31,282 

12.    Borrowings

The Corporation had long-term debt outstanding as follows:
In thousandsMarch 31, 2021December 31, 2020
FHLB advances$35,716 $38,716 
Loan payable to local bank1,200 1,329 
Loan payable variable rate2,700 2,700 
Trust preferred subordinated debt5,000 5,000 
Trust preferred subordinated debt6,000 6,000 
Subordinated debt15,000 
$65,616 $53,745 

The FHLB advances are collateralized by the assets defined in the security agreement and FHLB capital stock. FHLB advances have maturity dates from 2020 to 2023 with a weighted average rate of 2.39%.

The loan payable to a local bank has a fixed rate of 4.5% for the first five years and a variable rate of interest with Prime Rate thereafter to final maturity in June 2028. The principal balance of this note may be prepaid at any time without penalty.

The loan payable variable rate represents a promissory note (note) issued by FCBI in July 2011 and assumed by
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ACNB Corporation through the acquisition. The note has been amended from time to time through change in terms agreements. Under the current change in terms agreement, the maturity date of the note is April 9, 2021, with the rate of interest accruing on the principal balance of 3.25% per year. The note is unsecured.

The first trust preferred subordinated debt is comprised of debt securities issued by New Windsor in June 2005 and assumed by ACNB Corporation through the acquisition. New Windsor issued $5,000,000 of 6.39% fixed rate capital securities to institutional investors in a private pooled transaction. The proceeds were transferred to New Windsor as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual arrangements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.

The second trust preferred subordinated debt is comprised of debt securities issued by FCBI in December 2006 and assumed by ACNB Corporation through the acquisition. FCBI completed the private placement of an aggregate of $6,000,000 of trust preferred securities. The interest rate on the subordinated debentures is currently adjusted quarterly to 163 basis points over three-month LIBOR. The debenture has a provision if LIBOR is no longer available. On December 31, 2020, the most recent interest rate reset date, the interest rate was adjusted to 1.84650% for the period ending March 14, 2021. 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 were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Company intends to use 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.

13.    Goodwill and Other Intangible Assets

On January 5, 2005, ACNB Corporation completed its acquisition of Russell Insurance Group, Inc. of Westminster, Maryland. The acquisition of RIG resulted in goodwill of approximately $6,308,000.

On July 1, 2017, the Corporation completed its acquisition of New Windsor Bancorp, Inc. 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, the Corporation completed its acquisition of Frederick County Bancorp, Inc. of Frederick, Maryland. The acquisition of FCBI resulted in goodwill of approximately $22,528,000 and generated $3,560,000 in core deposit intangibles.

Combined goodwill included in the Corporation’s consolidated statement of condition is $42,108,000. Goodwill, which has an indefinite useful life, is evaluated for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Corporation did not identify any goodwill impairment on RIG or the Bank’s outstanding goodwill from its most recent testing.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated
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methods. Customer renewal lists are amortized over their estimated useful lives which range from eight to fifteen years.

The carrying value and accumulated amortization of the intangible assets and core deposit intangibles are as follows:

In thousandsGross carrying amountAccumulated amortization
RIG amortized intangible assets$10,428 $7,226 
New Windsor core deposit intangibles2,418 1,418 
FCBI core deposit intangibles3,560 793 

The Corporation completes a goodwill analysis at least on an annual basis or more often if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other intangible assets on an annual basis or more often if events and circumstances indicate a possible impairment. The annual analysis is scheduled to occur within the fourth quarter of 2021. At March 31, 2021, ACNB cannot project the outcome of the annual analysis, however there are no events or circumstances indicating impairment.

14.    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 $468,340,000 and $350,500,000 at March 31, 2021 and 2020, 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.

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
37


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.

Interchange revenue from debit card transactions - The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within non-interest expense in the consolidated statements of income.

15.    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 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

Certain incremental disclosures are required. Until recently, the new CECL standard was expected to become effective for the Corporation on January 1, 2020, and for interim periods within that year. In October 2019, FASB voted to delay implementation of the new CECL standard for certain companies, including those companies that qualify as a smaller reporting company under SEC rules, until January 1, 2023. The Corporation currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new CECL standard for a period of time. The Corporation will not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Corporation continues to evaluate the impact the CECL model will have on the accounting for credit losses, but the Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Corporation cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations. Management has developed a committee to address CECL and the committee is currently evaluating options to comply with the ASU in a timely manner.

ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), an update to simplify accounting for income taxes by removing certain exceptions in Topic 740. In addition, ASU 2019-12 improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is
38


effective for fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Corporation’s consolidated financial condition or results of operations.

ASU 2020-04

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.

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ACNB CORPORATION
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
INTRODUCTION AND FORWARD-LOOKING STATEMENTS
 
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.
 
Forward-Looking Statements
 
In addition to historical information, this Form 10-Q contains 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 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: the effects of governmental and fiscal policies, as well as legislative and regulatory changes; the effects of new laws and regulations, specifically the impact of the Coronavirus Response and Relief Supplemental Appropriations Act, the Coronavirus Aid, Relief, and Economic Security Act, the Tax Cuts and Jobs Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act; impacts of the capital and liquidity requirements of the Basel III standards; the 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- 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; the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and responses thereto on the operations of the Corporation and current customers, specifically the effect of the economy on loan customers’ ability to repay loans; the effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; the 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; the effects of technology changes; volatilities in the securities markets; the effect of general economic conditions and more specifically in the Corporation’s market areas; the 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; disruption of credit and equity markets; the ability to manage current levels of impaired assets; the loss of certain key officers; the 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.
 
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
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in the need to make estimates about the effect of such matters which are inherently uncertain. The following policies are deemed to be critical accounting policies by management:
 
The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. Management makes numerous assumptions, estimates and adjustments in determining an adequate allowance. The Corporation assesses the level of potential loss associated with its loan portfolio and provides for that exposure through an allowance for loan losses. The allowance is established through a provision for loan losses charged to earnings. The allowance is an estimate of the losses inherent in the loan portfolio as of the end of each reporting period. The Corporation assesses the adequacy of its allowance on a quarterly basis. The specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The evaluation of securities for other-than-temporary impairment requires a significant amount of judgment. In estimating other-than-temporary impairment losses, management considers various factors including the length of time the fair value has been below cost, the financial condition of the issuer, and the Corporation’s intent to sell, or requirement to sell, the security before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings.
 
Accounting Standard Codification (ASC) Topic 350, Intangibles — Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Corporation did not identify any impairment on RIG’s outstanding goodwill from its most recent testing, which was performed as of October 1, 2020. A qualitative assessment on the Bank’s outstanding goodwill, resulting from the 2017 New Windsor acquisition, was performed on the anniversary date of the merger which showed no impairment. Subsequent to that evaluation, ACNB concluded that it would be preferable to evaluate goodwill in the fourth quarter at year-end. This date was preferable from the anniversary date measurement as events happening nearer to year-end could be factored in if necessary. The second evaluation again revealed no impairment and it was agreed to continue to evaluate goodwill for the Bank at or near year-end. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. The Corporation has not identified any such events and, accordingly, has not tested goodwill resulting from the acquisition of New Windsor Bancorp, Inc. (New Windsor) for impairment during the three months ended March 31, 2021. Other acquired intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized using the straight line method over their estimated useful lives which range from eight to fifteen years.
 
RESULTS OF OPERATIONS
 
Quarter ended March 31, 2021, compared to Quarter ended March 31, 2020
 
Executive Summary
 
Net income for the three months ended March 31, 2021, was $7,471,000, compared to a net loss of $1,223,000 for the same quarter in 2020, an increase of $8,694,000 or 710.9%. Basic earnings (loss) per share for the three month period was $0.86 in 2021 and $(0.14) in 2020, or a 714.3% increase. The higher net income for the first quarter of 2021 was primarily a result of higher fee income, less loan loss provision compared to the first quarter of 2020 which had a loan charge-off of $2,000,000, and one-time merger expenses. Net interest income for the quarter ended March 31, 2021 decreased $130,000, or 0.7%, as decreases in total interest income were greater than decreases in total interest expense. Provision for loan losses was $50,000 for the quarter ended March 31, 2021, compared to $4,000,000 for the same quarter in 2020, based on the adequacy analysis including estimation of 2020 COVID-19 losses (that even though not realized were believed to be embedded in the loan portfolio in the first quarter of 2020), resulting in an allowance to total loans of 1.26% (1.66% of non-acquired loans) at March 31, 2021. Other income increased $1,747,000, or 41.9%, due in part to increases in bank fees from selling mortgages into the secondary market and change in equity securities fair value. Other expenses decreased $5,670,000, or 29.1%, due in part to merger-related expenses in 2020 in connection with the acquisition of Frederick County Bancorp, Inc. in the Frederick County, Maryland market (FCBI) in January 2020. During the first quarter of 2021 there were $0 in merger/system conversion related expenses for the acquisition of FCBI that was effective on January 11, 2020. Although profitable, ACNB was profoundly impacted by the COVID-19 events, as were most community banks.
 
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Net Interest Income
 
Net interest income totaled $17,325,000 for the three months ended March 31, 2021, compared to $17,455,000 for the same period in 2020, a decrease of $130,000, or 0.7%. Net interest income decreased due to an decrease in interest income to a greater extent than a decrease in interest expense. Interest income decreased $1,539,000, or 7.4%, due to the change in mix of average earning assets, in addition to decreased rates due to market events. The decrease in interest expense resulted from deposit rate decreases in addition to a favorable change in deposit mix (as discussed below). Loans outstanding was a result of active participation in the SBA Payroll Protection Program (PPP), the acquisition of FCBI offsetting loan paydowns and payoffs despite concerted effort by management to offset the recent year trend of the market area’s heightened competition and the COVID-19 related slow economic conditions. Loan yields were negatively impacted by declines in the U.S. Treasury yields and other market driver interest rates. The first quarter saw continued lower market yields and the difference between longer term rates and shorter term rates was generally modest. These driver rates affect new loan originations and are indexed to a portion of the loan portfolio in that a change in the driver rates changes the yield on new loans and on existing loans at subsequent interest rate reset dates. From these changes, interest income yield was negatively affected as new loans replace paydowns on existing loans and variable rate loans reset to new current rates in these years. Partially offsetting lower yields were FCBI purchase accounting adjustments that increased yield. Interest income decreased on investment securities due to new purchases at rates lower than rates on maturing investments. An elevated amount of earning assets remained in short-term, low-rate money market type accounts during the first quarter of 2021; and there exists ample ability to borrow for liquidity needs. The ability to increase lending is contingent on the effects of COVID-19 on current and potential customers even with intense competition that has reduced new loans and may result in the payoff of existing loans, as economic conditions in the Corporation’s marketplace eventually return to its previous stable state. As to funding costs, interest rates on alternative funding sources, such as the FHLB, and other market driver rates are factors in rates the Corporation and the local market pay for deposits. However, after COVID-19 Federal Open Market Committee (FOMC) actions, rates on transaction, savings and time deposits were sharply reduced in order to match sharply reduced market earning asset yields. Interest expense decreased $1,409,000, or 40.8%, due to lower rates offsetting higher volume on transaction deposits, certificate of deposit rate decreases and lower volume, and by less use of higher cost borrowings. The medical need to stop the spread of COVID-19 caused government officials to close or restrict operations of many businesses and their workers. One of the responses was for the Federal Reserve to decrease rates to 0% to 0.25%. The effects of these rate actions and a host of other responses cannot be predicted currently. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets to commercial loans.

The net interest spread for the first quarter of 2021 was 2.81% compared to 3.30% during the same period in 2020. Also comparing the first quarter of 2021 to 2020, the yield on interest earning assets decreased by 0.97% and the cost of interest bearing liabilities decreased by 0.47%. The net interest margin was 2.94% for the first quarter of 2021 and 3.55% for the first quarter of 2020. The net interest margin decrease was net of lower purchase accounting adjustments which decreased 28 basis points, but was more impacted by sharp market rate decreases (including PPP loans) and less loans as a percentage in the earning asset mix and more lower yielding investments and liquidity assets.

Average earning assets were $2,387,000,000 during the first quarter of 2021, an increase of $411,000,000 from the average for the first quarter of 2020. Average interest bearing liabilities were $1,721,000,000 in the first quarter of 2021, an increase of $266,000,000 from the same period in 2020. Non-interest demand deposits increased $210,000,000 on average. All increases were a result of COVID-19 related slow economic activity that tend to concentrate increased liquidity into the banking system, including PPP loan proceeds.

Provision for Loan Losses

The provision for loan losses was $50,000 in the first quarter of 2021 and $4,000,000 in the first quarter of 2020. The determination of the provision was a result of the analysis of the adequacy of the allowance for loan losses calculation. The allowance for loan and lease losses generally does not include the loans acquired from the FCBI acquisition or the New Windsor Bancorp, Inc. acquisition completed in 2017 (New Windsor), which were recorded at fair value as the acquisition dates. Total impaired loans at March 31, 2021 were 5.8% higher when compared to December 31, 2020. Nonaccrual loans increased by 9.2%, or $651,000, since December 31, 2020; all substandard loans increased by 7.6% in that period. 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. The first quarter 2021 provision was calculated to be much lower due to the intervening provisioning for the impact of the COVID-19 pandemic and the continued reduction in modifications made in prior periods because of COVID-19. This customer base includes businesses in the hospitality/tourism industry, restaurants and related businesses and lessors of commercial real estate properties. The estimated increase in this 2021 qualitative factor for this event was approximately $0 for a total of $50,000 in provision expense. The remainder of the provision was due to limited loss incurred in 2021 charge-offs. Otherwise Management concluded that the loan portfolio exhibited continued general stability in quantitative and qualitative
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measurements as shown in the tables and narrative in this Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements. The long term effect of the ongoing COVID-19 event cannot be currently estimated other than the calculation that resulted in the above mentioned special qualitative factors. This same analysis concluded that the unallocated allowance should be in the same range in 2021 compared with the previous quarter. For more information, please refer to Allowance for Loan Losses in the following Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the first quarter of 2021, the Corporation had net charge-offs of $39,000, as compared to net charge-offs of $1,983,000 for the first quarter of 2020.

Other Income

Total other income was $5,913,000 for the three months ended March 31, 2021, up $1,747,000, or 41.9%, from the first quarter of 2020. Fees from deposit accounts decreased by $216,000, or 21.8%, due to COVID-19-related decrease in economic activity that reduced fee generating activity. Fee volume varies with balance levels, account transaction activity, and customer-driven events such as overdrawing account balances. Various specific government regulations effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Revenue from ATM and debit card transactions increased by $140,000 or 21.9%, to $778,000 due to variations in volume and mix, including COVID-19 related higher online volume. The longer term trend had been increases resulting from consumer desire to use more electronic delivery channels (Internet and mobile applications); however, regulations or legal challenges for large financial institutions may impact industry pricing for such transactions and fees in connection therewith in future periods, the effects of which cannot be currently quantified. A another challenge to this revenue source is the general COVID-19 event and related impact caused decrease in retail activity and the retail system-wide security breaches in the merchant base that are negatively affecting consumer confidence in the debit card channel. Income from fiduciary, investment management and brokerage activities, which includes fees from both institutional and personal trust, investment management services, estate settlement and brokerage services, totaled $703,000 for the three months ended March 31, 2021, as compared to $668,000 for the first quarter of 2020, a 5.2% net increase as a net result of higher fee volume from increased assets under management, higher sporadic estate fee income and varying fees on brokerage relationship transactions. Earnings on bank-owned life insurance decreased by $9,000, or 2.6%, as a net result of more insurance in place, varying crediting rates and administrate cost. At the Corporation’s wholly-owned insurance subsidiary, Russell Insurance Group, Inc. (RIG), revenue was down by $57,000, or 4.0%, to $1,383,000 during the period due to variations in commission volume, net of volume on new books of business purchased in the interim period. A continuing risk to RIG revenue is nonrenewal of large commercial accounts and actions by insurance carriers to reduce commissions paid to agencies such as RIG. Contingent or extra commission payments from insurance carriers are received in the second quarter of each year. Contingent commissions accruals were lower than prior years, due to specific claims at RIG and trends in the entire insurance marketplace in general. Heightened pressure on commissions is expected to continue in this business line from insurance company actions. Estimation of upcoming contingent commissions is not practicable at March 31, 2021, however they are expected to exceed the prior year. Income for sold mortgages included in other income, increased by $965,000 or 303.5% due to demand for refinancing in the low rate environment; such demand is rate dependent and therefore volatile. There were no gains or losses on sales of securities during the first quarter of 2021 and 2020. A $365,000 net fair value gain was recognized on local bank and CRA-related equity securities during the first quarter of 2021 due to less concern on COVID-19 related negative market value effect on publicly-traded local bank stocks, compared to a $475,000 net fair value loss during the first quarter of 2020 when such concerns were high. No equity securities were sold in either period. Other income in the three months ended March 31, 2021, was up by $49,000, or 20.4%, to $289,000 due to a variety other fee income variances, mostly volume related. 

Other Expenses

Other expenses for the quarter ended March 31, 2021 were $13,787,000, a decrease of $5,670,000 or 29.1%, most of which was the result of the first quarter of 2020 merger expenses of $5,965,000.

The largest component of other expenses is salaries and employee benefits, which increased by $167,000, or 2.0%, when comparing the first quarter of 2021 to the same period a year ago. Overall, the increase in salaries and employee benefits was the result of increases as follows:

replacing and maintaining customer-facing staff through the COVID-19 event due to a competitive labor market;

variations in customer-facing staff retained to service the FCBI market;

increased organic growth initiatives at RIG;

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increased staff in support functions and higher skilled mix of employees necessitated by regulations and growth;

normal merit increases to employees and associated payroll taxes;

varying and timing on performance-based commissions, restricted stock grants and incentives;

market changes in actively managing employee benefit plan costs, including health insurance;

varying cost of 401(k) plan and non-qualified retirement plan benefits; and,

defined benefit pension expense, which was up by $126,000, or 210.0%, when comparing the three months ended March 31, 2021, to the three months ended March 31, 2020, resulting from the change in discount rates which increases or decreases the future pension obligations (creating volatility in the expense), return on assets at the latest annual evaluation date due to market conditions and changes in actuarial assumptions reflecting increased longevity.
 
The Corporation’s overall pension plan investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of asset types, fund strategies, and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation’s risk tolerance on contribution levels, funded status, plan expense, as well as any applicable regulatory requirements. However, the determination of future benefit expense is also dependent on the fair value of assets and the discount rate on the year-end measurement date, which in recent years has experienced fair value volatility and low discount rates. The expense could also be higher in future years due to volatility in the discount rates at the latest measurement date, lower plan returns, and change in mortality tables utilized.
 
Net occupancy expense increased by $186,000, or 19.0% during the period, mostly due to more winter season expense. Equipment expense increased by $7,000, or 0.5%, due to tech equipment expenditures which vary due to specific projects. Equipment expense is subject to ever-increasing technology demands and the need for system upgrades for security and reliability purposes. ACNB Bank is in the midst of a core system conversion that will change various expense components (which cannot be fully estimated) when complete as part of its Digital Transformation strategy. Technology investments and training allowing staff to work from home continues to prove invaluable in keeping the Bank operational during the pandemic.
 
Professional services expense totaled $224,000 during the first quarter of 2021, as compared to $402,000 for the same period in 2020, a decrease of $178,000, or 44.3%. This category includes expenses related to legal corporate governance, risk, compliance management and audit engagements, and legal counsel matters in connection with loans. It varies with specific engagements that are not on a regular recurring basis.

Marketing and corporate relations expenses were $77,000 for the first quarter of 2021, or 58.2% lower, as compared to the same period of 2020. Marketing expense varies with the timing and amount of planned advertising production and media expenditures, typically related to the promotion of certain in-market banking and trust products.
 
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 real estate (income) expense recovery (from prior year losses) was $(1,000) and $75,000 for the three months ended March 31, 2021 and 2020, respectively. The expense varies based upon the number and mix of commercial and residential real estate properties, unpaid property taxes, and deferred maintenance required upon acquisition. In addition, some properties suffer decreases in value after acquisition, requiring write-downs to fair value during the prolonged marketing cycles for these distressed properties. The higher expense in 2020 was related to expense until final liquidation. Foreclosed assets held for resale expenses or recoveries will vary in the remainder of 2021 depending on the unknown expenses related to new properties acquired. Foreclosure actions could be delayed in the COVID-19 environment.
 
Other tax expense increased by $66,000, or 20.2%, comparing the three months ended March 31, 2021 and 2020, including higher Pennsylvania Bank Shares Tax. The Pennsylvania Bank Shares Tax is a shareholders’ equity-based tax and is subject to increases based on state government parameters and the level of the stockholders’ equity base that increased with retained earnings equity and acquisitions. Supplies and postage expense decreased by 22.0% due to variation in timing of sporadic refills. FDIC and regulatory expense increased 465.9% due to prior periods use of credits that did not repeat in the current periods. Intangible amortization decreased 6.0% on bank acquisition calculations and RIG books of business purchases. Other operating expenses increased by $104,000, or 8.9%, in the first quarter of 2021, as compared to the first quarter of 2020. Increases included electronic banking and corporate governance related costs. In addition, other expenses include the expense
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of reimbursing checking and debit card customers for unauthorized transactions to their accounts and other third-party fraudulent use, added approximately $77,000 to other expenses in the first quarter of 2021 compared to $34,000 in the first quarter of 2020. Third-party breaches also cause additional card inventory and processing costs to the Corporation, none of which is expected to be recovered from the third-party merchants or other parties where the breaches occur. The debit card electronic delivery channel is valued by customers and provides significant revenue to the Corporation. The expense related to reimbursements is unpredictable and varying, but ACNB has policies and procedures to limit exposure.

Provision for Income Taxes
 
The Corporation recognized income taxes of $1,930,000, or 20.5% of pretax income, during the first quarter of 2021, as compared to $(613,000), or 33.4% of pretax loss, during the same period in 2020. The variances from the federal statutory rate of 21% in the respective periods are generally due to tax-exempt income from investments in and loans to state and local units of government at below-market rates (an indirect form of taxation), investment in bank-owned life insurance, and investments in low-income housing partnerships (which qualify for federal tax credits). In addition, both years include Maryland corporation income taxes. Low-income housing tax credits were $70,000 and $62,000 for the three months ended March 31, 2021 and 2020, respectively.


FINANCIAL CONDITION
 
Assets totaled $2,654,617,000 at March 31, 2021, compared to $2,555,362,000 at December 31, 2020, and $2,180,065,000 at March 31, 2020. Average earning assets during the three months ended March 31, 2021, increased to $2,387,000,000 from $2,130,625,000 during the same period in 2020. Average interest bearing liabilities increased in 2021 to $1,721,000,000 from $1,544,540,000 in 2020.
 
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 changes in the securities portfolio were the net result of purchases and matured securities to provide proper collateral for public deposits. Investing into investment security portfolio assets over the past several years was made more challenging due to the Federal Reserve Bank’s program commonly called Quantitative Easing in which, by the Federal Reserve’s open market purchases, the yields were maintained at a lower level than would otherwise be the case. 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 March 31, 2021, the securities balance included a net unrealized loss on available for sale securities of $1,434,000, net of taxes, on amortized cost of $356,852,000 versus a net unrealized gain of $4,645,000, net of taxes, on amortized cost of $331,745,000 at December 31, 2020, and a net unrealized gain of $4,463,000, net of taxes, on amortized cost of $247,310,000 at March 31, 2020. The change in fair value of available for sale securities during 2021 was a result of the higher amount of investments in the available for sale portfolio and by a decrease in fair value from an increase in the U.S. Treasury yield curve rates and the spread from this yield curve required by investors on the types of investment securities that ACNB owns. The Federal Reserve reinstituted their rate-decreasing Quantitative Easing program in the COVID-19 crisis; and after increasing the fed funds rate in mid-December 2015 through December 2018 the Federal Reserve decreased the target rate to 0% to 0.25% in the ongoing COVID-19 crisis; both actions causing the U.S. Treasury yield curve to decrease in 2020. However, the bond market sensed that government stimulus would lead to inflation and the yield curve increased in terms relevant to the investment securities in the Corporation’s portfolio as of March 31, 2021, leading to fair value deceases.. However, fair values were volatile on any given day in all periods presented and such volatility will continue. The changes in value are deemed to be related solely to changes in interest rates as the credit quality of the portfolio is high.

At March 31, 2021, the securities balance included held to maturity securities with an amortized cost of $9,155,000 and a fair value of $9,451,000, as compared to an amortized cost of $10,294,000 and a fair value of $10,768,000 at December 31, 2020, and an amortized cost of $18,090,000 and a fair value of $18,565,000 at March 31, 2020. The held to maturity securities are U.S. government pass-through mortgage-backed securities in which the full payment of principal and interest is guaranteed; however, they were not classified as available for sale because these securities are generally used as required collateral for certain eligible government accounts or repurchase agreements. They are also held for possible pledging to access additional liquidity for banking subsidiary needs in the form of FHLB borrowings. Due to changes in accounting rules, no held to maturity securities were added in the past several years. No held to maturity securities were acquired from FCBI.

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The Corporation does not own investments consisting of pools of Alt-A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments.

The fair values of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing. Please refer to Note 8 — “Securities” in the Notes to Consolidated Financial Statements for more information on the security portfolio and Note 10 — “Fair Value Measurements” in the Notes to Consolidated Financial Statements for more information about fair value.
 
Loans
 
Loans outstanding increased by $4,679,000, or 0.3%, at March 31, 2021 from March 31, 2020, and decreased by $27,066,000, or 1.7%, from December 31, 2020, to March 31, 2021. The decrease in loans year to date is largely attributable to the sale of most new residential mortgages and the early payoff of loans in the residential mortgage, consumer, and government lending portfolios. Year over year, organic loan growth is primarily a result of active participation in the Paycheck Protection Program (PPP). Despite the intense competition in the Corporation’s market areas, there is a continued focus internally on asset quality and disciplined underwriting standards in the loan origination process. In all periods, residential real estate lending and refinance activity was sold to the secondary market and commercial loans were subject to refinancing to competition for different rates or terms. In the normal course of business, more payoffs were anticipated in the remainder of 2021 from either customers’ cash reserves or refinancing at competing banks and markets, and currently lending actions are continuing while dealing with modifications and the ongoing work involved with the PPP Small Business Administration (SBA) guaranteed loans. During the first three months of 2021, total commercial purpose loans increased and local market portfolio residential mortgages decreased, largely from the acquisition of FCBI and active participation in the PPP program. Total commercial purpose segments increased $6,494,000, or 0.6%, as compared to December 31, 2020. $142,036,000 of this increase was PPP loans written in 2020 and 2021 to existing ACNB commercial customer base. Otherwise these loans are spread among diverse categories that include municipal governments/school districts, commercial real estate, commercial real estate construction, and commercial and industrial. 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 government body. In many cases, these loans are obtained through a bid process with other local and regional banks. The loans are predominantly bank qualified for mostly tax free interest income treatment for federal income taxes. These loans totaled $78,945,000 at March 31, 2021, an increase of 14.8% from $68,772,000 held at the end of 2020; these loans are especially subject to refinancing in a declining rate environment. Residential real estate mortgage lending, which includes smaller commercial purpose loans secured by the owner’s home, decreased by $32,751,000, or 6.5%, as compared to December 31, 2020. These loans are to local borrowers who preferred loan types that would not be sold into the secondary mortgage market. Of the $473,199,000 total in residential mortgage loans at March 31, 2021, $124,767,000 were 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. Non-real estate secured consumer loans comprise 0.8% of the portfolio, with automobile-secured loans representing less than 0.1% of the portfolio.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the PPP. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans. As of March 31, 2021, the Corporation had an outstanding balance of $142,036,347 under the PPP program, net of repayments and forgiveness to date. Gross fees collected totaled $8,650,000. Of this amount, fee income recognized was approximately $2,875,000, before costs in 2020. $953,000 was recognized as adjustment to interest income yield through the first quarter of 2021, and the balance will be recognized in future quarters as an adjustment of interest income yield.
 
Most of the Corporation’s lending activities are with customers located within southcentral Pennsylvania and in the northern Maryland area. This region currently and historically has lower unemployment rates than the U.S. as a whole. Included in commercial real estate loans are loans made to lessors of non-residential properties that total $371,449,000, or 23.1% of total loans, at March 31, 2021. These borrowers are geographically dispersed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space, and other commercial purpose facilities. Because of the varied nature of the tenants, in aggregate, management believes that these loans present an acceptable
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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.
 
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 collectibility of principal and interest, it evaluates a specific reserve on a quarterly basis in order to estimate potential losses. Management’s analysis considers:

adverse situations that may affect the borrower’s ability to repay;

the current estimated fair value of underlying collateral; and,

prevailing market conditions.
 
If management determines a loan is not impaired, a specific reserve allocation is not required. Management then places the loan in a pool of loans with similar risk factors and assigns the general loss factor to determine the reserve. For homogeneous loan types, such as consumer and residential mortgage loans, management bases specific allocations on the average loss ratio for the previous twelve quarters for each specific loan pool. Additionally, management adjusts projected loss ratios for other factors, including the following:

lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;

national, regional and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;

nature and volume of the portfolio and terms of loans;

experience, ability and depth of lending management and staff;

volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,

existence and effect of any concentrations of credit and changes in the level of such concentrations.

For 2020 a special allowance was developed to quantify a current expected incurred loss as a result of the COVID-19 crisis. The factor considered the loan mix effects of businesses likely to be harder hit by quarantine closure orders, the relative amount of COVID-19 related modifications requested to date, the estimated regional infection stage and geopolitical factors. A large unknown in this factor is the expected duration of the quarantine period.

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;

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.
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The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio; specifically reserves where the Corporation believes that tertiary losses are probable above the loss amount derived using appraisal-based loss estimation, where such additional loss estimates are in accordance with regulatory and GAAP guidance. Appraisal-based loss derivation does not fully develop the loss present in certain unique, ultimately bank-owned collateral. The Corporation has determined that the amount of provision in 2021 and the resulting allowance at March 31, 2021, are appropriate given the continuing level of risk in the loan portfolio. Further, management believes the unallocated allowance is appropriate, because even though the impaired loans added since 2020 demonstrate generally low risk due to adequate real estate collateral, the value of such collateral can decrease; plus, the growth in the loan portfolio is centered around commercial real estate which continues to have little increase in value and low liquidity. In addition, there are certain loans that, although they did not meet the criteria for impairment, management believes there was a strong possibility that these loans represented potential losses at March 31, 2021. The amount of the unallocated portion of the allowance was $1,048,000 at March 31, 2021. Before the COVID-19 event, management concluded that the loan portfolio exhibited continued general improvement in quantitative and qualitative measurements.

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 quarters’ improvement in the credit quality in the loan portfolio, but with increased risk from the impact of the COVID-19 crisis . The provision for year-to-date March 31, 2021 and 2020, was $50,000 and $4,000,000, respectively. More specifically, as total loans decreased from year-end 2020 and the provision expense decreased year over year, the allowance for loan losses was derived with data that most existing impaired credits were, in the opinion of management, adequately collateralized.
 
Federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. Upon adoption, the change in this accounting guidance could result in an increase in the Corporation’s allowance for loan losses and require the Corporation to record loan losses more rapidly. In October 2019, FASB voted to delay implementation of the CECL standard for certain companies, including those companies that qualify as a smaller reporting company under SEC rules until January 1, 2023. As a result ACNB will likely be able to defer implementation of the CECL standard for a period of time.
 
The allowance for loan losses at March 31, 2021, was $20,237,000, or 1.26% of total loans (1.66% of non-acquired loans), as compared to $15,852,000, or 0.99% of loans, at March 31, 2020, and $20,226,000, or 1.23% of loans, at December 31, 2020. The increase from year-end resulted from charge-offs of $39,000 net of recoveries and $50,000 in provisions, as shown in the table below. In the following discussion, acquired loans from FCBI and New Windsor were recorded at fair value at the acquisition date and are not included in the tables and information below, see more information in Note 9 — “Loans” in the Notes to Consolidated Financial Statements.

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Changes in the allowance for loan losses were as follows:
 
In thousandsThree Months Ended March 31, 2021Year Ended
December 31, 2020
Three Months Ended March 31, 2020
Beginning balance – January 1$20,226 $13,835 $13,835 
Provisions charged to operations50 9,140 4,000 
Recoveries on charged-off loans16 238 85 
Loans charged-off(55)(2,987)(2,068)
Ending balance$20,237 $20,226 $15,852 

Loans past due 90 days and still accruing were $675,000 and nonaccrual loans were $7,692,000 as of March 31, 2021. $111,000 of the nonaccrual balance at March 31, 2021, were in troubled debt restructured loans. $3,653,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $3,037,000 at March 31, 2020, while nonaccruals were $4,826,000. $175,000 of the nonaccrual balance at March 31, 2020, was in troubled debt restructured loans. $3,758,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $855,000 at December 31, 2020, while nonaccruals were $7,041,000. $127,000 of the nonaccrual balance at December 31, 2020, were in troubled debt restructured loans. $3,680,000 of the impaired loans were accruing troubled debt restructured loans. Total additional loans classified as substandard (potential problem loans) at March 31, 2021, March 31, 2020, and December 31, 2020, were approximately $2,470,000, $2,887,000 and $2,607,000, respectively. 

Because of the manageable level of nonaccrual loans and with substandard loans in the first quarter of 2021, a $50,000 provision addition to the allowance was necessary due to charge-offs of $39,000.

In the first two quarters of 2020, the Corporation had received significant numbers of requests to modify loan terms and/or defer principal and/or interest payments, and had agreed to appropriate deferrals or are in the process of doing so. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 related modifications. A financial institution can then use FASB agreed upon temporary changes to GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

Beginning the week of March 16, 2020, the Corporation began receiving requests for temporary modifications to the repayment structure for borrower loans. The modifications are grouped into deferred payments of no more than six months, interest only, lines of credit only and other. As of March 31, 2021, the Corporation had 30 temporary modifications with principal balances totaling $23,720,360.

Details with respect to actual loan modifications are as follows:
Type of LoansNumber of LoansDeferral PeriodBalancePercentage of Capital
Commercial Purpose28 Up to 6 months$23,562,751 9.15 %
Consumer PurposeUp to 6 months157,609 0.06 
30 $23,720,360 

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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Information on nonaccrual loans, by collateral type rather than loan class, at March 31, 2021, as compared to December 31, 2020, is as follows:

Dollars in thousandsNumber of
Credit
Relationships
BalanceSpecific Loss
Allocations
Current
Year
Charge-Offs
LocationOriginated
March 31, 2021      
Owner occupied commercial real estate9$4,544 $151 $ In market2008 - 2019
Investment/rental residential real estate3410   In market2009 - 2016
Commercial and industrial32,738 1,955  In market2008 - 2019
Total15$7,692 $2,106 $   
December 31, 2020      
Owner occupied commercial real estate9$4,601 $124 $— In market2008 - 2019
Investment/rental residential real estate3410 34 — In market2009 - 2016
Commercial and industrial22,030 1,224 — In market2008 - 2019
Total14$7,041 $1,382 $—   
 
Management deemed it appropriate to provide this type of more detailed information by collateral type in order to provide additional detail on the loans.

All nonaccrual impaired loans are to borrowers located within the market area served by the Corporation in southcentral Pennsylvania and nearby market areas of Maryland. All nonaccrual impaired loans were originated by ACNB’s banking subsidiary, except for one participation loan 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 March 31, 2021.

Owner occupied commercial real estate at March 31, 2021, includes nine unrelated loan relationships. A $1,009,000 relationship in food service that was performing when acquired was added in the first quarter of 2020 after becoming 90 days past due early in the year. An $802,000 merger-acquired loan relationship for a light manufacturing enterprise which was performing when acquired is pursuing a possible sale. An unrelated $392,000 credit was added to this category in the second quarter of 2020 when ACNB was notified that property was scheduled for tax sale which has been suspended. The other loans in this category have balances of less than $240,000 each, for which the real estate is collateral and is used in connection with a business enterprise that is suffering economic stress or is out of business. The loans in this category were originated between 2008 and 2014 and are business loans impacted by specific borrower credit situations. Most loans in this category are making principal payments. Collection efforts will continue unless it is deemed in the best interest of the Corporation to initiate foreclosure procedures.

A $1,311,000 2017-acquired commercial real estate participation loan (after partial payoff in the third quarter of 2020) was added in the fourth quarter of 2019 and has been assigned a $118,000 specific allocation.
 
Investment/rental residential real estate at March 31, 2021, includes three unrelated loan relationships totaling $410,000 for which the real estate is collateral and the purpose of which is for speculation, rental, or other non-owner occupied uses. One loan in this category at April 2015, was stayed from further foreclosure action by a bankruptcy filing. A second loan added in the third quarter of 2019 appears to be adequately collateralized in an upcoming sheriff's sale. An unrelated loan relationship in this category was a business affected by COVID-19 but has made payments.
 
A $1,795,000 commercial and industrial loan was added in the fourth quarter of 2020 after ceasing operations. Liquidation are underway with a specific allocation of $1,1190,000. A related $441,000 owner occupied real estate loan is also in nonaccrual. An unrelated commercial and industrial loan at March 31, 2021 with a balance of $34,000 and a specific allocation of $11,000; this loan is currently making payments. A third unrelated loan relationship was added in the first quarter 2021 with an outstanding balance of $909,000 and a specific allocation $754,000 due to concerns on collateralization.
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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-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 for 2021 and 2020 was a result of the measurement of the adequacy of the allowance for loan losses at each period.

Premises and Equipment

During the quarter ended June 30, 2016, a building was sold and the Corporation is leasing back a portion of that building. In connection with these transactions, a gain of $1,147,000 was realized, of which $447,000 was recognized in the quarter ended June 30, 2016 and the remaining $700,000 deferred for future recognition over the lease back term. A reduction of lease expense of $18,000 was recognized in the first three months of 2021 and 2020, respectively. ACNB valued six buildings acquired from New Windsor at $8,624,000 at July 1, 2017 and five properties acquired from FCBI at $7,514,000 at January 11, 2020.

Foreclosed Assets Held for Resale
 
Foreclosed assets held for resale consists 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. These fair values, less estimated costs to sell, become the Corporation’s new cost basis. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. The carrying value of real estate acquired through foreclosure totaled $0 for no properties at March 31, 2021, compared to $0 for no properties and borrowers at December 31, 2020. The decrease in the carrying value was due to all properties sold in 2020. All properties after acquisition are actively marketed. The Corporation expects to obtain and market additional foreclosed assets through the remainder of 2021; however, the total amount and timing is currently not certain.

Deposits
 
ACNB relies on deposits as a primary source of funds for lending activities with total deposits of $2,278,622,000 as of March 31, 2021. Deposits increased by $467,265,000, or 25.8%, from March 31, 2020, to March 31, 2021, and increased by $93,097,000, or 4.3%, from December 31, 2020, to March 31, 2021. Deposits increased in the first quarter of 2021 from PPP proceeds deposited to customer’s accounts and from increased balances in a broad base of accounts from lack of economic activity due to the COVID-19 event. Even with this increase in volume, deposit interest expense decreased 43.4% due to lower rates. Otherwise, deposits vary between quarters mostly reflecting different levels held by local government and school districts during different times of the year. ACNB’s deposit pricing function employs a disciplined pricing approach based upon alternative funding rates, but also strives to price deposits to be competitive with relevant local competition, including a local government investment trust, credit unions and larger regional banks. During the recession and subsequent slow recovery, deposit growth mix experienced a shift to transaction accounts as customers put more value in liquidity and FDIC insurance. Products, such as money market accounts and interest-bearing transaction accounts that had suffered declines in past years, continued with recovered balances; however, it is expected that a return to more normal, lower balances will occur when the economy improves. With heightened competition, ACNB’s ability to maintain and add to its deposit base may be impacted by the reluctance of consumers to accept community banks’ lower rates (as compared to Internet-based competition) and by larger competition willing to pay above market rates to attract market share. If rates rise rapidly, or when the equity markets are high, funds could leave the Corporation or be priced higher to maintain deposits.
 
Borrowings
 
Short-term Bank borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As of March 31, 2021, short-term Bank borrowings were $31,282,000, as compared to $38,464,000 at December 31, 2020, and $26,104,000 at March 31, 2020. Agreements to repurchase accounts are within the
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commercial and local government customer base and have attributes similar to core deposits. Investment securities are pledged in sufficient amounts to collateralize these agreements. In comparison to year-end 2020, repurchase agreement balances were down $7,182,000, or 18.7%, due to changes in the cash flow position of ACNB’s commercial and local government customer base and competition from non-bank sources. There were no short-term FHLB borrowings at March 31, 2021 and 2020, or December 31, 2020. 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 of loan assets, and Corporate borrowings that were acquired or originated in regards to the acquisitions. Long-term borrowings totaled $65,616,000 at March 31, 2021, versus $53,745,000 at December 31, 2020, and $71,723,000 at March 31, 2020. Long-term borrowings decreased 8.5% from March 31, 2020. $20.0 million was the net decrease to FHLB term Bank borrowings to balance loan demand and deposit growth. FHLB fixed-rate term Bank advances that matured after the first quarter of 2019 were not renewed due to adequate deposit funding sources. A second quarter of 2017 $4.6 million Corporation loan was paid down to $1.2 million outstanding balance on a borrowing from a local bank that had been made to fund the cash payment to shareholders of the New Windsor acquisition. RIG borrowed $1.0 million from a local bank at the end of the third quarter of 2018 to fund a book of business purchase. The balance of this loan was paid down to $0 at March 31, 2021. In addition, $5 million and $8.7 million was Corporation debt acquired from New Windsor and FCBI, respectively. On March 30, 2021, ACNB Corporation issued $15,000,000 in Fixed-to-Floating Rate subordinated debt due March 31, 2031. The terms are five year 4% fixed rate and thereafter callable at 100% or a floating rate. The potential use of the net proceeds include retiring outstanding debt of the Corporation, repurchase issued and outstanding shares of the Corporation, support general corporate purposes, underwrite growth opportunities, create an interest reserve for the notes issued, and downstream proceeds to ACNB Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank’s organic growth initiatives. Please refer to the Liquidity discussion below for more information on the Corporation’s ability to borrow.

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 $257,612,000 at March 31, 2021, compared to $257,972,000 at December 31, 2020, and $246,994,000 at March 31, 2020. Shareholders’ equity decreased in the first three months of 2021 by $360,000 primarily due to the increase in accumulated other comprehensive loss from change in investment market value, net of $5,294,000 in retained earnings from 2021 earnings net of dividends paid to date.

The acquisition of New Windsor resulted in 938,360 new ACNB shares of common stock issued to the New Windsor shareholders valued at $28,620,000 in 2017. The acquisition of FCBI resulted in 1,590,547 new ACNB shares of common stock issued to the FCBI shareholders valued at $57,721,000.

A $5,835,000 increase in accumulated other comprehensive loss was a result of a net decrease in the fair value of the investment portfolio from the increase in market rates and changes in the net funded position of the defined benefit pension plan. Other comprehensive income or loss is mainly caused by fixed-rate investment securities gaining or losing value in different interest rate environments and changes in the net funded position of the defined benefit pension plan. 
 
The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared.
During the first three months of 2021, ACNB earned $7,471,000 and paid dividends of $2,177,000 for a dividend payout ratio of 29.1%. During the first three months of 2020, ACNB earned $(1,223,000) and paid dividends of $2,167,000 for a dividend payout ratio of (177.2)%.

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. Year-to-date March 31, 2021, 5,627 shares were issued under this plan with proceeds in the amount of $(181,000). Year-to-date March 31, 2020, shares were provided to participants by open market purchases. Proceeds were used for general corporate purposes.

ACNB Corporation has a Restricted Stock plan available to selected officers and employees of the Bank, to advance the best interest of ACNB Corporation and its shareholders. The plan provides those persons who have responsibility for its growth with additional incentive by allowing them to acquire an ownership in ACNB Corporation and thereby encouraging them to contribute to the success of the Corporation. As of March 31, 2021, there were 25,945 shares of common stock granted as restricted stock awards to employees of the subsidiary bank. The restricted stock plan expired by its own terms after 10 years on
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February 24, 2019, and no further shares may be issued under the plan. Proceeds are used for general corporate purposes.

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 2009 Restricted Stock Plan. As of March 31, 2021, 35,587 shares were issued under this plan and 538,468 shares were available for grant. Proceeds are used for general corporate purposes.

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 new stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were no shares repurchased under the plan during the quarter ended March 31, 2021.

ACNB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ACNB. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ACNB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as of March 31, 2021, and December 31, 2020, that ACNB’s banking subsidiary met all minimum capital adequacy requirements to which it is subject and is categorized as “well capitalized” for regulatory purposes. There are no subsequent conditions or events that management believes have changed the banking subsidiary’s category.
 
Regulatory Capital Changes

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 establish a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016.

Under the initially proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity Tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule. The Corporation elected to opt-out.

The rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010, for inclusion in the Tier 1 capital of banking organizations with total consolidated assets of less than $15 billion as of December 31, 2009, and banking organizations that were mutual holding companies as of May 19, 2010.

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The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights, but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight.

Under the new rules, mortgage servicing assets and certain deferred tax assets are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

The Corporation calculated regulatory ratios as of March 31, 2021, and confirmed no material impact on the capital, operations, liquidity, and earnings of the Corporation and the banking subsidiary from the changes in the regulations.
 
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 on March 31, 2021.

The banking subsidiary’s capital ratios are as follows:
 March 31, 2021December 31, 2020To Be Well Capitalized
Under Prompt
Corrective Action
Regulations
Tier 1 leverage ratio (to average assets)9.21 %9.01 %5.00 %
Common Tier 1 capital ratio (to risk-weighted assets)14.33 %13.86 %6.50 %
Tier 1 risk-based capital ratio (to risk-weighted assets)14.33 %13.86 %8.00 %
Total risk-based capital ratio15.58 %15.10 %10.00 %

Liquidity
 
Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of ACNB, are met.
 
ACNB’s funds are available from a variety of sources, including assets that are readily convertible such as interest bearing deposits with banks, maturities and repayments from the securities portfolio, scheduled repayments of loans receivable, the core deposit base, and the ability to borrow from the FHLB. At March 31, 2021, ACNB’s banking subsidiary had a borrowing capacity of approximately $825,196,000 from the FHLB, of which $775,330,000 was available. Because of various restrictions and requirements on utilizing the available balance, ACNB considers $566,000,000 to be the practicable additional borrowing capacity, which is considered to be sufficient for operational needs. The FHLB system is self-capitalizing, member-owned, and its member banks’ stock is not publicly traded. ACNB creates its borrowing capacity with the FHLB by granting a security interest in certain loan assets with requisite credit quality. ACNB has reviewed information on the FHLB system and the FHLB
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of Pittsburgh, and has concluded that they have the capacity and intent to continue to provide both operational and contingency liquidity. The FHLB of Pittsburgh instituted a requirement that a member’s investment securities must be moved into a safekeeping account under FHLB control to be considered in the calculation of maximum borrowing capacity. The Corporation currently has securities in safekeeping at the FHLB of Pittsburgh; however, the safekeeping account is under the Corporation’s control. As better contingent liquidity is maintained by keeping the securities under the Corporation’s control, the Corporation has not moved the securities which, in effect, lowered the Corporation’s maximum borrowing capacity. However, there is no practical reduction in borrowing capacity as the securities can be moved into the FHLB-controlled account promptly if they are needed for borrowing purposes. 

Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling approximately $31,282,000 and $38,464,000 at March 31, 2021, and December 31, 2020, respectively. These agreements vary in balance according to the cash flow needs of customers and competing accounts at other financial organizations.
 
The liquidity of the parent company also represents an important aspect of liquidity management. The parent company’s cash outflows consist principally of dividends to 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.

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.

 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 March 31, 2021, the Corporation had unfunded outstanding commitments to extend credit of approximately $358,944,000 and outstanding standby letters of credit of approximately $8,094,000. 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.

Market Risks
 
Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of the organization. These risks involve interest rate risk, foreign currency exchange risk, commodity price risk, and equity market price risk. ACNB’s primary market risk is interest rate risk. Interest rate risk is inherent because, as a financial institution, ACNB derives a significant amount of its operating revenue from “purchasing” funds (customer deposits and wholesale borrowings) at various terms and rates. These funds are then invested into earning assets (primarily loans and investments) at various terms and rates.

Acquisition of Frederick County Bancorp, Inc.
 
ACNB Corporation, the parent financial holding company of ACNB Bank, a Pennsylvania state-chartered, FDIC-insured community bank, headquartered in Gettysburg, Pennsylvania, completed the acquisition of Frederick County Bancorp, Inc. (FCBI) and its wholly-owned subsidiary, Frederick County Bank, headquartered in Frederick, Maryland, effective January 11, 2020. FCBI was merged with and into a wholly-owned subsidiary of ACNB Corporation immediately followed by the merger of Frederick County Bank with and into ACNB Bank. ACNB Bank operates in the Frederick County, Maryland, market as “FCB Bank, A Division of ACNB Bank”.

Under the terms of the Reorganization Agreement, FCBI stockholders received 0.9900 share of ACNB Corporation common stock for each share of FCBI common stock that they owned as of the closing date. As a result, ACNB Corporation issued 1,590,547 shares of its common stock and cash in exchange for fractional shares based upon $36.43, the determined market share price of ACNB Corporation common stock in accordance with the Reorganization Agreement.
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With the combination of the two organizations, ACNB Corporation, on a consolidated basis, has approximately $2.7 billion in assets, $2.3 billion in deposits, and $1.6 billion in loans with 31 community banking offices and three loan offices located in the counties of Adams, Cumberland, Franklin, Lancaster and York in Pennsylvania and the counties of Baltimore, Carroll and Frederick in Maryland, as of April 1, 2021. Further discussion of the risk factors involved with the merger of FCBI into the Corporation can be found in Part II, Item 1A – Risk Factors.

RECENT DEVELOPMENTS
 
BANK SECRECY ACT (BSA) – 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.

TAX CUTS AND JOBS ACT – On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes, the Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018. ACNB anticipates that this tax rate change should reduce its federal income tax liability in future years, as it did in 2018. However, the Corporation did recognize certain effects of the tax law changes in 2017. U.S. generally accepted accounting principles require companies to revalue their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. Since the enactment took place in December 2017, the Corporation revalued its net deferred tax assets in the fourth quarter of 2017, resulting in an approximately $1.7 million reduction to earnings in 2017.
 
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 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 banking subsidiary’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.
 
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 requires the FDIC to
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increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates 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 the 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 $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
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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.

SUPERVISION AND REGULATION
 
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. 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 shareholders. 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
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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.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent review, management has determined that there have been no material changes in market risks since year-end 2020. For further discussion of year-end information, please refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
 
ITEM 4 – CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
As of the end of the period covered by this report, 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.

Disclosure controls and procedures are Corporation controls and other procedures that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

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PART II – OTHER INFORMATION
 
ACNB CORPORATION
ITEM 1 – LEGAL PROCEEDINGS
 
As of March 31, 2021, there were no material pending legal proceedings, other than ordinary routine litigation incidental to 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 1A – RISK FACTORS
 
Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There are no material changes in risk factors as previously disclosed in the Form 10-K.
 
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On November 3, 2008, the Corporation announced a plan to purchase up to 120,000 shares of its outstanding common stock. There were no treasury shares purchased under this plan during the quarter ended March 31, 2021. The maximum number of shares that may have been purchased under this stock repurchase plan was 57,400; however, this plan was replaced and superseded by the new stock repurchase program, as indicated below, approved on February 23, 2021.
 
On May 5, 2009, shareholders 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 March 31, 2021, there were 25,945 shares of common stock granted as restricted stock awards to employees of the subsidiary bank. The restricted stock plan expired by its own terms after 10 years 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, shareholders 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 March 31, 2021, 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 shareholders 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 March 31, 2021, there were 196,238 shares of common stock issued through the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan.

On May 1, 2018, shareholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of March 31, 2021, there were 35,587 shares issued under this plan. The maximum number of shares that may yet be granted under this plan is 538,468. 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 new stock repurchase program replaces and supersedes any and all earlier announced repurchase plans.
 
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES – NOTHING TO REPORT.
 
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ITEM 4 – MINE SAFETY DISCLOSURES – NOT APPLICABLE.
 
ITEM 5 – OTHER INFORMATION – NOTHING TO REPORT.
 
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ITEM 6 – 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
   
Exhibit 10.1 
   
Exhibit 10.2 
Exhibit 10.3 
   
Exhibit 10.4 
   
Exhibit 10.5 
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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
Exhibit 10.18
   
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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 18
Exhibit 31.1 
Exhibit 31.2 
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Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase.
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase.
   
Exhibit 101.INSXBRL 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 104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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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 (Registrant)
   
Date:April 30, 2021 /s/ James P. Helt
  James P. Helt
  President & Chief Executive Officer
   
  /s/ David W. Cathell
  David W. Cathell
  Executive Vice President/Treasurer &
  Chief Financial Officer (Principal Financial Officer)
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