ACNB CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from _______ to _______

Commission file number 1-35015

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)


Pennsylvania						23-2233457
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification No.)


16 Lincoln Square, Gettysburg, Pennsylvania						17325
(Address of principal executive offices)						(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading 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 ☒ No ☐

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

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

Large accelerated filer ☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

The number of shares of the Registrant’s Common Stock outstanding on October 26, 2021, was 8,695,071.

PART I - FINANCIAL INFORMATION

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)


Dollars in thousands, except per share data	September 30, 2021		September 30, 2020		December 31, 2020

ASSETS

Cash and due from banks	$	22,479	$	21,163	$	23,739
Interest bearing deposits with banks	700,303		278,490		375,613

Total Cash and Cash Equivalents	722,782		299,653		399,352

Equity securities with readily determinable fair values	2,547		1,880		2,170
Debt securities available for sale	411,676		313,671		337,718
Securities held to maturity, fair value $7,482; $14,110; $10,768	7,220		13,606		10,294
Loans held for sale	3,935		10,043		11,034
Loans, net of allowance for loan losses $19,141; $19,200; $20,226	1,467,745		1,681,683		1,617,558

Premises and equipment, net	31,667		33,180		33,013
Right of use assets	3,416		3,306		3,145
Restricted investment in bank stocks	2,368		3,022		2,942
Investment in bank-owned life insurance	64,467		63,049		63,401
Investments in low-income housing partnerships	1,286		1,411		1,380
Goodwill	42,108		42,108		42,108
Intangible assets, net	6,387		7,578		7,265
Foreclosed assets held for resale	—		680		—
Other assets	25,188		28,179		23,982

Total Assets	$	2,792,792	$	2,503,049	$	2,555,362

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Non-interest bearing	$	610,765	$	544,332	$	556,666
Interest bearing	1,806,796		1,571,244		1,628,859

Total Deposits	2,417,561		2,115,576		2,185,525

Short-term borrowings	44,605		52,721		38,464
Long-term borrowings	41,700		57,113		53,745
Lease liabilities	3,416		3,292		3,138
Other liabilities	15,670		17,624		16,518

Total Liabilities	2,522,952		2,246,326		2,297,390

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; 8,789,890, 8,765,913 and 8,771,993 shares issued; 8,712,189, 8,703,313 and 8,709,393 shares outstanding	21,963		21,903		21,918
Treasury stock, at cost; 77,701, 62,600 and 62,600 shares	(1,148)		(728)		(728)
Additional paid-in capital	94,527		93,895		94,048
Retained earnings	165,001		143,499		148,372
Accumulated other comprehensive loss	(10,503)		(1,846)		(5,638)

Total Stockholders’ Equity	269,840		256,723		257,972

Total Liabilities and Stockholders’ Equity	$	2,792,792	$	2,503,049	$	2,555,362

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in thousands, except per share data	2021		2020		2021		2020

INTEREST AND DIVIDEND INCOME
Loans, including fees	$	17,689	$	19,861	$	54,435	$	59,076
Securities:
Taxable	1,366		1,198		4,033		3,676
Tax-exempt	138		129		402		341
Dividends	34		60		137		205
Other	255		76		478		520
Total Interest Income	19,482		21,324		59,485		63,818
INTEREST EXPENSE
Deposits	1,084		2,498		4,028		8,166
Short-term borrowings	11		15		28		44
Long-term borrowings	387		445		1,535		1,442
Total Interest Expense	1,482		2,958		5,591		9,652
Net Interest Income	18,000		18,366		53,894		54,166

PROVISION FOR LOAN LOSSES	—		1,550		50		8,100

Net Interest Income after Provision for Loan Losses	18,000		16,816		53,844		46,066
OTHER INCOME
Commissions from insurance sales	1,715		1,688		4,951		4,745
Service charges on deposit accounts	900		827		2,428		2,460
Income from fiduciary, investment management and brokerage activities	837		659		2,363		1,982
Income from mortgage loans held for sale	300		427		2,497		1,279
Earnings on investment in bank-owned life insurance	356		365		1,066		1,090


Net gains (losses) on equity securities	—		(82)		377		(483)


Service charges on ATM and debit card transactions	862		809		2,536		2,161
Other	304		319		925		837
Total Other Income	5,274		5,012		17,143		14,071
OTHER EXPENSES
Salaries and employee benefits	8,921		8,625		26,259		25,731
Net occupancy	974		857		3,046		2,709
Equipment	1,181		1,284		3,783		4,039
Other tax	393		321		1,177		967
Professional services	422		265		890		921
Supplies and postage	198		145		539		554
Marketing and corporate relations	81		101		220		442
FDIC and regulatory	247		211		705		397
Merger related expenses	—		—		—		5,965
Intangible assets amortization	285		313		878		951
Foreclosed real estate income	(88)		(89)		(90)		(182)
Other operating	1,362		1,277		4,087		3,728
Total Other Expenses	13,976		13,310		41,494		46,222
Income before Income Taxes	9,298		8,518		29,493		13,915
PROVISION FOR INCOME TAXES	1,938		1,747		6,154		2,570
Net Income	$	7,360	$	6,771	$	23,339	$	11,345
PER SHARE DATA
Basic earnings	$	0.84	$	0.79	$	2.67	$	1.32
Cash dividends declared	$	0.25	$	0.25	$	0.77	$	0.75

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars in thousands	2021		2020		2021		2020

NET INCOME	$	7,360	$	6,771	$	23,339	$	11,345

OTHER COMPREHENSIVE INCOME

SECURITIES

Unrealized gains (losses) arising during the period, net of income taxes of $(484), $(102), $(1,600) and $1,025, respectively	(1,695)		(358)		(5,598)		3,613

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

PENSION

Amortization of pension net loss, transition liability, and prior service cost, net of income taxes of $69, $37, $208 and $113, respectively (B) (C)	245		132		733		394

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	(1,450)		(226)		(4,865)		4,007

TOTAL COMPREHENSIVE INCOME	$	5,910	$	6,545	$	18,474	$	15,352

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.

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2021 and 2020


Dollars in thousands	Common Stock		Treasury Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity

BALANCE – JANUARY 1, 2021	$	21,918	$	(728)	$	94,048	$	148,372	$	(5,638)	$	257,972
Net income	—		—		—		7,471		—		7,471
Other comprehensive loss, net of taxes	—		—		—		—		(5,835)		(5,835)
Common stock shares issued (5,627 shares)	14		—		(195)		—		—		(181)

Restricted stock compensation expense	—		—		362		—		—		362
Cash dividends declared	—		—		—		(2,177)		—		(2,177)
BALANCE – MARCH 31, 2021	21,932		(728)		94,215		153,666		(11,473)		257,612
Net income	—		—		—		8,508		—		8,508
Other comprehensive income, net of taxes	—		—		—		—		2,420		2,420
Common stock shares issued (6,328 shares)	16		—		163		—		—		179


Cash dividends declared	—		—		—		(2,353)		—		(2,353)
BALANCE – JUNE 30, 2021	21,948		(728)		94,378		159,821		(9,053)		266,366
Net income	—		—		—		7,360		—		7,360
Other comprehensive loss, net of taxes	—		—		—		—		(1,450)		(1,450)
Common stock shares issued (5,942 shares)	15		—		149		—		—		164
Repurchased shares (15,101 shares)	—		(420)		—		—		—		(420)


Cash dividends declared	—		—		—		(2,180)		—		(2,180)
BALANCE- SEPTEMBER 30, 2021	$	21,963	$	(1,148)	$	94,527	$	165,001	$	(10,503)	$	269,840


Dollars in thousands	Common Stock		Treasury Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity

BALANCE – JANUARY 1, 2020	$	17,855	$	(728)	$	39,579	$	138,663	$	(5,853)	$	189,516
Net loss	—		—		—		(1,223)		—		(1,223)
Other comprehensive income, net of taxes	—		—		—		—		3,333		3,333
Common stock shares issued (1,590,547 shares)	3,964		—		53,309		—		—		57,273

Restricted stock compensation expense	—		—		262		—		—		262
Cash dividends declared	—		—		—		(2,167)		—		(2,167)
BALANCE – MARCH 31, 2020	21,819		(728)		93,150		135,273		(2,520)		246,994
Net income	—		—		—		5,797		—		5,797
Other comprehensive income, net of taxes	—		—		—		—		900		900
Common stock shares issued (6,461 shares)	16		—		154		—		—		170
Restricted stock grants (19,472 shares)	49		—		282		—		—		331
Restricted stock compensation expense	—		—		166		—		—		166
Cash dividends declared	—		—		—		(2,168)		—		(2,168)
BALANCE – JUNE 30, 2020	21,884		(728)		93,752		138,902		(1,620)		252,190
Net income	—		—		—		6,771		—		6,771
Other comprehensive loss, net of taxes	—		—		—		—		(226)		(226)
Common stock shares issued (7,474 shares)	19		—		143		—		—		162


Cash dividends declared	—		—				(2,174)		—		(2,174)
BALANCE- SEPTEMBER 30, 2020	$	21,903	$	(728)	$	93,895	$	143,499	$	(1,846)	$	256,723

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,
Dollars in thousands	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	23,339	$	11,345
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of loans originated for sale	(2,497)		(1,279)
Gain on sales of foreclosed assets held for resale, including writedowns	(88)		(80)
Gain on sale of premises and equipment	(41)		—
Earnings on investment in bank-owned life insurance	(1,066)		(1,090)


(Gain) Loss on equity securities	(377)		483
Restricted stock compensation expense	362		428

Depreciation and amortization	2,582		2,745
Provision for loan losses	50		8,100
Net amortization of investment securities premiums	1,458		597
Decrease (Increase) in accrued interest receivable	1,204		(1,991)
Decrease in accrued interest payable	(1,017)		(896)
Mortgage loans originated for sale	(89,285)		(92,681)
Proceeds from sales of loans originated for sale	98,881		90,373
(Increase) Decrease in other assets	(1,416)		2,763
Decrease (Increase) in deferred tax expense	221		(1,635)
Increase in other liabilities	1,505		936
Net Cash Provided by Operating Activities	33,815		18,118
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity	3,074		5,628
Proceeds from maturities of investment securities available for sale	81,260		39,056

Purchase of investment securities available for sale	(163,874)		(135,939)


Redemption of restricted investment in bank stocks	574		1,763
Net decrease (increase) in loans	149,662		(101,840)

Purchase of bank-owned life insurance	—		(400)

Bank acquisition, net of cash acquired	—		35,262
Insurance book- acquisition	—		(542)
Capital expenditures	(530)		(622)

Proceeds from sales of premises and equipment	213		392
Proceeds from sales of foreclosed real estate	189		363
Net Cash Provided by (Used in) Investing Activities	70,568		(156,879)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits	54,099		126,463
Net increase in time certificates of deposits and interest bearing deposits	177,937		202,795
Net (decrease) increase in short-term borrowings	6,141		19,286
Proceeds from long-term borrowings	15,000		—
Repayments on long-term borrowings	(27,045)		(18,633)
Dividends paid	(6,710)		(6,509)
Common stock repurchased	(420)		—
Common stock issued	45		656
Net Cash Provided by Financing Activities	219,047		324,058
Net Increase in Cash and Cash Equivalents	323,430		185,297
CASH AND CASH EQUIVALENTS — BEGINNING	399,352		114,356
CASH AND CASH EQUIVALENTS — ENDING	$	722,782	$	299,653
Supplemental disclosures of cash flow information
Interest paid	$	6,608	$	10,548
Income taxes paid	$	6,200	$	4,150
Loans transferred to foreclosed assets held for resale and other foreclosed transactions	$	101	$	135

Transactions related to acquisition
Increase in assets and liabilities:
Securities	$	—	$	(22,167)
Loans	—		(333,362)
Premises and equipment	—		(10,959)
Investment in bank-owned life insurance	—		(10,896)
Restricted investments in bank stocks	—		(1,141)
Foreclosed assets held for resale	—		(464)
Goodwill	—		(22,528)
Core deposit intangible assets	—		(3,560)
Other assets	—		(3,086)
Non-interest bearing deposits	—		103,492
Interest bearing deposits	—		270,566
Trust preferred debentures	—		6,000
Long term borrowings	—		3,450
Other liabilities	—		2,637
Common shares issued	—		57,280

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

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 thirty-one community banking offices, including twenty community banking office locations in Adams, Cumberland, Franklin and York Counties, Pennsylvania, and eleven 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.

RIG is a full-service insurance agency based in Westminster, Maryland, with additional locations in Germantown and 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 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 six community banking offices located in Carroll County, Maryland.

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

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

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

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2020 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 5, 2021. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year.

The Corporation adopted ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The ASU removes the following disclosures: the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and, certain related party disclosures. The ASU clarifies the following disclosure requirements: the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets must be disclosed; and, the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets must be disclosed. The ASU adds the following disclosure requirements: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates;

and, an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU was effective for public business entities in fiscal years ending after December 15, 2020. The Corporation adopted this ASU on December 31, 2020 and the adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2021, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

2. Acquisition of Frederick County Bancorp, Inc.

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

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

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

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

Purchase Price Consideration in Common Stock


FCBI shares outstanding	1,601,764
Shares paid in cash for fractional shares	150.88
Cash consideration (per share)	$	36.43
Cash portion of purchase price (cash payout of stock options and cash in lieu of fractional shares)	$	100,798
FCBI shares outstanding	1,601,764
Shares paid stock consideration	1,601,613
Exchange ratio	0.9900
Total ACNB shares issued	1,585,597
ACNB’s share price for purposes of calculation	$	36.34
Equity portion of purchase price	$	57,620,595
Cost of shares owned by buyer	$	187,200
Total consideration paid	$	57,908,593


Allocation of Purchase Price	In thousands
Total Purchase Price		$	57,909

Fair Value of Assets Acquired
Cash and cash equivalents	35,262
Investment securities	22,167
Loans held for sale	4,050
Loans	329,312
Restricted stock	1,141
Premises and equipment	10,959
Core deposit intangible asset	3,560
Other assets	14,446
Total assets	420,897

Fair Value of Liabilities Assumed
Non-interest bearing deposits	103,492
Interest bearing deposits	270,566
Subordinated debt	6,000
Long term borrowings	3,450
Other liabilities	2,008
Total liabilities	385,516

Net Assets Acquired		35,381
Goodwill Recorded in Acquisition		$	22,528

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

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

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

Investment securities available-for-sale

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

Loans

credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of FCBI’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $339,577,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.


In thousands
Gross amortized cost basis at January 11, 2020	$	339,577
Interest rate fair value adjustment on pools of homogeneous loans	(2,632)
Credit fair value adjustment on pools of homogeneous loans	(5,931)
Credit fair value adjustment on purchased credit impaired loans	(1,702)
Fair value of acquired loans at January 11, 2020	$	329,312

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

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

The following table presents the acquired purchased credit impaired loans receivable at the Acquisition Date:


In thousands
Contractual principal and interest at acquisition	$	4,289
Nonaccretable difference	(2,361)
Expected cash flows at acquisition	1,928
Accretable yield	(354)
Fair value of purchased impaired loans	$	1,574

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

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available

through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

Time Deposits

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

Long-term Borrowings

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

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


In thousands	For the Nine Months Ended September 30, 2019
Total revenues (net interest income plus non-interest income)	$	72,281
Net Income	22,138

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

3. Earnings Per Share and Restricted Stock

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 8,715,767 and 8,616,588 weighted average shares of common stock outstanding for the nine months ended September 30, 2021 and 2020, respectively, and 8,720,732 and 8,694,620 for the three months ended September 30, 2021 and 2020, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. The Corporation has no instruments that would create dilutive earnings per share.

The ACNB Corporation 2009 Restricted Stock Plan expired by its own terms after 10 years on February 24, 2019. The purpose of this plan was to provide employees and directors of the Bank who have responsibility for its growth with additional incentives by allowing them to acquire ownership in the Corporation and, thereby, encouraging them to contribute to the organization’s success. As of September 30, 2021, 25,945 shares were issued under this plan and all shares were fully vested. No further shares may be issued under this restricted stock plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.

plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of September 30, 2021, 35,587 shares were issued under this plan, of which 29,041 were fully vested, none vested during the quarter, and the remaining 6,546 will vest over the next year. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2018 Omnibus Stock Incentive Plan was filed with the Securities and Exchange Commission on March 8, 2019. In addition, on March 8, 2019, the Corporation filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan to add the ACNB Corporation 2018 Omnibus Stock Incentive Plan to the registration statement.

Plan expense is recognized over the vesting period of the stock issued under both plans. $28,000 and $143,000 of compensation expenses related to the grants were recognized during the three months ended September 30, 2021 and 2020, respectively. $83,000 and $374,000 of compensation expenses related to the grants were recognized during the nine months ended September 30, 2021 and 2020, respectively.

4. Retirement Benefits

The components of net periodic benefit expense related to the non-contributory, defined benefit pension plan for the three and nine month periods ended September 30 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30
In thousands	2021		2020		2021		2020
Service cost	$	220	$	188	$	660	$	564
Interest cost	236		270		708		810
Expected return on plan assets	(704)		(687)		(2,112)		(2,061)
Amortization of net loss	314		169		942		507



Net Periodic Benefit Expense (Income)	$	66	$	(60)	$	198	$	(180)

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2020, that it had not yet determined the amount the Bank planned on contributing to the defined benefit plan in 2021. As of September 30, 2021, this contribution amount had still not been determined. Effective April 1, 2012, no inactive or former participant in the plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the plan. As of the last annual census, ACNB Bank had a combined 347 active, vested, terminated and retired persons in the plan.

5. Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its 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 $9,588,000 in standby letters of credit as of September 30, 2021. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of September 30, 2021, for guarantees under standby letters of credit issued is not material.

6. Accumulated Other Comprehensive Loss

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


In thousands	Unrealized Gains on Securities		Pension Liability		Accumulated Other Comprehensive Loss
BALANCE — SEPTEMBER 30, 2021	$	(953)	$	(9,550)	$	(10,503)
BALANCE — DECEMBER 31, 2020	$	4,645	$	(10,283)	$	(5,638)
BALANCE — SEPTEMBER 30, 2020	$	4,874	$	(6,720)	$	(1,846)

7. 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 nine month periods ended September 30, 2021 and 2020, is as follows:


In thousands	Banking		Insurance		Total
2021
Net interest income and other income from external customers	$	66,309	$	4,728	$	71,037
Income before income taxes	28,416		1,077		29,493
Total assets	2,780,109		12,683		2,792,792
Capital expenditures	530		—		530

2020
Net interest income and other income from external customers	$	63,696	$	4,541	$	68,237
Income before income taxes	12,993		922		13,915
Total assets	2,490,031		13,018		2,503,049
Capital expenditures	595		27		622

Segment information for the three month periods ended September 30, 2021 and 2020, is as follows:


In thousands	Banking		Insurance		Total
2021
Net interest income and other income from external customers	$	21,755	$	1,519	$	23,274
Income before income taxes	8,989		309		9,298
Total assets	2,780,109		12,683		2,792,792
Capital expenditures	277		—		277

2020
Net interest income and other income from external customers	$	21,879	$	1,499	$	23,378
Income before income taxes	8,204		314		8,518
Total assets	2,490,031		13,018		2,503,049
Capital expenditures	17		19		36

8. Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity or trading are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported,

net of tax, in other comprehensive income (loss). Equity securities with readily determinable fair values are recorded at fair value with changes in fair value recognized in net income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Amortized cost and fair value of securities at September 30, 2021, and December 31, 2020, were as follows:


In thousands	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

SECURITIES AVAILABLE FOR SALE

SEPTEMBER 30, 2021
U.S. Government and agencies	$	225,315	$	825	$	2,971	$	223,169
Mortgage-backed securities, residential	132,074		2,124		1,199		132,999
State and municipal	42,891		259		440		42,710
Corporate bonds	12,621		198		21		12,798
	$	412,901	$	3,406	$	4,631	$	411,676

DECEMBER 31, 2020
U.S. Government and agencies	$	181,704	$	2,117	$	218	$	183,603
Mortgage-backed securities, residential	105,327		3,529		34		108,822
State and municipal	35,930		561		7		36,484
Corporate bonds	8,784		41		16		8,809
	$	331,745	$	6,248	$	275	$	337,718

SECURITIES HELD TO MATURITY

SEPTEMBER 30, 2021

Mortgage-backed securities, residential	$	7,220	$	262	$	—	$	7,482
	$	7,220	$	262	$	—	$	7,482
DECEMBER 31, 2020

Mortgage-backed securities, residential	$	10,294	$	474	$	—	$	10,768
	$	10,294	$	474	$	—	$	10,768

Fair value of equity securities with readily determinable fair values at September 30, 2021, September 30, 2020, and December 31, 2020, are as follows:


In thousands	Fair Value at January 1, 2021		Unrealized Gains		Unrealized Losses		Fair Value at September 30, 2021
SEPTEMBER 30, 2021
CRA Mutual Fund	$	1,065	$	—	$	20	$	1,045
Stock in other banks	1,105		397		—		1,502
	$	2,170	$	397	$	20	$	2,547


In thousands	Fair Value at January 1, 2020		Unrealized Gains		Unrealized Losses		Fair Value at September 30, 2020
SEPTEMBER 30, 2020
CRA Mutual Fund	$	1,045	$	25	$	—	$	1,070
Stock in other banks	1,318		—		508		810
	$	2,363	$	25	$	508	$	1,880


In thousands	Fair Value at January 1, 2020		Unrealized Gains		Unrealized Losses		Fair Value at December 31, 2020
DECEMBER 31, 2020
CRA Mutual Fund	$	1,045	$	25	$	5	$	1,065
Stock in other banks	1,318		—		213		1,105
	$	2,363	$	25	$	218	$	2,170

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021, and December 31, 2020:


	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

SEPTEMBER 30, 2021
U.S. Government and agencies	$	148,047	$	2,469	$	15,014	$	502	$	163,061	$	2,971
Mortgage-backed securities, residential	75,394		1,144		2,713		55		78,107		1,199
State and municipal	22,384		415		901		25		23,285		440
Corporate bond	4,344		21		—		—		4,344		21
	$	250,169	$	4,049	$	18,628	$	582	$	268,797	$	4,631

DECEMBER 31, 2020
U.S. Government and agencies	$	32,629	$	218	$	—	$	—	$	32,629	$	218
Mortgage-backed securities, residential	10,458		34		—		—		10,458		34
State and municipal	2,148		7		—		—		2,148		7
Corporate bond	1,514		16		—		—		1,514		16
	$	46,749	$	275	$	—	$	—	$	46,749	$	275

SECURITIES HELD TO MATURITY

SEPTEMBER 30, 2021

Mortgage-backed securities, residential	$	—	$	—	$	—	$	—	$	—	$	—
	$	—	$	—	$	—	$	—	$	—	$	—

DECEMBER 31, 2020

Mortgage-backed securities, residential	$	—	$	—	$	—	$	—	$	—	$	—
	$	—	$	—	$	—	$	—	$	—	$	—

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

At September 30, 2021, sixty-seven available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 6% of amortized cost. Eight 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 September 30, 2021, thirty-nine available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 5% of amortized cost. Three 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 September 30, 2021, thirty-six available for sale state and municipal securities had unrealized losses that individually did not exceed 6% of amortized cost. Two 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 September 30, 2021, five corporate bonds had unrealized losses that individually did not exceed 2% of amortized cost. None of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

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 September 30, 2021, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

Amortized cost and fair value at September 30, 2021, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.


	Available for Sale				Held to Maturity
In thousands	Amortized Cost		Fair Value		Amortized Cost		Fair Value

1 year or less	$	29,292	$	29,505	$	—	$	—
Over 1 year through 5 years	67,854		68,105		—		—
Over 5 years through 10 years	136,154		134,047		—		—
Over 10 years	47,527		47,020		—		—
Mortgage-backed securities, residential	132,074		132,999		7,220		7,482
	$	412,901	$	411,676	$	7,220	$	7,482

The Corporation did not sell any securities available for sale during 2021 or 2020.

At September 30, 2021, and December 31, 2020, securities with a carrying value of $362,378,000 and $301,201,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

9. Loans

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

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan

losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

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

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

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

Allowance for Credit Losses

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.

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 a continued weak housing market.

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

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

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

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

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

Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is

performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

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

Acquired Loans

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

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

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

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

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

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

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the

Corporation used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, environment factors to estimate the expected cash flow for each loan pool.

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of September 30, 2021, and December 31, 2020:


In thousands	Pass		Special Mention		Substandard		Doubtful		Total
SEPTEMBER 30, 2021
Originated Loans
Commercial and industrial	$	154,999	$	4,941	$	2,120	$	—	$	162,060
Commercial real estate	484,915		55,952		9,374		—		550,241
Commercial real estate construction	33,549		1,380		—		—		34,929
Residential mortgage	302,905		5,735		75		—		308,715
Home equity lines of credit	75,666		921		—		—		76,587
Consumer	10,502		—		—		—		10,502
Total Originated Loans	1,062,536		68,929		11,569		—		1,143,034
Acquired Loans
Commercial and industrial	30,950		1,518		317		—		32,785
Commercial real estate	218,966		11,657		4,343		—		234,966
Commercial real estate construction	6,653		2,225		—		—		8,878
Residential mortgage	42,160		4,429		1,578		—		48,167
Home equity lines of credit	17,384		37		596		—		18,017
Consumer	1,039		—		—		—		1,039
Total Acquired Loans	317,152		19,866		6,834		—		343,852
Total Loans
Commercial and industrial	185,949		6,459		2,437		—		194,845
Commercial real estate	703,881		67,609		13,717		—		785,207
Commercial real estate construction	40,202		3,605		—		—		43,807
Residential mortgage	345,065		10,164		1,653		—		356,882
Home equity lines of credit	93,050		958		596		—		94,604
Consumer	11,541		—		—		—		11,541
Total Loans	$	1,379,688	$	88,795	$	18,403	$	—	$	1,486,886


In thousands	Pass		Special Mention		Substandard		Doubtful		Total
DECEMBER 31, 2020
Originated Loans
Commercial and industrial	$	270,047	$	5,168	$	2,688	$	—	$	277,903
Commercial real estate	414,538		54,122		10,463		—		479,123
Commercial real estate construction	39,462		1,746		—		—		41,208
Residential mortgage	332,632		4,327		178		—		337,137
Home equity lines of credit	80,560		346		—		—		80,906
Consumer	11,819		—		—		—		11,819
Total Originated Loans	1,149,058		65,709		13,329		—		1,228,096
Acquired Loans
Commercial and industrial	38,882		1,893		1,476		—		42,251
Commercial real estate	245,597		16,706		3,201		—		265,504
Commercial real estate construction	10,300		2,394		—		—		12,694
Residential mortgage	58,787		3,535		1,881		—		64,203
Home equity lines of credit	23,165		97		442		—		23,704
Consumer	1,330		—		2		—		1,332
Total Acquired Loans	378,061		24,625		7,002		—		409,688
Total Loans
Commercial and industrial	308,929		7,061		4,164		—		320,154
Commercial real estate	660,135		70,828		13,664		—		744,627
Commercial real estate construction	49,762		4,140		—		—		53,902
Residential mortgage	391,419		7,862		2,059		—		401,340
Home equity lines of credit	103,725		443		442		—		104,610
Consumer	13,149		—		2		—		13,151
Total Loans	$	1,527,119	$	90,334	$	20,331	$	—	$	1,637,784

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.


In thousands	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Balance at beginning of period	$	596	$	642
Acquisitions of impaired loans	—		354
Reclassification from non-accretable differences	44		258
Accretion to loan interest income	(305)		(495)
Balance at end of period	$	335	$	759

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 September 30, 2021, and December 31, 2020:


	Impaired Loans with Allowance						Impaired Loans with No Allowance
In thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
SEPTEMBER 30, 2021
Commercial and industrial	$	1,032	$	1,032	$	883	$	491	$	1,461
Commercial real estate	1,311		1,311		457		6,384		6,384
Commercial real estate construction	—		—		—		—		—
Residential mortgage	—		—		—		—		—
Home equity lines of credit	—		—		—		—		—
	$	2,343	$	2,343	$	1,340	$	6,875	$	7,845

DECEMBER 31, 2020
Commercial and industrial	$	2,031	$	2,031	$	1,224	$	—	$	—
Commercial real estate	2,728		2,728		158		5,861		5,861
Commercial real estate construction	—		—		—		—		—
Residential mortgage	—		—		—		101		101
Home equity lines of credit	—		—		—		—		—
	$	4,759	$	4,759	$	1,382	$	5,962	$	5,962

The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class for the three months ended September 30, 2021 and 2020:


	Impaired Loans with Allowance				Impaired Loans with No Allowance
In thousands	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
SEPTEMBER 30, 2021
Commercial and industrial	$	1,833	$	—	$	11	$	—
Commercial real estate	1,311		—		6,654		46
Commercial real estate construction	—		—		123		—
Residential mortgage	—		—		50		—
Home equity lines of credit	—		—		—		—
	$	3,144	$	—	$	6,838	$	46

SEPTEMBER 30, 2020
Commercial and industrial	$	26	$	—	$	23	$	—
Commercial real estate	2,210		—		6,075		42
Commercial real estate construction	—		—		1,173		—
Residential mortgage	—		—		101		—
Home equity lines of credit	—		—		22		3
	$	2,236	$	—	$	7,394	$	45

The following table summarizes information in regards to the average of impaired loans and related interest income by loan portfolio class for the nine months ended September 30, 2021 and 2020:


	Impaired Loans with Allowance				Impaired Loans with No Allowance
In thousands	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
SEPTEMBER 30, 2021
Commercial and industrial	$	2,109	$	—	$	5	$	—
Commercial real estate	1,507		20		6,685		140
Commercial real estate construction	—		—		126		—
Residential mortgage	—		—		76		—
Home equity lines of credit	—		—		—		—
	$	3,616	$	20	$	6,892	$	140

SEPTEMBER 30, 2020
Commercial and industrial	$	44	$	—	$	12	$	—
Commercial real estate	1,370		—		6,707		157
Commercial real estate construction	—		—		586		—
Residential mortgage	—		—		118		7
Home equity lines of credit	—		—		49		3
	$	1,414	$	—	$	7,472	$	167

No additional funds are committed to be advanced in connection with impaired loans.

The following table presents nonaccrual loans by loan portfolio class as of September 30, 2021, and December 31, 2020, the table below excludes $5.0 million in purchase credit impaired loans, net of unamortized fair value adjustments:


In thousands	September 30, 2021		December 31, 2020
Commercial and industrial	$	1,523	$	2,031
Commercial real estate	4,095		4,909
Commercial real estate construction	—		—
Residential mortgage	—		101
Home equity lines of credit	—		—
	$	5,618	$	7,041

There were no loans whose terms have been modified thereby resulting in a troubled debt restructuring during the three and nine months ended September 30, 2021 and 2020. The Corporation classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the restructuring of scheduled principal payments. The Corporation had pre-existing nonaccruing and accruing troubled debt restructurings of $3,679,000 and $3,850,000 at September 30, 2021 and September 30, 2020, respectively. All of the Corporation’s troubled debt restructured loans are also impaired loans, of which some have resulted in a specific allocation and, subsequently, a charge-off as appropriate. Included in the non-accrual loan total at September 30, 2021 and September 30, 2020, were $79,000 and $143,000, respectively, of troubled debt restructurings. In addition to the troubled debt restructurings included in non-accrual loans, the Corporation also has a loan classified as an accruing troubled debt restructuring at September 30, 2021 and September 30, 2020, which totaled $3,600,000 and $3,707,000, respectively. As of September 30, 2021 and 2020, there were no defaulted troubled debt restructured loans. There were no charge-offs or specific allocation on any of the troubled debt restructured loans for the three and nine months ended September 30, 2021 and 2020. All other troubled debt restructured loans were current as of September 30, 2021, with respect to their associated forbearance agreement, except for one loan which has had periodic late payments. As of September 30, 2021, 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 September 30, 2021 and December 31, 2020, totaled $527,000 and $391,000, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.

The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2021, and December 31, 2020:


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
SEPTEMBER 30, 2021
Originated Loans
Commercial and industrial	$	211	$	921	$	639	$	1,771	$	160,289	$	162,060	$	—
Commercial real estate	114		1,368		2,514		3,996		546,245		550,241		—
Commercial real estate construction	—		—		—		—		34,929		34,929		—
Residential mortgage	28		237		371		636		308,079		308,715		371
Home equity lines of credit	560		—		59		619		75,968		76,587		59
Consumer	82		3		—		85		10,417		10,502		—
Total originated loans	995		2,529		3,583		7,107		1,135,927		1,143,034		430
Acquired Loans
Commercial and industrial	—		—		—		—		32,785		32,785		—
Commercial real estate	350		—		—		350		234,616		234,966		—
Commercial real estate construction	—		—		—		—		8,878		8,878		—
Residential mortgage	1		170		—		171		47,996		48,167		—
Home equity lines of credit	372		—		—		372		17,645		18,017		—
Consumer	2		1		—		3		1,036		1,039		—
Total acquired loans	725		171		—		896		342,956		343,852		—
Total Loans
Commercial and industrial	211		921		639		1,771		193,074		194,845		—
Commercial real estate	464		1,368		2,514		4,346		780,861		785,207		—
Commercial real estate construction	—		—		—		—		43,807		43,807		—
Residential mortgage	29		407		371		807		356,075		356,882		371
Home equity lines of credit	932		—		59		991		93,613		94,604		59
Consumer	84		4		—		88		11,453		11,541		—
Total Loans	$	1,720	$	2,700	$	3,583	$	8,003	$	1,478,883	$	1,486,886	$	430


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, 2020
Originated Loans
Commercial and industrial	$	1,432	$	—	$	—	$	1,432	$	276,471	$	277,903	$	—
Commercial real estate	133		2,463		1,631		4,227		474,896		479,123		—
Commercial real estate construction	—		76		—		76		41,132		41,208		—
Residential mortgage	1,382		335		623		2,340		334,797		337,137		522
Home equity lines of credit	54		60		58		172		80,734		80,906		58
Consumer	98		51		—		149		11,670		11,819		—
Total originated loans	3,099		2,985		2,312		8,396		1,219,700		1,228,096		580
Acquired Loans
Commercial and industrial	122		231		—		353		41,898		42,251		—
Commercial real estate	319		220		—		539		264,965		265,504		—
Commercial real estate construction	42		—		97		139		12,555		12,694		97
Residential mortgage	834		349		146		1,329		62,874		64,203		146
Home equity lines of credit	196		—		32		228		23,476		23,704		32
Consumer	—		16		—		16		1,316		1,332		—
Total acquired loans	1,513		816		275		2,604		407,084		409,688		275
Total Loans
Commercial and industrial	1,554		231		—		1,785		318,369		320,154		—
Commercial real estate	452		2,683		1,631		4,766		739,861		744,627		—
Commercial real estate construction	42		76		97		215		53,687		53,902		97
Residential mortgage	2,216		684		769		3,669		397,671		401,340		668
Home equity lines of credit	250		60		90		400		104,210		104,610		90
Consumer	98		67		—		165		12,986		13,151		—
Total Loans	$	4,612	$	3,801	$	2,587	$	11,000	$	1,626,784	$	1,637,784	$	855

The following tables summarize the allowance for loan losses and recorded investment in loans receivable:


In thousands	Commercial and Industrial		Commercial Real Estate		Commercial Real Estate Construction		Residential Mortgage		Home Equity Lines of Credit		Consumer		Unallocated		Total
AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2021
Allowance for Loan Losses
Beginning balance - July 1, 2021	$	4,630	$	10,127	$	457	$	2,976	$	573	$	461	$	983	$	20,207
Charge-offs	(1,073)		—		—		—		(22)		(2)		—		(1,097)
Recoveries	14		—		—		—		—		17		—		31
Provisions (credits)	(422)		457		54		391		50		(19)		(511)		—
Ending balance - September 30, 2021	$	3,149	$	10,584	$	511	$	3,367	$	601	$	457	$	472	$	19,141

Beginning balance - January 1, 2021	$	4,037	$	9,569	$	503	$	3,395	$	693	$	648	$	1,381	$	20,226
Charge-offs	(1,105)		—		—		—		(22)		(65)		—		(1,192)
Recoveries	30		—		—		—		—		27		—		57
Provisions (credits)	187		1,015		8		(28)		(70)		(153)		(909)		50
Ending balance - September 30, 2021	$	3,149	$	10,584	$	511	$	3,367	$	601	$	457	$	472	$	19,141
Ending balance: individually evaluated for impairment	$	883	$	457	$	—	$	—	$	—	$	—	$	—	$	1,340
Ending balance: collectively evaluated for impairment	$	2,266	$	10,127	$	511	$	3,367	$	601	$	457	$	472	$	17,801

Loans Receivable
Ending balance	$	194,845	$	785,207	$	43,807	$	356,882	$	94,604	$	11,541	$	—	$	1,486,886
Ending balance: individually evaluated for impairment	$	1,523	$	7,695	$	—	$	—	$	—	$	—	$	—	$	9,218
Ending balance: collectively evaluated for impairment	$	193,322	$	777,512	$	43,807	$	356,882	$	94,604	$	11,541	$	—	$	1,477,668

AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 2020
Allowance for Loan Losses
Beginning balance - July 1, 2020	$	2,656	$	8,135	$	251	$	3,074	$	661	$	661	$	2,915	$	18,353
Charge-offs	(14)		(675)		—		—		—		(63)		—		(752)
Recoveries	3		—		—		—		28		18		—		49
Provisions	430		2,272		222		504		58		134		(2,070)		1,550
Ending balance - September 30, 2020	$	3,075	$	9,732	$	473	$	3,578	$	747	$	750	$	845	$	19,200

Beginning balance - January 1, 2020	$	2,400	$	6,693	$	298	$	2,555	$	619	$	650	$	620	$	13,835
Charge-offs	(2,048)		(675)		—		—		—		(153)		—		(2,876)
Recoveries	78		6		—		—		29		28		—		141
Provisions (credits)	2,645		3,708		175		1,023		99		225		225		8,100
Ending balance - September 30, 2020	$	3,075	$	9,732	$	473	$	3,578	$	747	$	750	$	845	$	19,200
Ending balance: individually evaluated for impairment	$	23	$	213	$	—	$	—	$	—	$	—	$	—	$	236
Ending balance: collectively evaluated for impairment	$	3,052	$	9,519	$	473	$	3,578	$	747	$	750	$	845	$	18,964

Loans Receivable
Ending balance	$	345,011	$	754,074	$	50,367	$	428,480	$	109,293	$	13,658	$	—	$	1,700,883
Ending balance: individually evaluated for impairment	$	46	$	10,445	$	—	$	101	$	—	$	—	$	—	$	10,592
Ending balance: collectively evaluated for impairment	$	344,965	$	743,629	$	50,367	$	428,379	$	109,293	$	13,658	$	—	$	1,690,291


In thousands	Commercial and Industrial		Commercial Real Estate		Commercial Real Estate Construction		Residential Mortgage		Home Equity Lines of Credit		Consumer		Unallocated		Total
AS OF DECEMBER 31, 2020
Allowance for Loan Losses
Ending balance	$	4,037	$	9,569	$	503	$	3,395	$	693	$	648	$	1,381	$	20,226
Ending balance: individually evaluated for impairment	$	1,224	$	158	$	—	$	—	$	—	$	—	$	—	$	1,382
Ending balance: collectively evaluated for impairment	$	2,813	$	9,411	$	503	$	3,395	$	693	$	648	$	1,381	$	18,844

Loans Receivable
Ending balance	$	320,154	$	744,627	$	53,902	$	401,340	$	104,610	$	13,151	$	—	$	1,637,784
Ending balance: individually evaluated for impairment	$	2,031	$	8,589	$	—	$	101	$	—	$	—	$	—	$	10,721
Ending balance: collectively evaluated for impairment	$	318,123	$	736,038	$	53,902	$	401,239	$	104,610	$	13,151	$	—	$	1,627,063

Loan Modifications/Troubled Debt Restructurings/COVID-19

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

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

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

The Corporation’s Commercial loan portfolio previously had loans affected by COVID-19; however at September 30, 2021 there were no loans that are expected to suffer greater losses as a result of COVID-19.

Paycheck Protection Program

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

On December 27, 2020, President Trump signed H.R. 133, the Consolidated Appropriations Act, 2021, into law (Economic Aid Act). Congress appropriated approximately $285 billion to the SBA to reopen the PPP for first-time and second-time borrowers. The Economic Aid Act reopened the PPP for first-time borrowers (First Draw PPP Loan) and allows for a second draw of PPP funds (Second Draw PPP Loan) for small businesses with 300 or fewer employees that have sustained a 25% drop in revenue in any quarter of 2020 when compared to the same quarter in 2019. To receive a second draw PPP loan, a business must use or have used the full amount of their first PPP loan. The

maximum second-draw loan amount is $2 million. Second Draw PPP Loans will have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity; and (c) principal and interest payments deferred until ten months following the last day of the covered period.

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

As of September 30, 2021, the Corporation had originated approximately 2,217 applications for $223,036,703 of loans under the PPP. Fee income was approximately $9.5 million, before costs. The Corporation recognized $1,281,000 and $4,411,000 of PPP fee income through the three and nine months ended September 30, 2021, respectively. The remaining amount will be recognized in future quarters. The Corporation recognized $741,000 and $1,417,000 of PPP fee income through the three and nine months ended September 30, 2020.

10. Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

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 September 30, 2021, and December 31, 2020, are as follows:


		September 30, 2021
In thousands	Basis	Total		Level 1		Level 2		Level 3
U.S. Government and agencies		$	223,169	$	—	$	223,169	$	—
Mortgage-backed securities, residential		132,999		—		132,999		—
State and municipal		42,710		—		42,710		—
Corporate bonds		12,798		—		12,798		—


Total securities available for sale	Recurring	$	411,676	$	—	$	411,676	$	—
Equity securities with readily determinable fair values	Recurring	$	2,547	$	2,547	$	—	$	—
Collateral dependent impaired loans	Nonrecurring	$	5,474	$	—	$	—	$	5,474


		December 31, 2020
In thousands	Basis	Total		Level 1		Level 2		Level 3
U.S. Government and agencies		$	183,603	$	—	$	183,603	$	—
Mortgage-backed securities, residential		108,822		—		108,822		—
State and municipal		36,484		—		36,484		—
Corporate bonds		8,809		—		8,809		—


Total securities available for sale	Recurring	$	337,718	$	—	$	337,718	$	—
Equity securities with readily determinable fair values	Recurring	$	2,170	$	2,170	$	—	$	—
Collateral dependent impaired loans	Nonrecurring	$	7,498	$	—	$	—	$	7,498

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

Dollars in thousands

Fair Value Estimate

Valuation Technique

Unobservable Input

Range

Weighted Average

September 30, 2021

Impaired loans

5,474

Appraisal of collateral

(a)

Appraisal adjustments

(b)

(10) – (50)%

(51)%

December 31, 2020

Impaired loans

7,498

Appraisal of collateral

(a)

Appraisal adjustments

(b)

(10) – (50)%

(52)%

(a) Fair value is generally determined through management’s estimate or independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.

(b) Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, and/or age of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments as of September 30, 2021:


	September 30, 2021
In thousands	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	22,479	$	22,479	$	9,400	$	13,079	$	—
Interest-bearing deposits in banks	700,303		700,303		700,303		—		—
Equity securities available for sale	2,547		2,547		2,547		—		—
Investment securities available for sale	411,676		411,676		—		411,676		—
Investment securities held to maturity	7,220		7,482		—		7,482		—
Loans held for sale	3,935		3,935		—		3,935		—
Loans, less allowance for loan losses	1,467,745		1,490,133		—		—		1,490,133
Accrued interest receivable	5,746		5,746		—		5,746		—
Restricted investment in bank stocks	2,368		2,368		—		2,368		—

Financial liabilities:
Demand deposits and savings	1,966,499		1,966,499		—		1,966,499		—
Time deposits	451,062		453,159		—		453,159		—
Short-term borrowings	44,605		44,605		—		44,605		—
Long-term borrowings	20,700		21,027		—		21,027		—
Trust preferred subordinated debt	21,000		20,132		—		20,132		—
Accrued interest payable	417		417		—		417		—

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 as of December 31, 2020:


	December 31, 2020
In thousands	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	23,739	$	23,739	$	12,436	$	11,303	$	—
Interest-bearing deposits in banks	375,613		375,613		375,613		—		—
Equity securities available for sale	2,170		2,170		2,170		—		—
Investment securities available for sale	337,718		337,718		—		337,718		—
Investment securities held to maturity	10,294		10,768		—		10,768		—
Loans held for sale	11,034		11,034		—		11,034		—
Loans, less allowance for loan losses	1,617,558		1,662,342		—		—		1,662,342
Accrued interest receivable	6,950		6,950		—		6,950		—
Restricted investment in bank stocks	2,942		2,942		—		2,942		—

Financial liabilities:
Demand deposits and savings	1,708,868		1,708,868		—		1,708,868		—
Time deposits	476,657		481,138		—		481,138		—
Short-term borrowings	38,464		38,464		—		38,464		—
Long-term borrowings	42,745		43,669		—		43,669		—
Trust preferred subordinated debt	11,000		9,902		—		9,902		—
Accrued interest payable	1,434		1,434		—		1,434		—

Off-balance sheet financial instruments	—		—		—		—		—

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

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

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

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreement as of September 30, 2021, and December 31, 2020:


								Gross Amounts Not Offset in the Statements of Condition
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
September 30, 2021
Repurchase agreements
Commercial customers and government entities	(a)	$	44,605	$	—	$	44,605	$	(44,605)	$	—	$	—

December 31, 2020
Repurchase agreements
Commercial customers and government entities	(a)	$	38,464	$	—	$	38,464	$	(38,464)	$	—	$	—

(a) As of September 30, 2021, and December 31, 2020, the fair value of securities pledged in connection with repurchase agreements was $48,058,000 and $54,680,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of September 30, 2021:


	Remaining Contractual Maturity of the Agreements
In thousands	Overnight and Continuous		Up to 30 Days		30 – 90 Days		Greater than 90 Days		Total
Repurchase agreements and repurchase-to-maturity transactions
U.S. Treasury and agency securities	$	44,605	$	—	$	—	$	—	$	44,605
Total	$	44,605	$	—	$	—	$	—	$	44,605

12. Borrowings

The Corporation had long-term debt outstanding as follows:


In thousands	September 30, 2021		December 31, 2020
FHLB advances	$	18,000	$	38,716
Loan payable to local bank	—		1,329

Loan payable variable rate	2,700		2,700
Trust preferred subordinated debt	—		5,000
Trust preferred subordinated debt	6,000		6,000
Subordinated debt	15,000		—
	$	41,700	$	53,745

The FHLB advances are collateralized by the assets defined in the security agreement and FHLB capital stock. FHLB advances have maturity dates from 2021 to 2023 with a weighted average rate of 2.67%.

The loan payable to a local bank has a fixed rate of 4.5% for the first five years and a variable rate of interest with Prime Rate thereafter to final maturity in June 2028. The principal balance of this note may be prepaid at any time without penalty. This loan payable was paid off during the second quarter of 2021.

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 October 6, 2021, with the rate of interest accruing on the principal balance of 3.25% per year. The note is unsecured.

The first trust preferred subordinated debt is comprised of debt securities issued by New Windsor in June 2005 and assumed by ACNB Corporation through the acquisition. New Windsor issued $5,000,000 of 6.39% fixed rate capital securities to institutional investors in a private pooled transaction. The proceeds were transferred to New Windsor as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual arrangements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities. The trust preferred security was paid off during the second quarter of 2021.

The second trust preferred subordinated debt is comprised of debt securities issued by FCBI in December 2006 and assumed by ACNB Corporation through the acquisition. FCBI completed the private placement of an aggregate of $6,000,000 of trust preferred securities. The interest rate on the subordinated debentures is currently adjusted quarterly to 163 basis points over three-month LIBOR. The debenture has a provision if LIBOR is no longer available. On September 30, 2021, the most recent interest rate reset date, the interest rate was adjusted to 1.74600% for the period ending September 13, 2021. The trust preferred securities mature on December 15, 2036, and may be redeemed at par, at the Corporation’s option, on any interest payment date. The proceeds were transferred to FCBI as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual agreements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.

On March 30, 2021, ACNB Corporation (the Company) entered into Subordinated Note Purchase Agreements (Purchase Agreements) with certain institutional accredited investors and qualified institutional buyers (the Purchasers) pursuant to which the Company sold and issued $15.0 million in aggregate principal amount of its 4.00% fixed-to-floating rate subordinated notes due March 31, 2031 (the Notes). The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. The Company intends to use the net proceeds it received from the sale of the Notes to retire outstanding debt of the Company, repurchase issued and outstanding shares of the Company, support general corporate purposes, underwrite growth opportunities, create an interest reserve for the Notes, and downstream proceeds to ACNB Bank (the Bank), to be used by the Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank’s organic growth initiatives. The Notes have a stated maturity of March 31, 2031, are redeemable by the Company at its option, in whole or in part, on or after March 30, 2026, and at any time upon the occurrences of certain events.

13. Goodwill and Other Intangible Assets

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

On July 1, 2017, the Corporation completed its acquisition of New Windsor Bancorp, Inc. of Taneytown, Maryland. The acquisition of New Windsor resulted in goodwill of approximately $13,272,000 and generated $2,418,000 in core deposit intangibles.

On January 11, 2020, the Corporation completed its acquisition of Frederick County Bancorp, Inc. of Frederick, Maryland. The acquisition of FCBI resulted in goodwill of approximately $22,528,000 and generated $3,560,000 in core deposit intangibles.

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

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

years. ACNB continues to evaluate long lived assets to determine if there are events or conditions that require an impairment test.

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


In thousands	Gross carrying amount		Accumulated amortization
RIG amortized intangible assets	$	10,428	$	7,374
New Windsor core deposit intangibles	2,418		1,561
FCBI core deposit intangibles	3,560		1,084

The Corporation completes a goodwill analysis at least on an annual basis or more often if events and circumstances indicate that there may be impairment. The Corporation also completes an impairment test for other intangible assets on an annual basis or more often if events and circumstances indicate a possible impairment. The annual analysis is scheduled to occur within the fourth quarter of 2021. At September 30, 2021, ACNB cannot project the outcome of the annual analysis, however there are no events or circumstances indicating impairment.

14. Revenue Recognition

As of January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the cumulative effect approach. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Additional disclosures related to the Corporation’s largest sources of non-interest income within the consolidated statements of income that are subject to ASC 606 are as follows:

Income from fiduciary, investment management and brokerage activities – ACNB Bank’s Trust & Investment Services, under the umbrella of ACNB Wealth Management, provides a wide range of financial services, including trust services for individuals, businesses and retirement funds. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, power of attorney, custodial accounts and investment management and advisor accounts. In addition, ACNB’s Wealth Management Department offers retail brokerage-services through a third party provider. Wealth Management clients are located primarily within the Corporation’s geographic markets. Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statement since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $496,780,000 and $399,544,000 at September 30, 2021 and 2020, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.

The majority of trust services revenue is earned and collected monthly, with the amount determined based on the investment funds in each trust multiplied by a fee schedule for type of trust. Each trust has one integrated set of performance obligations so no allocation is required. The performance obligation is met by performing the identified fiduciary service. Successful performance is confirmed by ongoing internal and regulatory control, measurement is by valuing the trust assets at a monthly date to which a fee schedule is applied. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The costs of acquiring trust customers are incremental and recognized within non-interest expense in the consolidated statements of income.

Service charges on deposit accounts – Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-

day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within non-interest expense in the consolidated statements of income.

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

15. New Accounting Pronouncements

ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

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

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

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

ASU 2019-12

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

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

ASU 2020-04

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

ACNB CORPORATION

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION AND FORWARD-LOOKING STATEMENTS

Introduction

The following is management’s discussion and analysis of the significant changes in the financial condition, results of operations, comprehensive income, capital resources, and liquidity presented in its accompanying consolidated financial statements for ACNB Corporation (the Corporation or ACNB), a financial holding company. Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein. Current performance does not guarantee, assure or indicate similar performance in the future.

Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Corporation’s market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. Forward-looking statements are subject to certain risks and uncertainties such as local economic conditions, competitive factors, and regulatory limitations. Actual results may differ materially from those projected in the forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: the effects of governmental and fiscal policies, as well as legislative and regulatory changes; the effects of new laws and regulations, specifically the impact of the Coronavirus Response and Relief Supplemental Appropriations Act, the Coronavirus Aid, Relief, and Economic Security Act, the Tax Cuts and Jobs Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act; impacts of the capital and liquidity requirements of the Basel III standards; the effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters; ineffectiveness of the business strategy due to changes in current or future market conditions; future actions or inactions of the United States government, including the effects of short- and long-term federal budget and tax negotiations and a failure to increase the government debt limit or a prolonged shutdown of the federal government; the effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of Coronavirus Disease 2019 (COVID-19) and responses thereto on the operations of the Corporation and current customers, specifically the effect of the economy on loan customers’ ability to repay loans; the effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate protection agreements, as well as interest rate risks; difficulties in acquisitions and integrating and operating acquired business operations, including information technology difficulties; challenges in establishing and maintaining operations in new markets; the effects of technology changes; volatilities in the securities markets; the effect of general economic conditions and more specifically in the Corporation’s market areas; the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities; acts of war or terrorism; disruption of credit and equity markets; the ability to manage current levels of impaired assets; the loss of certain key officers; the ability to maintain the value and image of the Corporation’s brand and protect the Corporation’s intellectual property rights; continued relationships with major customers; and, potential impacts to the Corporation from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses. We caution readers not to place undue reliance on these forward-looking statements. They only reflect management’s analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.

CRITICAL ACCOUNTING POLICIES

The accounting policies that the Corporation’s management deems to be most important to the portrayal of its financial condition and results of operations, and that require management’s most difficult, subjective or complex judgment, often result

in the need to make estimates about the effect of such matters which are inherently uncertain. The following policies are deemed to be critical accounting policies by management:

The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. Management makes numerous assumptions, estimates and adjustments in determining an adequate allowance. The Corporation assesses the level of potential loss associated with its loan portfolio and provides for that exposure through an allowance for loan losses. The allowance is established through a provision for loan losses charged to earnings. The allowance is an estimate of the losses inherent in the loan portfolio as of the end of each reporting period. The Corporation assesses the adequacy of its allowance on a quarterly basis. The specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The evaluation of securities for other-than-temporary impairment requires a significant amount of judgment. In estimating other-than-temporary impairment losses, management considers various factors including the length of time the fair value has been below cost, the financial condition of the issuer, and the Corporation’s intent to sell, or requirement to sell, the security before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings.

Accounting Standard Codification (ASC) Topic 350, Intangibles — Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Corporation did not identify any impairment on RIG’s outstanding goodwill from its most recent testing, which was performed as of October 1, 2020. A qualitative assessment on the Bank’s outstanding goodwill, resulting from the 2017 New Windsor acquisition, was performed on the anniversary date of the merger which showed no impairment. Subsequent to that evaluation, ACNB concluded that it would be preferable to evaluate goodwill in the fourth quarter at year-end. This date was preferable from the anniversary date measurement as events happening nearer to year-end could be factored in if necessary. The second evaluation again revealed no impairment and it was agreed to continue to evaluate goodwill for the Bank at or near year-end. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. The Corporation has not identified any such events and, accordingly, has not tested goodwill resulting from the acquisition of New Windsor Bancorp, Inc. (New Windsor) for impairment during the nine months ended September 30, 2021. Other acquired intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized using the straight line method over their estimated useful lives which range from eight to fifteen years.

RESULTS OF OPERATIONS

Quarter ended September 30, 2021, compared to Quarter ended September 30, 2020

Executive Summary

Net income for the three months ended September 30, 2021, was $7,360,000, compared to a net income of $6,771,000 for the same quarter in 2020, an increase of $589,000 or 8.7%. Basic earnings per share for the three month period was $0.84 in 2021 and $0.79 in 2020, or a 6.3% increase. The higher net income for the third quarter of 2021 was primarily a result of higher fee income and less loan loss provision compared to the third quarter of 2020 in which the Pandemic caused higher provision expense. Net interest income for the quarter ended September 30, 2021 decreased $366,000, or 2.0%, as decreases in total interest income were more than decreases in total interest expense. Provision for loan losses was $0 for the quarter ended September 30, 2021, compared to $1,550,000 for the same quarter in 2020, based on the adequacy analysis including estimation of 2020 COVID-19 related losses (that even though not realized were believed to be embedded in the loan portfolio in the third quarter of 2020), resulting in an allowance to total loans of 1.29% (1.67% of non-acquired loans) at September 30, 2021. Other income increased $262,000, or 5.2%, due in part to increases in fees from fiduciary and investment activities and increases in most other categories while fees from selling mortgages into the secondary market decreased. Other expenses increased $666,000, or 5.0%, due in part to normal personnel, occupancy and regulatory expenses. During the third quarter of 2021, there were $0 in merger/system conversion related expenses for the acquisition of Frederick County Bancorp, Inc. (FCBI) that was effective on January 11, 2020. Although continuing to be profitable, ACNB was profoundly impacted by the COVID-19 events, as were most community banks.

Net Interest Income

Net interest income totaled $18,000,000 for the three months ended September 30, 2021, compared to $18,366,000 for the same period in 2020, a decrease of $366,000, or 2.0%. Net interest income decreased due to a decrease in interest income in a greater amount than the decrease in interest expenses. Interest income decreased $1,842,000, or 8.6%, due to the change in mix of average earning assets, in addition to decreased rates due to market events. The decrease in interest expense resulted from deposit rate decreases in addition to a favorable change in deposit mix (as discussed below). Loans outstanding was a result of active participation in the SBA Payroll Protection Program (PPP) offset by loan paydowns and payoffs ( including the PPP loans) despite concerted effort by management to counteract the recent year trend of the market area’s heightened competition and the COVID-19 related slow economic conditions. Loan yields were negatively impacted by declines in the U.S. Treasury yields and other market driver interest rates. The third quarter saw continued lower market yields and the difference between longer term rates and shorter term rates was generally modest. These driver rates affect new loan originations and are indexed to a portion of the loan portfolio in that a change in the driver rates changes the yield on new loans and on existing loans at subsequent interest rate reset dates. From these changes, interest income yield was negatively affected as new loans replace paydowns on existing loans and variable rate loans reset to new current rates in these years. Partially offsetting lower yields were FCBI purchase accounting adjustments ($642,000) and PPP fees ($1,281,000) recognized that increased yield. Both are finite in amount and nonrecurring in nature, especially the PPP fees, that will not repeat in this magnitude in upcoming periods. Interest income increased on investment securities due to increased new purchases at rates lower than rates on maturing investments. An elevated amount of earning assets remained in short-term, low-rate money market type accounts during the third quarter of 2021; and there exists ample ability to borrow for liquidity needs. The ability to increase lending is contingent on the lingering effects of COVID-19 on current and potential customers even with intense competition that has reduced new loans and may result in the payoff of existing loans, allowing economic conditions in the Corporation’s marketplace to eventually return to its previous stable state. As to funding costs, interest rates on alternative funding sources, such as the FHLB, and other market driver rates are factors in rates the Corporation and the local market pay for deposits. However, after COVID-19, Federal Open Market Committee (FOMC) actions, rates on transaction, savings and time deposits were sharply reduced in order to match sharply reduced market earning asset yields. Interest expense decreased $1,476,000, or 49.9%, due to lower rates offsetting higher volume on transaction deposits, certificate of deposit rate decreases and lower volume, and by less use of higher cost borrowings. The medical need to stop the spread of COVID-19 caused government officials to close or restrict operations of many businesses and their workers. One of the responses was for the Federal Reserve to decrease rates to 0% to 0.25% at which they remain. The effects of these rate actions and a host of other responses cannot be predicted currently. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets to commercial loans.

The net interest spread for the third quarter of 2021 was 2.70% compared to 3.07% during the same period in 2020. Also comparing the third quarter of 2021 to 2020, the yield on interest earning assets decreased by 0.70% and the cost of interest bearing liabilities decreased by 0.34%. The net interest margin was 2.79% for the third quarter of 2021 and 3.21% for the third quarter of 2020. The net interest margin decrease was net of lower purchase accounting adjustments which decreased 11 basis points, but was more impacted by sharp market rate decreases (including PPP loans fees) and less loans as a percentage in the earning asset mix and more lower yielding investments and liquidity assets.

Average earning assets were $2,560,000,000 during the third quarter of 2021, an increase of $287,000,000 from the average for the third quarter of 2020. Average interest bearing liabilities were $1,861,000,000 in the third quarter of 2021, an increase of $72,000,000 from the same period in 2020. Non-interest demand deposits increased $69,000,000 on average over the same period in 2020. All increases were a result of COVID-19 related slow economic activity that tend to concentrate increased liquidity into the banking system, including PPP loan proceeds.

Provision for Loan Losses

The provision for loan losses was $0 in the third quarter of 2021 and $1,550,000 in the third quarter of 2020. The determination of the provision was a result of the analysis of the adequacy of the allowance for loan losses calculation. The allowance for loan and lease losses generally does not include the loans acquired from the FCBI acquisition or the New Windsor Bancorp, Inc. acquisition completed in 2017 (New Windsor), which were recorded at fair value as of the acquisition dates. Total impaired loans at September 30, 2021 were (14.0)% lower when compared to December 31, 2020. Nonaccrual loans decreased by 20.2%, or $1,423,000, since December 31, 2020; all substandard loans decreased by 9.5% in that period. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. The third quarter of 2021 provision was calculated to be much lower due to the intervening provisioning for the impact of the COVID-19 pandemic and the continued reduction in modifications made in prior periods because of COVID-19. This customer base includes businesses in the hospitality/tourism industry, restaurants and related businesses and lessors of commercial real estate properties. The qualitative factor for this event and a related factor on commercial and industrial loan collateral was

stable. The lack of the provision in the third quarter of 2021, was despite loss incurred in 2021 charge-offs as allowance for the losses were calculated in prior periods. Otherwise Management concluded that the loan portfolio exhibited continued general stability in quantitative and qualitative measurements as shown in the tables and narrative in this Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements. The long term effect of the ongoing COVID-19 event cannot be currently estimated other than the calculation that resulted in the above mentioned special qualitative factors. This same analysis concluded that the unallocated allowance should be in the same range in the third quarter of 2021 compared with the previous quarter. For more information, please refer to Allowance for Loan Losses in the following Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the third quarter of 2021, the Corporation had net charge-offs of $1,066,000, as compared to net charge-offs of $703,000 for the third quarter of 2020.

Other Income

Total other income was $5,274,000 for the three months ended September 30, 2021, up $262,000, or 5.2%, from the third quarter of 2020. Fees from deposit accounts increased by $73,000, or 8.8%, due to partial resumption of economic activity that produces fee generating activity. Fee volume varies with balance levels, account transaction activity, and customer-driven events such as overdrawing account balances. Various specific government regulations effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Revenue from ATM and debit card transactions increased by $53,000 or 6.6%, to $862,000 due to variations in volume and mix, including COVID-19 related higher online volume. The longer term trend had been increases resulting from consumer desire to use more electronic delivery channels (Internet and mobile applications); however, regulations or legal challenges for large financial institutions may impact industry pricing for such transactions and fees in connection therewith in future periods, the effects of which cannot be currently quantified. The retail system-wide security breaches in the merchant base that are negatively affecting consumer confidence in the debit card channel. Income from fiduciary, investment management and brokerage activities, which includes fees from both institutional and personal trust, investment management services, estate settlement and brokerage services, totaled $837,000 for the three months ended September 30, 2021, as compared to $659,000 for the third quarter of 2020, a 27.0% net increase as a net result of higher fee volume from increased assets under management, lower sporadic estate fee income and varying fees on brokerage relationship transactions. Earnings on bank-owned life insurance decreased by $9,000, or 2.5%, as a net result of varying crediting rates and administrate cost. At the Corporation’s wholly-owned insurance subsidiary, Russell Insurance Group, Inc. (RIG), revenue was up by $27,000, or 1.6%, to $1,715,000 during the three month period due to increases in commission on recurring books of business due to economic activity factors. A continuing risk to RIG revenue is nonrenewal of large commercial accounts and actions by insurance carriers to reduce commissions paid to agencies such as RIG. Contingent or extra commission payments from insurance carriers are received in the second quarter of each year. Contingent commissions vary from prior periods, due to specific claims at RIG and trends in the entire insurance marketplace in general. Heightened pressure on commissions is expected to continue in this business line from insurance company actions. Estimation of upcoming contingent commissions is not calculable at September 30, 2021. Income for sold mortgages included in other income, decreased by $127,000 or (29.7)% due to less demand for refinancing in the current rate environment; such demand is rate dependent and therefore volatile. There were no gains or losses on sales of securities during the third quarter of 2021 and 2020. A $0 net fair value loss was recognized on local bank and CRA-related equity securities during the third quarter of 2021 due to normal variations in market value on publicly-traded local bank stocks, compared to a $82,000 net fair value loss during the third quarter of 2020 when these stocks were volatile from economic events. No equity securities were sold in either period. Other income in the three months ended September 30, 2021, was down by $15,000, or 4.7%, to $304,000 due to a variety of other fee income variances, mostly volume related.

Other Expenses

Other expenses for the quarter ended September 30, 2021 were $13,976,000, an increase of $666,000 or 5.0%, most of which was the result of managing expenditures in the current low economic activity period.

The largest component of other expenses is salaries and employee benefits, which moderately increased by $296,000, or 3.4%, when comparing the third quarter of 2021 to the same period a year ago. Overall, the limited increase in salaries and employee benefits was the result of factors as follows:

•challenges in replacing and maintaining customer-facing staff due to a competitive labor market;

•variations in back-office staff due to high demand for employees;

•increased organic growth initiatives at RIG;

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

•normal merit increases to employees and associated payroll taxes;

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

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

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

•defined benefit pension expense, which was up by $126,000, or 210.0%, when comparing the three months ended September 30, 2021, to the three months ended September 30, 2020, resulting from the change in discount rates which increases or decreases the future pension obligations (creating volatility in the expense), return on assets at the latest annual evaluation date due to market conditions and changes in actuarial assumptions reflecting increased longevity.

The Corporation’s overall pension plan investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of asset types, fund strategies, and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation’s risk tolerance on contribution levels, funded status, plan expense, as well as any applicable regulatory requirements. However, the determination of future benefit expense is also dependent on the fair value of assets and the discount rate on the year-end measurement date, which in recent years has experienced fair value volatility and low discount rates. The expense could also be higher in future years due to volatility in the discount rates at the latest measurement date, lower plan returns, and change in mortality tables utilized.

Net occupancy expense increased by $117,000, or 13.7% during the period, mostly due to deferred maintenance acceleration. Equipment expense decreased by $103,000, or 8.0%, due to tech equipment expenditures which vary due to specific projects. Equipment expense is subject to ever-increasing technology demands and the need for system upgrades for security and reliability purposes. ACNB Bank executed a third quarter core system conversion that will change various expense components (the future expense cannot be fully estimated) when complete as part of its Digital Transformation strategy. Technology investments and training allowing staff to work from home continues to prove invaluable in keeping the Bank operational during the resurging pandemic.

Professional services expense totaled $422,000 during the third quarter of 2021, as compared to $265,000 for the same period in 2020, an increase of $157,000, or 59.2%. This category includes expenses related to legal corporate governance, risk, compliance management and audit engagements, and legal counsel matters in connection with loans. It varies with specific engagements that occur at different times of each year, such as loan and compliance reviews.

Marketing and corporate relations expenses were $81,000 for the third quarter of 2021, or 19.8% lower, as compared to the same period of 2020. Marketing expense varies with the timing and amount of planned advertising production and media expenditures, typically related to the promotion of certain in-market banking and trust products.

Foreclosed assets held for resale consist of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed real estate expense recovery (from prior year losses) was $88,000 and $89,000 for the three months ended September 30, 2021 and 2020, respectively. The expense varies based upon the number and mix of commercial and residential real estate properties, unpaid property taxes, and deferred maintenance required upon acquisition. In addition, some properties suffer decreases in value after acquisition, requiring write-downs to fair value during the prolonged marketing cycles for these distressed properties. The net recoveries in 2021 and 2020 were related to final liquidation on unrelated properties which incurred expenses in prior periods. Foreclosed assets held for resale expenses or recoveries will vary in the remainder of 2021 depending on the unknown expenses related to new properties acquired. Foreclosure actions could be delayed in the COVID-19 environment.

Other tax expense increased by $72,000, or 22.4%, mostly due to the FCB acquisition comparing the three months ended September 30, 2021 and 2020, including higher Pennsylvania Bank Shares Tax. The Pennsylvania Bank Shares Tax is a shareholders’ equity-based tax and is subject to increases based on state government parameters and the level of the stockholders’ equity base that increased due to retained earnings equity and acquisitions. Supplies and postage expense increased by 36.6% due to variation in the timing of necessary replenishments. FDIC and regulatory expense increased 17.1% due to prior period use of credits that did not repeat in the current period. Intangible amortization decreased 8.9% on bank acquisition calculations while RIG was stable on books of business purchases. Other operating expenses increased by $85,000,

or 6.7%, in the third quarter of 2021, as compared to the third quarter of 2020. Increases included electronic banking and telecommunication related costs. In addition, other expenses include the expense of reimbursing checking and debit card customers for unauthorized transactions to their accounts and other third-party fraudulent use, which added approximately $37,000 to other expenses in the third quarter of 2021 compared to $47,000 in the third quarter of 2020. The expense related to reimbursements is unpredictable and varying, but ACNB has policies and procedures to limit exposure recognizing the value of electronic and other banking channels to customers and the significant revenue generated especially in the debit card arena.

Provision for Income Taxes

The Corporation recognized income taxes of $1,938,000, or 20.8% of pretax income, during the third quarter of 2021, as compared to $1,747,000, or 20.5% of pretax income, during the same period in 2020. The variances from the federal statutory rate of 21% in the respective periods are generally due to tax-exempt income from investments in and loans to state and local units of government at below-market rates (an indirect form of taxation), investment in bank-owned life insurance, and investments in low-income housing partnerships (which qualify for federal tax credits). In addition, both years include Maryland corporation income taxes. Low-income housing tax credits were $70,000 and $66,000 for the three months ended September 30, 2021 and 2020, respectively.

Nine Months ended September 30, 2021, compared to Nine Months ended September 30, 2020

Executive Summary

Net income for the nine months ended September 30, 2021, was $23,339,000, compared to $11,345,000 for the same nine months in 2020, an increase of $11,994,000 or 105.7%. Basic earnings per share for the nine month period was $2.67 in 2021 and $1.32 in 2020 or a 102.3% increase over the prior period. The higher net income for the first three quarters of 2021 was primarily a result of less loan loss provision compared to the first three quarters of 2020, one-time merger expenses in the first quarter of 2020, and higher fee income. Net interest income for the nine months ended September 30, 2021 decreased $272,000, or 0.5%, as decreases in total interest income were more than decreases in total interest expense. Provision for loan losses was $50,000 for the nine months ended September 30, 2021, compared to $8,100,000 for the same nine months in 2020, based on the adequacy analysis including estimation of 2020 COVID-19 related losses (that even though not realized were believed to be embedded in the loan portfolio in the first half of 2020), resulting in an allowance to total loans of 1.29% (1.67% of non-acquired loans) at September 30, 2021. Other income increased $3,072,000, or 21.8%, due in part to earlier in the year increases in bank fees from selling mortgages into the secondary market and change in equity securities fair value. Other expenses decreased $4,728,000, or 10.2%, due mostly to merger-related expenses in 2020 in connection with the acquisition of FCBI. During the nine months ended September 30, 2021, there were $0 in merger/system conversion related expenses for the acquisition of FCBI that was effective on January 11, 2020. Although continuing to be profitable, ACNB was profoundly impacted by the COVID-19 events, as were most community banks.

Net Interest Income

Net interest income totaled $53,894,000 for the nine months ended September 30, 2021, compared to $54,166,000 for the same period in 2020, a decrease of $272,000, or 0.5%. Net interest income decreased due to a decrease in interest income to a greater extent than a decrease in interest expense. Interest income decreased $4,333,000, or 6.8%, due to the change in mix of average earning assets, in addition to decreased rates due to market events. The decrease in interest expense resulted from deposit rate decreases in addition to a favorable change in deposit mix (as discussed below). Decreased loans outstanding was a result of active participation in the short term PPP loans and their subsequent paydown, despite concerted effort by management to offset the recent year trend of the market area’s heightened competition and the COVID-19 related slow economic conditions. Loan yields were negatively impacted by declines in the U.S. Treasury yields and other market driver interest rates. The first three quarters of 2021 saw continued lower market yields and the difference between longer term rates and shorter term rates was generally modest. These driver rates affect new loan originations and are indexed to a portion of the loan portfolio in that a change in the driver rates changes the yield on new loans and on existing loans at subsequent interest rate reset dates. From these changes, interest income yield was negatively affected as new loans replace paydowns on existing loans and variable rate loans reset to new current rates in these years. Partially offsetting lower yields were FCBI purchase accounting adjustments that increased yield. Interest income increased on investment securities due to new purchases despite lower rates than rates on maturing investments. An elevated amount of earning assets remained in short-term, low-rate money market type accounts during the first nine months of 2021; and there exists ample ability to borrow for liquidity needs. The ability to increase lending is contingent on the effects of COVID-19 on current and potential customers even with intense competition that has reduced new loans and may result in the payoff of existing loans, as economic conditions in the Corporation’s marketplace eventually return to its previous stable state. As to funding costs, interest rates on alternative funding sources, such as the FHLB, and other market driver rates are factors in and influence the rates the Corporation and the local market pay for deposits. However, after

COVID-19 FOMC actions, rates on transaction, savings and time deposits were sharply reduced in order to match sharply reduced market earning asset yields. Interest expense decreased $4,061,000, or 42.1%, due to lower rates offsetting higher volume on transaction deposits, certificate of deposit rate decreases and lower volume, and by less use of higher cost borrowings in the first three quarters of 2021. The medical need to stop the spread of COVID-19 caused government officials to close or restrict operations of many businesses and their workers. One of the responses was for the Federal Reserve to decrease rates to 0% to 0.25%. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets to commercial loans.

The net interest spread for the first nine months of 2021 was 2.78% compared to 3.33% during the same period in 2020. Also comparing the first nine months of 2021 to 2020, the yield on interest earning assets decreased by 0.98% and the cost of interest bearing liabilities decreased by 0.43%. The net interest margin was 2.90% for the first nine months of 2021 and 3.42% for the first nine months of 2020. The net interest margin decrease was net of lower purchase accounting adjustments which decreased 11 basis points, but was more impacted by sharp market rate decreases (including PPP loans) and less loans as a percentage in the earning asset mix and more lower yielding investments and liquidity assets. PPP fees recognized year to date 2021 were $4,411,000 and purchase accounting added another $2,384,000 to interest income. Both are finite in amount and duration, especially the PPP fees, and will not repeat at this magnitude in future periods. $2,205,000 in PPP deferred fees remain at September 30th.

Average earning assets were $2,483,000,000 during the first nine months of 2021, an increase of $443,000,000 from the average for the first nine months of 2020. Average interest bearing liabilities were $1,786,000,000 in the first nine months of 2021, an increase of $299,000,000 from the same period in 2020. Non-interest demand deposits increased $128,000,000 on average. All increases were a result of COVID-19 related slow economic activity that tend to concentrate increased liquidity into the banking system.

Provision for Loan Losses

The provision for loan losses was $50,000 in the first nine months of 2021 and $8,100,000 in the first nine months of 2020. The determination of the provision was a result of the analysis of the adequacy of the allowance for loan losses calculation. The allowance for loan and lease losses generally does not include the loans acquired from the FCBI acquisition or the New Windsor acquisition, which were recorded at fair value as of the acquisition dates. Total impaired loans at September 30, 2021 were 14.0% lower compared to December 31, 2020. Nonaccrual loans decreased by 20.2%, or $1,423,000, since December 31, 2020; all substandard loans decreased by 9.5% in that period. Each quarter, the Corporation assesses risk in the loan portfolio and reserve required compared with the balance in the allowance for loan losses and the current evaluation factors. The first nine months of 2021 provision was calculated to be much lower due to the intervening provisioning for the impact of the COVID-19 pandemic and the continued reduction in modifications made in prior periods because of COVID-19. This customer base includes businesses in the hospitality/tourism industry, restaurants and related businesses and lessors of commercial real estate properties. The qualitative factor for this event and a related factor on commercial and industrial loan collateral was stable. The $50,000 in provision expense was due to limited loss incurred in 2021 charge-offs. Otherwise, Management concluded that the loan portfolio exhibited continued general stability in quantitative and qualitative measurements as shown in the tables and narrative in this Management’s Discussion and Analysis and the Notes to the Consolidated Financial Statements. The long term effect of the ongoing COVID-19 event cannot be currently estimated other than the calculation that resulted in the above mentioned special qualitative factors. This same analysis concluded that the unallocated allowance should be in the same range in 2021 compared with the previous quarter. For more information, please refer to Allowance for Loan Losses in the following Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the first nine months of 2021, the Corporation had net charge-offs of $1,135,000, as compared to net charge-offs of $2,735,000 for the first nine months of 2020.

Other Income

Total other income was $17,143,000 for the nine months ended September 30, 2021, up $3,072,000, or 21.8%, from the first nine months of 2020. At the Corporation’s wholly-owned insurance subsidiary, Russell Insurance Group, Inc. (RIG), revenue was up by $206,000, or 4.3%, to $4,951,000 during the period due to increases in contingent commission volume, net of lower commission on recurring books of business due to economic activity factors. A continuing risk to RIG revenue is nonrenewal of large commercial accounts and actions by insurance carriers to reduce commissions paid to agencies such as RIG. Contingent or extra commission payments from insurance carriers are received in the second quarter of each year. Contingent commissions were higher than the prior year, due to specific claims at RIG and trends in the entire insurance marketplace in general in prior periods. Heightened pressure on commissions is expected to continue in this business line from insurance company actions. Estimation of upcoming contingent commission is not calculable at September 30, 2021. Revenue from ATM and debit card

transactions increased by $375,000 or 17.4%, to $2,536,000 due to variations in volume and mix, including COVID-19 related higher online volume. The longer term trend had been increases resulting from consumer desire to use more electronic delivery channels (Internet and mobile applications); however, regulations or legal challenges for large financial institutions may impact industry pricing for such transactions and fees in connection therewith in future periods, the effects of which cannot be currently quantified. Another challenge to this revenue source is the general COVID-19 event and related impact caused decrease in retail activity and the retail system-wide security breaches in the merchant base that are negatively affecting consumer confidence in the debit card channel. Income for sold mortgages included in other income, increased earlier in the year by $1,218,000 or 95.2% due to demand for refinancing in the low rate environment; such demand is rate dependent and therefore volatile. Fees from deposit accounts decreased by $32,000, or 1.3%, due to COVID-19 related decrease in economic activity that reduced fee generating activity. Fee volume varies with balance levels, account transaction activity, and customer-driven events such as overdrawing account balances. Various specific government regulations effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Income from fiduciary, investment management and brokerage activities, which includes fees from both institutional and personal trust, investment management services, estate settlement and brokerage services, totaled $2,363,000 for the nine months ended September 30, 2021, as compared to $1,982,000 for the first nine months of 2020, a 19.2% net increase as a net result of higher fee volume from increased assets under management, lower sporadic estate fee income and varying fees on brokerage relationship transactions. Earnings on bank-owned life insurance decreased by $24,000, or 2.2%, as a net result of varying crediting rates and administrative cost. Other income in the nine months ended September 30, 2021, was up by $88,000, or 10.5%, to $925,000 due to a variety of other fee income variances, mostly volume related. A $377,000 net fair value gain was recognized on local bank and CRA-related equity securities during the first nine months of 2021 due to less concern on COVID-19 related negative market value effect on publicly-traded stocks, compared to a $483,000 net fair value loss during the first nine months of 2020 when such concerns were high. No equity securities were sold in either quarter. There were no gains or losses on sales of securities during the first nine months of 2021 and 2020.

Other Expenses

Other expenses for the nine months ended September 30, 2021 were $41,494,000, a decrease of $4,728,000 or 10.2%, most of which was the result of the first quarter of 2020 merger expenses of $5,965,000. Merger expenses included legal and consulting expenses to effect the legal merger, investment banking fees and preparing purchase accounting adjustments. Integration expenses included severance payments to FCBI staff separated by the merger, consultant costs to integrate FCBI systems into ACNB’s and the cost to terminate all FCBI core banking and electronic technology systems contracts. These costs were all necessary to provide requisite internal controls and cost effective core banking technology systems going forward. The costs of integrating all systems into one system was important to the merger viability and ongoing system integrity and quality.

The largest component of other expenses is salaries and employee benefits, which moderately increased by $528,000, or 2.1%, when comparing the first nine months of 2021 to the same period a year ago. Overall, the increase in salaries and employee benefits was the result of increases as follows:

•challenges in replacing and maintaining customer-facing staff due to a competitive labor market;

•variations in back-office staff due to the marketplace high demand for employees;

•increased organic growth initiatives at RIG;

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

•normal merit increases to employees and associated payroll taxes;

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

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

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

•defined benefit pension expense, which was up by $378,000, or 210.0%, when comparing the nine months ended September 30, 2021, to the nine months ended September 30, 2020, resulting from the change in discount rates which increases or decreases the future pension obligations (creating volatility in the expense), return on assets at the latest annual evaluation date due to market conditions and changes in actuarial assumptions reflecting increased longevity.

Net occupancy expense increased by $337,000, or 12.4% during the period, mostly due to higher first quarter seasonal expense and deferred and periodic maintenance expenditures. Equipment expense decreased by $256,000, or 6.3%, due to tech equipment expenditures which vary due to specific projects. Equipment expense is subject to ever-increasing technology demands and the need for system upgrades for security and reliability purposes. ACNB Bank executed a third quarter core system conversion that will change various expense components (which cannot be fully estimated) when complete as part of its Digital Transformation strategy. Technology investments and training allowing staff to work from home continues to prove invaluable in keeping the Bank operational during the pandemic.

Professional services expense totaled $890,000 during the first nine months of 2021, as compared to $921,000 for the same period in 2020, a decrease of $31,000, or 3.4%. This category includes expenses related to legal corporate governance, risk, compliance management and audit engagements, and legal counsel matters in connection with loans. It varies with specific engagements that are not on a regular recurring basis.

Marketing and corporate relations expenses were $220,000 for the first nine months of 2021, or 50.2% lower, as compared to the same period of 2020. Marketing expense varies with the timing and amount of planned advertising production and media expenditures, typically related to the promotion of certain in-market banking and trust products.

Foreclosed assets held for resale consist of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed real estate expense recovery (from prior year losses) was $90,000 and $182,000 for the nine months ended September 30, 2021 and 2020, respectively. The expense varies based upon the number and mix of commercial and residential real estate properties, unpaid property taxes, and deferred maintenance required upon acquisition. In addition, some properties suffer decreases in value after acquisition, requiring write-downs to fair value during the prolonged marketing cycles for these distressed properties. The higher net expense recovery in 2020 was related to final liquidation on unrelated properties which incurred expenses in prior periods. Foreclosed assets held for resale expenses or recoveries will vary in the remainder of 2021 depending on the unknown expenses related to new properties acquired and final disposition. Foreclosure actions could be delayed in the COVID-19 environment.

Other tax expense increased by $210,000, or 21.7%, comparing the nine months ended September 30, 2021 and 2020, mostly due to higher Pennsylvania Bank Shares Tax. The Pennsylvania Bank Shares Tax is a shareholders’ equity-based tax and is subject to increases based on state government parameters and the level of the stockholders’ equity base that increased due to retained earnings equity (including such amount acquired in the 2020 merger). Supplies and postage expense decreased by 2.7% due to variation in the timing of necessary replenishments and with more use of electronic delivery. FDIC and regulatory expense increased 77.6% due to prior period use of credits that did not repeat in the current period. Intangible amortization decreased 7.7% due to bank acquisition calculation net of higher RIG amortization on new book purchases. Other operating expenses increased by $359,000, or 9.6%, in the first nine months of 2021, as compared to the first nine months of 2020. Increases included electronic banking and telecommunication costs. Other expenses including the expense of reimbursing debit card customers for unauthorized transactions to their accounts and other third-party fraudulent use, which added approximately $131,000 to other expenses in the first nine months of 2021 compared to $91,000 in the first nine months of 2020. Third-party breaches also cause additional card inventory and processing costs to the Corporation, none of which is expected to be recovered from the third-party merchants or other parties where the breaches occur. The debit card electronic delivery channel is valued by customers and provides significant revenue to the Corporation. The expense related to reimbursements is unpredictable and varying, but ACNB has policies and procedures in place to limit exposure.

Provision for Income Taxes

The Corporation recognized income taxes of $6,154,000, or 20.9% of pretax income, during the first nine months of 2021, as compared to $2,570,000, or 18.5% of pretax income, during the same period in 2020. The variances from the federal statutory rate of 21% in the respective periods are generally due to tax-exempt income from investments in and loans to state and local

units of government at below-market rates (an indirect form of taxation), investment in bank-owned life insurance, and investments in low-income housing partnerships (which qualify for federal tax credits). In addition, both years include Maryland corporation income taxes. Low-income housing tax credits were $211,000 and $193,000 for the nine months ended September 30, 2021 and 2020, respectively.

FINANCIAL CONDITION

Assets totaled $2,792,792,000 at September 30, 2021, compared to $2,555,362,000 at December 31, 2020, and $2,503,049,000 at September 30, 2020. Average earning assets during the nine months ended September 30, 2021, increased to $2,483,000,000 from $2,040,000,000 during the same period in 2020. Average interest bearing liabilities increased in 2021 to $1,786,000,000 from $1,4871,000,000 in 2020.

Investment Securities

ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity. The changes in the securities portfolio were the net result of purchases and matured securities to provide proper collateral for public deposits. Investing into investment security portfolio assets over the past several years was made more challenging due to the Federal Reserve Bank’s program commonly called Quantitative Easing in which, by the Federal Reserve’s open market purchases, the yields were maintained at a lower level than would otherwise be the case. The investment portfolio is comprised of U.S. Government agency, municipal, and corporate securities. These securities provide the appropriate characteristics with respect to credit quality, yield and maturity relative to the management of the overall balance sheet.

At September 30, 2021, the securities balance included a net unrealized loss on available for sale securities of $953,000, net of taxes, on amortized cost of $412,901,000 versus a net unrealized gain of $4,645,000, net of taxes, on amortized cost of $331,745,000 at December 31, 2020, and a net unrealized gain of $4,874,000, net of taxes, on amortized cost of $307,404,000 at September 30, 2020. The change in fair value of available for sale securities during 2021 was a result of the higher amount of investments in the available for sale portfolio and by an decrease in fair value from an late in the quarter increase in the U.S. Treasury yield curve rates (which varies daily with volatility) and the spread from this yield curve required by investors on the types of investment securities that ACNB owns. The Federal Reserve reinstituted their rate-decreasing Quantitative Easing program in the COVID-19 crisis; and after increasing the fed funds rate in mid-December 2015 through December 2018 the Federal Reserve decreased the target rate to 0% to 0.25% in the ongoing COVID-19 crisis; both actions causing the U.S. Treasury yield curve to decrease in 2020. However, the bond market sensed that government stimulus would lead to inflation and the yield curve increased in terms relevant to the investment securities in the Corporation’s portfolio as of September 30, 2021, leading to fair value decreases. However, fair values were volatile on any given day in all periods presented and such volatility will continue. The changes in value are deemed to be related solely to changes in interest rates as the credit quality of the portfolio is high.

At September 30, 2021, the securities balance included held to maturity securities with an amortized cost of $7,220,000 and a fair value of $7,482,000, as compared to an amortized cost of $10,294,000 and a fair value of $10,768,000 at December 31, 2020, and an amortized cost of $13,606,000 and a fair value of $14,110,000 at September 30, 2020. The held to maturity securities are U.S. government pass-through mortgage-backed securities in which the full payment of principal and interest is guaranteed; however, they were not classified as available for sale because these securities are generally used as required collateral for certain eligible government accounts or repurchase agreements. They are also held for possible pledging to access additional liquidity for banking subsidiary needs in the form of FHLB borrowings. Due to changes in accounting rules, no held to maturity securities were added in the past several years. No held to maturity securities were acquired from FCBI.

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

The fair values of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing. Please refer to Note 8 — “Securities” in the Notes to Consolidated Financial Statements for more information on the security portfolio and Note 10 — “Fair Value Measurements” in the Notes to Consolidated Financial Statements for more information about fair value.

Loans

Loans outstanding decreased by $213,997,000, or 12.6%, at September 30, 2021 from September 30, 2020, and decreased by $150,898,000, or 9.2%, from December 31, 2020, to September 30, 2021. The decrease in loans year to date is largely attributable to the sale of most new residential mortgages, PPP loan payoffs, and the payoff of loans in the residential mortgage, consumer, and government lending portfolios. Year over year, organic loan declines is primarily a result of active participation and subsequent payoffs in the Paycheck Protection Program (PPP) as well as the other factors mentioned above. Despite the intense competition in the Corporation’s market areas, there is a continued focus internally on asset quality and disciplined underwriting standards in the loan origination process. In all periods, residential real estate lending and refinance activity was sold to the secondary market and commercial loans were subject to refinancing to competition for different rates or terms. In the normal course of business, more payoffs were anticipated in the remainder of 2021 from either customers’ cash reserves or refinancing at competing banks and markets, and currently lending actions are continuing while dealing with modifications and the ongoing work involved with the PPP Small Business Administration (SBA) guaranteed loans. During the first nine months of 2021, total commercial purpose loans decreased and local market portfolio residential mortgages decreased, largely from active participation and subsequent payoffs in the PPP program. Total commercial purpose segments decreased $94,824,000, or 8.5%, as compared to December 31, 2020. $98,000,000 of this decrease was PPP loans written in 2020 and subsequently paid off, net of new 2021 PPP loans to existing ACNB commercial customer base. Otherwise these loans are spread among diverse categories that include municipal governments/school districts, commercial real estate, commercial real estate construction, and commercial and industrial. Included in the commercial, financial and agricultural category are loans to Pennsylvania school districts, municipalities (including townships) and essential purpose authorities. In most cases, these loans are backed by the general obligation of the local government body. In many cases, these loans are obtained through a bid process with other local and regional banks. The loans are predominantly bank qualified for mostly tax-free interest income treatment for federal income taxes. These loans totaled $52,290,000 at September 30, 2021, a decrease of 24.0% from $68,772,000 held at the end of 2020; these loans are especially subject to refinancing in a low rate environment. Residential real estate mortgage lending, which includes smaller commercial purpose loans secured by the owner’s home, decreased by $54,464,000, or 10.8%, as compared to December 31, 2020. These loans are to local borrowers who preferred loan types that would not be sold into the secondary mortgage market. Of the $451,486,000 total in residential mortgage loans at September 30, 2021, $118,375,000 were secured by junior liens or home equity loans, which are also in many cases junior liens. Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a senior security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market weakens, property values deteriorate, or rates increase sharply. Non-real estate secured consumer loans comprise 0.8% of the portfolio, with automobile-secured loans representing less than 0.1% of the portfolio.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the PPP. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans. As of September 30, 2021, the Corporation had an outstanding balance of $40,798,000 under the PPP program, net of repayments and forgiveness to date. Gross fees collected totaled $9,491,000. Of this amount, fee income recognized was approximately $2,875,000, before costs in 2020. $4,407,000 was recognized as adjustment to interest income yield during 2021, and the balance will be recognized in future quarters as an adjustment of interest income yield.

Most of the Corporation’s lending activities are with customers located within southcentral Pennsylvania and in the northern Maryland area. This region currently and historically has lower unemployment rates than the U.S. as a whole. Included in commercial real estate loans are loans made to lessors of non-residential properties that total $390,607,000, or 26.3% of total loans, at September 30, 2021. These borrowers are geographically dispersed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space, and other commercial purpose facilities. Because of the varied nature of the tenants, in aggregate, management believes that these loans present an acceptable risk when compared to commercial loans in general. ACNB does not originate or hold Alt-A or subprime mortgages in its loan portfolio.

Allowance for Loan Losses

ACNB maintains the allowance for loan losses at a level believed to be adequate by management to absorb probable losses in the loan portfolio, and it is funded through a provision for loan losses charged to earnings. On a quarterly basis, ACNB utilizes a defined methodology in determining the adequacy of the allowance for loan losses, which considers specific credit reviews, past loan losses, historical experience, and qualitative factors. This methodology results in an allowance that is considered appropriate in light of the high degree of judgment required and that is prudent and conservative, but not excessive.

Management assigns internal risk ratings for each commercial lending relationship. Utilizing historical loss experience, adjusted for changes in trends, conditions, and other relevant factors, management derives estimated losses for non-rated and non-classified loans. When management identifies impaired loans with uncertain collectibility of principal and interest, it evaluates a specific reserve on a quarterly basis in order to estimate potential losses. Management’s analysis considers:

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

•the current estimated fair value of underlying collateral; and,

•prevailing market conditions.

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

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

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

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

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

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

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

Management determines the unallocated portion of the allowance for loan losses, which represents the difference between the reported allowance for loan losses and the calculated allowance for loan losses, based on the following criteria:

•the risk of imprecision in the specific and general reserve allocations;

•the perceived level of consumer and small business loans with demonstrated weaknesses for which it is not practicable to develop specific allocations;

•other potential exposure in the loan portfolio;

•variances in management’s assessment of national, regional and local economic conditions; and,

•other internal or external factors that management believes appropriate at that time, such as COVID-19.

The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio; specifically reserves where the Corporation believes that tertiary losses are probable above the loss amount derived using appraisal-based loss estimation, where such additional loss estimates are in accordance with regulatory and GAAP guidance. Appraisal-based loss derivation does not fully develop the loss present in certain unique, ultimately bank-owned collateral. The Corporation has determined that the amount of provision in 2021 and the resulting allowance at September 30, 2021, are appropriate given the continuing level of risk in the loan portfolio. Further, management believes the unallocated allowance is appropriate, because even though the impaired loans added since 2020 demonstrate generally low risk due to adequate real estate collateral, the value of such collateral can decrease; plus, the growth in the loan portfolio is centered around commercial real estate which continues to have little increase in value and low liquidity. In addition, there are certain loans that, although they did not meet the criteria for impairment, management believes there was a strong possibility that these loans

represented potential losses at September 30, 2021. The amount of the unallocated portion of the allowance was $472,000 at September 30, 2021. Before the COVID-19 event, management concluded that the loan portfolio exhibited continued general improvement in quantitative and qualitative measurements.

Management believes the above methodology materially reflects losses inherent in the portfolio. Management charges actual loan losses to the allowance for loan losses. Management periodically updates the methodology and the assumptions discussed above.

Management bases the provision for loan losses, or lack of provision, on the overall analysis taking into account the methodology discussed above, which is consistent with recent quarters’ improvement in the credit quality in the loan portfolio, but with increased risk from the impact of the COVID-19 crisis. The provision for year-to-date September 30, 2021 and 2020, was $50,000 and $8,100,000, respectively. More specifically, as total loans decreased from year-end 2020 and the provision expense decreased year over year, the allowance for loan losses was derived with data that most existing impaired credits were, in the opinion of management, adequately collateralized.

Federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. Upon adoption, the change in this accounting guidance could result in an increase in the Corporation’s allowance for loan losses and require the Corporation to record loan losses more rapidly. In October 2019, FASB voted to delay implementation of the CECL standard for certain companies, including those companies that qualify as a smaller reporting company under SEC rules until January 1, 2023. As a result ACNB will likely be able to defer implementation of the CECL standard for a period of time.

The allowance for loan losses at September 30, 2021, was $19,141,000, or 1.29% of total loans (1.67% of non-acquired loans), as compared to $19,200,000, or 1.13% of loans, at September 30, 2020, and $20,226,000, or 1.23% of loans, at December 31, 2020. The decrease from year-end resulted from charge-offs of $1,135,000 net of recoveries and $50,000 in provisions, as shown in the table below. In the following discussion, acquired loans from FCBI and New Windsor were recorded at fair value at the acquisition date and are not included in the tables and information below, see more information in Note 9 — “Loans” in the Notes to Consolidated Financial Statements.

Changes in the allowance for loan losses were as follows:


In thousands	Nine Months Ended September 30, 2021		Year Ended December 31, 2020		Nine Months Ended September 30, 2020
Beginning balance – January 1	$	20,226	$	13,835	$	13,835
Provisions charged to operations	50		9,140		8,100
Recoveries on charged-off loans	57		238		141
Loans charged-off	(1,192)		(2,987)		(2,876)
Ending balance	$	19,141	$	20,226	$	19,200

Loans past due 90 days and still accruing were $430,000 and nonaccrual loans were $5,618,000 as of September 30, 2021. $79,000 of the nonaccrual balance at September 30, 2021, were in troubled debt restructured loans. $3,600,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $1,743,000 at September 30, 2020, while nonaccruals were $6,885,000. $143,000 of the nonaccrual balance at September 30, 2020, was in troubled debt restructured loans. $3,707,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $855,000 at December 31, 2020, while nonaccruals were $7,041,000. $127,000 of the nonaccrual balance at December 31, 2020, were in troubled debt restructured loans. $3,680,000 of the impaired loans were accruing troubled debt restructured loans. Total additional loans classified as substandard (potential problem loans) at

September 30, 2021, September 30, 2020, and December 31, 2020, were approximately $2,351,000, $5,181,000 and $2,607,000, respectively.

Because of the manageable level of nonaccrual loans and with substandard loans in the third quarter of 2021, a $50,000 provision addition to the allowance was necessary due to charge-offs of $1,135,000.

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

As to nonaccrual and substandard loans, management believes that adequate collateralization generally exists for these loans in accordance with GAAP. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors.

Information on nonaccrual loans, by collateral type rather than loan class, at September 30, 2021, as compared to December 31, 2020, is as follows:


Dollars in thousands	Number of Credit Relationships	Balance		Specific Loss Allocations		Current Year Charge-Offs		Location	Originated
September 30, 2021

Owner occupied commercial real estate	8	$	3,980	$	457	$	—	In market	2008 - 2019
Investment/rental residential real estate	1	115		—		—		In market	2016
Commercial and industrial	3	1,523		883		970		In market	2008 - 2019
Total	12	$	5,618	$	1,340	$	970

December 31, 2020

Owner occupied commercial real estate	9	$	4,601	$	124	$	—	In market	2008 - 2019
Investment/rental residential real estate	3	410		34		—		In market	2009 - 2016
Commercial and industrial	2	2,030		1,224		—		In market	2008 - 2019
Total	14	$	7,041	$	1,382	$	—

Management deemed it appropriate to provide this type of more detailed information by collateral type in order to provide additional detail on the loans.

All nonaccrual impaired loans are to borrowers located within the market area served by the Corporation in southcentral Pennsylvania and nearby market areas of Maryland. All nonaccrual impaired loans were originated by ACNB’s banking subsidiary, except for one participation loan discussed below, for purposes listed in the classifications in the table above.

The Corporation had no impaired and nonaccrual loans included in commercial real estate construction at September 30, 2021.

Owner occupied commercial real estate at September 30, 2021, includes seven unrelated loan relationships. A $957,000 relationship in food service that was performing when acquired was added in the first quarter of 2020 after becoming 90 days past due early in the year, subsequent payments have been received under a forbearance agreement. An $802,000 merger-

acquired loan relationship for a light manufacturing enterprise which was performing when acquired is working through bankruptcy. The other loans in this category have balances of less than $228,000 each, for which the real estate is collateral and is used in connection with a business enterprise that is suffering economic stress or is out of business. The loans in this category were originated between 2008 and 2014 and are business loans impacted by specific borrower credit situations. Most loans in this category are making principal payments. Collection efforts will continue unless it is deemed in the best interest of the Corporation to initiate foreclosure procedures.

A $1,311,000 2017-acquired commercial real estate participation loan (after partial payoff in the third quarter of 2020) was added in the fourth quarter of 2019 and has been currently assigned a $457,000 specific allocation at September 30, 2021.

Investment/rental residential real estate at September 30, 2021, includes one (after two unrelated loans paid off without loss in the third quarter of 2021) totaling $115,000 for which the real estate is collateral and the purpose of which is for speculation, rental, or other non-owner occupied uses. The remaining loan relationship in this category was a business affected by COVID-19 but has made payments.

A $1,795,000 commercial and industrial loan was added in the fourth quarter of 2020 after ceasing operations, with a current balance of $640,000. Liquidation is underway with a specific allocation of $21,000 after a $970,000 third quarter charge-off. A related $441,000 owner occupied real estate loan is also in nonaccrual. An unrelated commercial and industrial loan at September 30, 2021 with a balance of $22,000 is currently making payments. A third unrelated loan relationship was added in the first quarter 2021 with an outstanding balance of $862,000 and a specific allocation $862,000 due to concerns on collateralization and liens.

The Corporation utilizes a systematic review of its loan portfolio on a quarterly basis in order to determine the adequacy of the allowance for loan losses. In addition, ACNB engages the services of an outside independent loan review function and sets the timing and coverage of loan reviews during the year. The results of this independent loan review are included in the systematic review of the loan portfolio. The allowance for loan losses consists of a component for individual loan impairment, primarily based on the loan’s collateral fair value and expected cash flow. A watch list of loans is identified for evaluation based on internal and external loan grading and reviews. Loans other than those determined to be impaired are grouped into pools of loans with similar credit risk characteristics. These loans are evaluated as groups with allocations made to the allowance based on historical loss experience adjusted for current trends in delinquencies, trends in underwriting and oversight, concentrations of credit, and general economic conditions within the Corporation’s trading area. The provision expense was based on the loans discussed above, as well as current trends in the watch list and the local economy as a whole. The charge-offs discussed elsewhere in this Management’s Discussion and Analysis create the recent loss history experience and result in the qualitative adjustment which, in turn, affects the calculation of losses inherent in the portfolio. The provision for loan losses for 2021 and 2020 was a result of the measurement of the adequacy of the allowance for loan losses at each period.

Premises and Equipment

During the quarter ended June 30, 2016, a building was sold and the Corporation is leasing back a portion of that building. In connection with these transactions, a gain of $1,147,000 was realized, of which $447,000 was recognized in the quarter ended June 30, 2016 and the remaining $700,000 deferred for future recognition over the lease back term. A reduction of lease expense of $53,000 was recognized in the first nine months of 2021 and 2020, respectively. ACNB valued six buildings acquired from New Windsor at $8,624,000 at July 1, 2017 and five properties acquired from FCBI at $7,514,000 at January 11, 2020. Two community offices closed in the second quarter of 2021 resulted in a small net gain.

Foreclosed Assets Held for Resale

Foreclosed assets held for resale consists of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. These fair values, less estimated costs to sell, become the Corporation’s new cost basis. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. The carrying value of real estate acquired through foreclosure totaled $0 with no properties at September 30, 2021, compared to $0 with no properties and borrowers at December 31, 2020. The decrease in the carrying value was due to all properties sold in 2020. All properties after acquisition are actively marketed. The Corporation expects to obtain and market additional foreclosed assets through the remainder of 2021; however, the total amount and timing is currently not certain.

Deposits

ACNB relies on deposits as a primary source of funds for lending activities with total deposits of $2,417,561,000 as of

September 30, 2021. Deposits increased by $301,985,000, or 14.3%, from September 30, 2020, to September 30, 2021, and increased by $232,036,000, or 10.6%, from December 31, 2020, to September 30, 2021. Deposits increased in the third quarter of 2021 from increased balances in a broad base of accounts from lack of economic activity continuing from the COVID-19 event. Even with this increase in volume, deposit interest expense decreased 56.6% due to lower rates. Otherwise, deposits vary between quarters mostly reflecting different levels held by local government and school districts during different times of the year. ACNB’s deposit pricing function employs a disciplined pricing approach based upon alternative funding rates, but also strives to price deposits to be competitive with relevant local competition, including a local government investment trust, credit unions and larger regional banks. During the recession and subsequent slow recovery, deposit growth mix experienced a shift to transaction accounts as customers put more value in liquidity and FDIC insurance. Products, such as money market accounts and interest-bearing transaction accounts that had suffered declines in past years, continued with recovered balances; however, it is expected that a return to more normal, lower balances will occur when the economy improves. With heightened competition, ACNB’s ability to maintain and add to its deposit base may be impacted by the reluctance of consumers to accept community banks’ lower rates (as compared to Internet-based competition) and by larger competition willing to pay above market rates to attract market share. If rates rise rapidly, or when the equity markets are high, funds could leave the Corporation or be priced higher to maintain deposits.

Borrowings

Short-term Bank borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As of September 30, 2021, short-term Bank borrowings were $44,605,000, as compared to $38,464,000 at December 31, 2020, and $52,721,000 at September 30, 2020. Agreements to repurchase accounts are within the commercial and local government customer base and have attributes similar to core deposits. Investment securities are pledged in sufficient amounts to collateralize these agreements. In comparison to year-end 2020, repurchase agreement balances were up $6,141,000, or 16.0%, due to changes in the cash flow position of ACNB’s commercial and local government customer base and lack of competition from non-bank sources. There were no short-term FHLB borrowings at September 30, 2021 and 2020, or December 31, 2020. Short-term FHLB borrowings are used to even out Bank funding from seasonal and daily fluctuations in the deposit base. Long-term borrowings consist of longer-term advances from the FHLB that provides term funding of loan assets, and Corporate borrowings that were acquired or originated in regards to the acquisitions. Long-term borrowings totaled $41,700,000 at September 30, 2021, versus $53,745,000 at December 31, 2020, and $57,113,000 at September 30, 2020. Long-term borrowings decreased 27.0% from September 30, 2020. $23.7 million was the net decrease to FHLB term Bank borrowings to balance loan demand and deposit growth. FHLB fixed-rate term Bank advances that matured after the first quarter of 2019 were not renewed due to adequate deposit funding sources. A second quarter of 2017 $4.6 million Corporation loan was paid off during the second quarter of 2021 on a borrowing from a local bank that had been made to fund the cash payment to shareholders of the New Windsor acquisition. RIG borrowed $1.0 million from a local bank at the end of the third quarter of 2018 to fund a book of business purchase. The balance of this loan was paid down to $0 at March 31, 2021. In addition, $5 million and $8.7 million was Corporation debt acquired from New Windsor and FCBI, respectively. The $5 million New Windsor debt was paid off with proceeds from the subordinated debt proceeds in June 2021. On March 30, 2021, ACNB Corporation issued $15,000,000 in Fixed-to-Floating Rate subordinated debt due March 31, 2031. The terms are five year 4% fixed rate and thereafter callable at 100% or a floating rate. The potential use of the net proceeds include retiring outstanding debt of the Corporation, repurchasing issued and outstanding shares of the Corporation, supporting general corporate purposes, underwriting growth opportunities, creating an interest reserve for the notes issued, and downstreaming proceeds to ACNB Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank’s organic growth initiatives. Please refer to the Liquidity discussion below for more information on the Corporation’s ability to borrow.

Capital

ACNB’s capital management strategies have been developed to provide an appropriate rate of return, in the opinion of management, to shareholders, while maintaining its “well-capitalized” regulatory position in relationship to its risk exposure. Total shareholders’ equity was $269,840,000 at September 30, 2021, compared to $257,972,000 at December 31, 2020, and $256,723,000 at September 30, 2020. Shareholders’ equity increased in the first nine months of 2021 by $11,868,000 primarily due to $16,629,000 in retained earnings from 2021 earnings net of dividends paid to date and the increase in accumulated other comprehensive loss from change in investment market value.

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

Since year end 2020 a $4,865,000 increase in accumulated other comprehensive loss was a result of a net decrease in the fair

value of the investment portfolio from the near quarter end increase in market rates and changes in the net funded position of the defined benefit pension plan. Other comprehensive income or loss is mainly caused by fixed-rate investment securities gaining or losing value in different interest rate environments and changes in the net funded position of the defined benefit pension plan.

The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared.

During the first nine months of 2021, ACNB earned $23,339,000 and paid dividends of $6,710,000 for a dividend payout ratio of 28.8%. During the first nine months of 2020, ACNB earned $11,345,000 and paid dividends of $6,509,000 for a dividend payout ratio of 57.4%.

ACNB Corporation has a Dividend Reinvestment and Stock Purchase Plan that provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. Year-to-date September 30, 2021, 17,897 shares were issued under this plan with proceeds in the amount of $162,000. Year-to-date September 30, 2020, 13,935 shares were issued under this plan with proceeds in the amount of $332,000. Proceeds were used for general corporate purposes.

ACNB Corporation has a Restricted Stock plan available to selected officers and employees of the Bank, to advance the best interest of ACNB Corporation and its shareholders. The plan provides those persons who have responsibility for its growth with additional incentive by allowing them to acquire an ownership in ACNB Corporation and thereby encouraging them to contribute to the success of the Corporation. As of September 30, 2021, there were 25,945 shares of common stock granted as restricted stock awards to employees of the subsidiary bank. The restricted stock plan expired by its own terms after 10 years on February 24, 2019, and no further shares may be issued under the plan. Proceeds are used for general corporate purposes.

On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the 2009 Restricted Stock Plan. As of September 30, 2021, 35,587 shares were issued under this plan and 538,468 shares were available for grant. Proceeds are used for general corporate purposes.

On February 25, 2021, the Corporation announced that the Board of Directors approved on February 23, 2021, a plan to repurchase, in open market and privately negotiated transactions, up to 261,000, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were 15,101 shares repurchased under the plan during the quarter ended September 30, 2021.

On September 30, 2021, the Corporation entered into an issuer stock repurchase agreement with an independent third-party broker under which the broker is authorized to repurchase the Corporation’s common stock on behalf of the Corporation during the period from the close of business on September 30, 2021 through March 31, 2022, subject to certain price, market and volume constraints specified in the agreement. The agreement was established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (Exchange Act). The shares will be purchased pursuant to the Corporation’s previously announced stock repurchase program and in a manner consistent with applicable laws and regulations, including the provisions of the safe harbor contained in Rule 10b-18 under the Exchange Act.

ACNB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ACNB. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ACNB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as of September 30, 2021, and December 31, 2020, that ACNB’s banking subsidiary met all minimum capital adequacy requirements to which it is subject and is categorized as “well capitalized” for regulatory purposes. There are no subsequent conditions or events that management believes have changed the banking subsidiary’s category.

Regulatory Capital Changes

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance effective January 1, 2014. The final rules call for the following capital requirements:

•a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;

•a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%;

•a minimum ratio of total capital to risk-weighted assets of 8.0%; and,

•a minimum leverage ratio of 4.0%.

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

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

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

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

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

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

The Corporation calculated regulatory ratios as of September 30, 2021, and confirmed no material impact on the capital, operations, liquidity, and earnings of the Corporation and the banking subsidiary from the changes in the regulations.

Risk-Based Capital

ACNB Corporation considers the capital ratios of the banking subsidiary to be the relevant measurement of capital adequacy.

In 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (CBLR) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited

amounts of off-balance sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9% (subsequently reduced to 8% as a COVID-19 relief measure). Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The CBLR framework was available for banks to use in their March 31, 2020 Call Report. The Corporation has performed changes to capital adequacy and reporting requirements within the quarterly Call Report, and it opted out of the CBLR framework on June 31, 2021.

The banking subsidiary’s capital ratios are as follows:


	September 30, 2021		December 31, 2020		To Be Well Capitalized Under Prompt Corrective Action Regulations
Tier 1 leverage ratio (to average assets)	9.04	%	9.01	%	5.00	%
Common Tier 1 capital ratio (to risk-weighted assets)	15.82	%	13.86	%	6.50	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	15.82	%	13.86	%	8.00	%
Total risk-based capital ratio	17.07	%	15.10	%	10.00	%

Liquidity

Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of ACNB, are met.

ACNB’s funds are available from a variety of sources, including assets that are readily convertible such as interest bearing deposits with banks, maturities and repayments from the securities portfolio, scheduled repayments of loans receivable, the core deposit base, and the ability to borrow from the FHLB. At September 30, 2021, ACNB’s banking subsidiary had a borrowing capacity of approximately $796,110,000 from the FHLB, of which $760,860,000 was available. Because of various restrictions and requirements on utilizing the available balance, ACNB considers $562,000,000 to be the practicable additional borrowing capacity, which is considered to be sufficient for operational needs. The FHLB system is self-capitalizing, member-owned, and its member banks’ stock is not publicly traded. ACNB creates its borrowing capacity with the FHLB by granting a security interest in certain loan assets with requisite credit quality. ACNB has reviewed information on the FHLB system and the FHLB of Pittsburgh, and has concluded that they have the capacity and intent to continue to provide both operational and contingency liquidity. The FHLB of Pittsburgh instituted a requirement that a member’s investment securities must be moved into a safekeeping account under FHLB control to be considered in the calculation of maximum borrowing capacity. The Corporation currently has securities in safekeeping at the FHLB of Pittsburgh; however, the safekeeping account is under the Corporation’s control. As better contingent liquidity is maintained by keeping the securities under the Corporation’s control, the Corporation has not moved the securities which, in effect, lowered the Corporation’s maximum borrowing capacity. However, there is no practical reduction in borrowing capacity as the securities can be moved into the FHLB-controlled account promptly if they are needed for borrowing purposes.

Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling approximately $44,605,000 and $38,464,000 at September 30, 2021, and December 31, 2020, respectively. These agreements vary in balance according to the cash flow needs of customers and competing accounts at other financial organizations.

The liquidity of the parent company also represents an important aspect of liquidity management. The parent company’s cash outflows consist principally of dividends to shareholders and corporate expenses. The main source of funding for the parent company is the dividends it receives from its subsidiaries. Federal and state banking regulations place certain legal restrictions and other practicable safety and soundness restrictions on dividends paid to the parent company from the subsidiary bank.

ACNB manages liquidity by monitoring projected cash inflows and outflows on a daily basis, and believes it has sufficient funding sources to maintain sufficient liquidity under varying degrees of business conditions.

On March 30, 2021, the Corporation issued $15 million of subordinated debt in order to pay off existing higher rate debt, to potentially repurchase ACNB common stock and to use for inorganic growth opportunities. Otherwise, the $15 million of subordinated debt qualifies as Tier 2 capital at the Holding Company level, but can be transferred to the Bank where it qualifies as Tier 1 Capital. The debt has a 4.00% fixed-to-floating rate and a stated maturity of March 31, 2031. The debt is redeemable

by the Corporation at its option, in whole or in part, on or after March 30, 2026, and at any time upon occurrences of certain unlikely events such as receivership insolvency or liquidation of ACNB or ACNB Bank.

Off-Balance Sheet Arrangements

The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At September 30, 2021, the Corporation had unfunded outstanding commitments to extend credit of approximately $384,645,000 and outstanding standby letters of credit of approximately $9,588,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.

Market Risks

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

Acquisition of Frederick County Bancorp, Inc.

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

Under the terms of the Reorganization Agreement, FCBI stockholders received 0.9900 share of ACNB Corporation common stock for each share of FCBI common stock that they owned as of the closing date. As a result, ACNB Corporation issued 1,590,547 shares of its common stock and cash in exchange for fractional shares based upon $36.43, the determined market share price of ACNB Corporation common stock in accordance with the Reorganization Agreement.

With the combination of the two organizations, ACNB Corporation, on a consolidated basis, has approximately $2.7 billion in assets, $2.3 billion in deposits, and $1.6 billion in loans with 31 community banking offices and three loan offices located in the counties of Adams, Cumberland, Franklin, Lancaster and York in Pennsylvania and the counties of Baltimore, Carroll and Frederick in Maryland, as of July 1, 2021. Further discussion of the risk factors involved with the merger of FCBI into the Corporation can be found in Part II, Item 1A – Risk Factors.

RECENT DEVELOPMENTS

BANK SECRECY ACT (BSA) – The Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. Effective May 11, 2018, the Bank began compliance with the new Customer Due Diligence Rule, which clarified and strengthened the existing obligations for identifying new and existing customers and includes risk-based procedures for conducting ongoing customer due diligence. All financial institutions are also required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Corporation’s banking

subsidiary has a BSA and USA PATRIOT Act compliance program commensurate with its risk profile and appetite.

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

DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK) – In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Dodd-Frank was intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally created a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank has had and will continue to have a significant impact on ACNB’s business operations as its provisions take effect. It is expected that, as various implementing rules and regulations are released, they will increase ACNB’s operating and compliance costs and could increase the banking subsidiary’s interest expense. Among the provisions that are likely to affect ACNB are the following:

Holding Company Capital Requirements

Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets as of December 31, 2009. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion, consistent with safety and soundness.

Deposit Insurance

Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions, and credit unions to $250,000 per depositor. Dodd-Frank also broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Dodd-Frank also eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

Corporate Governance

Dodd-Frank requires publicly-traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by the stockholders. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a state to a federal charter, or vice versa, while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.

Limits on Interstate Acquisitions and Mergers

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition — the acquisition of a bank outside its home state — unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Consumer Financial Protection Bureau

Dodd-Frank created the independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE – Pursuant to Dodd-Frank as highlighted above, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine the consumer’s ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and, (8) credit history. Alternatively, the mortgage lender can originate “qualified mortgages”, which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages and, as a result, generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g., subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g., prime loans) are given a safe harbor of compliance. The impact of the final rule, and the subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential effects on the Corporation’s business.

DEPARTMENT OF DEFENSE MILITARY LENDING RULE – In 2015, the U.S. Department of Defense issued a final rule which restricts pricing and terms of certain credit extended to active duty military personnel and their families. This rule, which was implemented effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage rate of

36% and restricts other fees. The rule requires financial institutions to verify whether customers are military personnel subject to the rule. The impact of this final rule, and any subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential effects on the Corporation’s business.

SUPERVISION AND REGULATION

Dividends

ACNB is a legal entity separate and distinct from its subsidiary bank. ACNB’s revenues, on a parent company only basis, result primarily from dividends paid to the Corporation by its subsidiaries. Federal and state laws regulate the payment of dividends by ACNB’s subsidiary bank. For further information, please refer to Regulation of Bank below.

Regulation of Bank

The operations of the subsidiary bank are subject to statutes applicable to banks chartered under the banking laws of Pennsylvania, to state nonmember banks of the Federal Reserve, and to banks whose deposits are insured by the FDIC. The subsidiary bank’s operations are also subject to regulations of the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC.

The Pennsylvania Department of Banking and Securities, which has primary supervisory authority over banks chartered in Pennsylvania, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. The subsidiary bank is also subject to examination by the FDIC for safety and soundness, as well as consumer compliance. These examinations are designed for the protection of the subsidiary bank’s depositors rather than ACNB’s shareholders. The subsidiary bank must file quarterly and annual reports to the Federal Financial Institutions Examination Council, or FFIEC.

Monetary and Fiscal Policy

ACNB and its subsidiary bank are affected by the monetary and fiscal policies of government agencies, including the Federal Reserve and FDIC. Through open market securities transactions and changes in its discount rate and reserve requirements, the Board of Governors of the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. The nature and impact of monetary and fiscal policies on future business and earnings of ACNB cannot be predicted at this time. From time to time, various federal and state legislation is proposed that could result in additional regulation of, and restrictions on, the business of ACNB and the subsidiary bank, or otherwise change the business environment. Management cannot predict whether any of this legislation will have a material effect on the business of ACNB.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent review, management has determined that there have been no material changes in market risks since year-end 2020. For further discussion of year-end information, please refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

ITEM 4 – CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in periodic SEC filings.

Disclosure controls and procedures are Corporation controls and other procedures that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

ACNB CORPORATION

ITEM 1 – LEGAL PROCEEDINGS

As of September 30, 2021, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which ACNB or its subsidiaries are a party or by which any of their assets are the subject, which could have a material adverse effect on ACNB or its subsidiaries or their results of operations. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or its subsidiaries by governmental authorities.

ITEM 1A – RISK FACTORS

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020. There are no material changes in risk factors as previously disclosed in the Form 10-K.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 5, 2009, shareholders approved and ratified the ACNB Corporation 2009 Restricted Stock Plan, effective as of February 24, 2009, in which awards shall not exceed, in the aggregate, 200,000 shares of common stock. As of September 30, 2021, there were 25,945 shares of common stock granted as restricted stock awards under this plan to employees of the subsidiary bank. The restricted stock plan expired by its own terms after 10 years on February 24, 2019, and no further shares may be issued under the plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.

On May 5, 2009, shareholders approved and adopted the amendment to the Articles of Incorporation of ACNB Corporation to authorize up to 20,000,000 shares of preferred stock, par value $2.50 per share. As of September 30, 2021, there were no issued or outstanding shares of preferred stock.

On January 24, 2011, the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan was introduced for shareholders of record. This plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. As of September 30, 2021, there were 208,508 shares of common stock issued through the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan.

On May 1, 2018, shareholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of September 30, 2021, there were 35,587 shares issued under this plan. The maximum number of shares that may yet be granted under this plan is 538,468. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2018 Omnibus Stock Incentive Plan was filed with the Securities and Exchange Commission on March 8, 2019. In addition, on March 8, 2019, the Corporation filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan to add the ACNB Corporation 2018 Omnibus Stock Incentive Plan to the registration statement.

On February 25, 2021, the Corporation announced that the Board of Directors approved on February 23, 2021, a plan to repurchase, in open market and privately negotiated transactions, up to 261,000, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were 15,101 treasury shares purchased under this plan during the quarter ended September 30, 2021.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES – NOTHING TO REPORT.

ITEM 4 – MINE SAFETY DISCLOSURES – NOT APPLICABLE.

ITEM 5 – OTHER INFORMATION – NOTHING TO REPORT.

ITEM 6 – EXHIBITS

The following exhibits are included in this report:


Exhibit 2.1						Agreement and Plan of Reorganization by and among ACNB Corporation, ACNB South Acquisition Subsidiary, LLC, ACNB Bank, New Windsor Bancorp, Inc., and New Windsor State Bank dated as of November 21, 2016, as amended. (Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-215914 on Form S-4, filed with the Commission on February 6, 2017.) Schedules are omitted; the Registrant agrees to furnish copies of Schedules to the Securities and Exchange Commission upon request.

Exhibit 2.2						Amendment No. 2 to Agreement and Plan of Reorganization by and among ACNB Corporation, ACNB South Acquisition Subsidiary, LLC, ACNB Bank, New Windsor Bancorp, Inc., and New Windsor State Bank dated as of April 18, 2017. (Incorporated by reference to Exhibit 2.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed with the Commission on August 4, 2017.)

Exhibit 2.3						Agreement and Plan of Reorganization by and among ACNB Corporation, ACNB South Acquisition Subsidiary, LLC, ACNB Bank, Frederick County Bancorp, Inc. and Frederick County Bank dated as of July 1, 2019. (Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-233791 on Form S-4, filed with the Commission on September 16, 2019.) Schedules are omitted; the Registrant agrees to furnish copies of Schedules to the Securities and Exchange Commission upon request.

Exhibit 3(i)						Amended and Restated Articles of Incorporation of ACNB Corporation. (Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on May 7, 2018.)

Exhibit 3(ii)						Amended and Restated Bylaws of ACNB Corporation. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 27, 2020.)

Exhibit 4.1						Form of ACNB Corporation 4.00% Fixed-to-Floating Rate Subordinated Note due March 31, 2031. (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on March 30, 2021.)

Exhibit 10.1						ACNB Corporation, ACNB Acquisition Subsidiary LLC, and Russell Insurance Group, Inc. Stock Purchase Agreement. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 15, 2005.)

Exhibit 10.2						Amended and Restated Executive Supplemental Life Insurance Plan — Applicable to James P. Helt, David W. Cathell and Lynda L. Glass. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Commission on March 6, 2015.)

Exhibit 10.3						Amended and Restated Director Supplemental Life Insurance Plan — Applicable to Kimberly S. Chaney, Frank Elsner, III, Todd L. Herring, Scott L. Kelley, James J. Lott, Donna M. Newell, Daniel W. Potts, Marian B. Schultz, D. Arthur Seibel, Jr., David L. Sites, Alan J. Stock and James E. Williams. (Incorporated by reference to Exhibit 10.4 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Commission on March 6, 2015.)

Exhibit 10.4						Amended and Restated Director Deferred Fee Plan — Applicable to Frank Elsner, III, Todd L. Herring, Scott L. Kelley, James J. Lott, Marian B. Schultz, Alan J. Stock and James E. Williams. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on January 6, 2012.)

Exhibit 10.5						ACNB Bank Salary Savings Plan. (Incorporated by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Commission on March 12, 2010.)



Exhibit 10.6						Group Pension Plan for Employees of ACNB Bank. (Incorporated by reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the Commission on May 4, 2012.)

Exhibit 10.7						Amended and Restated Employment Agreement between ACNB Corporation, Adams County National Bank and Lynda L. Glass dated as of December 31, 2008. (Incorporated by reference to Exhibit 10.10 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 13, 2009.)

Exhibit 10.8						Employment Agreement between ACNB Corporation, Adams County National Bank and David W. Cathell dated as of April 17, 2009. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 23, 2009.)

Exhibit 10.9						2009 Restricted Stock Plan. (Incorporated by reference to Appendix C of the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on March 25, 2009.)

Exhibit 10.10						Salary Continuation Agreement by and between ACNB Bank and Thomas A. Ritter dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.11						Salary Continuation Agreement by and between ACNB Bank and Lynda L. Glass dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.12						Salary Continuation Agreement by and between ACNB Bank and David W. Cathell dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.13						Amended and Restated 2001 Salary Continuation Agreement by and between ACNB Bank and Thomas A. Ritter dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.14						Amended and Restated 1996 Salary Continuation Agreement by and between ACNB Bank and Lynda L. Glass dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.5 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.15						Salary Continuation Agreement by and between ACNB Bank and James P. Helt dated as of March 28, 2012. (Incorporated by reference to Exhibit 10.20 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Commission on March 7, 2014.)

Exhibit 10.16						ACNB Bank Variable Compensation Plan effective January 1, 2014, as amended. (Incorporated by reference to Exhibit 10.16 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Commission on March 5, 2021.)

Exhibit 10.17						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement dated as of June 22, 2015. (Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 25, 2015.)

Exhibit 10.18						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement dated as of June 15, 2016. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 21, 2016.)


Exhibit 10.19						First Amendment to the Amended and Restated Employment Agreement by and between ACNB Corporation, ACNB Bank and Lynda L. Glass dated as of December 27, 2016. (Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on December 28, 2016.)

Exhibit 10.20						First Amendment to Employment Agreement by and between ACNB Corporation, ACNB Bank and David W. Cathell dated as of December 27, 2016. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on December 28, 2016.)

Exhibit 10.21						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement dated as of June 15, 2017. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 21, 2017.)

Exhibit 10.22						Amended and Restated Employment Agreement between ACNB Corporation, ACNB Bank and James P. Helt dated as of August 14, 2018. (Incorporated by reference to Exhibit 10.25 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, filed with the Commission on November 2, 2018.)

Exhibit 10.23						2018 Omnibus Stock Incentive Plan. (Incorporated by reference to Exhibit A of the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on March 27, 2018.)

Exhibit 10.24						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement for Employees dated as of June 14, 2019. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 20, 2019.)

Exhibit 10.25						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement for Non-Employee Directors dated as of June 14, 2019. (Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 20, 2019.)

Exhibit 10.26						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement for Employees dated as of June 15, 2020. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 19, 2020.)

Exhibit 10.27						Form of ACNB Bank Variable Compensation Plan Restricted Stock Agreement for Non-Employee Directors dated as of June 15, 2020. (Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 19, 2020.)

Exhibit 10.28						Form of Exhibit B Split Dollar Policy Endorsement to the Amended and Restated Director Supplemental Life Insurance Plan dated November 27, 2018. (Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K, filed with the Commission on November 28, 2018.)

Exhibit 10.29						Salary Continuation Agreement by and between ACNB Bank and James P. Helt dated as of November 27, 2018. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on November 28, 2018.)

Exhibit 10.30						Form of Subordinated Note Purchase Agreement dated March 30, 2021, by and among ACNB Corporation and the Purchasers. (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on March 30, 2021.)

Exhibit 18						Preferability Letter from ParenteBeard LLC dated as of August 3, 2012. (Incorporated by reference to Exhibit 18 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Commission on August 3, 2012.)

Exhibit 31.1						Chief Executive Officer Certification of Quarterly Report on Form 10-Q.

Exhibit 31.2						Chief Financial Officer Certification of Quarterly Report on Form 10-Q.



Exhibit 32.1						Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2						Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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Exhibit 101.INS						XBRL Instance Document – The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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Exhibit 101.CAL						XBRL Taxonomy Extension Calculation Linkbase.

Exhibit 101.DEF						XBRL Taxonomy Extension Definition Linkbase.

Exhibit 104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		ACNB CORPORATION (Registrant)

Date:	November 3, 2021	/s/ James P. Helt
		James P. Helt
		President & Chief Executive Officer

		/s/ David W. Cathell
		David W. Cathell
		Executive Vice President/Treasurer &
		Chief Financial Officer (Principal Financial Officer)