10-Q 1 a19-7711_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

Commission file number 1-35015

 

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)

 

Pennsylvania

 

23-2233457

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

16 Lincoln Square, Gettysburg, Pennsylvania

 

17325

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (717) 334-3161

 

Title of each class

 

Symbol

 

Name of each exchange on which registered

Common Stock, $2.50 par value per share

 

ACNB

 

The NASDAQ Stock Market, LLC

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

 

 

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares of the Registrant’s Common Stock outstanding on May 3, 2019, was 7,049,682.

 

 

 


 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands, except per share data

 

March 31,
2019

 

March 31,
2018

 

December 31,
2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,068

 

$

16,467

 

$

20,105

 

Interest bearing deposits with banks

 

43,285

 

43,730

 

20,800

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

61,353

 

60,197

 

40,905

 

 

 

 

 

 

 

 

 

Equity securities with readily determinable fair values

 

1,872

 

1,760

 

1,839

 

Debt securities available for sale

 

160,949

 

155,620

 

161,730

 

Securities held to maturity, fair value $25,871; $40,758; $26,911

 

26,073

 

41,378

 

27,266

 

Loans held for sale

 

300

 

474

 

408

 

Loans, net of allowance for loan losses $14,020; $13,417; $13,964

 

1,287,315

 

1,224,337

 

1,288,501

 

Premises and equipment

 

26,046

 

26,609

 

26,409

 

Right of use asset

 

3,804

 

 

 

Restricted investment in bank stocks

 

4,382

 

4,802

 

4,336

 

Investment in bank-owned life insurance

 

49,768

 

45,692

 

48,003

 

Investments in low-income housing partnerships

 

1,780

 

2,330

 

1,871

 

Goodwill

 

19,580

 

19,580

 

19,580

 

Intangible assets

 

4,303

 

2,985

 

4,407

 

Foreclosed assets held for resale

 

48

 

630

 

155

 

Other assets

 

23,586

 

24,621

 

22,314

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,671,159

 

$

1,611,015

 

$

1,647,724

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

320,351

 

$

290,333

 

$

302,394

 

Interest bearing

 

1,046,707

 

1,023,081

 

1,045,698

 

 

 

 

 

 

 

 

 

Total Deposits

 

1,367,058

 

1,313,414

 

1,348,092

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

29,759

 

33,435

 

34,648

 

Long-term borrowings

 

82,407

 

95,316

 

83,516

 

Lease liability

 

3,804

 

 

 

Other liabilities

 

14,338

 

12,245

 

13,331

 

 

 

 

 

 

 

 

 

Total Liabilities

 

1,497,366

 

1,454,410

 

1,479,587

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Preferred stock, $2.50 par value; 20,000,000 shares authorized; no shares outstanding

 

 

 

 

Common stock, $2.50 par value; 20,000,000 shares authorized; 7,112,282, 7,097,140 and 7,108,620 shares issued; 7,049,682, 7,034,540 and 7,046,020 shares outstanding

 

17,781

 

17,743

 

17,772

 

Treasury stock, at cost (62,600 shares)

 

(728

)

(728

)

(728

)

Additional paid-in capital

 

38,578

 

38,070

 

38,448

 

Retained earnings

 

126,105

 

109,801

 

121,862

 

Accumulated other comprehensive loss

 

(7,943

)

(8,281

)

(9,217

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

173,793

 

156,605

 

168,137

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,671,159

 

$

1,611,015

 

$

1,647,724

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2


 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended March 31,

 

Dollars in thousands, except per share data

 

2019

 

2018

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

Loans, including fees

 

$

15,668

 

$

14,157

 

Securities:

 

 

 

 

 

Taxable

 

971

 

903

 

Tax-exempt

 

44

 

65

 

Dividends

 

94

 

78

 

Other

 

108

 

52

 

 

 

 

 

 

 

Total Interest Income

 

16,885

 

15,255

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

1,685

 

1,134

 

Short-term borrowings

 

31

 

16

 

Long-term borrowings

 

504

 

543

 

 

 

 

 

 

 

Total Interest Expense

 

2,220

 

1,693

 

 

 

 

 

 

 

Net Interest Income

 

14,665

 

13,562

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

150

 

250

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

14,515

 

13,312

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

Service charges on deposit accounts

 

938

 

816

 

Income from fiduciary, investment management and brokerage activities

 

592

 

571

 

Earnings on investment in bank-owned life insurance

 

264

 

257

 

Gain on life insurance proceeds

 

 

52

 

Net gains (losses) on equity securities

 

33

 

(33

)

Service charges on ATM and debit card transactions

 

538

 

530

 

Commissions from insurance sales

 

1,320

 

1,201

 

Other

 

255

 

318

 

 

 

 

 

 

 

Total Other Income

 

3,940

 

3,712

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

Salaries and employee benefits

 

6,965

 

6,627

 

Net occupancy

 

863

 

779

 

Equipment

 

1,103

 

1,162

 

Other tax

 

262

 

206

 

Professional services

 

200

 

369

 

Supplies and postage

 

206

 

215

 

Marketing and corporate relations

 

139

 

103

 

FDIC and regulatory

 

169

 

184

 

Intangible assets amortization

 

155

 

184

 

Foreclosed real estate (income) expenses

 

(53

)

48

 

Other operating

 

1,252

 

1,109

 

 

 

 

 

 

 

Total Other Expenses

 

11,261

 

10,986

 

 

 

 

 

 

 

Income before Income Taxes

 

7,194

 

6,038

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

1,330

 

1,125

 

 

 

 

 

 

 

Net Income

 

$

5,864

 

$

4,913

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

Basic earnings

 

$

0.83

 

$

0.70

 

Cash dividends declared

 

$

0.23

 

$

0.20

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended March 31,

 

Dollars in thousands

 

2019

 

2018

 

NET INCOME

 

$

5,864

 

$

4,913

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

SECURITIES

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period, net of income taxes of $323 and $(375), respectively

 

1,110

 

(1,289

)

 

 

 

 

 

 

Reclassification adjustment for net gains included in net income, net of income taxes of $0 and $0, respectively (A) (C)

 

 

 

 

 

 

 

 

 

PENSION

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $48 and $29, respectively (B) (C)

 

164

 

100

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

 

1,274

 

(1,189

)

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

7,138

 

$

3,724

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 


(A) Gross amounts are included in net gains on sales or calls of securities on the Consolidated Statements of Income in total other income.

 

(B) Gross amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of Income in total other expenses.

 

(C) Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.

 

4


 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2019 and 2018

 

Dollars in thousands

 

Common
Stock

 

Treasury
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Stockholders’
Equity

 

BALANCE — JANUARY 1, 2018

 

$

17,716

 

$

(728

)

$

37,777

 

$

106,293

 

$

(7,092

)

$

153,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

4,913

 

 

4,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(1,189

)

(1,189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (4,138 shares)

 

10

 

 

111

 

 

 

121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock grants (6,744 shares)

 

17

 

 

(4

)

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation expense

 

 

 

186

 

 

 

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(1,405

)

 

(1,405

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — MARCH 31, 2018

 

$

17,743

 

$

(728

)

$

38,070

 

$

109,801

 

$

(8,281

)

$

156,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2019

 

$

17,772

 

$

(728

)

$

38,448

 

$

121,862

 

$

(9,217

)

$

168,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,864

 

 

5,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of taxes

 

 

 

 

 

1,274

 

1,274

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock shares issued (3,662 shares)

 

9

 

 

4

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation expense

 

 

 

126

 

 

 

126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(1,621

)

 

(1,621

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — MARCH 31, 2019

 

$

17,781

 

$

(728

)

$

38,578

 

$

126,105

 

$

(7,943

)

$

173,793

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5


 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended March 31,

 

Dollars in thousands

 

2019

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

5,864

 

$

4,913

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on sales of loans originated for sale

 

(73

)

(138

)

Gain on sales of foreclosed assets held for resale, including writedowns

 

(66

)

(9

)

Earnings on investment in bank-owned life insurance

 

(264

)

(257

)

(Gain) loss on equity securities

 

(33

)

33

 

Restricted stock compensation expense

 

126

 

186

 

Depreciation and amortization

 

678

 

706

 

Provision for loan losses

 

150

 

250

 

Net amortization of investment securities premiums

 

93

 

120

 

Increase in accrued interest receivable

 

(502

)

(588

)

Increase in accrued interest payable

 

250

 

175

 

Mortgage loans originated for sale

 

(3,704

)

(6,186

)

Proceeds from sales of loans originated for sale

 

3,885

 

7,586

 

Increase in other assets

 

(660

)

(98

)

Decrease in deferred tax expense

 

110

 

195

 

Increase in other liabilities

 

968

 

733

 

Net Cash Provided by Operating Activities

 

6,822

 

7,621

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

1,193

 

3,449

 

Proceeds from maturities of investment securities available for sale

 

2,121

 

3,842

 

Purchase of investment securities available for sale

 

 

(3,986

)

Purchase of equity securities

 

(500

)

 

Purchase of restricted investment in bank stocks

 

(46

)

(29

)

Net decrease in loans

 

988

 

5,372

 

Purchase of bank-owned life insurance

 

(1,500

)

(500

)

Insurance book- acquisition

 

(50

)

(600

)

Capital expenditures

 

(161

)

(357

)

Proceeds from sales of foreclosed real estate

 

221

 

50

 

Net Cash Provided by Investing Activities

 

2,266

 

7,241

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

17,957

 

10,920

 

Net increase in time certificates of deposits and interest bearing deposits

 

1,009

 

4,002

 

Net decrease in short-term borrowings

 

(4,889

)

(3,473

)

Proceeds from long-term borrowings

 

7,000

 

8,716

 

Repayments on long-term borrowings

 

(8,109

)

(8,000

)

Dividends paid

 

(1,621

)

(1,405

)

Common stock issued

 

13

 

134

 

Net Cash Provided by Financing Activities

 

11,360

 

10,894

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

20,448

 

25,756

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

40,905

 

34,441

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

$

61,353

 

$

60,197

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Interest paid

 

$

1,970

 

$

1,518

 

Income taxes paid

 

$

 

$

500

 

Loans transferred to foreclosed assets held for resale and other foreclosed transactions

 

$

48

 

$

235

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


 

ACNB CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Basis of Presentation and Nature of Operations

 

ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and Russell Insurance Group, Inc. (RIG). The Bank engages in full-service commercial and consumer banking and wealth management services, including trust and retail brokerage, through its twenty-two community banking office locations in Adams, Cumberland, Franklin and York Counties, Pennsylvania. There are also loan production offices situated in York County, Pennsylvania and Hunt Valley, 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 Maryland market as “NWSB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via a network of seven community banking offices located in Carroll County, Maryland.

 

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

 

The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position and the results of operations, comprehensive income, changes in stockholders’ equity, and cash flows. All such adjustments are of a normal recurring nature.

 

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2018 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 8, 2019. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three month period ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year.

 

The Corporation early adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment. The ASU eliminates Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. If fair value exceeds the carrying amount, no impairment should be recorded. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Impairment losses on goodwill cannot be reversed once recognized. An entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that goodwill is impaired. However, the ASU eliminates the requirement to perform a qualitative assessment for any reporting unit with a zero or negative carrying amount. Therefore, the same one-step impairment assessment will apply to all reporting units. However, for a reporting unit with a zero or negative carrying amount, the ASU adds a requirement to disclose the amount of goodwill allocated to it and the reportable segment in which it is included. The amendments in this ASU would be effective with their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.

 

7


 

On January 1, 2019, the Corporation adopted ASU 2016-02, Leases, and all subsequent amendments to the ASU (collectively “Topic 842”). From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. Under the optional transition method, only the most recent period presented will reflect the adoption of Topic 842 and the comparative prior periods will be reported under the previous guidance in Topic 840. The Corporation recorded a $4 million right-of-use asset and lease liability, which represents all of its operating lease commitments, based on the present value of committed lease payments. The ASU offers lessors a practical expedient that mirrors the practical expedient already provided to lessees in ASU 2016-02, Leases (Topic 842). The Corporation adopted the new practical expedient which will allow the Corporation to elect, by class of underlying asset, to not separate nonlease components from the associated lease component when specified conditions are met. Examples of nonlease components include equipment maintenance services, common area maintenance services in real estate, or other goods or services provided to the lessee apart from the right to use the underlying asset. The practical expedient must be applied consistently for all lease contracts. The effect on operations and capital adequacy was not material.

 

On January 1, 2019, the Corporation adopted ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e., yield-to-earliest call amortization), rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount. The amendments apply to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based upon prepayments of the underlying loans, not because the issuer exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendments. Further, the amendments apply to all premiums on callable debt securities, regardless of how they were generated. The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date. The adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.

 

The Corporation adopted ASU 2018-09, Codification Improvements. The ASU contains various improvements to various topics in the codification, including clarification that an entity must disclose the required and actual amounts of regulatory capital for each measure of regulatory capital for which the entity must comply. The adoption of this ASU did not impact the Corporation’s consolidated financial condition or results of operations since the Corporation already discloses capital requirements within the Management’s Discussion and Analysis section of this Form 10-Q.

 

The Corporation early adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes, modifies and adds to existing fair value measurement disclosure requirements. The ASU would be effective for all entities in fiscal years beginning after December 15, 2019, including interim periods, which is first effective for calendar year entities in the March 31, 2020, interim financial statements. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.

 

2.              Earnings Per Share and Restricted Stock

 

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 7,046,671 and 7,025,593 weighted average shares of common stock outstanding for the three months ended March 31, 2019 and 2018, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation.

 

The ACNB Corporation 2009 Restricted Stock Plan expired by its own terms after 10 years on February 24, 2019. The purpose of this plan was to provide employees and directors of the Bank who have responsibility for its growth with additional incentives by allowing them to acquire ownership in the Corporation and, thereby, encouraging them to contribute to the organization’s success. As of March 31, 2019, 25,945 shares were issued under this plan, of which 19,485 were fully vested, 4,240 shares vested during the quarter, and the remaining 2,220 will vest over the next year. No further shares may be issued under this restricted stock plan. Plan expense is recognized over the vesting period of the stock issued under the plan. $126,000 and $186,000 of compensation expenses related to the grants were recognized during the three months ended March 31, 2019 and 2018, respectively. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.

 

8


 

On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the 2009 Restricted Stock Plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2018 Omnibus Stock Incentive Plan was filed with the Securities and Exchange Commission on March 8, 2019. In addition, on March 8, 2019, the Corporation filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 for the 2009 Restricted Stock Plan to add the 2018 Omnibus Stock Incentive Plan to the registration statement.

 

3.              Retirement Benefits

 

The components of net periodic benefit expense related to the non-contributory, defined benefit pension plan for the three month periods ended March 31 were as follows:

 

 

 

Three Months Ended March 31,

 

In thousands

 

2019

 

2018

 

Service cost

 

$

174

 

$

215

 

Interest cost

 

303

 

274

 

Expected return on plan assets

 

(637

)

(692

)

Amortization of net loss

 

212

 

128

 

 

 

 

 

 

 

Net Periodic Benefit Expense

 

$

52

 

$

(75

)

 

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2018, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2019. As of March 31, 2019, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 353 active, vested, terminated and retired persons in the plan.

 

4.              Guarantees

 

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $3,757,000 in standby letters of credit as of March 31, 2019. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of March 31, 2019, for guarantees under standby letters of credit issued is not material.

 

9


 

5.              Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive loss, net of taxes, are as follows:

 

In thousands

 

Unrealized
Losses on
Securities

 

Pension
Liability

 

Accumulated Other
Comprehensive
Loss

 

BALANCE — MARCH 31, 2019

 

$

(541

)

$

(7,402

)

$

(7,943

)

BALANCE DECEMBER 31, 2018

 

$

(1,651

)

$

(7,566

)

$

(9,217

)

BALANCE — MARCH 31, 2018

 

$

(2,246

)

$

(6,035

)

$

(8,281

)

 

6.              Segment Reporting

 

The Corporation has two reporting segments, the Bank and RIG. RIG is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. RIG offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients.

 

Segment information for the three month periods ended March 31, 2019 and 2018, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Total

 

2019

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

17,286

 

$

1,319

 

$

18,605

 

Income before income taxes

 

6,945

 

249

 

7,194

 

Total assets

 

1,658,919

 

12,240

 

1,671,159

 

Capital expenditures

 

161

 

 

161

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

16,074

 

$

1,200

 

$

17,274

 

Income before income taxes

 

5,818

 

220

 

6,038

 

Total assets

 

1,601,028

 

9,987

 

1,611,015

 

Capital expenditures

 

357

 

 

357

 

 

Customer renewal lists are amortized over their estimated useful lives which range from eight to fifteen years. Core deposit intangible assets are primarily amortized over 10 years using accelerated methods. Goodwill is not amortized, but rather is analyzed annually for impairment. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Tax amortization of goodwill and the intangible assets is deductible for tax purposes. Tax amortization of the goodwill associated with the New Windsor acquisition is not deductible for federal income tax purposes.

 

7.              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). As of January 1, 2018, equity securities with readily determinable fair values are recorded at fair value with changes in fair value recognized in net income. Prior to 2018, fair value changes were reported, net of tax, in other comprehensive income (loss).

 

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.

 

10


 

Amortized cost and fair value of securities at March 31, 2019, and December 31, 2018, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

119,831

 

$

358

 

$

1,402

 

$

118,787

 

Mortgage-backed securities, residential

 

32,347

 

390

 

105

 

32,632

 

State and municipal

 

9,470

 

72

 

12

 

9,530

 

 

 

$

161,648

 

$

820

 

$

1,519

 

$

160,949

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

120,420

 

$

142

 

$

2,149

 

$

118,413

 

Mortgage-backed securities, residential

 

33,960

 

194

 

343

 

33,811

 

State and municipal

 

9,482

 

60

 

36

 

9,506

 

 

 

$

163,862

 

$

396

 

$

2,528

 

$

161,730

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

7,000

 

$

 

$

41

 

$

6,959

 

Mortgage-backed securities, residential

 

19,073

 

10

 

171

 

18,912

 

 

 

$

26,073

 

$

10

 

$

212

 

$

25,871

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

7,000

 

$

 

$

69

 

$

6,931

 

Mortgage-backed securities, residential

 

20,266

 

4

 

290

 

19,980

 

 

 

$

27,266

 

$

4

 

$

359

 

$

26,911

 

 

The Corporation adopted ASU 2016-01, Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effective January 1, 2018. The required fair value disclosures are as follows:

 

In thousands

 

Fair Value at
January 1, 2019

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value at
March 31, 2019

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

CRA Mutual Fund

 

$

1,012

 

$

16

 

$

 

$

1,028

 

Stock in other banks

 

827

 

37

 

20

 

844

 

 

 

$

1,839

 

$

53

 

$

20

 

$

1,872

 

 

11


 

In thousands

 

Fair Value at
January 1, 2018

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value at
March 31, 2018

 

MARCH 31, 2018

 

 

 

 

 

 

 

 

 

CRA Mutual Fund

 

$

1,044

 

$

 

$

25

 

$

1,019

 

Stock in other banks

 

749

 

7

 

15

 

741

 

 

 

$

1,793

 

$

7

 

$

40

 

$

1,760

 

 

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2019, and December 31, 2018:

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 

$

 

$

86,876

 

$

1,402

 

$

86,876

 

$

1,402

 

Mortgage-backed securities, residential

 

9

 

1

 

13,364

 

104

 

13,373

 

105

 

State and municipal

 

 

 

2,062

 

12

 

2,062

 

12

 

 

 

$

9

 

$

1

 

$

102,302

 

$

1,518

 

$

102,311

 

$

1,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

1,997

 

$

5

 

$

87,216

 

$

2,144

 

$

89,213

 

$

2,149

 

Mortgage-backed securities, residential

 

9,410

 

134

 

8,586

 

209

 

17,996

 

343

 

State and municipal

 

 

 

2,696

 

36

 

2,696

 

36

 

 

 

$

11,407

 

$

139

 

$

98,498

 

$

2,389

 

$

109,905

 

$

2,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 

$

 

$

6,959

 

$

41

 

$

6,959

 

$

41

 

Mortgage-backed securities, residential

 

1,324

 

6

 

13,915

 

165

 

15,239

 

171

 

 

 

$

1,324

 

$

6

 

$

20,874

 

$

206

 

$

22,198

 

$

212

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

2,975

 

$

25

 

$

3,956

 

$

44

 

$

6,931

 

$

69

 

Mortgage-backed securities, residential

 

5,408

 

59

 

12,636

 

231

 

18,044

 

290

 

 

 

$

8,383

 

$

84

 

$

16,592

 

$

275

 

$

24,975

 

$

359

 

 

All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.

 

At March 31, 2019, forty-eight available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 4% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

12


 

At March 31, 2019, twenty-two available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 15% of amortized cost. Twenty of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At March 31, 2019, seven available for sale state and municipal securities had unrealized losses that individually did not exceed 2% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At March 31, 2019, five held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 1% of amortized cost. All of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

At March 31, 2019, twenty-seven held to maturity residential mortgage-backed securities had unrealized losses that individually did not exceed 2% of amortized cost. Twenty-four of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

 

In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.

 

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing.

 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At March 31, 2019, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

 

Amortized cost and fair value at March 31, 2019, 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

 

$

8,772

 

$

8,747

 

$

3,000

 

$

2,983

 

Over 1 year through 5 years

 

120,330

 

119,369

 

4,000

 

3,976

 

Over 5 years through 10 years

 

199

 

201

 

 

 

Over 10 years

 

 

 

 

 

Mortgage-backed securities, residential

 

32,347

 

32,632

 

19,073

 

18,912

 

 

 

$

161,648

 

$

160,949

 

$

26,073

 

$

25,871

 

 

The Corporation did not sell any securities available for sale during the first quarters of 2019 or 2018.

 

13


 

At March 31, 2019, and December 31, 2018, securities with a carrying value of $164,002,000 and $165,792,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

8.              Loans

 

The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.

 

The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Allowance for Credit Losses

 

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (the “allowance”) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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

 

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

 

14


 

                   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;

 

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

 

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

 

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

 

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

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.

 

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.

 

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

 

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

 

The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. The Corporation orders valuations at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.

 

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

 

15


 

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.

 

16


 

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 a continued weak housing market.

 

Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.

 

Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

 

Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as a continued weak housing market.

 

17


 

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market continues to be weak and property values deteriorate.

 

Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

 

Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

 

Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

Acquired Loans

 

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

 

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

 

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

 

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Corporation used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, environment factors to estimate the expected cash flow for each loan pool. With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows resulted in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan’s acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

 

18


 

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

 

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

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of March 31, 2019, and December 31, 2018:

 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Originated Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

166,974

 

$

2,864

 

$

854

 

$

 

$

170,692

 

Commercial real estate

 

386,932

 

21,102

 

8,737

 

 

416,771

 

Commercial real estate construction

 

25,421

 

819

 

 

 

26,240

 

Residential mortgage

 

375,627

 

6,778

 

295

 

 

382,700

 

Home equity lines of credit

 

91,775

 

341

 

 

 

92,116

 

Consumer

 

14,092

 

 

 

 

14,092

 

Total Originated Loans

 

1,060,821

 

31,904

 

9,886

 

 

1,102,611

 

Acquired Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

4,295

 

192

 

130

 

 

4,617

 

Commercial real estate

 

119,053

 

5,256

 

3,193

 

 

127,502

 

Commercial real estate construction

 

2,778

 

708

 

 

 

3,486

 

Residential mortgage

 

38,581

 

2,026

 

3,119

 

 

43,726

 

Home equity lines of credit

 

18,713

 

88

 

416

 

 

19,217

 

Consumer

 

176

 

 

 

 

176

 

Total Acquired Loans

 

183,596

 

8,270

 

6,858

 

 

198,724

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

171,269

 

3,056

 

984

 

 

175,309

 

Commercial real estate

 

505,985

 

26,358

 

11,930

 

 

544,273

 

Commercial real estate construction

 

28,199

 

1,527

 

 

 

29,726

 

Residential mortgage

 

414,208

 

8,804

 

3,414

 

 

426,426

 

Home equity lines of credit

 

110,488

 

429

 

416

 

 

111,333

 

Consumer

 

14,268

 

 

 

 

14,268

 

Total Loans

 

$

1,244,417

 

$

40,174

 

$

16,744

 

$

 

$

1,301,335

 

 

19


 

In thousands

 

Pass

 

Special
Mention

 

Substandard

 

Doubtful

 

Total

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Originated Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

166,035

 

$

2,902

 

$

161

 

$

 

$

169,098

 

Commercial real estate

 

393,987

 

18,079

 

7,899

 

 

419,965

 

Commercial real estate construction

 

15,471

 

835

 

 

 

16,306

 

Residential mortgage

 

381,525

 

6,492

 

733

 

 

388,750

 

Home equity lines of credit

 

90,941

 

334

 

 

 

91,275

 

Consumer

 

14,174

 

 

 

 

14,174

 

Total Originated Loans

 

1,062,133

 

28,642

 

8,793

 

 

1,099,568

 

Acquired Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

4,803

 

134

 

147

 

 

5,084

 

Commercial real estate

 

120,321

 

5,112

 

3,525

 

 

128,958

 

Commercial real estate construction

 

3,276

 

716

 

 

 

3,992

 

Residential mortgage

 

41,193

 

1,896

 

2,460

 

 

45,549

 

Home equity lines of credit

 

18,614

 

88

 

386

 

 

19,088

 

Consumer

 

226

 

 

 

 

226

 

Total Acquired Loans

 

188,433

 

7,946

 

6,518

 

 

202,897

 

Total Loans

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

170,838

 

3,036

 

308

 

 

174,182

 

Commercial real estate

 

514,308

 

23,191

 

11,424

 

 

548,923

 

Commercial real estate construction

 

18,747

 

1,551

 

 

 

20,298

 

Residential mortgage

 

422,718

 

8,388

 

3,193

 

 

434,299

 

Home equity lines of credit

 

109,555

 

422

 

386

 

 

110,363

 

Consumer

 

14,400

 

 

 

 

14,400

 

Total Loans

 

$

1,250,566

 

$

36,588

 

$

15,311

 

$

 

$

1,302,465

 

 

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

 

Three Months Ended
March 31, 2019

 

Three Months Ended
March 31, 2018

 

Balance at beginning of period

 

$

891

 

$

1,234

 

Acquisitions of impaired loans

 

 

 

Reclassification from non-accretable differences

 

 

114

 

Accretion to loan interest income

 

(137

)

(203

)

Balance at end of period

 

$

754

 

$

1,145

 

 

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.

 

20


 

The following table summarizes information relative to impaired loans by loan portfolio class as of March 31, 2019, and December 31, 2018:

 

 

 

Impaired Loans with
Allowance

 

Impaired Loans with
No Allowance

 

In thousands

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allowance

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

MARCH 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Commercial real estate

 

 

 

 

6,654

 

6,654

 

Commercial real estate construction

 

 

 

 

 

 

Residential mortgage

 

 

 

 

537

 

537

 

Home equity lines of credit

 

 

 

 

 

 

 

 

$

 

$

 

$

 

$

7,191

 

$

7,191

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

$

 

$

 

$

 

$

 

Commercial real estate

 

 

 

 

6,763

 

6,763

 

Commercial real estate construction

 

 

 

 

 

 

Residential mortgage

 

 

 

 

537

 

537

 

Home equity lines of credit