NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and ACNB Insurance Services, Inc., formerly Russell Insurance Group, Inc. The Bank engages in full-service commercial and consumer banking and wealth management services, including trust and retail brokerage, through its twenty-six community banking offices, including seventeen community banking office locations in Adams, Cumberland, Franklin, and York Counties, Pennsylvania, and nine community banking office locations in Carroll and Frederick Counties, Maryland. There are also loan production offices situated in Lancaster and York, Pennsylvania, and Hunt Valley, Maryland.
ACNB Insurance Services, Inc. is a full-service insurance agency based in Westminster, Maryland, with additional locations in Jarrettsville, Maryland, and Gettysburg, Pennsylvania. The agency offers a broad range of property, casualty, health, life and disability insurance to both individual and commercial clients.
On January 11, 2020, ACNB completed the acquisition of Frederick County Bancorp, Inc. (FCBI), a bank holding company based in Frederick, Maryland. In addition, Frederick County Bank, a Maryland state-chartered bank and FCBI’s wholly-owned subsidiary, merged with and into ACNB Bank. ACNB Bank now operates in the Frederick County, Maryland, market as “FCB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via the network of four community banking offices located in Frederick County, Maryland.
On July 1, 2017, ACNB completed its acquisition of New Windsor Bancorp, Inc. (New Windsor) of Taneytown, Maryland. At the effective time of the acquisition, New Windsor merged with and into a wholly-owned subsidiary of ACNB, immediately followed by the merger of New Windsor State Bank (NWSB) with and into ACNB Bank. ACNB Bank now operates in the Carroll County, Maryland market as “NWSB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via the network of five community banking offices located in Carroll County, Maryland.
On February 28, 2022, ACNB Insurance Services, Inc. completed the acquisition of the business and assets of Hockley & O’Donnell Insurance Agency, LLC, Gettysburg, PA. This insurance agency acquisition in Adams County, PA, leveraged the affiliation with ACNB Corporation and ACNB Bank in their headquarters market.
On December 19, 2022, plans for ACNB Bank to rebrand its Maryland banking divisions were announced. Effective January 1, 2023, these divisions, NWSB Bank and FCB Bank, formally adopted the ACNB Bank name and brand identity in the counties of Carroll and Frederick in northern Maryland, respectively. The goal of this rebranding initiative is to eliminate customer confusion, especially for those who bank in multiple markets, and to provide future operating and cost efficiencies. Further, this step now fully aligns the brand of ACNB Bank with that of ACNB Insurance Services, Inc., which was rebranded effective January 1, 2022, to create enhanced synergies and market recognition throughout the Corporation’s footprint in southcentral Pennsylvania and northern Maryland.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.
Basis of Financial Statements
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $518,800,000 and $537,800,000 at December 31, 2022 and 2021, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
Subsequent Events
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2022, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.
Use of Estimates
To prepare financial statements in conformity with U.S. generally accepted accounting principles (GAAP) management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.
Cash Flows
Cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which mature within 90 days. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions are carried at cost.
Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity or trading are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss). Equity securities with readily determinable fair values are recorded at fair value with changes in fair value recognized in net income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Transfers of debt securities into the held to maturity category from the available for sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining expected life of the security.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income.
Mortgage loans held for sale are sold with the mortgage servicing rights released to another financial institution through a correspondent relationship. The correspondent financial institution absorbs all of the risk related to rate lock commitments. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Loans
The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.
The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses (the allowance) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include:
•lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;
•national, regional and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;
•nature and volume of the portfolio and terms of loans;
•experience, ability and depth of lending management and staff;
•volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,
•existence and effect of any concentrations of credit and changes in the level of such concentrations.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.
It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third-party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third-party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, change in the condition of the real estate, change in local market and economic conditions, and other specific factors involving the collateral. Once the updated valuation is completed, the collateral value is updated accordingly.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. The Corporation orders valuations at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.
For impaired loans secured by collateral other than real estate, the Corporation considers the net book value of the collateral, as recorded in the most recent financial statements of the borrower, and determines fair value based on estimates made by management.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.
Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current
sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.
Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.
Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.
In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.
Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.
Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.
In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.
Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.
The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.
In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.
Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.
Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.
In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s financial ability to repay the loan as agreed and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.
Residential mortgage loans are subject to risk due primarily to general economic conditions, as well as periods of weak housing markets.
Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.
Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as periods of weak housing markets.
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate markets are weak and property values deteriorate.
Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Concentration of Credit Risk
Most of the Corporation’s activities are with customers located within southcentral Pennsylvania and northern Maryland. Note C discusses the types of securities in which the Corporation invests. Note D discusses the types of lending in which the Corporation engages. Included in commercial real estate loans are loans made to lessors of non-residential dwellings that total $434,057,000, or 28.2%, of total loans at December 31, 2022. These borrowers are geographically disbursed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space and recreational facilities. Because of the varied nature of the tenants in aggregate, management believes that these loans do not present any greater risk than commercial loans in general.
Acquired Loans
Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values. The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common rick characteristics such as credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. The Corporation estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater that the carrying amount, it is recognized as part of future income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, equipment and leasehold improvements are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the assets’ estimated useful lives. Normally, a building’s useful life is 40 years, except for building remodels and additions, which are depreciated over fifteen years. Bank equipment, including furniture and fixtures, is normally depreciated over five - fifteen years depending upon the nature of the purchase. Maintenance and normal repairs are charged to expense when incurred while major additions and improvements are capitalized. Gains and losses on disposals are reflected in current operations. Amortization of leasehold improvements is computed by straight line over the shorter of the assets’ useful life or the related lease term.
Restricted Investment in Bank Stocks
Restricted investment in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of December 31, 2022 and 2021, and consists of common stock in the Atlantic Central Bankers Bank, Community Bankers Bank and Federal Home Loan Bank (FHLB).
Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Financial Services—Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank, and (4) the liquidity position of the correspondent bank.
Management believes no impairment charge was necessary related to the restricted investment in bank stocks during 2022 or 2021.
Bank-Owned Life Insurance
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans. Investment in bank-owned life insurance policies was used to finance the nonqualified compensation plans and provide tax-exempt income to the Corporation.
ASC Topic 715, Compensation—Retirement Benefits, requires a liability to be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability is based on either the post-employment benefit cost for continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Corporation’s liability is based on the post-employment benefit cost for continuing life insurance. The Corporation incurred approximately $81,000 and $86,000 of expense in 2022 and 2021, respectively, related to these benefits.
Investments in Low-Income Housing Partnerships
The Corporation’s investments in low-income housing partnerships are accounted for using the “equity method” prescribed by ASC Topic 323, Investments — Equity Method. In accordance with ASC Topic 740, Income Taxes, tax credits are recognized as they become available. Any residual loss is amortized as the tax credits are received.
Goodwill and Intangible Assets
The Corporation accounts for its acquisitions using the acquisition accounting method required by ASC Topic 805, Business Combinations. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Generally, this results in a residual amount in excess of the net fair values, which is recorded as goodwill.
ASC Topic 350, Intangibles—Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Corporation did not identify any impairment on ACNB Insurance Services, Inc.’s outstanding goodwill from its most recent testing, which was performed as of October 1, 2022. The Corporation did not identify any impairment on the Bank’s outstanding goodwill from its most recent qualitative assessment, which was completed as of December 31, 2022. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Other acquired intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized using the straight line method over their estimated useful lives which range from eight to fifteen years.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are adjusted to the fair value, less costs to sell as necessary. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Outstanding foreclosed asset balance of $474,000 and $0 was held at December 31, 2022 and 2021, respectively.
Income Taxes
The Corporation accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.
Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Corporation accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense.
Retirement Plan
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Stock-based Compensation
The ACNB Corporation 2009 Restricted Stock plan expired by its own terms after 10 years on February 24, 2019. The purpose of this plan was to provide employees and directors of the Bank who have responsibility for its growth with additional incentives by allowing them to acquire ownership in the Corporation and, thereby, encouraging them to contribute to the success of the Corporation. As of December 31, 2022, 25,945 shares were issued under the plan and all shares are fully vested. No further shares may be issued under this restricted stock plan.
On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2022, 57,522 shares were issued under this plan, of which 44,154 are fully vested and the remaining 13,368 will vest over the next one year.
Plan expense is recognized over the vesting period of the stock issued under both plans. $729,000 and $110,000 of compensation expenses related to the grants were recognized for the years ended December 31, 2022 and 2021, respectively.
Net Income per Share
The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 8,623,012 and 8,714,926 weighted average shares of common stock outstanding for 2022 and 2021, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating for this calculation.
Advertising Costs
Costs of advertising, which are included in marketing expenses, are expensed when incurred.
Off-Balance Sheet Credit-Related Financial Instruments
In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Comprehensive Income (Loss)
Comprehensive Income (Loss) consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains and losses on changes in funded status
of the pension plan which are also recognized as separate components of equity. The components of the accumulated other comprehensive loss, net of taxes, are as follows:
| | | | | | | | | | | | | | | | | |
| In thousands | Unrealized Gains on
Securities | | Pension
Liability | | Accumulated
Other
Comprehensive
Loss |
| Ending Balance — December 31, 2021 | $ | (3,474) | | | $ | (6,071) | | | $ | (9,545) | |
| | | | | |
| December 31, 2022 | | | | | |
| Beginning balance | $ | (3,474) | | | $ | (6,071) | | | $ | (9,545) | |
| Amounts reclassified from accumulated other comprehensive loss, net of tax | | | | | |
| Unrealized gain on available for sale securities, net of tax | (50,192) | | | — | | | (50,192) | |
| Realized losses on securities, net of tax | 193 | | | — | | | 193 | |
| Amortization of unrealized losses on securities transferred to held to maturity, net of tax | 739 | | | — | | | 739 | |
| Amortization of pension net loss, transition liability and prior service cost, net of tax | — | | | 317 | | | 317 | |
| Unrecognized pension net gain, net of tax | — | | | 476 | | | 476 | |
| Net current period other comprehensive (loss) income | (49,260) | | | 793 | | | (48,467) | |
| Ending Balance | $ | (52,734) | | | $ | (5,278) | | | $ | (58,012) | |
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note L — “Fair Value Measurements”. Fair value estimates involve uncertainties and matters of significant judgement regarding interest rate, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Segment Reporting
While the Corporation monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporate-wide basis. Segment determination also considered organizational structure and is consistent with the presentation of financial information to the chief operation decision maker to evaluate segment performance, develop strategy, and allocate resources. The Corporation’s chief operating decision maker is the Board of Directors. Management has determined that the Corporation has two reportable segments consisting of Banking and Insurance. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. Please refer to Note S — “Segment and Related Information” for a discussion of insurance operations.
New Accounting Pronouncements
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new model referred to as current expected credit losses (CECL) model, will apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments. ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, as defined by the Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, and information systems. The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model. The Corporation is continuing to conduct model comparisons and finalized policy and control framework over the adoption process. The Corporation is currently evaluating the provisions of ASU 2016-13 to determine the potential impact the new standard will have on the financial condition or results of operations.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The ASU is effective as of March 12, 2020 through December 31, 2022.
Furthermore, in December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Reference Rate Reform (Topic 848). This ASU extends the sunset date of ASC Topic 848 (Reference Rate Reform) to December 31, 2024, in response to the United Kingdom’s Financial Conduct Authority (FCA) extension of the intended cessation date of LIBOR in the United States.
The Corporation evaluated the impact of this standard, and believes that its adoption will not have a material impact on the Corporation’s consolidated financial condition or results of operations.
ASU 2022-02
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Corporation will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective March 31, 2023, for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13. The Corporation’s current plan is to adopt ASU 2016-13 January 1, 2023 and will simultaneously implement ASU 2022-02.
NOTE B — RESTRICTIONS ON CASH AND DUE FROM BANKS
In return for services obtained through correspondent banks, the Corporation is required to maintain non-interest bearing cash balances in those correspondent banks. At December 31, 2022 and 2021, all compensating balances are met by vault cash.
NOTE C — SECURITIES
Amortized cost and fair value of securities at December 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| SECURITIES AVAILABLE FOR SALE | | | | | | | |
| December 31, 2022 | | | | | | | |
| U.S. Government and agencies | $ | 241,467 | | | $ | — | | | $ | 30,468 | | | $ | 210,999 | |
| Mortgage-backed securities, residential | 327,535 | | | 342 | | | 32,159 | | | 295,718 | |
| State and municipal | 15,235 | | | 196 | | | 196 | | | 15,235 | |
| Corporate bonds | 33,404 | | | 15 | | | 1,817 | | | 31,602 | |
| $ | 617,641 | | | $ | 553 | | | $ | 64,640 | | | $ | 553,554 | |
| December 31, 2021 | | | | | | | |
| U.S. Government and agencies | $ | 249,463 | | | $ | 503 | | | $ | 4,925 | | | $ | 245,041 | |
| Mortgage-backed securities, residential | 133,697 | | | 1,562 | | | 1,763 | | | 133,496 | |
| State and municipal | 44,547 | | | 315 | | | 251 | | | 44,611 | |
| Corporate bonds | 13,858 | | | 164 | | | 72 | | | 13,950 | |
| $ | 441,565 | | | $ | 2,544 | | | $ | 7,011 | | | $ | 437,098 | |
| | | | | | | |
| Amortized
Cost | | Gross
Unrecognized
Gains | | Gross
Unrecognized
Losses | | Fair
Value |
| SECURITIES HELD TO MATURITY | | | | | | | |
| December 31, 2022 | | | | | | | |
| | | | | | | |
| Mortgage-backed securities, residential | $ | 3,279 | | | $ | — | | | $ | 194 | | | $ | 3,085 | |
| State and municipal | 61,698 | | | — | | | 6,705 | | | 54,993 | |
| $ | 64,977 | | | $ | — | | | $ | 6,899 | | | $ | 58,078 | |
| December 31, 2021 | | | | | | | |
| | | | | | | |
| Mortgage-backed securities, residential | $ | 6,454 | | | $ | 198 | | | $ | — | | | $ | 6,652 | |
| $ | 6,454 | | | $ | 198 | | | $ | — | | | $ | 6,652 | |
Fair value of equity securities with readily determinable fair values at December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | Fair Value at January 1, 2022 | | Purchases | | Sales | | Gains | | Losses | | Fair Value at December 31, 2022 |
| December 31, 2022 | | | | | | | | | | | | |
| CRA Mutual Fund | | $ | 1,036 | | | $ | — | | | $ | — | | | $ | — | | | $ | 121 | | | $ | 915 | |
| Canapi Ventures SBIC Fund | | — | | | 206 | | | — | | | — | | | — | | | 206 | |
| Stock in other banks | | 1,573 | | | — | | | 811 | | | 13 | | | 177 | | | 598 | |
| | $ | 2,609 | | | $ | 206 | | | $ | 811 | | | $ | 13 | | | $ | 298 | | | $ | 1,719 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | Fair Value at January 1, 2021 | | Gains | | Losses | | Fair Value at December 31, 2021 |
| December 31, 2021 | | | | | | | | |
| CRA Mutual Fund | | $ | 1,065 | | | $ | — | | | $ | 29 | | | $ | 1,036 | |
| Stock in other banks | | 1,105 | | | 468 | | | — | | | 1,573 | |
| | $ | 2,170 | | | $ | 468 | | | $ | 29 | | | $ | 2,609 | |
The following table shows the Corporation’s investments’ gross unrealized and unrecognized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| In thousands | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| SECURITIES AVAILABLE FOR SALE | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| U.S. Government and agencies | $ | 25,426 | | | $ | 1,461 | | | $ | 185,573 | | | $ | 29,007 | | | $ | 210,999 | | | $ | 30,468 | |
| Mortgage-backed securities, residential | 221,249 | | | 19,362 | | | 63,145 | | | 12,797 | | | 284,394 | | | 32,159 | |
| State and municipal | 6,229 | | | 196 | | | — | | | — | | | 6,229 | | | 196 | |
| Corporate bonds | 24,337 | | | 1,217 | | | 5,250 | | | 600 | | | 29,587 | | | 1,817 | |
| $ | 277,241 | | | $ | 22,236 | | | $ | 253,968 | | | $ | 42,404 | | | $ | 531,209 | | | $ | 64,640 | |
| December 31, 2021 | | | | | | | | | | | |
| U.S. Government and agencies | $ | 177,107 | | | $ | 3,537 | | | $ | 34,297 | | | $ | 1,388 | | | $ | 211,404 | | | $ | 4,925 | |
| Mortgage-backed securities, residential | 77,969 | | | 1,495 | | | 7,727 | | | 268 | | | 85,696 | | | 1,763 | |
| State and municipal | 20,289 | | | 224 | | | 2,123 | | | 27 | | | 22,412 | | | 251 | |
| Corporate bonds | 5,790 | | | 72 | | | — | | | — | | | 5,790 | | | 72 | |
| $ | 281,155 | | | $ | 5,328 | | | $ | 44,147 | | | $ | 1,683 | | | $ | 325,302 | | | $ | 7,011 | |
| | | | | | | | | | | |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair
Value | | Unrecognized
Losses | | Fair
Value | | Unrecognized
Losses | | Fair
Value | | Unrecognized
Losses |
| SECURITIES HELD TO MATURITY | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| | | | | | | | | | | |
| Mortgage-backed securities, residential | $ | 3,085 | | | $ | 194 | | | $ | — | | | $ | — | | | $ | 3,085 | | | $ | 194 | |
| State and municipal | 38,086 | | | 3,875 | | | 16,907 | | | 2,830 | | | 54,993 | | | 6,705 | |
| $ | 41,171 | | | $ | 4,069 | | | $ | 16,907 | | | $ | 2,830 | | | $ | 58,078 | | | $ | 6,899 | |
| December 31, 2021 | | | | | | | | | | | |
| | | | | | | | | | | |
| Mortgage-backed security, residential | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.
Management sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At December 31, 2022, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.
Amortized cost and fair value at December 31, 2022, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Available for Sale | | Held to Maturity |
| In thousands | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| 1 year or less | $ | 11,012 | | | $ | 10,876 | | | $ | 285 | | | $ | 283 | |
| Over 1 year through 5 years | 165,837 | | | 149,826 | | | 377 | | | 356 | |
| Over 5 years through 10 years | 92,955 | | | 77,710 | | | 16,437 | | | 15,248 | |
| Over 10 years | 20,302 | | | 19,424 | | | 44,599 | | | 39,106 | |
| Mortgage-backed securities, residential | 327,535 | | | 295,718 | | | 3,279 | | | 3,085 | |
| $ | 617,641 | | | $ | 553,554 | | | $ | 64,977 | | | $ | 58,078 | |
The Corporation enacted a sale of certain amortizing securities designated as held-to-maturity under the standards set forth in ASC 320. It was determined that the combination of scheduled, equal installments, principal prepayments on such securities had resulted in the collection of more than eighty-five percent of the principal outstanding at acquisition, and the non-recurrence of the event to enact a sale of such securities
The Corporation realized gross gains of $14,000 and gross losses of $248,000 on sales of securities available for sale and held to maturity during 2022. The Corporation did not sell any securities available for sale during 2021.
The Corporation reassessed classification of certain investments and effective April 1, 2022, the Corporation transferred $39.7 million of state and municipal securities from available for sale to held to maturity securities. The transfer occurred at fair value. The related unrealized loss of $4.8 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer.
At December 31, 2022 and 2021, securities with a carrying value of $342,180,000 and $353,989,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.
NOTE D — LOANS AND ALLOWANCE FOR LOAN LOSSES
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Pass | | Special
Mention | | Substandard | | Doubtful | | Total |
| December 31, 2022 | | | | | | | | | |
| Originated Loans | | | | | | | | | |
| Commercial and industrial | $ | 145,691 | | | $ | 3,239 | | | $ | 1,225 | | | $ | — | | | $ | 150,155 | |
| Commercial real estate | 604,315 | | | 23,773 | | | 5,352 | | | — | | | 633,440 | |
| Commercial real estate construction | 73,538 | | | 1,562 | | | — | | | — | | | 75,100 | |
| Residential mortgage | 323,121 | | | 3,469 | | | 73 | | | — | | | 326,663 | |
| Home equity lines of credit | 70,669 | | | 675 | | | — | | | — | | | 71,344 | |
| Consumer | 10,723 | | | — | | | — | | | — | | | 10,723 | |
| Total Originated Loans | 1,228,057 | | | 32,718 | | | 6,650 | | | — | | | 1,267,425 | |
| Acquired Loans | | | | | | | | | |
| Commercial and industrial | 27,746 | | | 796 | | | 65 | | | — | | | 28,607 | |
| Commercial real estate | 182,396 | | | 5,767 | | | 202 | | | — | | | 188,365 | |
| Commercial real estate construction | 5,114 | | | 256 | | | — | | | — | | | 5,370 | |
| Residential mortgage | 32,960 | | | 2,334 | | | 141 | | | — | | | 35,435 | |
| Home equity lines of credit | 12,375 | | | 37 | | | 385 | | | — | | | 12,797 | |
| Consumer | 611 | | | — | | | — | | | — | | | 611 | |
| Total Acquired Loans | 261,202 | | | 9,190 | | | 793 | | | — | | | 271,185 | |
| Total Loans | | | | | | | | | |
| Commercial and industrial | 173,437 | | | 4,035 | | | 1,290 | | | — | | | 178,762 | |
| Commercial real estate | 786,711 | | | 29,540 | | | 5,554 | | | — | | | 821,805 | |
| Commercial real estate construction | 78,652 | | | 1,818 | | | — | | | — | | | 80,470 | |
| Residential mortgage | 356,081 | | | 5,803 | | | 214 | | | — | | | 362,098 | |
| Home equity lines of credit | 83,044 | | | 712 | | | 385 | | | — | | | 84,141 | |
| Consumer | 11,334 | | | — | | | — | | | — | | | 11,334 | |
| Total Loans | $ | 1,489,259 | | | $ | 41,908 | | | $ | 7,443 | | | $ | — | | | $ | 1,538,610 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Pass | | Special
Mention | | Substandard | | Doubtful | | Total |
| December 31, 2021 | | | | | | | | | |
| Originated Loans | | | | | | | | | |
| Commercial and industrial | $ | 139,908 | | | $ | 5,549 | | | $ | 2,056 | | | $ | — | | | $ | 147,513 | |
| Commercial real estate | 500,978 | | | 56,462 | | | 8,658 | | | — | | | 566,098 | |
| Commercial real estate construction | 41,002 | | | 1,659 | | | — | | | — | | | 42,661 | |
| Residential mortgage | 299,041 | | | 4,961 | | | 75 | | | — | | | 304,077 | |
| Home equity lines of credit | 74,094 | | | 883 | | | — | | | — | | | 74,977 | |
| Consumer | 9,708 | | | — | | | — | | | — | | | 9,708 | |
| Total Originated Loans | 1,064,731 | | | 69,514 | | | 10,789 | | | — | | | 1,145,034 | |
| Acquired Loans | | | | | | | | | |
| Commercial and industrial | 29,728 | | | 1,555 | | | 771 | | | — | | | 32,054 | |
| Commercial real estate | 207,937 | | | 11,596 | | | 624 | | | — | | | 220,157 | |
| Commercial real estate construction | 5,228 | | | 2,111 | | | — | | | — | | | 7,339 | |
| Residential mortgage | 39,378 | | | 4,175 | | | 1,495 | | | — | | | 45,048 | |
| Home equity lines of credit | 17,491 | | | 37 | | | 257 | | | — | | | 17,785 | |
| Consumer | 997 | | | — | | | 13 | | | — | | | 1,010 | |
| Total Acquired Loans | 300,759 | | | 19,474 | | | 3,160 | | | — | | | 323,393 | |
| Total Loans | | | | | | | | | |
| Commercial and industrial | 169,636 | | | 7,104 | | | 2,827 | | | — | | | 179,567 | |
| Commercial real estate | 708,915 | | | 68,058 | | | 9,282 | | | — | | | 786,255 | |
| Commercial real estate construction | 46,230 | | | 3,770 | | | — | | | — | | | 50,000 | |
| Residential mortgage | 338,419 | | | 9,136 | | | 1,570 | | | — | | | 349,125 | |
| Home equity lines of credit | 91,585 | | | 920 | | | 257 | | | — | | | 92,762 | |
| Consumer | 10,705 | | | — | | | 13 | | | — | | | 10,718 | |
| Total Loans | $ | 1,365,490 | | | $ | 88,988 | | | $ | 13,949 | | | $ | — | | | $ | 1,468,427 | |
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
| | | | | | | | | | | | | | |
| In thousands | | Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| Balance at beginning of period | | $ | 435 | | | $ | 596 | |
| Acquisitions of impaired loans | | — | | | — | |
| Reclassification from non-accretable differences | | 642 | | | 253 | |
| Accretion to loan interest income | | (644) | | | (414) | |
| Balance at end of period | | $ | 433 | | | $ | 435 | |
Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as impairment through a charge to the provision for loan losses and credit to the allowance for loan losses.
The following table summarizes information relative to impaired loans by loan portfolio class as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impaired Loans with Allowance | | Impaired Loans with
No Allowance |
| In thousands | Recorded
Investment | | Unpaid
Principal
Balance | | Related
Allowance | | Recorded
Investment | | Unpaid
Principal
Balance |
| December 31, 2022 | | | | | | | | | |
| Commercial and industrial | $ | 781 | | | $ | 781 | | | $ | 628 | | | $ | — | | | $ | — | |
| Commercial real estate | 350 | | | 350 | | | 192 | | | 4,984 | | | 4,984 | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | — | |
| Residential mortgage | — | | | — | | | — | | | — | | | — | |
| Home equity lines of credit | — | | | — | | | — | | | — | | | — | |
| Total | $ | 1,131 | | | $ | 1,131 | | | $ | 820 | | | $ | 4,984 | | | $ | 4,984 | |
| December 31, 2021 | | | | | | | | | |
| Commercial and industrial | $ | 1,005 | | | $ | 1,005 | | | $ | 855 | | | $ | 482 | | | $ | 1,452 | |
| Commercial real estate | 1,311 | | | 1,311 | | | 600 | | | 6,265 | | | 6,265 | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | — | |
| Residential mortgage | — | | | — | | | — | | | — | | | — | |
| Home equity lines of credit | — | | | — | | | — | | | — | | | — | |
| Total | $ | 2,316 | | | $ | 2,316 | | | $ | 1,455 | | | $ | 6,747 | | | $ | 7,717 | |
The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Impaired Loans with
Allowance | | Impaired Loans with
No Allowance |
| In thousands | Average
Recorded
Investment | | Interest
Income | | Average
Recorded
Investment | | Interest
Income |
| December 31, 2022 | | | | | | | |
| Commercial and industrial | $ | 991 | | | $ | — | | | $ | 2 | | | $ | — | |
| Commercial real estate | 856 | | | — | | | 5,566 | | | 589 | |
| Commercial real estate construction | — | | | — | | | — | | | — | |
| Residential mortgage | — | | | — | | | — | | | — | |
| Home equity lines of credit | — | | | — | | | — | | | — | |
| Total | $ | 1,847 | | | $ | — | | | $ | 5,568 | | | $ | 589 | |
| December 31, 2021 | | | | | | | |
| Commercial and industrial | $ | 1,888 | | | $ | — | | | $ | 7 | | | $ | — | |
| Commercial real estate | 1,468 | | | 181 | | | 6,673 | | | 20 | |
| Commercial real estate construction | — | | | 2 | | | 123 | | | — | |
| Residential mortgage | — | | | — | | | 60 | | | — | |
| Home equity lines of credit | — | | | — | | | — | | | — | |
| Total | $ | 3,356 | | | $ | 183 | | | $ | 6,863 | | | $ | 20 | |
No additional funds are committed to be advanced in connection with impaired loans.
If interest on all nonaccrual loans had been accrued at original contract rates, interest income would have increased by $410,000 in 2022 and $462,000 in 2021.
The following table presents nonaccrual loans by loan portfolio class as of December 31, 2022 and 2021, the table below excludes $735,000 and $4.6 million, respectively, in purchase credit impaired loans, net of unamortized fair value adjustments:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Commercial and industrial | $ | 781 | | | $ | 1,487 | |
| Commercial real estate | 1,873 | | | 4,002 | |
| Commercial real estate construction | — | | | — | |
| Residential mortgage | — | | | — | |
| Home equity lines of credit | — | | | — | |
| Total | $ | 2,654 | | | $ | 5,489 | |
There were no loans whose terms have been modified resulting in a troubled debt restructuring during the years ended December 31, 2022 and 2021. The Corporation classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the restructuring of scheduled principal payments. The Corporation had pre-existing nonaccruing and accruing troubled debt restructurings of $3,461,000 and $3,637,000 at December 31, 2022 and 2021, respectively. All of the Corporation’s troubled debt restructured loans are also impaired loans, of which some have resulted in a specific allocation and, subsequently, a charge-off as appropriate. Included in the non-accrual loan total at December 31, 2022 and 2021, were $0 and $63,000, respectively, of troubled debt restructurings. In addition to the troubled debt restructurings included in non-accrual loans, the Corporation also has a loan classified as an accruing troubled debt restructurings at December 31, 2022 and 2021, which total $3,461,000 and $3,574,000, respectively. There were no defaulted troubled debt restructured loans as of December 31, 2022 and 2021. There were no charge-offs on any of the troubled debt restructured loans for the years ended December 31, 2022 and 2021. There were no specific allocations on any troubled debt restructured loans for the years ended December 31, 2022 and 2021. All troubled debt restructured loans were current as of December 31, 2022, with respect to their associated forbearance agreement. As of December 31, 2022, there are no active forbearance agreements. All forbearance agreements have expired or the loans have paid off.
Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2022 and 2021, totaled $1,101,000 and $399,000, respectively.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | 30-59 Days
Past Due | | 60-89 Days
Past Due | | >90 Days Past Due | | Total Past Due | | Current | | Total Loans
Receivable | | Loans
Receivable
>90 Days and
Accruing |
| December 31, 2022 | | | | | | | | | | | | | |
| Originated Loans | | | | | | | | | | | | | |
| Commercial and industrial | $ | 257 | | | $ | — | | | $ | 162 | | | $ | 419 | | | $ | 149,736 | | | $ | 150,155 | | | $ | — | |
| Commercial real estate | 1,809 | | | — | | | 255 | | | 2,064 | | | 631,376 | | | 633,440 | | | — | |
| Commercial real estate construction | 24 | | | — | | | — | | | 24 | | | 75,076 | | | 75,100 | | | — | |
| Residential mortgage | 1,846 | | | 734 | | | 330 | | | 2,910 | | | 323,753 | | | 326,663 | | | 330 | |
| Home equity lines of credit | 245 | | | 117 | | | 49 | | | 411 | | | 70,933 | | | 71,344 | | | 49 | |
| Consumer | 150 | | | 80 | | | — | | | 230 | | | 10,493 | | | 10,723 | | | — | |
| Total originated loans | 4,331 | | | 931 | | | 796 | | | 6,058 | | | 1,261,367 | | | 1,267,425 | | | 379 | |
| Acquired Loans | | | | | | | | | | | | | |
| Commercial and industrial | 30 | | | — | | | — | | | 30 | | | 28,577 | | | 28,607 | | | — | |
| Commercial real estate | 217 | | | 350 | | | — | | | 567 | | | 187,798 | | | 188,365 | | | — | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | 5,370 | | | 5,370 | | | — | |
| Residential mortgage | 1,123 | | | 236 | | | 375 | | | 1,734 | | | 33,701 | | | 35,435 | | | 375 | |
| Home equity lines of credit | 193 | | | — | | | 449 | | | 642 | | | 12,155 | | | 12,797 | | | 449 | |
| Consumer | 5 | | | — | | | — | | | 5 | | | 606 | | | 611 | | | — | |
| Total acquired loans | 1,568 | | | 586 | | | 824 | | | 2,978 | | | 268,207 | | | 271,185 | | | 824 | |
| Total Loans | | | | | | | | | | | | | |
| Commercial and industrial | 287 | | | — | | | 162 | | | 449 | | | 178,313 | | | 178,762 | | | — | |
| Commercial real estate | 2,026 | | | 350 | | | 255 | | | 2,631 | | | 819,174 | | | 821,805 | | | — | |
| Commercial real estate construction | 24 | | | — | | | — | | | 24 | | | 80,446 | | | 80,470 | | | — | |
| Residential mortgage | 2,969 | | | 970 | | | 705 | | | 4,644 | | | 357,454 | | | 362,098 | | | 705 | |
| Home equity lines of credit | 438 | | | 117 | | | 498 | | | 1,053 | | | 83,088 | | | 84,141 | | | 498 | |
| Consumer | 155 | | | 80 | | | — | | | 235 | | | 11,099 | | | 11,334 | | | — | |
| Total Loans | $ | 5,899 | | | $ | 1,517 | | | $ | 1,620 | | | $ | 9,036 | | | $ | 1,529,574 | | | $ | 1,538,610 | | | $ | 1,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | 30-59 Days
Past Due | | 60-89 Days
Past Due | | >90 Days Past Due | | Total Past Due | | Current | | Total Loans
Receivable | | Loans
Receivable
>90 Days and
Accruing |
| December 31, 2021 | | | | | | | | | | | | | |
| Originated Loans | | | | | | | | | | | | | |
| Commercial and industrial | $ | 20 | | | $ | 64 | | | $ | 1,397 | | | $ | 1,481 | | | $ | 146,032 | | | $ | 147,513 | | | $ | — | |
| Commercial real estate | — | | | — | | | 2,483 | | | 2,483 | | | 563,615 | | | 566,098 | | | — | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | 42,661 | | | 42,661 | | | — | |
| Residential mortgage | 970 | | | 140 | | | 475 | | | 1,585 | | | 302,492 | | | 304,077 | | | 475 | |
| Home equity lines of credit | 239 | | | 42 | | | 255 | | | 536 | | | 74,441 | | | 74,977 | | | 255 | |
| Consumer | 84 | | | 58 | | | — | | | 142 | | | 9,566 | | | 9,708 | | | — | |
| Total originated loans | 1,313 | | | 304 | | | 4,610 | | | 6,227 | | | 1,138,807 | | | 1,145,034 | | | 730 | |
| Acquired Loans | | | | | | | | | | | | | |
| Commercial and industrial | — | | | — | | | — | | | — | | | 32,054 | | | 32,054 | | | — | |
| Commercial real estate | — | | | 270 | | | — | | | 270 | | | 219,887 | | | 220,157 | | | — | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | 7,339 | | | 7,339 | | | — | |
| Residential mortgage | 210 | | | 950 | | | — | | | 1,160 | | | 43,888 | | | 45,048 | | | — | |
| Home equity lines of credit | 1,156 | | | — | | | — | | | 1,156 | | | 16,629 | | | 17,785 | | | — | |
| Consumer | — | | | — | | | — | | | — | | | 1,010 | | | 1,010 | | | — | |
| Total acquired loans | 1,366 | | | 1,220 | | | — | | | 2,586 | | | 320,807 | | | 323,393 | | | — | |
| Total Loans | | | | | | | | | | | | | |
| Commercial and industrial | 20 | | | 64 | | | 1,397 | | | 1,481 | | | 178,086 | | | 179,567 | | | — | |
| Commercial real estate | — | | | 270 | | | 2,483 | | | 2,753 | | | 783,502 | | | 786,255 | | | — | |
| Commercial real estate construction | — | | | — | | | — | | | — | | | 50,000 | | | 50,000 | | | — | |
| Residential mortgage | 1,180 | | | 1,090 | | | 475 | | | 2,745 | | | 346,380 | | | 349,125 | | | 475 | |
| Home equity lines of credit | 1,395 | | | 42 | | | 255 | | | 1,692 | | | 91,070 | | | 92,762 | | | 255 | |
| Consumer | 84 | | | 58 | | | — | | | 142 | | | 10,576 | | | 10,718 | | | — | |
| Total Loans | $ | 2,679 | | | $ | 1,524 | | | $ | 4,610 | | | $ | 8,813 | | | $ | 1,459,614 | | | $ | 1,468,427 | | | $ | 730 | |
The following table summarizes the allowance for loan losses and recorded investment in loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Commercial
and Industrial | | Commercial
Real Estate | | Commercial
Real Estate
Construction | | Residential
Mortgage | | Home Equity
Lines of Credit | | Consumer | | Unallocated | | Total |
| December 31, 2022 | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | | | | | | | | | | | | | |
| Beginning balance- January 1, 2022 | $ | 3,176 | | | $ | 10,716 | | | $ | 616 | | | $ | 3,235 | | | $ | 501 | | | $ | 408 | | | $ | 381 | | | $ | 19,033 | |
| Charge-offs | (238) | | | (831) | | | — | | | (3) | | | (33) | | | (181) | | | — | | | (1,286) | |
| Recoveries | 58 | | | — | | | — | | | 5 | | | 22 | | | 29 | | | — | | | 114 | |
| Provisions (credits) | (148) | | | 131 | | | 384 | | | (208) | | | (143) | | | 120 | | | (136) | | | — | |
| Ending balance- December 31, 2022 | $ | 2,848 | | | $ | 10,016 | | | $ | 1,000 | | | $ | 3,029 | | | $ | 347 | | | $ | 376 | | | $ | 245 | | | $ | 17,861 | |
| Ending balance: individually evaluated for impairment | $ | 628 | | | $ | 192 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 820 | |
| Ending balance: collectively evaluated for impairment | $ | 2,220 | | | $ | 9,824 | | | $ | 1,000 | | | $ | 3,029 | | | $ | 347 | | | $ | 376 | | | $ | 245 | | | $ | 17,041 | |
| Loans receivables | | | | | | | | | | | | | | | |
| Ending balance | $ | 178,762 | | | $ | 821,805 | | | $ | 80,470 | | | $ | 362,098 | | | $ | 84,141 | | | $ | 11,334 | | | $ | — | | | $ | 1,538,610 | |
| Ending balance: individually evaluated for impairment | $ | 781 | | | $ | 5,334 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,115 | |
| Ending balance: collectively evaluated for impairment | $ | 177,981 | | | $ | 816,471 | | | $ | 80,470 | | | $ | 362,098 | | | $ | 84,141 | | | $ | 11,334 | | | $ | — | | | $ | 1,532,495 | |
| December 31, 2021 | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | | | | | | | | | | | | | |
| Beginning balance- January 1, 2021 | $ | 4,037 | | | $ | 9,569 | | | $ | 503 | | | $ | 3,395 | | | $ | 693 | | | $ | 648 | | | $ | 1,381 | | | $ | 20,226 | |
| Charge-offs | (1,176) | | | — | | | — | | | — | | | (22) | | | (120) | | | — | | | (1,318) | |
| Recoveries | 43 | | | — | | | — | | | — | | | — | | | 32 | | | — | | | 75 | |
| Provisions | 272 | | | 1,147 | | | 113 | | | (160) | | | (170) | | | (152) | | | (1,000) | | | 50 | |
| Ending balance- December 31, 2021 | $ | 3,176 | | | $ | 10,716 | | | $ | 616 | | | $ | 3,235 | | | $ | 501 | | | $ | 408 | | | $ | 381 | | | $ | 19,033 | |
| Ending balance: individually evaluated for impairment | $ | 855 | | | $ | 600 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,455 | |
| Ending balance: collectively evaluated for impairment | $ | 2,321 | | | $ | 10,116 | | | $ | 616 | | | $ | 3,235 | | | $ | 501 | | | $ | 408 | | | $ | 381 | | | $ | 17,578 | |
| Loans receivables | | | | | | | | | | | | | | | |
| Ending balance | $ | 179,567 | | | $ | 786,255 | | | $ | 50,000 | | | $ | 349,125 | | | $ | 92,762 | | | $ | 10,718 | | | $ | — | | | $ | 1,468,427 | |
| Ending balance: individually evaluated for impairment | $ | 1,487 | | | $ | 7,576 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,063 | |
| Ending balance: collectively evaluated for impairment | $ | 178,080 | | | $ | 778,679 | | | $ | 50,000 | | | $ | 349,125 | | | $ | 92,762 | | | $ | 10,718 | | | $ | — | | | $ | 1,459,364 | |
The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time. The aggregate amount of these loans was $5,950,000 and $5,759,000 at December 31, 2022 and 2021, respectively. During 2022, $975,000 new loans were extended and repayments totaled $784,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2022.
Loan Modifications/Troubled Debt Restructurings/COVID-19
As of December 31, 2022, the Corporation had originated an aggregate total of 2,217 loans in the amount of $223,036,703 under the PPP, resulting in approximately $9.5 million in total fee income. Of this fee income amount
$5,627,000, before costs, was recognized in 2021 as an adjustment to interest income yield, and the remaining $986,000, before costs, was recognized in 2022. As of December 31, 2022, the Corporation did not have any outstanding balances under the PPP program.
NOTE E — PREMISES AND EQUIPMENT
Premises and equipment at December 31 were as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Land | $ | 5,418 | | | $ | 6,953 | |
| Buildings and improvements | 32,515 | | | 33,139 | |
| Furniture and equipment | 14,598 | | | 16,781 | |
| Construction in process | 8 | | | 888 | |
| 52,539 | | | 57,761 | |
| Accumulated depreciation | (25,486) | | | (26,781) | |
| $ | 27,053 | | | $ | 30,980 | |
Depreciation expense was $2,304,000 and $2,277,000 for the years ended December 31, 2022 and 2021, respectively.
NOTE F — INVESTMENTS IN LOW-INCOME HOUSING PARTNERSHIPS
ACNB Corporation is a limited partner in two partnerships, whose purpose is to develop, manage and operate residential low-income properties. At December 31, 2022 and 2021, the carrying value of these investments was approximately $1,129,000 and $1,254,000, respectively. In December 2022, ACNB Corporation sold one limited partnership resulting in a $421,000 gain on sale.
NOTE G — DEPOSITS
Deposits were comprised of the following as of December 31:
| | | | | | | | | | | |
| In thousands | | |
| 2022 | | 2021 |
| Non-interest bearing demand | $ | 595,049 | | | $ | 623,360 | |
| Interest bearing demand | 365,034 | | | 320,597 | |
| Savings | 945,762 | | | 1,052,380 | |
Time certificates of deposit of $250,000 or less | 241,562 | | | 322,855 | |
| Time certificates of deposit greater than $250,000 | 51,568 | | | 107,197 | |
| $ | 2,198,975 | | | $ | 2,426,389 | |
Scheduled maturities of time certificates of deposit at December 31, 2022, were as follows:
| | | | | |
| Years Ending | In thousands |
| 2023 | $ | 218,193 | |
| 2024 | 47,457 | |
| 2025 | 15,665 | |
| 2026 | 7,138 | |
| 2027 | 4,660 | |
| Thereafter | 17 | |
| $ | 293,130 | |
NOTE H — LEASE COMMITMENTS
The Corporation enters into noncancellable lease arrangements primarily for some of its community offices. Certain lease arrangements contain clauses requiring increasing rental payments over the lease term, which are generally contractually stipulated. Many of these lease arrangements provide the Corporation with the option to renew the lease arrangement after the
initial lease term. These options are included in determining the lease term used to establish the right-of-use assets and lease liabilities, in accordance with ASU 2016-02, when it is reasonably certain the Corporation will exercise its renewal option. As most of the Corporation’s leases do not have a readily determinable implicit rate, the incremental borrowing rate is primarily used to determine the discount rate for purposes of measuring the right-of-use assets and lease liabilities. The Corporation’s lease arrangements do not contain any material residual value guarantees or material restrictive covenants.
The following right-of-use assets and lease liabilities are reported within the consolidated statements of condition as follows:
| | | | | | | | |
| In thousands | | December 31, 2022 |
| Operating Leases: | | |
| Right of use assets | | $ | 3,162 | |
| Lease liabilities | | 3,162 | |
| | | | | | | | |
| In thousands | | December 31, 2021 |
| Operating Leases: | | |
| Right of use assets | | $ | 3,270 | |
| Lease liabilities | | 3,270 | |
Supplemental balance sheet information related to leases was as follows for the year ended December 31, 2022:
| | | | | | | | |
| Operating Leases: | | |
| Weighted average remaining lease term | | 5.0 years |
| Weighted average discount rate | | 5.42 | % |
The following summarizes the remaining scheduled future minimum lease payments for operating leases as of December 31, 2022:
| | | | | |
| Years Ending | In thousands |
| 2023 | $ | 953 | |
| 2024 | 957 | |
| 2025 | 917 | |
| 2026 | 746 | |
| 2027 | 441 | |
| Thereafter | 779 | |
| Total minimum lease payments | 4,793 | |
| Less: Amount representing interest (1) | 1,631 | |
| Present value of net minimum lease payments | $ | 3,162 | |
_______________________________
(1) Amount necessary to reduce net minimum lease payments to present value calculated at the Corporation’s incremental borrowing rate.
As of December 31, 2022, the Corporation does not have any significant additional operating or finance leases that have not yet commenced. The total rent expense for all operating leases was $1,034,000 and $967,000 for the years ended December 31, 2022 and 2021, respectively.
ACNB leased space at several of its owned offices to other unrelated organizations. Total rental income for these properties was $78,000 and $77,000 for the years ended December 31, 2022 and 2021, respectively.
NOTE I — BORROWINGS
Short-term borrowings and weighted-average interest rates at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Dollars in thousands | Amount | | Rate | | Amount | | Rate |
| | | | | | | |
| | | | | | | |
| Securities sold under repurchase agreements | $ | 41,954 | | | 0.12 | % | | $ | 35,202 | | | 0.12 | % |
Under an agreement with the FHLB, the Bank has short-term borrowing capacity included within its maximum borrowing capacity. All FHLB advances are collateralized by a security agreement covering qualifying loans and unpledged U.S. Treasury, agency and mortgage-backed securities. In addition, all FHLB advances are secured by the FHLB capital stock owned by the Bank having a par value of $1,215,100 at December 31, 2022. The Corporation also has lines of credit that total $75,000,000 with correspondent banks for overnight federal funds borrowings. There were no advances on these lines at December 31, 2022 and 2021.
The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreement as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Statements of Condition | | |
| Dollars in thousands | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statements of Condition | | Net Amounts of Liabilities Presented in the Statements of Condition | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| December 31, 2022 | | | | | | | | | | | | |
| Repurchase agreements | | | | | | | | | | | | |
| Commercial customers and government entities | (a) | $ | 41,954 | | | $ | — | | | $ | 41,954 | | | $ | (41,954) | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | |
| Repurchase agreements | | | | | | | | | | | | |
| Commercial customers and government entities | (a) | $ | 35,202 | | | $ | — | | | $ | 35,202 | | | $ | (35,202) | | | $ | — | | | $ | — | |
_______________________________
(a) As of December 31, 2022 and 2021, the fair value of securities pledged in connection with repurchase agreements was $52,157,000 and $46,160,000, respectively.
A summary of long-term debt as of December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Dollars in thousands | Amount | | Rate | | Amount | | Rate |
| FHLB fixed-rate advances maturing: | | | | | | | |
| 2022 | $ | — | | | — | % | | $ | 11,000 | | | 2.69 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Loan payable variable rate | — | | | — | % | | 2,700 | | | 3.32 | % |
| | | | | | | |
| Trust preferred subordinated debt | 6,000 | | | 3.21 | % | | 6,000 | | | 1.69 | % |
| Subordinated debt | 15,000 | | | 4.00 | % | | 15,000 | | | 4.00 | % |
| $ | 21,000 | | | 3.78 | % | | $ | 34,700 | | | 2.69 | % |
The FHLB advances are collateralized by the assets defined in the security agreement and FHLB capital stock described previously. The Corporation can borrow a maximum of $821,375,000 from the FHLB, of which $808,275,000 was available at December 31, 2022.
The loan payable variable rate represents a promissory note (note) issued by FCBI in July 2011 and assumed by ACNB Corporation through the acquisition. The note has been amended from time to time through change in terms agreements. Under
the current change in terms agreement, the maturity date of the note is December 30, 2022, with the rate of interest accruing on the principal balance of 3.25% per year. The note is unsecured. The note was paid off on December 30, 2022.
The trust preferred subordinated debt is comprised of debt securities issued by FCBI in December 2006 and assumed by ACNB Corporation through the acquisition. FCBI completed the private placement of an aggregate of $6,000,000 of trust preferred securities. The interest rate on the subordinated debentures is currently adjusted quarterly to 163 basis points over three-month LIBOR. The debenture has a provision for when LIBOR is no longer available. On December 15, 2022 the most recent interest rate reset date, the interest rate was adjusted to 6.39900% for the period ending March 14, 2023. The trust preferred securities mature on December 15, 2036, and may be redeemed at par, at the Corporation’s option, on any interest payment date. The proceeds were transferred to FCBI as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual agreements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.
On March 30, 2021, ACNB Corporation (the Company) entered into Subordinated Note Purchase Agreements (Purchase Agreements) with certain institutional accredited investors and qualified institutional buyers (the Purchasers) pursuant to which the Company sold and issued $15.0 million in aggregate principal amount of its 4.00% fixed-to-floating rate subordinated notes due March 31, 2031 (the Notes). The Notes will bear interest at a fixed rate of 4.00% per year, from and including March 30, 2021 to, but excluding, March 31, 2026 or earlier redemption date. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current 90-day average Secured Overnight Financing Rate (SOFR) plus 329 basis points. As provided in the Notes, the interest rate on the Notes during the applicable floating rate period may be determined based on a rate other than the 90-day average SOFR. The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Company used the net proceeds it received from the sale of the Notes to retire outstanding debt of the Company, repurchase issued and outstanding shares of the Company, support general corporate purposes, underwrite growth opportunities, create an interest reserve for the Notes, and downstream proceeds to ACNB Bank (the Bank), to be used by the Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank’s organic growth initiatives. The Notes have a stated maturity of March 31, 2031, are redeemable by the Company at its option, in whole or in part, on or after March 30, 2026, and at any time upon the occurrences of certain events.
NOTE J — REGULATORY RESTRICTIONS ON DIVIDENDS
Dividend payments by the Bank to the Corporation are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC, including final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. As of December 31, 2022, $36,288,000 of undistributed earnings of the Bank, included in consolidated retained earnings, was available for distribution to the Corporation as dividends without prior regulatory approval. Additionally, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. Some of the undistributed earnings of the Bank were distributed to the Corporation for general corporate expenses and future shareholder dividends.
NOTE K — INCOME TAXES
The components of income tax expense for the years ended December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Federal: | | | |
| Current | $ | 7,461 | | | $ | 6,189 | |
| Deferred | 592 | | | 24 | |
| 8,053 | | | 6,213 | |
| State: | | | |
| Current | 1,259 | | | 949 | |
| Deferred | (113) | | | 23 | |
| 1,146 | | | 972 | |
| $ | 9,199 | | | $ | 7,185 | |
Reconciliations of the statutory federal income tax to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | |
| | Percentage of Income
before Income Taxes |
| | 2022 | | 2021 |
| Federal income tax at statutory rate | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 1.8 | % | | 2.2 | % |
| Tax-exempt income | (1.1) | % | | (1.1) | % |
| Earnings on investment in bank-owned life insurance | (0.7) | % | | (0.9) | % |
| Tax credit benefits | (0.6) | % | | (0.8) | % |
| Reduction of federal tax rate | — | % | | — | % |
| Other | 0.1 | % | | 0.1 | % |
| 20.5 | % | | 20.5 | % |
Rehabilitation and low-income housing income tax credits were $281,000, during 2022 and 2021, respectively.
Components of deferred tax assets and liabilities at December 31 were as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Allowance for loan losses | $ | 4,128 | | | $ | 4,336 | |
| Available for sale securities | 15,210 | | | 1,017 | |
| Accrued deferred compensation | 1,064 | | | 1,126 | |
| Lease liability | 731 | | | — | |
| Pension | 1,608 | | | 1,714 | |
| Deferred loan fees | — | | | 203 | |
| Other-than-temporary impairment | — | | | 43 | |
| Nonaccrual interest | 792 | | | 590 | |
| Deferred director fees | 978 | | | 844 | |
| Purchase accounting | 149 | | | (1,112) | |
| Other | 719 | | | 1,719 | |
| 25,379 | | | 10,480 | |
| Deferred tax liabilities: | | | |
| Deferred loan fees | 66 | | | — | |
| | | |
| Accumulated depreciation | 208 | | | 354 | |
| Prepaid benefit cost | 4,571 | | | 4,148 | |
| Right of use asset | 731 | | | — | |
| Prepaid expenses | 179 | | | 131 | |
| Goodwill/intangibles | 1,462 | | | 1,333 | |
| | | |
| 7,217 | | | 5,966 | |
| Net Deferred Tax Asset included in Other Assets | $ | 18,162 | | | $ | 4,514 | |
The Corporation did not have any uncertain tax positions at December 31, 2022 and 2021. The Corporation’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.
Years that remain open for potential review by the Internal Revenue Service are 2018 through 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income.
The tax law changes in the CARES Act did not have a material impact on the Corporation’s income tax provision.
NOTE L — FAIR VALUE MEASUREMENTS
Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the
volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.
This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis of measurement used at December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2022 |
| In thousands | Basis | | Total | | Level 1 | | Level 2 | | Level 3 |
| U.S. Government and agencies | | | $ | 210,999 | | | $ | — | | | $ | 210,999 | | | $ | — | |
| Mortgage-backed securities, residential | | | 295,718 | | | — | | | 295,718 | | | — | |
| State and municipal | | | 15,235 | | | — | | | 15,235 | | | — | |
| Corporate bonds | | | 31,602 | | | — | | | 31,602 | | | — | |
| Total securities available for sale | Recurring | | $ | 553,554 | | | $ | — | | | $ | 553,554 | | | $ | — | |
| Equity securities with readily determinable fair values | Recurring | | $ | 1,719 | | | $ | 1,719 | | | $ | — | | | $ | — | |
| Collateral dependent impaired loans | Non-recurring | | $ | 3,773 | | | $ | — | | | $ | — | | | $ | 3,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements at December 31, 2021 |
| In thousands | Basis | | Total | | Level 1 | | Level 2 | | Level 3 |
| U.S. Government and agencies | | | $ | 245,041 | | | $ | — | | | $ | 245,041 | | | $ | — | |
| Mortgage-backed securities, residential | | | 133,496 | | | — | | | 133,496 | | | — | |
| State and municipal | | | 44,611 | | | — | | | 44,611 | | | — | |
| Corporate bonds | | | 13,950 | | | — | | | 13,950 | | | — | |
| Total securities available for sale | Recurring | | $ | 437,098 | | | $ | — | | | $ | 437,098 | | | $ | — | |
| Equity securities with readily determinable fair values | Recurring | | $ | 2,609 | | | $ | 2,609 | | | $ | — | | | $ | — | |
| Collateral dependent impaired loans | Non-recurring | | $ | 5,275 | | | $ | — | | | $ | — | | | $ | 5,275 | |
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| Dollars in thousands | | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
| December 31, 2022 | | | | | | | | | | |
| Impaired loans | | $ | 3,773 | | | Appraisal of collateral(1) | | Appraisal adjustments(2) | | (10) – (50)% | | (48) | % |
| | | | | | | | | | |
| | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | |
| Impaired loans | | $ | 5,275 | | | Appraisal of collateral(1) | | Appraisal adjustments(2) | | (10) – (50)% | | (50) | % |
| | | | | | | | | | |
_______________________________
(1)Fair value is generally determined through management’s estimate or independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, and/or age of the appraisal.
The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| In thousands | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and due from banks | $ | 40,067 | | | $ | 40,067 | | | $ | 6,977 | | | $ | 33,090 | | | $ | — | |
| Interest-bearing deposits with banks | 128,094 | | | 128,094 | | | 128,094 | | | — | | | — | |
| Equity securities with readily determinable fair values | 1,719 | | | 1,719 | | | 1,719 | | | — | | | — | |
| Debt securities available for sale | 553,554 | | | 553,554 | | | — | | | 553,554 | | | — | |
| Securities held to maturity | 64,977 | | | 58,078 | | | — | | | 58,078 | | | — | |
| Loans held for sale | 123 | | | 123 | | | — | | | 123 | | | — | |
| Loans, less allowance for loan losses | 1,520,749 | | | 1,458,556 | | | — | | | — | | | 1,458,556 | |
| Accrued interest receivable | 6,915 | | | 6,915 | | | — | | | 6,915 | | | — | |
| Restricted investment in bank stocks | 1,629 | | | 1,629 | | | — | | | 1,629 | | | — | |
| | | | | | | | | |
| Financial liabilities: | | | | | | | | | |
| Demand deposits and savings | 1,905,845 | | | 1,905,845 | | | — | | | 1,905,845 | | | — | |
| Time deposits | 293,130 | | | 276,182 | | | — | | | 276,182 | | | — | |
| Short-term borrowings | 41,954 | | | 41,954 | | | — | | | 41,954 | | | — | |
| Long-term borrowings | — | | | — | | | — | | | — | | | — | |
| Trust preferred and subordinated debt | 21,000 | | | 18,648 | | | — | | | 18,648 | | | — | |
| Accrued interest payable | 51 | | | 51 | | | — | | | 51 | | | — | |
| | | | | | | | | |
| Off-balance sheet financial instruments | — | | | — | | | — | | | — | | | — | |
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| In thousands | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and due from banks | $ | 14,912 | | | $ | 14,912 | | | $ | 7,992 | | | $ | 6,920 | | | $ | — | |
| Interest-bearing deposits with banks | 695,219 | | | 695,219 | | | 695,219 | | | — | | | — | |
| Equity securities with readily determinable fair values | 2,609 | | | 2,609 | | | 2,609 | | | — | | | — | |
| Debt securities available for sale | 437,098 | | | 437,098 | | | — | | | 437,098 | | | — | |
| Securities held to maturity | 6,454 | | | 6,652 | | | — | | | 6,652 | | | — | |
| Loans held for sale | 2,193 | | | 2,193 | | | — | | | 2,193 | | | — | |
| Loans, less allowance for loan losses | 1,449,394 | | | 1,459,900 | | | — | | | — | | | 1,459,900 | |
| Accrued interest receivable | 5,520 | | | 5,520 | | | — | | | 5,520 | | | — | |
| Restricted investment in bank stocks | 2,303 | | | 2,303 | | | — | | | 2,303 | | | — | |
| | | | | | | | | |
| Financial liabilities: | | | | | | | | | |
| Demand deposits and savings | 1,996,337 | | | 1,996,337 | | | — | | | 1,996,337 | | | — | |
| Time deposits | 430,052 | | | 428,718 | | | — | | | 428,718 | | | — | |
| Short-term borrowings | 35,202 | | | 35,202 | | | — | | | 35,202 | | | — | |
| Long-term borrowings | 13,700 | | | 13,764 | | | — | | | 13,764 | | | — | |
| Trust preferred and subordinated debt | 21,000 | | | 19,991 | | | — | | | 19,991 | | | — | |
| Accrued interest payable | 109 | | | 109 | | | — | | | 109 | | | — | |
| | | | | | | | | |
| Off-balance sheet financial instruments | — | | | — | | | — | | | — | | | — | |
NOTE M — RETIREMENT PLANS
The Corporation’s banking subsidiary has a non-contributory, defined benefit pension plan. Retirement benefits are a function of both years of service and compensation. The funding policy is to contribute annually the amount that is sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act.
A measurement date of December 31 has been used for the fiscal years ended December 31, 2022 and 2021.
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Change in benefit obligation: | | | |
| Benefit obligation at beginning of year | $ | 39,123 | | | $ | 39,412 | |
| Service cost | 777 | | | 879 | |
| Interest cost | 1,052 | | | 945 | |
| Actuarial loss | (9,141) | | | (660) | |
| Benefits paid | (1,585) | | | (1,453) | |
| Projected benefit obligation at end of year | 30,226 | | | 39,123 | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | 50,218 | | | 45,337 | |
| Actual return on plan assets | (5,514) | | | 6,334 | |
| Employer contribution | — | | | — | |
| Benefits paid | (1,585) | | | (1,453) | |
| Fair value of plan assets at end of year | 43,119 | | | 50,218 | |
| Funded Status, included in other assets | $ | 12,893 | | | $ | 11,095 | |
| Amounts recognized in accumulated other comprehensive loss: | | | |
| Total net actuarial loss | $ | 6,887 | | | $ | 7,785 | |
| | | |
| Prior service cost | — | | | — | |
| Total included in accumulated other comprehensive loss (pretax) | $ | 6,887 | | | $ | 7,785 | |
For the years ended December 31, 2022 and 2021, the assumptions used to determine the benefit obligation are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Discount rate | 5.10 | % | | 2.75 | % |
| Rate of compensation increase | 3.50 | % | | 3.50 | % |
The discount rate assumption used to determine the benefit obligation increased since last year. This change results in a decrease in the benefit obligation.
The components of net periodic benefit (income) cost related to the non-contributory, defined benefit pension plan for the years ended December 31 are as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Components of net periodic benefit cost (income): | | | |
| Service cost | $ | 777 | | | $ | 879 | |
| Interest cost | 1,052 | | | 945 | |
| Expected return on plan assets | (3,136) | | | (2,814) | |
| Recognized net actuarial loss | 407 | | | 1,255 | |
| Amortization of prior service cost | — | | | — | |
| Net Periodic Benefit (Income) Cost | (900) | | | 265 | |
| Net loss | (491) | | | (4,181) | |
| Amortization of net loss | (407) | | | (1,255) | |
| Amortization of prior service cost | — | | | — | |
| Total recognized in other comprehensive loss (income) | $ | (898) | | | $ | (5,436) | |
| Total recognized in net periodic benefit cost (income) and other comprehensive (income) loss | $ | (1,798) | | | $ | (5,171) | |
For the years ended December 31, 2022 and 2021, the assumptions used to determine the net periodic benefit cost (income) are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Discount rate | 2.75 | % | | 2.45 | % |
| Expected long-term rate of return on plan assets | 6.75 | % | | 6.75 | % |
| Rate of compensation increase | 3.50 | % | | 3.50 | % |
The Corporation’s comparison of obligations to plan assets at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Projected benefit obligation | $ | 30,226 | | | $ | 39,123 | |
| Accumulated benefit obligation | 29,150 | | | 37,159 | |
| Fair value of plan assets at measurement date | 43,119 | | | 50,218 | |
It has not yet been determined the amount that the Bank may contribute to the Plan in 2023. ACNB does not anticipate any refunds from the postretirement Plan. The Corporation reduced the future benefit accruals for the defined benefit pension plan effective January 1, 2010, in order to manage total benefit expense. The new formula is the earned benefit as of December 31, 2009, plus 0.75% of a participant’s average monthly pay multiplied by years of benefit service earned on and after January 1, 2010, but not more than 25 years. The benefit formula percentage and maximum years of benefit service were both reduced. Effective April 1, 2012, no inactive or former participant in the Plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the Plan. As of the last annual census, ACNB Bank had a combined 343 active, vested terminated, and retired persons in the Plan.
For the year ended December 31, 2022 the mortality assumption has been updated to reflect the most recently published mortality information through October 20, 2022. The assumption changes decreased the benefit obligation by $9,714,000. For the year ended December 31, 2021 the mortality assumption has been updated to reflect the historical U.S. mortality date in the MP-2021 report. The assumption changes decreased the benefit obligation by $1,509,000.
Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are:
| | | | | |
| Years Ending | In thousands |
| 2023 | $ | 1,920 | |
| 2024 | 1,970 | |
| 2025 | 2,010 | |
| 2026 | 2,030 | |
| 2027 | 2,020 | |
| 2028 - 2032 | 10,440 | |
The Corporation’s pension plan weighted-average assets’ allocations at December 31, 2022 and 2021, are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Equity securities | 46 | % | | 65 | % |
| Debt securities | 49 | % | | 31 | % |
| | | |
| Real property | 5 | % | | 4 | % |
| 100 | % | | 100 | % |
The Corporation’s overall investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of assets types, fund strategies and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation’s risk tolerance on contribution levels, funded status and plan expense, and any applicable regulatory requirements. The weighted-average assets’ allocation in the above table represents the Corporation’s conclusion on the appropriate mix of investments. The specific investment vehicles are institutional separate accounts from a variety of fund managers which are regularly reviewed by the Corporation for acceptable performance.
Equity securities included Corporation common stock in amounts of $3,339,000, or 8% of total plan assets, and $2,543,000, or 5% of total plan assets, at December 31, 2022 and 2021, respectively.
Fair value measurements at December 31, 2022, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Total | | Level 1 | | Level 2 | | Level 3 |
| Equity securities | $ | 19,749 | | | $ | 3,339 | | | $ | 16,410 | | | $ | — | |
| Debt securities | 21,228 | | | — | | | 21,228 | | | — | |
| Real estate | 2,142 | | | — | | | 2,142 | | | — | |
Fair value measurements at December 31, 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | Total | | Level 1 | | Level 2 | | Level 3 |
| Equity securities | $ | 32,909 | | | $ | 2,543 | | | $ | 30,366 | | | $ | — | |
| Debt securities | 15,441 | | | — | | | 15,441 | | | — | |
| Real estate | 1,868 | | | — | | | 1,868 | | | — | |
The Corporation’s banking subsidiary maintains a 401(k) plan for the benefit of eligible employees. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Bank makes matching contributions equal to 100% of an employee’s compensation contributed to the plan up to 3% of an employee’s pay, plus 50% of an employee’s compensation contributed to the plan on the next 2% of their pay for the payroll period. Matching contributions vest immediately to the employee. Bank contributions to and expenses for the plan were $901,000 and $921,000 for 2022 and 2021, respectively.
ACNB Insurance Services, Inc. has a similar but separate 401(k) plan with the match of 6% for non-highly compensated employees and 3% match for highly compensated employees. ACNB Insurance Services, Inc.’s contributions to and expenses for the plan were $157,000 and $124,000 for 2022 and 2021, respectively.
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. The estimated present value of future benefits is accrued over the period from the effective date of the agreements until the expected retirement dates of the individuals. The balance accrued for these plans included in other liabilities as of December 31, 2022 and 2021, totaled $4,145,000 and $3,768,000, respectively. The annual expense included in salaries and benefits expense
totaled $628,000 and $505,000 during the years ended December 31, 2022 and 2021, respectively. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans.
NOTE N — STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS
In January 2011, the Corporation offered stockholders the opportunity to participate in the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan. The plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. During 2022, 20,908 shares were issued under this plan with proceeds in the amount of $713,000. During 2021, 23,884 shares were issued under this plan with proceeds in the amount of $670,000. Proceeds are used for general corporate purposes.
The ACNB Corporation 2009 Restricted Stock Plan expired by its own terms after ten years on February 24, 2019. No further shares may be issued under this plan. Of the 200,000 shares of common stock authorized under this plan, 25,945 shares were issued. The remaining 174,055 shares were transferred to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.
On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2022, there were 57,522 shares issued under this plan. The maximum number of shares that may yet be granted under this plan is 516,533.
On October 24, 2022, the Corporation announced that the Board of Directors approved on October 18, 2022, a plan to repurchase, in open market and privately negotiated transactions, up to 255,575, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new common stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were no treasury shares purchased under this plan during the quarter ended December 31, 2022.
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:
•a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;
•a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%;
•a minimum ratio of total capital to risk-weighted assets of 8.0%; and,
•a minimum leverage ratio of 4.0%.
In addition, the final rules established a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.
Management believes, as of December 31, 2022, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2022, the most recent notification from the federal banking regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no subsequent conditions or events that management believes have changed the Bank’s category.
The actual and required capital amounts and ratios were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | For Capital Adequacy
Purposes | | To be Well
Capitalized
under Prompt
Corrective Action
Provisions |
| Dollars in thousands | Amount | | Ratio | | Amount (1) | | Ratio (1) | | Amount | | Ratio |
| CORPORATION | | | | | | | | | | | |
| As of December 31, 2022 | | | | | | | | | | | |
| Tier 1 leverage ratio (to average assets) | $ | 258,468 | | | 9.91 | % | | $ ≥104,372 | | | ≥4.0% | | N/A | | N/A |
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 252,468 | | | 15.00 | | | ≥75,733 | | | ≥4.5 | | N/A | | N/A |
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 258,468 | | | 15.36 | | | ≥100,978 | | | ≥6.0 | | N/A | | N/A |
| Total risk-based capital ratio (to risk-weighted assets) | 291,421 | | | 17.32 | | | ≥134,637 | | | ≥8.0 | | N/A | | N/A |
| As of December 31, 2021 | | | | | | | | | | | |
| Tier 1 leverage ratio (to average assets) | $ | 249,574 | | | 8.91 | % | | $ ≥112,027 | | | ≥4.0% | | N/A | | N/A |
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 243,574 | | | 16.08 | | | ≥68,174 | | | ≥4.5 | | N/A | | N/A |
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 249,574 | | | 16.47 | | | ≥90,899 | | | ≥6.0 | | N/A | | N/A |
| Total risk-based capital ratio (to risk-weighted assets) | 283,511 | | | 18.71 | | | ≥121,199 | | | ≥8.0 | | N/A | | N/A |
| BANK | | | | | | | | | | | |
| As of December 31, 2022 | | | | | | | | | | | |
| Tier 1 leverage ratio (to average assets) | $ | 246,184 | | | 9.50 | % | | $ ≥103,690 | | | ≥4.0% | | $ ≥ | 129,612 | | | ≥5.0 | % |
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,184 | | | 14.68 | | | ≥75,441 | | | ≥4.5 | | ≥108,971 | | | ≥6.5 | |
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,184 | | | 14.68 | | | ≥100,588 | | | ≥6.0 | | ≥134,118 | | | ≥8.0 | |
| Total risk-based capital ratio (to risk-weighted assets) | 264,137 | | | 15.76 | | | ≥134,118 | | | ≥8.0 | | ≥167,647 | | | ≥10.0 | |
| As of December 31, 2021 | | | | | | | | | | | |
| Tier 1 leverage ratio (to average assets) | $ | 246,259 | | | 8.81 | % | | $ ≥111,766 | | | ≥4.0% | | $ ≥139,708 | | | ≥5.0 | % |
| Common Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,259 | | | 16.32 | | | ≥67,906 | | | ≥4.5 | | ≥98,086 | | | ≥6.5 | |
| Tier 1 risk-based capital ratio (to risk-weighted assets) | 246,259 | | | 16.32 | | | ≥90,541 | | | ≥6.0 | | ≥120,722 | | | ≥8.0 | |
| Total risk-based capital ratio (to risk-weighted assets) | 265,126 | | | 17.57 | | | ≥120,722 | | | ≥8.0 | | ≥150,902 | | | ≥10.0 | |
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(1) Amounts and ratios do not include capital conservation buffer.
NOTE O — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit (typically mortgages and commercial loans) and, to a lesser extent, standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Corporation does not anticipate any material losses from these commitments.
Commitments to extend credit, including commitments to grant loans and unfunded commitments under lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extensions of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties. On loans secured by real estate, the Corporation generally requires loan to value ratios of no greater than 80%.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and similar transactions. The terms of the letters of credit vary and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation generally holds collateral and/or personal guarantees supporting those commitments for which collateral is deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2022 and 2021, for guarantees under standby letters of credit issued is not material.
In 2018, ACNB Corporation executed a guaranty for a note related to a $1,500,000 commercial line of credit from a local bank, with normal terms and conditions for such a line, for ACNB Insurance Services, Inc., the borrower and a wholly-owned subsidiary of ACNB Corporation. The commercial line of credit is for general working capital needs as they arise by the borrower. A subsequent draw taken was reduced to $0 in 2020 on this commercial line of credit since its inception. The liability is recorded for the net drawn amount of this line, no further liability is recorded for the remaining line as to the guarantor’s obligation as the guarantor would have full recourse from all assets of its wholly-owned subsidiary.
The Corporation maintains a $5,000,000 unsecured line of credit with a correspondent bank. The line of credit remains at full capacity at year-end.
The Corporation has not been required to perform on any financial guarantees, and has not incurred any losses on its commitments, during the past three years.
A summary of the Corporation’s commitments at December 31 were as follows:
| | | | | | | | | | | |
| In thousands | 2022 | | 2021 |
| Commitments to extend credit | $ | 401,786 | | | $ | 365,320 | |
| Standby letters of credit | 11,429 | | | 9,014 | |
NOTE P — CONTINGENCIES
The Corporation is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Corporation in connection with any such claims and lawsuits, it is the opinion of management that the disposition or ultimate determination of any such claims and lawsuits will not have a material adverse effect on the consolidated financial position, consolidated results of operations or liquidity of the Corporation.
NOTE Q — ACNB CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF CONDITION
| | | | | | | | | | | |
| | December 31, |
| In thousands | 2022 | | 2021 |
| ASSETS | | | |
| Cash | $ | 18,263 | | | $ | 13,451 | |
| Investment in banking subsidiary | 225,806 | | | 266,983 | |
| Investment in other subsidiaries | 18,757 | | | 11,807 | |
| | | |
| Securities and other assets | 1,797 | | | 2,549 | |
| Receivable from banking subsidiary | 1,508 | | | 1,197 | |
| Total Assets | $ | 266,131 | | | $ | 295,987 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Long-term debt | $ | 21,000 | | | $ | 23,700 | |
| Other liabilities | 89 | | | 173 | |
| Stockholders’ equity | 245,042 | | | 272,114 | |
| Total Liabilities and Stockholders’ Equity | $ | 266,131 | | | $ | 295,987 | |
STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
| | | | | | | | | | | |
| | Years Ended December 31, |
| In thousands | 2022 | | 2021 |
| Dividends from banking subsidiary | $ | 9,117 | | | $ | 8,968 | |
| Gain on sale of securities | 13 | | | — | |
| Other income | 519 | | | 554 | |
| 9,649 | | | 9,522 | |
| | | |
| Expenses | 1,653 | | | 1,649 | |
| 7,996 | | | 7,873 | |
| Income tax benefit | 516 | | | 511 | |
| 8,512 | | | 8,384 | |
| Equity in undistributed earnings of subsidiaries | 27,240 | | | 19,450 | |
| Net Income | $ | 35,752 | | | $ | 27,834 | |
| Comprehensive (Loss) Income | $ | (12,715) | | | $ | 23,927 | |
STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| | Years Ended December 31, |
| In thousands | 2022 | | 2021 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 35,752 | | | $ | 27,834 | |
| Equity in undistributed earnings of subsidiaries | (27,240) | | | (19,450) | |
| (Increase) Decrease in receivable from banking subsidiary | (311) | | | 54 | |
| Gain on sale of securities | (13) | | | — | |
| Gain (Loss) on equity securities | 177 | | | (468) | |
| | | |
| Gain on sale of low-income housing partnership | (421) | | | — | |
| Other | (308) | | | 555 | |
| Net Cash Provided by Operating Activities | 7,636 | | | 8,525 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Return on investment from subsidiary | 13,000 | | | — | |
| Proceeds from sale of low-income housing partnership | 421 | | | — | |
| Proceeds from sale of equity securities | 811 | | | — | |
| | | |
| | | |
| Net Cash Used in Investing Activities | 14,232 | | | — | |
| CASH FLOWS USED IN FINANCING ACTIVITIES | | | |
| Proceeds from long-term debt | — | | | 15,000 | |
| Repayments on long-term debt | (2,700) | | | (6,329) | |
| Payment to repurchase common stock | (6,681) | | | (1,517) | |
| Proceeds from issuance of common stock | 1,442 | | | 343 | |
| Dividends paid | (9,117) | | | (8,968) | |
| Net Cash Used in Financing Activities | (17,056) | | | (1,471) | |
| Net Increase (Decrease) in Cash and Cash Equivalents | 4,812 | | | 7,054 | |
| CASH AND CASH EQUIVALENTS — BEGINNING | 13,451 | | | 6,397 | |
| CASH AND CASH EQUIVALENTS — ENDING | $ | 18,263 | | | $ | 13,451 | |
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NOTE R — GOODWILL AND OTHER INTANGIBLES
On January 5, 2005, ACNB Corporation completed its acquisition of Russell Insurance Group, Inc. (now ACNB Insurance Services, Inc.) of Westminster, Maryland. The acquisition of ACNB Insurance Services, Inc. resulted in goodwill of approximately $6,308,000.
On July 1, 2017, ACNB Corporation completed its acquisition of New Windsor Bancorp Inc. (New Windsor) of Taneytown, Maryland. The acquisition of New Windsor resulted in goodwill of approximately $13,272,000 and generated $2,418,000 in core deposit intangibles.
On January 11, 2020, ACNB Corporation completed its acquisition of Frederick County Bancorp, Inc. (FCBI) of Frederick, Maryland. The acquisition of FCBI resulted in good will of approximately $22,528,000 and generated $3,560,000 in core deposit intangibles.
On February 28, 2022, ACNB Insurance Services, Inc. completed its acquisition of Hockley & O’Donnell Insurance Agency, LLC of Gettysburg, Pennsylvania. The purchase price was $7,800,000 and was funded with all cash and no additional contingent payments were required. The acquisition of Hockley & O’Donnell resulted in goodwill of approximately $2,077,000 and generated $5,723,000 in customer list and covenant not to compete intangibles. During the third quarter of 2022, goodwill was decreased and the customer list was increased by $587,000 due to finalizing the calculation.
The fair value of customer list intangibles was based upon an income approach which included estimated financial projections developed by the Corporation and included other fair value assumptions for attrition, present value discount rates using market participant assumptions. The fair value of the covenant not to compete intangible was based upon an income
approach which compared the present value impact of various non-compete scenarios and other fair value assumptions including present value discount rates using market participant assumptions.
Combined goodwill included in the Corporation’s consolidated statement of condition is $44,185,000. Goodwill, which has an indefinite useful life, is evaluated for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Corporation did not identify any goodwill impairment on ACNB Insurance Services, Inc. or the Bank’s outstanding goodwill from its most recent testing. There are no impairment losses associated with goodwill as of December 31, 2022 and 2021. Additionally, there are no accumulated impairment losses associated with goodwill as of December 31, 2022 and 2021.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, customer list intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer lists are amortized over their estimated useful lives which range from eight to fifteen years.
The carrying value and accumulated amortization of the intangible assets and core deposit intangibles are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Dollars in thousands | | Gross
Carrying
Amount | | Accumulated Amortization | | Gross
Carrying
Amount | | Accumulated Amortization |
| ACNB Insurance Services, Inc. amortized intangible assets | | $ | 16,151 | | | $ | 8,177 | | | $ | 10,428 | | | $ | 7,448 | |
| New Windsor core deposit intangibles | | 2,418 | | | 1,872 | | | 2,418 | | | 1,627 | |
| FCBI core deposit intangibles | | 3,560 | | | 1,748 | | | 3,560 | | | 1,230 | |
| | $ | 22,129 | | | $ | 11,797 | | | $ | 16,406 | | | $ | 10,305 | |
Amortization expense was $1,492,000 and $1,164,000 for the years ended December 31, 2022 and 2021, respectively.
Amortization of the intangible assets for the five years subsequent to December 31, 2022, is expected to be as follows:
| | | | | |
| Years Ending | In thousands |
| 2023 | $ | 1,419 | |
| 2024 | 1,233 | |
| 2025 | 1,104 | |
| 2026 | 991 | |
| 2027 | 846 | |
| Thereafter | 4,739 | |
| $ | 10,332 | |
NOTE S — SEGMENT AND RELATED INFORMATION
The Corporation has two reporting segments, the Bank and ACNB Insurance Services, Inc. ACNB Insurance Services, Inc. is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. ACNB Insurance Services, Inc. offers a broad range of property and casualty, life and health insurance to both commercial and individual clients.
Segment information for 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | |
| In thousands | Banking | | Insurance | | Total |
| 2022 | | | | | |
| Interest income and other income from external customers | $ | 101,240 | | | $ | 7,616 | | | $ | 108,856 | |
| Interest expense | 3,591 | | | 33 | | | 3,624 | |
| Depreciation and amortization expense | 2,995 | | | 801 | | | 3,796 | |
| Income before income taxes | 43,639 | | | 1,312 | | | 44,951 | |
| Total assets | 2,505,353 | | | 20,154 | | | 2,525,507 | |
| Capital expenditures | 1,783 | | | 28 | | | 1,811 | |
| 2021 | | | | | |
| Interest income and other income from external customers | $ | 95,007 | | | $ | 5,928 | | | $ | 100,935 | |
| Interest expense | 6,915 | | | — | | | 6,915 | |
| Depreciation and amortization expense | 3,069 | | | 372 | | | 3,441 | |
| Income before income taxes | 34,099 | | | 920 | | | 35,019 | |
| Total assets | 2,774,449 | | | 12,538 | | | 2,786,987 | |
| Capital expenditures | 1,561 | | | 15 | | | 1,576 | |
NOTE T — REVENUE RECOGNITION
As of January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the cumulative effect approach. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Additional disclosures related to the Corporation’s largest sources of non-interest income within the consolidated statements of income that are subject to ASC 606 are as follows:
Income from fiduciary, investment management and brokerage activities - ACNB Bank’s Trust & Investment Services, under the umbrella of ACNB Wealth Management, provides a wide range of financial services, including trust services for individuals, businesses and retirement funds. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, power of attorney, custodial accounts and investment management and advisor accounts. In addition, ACNB’s Wealth Management Department offers retail brokerage-services through a third party provider. Wealth Management clients are located primarily within the Corporation’s geographic markets. Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statement since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $518,800,000 and $537,800,000 at December 31, 2022 and 2021, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
The majority of trust services revenue is earned and collected monthly, with the amount determined based on the investment funds in each trust multiplied by a fee schedule for type of trust. Each trust has one integrated set of performance obligations so no allocation is required. The performance obligation is met by performing the identified fiduciary service. Successful performance is confirmed by ongoing internal and regulatory control, measurement is by valuing the trust assets at a monthly date to which a fee schedule is applied. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The costs of acquiring trust customers are incremental and recognized within non-interest expense in the consolidated statements of income.
Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within non-interest expense in the consolidated statements of income.
Service charges on ATM and debit card transactions - The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within non-interest expense in the consolidated statements of income.
Other Fees and Other Income - Other fees and other income consists of safe deposit rents, money order fees, check cashing and cashiers’ check fees, wire transfer fees, letter of credit fees, check order income, and other miscellaneous fees. These fees are largely transaction-based; therefore, the Corporation’s performance obligation is satisfied and the resultant revenue is recognized at the point in time the service is rendered. Payments for transaction-based fees are generally received immediately or in the following month by a direct charge to a customer’s account.
Commissions from insurance sales - Commission income is earned based on customers transactions. The commission income is recognized when the transaction is complete. The Corporation also receives a return on its investment in ACNB Insurance Services based on the income of the insurance company.