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.


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 on the effects of these questions which are inherently uncertain. The following policies are considered critical accounting policies by management:

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

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

Accounting Standard Codification (ASC) Topic 350, Intangibles - Goodwill and
Other, requires that goodwill is not amortized to expense, but rather that it be
assessed or tested for impairment at least annually. Impairment write-downs are
charged to results of operations in the period in which the impairment is
determined. The Corporation did not identify any impairment on RIG's outstanding
goodwill from its most recent testing, which was performed as of October 1,
2020. A qualitative assessment on the Bank's outstanding goodwill, resulting
from the 2017 New Windsor acquisition, was performed on the anniversary date of
the merger which showed no impairment. Subsequent to that evaluation, ACNB
concluded that it would be preferable to evaluate goodwill in the fourth quarter
at year-end. This date was preferable from the anniversary date measurement as
events happening nearer to year-end could be factored in if necessary. The
second evaluation again revealed no impairment and it was agreed to continue to
evaluate goodwill for the Bank at or near year-end. If certain events occur
which might indicate goodwill has been impaired, the goodwill is tested for
impairment when such events occur. The Corporation has not identified any such
events and, accordingly, has not tested goodwill resulting from the acquisition
of New Windsor Bancorp, Inc. (New Windsor) for impairment during the three
months ended March 31, 2021. Other acquired intangible assets that have finite
lives, such as core deposit intangibles, customer relationship intangibles and
renewal lists, are amortized over their estimated useful lives and subject to
periodic impairment testing. Core deposit intangibles are primarily amortized
over ten years using accelerated methods. Customer renewal lists are amortized
using the straight line method over their estimated useful lives which range
from eight to fifteen years.


Quarter ended March 31, 2021, compared to the quarter ended March 31, 2020


Net income for the three months ended March 31, 2021, was $7,471,000, compared
to a net loss of $1,223,000 for the same quarter in 2020, an increase of
$8,694,000 or 710.9%. Basic earnings (loss) per share for the three month period
was $0.86 in 2021 and $(0.14) in 2020, or a 714.3% increase. The higher net
income for the first quarter of 2021 was primarily a result of higher fee
income, less loan loss provision compared to the first quarter of 2020 which had
a loan charge-off of $2,000,000, and one-time merger expenses. Net interest
income for the quarter ended March 31, 2021 decreased $130,000, or 0.7%, as
decreases in total interest income were greater than decreases in total interest
expense. Provision for loan losses was $50,000 for the quarter ended March 31,
2021, compared to $4,000,000 for the same quarter in 2020, based on the adequacy
analysis including estimation of 2020 COVID-19 losses (that even though not
realized were believed to be embedded in the loan portfolio in the first quarter
of 2020), resulting in an allowance to total loans of 1.26% (1.66% of
non-acquired loans) at March 31, 2021. Other income increased $1,747,000, or
41.9%, due in part to increases in bank fees from selling mortgages into the
secondary market and change in equity securities fair value. Other expenses
decreased $5,670,000, or 29.1%, due in part to merger-related expenses in 2020
in connection with the acquisition of Frederick County Bancorp, Inc. in the
Frederick County, Maryland market (FCBI) in January 2020. During the first
quarter of 2021 there were $0 in merger/system conversion related expenses for
the acquisition of FCBI that was effective on January 11, 2020. Although
profitable, ACNB was profoundly impacted by the COVID-19 events, as were most
community banks.


Net interest income

Net interest income totaled $17,325,000 for the three months ended March 31,
2021, compared to $17,455,000 for the same period in 2020, a decrease of
$130,000, or 0.7%. Net interest income decreased due to an decrease in interest
income to a greater extent than a decrease in interest expense. Interest income
decreased $1,539,000, or 7.4%, due to the change in mix of average earning
assets, in addition to decreased rates due to market events. The decrease in
interest expense resulted from deposit rate decreases in addition to a favorable
change in deposit mix (as discussed below). Loans outstanding was a result of
active participation in the SBA Payroll Protection Program (PPP), the
acquisition of FCBI offsetting loan paydowns and payoffs despite concerted
effort by management to offset the recent year trend of the market area's
heightened competition and the COVID-19 related slow economic conditions. Loan
yields were negatively impacted by declines in the U.S. Treasury yields and
other market driver interest rates. The first quarter saw continued lower market
yields and the difference between longer term rates and shorter term rates was
generally modest. These driver rates affect new loan originations and are
indexed to a portion of the loan portfolio in that a change in the driver rates
changes the yield on new loans and on existing loans at subsequent interest rate
reset dates. From these changes, interest income yield was negatively affected
as new loans replace paydowns on existing loans and variable rate loans reset to
new current rates in these years. Partially offsetting lower yields were FCBI
purchase accounting adjustments that increased yield. Interest income decreased
on investment securities due to new purchases at rates lower than rates on
maturing investments. An elevated amount of earning assets remained in
short-term, low-rate money market type accounts during the first quarter of
2021; and there exists ample ability to borrow for liquidity needs. The ability
to increase lending is contingent on the effects of COVID-19 on current and
potential customers even with intense competition that has reduced new loans and
may result in the payoff of existing loans, as economic conditions in the
Corporation's marketplace eventually return to its previous stable state. As to
funding costs, interest rates on alternative funding sources, such as the FHLB,
and other market driver rates are factors in rates the Corporation and the local
market pay for deposits. However, after COVID-19 Federal Open Market Committee
(FOMC) actions, rates on transaction, savings and time deposits were sharply
reduced in order to match sharply reduced market earning asset yields. Interest
expense decreased $1,409,000, or 40.8%, due to lower rates offsetting higher
volume on transaction deposits, certificate of deposit rate decreases and lower
volume, and by less use of higher cost borrowings. The medical need to stop the
spread of COVID-19 caused government officials to close or restrict operations
of many businesses and their workers. One of the responses was for the Federal
Reserve to decrease rates to 0% to 0.25%. The effects of these rate actions and
a host of other responses cannot be predicted currently. Over the longer term,
the Corporation continues its strategic direction to increase asset yield and
interest income by means of loan growth and rebalancing the composition of
earning assets to commercial loans.

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

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

Allowance for loan losses

The provision for loan losses was $50,000 in the first quarter of 2021 and
$4,000,000 in the first quarter of 2020. The determination of the provision was
a result of the analysis of the adequacy of the allowance for loan losses
calculation. The allowance for loan and lease losses generally does not include
the loans acquired from the FCBI acquisition or the New Windsor Bancorp, Inc.
acquisition completed in 2017 (New Windsor), which were recorded at fair value
as the acquisition dates. Total impaired loans at March 31, 2021 were 5.8%
higher when compared to December 31, 2020. Nonaccrual loans increased by 9.2%,
or $651,000, since December 31, 2020; all substandard loans increased by 7.6% in
that period. Each quarter, the Corporation assesses risk in the loan portfolio
compared with the balance in the allowance for loan losses and the current
evaluation factors. The first quarter 2021 provision was calculated to be much
lower due to the intervening provisioning for the impact of the COVID-19
pandemic and the continued reduction in modifications made in prior periods
because of COVID-19. This customer base includes businesses in the
hospitality/tourism industry, restaurants and related businesses and lessors of
commercial real estate properties. The estimated increase in this 2021
qualitative factor for this event was approximately $0 for a total of $50,000 in
provision expense. The remainder of the provision was due to limited loss
incurred in 2021 charge-offs. Otherwise Management concluded that the loan
portfolio exhibited continued general stability in quantitative and qualitative

measurements as shown in the tables and narrative in this Management's
Discussion and Analysis and the Notes to the Consolidated Financial Statements.
The long term effect of the ongoing COVID-19 event cannot be currently estimated
other than the calculation that resulted in the above mentioned special
qualitative factors. This same analysis concluded that the unallocated allowance
should be in the same range in 2021 compared with the previous quarter. For more
information, please refer to Allowance for Loan Losses in the following
Financial Condition section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations. ACNB charges confirmed loan
losses to the allowance and credits the allowance for recoveries of previous
loan charge-offs. For the first quarter of 2021, the Corporation had net
charge-offs of $39,000, as compared to net charge-offs of $1,983,000 for the
first quarter of 2020.

Other Income

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

Other expenses

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

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

• the replacement and maintenance of personnel in contact with customers during the COVID-19 event due to a competitive labor market;

• variations in the personnel in contact with customers retained to serve the FCBI market;

• increased organic growth initiatives at RIG;


• an increase in staff in support functions and a more skilled mix of employees made necessary by regulation and growth;

• normal employee merit increases and related payroll taxes;

• the variation and timing of performance-based commissions, restricted stock awards and incentives;

• market developments in actively managing the costs of employee benefit plans, including health insurance;

• the variable cost of benefits from the 401 (k) plan and the non-qualifying pension plan; and,

•defined benefit pension expense, which was up by $126,000, or 210.0%, when
comparing the three months ended March 31, 2021, to the three months ended March
31, 2020, resulting from the change in discount rates which increases or
decreases the future pension obligations (creating volatility in the expense),
return on assets at the latest annual evaluation date due to market conditions
and changes in actuarial assumptions reflecting increased longevity.

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

Net occupancy expense increased by $186,000, or 19.0% during the period, mostly
due to more winter season expense. Equipment expense increased by $7,000, or
0.5%, due to tech equipment expenditures which vary due to specific projects.
Equipment expense is subject to ever-increasing technology demands and the need
for system upgrades for security and reliability purposes. ACNB Bank is in the
midst of a core system conversion that will change various expense components
(which cannot be fully estimated) when complete as part of its Digital
Transformation strategy. Technology investments and training allowing staff to
work from home continues to prove invaluable in keeping the Bank operational
during the pandemic.

Professional services expense totaled $224,000 during the first quarter of 2021,
as compared to $402,000 for the same period in 2020, a decrease of $178,000, or
44.3%. This category includes expenses related to legal corporate governance,
risk, compliance management and audit engagements, and legal counsel matters in
connection with loans. It varies with specific engagements that are not on a
regular recurring basis.

Marketing and corporate relations expenses were $77,000 for the first quarter of
2021, or 58.2% lower, as compared to the same period of 2020. Marketing expense
varies with the timing and amount of planned advertising production and media
expenditures, typically related to the promotion of certain in-market banking
and trust products.

Foreclosed assets held for resale consist of the fair value of real estate
acquired through foreclosure on real estate loan collateral or the acceptance of
ownership of real estate in lieu of the foreclosure process. Fair values are
based on appraisals that consider the sales prices of similar properties in the
proximate vicinity less estimated selling costs. Foreclosed real estate (income)
expense recovery (from prior year losses) was $(1,000) and $75,000 for the three
months ended March 31, 2021 and 2020, respectively. The expense varies based
upon the number and mix of commercial and residential real estate properties,
unpaid property taxes, and deferred maintenance required upon acquisition. In
addition, some properties suffer decreases in value after acquisition, requiring
write-downs to fair value during the prolonged marketing cycles for these
distressed properties. The higher expense in 2020 was related to expense until
final liquidation. Foreclosed assets held for resale expenses or recoveries will
vary in the remainder of 2021 depending on the unknown expenses related to new
properties acquired. Foreclosure actions could be delayed in the COVID-19

Other tax expense increased by $66,000, or 20.2%, comparing the three months
ended March 31, 2021 and 2020, including higher Pennsylvania Bank Shares Tax.
The Pennsylvania Bank Shares Tax is a shareholders' equity-based tax and is
subject to increases based on state government parameters and the level of the
stockholders' equity base that increased with retained earnings equity and
acquisitions. Supplies and postage expense decreased by 22.0% due to variation
in timing of sporadic refills. FDIC and regulatory expense increased 465.9% due
to prior periods use of credits that did not repeat in the current periods.
Intangible amortization decreased 6.0% on bank acquisition calculations and RIG
books of business purchases. Other operating expenses increased by $104,000, or
8.9%, in the first quarter of 2021, as compared to the first quarter of 2020.
Increases included electronic banking and corporate governance related costs. In
addition, other expenses include the expense

of reimbursing checking and debit card customers for unauthorized transactions
to their accounts and other third-party fraudulent use, added approximately
$77,000 to other expenses in the first quarter of 2021 compared to $34,000 in
the first quarter of 2020. Third-party breaches also cause additional card
inventory and processing costs to the Corporation, none of which is expected to
be recovered from the third-party merchants or other parties where the breaches
occur. The debit card electronic delivery channel is valued by customers and
provides significant revenue to the Corporation. The expense related to
reimbursements is unpredictable and varying, but ACNB has policies and
procedures to limit exposure.

Provision for income taxes

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


Assets totaled $2,654,617,000 at March 31, 2021, compared to $2,555,362,000 at
December 31, 2020, and $2,180,065,000 at March 31, 2020. Average earning assets
during the three months ended March 31, 2021, increased to $2,387,000,000 from
$2,130,625,000 during the same period in 2020. Average interest bearing
liabilities increased in 2021 to $1,721,000,000 from $1,544,540,000 in 2020.

Investment security

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

At March 31, 2021, the securities balance included a net unrealized loss on
available for sale securities of $1,434,000, net of taxes, on amortized cost of
$356,852,000 versus a net unrealized gain of $4,645,000, net of taxes, on
amortized cost of $331,745,000 at December 31, 2020, and a net unrealized gain
of $4,463,000, net of taxes, on amortized cost of $247,310,000 at March 31,
2020. The change in fair value of available for sale securities during 2021 was
a result of the higher amount of investments in the available for sale portfolio
and by a decrease in fair value from an increase in the U.S. Treasury yield
curve rates and the spread from this yield curve required by investors on the
types of investment securities that ACNB owns. The Federal Reserve reinstituted
their rate-decreasing Quantitative Easing program in the COVID-19 crisis; and
after increasing the fed funds rate in mid-December 2015 through December 2018
the Federal Reserve decreased the target rate to 0% to 0.25% in the ongoing
COVID-19 crisis; both actions causing the U.S. Treasury yield curve to decrease
in 2020. However, the bond market sensed that government stimulus would lead to
inflation and the yield curve increased in terms relevant to the investment
securities in the Corporation's portfolio as of March 31, 2021, leading to fair
value deceases.. However, fair values were volatile on any given day in all
periods presented and such volatility will continue. The changes in value are
deemed to be related solely to changes in interest rates as the credit quality
of the portfolio is high.

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


The Company does not hold investments comprised of Alt-A or subprime mortgage pools, private label mortgage-backed securities or preferred trust 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 outstanding increased by $4,679,000, or 0.3%, at March 31, 2021 from
March 31, 2020, and decreased by $27,066,000, or 1.7%, from December 31, 2020,
to March 31, 2021. The decrease in loans year to date is largely attributable to
the sale of most new residential mortgages and the early payoff of loans in the
residential mortgage, consumer, and government lending portfolios. Year over
year, organic loan growth is primarily a result of active participation in the
Paycheck Protection Program (PPP). Despite the intense competition in the
Corporation's market areas, there is a continued focus internally on asset
quality and disciplined underwriting standards in the loan origination process.
In all periods, residential real estate lending and refinance activity was sold
to the secondary market and commercial loans were subject to refinancing to
competition for different rates or terms. In the normal course of business, more
payoffs were anticipated in the remainder of 2021 from either customers' cash
reserves or refinancing at competing banks and markets, and currently lending
actions are continuing while dealing with modifications and the ongoing work
involved with the PPP Small Business Administration (SBA) guaranteed loans.
During the first three months of 2021, total commercial purpose loans increased
and local market portfolio residential mortgages decreased, largely from the
acquisition of FCBI and active participation in the PPP program. Total
commercial purpose segments increased $6,494,000, or 0.6%, as compared to
December 31, 2020. $142,036,000 of this increase was PPP loans written in 2020
and 2021 to existing ACNB commercial customer base. Otherwise these loans are
spread among diverse categories that include municipal governments/school
districts, commercial real estate, commercial real estate construction, and
commercial and industrial. Included in the commercial, financial and
agricultural category are loans to Pennsylvania school districts, municipalities
(including townships) and essential purpose authorities. In most cases, these
loans are backed by the general obligation of the local government body. In many
cases, these loans are obtained through a bid process with other local and
regional banks. The loans are predominantly bank qualified for mostly tax free
interest income treatment for federal income taxes. These loans totaled
$78,945,000 at March 31, 2021, an increase of 14.8% from $68,772,000 held at the
end of 2020; these loans are especially subject to refinancing in a declining
rate environment. Residential real estate mortgage lending, which includes
smaller commercial purpose loans secured by the owner's home, decreased by
$32,751,000, or 6.5%, as compared to December 31, 2020. These loans are to local
borrowers who preferred loan types that would not be sold into the secondary
mortgage market. Of the $473,199,000 total in residential mortgage loans at
March 31, 2021, $124,767,000 were secured by junior liens or home equity loans,
which are also in many cases junior liens. Junior liens inherently have more
credit risk by virtue of the fact that another financial institution may have a
senior security position in the case of foreclosure liquidation of collateral to
extinguish the debt. Generally, foreclosure actions could become more prevalent
if the real estate market weakens, property values deteriorate, or rates
increase sharply. Non-real estate secured consumer loans comprise 0.8% of the
portfolio, with automobile-secured loans representing less than 0.1% of the

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed
into law on March 27, 2020, and provided over $2.0 trillion in emergency
economic relief to individuals and businesses impacted by the COVID-19 pandemic.
The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a)
loan program called the PPP. As a qualified SBA lender, the Corporation was
automatically authorized to originate PPP loans. As of March 31, 2021, the
Corporation had an outstanding balance of $142,036,347 under the PPP program,
net of repayments and forgiveness to date. Gross fees collected totaled
$8,650,000. Of this amount, fee income recognized was approximately $2,875,000,
before costs in 2020. $953,000 was recognized as adjustment to interest income
yield through the first quarter of 2021, and the balance will be recognized in
future quarters as an adjustment of interest income yield.

Most of the Corporation's lending activities are with customers located within
southcentral Pennsylvania and in the northern Maryland area. This region
currently and historically has lower unemployment rates than the U.S. as a
whole. Included in commercial real estate loans are loans made to lessors of
non-residential properties that total $371,449,000, or 23.1% of total loans, at
March 31, 2021. These borrowers are geographically dispersed throughout ACNB's
marketplace and are leasing commercial properties to a varied group of tenants
including medical offices, retail space, and other commercial purpose
facilities. Because of the varied nature of the tenants, in aggregate,
management believes that these loans present an acceptable

risk compared to commercial loans in general. ACNB does not issue 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:

• unfavorable situations that could affect the borrower’s repayment capacity;

• the current estimated fair value of the 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:

• loan policies and procedures, including underwriting standards and collection, write-off and collection practices;

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

• the nature and size of the portfolio and the loan conditions;

• experience, skill and depth of loan and staff management;

• the volume and severity of delinquent, classified and non-accounting loans, as well as other loan modifications; and,

• existence and effect of any concentration of credit and change 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 allocation of specific and general reserves;

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

• other potential exposure in the loan portfolio;

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

• other internal or external factors that management deems appropriate at the 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 March 31,
2021, are appropriate given the continuing level of risk in the loan portfolio.
Further, management believes the unallocated allowance is appropriate, because
even though the impaired loans added since 2020 demonstrate generally low risk
due to adequate real estate collateral, the value of such collateral can
decrease; plus, the growth in the loan portfolio is centered around commercial
real estate which continues to have little increase in value and low liquidity.
In addition, there are certain loans that, although they did not meet the
criteria for impairment, management believes there was a strong possibility that
these loans represented potential losses at March 31, 2021. The amount of the
unallocated portion of the allowance was $1,048,000 at March 31, 2021. Before
the COVID-19 event, management concluded that the loan portfolio exhibited
continued general improvement in quantitative and qualitative measurements.

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

Management bases the provision for loan losses, or lack of provision, on the
overall analysis taking into account the methodology discussed above, which is
consistent with recent quarters' improvement in the credit quality in the loan
portfolio, but with increased risk from the impact of the COVID-19 crisis . The
provision for year-to-date March 31, 2021 and 2020, was $50,000 and $4,000,000,
respectively. More specifically, as total loans decreased from year-end 2020 and
the provision expense decreased year over year, the allowance for loan losses
was derived with data that most existing impaired credits were, in the opinion
of management, adequately collateralized.

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

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

The allowance for loan losses at March 31, 2021, was $20,237,000, or 1.26% of
total loans (1.66% of non-acquired loans), as compared to $15,852,000, or 0.99%
of loans, at March 31, 2020, and $20,226,000, or 1.23% of loans, at December 31,
2020. The increase from year-end resulted from charge-offs of $39,000 net of
recoveries and $50,000 in provisions, as shown in the table below. In the
following discussion, acquired loans from FCBI and New Windsor were recorded at
fair value at the acquisition date and are not included in the tables and
information below, see more information in Note 9 - "Loans" in the Notes to
Consolidated Financial Statements.


The changes in the allowance for loan losses are as follows:

                                                  Three Months Ended             Year Ended             Three Months Ended
In thousands                                        March 31, 2021            December 31, 2020           March 31, 2020
Beginning balance - January 1                     $         20,226          $           13,835          $         13,835
Provisions charged to operations                                50                       9,140                     4,000
Recoveries on charged-off loans                                 16                         238                        85
Loans charged-off                                              (55)                     (2,987)                   (2,068)
Ending balance                                    $         20,237          $           20,226          $         15,852

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

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

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

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

The details regarding the actual loan modifications are as follows:

         Type of Loans                   Number of Loans              Deferral Period               Balance             Percentage of Capital
Commercial Purpose                                 28                      Up to 6 months       $ 23,562,751                             9.15  %
Consumer Purpose                                    2                      Up to 6 months            157,609                             0.06
                                                   30                                           $ 23,720,360

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


Information on non-criminal loans, by collateral type rather than loan category, at
March 31, 2021, compared to December 31, 2020, is as follows:

                                              Number of                                                         Current
                                               Credit                                 Specific Loss              Year
Dollars in thousands                        Relationships           Balance            Allocations            Charge-Offs            Location               Originated
March 31, 2021

Owner occupied commercial real
estate                                            9                $ 4,544          $          151          $          -             In market             2008 - 2019
Investment/rental residential real
estate                                            3                    410                       -                     -             In market             2009 - 2016
Commercial and industrial                         3                  2,738                   1,955                     -             In market             2008 - 2019
Total                                            15                $ 7,692          $        2,106          $          -

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 has deemed it appropriate to provide this type of information in more detail by type of guarantee in order to provide additional details 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 Company had no impaired and non-incremental loans included in the construction of commercial buildings at March 31, 2021.

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

A $ 1,311,000 The commercial real estate equity loan acquired in 2017 (after partial repayment in the third quarter of 2020) was added in the fourth quarter of 2019 and was granted a $ 118,000 specific allowance.

Investment/rental residential real estate at March 31, 2021, includes three
unrelated loan relationships totaling $410,000 for which the real estate is
collateral and the purpose of which is for speculation, rental, or other
non-owner occupied uses. One loan in this category at April 2015, was stayed
from further foreclosure action by a bankruptcy filing. A second loan added in
the third quarter of 2019 appears to be adequately collateralized in an upcoming
sheriff's sale. An unrelated loan relationship in this category was a business
affected by COVID-19 but has made payments.

A $1,795,000 commercial and industrial loan was added in the fourth quarter of
2020 after ceasing operations. Liquidation are underway with a specific
allocation of $1,1190,000. A related $441,000 owner occupied real estate loan is
also in nonaccrual. An unrelated commercial and industrial loan at March 31,
2021 with a balance of $34,000 and a specific allocation of $11,000; this loan
is currently making payments. A third unrelated loan relationship was added in
the first quarter 2021 with an outstanding balance of $909,000 and a specific
allocation $754,000 due to concerns on collateralization.

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

Premises and Equipment

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

Assets seized for resale

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


ACNB relies on deposits as a primary source of funds for lending activities with
total deposits of $2,278,622,000 as of March 31, 2021. Deposits increased by
$467,265,000, or 25.8%, from March 31, 2020, to March 31, 2021, and increased by
$93,097,000, or 4.3%, from December 31, 2020, to March 31, 2021. Deposits
increased in the first quarter of 2021 from PPP proceeds deposited to customer's
accounts and from increased balances in a broad base of accounts from lack of
economic activity due to the COVID-19 event. Even with this increase in volume,
deposit interest expense decreased 43.4% due to lower rates. Otherwise, deposits
vary between quarters mostly reflecting different levels held by local
government and school districts during different times of the year. ACNB's
deposit pricing function employs a disciplined pricing approach based upon
alternative funding rates, but also strives to price deposits to be competitive
with relevant local competition, including a local government investment trust,
credit unions and larger regional banks. During the recession and subsequent
slow recovery, deposit growth mix experienced a shift to transaction accounts as
customers put more value in liquidity and FDIC insurance. Products, such as
money market accounts and interest-bearing transaction accounts that had
suffered declines in past years, continued with recovered balances; however, it
is expected that a return to more normal, lower balances will occur when the
economy improves. With heightened competition, ACNB's ability to maintain and
add to its deposit base may be impacted by the reluctance of consumers to accept
community banks' lower rates (as compared to Internet-based competition) and by
larger competition willing to pay above market rates to attract market share. If
rates rise rapidly, or when the equity markets are high, funds could leave the
Corporation or be priced higher to maintain deposits.


Short-term banking borrowings mainly consist of securities sold under repurchase agreements and short-term borrowings from the FHLB. From
March 31, 2021, short-term bank loans were 31,282,000 USD, compared to
38,464,000 USD at December 31, 2020, and 26,104,000 USD at March 31, 2020. Account buyback agreements are part of 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 down $7,182,000, or 18.7%, due to changes in the cash
flow position of ACNB's commercial and local government customer base and
competition from non-bank sources. There were no short-term FHLB borrowings at
March 31, 2021 and 2020, or December 31, 2020. Short-term FHLB borrowings are
used to even out Bank funding from seasonal and daily fluctuations in the
deposit base. Long-term borrowings consist of longer-term advances from the FHLB
that provides term funding of loan assets, and Corporate borrowings that were
acquired or originated in regards to the acquisitions. Long-term borrowings
totaled $65,616,000 at March 31, 2021, versus $53,745,000 at December 31, 2020,
and $71,723,000 at March 31, 2020. Long-term borrowings decreased 8.5% from
March 31, 2020. $20.0 million was the net decrease to FHLB term Bank borrowings
to balance loan demand and deposit growth. FHLB fixed-rate term Bank advances
that matured after the first quarter of 2019 were not renewed due to adequate
deposit funding sources. A second quarter of 2017 $4.6 million Corporation loan
was paid down to $1.2 million outstanding balance on a borrowing from a local
bank that had been made to fund the cash payment to shareholders of the New
Windsor acquisition. RIG borrowed $1.0 million from a local bank at the end of
the third quarter of 2018 to fund a book of business purchase. The balance of
this loan was paid down to $0 at March 31, 2021. In addition, $5 million and
$8.7 million was Corporation debt acquired from New Windsor and FCBI,
respectively. On March 30, 2021, ACNB Corporation issued $15,000,000 in
Fixed-to-Floating Rate subordinated debt due March 31, 2031. The terms are five
year 4% fixed rate and thereafter callable at 100% or a floating rate. The
potential use of the net proceeds include retiring outstanding debt of the
Corporation, repurchase issued and outstanding shares of the Corporation,
support general corporate purposes, underwrite growth opportunities, create an
interest reserve for the notes issued, and downstream proceeds to ACNB Bank to
continue to meet regulatory capital requirements, increase the regulatory
lending ability of the Bank, and support the Bank's organic growth initiatives.
Please refer to the Liquidity discussion below for more information on the
Corporation's ability to borrow.

Capital city

ACNB's capital management strategies have been developed to provide an
appropriate rate of return, in the opinion of management, to shareholders, while
maintaining its "well-capitalized" regulatory position in relationship to its
risk exposure. Total shareholders' equity was $257,612,000 at March 31, 2021,
compared to $257,972,000 at December 31, 2020, and $246,994,000 at March 31,
2020. Shareholders' equity decreased in the first three months of 2021 by
$360,000 primarily due to the increase in accumulated other comprehensive loss
from change in investment market value, net of $5,294,000 in retained earnings
from 2021 earnings net of dividends paid to date.

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

A $5,835,000 increase in accumulated other comprehensive loss was a result of a
net decrease in the fair value of the investment portfolio from the increase in
market rates and changes in the net funded position of the defined benefit
pension plan. Other comprehensive income or loss is mainly caused by fixed-rate
investment securities gaining or losing value in different interest rate
environments and changes in the net funded position of the defined benefit
pension plan.

The primary source of additional capital to ACNB is earnings retention, which
represents net income less dividends declared.
During the first three months of 2021, ACNB earned $7,471,000 and paid dividends
of $2,177,000 for a dividend payout ratio of 29.1%. During the first three
months of 2020, ACNB earned $(1,223,000) and paid dividends of $2,167,000 for a
dividend payout ratio of (177.2)%.

ACNB Corporation has a Dividend Reinvestment and Stock Purchase Plan that
provides registered holders of ACNB Corporation common stock with a convenient
way to purchase additional shares of common stock by permitting participants in
the plan to automatically reinvest cash dividends on all or a portion of the
shares owned and to make quarterly voluntary cash payments under the terms of
the plan. Participation in the plan is voluntary, and there are eligibility
requirements to participate in the plan. Year-to-date March 31, 2021, 5,627
shares were issued under this plan with proceeds in the amount of $(181,000).
Year-to-date March 31, 2020, shares were provided to participants by open market
purchases. Proceeds were used for general corporate purposes.

ACNB Corporation has a Restricted Stock plan available to selected officers and
employees of the Bank, to advance the best interest of ACNB Corporation and its
shareholders. The plan provides those persons who have responsibility for its
growth with additional incentive by allowing them to acquire an ownership in
ACNB Corporation and thereby encouraging them to contribute to the success of
the Corporation. As of March 31, 2021, there were 25,945 shares of common stock
granted as restricted stock awards to employees of the subsidiary bank. The
restricted stock plan expired by its own terms after 10 years on

February 24, 2019, and no other shares may be issued under the plan. The product is used for general corporate purposes.

On May 1, 2018, stockholders approved and ratified the ACNB Corporation 2018
Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards
shall not exceed, in the aggregate, 400,000 shares of common stock, plus any
shares that are authorized, but not issued, under the 2009 Restricted Stock
Plan. As of March 31, 2021, 35,587 shares were issued under this plan and
538,468 shares were available for grant. Proceeds are used for general corporate

On February 25, 2021, the Corporation announced that the Board of Directors
approved on February 23, 2021, a plan to repurchase, in open market and
privately negotiated transactions, up to 261,000, or approximately 3%, of the
outstanding shares of the Corporation's common stock. This new stock repurchase
program replaces and supersedes any and all earlier announced repurchase plans.
There were no shares repurchased under the plan during the quarter ended
March 31, 2021.

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

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

Changes in regulatory capital

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

Risk-based capital

ACNB Company considers the capital ratios of the banking subsidiary to be the relevant measure of capital adequacy.

In 2019, the federal banking agencies issued a final rule to provide an optional
simplified measure of capital adequacy for qualifying community banking
organizations, including the community bank leverage ratio (CBLR) framework.
Generally, under the CBLR framework, qualifying community banking organizations
with total assets of less than $10 billion, and limited amounts of off-balance
sheet exposures and trading assets and liabilities, may elect whether to be
subject to the CBLR framework if they have a CBLR of greater than 9%
(subsequently reduced to 8% as a COVID-19 relief measure). Qualifying community
banking organizations that elect to be subject to the CBLR framework and
continue to meet all requirements under the framework would not be subject to
risk-based or other leverage capital requirements and, in the case of an insured
depository institution, would be considered to have met the well capitalized
ratio requirements for purposes of the FDIC's Prompt Corrective Action
framework. The CBLR framework was available for banks to use in their March 31,
2020 Call Report. The Corporation has performed changes to capital adequacy and
reporting requirements within the quarterly Call Report, and it opted out of the
CBLR framework on March 31, 2021.

The capital ratios of the banking subsidiary are as follows:

                                                                                                                 To Be Well Capitalized
                                                                                                                      Under Prompt
                                                                                                                    Corrective Action
                                                       March 31, 2021            December 31, 2020                     Regulations
Tier 1 leverage ratio (to average assets)                        9.21  %                     9.01  %                                   5.00  %
Common Tier 1 capital ratio (to risk-weighted
assets)                                                         14.33  %                    13.86  %                                   6.50  %
Tier 1 risk-based capital ratio (to risk-weighted
assets)                                                         14.33  %                    13.86  %                                   8.00  %
Total risk-based capital ratio                                  15.58  %                    15.10  %                                  10.00  %


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

ACNB's funds are available from a variety of sources, including assets that are
readily convertible such as interest bearing deposits with banks, maturities and
repayments from the securities portfolio, scheduled repayments of loans
receivable, the core deposit base, and the ability to borrow from the FHLB. At
March 31, 2021, ACNB's banking subsidiary had a borrowing capacity of
approximately $825,196,000 from the FHLB, of which $775,330,000 was
available. Because of various restrictions and requirements on utilizing the
available balance, ACNB considers $566,000,000 to be the practicable additional
borrowing capacity, which is considered to be sufficient for operational needs.
The FHLB system is self-capitalizing, member-owned, and its member banks' stock
is not publicly traded. ACNB creates its borrowing capacity with the FHLB by
granting a security interest in certain loan assets with requisite credit
quality. ACNB has reviewed information on the FHLB system and the FHLB

of Pittsburgh, and has concluded that they have the capacity and intent to
continue to provide both operational and contingency liquidity. The FHLB of
Pittsburgh instituted a requirement that a member's investment securities must
be moved into a safekeeping account under FHLB control to be considered in the
calculation of maximum borrowing capacity. The Corporation currently has
securities in safekeeping at the FHLB of Pittsburgh; however, the safekeeping
account is under the Corporation's control. As better contingent liquidity is
maintained by keeping the securities under the Corporation's control, the
Corporation has not moved the securities which, in effect, lowered the
Corporation's maximum borrowing capacity. However, there is no practical
reduction in borrowing capacity as the securities can be moved into the
FHLB-controlled account promptly if they are needed for borrowing purposes.

Another source of liquidity is securities sold under repurchase agreements to
customers of ACNB's banking subsidiary totaling approximately $31,282,000 and
$38,464,000 at March 31, 2021, and December 31, 2020, respectively. These
agreements vary in balance according to the cash flow needs of customers and
competing accounts at other financial organizations.

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

ACNB manages liquidity by monitoring expected cash inflows and outflows on a daily basis and believes that it has sufficient sources of funding to maintain sufficient liquidity under varying degrees of commercial terms.

 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

Off-balance sheet arrangements

The Corporation is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and,
to a lesser extent, standby letters of credit. At March 31, 2021, the
Corporation had unfunded outstanding commitments to extend credit of
approximately $358,944,000 and outstanding standby letters of credit of
approximately $8,094,000. Because these commitments generally have fixed
expiration dates and many will expire without being drawn upon, the total
commitment level does not necessarily represent future cash requirements.

Market risks

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

The 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 April 1, 2021. Further discussion of the risk factors involved
with the merger of FCBI into the Corporation can be found in Part II, Item 1A -
Risk Factors.


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.

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:

Capital requirements of the holding company

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 of Charter-based conversions of institutions in difficulty

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.

Connection from one state to another

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.

Interchange Fee Limits

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

compliance with state and federal laws and regulations.

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.

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.


The 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.

Banking regulations

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

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.

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