| --- | --- | |---------------------|-------| | | | | | | | | | | | | | | | | | | | 23-2233457 | | | (I.R.S. Employer | | | Identification No.) | | | 17325 | | | (Zip Code) | | | --- | --- | --- | --- | |-------------------------------------------|-------------------|------------------|-------------------------------------------------------| | Title of each class | | Trading Symbol | Name of each exchange on which registered | | Common Stock, $2.50 par value per share | | ACNB | The NASDAQ Stock Market, LLC ...

PART I - FINANCIAL INFORMATION [ITEM 1 - FINANCIAL STATEMENTS](index=2&type=section&id=ITEM%201%20-%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements of ACNB Corporation, including the Statements of Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with their accompanying notes, providing a snapshot of the company's financial health, performance, and cash movements for the periods ended June 30, 2021, and comparative periods [CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)](index=2&type=page&id=CONSOLIDATED%20STATEMENTS%20OF%20CONDITION%20(UNAUDITED)) The Consolidated Statements of Condition show ACNB Corporation's financial position at June 30, 2021, compared to June 30, 2020, and December 31, 2020, with key changes including a significant increase in total assets, primarily driven by higher cash and cash equivalents and debt securities, alongside growth in total deposits | Metric | June 30, 2021 ($ thousands) | June 30, 2020 ($ thousands) | December 31, 2020 ($ thousands) | |:----------------------------|:----------------------------|:----------------------------|:--------------------------------| | Total Assets | 2,708,520 | 2,412,303 | 2,555,362 | | Total Liabilities | 2,442,154 | 2,160,113 | 2,297,390 | | Total Stockholders' Equity | 266,366 | 252,190 | 257,972 | | Cash & Cash Equivalents | 592,866 | 232,231 | 399,352 | | Total Deposits | 2,338,035 | 2,032,801 | 2,185,525 | | Loans, net | 1,537,569 | 1,715,210 | 1,617,558 | - Total Assets increased by **$296.2 million (11.7%)** from December 31, 2020, to June 30, 2021, and by **$296.2 million (12.3%)** from June 30, 2020, to June 30, 2021, primarily due to increases in cash and cash equivalents and debt securities[6](index=6&type=chunk) - Total Deposits increased by **$152.5 million (7.0%)** from December 31, 2020, to June 30, 2021, and by **$305.2 million (15.0%)** from June 30, 2020, to June 30, 2021[6](index=6&type=chunk) [CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)](index=4&type=page&id=CONSOLIDATED%20STATEMENTS%20OF%20INCOME%20(UNAUDITED)) The Consolidated Statements of Income show a significant increase in net income for both the three and six months ended June 30, 2021, compared to the same periods in 2020, driven by stable net interest income, a substantial reduction in the provision for loan losses, and growth in other income, despite a decrease in total interest income | Metric | Three Months Ended June 30, 2021 ($ thousands) | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | |:-------------------------------------|:-----------------------------------------------|:-----------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Total Interest Income | 20,633 | 21,585 | 40,003 | 42,494 | | Total Interest Expense | 2,064 | 3,240 | 4,109 | 6,694 | | Net Interest Income | 18,569 | 18,345 | 35,894 | 35,800 | | Provision for Loan Losses | — | 2,550 | 50 | 6,550 | | Total Other Income | 5,956 | 4,893 | 11,869 | 9,059 | | Total Other Expenses | 13,731 | 13,455 | 27,518 | 32,912 | | Net Income | 8,508 | 5,797 | 15,979 | 4,574 | | Basic earnings per share | 0.98 | 0.67 | 1.83 | 0.53 | | Cash dividends declared per share | 0.27 | 0.25 | 0.52 | 0.50 | - Net Income for the three months ended June 30, 2021, increased by **$2.711 million (46.8%)** YoY, and for the six months ended June 30, 2021, increased by **$11.405 million (249.3%)** YoY[8](index=8&type=chunk) - Provision for Loan Losses significantly decreased to **$0** for the three months ended June 30, 2021 (from $2.550 million YoY), and to **$50 thousand** for the six months ended June 30, 2021 (from $6.550 million YoY)[8](index=8&type=chunk) [CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)](index=5&type=page&id=CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME%20(UNAUDITED)) The Consolidated Statements of Comprehensive Income show an increase in total comprehensive income for the three months ended June 30, 2021, primarily due to higher net income and positive unrealized gains on securities, but for the six-month period, total comprehensive income decreased due to significant unrealized losses on securities, despite higher net income | Metric | Three Months Ended June 30, 2021 ($ thousands) | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | |:----------------------------------------|:-----------------------------------------------|:-----------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net Income | 8,508 | 5,797 | 15,979 | 4,574 | | Unrealized gains (losses) on securities | 2,176 | 769 | (3,903) | 3,971 | | Amortization of pension net loss | 244 | 131 | 488 | 262 | | Total Other Comprehensive Income (Loss) | 2,420 | 900 | (3,415) | 4,233 | | Total Comprehensive Income | 10,928 | 6,697 | 12,564 | 8,807 | - Total Comprehensive Income increased by **$4.231 million (63.2%)** for the three months ended June 30, 2021, compared to the same period in 2020, but increased by **$3.757 million (42.7%)** for the six months ended June 30, 2021, compared to the same period in 2020[9](index=9&type=chunk) - Unrealized gains on securities, net of taxes, were **$2.176 million** for the three months ended June 30, 2021, but turned into a **loss of $3.903 million** for the six months ended June 30, 2021[9](index=9&type=chunk) [CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)](index=6&type=page&id=CONSOLIDATED%20STATEMENTS%20OF%20CHANGES%20IN%20STOCKHOLDERS%27%20EQUITY%20(UNAUDITED)) The Consolidated Statements of Changes in Stockholders' Equity show an increase in total stockholders' equity from January 1, 2021, to June 30, 2021, primarily driven by net income and other comprehensive income, partially offset by cash dividends declared, with a similar trend observed in the prior year | Metric | January 1, 2021 ($ thousands) | March 31, 2021 ($ thousands) | June 30, 2021 ($ thousands) | |:-------------------------------------|:------------------------------|:-----------------------------|:----------------------------| | Total Stockholders' Equity | 257,972 | 257,612 | 266,366 | | Net Income | — | 7,471 | 8,508 | | Other comprehensive income (loss) | — | (5,835) | 2,420 | | Cash dividends declared | — | (2,177) | (2,353) | - Total Stockholders' Equity increased by **$8.394 million** from January 1, 2021, to June 30, 2021, primarily due to net income and other comprehensive income, partially offset by cash dividends[13](index=13&type=chunk) - Accumulated Other Comprehensive Loss increased from **$(5,638) thousand** at January 1, 2021, to **$(9,053) thousand** at June 30, 2021, indicating a net loss in other comprehensive income during the period[13](index=13&type=chunk) [CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)](index=7&type=page&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS%20(UNAUDITED)) The Consolidated Statements of Cash Flows indicate a significant increase in net cash provided by operating activities for the six months ended June 30, 2021, compared to the prior year, with investing activities shifting from a net use of cash to a net provision of cash, while financing activities saw a decrease in net cash provided, primarily due to lower net increases in deposits and higher repayments on long-term borrowings | Metric | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | |:----------------------------------------|:---------------------------------------------|:---------------------------------------------| | Net Cash Provided by Operating Activities | 25,168 | 16,531 | | Net Cash Provided by (Used in) Investing Activities | 28,087 | (134,528) | | Net Cash Provided by Financing Activities | 140,259 | 235,872 | | Net Increase in Cash and Cash Equivalents | 193,514 | 117,875 | | Cash and Cash Equivalents — Ending | 592,866 | 232,231 | - Net cash provided by operating activities increased by **$8.637 million (52.2%)** for the six months ended June 30, 2021, compared to the same period in 2020[15](index=15&type=chunk) - Investing activities shifted from a net cash outflow of **$134.528 million** in 2020 to a net cash inflow of **$28.087 million** in 2021, largely due to a net decrease in loans and proceeds from maturities of investment securities[15](index=15&type=chunk) - Net cash provided by financing activities decreased by **$95.613 million (40.5%)** for the six months ended June 30, 2021, primarily due to lower net increases in deposits and higher repayments on long-term borrowings[15](index=15&type=chunk) [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS](index=9&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides detailed notes to the consolidated financial statements, offering explanations and additional information on the Corporation's accounting policies, significant transactions like acquisitions, earnings per share, retirement benefits, segment reporting, and financial instruments, also covering new accounting pronouncements and their potential impact [1. Basis of Presentation and Nature of Operations](index=9&type=page&id=1.%20Basis%20of%20Presentation%20and%20Nature%20of%20Operations) ACNB Corporation, headquartered in Gettysburg, Pennsylvania, operates through its wholly-owned subsidiaries, ACNB Bank and Russell Insurance Group, Inc. (RIG), providing banking, insurance, and financial services, with primary revenues from interest income on loans and investments, and fee income - ACNB Corporation provides banking, insurance, and financial services through ACNB Bank and Russell Insurance Group, Inc. (RIG)[16](index=16&type=chunk) - ACNB Bank operates **31 community banking offices** in Pennsylvania and Maryland, including divisions from acquisitions (NWSB Bank and FCB Bank)[16](index=16&type=chunk)[17](index=17&type=chunk)[18](index=18&type=chunk) - Primary revenue sources are interest income on loans and investment securities, and fee income on products and services[18](index=18&type=chunk) [2. Acquisition of Frederick County Bancorp, Inc.](index=10&type=page&id=2.%20Acquisition%20of%20Frederick%20County%20Bancorp%20Inc.) ACNB completed the acquisition of Frederick County Bancorp, Inc. (FCBI) on January 11, 2020, to expand into the Frederick, Maryland market, valued at approximately $57.9 million, involving the issuance of 1,590,547 shares of ACNB common stock and recording $22.5 million in goodwill - ACNB acquired Frederick County Bancorp, Inc. (FCBI) on **January 11, 2020**, to expand into Frederick, Maryland[23](index=23&type=chunk) | Metric | Amount ($ thousands) | |:--------------------------------------|:---------------------| | Total consideration paid | 57,909 | | Fair Value of Assets Acquired | 420,897 | | Fair Value of Liabilities Assumed | 385,516 | | Net Assets Acquired | 35,381 | | Goodwill Recorded in Acquisition | 22,528 | - Goodwill recorded in the merger was **$22.5 million**, and ACNB issued **1,590,547 shares** of its common stock as part of the consideration[24](index=24&type=chunk) - Acquisition-related expenses for FCBI totaled **$6.0 million** for the three months ended March 31, 2020, covering legal, accounting, system conversion, and employee severance costs[42](index=42&type=chunk) [3. Earnings Per Share and Restricted Stock](index=13&type=page&id=3.%20Earnings%20Per%20Share%20and%20Restricted%20Stock) Basic earnings per share are calculated based on weighted average common stock outstanding, with unvested restricted stock awards considered participating securities, and the 2018 Omnibus Stock Incentive Plan authorizes up to 400,000 shares, with 35,587 shares issued and 6,546 unvested as of June 30, 2021 | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | |:-------------------------------------|:---------------------------------|:---------------------------------| | Basic earnings per share | $0.98 | $0.67 | | Weighted average shares outstanding | 8,716,063 | 8,674,181 | | Compensation expenses (grants) | $27,000 | $198,000 | - The 2009 Restricted Stock Plan expired in February 2019, with **25,945 shares** issued and fully vested[44](index=44&type=chunk) - The 2018 Omnibus Stock Incentive Plan authorized **400,000 shares**, with **35,587 shares issued** and **6,546 unvested** as of June 30, 2021[45](index=45&type=chunk)[46](index=46&type=chunk) [4. Retirement Benefits](index=14&type=page&id=4.%20Retirement%20Benefits) The Corporation's defined benefit pension plan reported a net periodic benefit expense of $66,000 for the three months ended June 30, 2021, a significant increase from a net benefit income of $(60,000) in the prior year, primarily due to increased service cost and amortization of net loss | Metric | Three Months Ended June 30, 2021 ($ thousands) | Three Months Ended June 30, 2020 ($ thousands) | Six Months Ended June 30, 2021 ($ thousands) | Six Months Ended June 30, 2020 ($ thousands) | |:--------------------------------|:-----------------------------------------------|:-----------------------------------------------|:---------------------------------------------|:---------------------------------------------| | Service cost | 220 | 188 | 440 | 376 | | Interest cost | 236 | 270 | 472 | 540 | | Expected return on plan assets | (704) | (687) | (1,408) | (1,374) | | Amortization of net loss | 314 | 169 | 628 | 338 | | Net Periodic Benefit Expense (Income) | 66 | (60) | 132 | (120) | - Net Periodic Benefit Expense shifted from an income of **$(60) thousand** in Q2 2020 to an expense of **$66 thousand** in Q2 2021, and from an income of **$(120) thousand** in H1 2020 to an expense of **$132 thousand** in H1 2021[48](index=48&type=chunk) - The Corporation had **347 active, vested, terminated, and retired persons** in the defined benefit plan as of the last annual census[48](index=48&type=chunk) [5. Guarantees](index=14&type=page&id=5.%20Guarantees) The Corporation's only guarantees requiring disclosure are standby letters of credit, which totaled $8,818,000 as of June 30, 2021, carrying credit risk similar to loans and generally supported by collateral or personal guarantees - Standby letters of credit totaled **$8,818,000** as of June 30, 2021[49](index=49&type=chunk) - The credit risk for standby letters of credit is similar to extending loan facilities, and they are generally supported by collateral and/or personal guarantees[49](index=49&type=chunk) [6. Accumulated Other Comprehensive Loss](index=15&type=page&id=6.%20Accumulated%20Other%20Comprehensive%20Loss) The Accumulated Other Comprehensive Loss for ACNB Corporation was $(9,053,000) at June 30, 2021, a significant increase in loss compared to $(5,638,000) at December 31, 2020, and $(1,620,000) at June 30, 2020, primarily driven by a decrease in unrealized gains on securities and an increase in pension liability | Component | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | June 30, 2020 ($ thousands) | |:----------------------------------------|:----------------------------|:--------------------------------|:----------------------------| | Unrealized Gains on Securities | 742 | 4,645 | 5,232 | | Pension Liability | (9,795) | (10,283) | (6,852) | | Accumulated Other Comprehensive Loss | (9,053) | (5,638) | (1,620) | - Accumulated Other Comprehensive Loss increased by **$3.415 million** from December 31, 2020, to June 30, 2021, primarily due to a decrease in unrealized gains on securities and an increase in pension liability[51](index=51&type=chunk) [7. Segment Reporting](index=15&type=page&id=7.%20Segment%20Reporting) ACNB Corporation operates in two reportable segments: Banking and Insurance (RIG), with the Banking segment generating significantly higher net interest and other income ($44.554 million) and income before income taxes ($19.427 million) for the six months ended June 30, 2021, compared to the Insurance segment | Metric (Six Months Ended June 30, 2021) | Banking ($ thousands) | Insurance ($ thousands) | Total ($ thousands) | |:----------------------------------------|:----------------------|:------------------------|:--------------------| | Net interest income and other income | 44,554 | 3,209 | 47,763 | | Income before income taxes | 19,427 | 768 | 20,195 | | Total assets | 2,695,978 | 12,542 | 2,708,520 | | Capital expenditures | 253 | — | 253 | | Metric (Six Months Ended June 30, 2020) | Banking ($ thousands) | Insurance ($ thousands) | Total ($ thousands) | |:----------------------------------------|:----------------------|:------------------------|:--------------------| | Net interest income and other income | 41,817 | 3,042 | 44,859 | | Income before income taxes | 4,789 | 608 | 5,397 | | Total assets | 2,399,386 | 12,917 | 2,412,303 | | Capital expenditures | 578 | 8 | 586 | - Banking segment's income before income taxes increased by **$14.638 million (305.7%)** for the six months ended June 30, 2021, compared to the same period in 2020[53](index=53&type=chunk) [8. Securities](index=15&type=page&id=8.%20Securities) ACNB's securities portfolio includes available-for-sale (AFS) and held-to-maturity (HTM) debt securities, and equity securities, with AFS securities recorded at fair value with unrealized gains/losses in OCI, and HTM securities at amortized cost, with no other-than-temporary impairment identified despite changes in unrealized gains/losses due to interest rate fluctuations | Security Type (June 30, 2021) | Amortized Cost ($ thousands) | Fair Value ($ thousands) | |:------------------------------|:-----------------------------|:-------------------------| | Securities Available For Sale | 384,880 | 385,834 | | Securities Held To Maturity | 8,139 | 8,452 | | Equity Securities (June 30, 2021) | Fair Value at Jan 1, 2021 ($ thousands) | Unrealized Gains ($ thousands) | Unrealized Losses ($ thousands) | Fair Value at June 30, 2021 ($ thousands) | |:----------------------------------|:----------------------------------------|:-------------------------------|:--------------------------------|:------------------------------------------| | CRA Mutual Fund | 1,065 | — | 16 | 1,049 | | Stock in other banks | 1,105 | 393 | — | 1,498 | | Total | 2,170 | 393 | 16 | 2,547 | - At June 30, 2021, the total fair value of securities available for sale was **$385.834 million**, up from **$337.718 million** at December 31, 2020[59](index=59&type=chunk) - The Corporation did not sell any securities available for sale during 2021 or 2020[76](index=76&type=chunk) [9. Loans](index=19&type=page&id=9.%20Loans) ACNB's loan portfolio, primarily mortgage loans in southcentral Pennsylvania and northern Maryland, decreased by 4.9% from December 31, 2020, to June 30, 2021, largely due to PPP loan payoffs and residential mortgage sales, with credit quality monitored through internal risk ratings and an allowance for loan losses established based on collectibility, historical experience, and economic conditions | Loan Class (June 30, 2021) | Pass ($ thousands) | Special Mention ($ thousands) | Substandard ($ thousands) | Doubtful ($ thousands) | Total ($ thousands) | |:---------------------------|:-------------------|:------------------------------|:--------------------------|:-----------------------|:--------------------| | Commercial and industrial | 262,660 | 6,240 | 3,639 | — | 272,539 | | Commercial real estate | 693,624 | 69,917 | 14,769 | — | 778,310 | | Residential mortgage | 345,485 | 9,586 | 2,351 | — | 357,422 | | Total Loans | 1,445,982 | 90,519 | 21,275 | — | 1,557,776 | - Loans outstanding decreased by **$80.008 million (4.9%)** from December 31, 2020, to June 30, 2021, primarily due to PPP loan payoffs and residential mortgage sales[228](index=228&type=chunk) | Loan Type (June 30, 2021) | Number of Loans | Balance ($) | Percentage of Capital | |:--------------------------|:----------------|:------------|:----------------------| | Commercial Purpose | 8 | 17,431,231 | 6.55 % | - As of June 30, 2021, the Corporation had **eight temporary loan modifications** totaling **$17.431 million** due to COVID-19, representing a **93% reduction** compared to June 30, 2020[132](index=132&type=chunk)[133](index=133&type=chunk) - The outstanding balance under the Paycheck Protection Program (PPP) was **$93.354 million** as of June 30, 2021, net of repayments and forgiveness[230](index=230&type=chunk) [10. Fair Value Measurements](index=33&type=page&id=10.%20Fair%20Value%20Measurements) ACNB uses fair value measurements for financial instruments, categorized into a three-level hierarchy based on input observability, with most securities available for sale and held to maturity valued using Level 2 inputs, while collateral-dependent impaired loans and a significant portion of loans were valued using Level 3 inputs, reflecting management's estimates and appraisals | Asset Category (June 30, 2021) | Total ($ thousands) | Level 1 ($ thousands) | Level 2 ($ thousands) | Level 3 ($ thousands) | |:-------------------------------|:--------------------|:----------------------|:----------------------|:----------------------| | Securities available for sale | 385,834 | — | 385,834 | — | | Equity securities | 2,547 | 2,547 | — | — | | Collateral dependent impaired loans | 5,608 | — | — | 5,608 | | Financial Assets (June 30, 2021) | Carrying Amount ($ thousands) | Fair Value ($ thousands) | Level 1 ($ thousands) | Level 2 ($ thousands) | Level 3 ($ thousands) | |:---------------------------------|:------------------------------|:-------------------------|:----------------------|:----------------------|:----------------------| | Loans, less allowance | 1,537,569 | 1,559,754 | — | — | 1,559,754 | - Collateral-dependent impaired loans, valued at **$5.608 million** at June 30, 2021, are measured using Level 3 inputs, with appraisal adjustments ranging from **(10)% to (50)%** and a weighted average of **(57)%**[145](index=145&type=chunk)[147](index=147&type=chunk) [11. Securities Sold Under Agreements to Repurchase (Repurchase Agreements)](index=37&type=page&id=11.%20Securities%20Sold%20Under%20Agreements%20to%20Repurchase%20(Repurchase%20Agreements)) Repurchase agreements are treated as collateralized financing agreements, with the obligation reflected as a liability and underlying securities remaining in asset accounts, totaling $29,758,000 as of June 30, 2021, collateralized by $35,026,000 in securities, primarily with commercial customers and government entities | Metric (June 30, 2021) | Amount ($ thousands) | |:-----------------------|:---------------------| | Repurchase agreements | 29,758 | | Fair value of securities pledged | 35,026 | - All repurchase agreements as of June 30, 2021, had an **overnight or continuous contractual maturity**[158](index=158&type=chunk) [12. Borrowings](index=38&type=page&id=12.%20Borrowings) ACNB's long-term borrowings totaled $54,700,000 at June 30, 2021, an increase from December 31, 2020, but a decrease from June 30, 2020, reflecting a net decrease in FHLB advances, the payoff of a loan payable to a local bank, and the issuance of $15.0 million in 4.00% fixed-to-floating rate subordinated notes due March 31, 2031 | Borrowing Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | |:--------------------------------|:----------------------------|:--------------------------------| | FHLB advances | 31,000 | 38,716 | | Loan payable to local bank | — | 1,329 | | Loan payable variable rate | 2,700 | 2,700 | | Trust preferred subordinated debt | — | 5,000 | | Trust preferred subordinated debt | 6,000 | 6,000 | | Subordinated debt | 15,000 | — | | Total | 54,700 | 53,745 | - ACNB Corporation issued **$15.0 million** in 4.00% fixed-to-floating rate subordinated notes due March 31, 2031, on March 30, 2021[164](index=164&type=chunk) - A **$5.0 million** trust preferred subordinated debt was paid off during the quarter[162](index=162&type=chunk) [13. Goodwill and Other Intangible Assets](index=39&type=page&id=13.%20Goodwill%20and%20Other%20Intangible%20Assets) ACNB Corporation's combined goodwill totaled $42,108,000, resulting from three acquisitions, which is not amortized but tested for impairment annually, with no impairment identified in the most recent testing for RIG or the Bank's goodwill, while other intangible assets are amortized over their estimated useful lives and also subject to periodic impairment testing - Combined goodwill is **$42.108 million**, stemming from three acquisitions: RIG (**$6.308 million**), New Windsor (**$13.272 million**), and FCBI (**$22.528 million**)[165](index=165&type=chunk)[166](index=166&type=chunk) - Goodwill is evaluated for impairment annually, with **no impairment identified** in the most recent testing[166](index=166&type=chunk) | Intangible Asset | Gross Carrying Amount ($ thousands) | Accumulated Amortization ($ thousands) | |:---------------------------------|:------------------------------------|:---------------------------------------| | RIG amortized intangible assets | 10,428 | 7,300 | | New Windsor core deposit intangibles | 2,418 | 1,495 | | FCBI core deposit intangibles | 3,560 | 939 | [14. Revenue Recognition](index=40&type=page&id=14.%20Revenue%20Recognition) ACNB adopted ASU 2014-09 (Topic 606) on January 1, 2018, with no material impact on prior period revenue recognition, and key non-interest income sources subject to ASC 606 include fiduciary, investment management, and brokerage activities, service charges on deposit accounts, and interchange revenue from debit card transactions, with Wealth Management assets under management increasing to $490.8 million at June 30, 2021 - ACNB adopted ASU 2014-09 (Topic 606) on **January 1, 2018**, with no material impact on prior period revenue recognition[170](index=170&type=chunk) - Assets held by the Wealth Management Department increased to **$490.8 million** at June 30, 2021, from **$385.15 million** at June 30, 2020[171](index=171&type=chunk) - Revenue from fiduciary, investment management, and brokerage activities is earned and collected monthly, based on investment funds and fee schedules[172](index=172&type=chunk) [15. New Accounting Pronouncements](index=41&type=page&id=15.%20New%20Accounting%20Pronouncements) ACNB is evaluating the impact of several new accounting pronouncements, including ASU 2016-13 (CECL model) which it plans to defer until January 1, 2023, ASU 2019-12 (Income Taxes) which is not expected to have a material effect, and ASU 2020-04 (Reference Rate Reform) whose impact is currently being evaluated - ACNB plans to defer implementation of the CECL model (ASU 2016-13) until **January 1, 2023**, as a smaller reporting company[178](index=178&type=chunk) - ASU 2019-12 (Income Taxes) is effective for fiscal years beginning after **December 15, 2020**, and is not expected to materially affect financial condition or results of operations[179](index=179&type=chunk) - ASU 2020-04 (Reference Rate Reform) provides optional guidance for LIBOR transition, effective through **December 31, 2022**, and ACNB is evaluating its impact[180](index=180&type=chunk) [ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=43&type=section&id=ITEM%202%20%E2%80%93%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on ACNB Corporation's financial condition, results of operations, comprehensive income, capital resources, and liquidity, highlighting significant changes, critical accounting policies, and the impact of external factors like COVID-19 and regulatory changes [INTRODUCTION AND FORWARD-LOOKING STATEMENTS](index=43&type=page&id=INTRODUCTION%20AND%20FORWARD-LOOKING%20STATEMENTS) This introductory section provides management's discussion and analysis of ACNB Corporation's financial condition, results of operations, comprehensive income, capital resources, and liquidity, also including forward-looking statements that caution readers about inherent risks and uncertainties - The discussion covers significant changes in financial condition, results of operations, comprehensive income, capital resources, and liquidity[183](index=183&type=chunk) - Forward-looking statements are subject to risks and uncertainties including local economic conditions, competitive factors, regulatory limitations, and the impact of COVID-19[184](index=184&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=43&type=page&id=CRITICAL%20ACCOUNTING%20POLICIES) ACNB's critical accounting policies involve significant management judgment and estimates, particularly concerning the allowance for loan losses, evaluation of securities for other-than-temporary impairment, and goodwill and other intangible asset impairment testing, with no impairment identified in recent goodwill tests - The allowance for loan losses is management's estimate of probable losses, requiring numerous assumptions and quarterly assessment[186](index=186&type=chunk) - Evaluation of securities for other-than-temporary impairment involves judgment on fair value, issuer's condition, and intent to sell[187](index=187&type=chunk) - Goodwill is tested for impairment at least annually, with no impairment identified in recent tests for RIG or the Bank's goodwill[188](index=188&type=chunk) [RESULTS OF OPERATIONS](index=44&type=section&id=RESULTS%20OF%20OPERATIONS) ACNB's results of operations for both the three and six months ended June 30, 2021, showed significant improvements in net income compared to 2020, primarily driven by a substantial reduction in loan loss provisions, growth in other income, and a decrease in merger-related expenses [Quarter ended June 30, 2021, compared to Quarter ended June 30, 2020](index=44&type=section&id=Quarter%20ended%20June%2030%2C%202021%2C%20compared%20to%20Quarter%20ended%20June%2030%2C%202020) For the second quarter of 2021, ACNB reported a 46.8% increase in net income to $8.508 million, with basic EPS rising 46.3% to $0.98, primarily due to higher fee income and a $2.550 million reduction in loan loss provision [Executive Summary](index=44&type=page&id=Executive%20Summary) ACNB Corporation's net income for the second quarter of 2021 increased by 46.8% to $8.508 million, with basic earnings per share rising 46.3% to $0.98, primarily driven by higher fee income and a significant reduction in the provision for loan losses compared to the same period in 2020 | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:----------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Net Income | 8,508 | 5,797 | 2,711 | 46.8% | | Basic earnings per share | 0.98 | 0.67 | 0.31 | 46.3% | | Provision for Loan Losses | — | 2,550 | (2,550) | -100.0% | - The higher net income was primarily a result of higher fee income and less loan loss provision compared to Q2 2020[189](index=189&type=chunk) [Net Interest Income](index=45&type=page&id=Net%20Interest%20Income) Net interest income for Q2 2021 increased by 1.2% to $18.569 million, as a larger decrease in interest expense (36.3%) offset a smaller decrease in interest income (4.4%), though net interest spread and margin decreased due to lower market yields, PPP loans, and a shift in earning asset mix | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:----------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Net Interest Income | 18,569 | 18,345 | 224 | 1.2% | | Total Interest Income | 20,633 | 21,585 | (952) | -4.4% | | Total Interest Expense | 2,064 | 3,240 | (1,176) | -36.3% | | Metric | Q2 2021 | Q2 2020 | |:--------|:--------|:--------| | Net interest spread | 2.85% | 3.39% | | Net interest margin | 2.98% | 3.50% | - Average earning assets increased by **$399 million** to **$2.503 billion** in Q2 2021, while average interest-bearing liabilities decreased by **$25 million** to **$1.776 billion**[193](index=193&type=chunk) [Provision for Loan Losses](index=45&type=page&id=Provision%20for%20Loan%20Losses) The provision for loan losses was $0 in Q2 2021, a significant decrease from $2.550 million in Q2 2020, reflecting prior provisioning for COVID-19 impacts and continued stability in the loan portfolio, with net charge-offs of $30,000 | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | |:----------------------------|:----------------------|:----------------------| | Provision for Loan Losses | — | 2,550 | | Net Charge-offs | 30 | 49 | - The allowance to total loans was **1.30% (1.69% of non-acquired loans)** at June 30, 2021[194](index=194&type=chunk) [Other Income](index=46&type=page&id=Other%20Income) Total other income increased by 21.7% to $5.956 million in Q2 2021, driven by higher commissions from insurance sales, increased service charges on deposit accounts, growth in ATM/debit card transaction revenue, and a surge in income from mortgage loans held for sale | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:-------------------------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Total Other Income | 5,956 | 4,893 | 1,063 | 21.7% | | Commissions from insurance sales | 1,853 | 1,617 | 236 | 14.6% | | Service charges on deposit accounts | 754 | 643 | 111 | 17.3% | | Service charges on ATM and debit card transactions | 896 | 714 | 182 | 25.5% | | Income from mortgage loans held for sale | 914 | 535 | 379 | 70.8% | | Net gains (losses) on equity securities | 12 | 74 | (62) | -83.8% | - Income from fiduciary, investment management and brokerage activities increased by **25.6%** to **$823,000** due to higher assets under management[196](index=196&type=chunk) [Other Expenses](index=46&type=page&id=Other%20Expenses) Total other expenses increased modestly by 2.1% to $13.731 million in Q2 2021, primarily due to a 210.0% rise in defined benefit pension expense, partially offset by decreases in equipment expense and marketing and corporate relations expenses | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:-------------------------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Total Other Expenses | 13,731 | 13,455 | 276 | 2.1% | | Salaries and employee benefits | 8,670 | 8,605 | 65 | 0.8% | | Defined benefit pension expense | 66 | (60) | 126 | 210.0% | | Net occupancy | 905 | 871 | 34 | 3.9% | | Equipment | 1,311 | 1,471 | (160) | -10.9% | | Marketing and corporate relations | 62 | 157 | (95) | -60.5% | | Other operating | 1,448 | 1,278 | 170 | 13.3% | - Foreclosed real estate income shifted from a recovery of **$168,000** in Q2 2020 to a recovery of **$1,000** in Q2 2021[8](index=8&type=chunk)[202](index=202&type=chunk) [Provision for Income Taxes](index=48&type=page&id=Provision%20for%20Income%20Taxes) The Corporation's provision for income taxes increased to $2.286 million in Q2 2021 (21.2% of pretax income) from $1.436 million in Q2 2020 (19.9% of pretax income), with effective tax rates varying from the federal statutory rate due to tax-exempt income and Maryland corporation income taxes | Metric | Q2 2021 ($ thousands) | Q2 2020 ($ thousands) | |:----------------------------|:----------------------|:----------------------| | Provision for Income Taxes | 2,286 | 1,436 | | Effective Tax Rate | 21.2% | 19.9% | - Low-income housing tax credits were **$70,000** in Q2 2021, up from **$66,000** in Q2 2020[205](index=205&type=chunk) [Six Months ended June 30, 2021, compared to Six Months ended June 30, 2020](index=48&type=section&id=Six%20Months%20ended%20June%2030%2C%202021%2C%20compared%20to%20Six%20Months%20ended%20June%2030%2C%202020) For the first six months of 2021, ACNB's net income surged by 249.3% to $15.979 million, with basic EPS increasing 245.3% to $1.83, driven by a substantial reduction in loan loss provision, a decrease in other expenses due to lower merger-related costs, and a 31.0% increase in other income [Executive Summary](index=48&type=page&id=Executive%20Summary) ACNB Corporation's net income for the first six months of 2021 significantly increased by 249.3% to $15.979 million, with basic earnings per share rising 245.3% to $1.83, primarily attributed to a lower loan loss provision, the absence of one-time merger expenses, and higher fee income | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:----------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Net Income | 15,979 | 4,574 | 11,405 | 249.3% | | Basic earnings per share | 1.83 | 0.53 | 1.30 | 245.3% | | Provision for Loan Losses | 50 | 6,550 | (6,500) | -99.2% | - The higher net income was primarily a result of less loan loss provision, one-time merger expenses in Q1 2020, and higher fee income[206](index=206&type=chunk) [Net Interest Income](index=48&type=page&id=Net%20Interest%20Income) Net interest income for H1 2021 increased marginally by 0.3% to $35.894 million, as a 38.6% decrease in interest expense largely offset a 5.9% decrease in interest income, though net interest spread and margin declined due to lower market yields, PPP loans, and a higher proportion of lower-yielding investments | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:----------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Net Interest Income | 35,894 | 35,800 | 94 | 0.3% | | Total Interest Income | 40,003 | 42,494 | (2,491) | -5.9% | | Total Interest Expense | 4,109 | 6,694 | (2,585) | -38.6% | | Metric | H1 2021 | H1 2020 | |:--------|:--------|:--------| | Net interest spread | 2.83% | 3.28% | | Net interest margin | 2.96% | 3.53% | - Average earning assets increased by **$405 million** to **$2.445 billion** in H1 2021, while average interest-bearing liabilities increased by **$261 million** to **$1.749 billion**[210](index=210&type=chunk) [Provision for Loan Losses](index=49&type=page&id=Provision%20for%20Loan%20Losses) The provision for loan losses for H1 2021 was $50,000, a substantial decrease from $6.550 million in H1 2020, reflecting prior provisioning for COVID-19 impacts and continued stability in the loan portfolio, with net charge-offs of $69,000 | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | |:----------------------------|:----------------------|:----------------------| | Provision for Loan Losses | 50 | 6,550 | | Net Charge-offs | 69 | 2,032 | - The allowance to total loans was **1.30% (1.69% of non-acquired loans)** at June 30, 2021[211](index=211&type=chunk) [Other Income](index=49&type=page&id=Other%20Income) Total other income increased by 31.0% to $11.869 million in H1 2021, driven by a 157.9% surge in income from mortgage loans held for sale, a $377,000 net fair value gain on equity securities, and a 23.8% increase in ATM/debit card transaction revenue | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:-------------------------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Total Other Income | 11,869 | 9,059 | 2,810 | 31.0% | | Income from mortgage loans held for sale | 2,197 | 852 | 1,345 | 157.9% | | Net gains (losses) on equity securities | 377 | (401) | 778 | -194.0% | | Service charges on ATM and debit card transactions | 1,674 | 1,352 | 322 | 23.8% | | Commissions from insurance sales | 3,236 | 3,057 | 179 | 5.9% | | Service charges on deposit accounts | 1,528 | 1,633 | (105) | -6.4% | - Income from fiduciary, investment management and brokerage activities increased by **15.3%** to **$1.526 million** due to higher assets under management[213](index=213&type=chunk) [Other Expenses](index=50&type=page&id=Other%20Expenses) Total other expenses decreased by 16.4% to $27.518 million in H1 2021, primarily due to the absence of $5.965 million in merger-related expenses incurred in H1 2020, partially offset by modest increases in salaries and employee benefits and net occupancy expense | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | Change ($ thousands) | Change (%) | |:-------------------------------------------|:----------------------|:----------------------|:---------------------|:-----------| | Total Other Expenses | 27,518 | 32,912 | (5,394) | -16.4% | | Merger related expenses | — | 5,965 | (5,965) | -100.0% | | Salaries and employee benefits | 17,338 | 17,106 | 232 | 1.4% | | Defined benefit pension expense | 132 | (120) | 252 | 210.0% | | Net occupancy | 2,072 | 1,852 | 220 | 11.9% | | Equipment | 2,602 | 2,755 | (153) | -5.6% | | Marketing and corporate relations | 139 | 341 | (202) | -59.2% | | Other operating | 2,725 | 2,451 | 274 | 11.2% | - Foreclosed real estate income shifted from a recovery of **$93,000** in H1 2020 to a recovery of **$2,000** in H1 2021[8](index=8&type=chunk)[220](index=220&type=chunk) [Provision for Income Taxes](index=51&type=page&id=Provision%20for%20Income%20Taxes) The Corporation's provision for income taxes increased to $4.216 million in H1 2021 (20.9% of pretax income) from $823,000 in H1 2020 (15.2% of pretax income), with effective tax rates varying from the federal statutory rate due to tax-exempt income and Maryland corporation income taxes | Metric | H1 2021 ($ thousands) | H1 2020 ($ thousands) | |:----------------------------|:----------------------|:----------------------| | Provision for Income Taxes | 4,216 | 823 | | Effective Tax Rate | 20.9% | 15.2% | - Low-income housing tax credits were **$140,000** in H1 2021, up from **$128,000** in H1 2020[222](index=222&type=chunk) [FINANCIAL CONDITION](index=52&type=section&id=FINANCIAL%20CONDITION) ACNB's financial condition at June 30, 2021, shows total assets of $2.708 billion, an increase from year-end 2020, with this section detailing changes in investment securities, a decrease in the loan portfolio, the adequacy of the allowance for loan losses, growth in deposits, and the composition of borrowings, while emphasizing the company's well-capitalized status and sufficient liquidity - Total assets reached **$2.708 billion** at June 30, 2021, up from **$2.555 billion** at December 31, 2020[223](index=223&type=chunk) - Average earning assets increased to **$2.445 billion** during the six months ended June 30, 2021, from **$2.040 billion** in the same period of 2020[223](index=223&type=chunk) [Investment Securities](index=52&type=page&id=Investment%20Securities) ACNB's investment securities portfolio, used for income, interest rate risk management, collateral, and liquidity, showed available-for-sale (AFS) securities with a net unrealized gain of $742,000 at June 30, 2021, a decrease from $4.645 million at December 31, 2020, with no other-than-temporary impairment identified | Metric | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | |:-------------------------------------|:----------------------------|:--------------------------------| | AFS Securities Amortized Cost | 384,880 | 331,745 | | AFS Securities Net Unrealized Gain | 742 | 4,645 | | HTM Securities Amortized Cost | 8,139 | 10,294 | | HTM Securities Fair Value | 8,452 | 10,768 | - The net unrealized gain on AFS securities decreased from **$4.645 million** at December 31, 2020, to **$742,000** at June 30, 2021, primarily due to changes in the U.S. Treasury yield curve rates[225](index=225&type=chunk) [Loans](index=52&type=page&id=Loans) Loans outstanding decreased by 4.9% to $1.538 billion from December 31, 2020, to June 30, 2021, primarily due to Paycheck Protection Program (PPP) loan payoffs and sales of new residential mortgages, with the Corporation maintaining a focus on asset quality and disciplined underwriting standards - Loans outstanding decreased by **$80.008 million (4.9%)** from December 31, 2020, to June 30, 2021[228](index=228&type=chunk) - The decrease is largely attributable to **PPP loan payoffs** and the **sale of most new residential mortgages**[228](index=228&type=chunk) - As of June 30, 2021, the outstanding balance under the PPP program was **$93.354 million**, with **$3.126 million** in fee income recognized through Q2 2021[230](index=230&type=chunk) [Allowance for Loan Losses](index=53&type=page&id=Allowance%20for%20Loan%20Losses) ACNB maintains an allowance for loan losses (ALL) of $20.207 million at June 30, 2021, representing 1.30% of total loans, determined quarterly through a methodology considering specific credit reviews, historical losses, and qualitative factors, with a significantly lower provision for loan losses in H1 2021 reflecting prior COVID-19 provisioning and stable credit quality | Metric | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | June 30, 2020 ($ thousands) | |:-------------------------------------|:----------------------------|:--------------------------------|:----------------------------| | Allowance for Loan Losses | 20,207 | 20,226 | 18,353 | | Provision for Loan Losses (H1) | 50 | 9,140 (FY) | 6,550 | | Net Charge-offs (H1) | 69 | 2,749 (FY) | 2,032 | - The ALL as a percentage of total loans was **1.30% (1.69% of non-acquired loans)** at June 30, 2021[241](index=241&type=chunk) | Nonaccrual Loans (June 30, 2021) | Balance ($ thousands) | Specific Loss Allocations ($ thousands) | |:---------------------------------|:----------------------|:----------------------------------------| | Owner occupied commercial real estate | 4,078 | 522 | | Commercial and industrial | 2,634 | 1,874 | | Total | 7,120 | 2,396 | - As of June 30, 2021, there were **eight temporary COVID-19 loan modifications** with principal balances totaling **$17.431 million**, a **93% reduction** compared to June 30, 2020[245](index=245&type=chunk) [Deposits](index=58&type=page&id=Deposits) Total deposits increased by 7.0% to $2.338 billion from December 31, 2020, to June 30, 2021, and by 15.0% from June 30, 2020, driven by increased balances across a broad base of accounts due to reduced economic activity from the COVID-19 event, despite a decrease in deposit interest expense due to lower rates - Total deposits increased by **$152.510 million (7.0%)** from December 31, 2020, to June 30, 2021, reaching **$2.338 billion**[256](index=256&type=chunk) - Deposit interest expense decreased by **53.0%** due to lower rates, despite an increase in deposit volume[256](index=256&type=chunk) [Borrowings](index=58&type=page&id=Borrowings) Short-term borrowings decreased to $29.758 million at June 30, 2021, from $38.464 million at December 31, 2020, while long-term borrowings increased to $54.700 million at June 30, 2021, reflecting a net decrease in FHLB term advances, the payoff of a Corporation loan, and the issuance of $15.0 million in fixed-to-floating rate subordinated debt | Borrowing Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | |:------------------------|:----------------------------|:--------------------------------| | Short-term borrowings | 29,758 | 38,464 | | Long-term borrowings | 54,700 | 53,745 | - Short-term borrowings decreased by **$8.706 million (22.6%)** from year-end 2020 due to changes in customer cash flow and competition[257](index=257&type=chunk) - ACNB Corporation issued **$15.0 million** in fixed-to-floating rate subordinated debt on March 30, 2021, to retire outstanding debt, repurchase shares, support growth, and meet regulatory capital requirements[257](index=257&type=chunk) [Capital](index=58&type=page&id=Capital) ACNB's capital management aims to provide shareholder returns while maintaining a "well-capitalized" regulatory position, with total shareholders' equity increasing to $266.366 million at June 30, 2021, driven by earnings retention and a decrease in accumulated other comprehensive loss, and the banking subsidiary meeting all minimum capital adequacy requirements | Metric | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | |:----------------------------|:----------------------------|:--------------------------------| | Total Stockholders' Equity | 266,366 | 257,972 | | Metric (H1) | 2021 ($ thousands) | 2020 ($ thousands) | |:----------------------------|:-------------------|:-------------------| | Net Income | 15,979 | 4,574 | | Dividends paid | 4,530 | 4,335 | | Dividend payout ratio | 28.3% | 94.8% | | Capital Ratio (Banking Subsidiary) | June 30, 2021 | December 31, 2020 | Well Capitalized Minimum | |:-----------------------------------|:--------------|:------------------|:-------------------------| | Tier 1 leverage ratio | 9.03% | 9.01% | 5.00% | | Common Tier 1 capital ratio | 15.15% | 13.86% | 6.50% | | Total risk-based capital ratio | 16.40% | 15.10% | 10.00% | - ACNB's banking subsidiary is categorized as **"well capitalized"** for regulatory purposes, exceeding all minimum capital adequacy requirements[265](index=265&type=chunk)[272](index=272&type=chunk) [Liquidity](index=61&type=page&id=Liquidity) ACNB maintains effective liquidity management through diverse funding sources, including interest-bearing deposits, securities maturities, loan repayments, core deposits, and FHLB borrowings, with the banking subsidiary having an FHLB borrowing capacity of approximately $812.388 million at June 30, 2021, and the parent company's liquidity primarily from subsidiary dividends - ACNB's banking subsidiary had an FHLB borrowing capacity of approximately **$812.388 million** at June 30, 2021, with **$561 million** considered practicable additional capacity[274](index=274&type=chunk) - Securities sold under repurchase agreements provided **$29.758 million** in liquidity at June 30, 2021[275](index=275&type=chunk) - The Corporation issued **$15 million** of subordinated debt in March 2021 to pay off existing debt, potentially repurchase stock, and support growth and regulatory capital[276](index=276&type=chunk) [Off-Balance Sheet Arrangements](index=61&type=page&id=Off-Balance%20Sheet%20Arrangements) ACNB engages in off-balance sheet arrangements primarily through commitments to extend credit and standby letters of credit, with unfunded outstanding commitments totaling approximately $381.317 million and outstanding standby letters of credit at approximately $8.818 million as of June 30, 2021 | Off-Balance Sheet Instrument | Amount (June 30, 2021, $ thousands) | |:-----------------------------|:------------------------------------| | Unfunded commitments to extend credit | 381,317 | | Standby letters of credit | 8,818 | - The total commitment level does not necessarily represent future cash requirements, as many commitments expire without being drawn upon[278](index=278&type=chunk) [Market Risks](index=62&type=page&id=Market%20Risks) ACNB's primary market risk is interest rate risk, arising from the difference in terms and rates between funds purchased and earning assets, which management continuously monitors and evaluates for changes in market conditions - ACNB's primary market risk is **interest rate risk**, stemming from the mismatch in terms and rates of funds and earning assets[279](index=279&type=chunk) - No material changes in market risks have been identified since year-end 2020[298](index=298&type=chunk) [Acquisition of Frederick County Bancorp, Inc.](index=62&type=page&id=Acquisition%20of%20Frederick%20County%20Bancorp%20Inc.) ACNB Corporation completed the acquisition of Frederick County Bancorp, Inc. (FCBI) on January 11, 2020, integrating Frederick County Bank into ACNB Bank, which involved issuing 1,590,547 shares of ACNB common stock and expanded its presence across Pennsylvania and Maryland - ACNB Corporation acquired Frederick County Bancorp, Inc. (FCBI) on **January 11, 2020**[280](index=280&type=chunk) - **1,590,547 shares** of ACNB common stock were issued as part of the acquisition[281](index=281&type=chunk) - Post-acquisition (as of July 1, 2021), ACNB Corporation had approximately **$2.7 billion in assets**, **$2.3 billion in deposits**, and **$1.6 billion in loans**[282](index=282&type=chunk) [RECENT DEVELOPMENTS](index=62&type=section&id=RECENT%20DEVELOPMENTS) Recent developments include ongoing compliance with the Bank Secrecy Act (BSA) and USA PATRIOT Act, the impact of the Tax Cuts and Jobs Act of 2017 on deferred tax assets, and the continuous influence of the Dodd-Frank Wall Street Reform and Consumer Protection Act on federal banking regulation [BANK SECRECY ACT (BSA)](index=62&type=page&id=BANK%20SECRECY%20ACT%20(BSA)) The Bank Secrecy Act (BSA), as amended by the USA PATRIOT Act, mandates that U.S. financial institutions implement policies and controls to detect and report money laundering and terrorism financing, with ACNB's banking subsidiary having a compliance program aligned with its risk profile - The Bank Secrecy Act (BSA) and USA PATRIOT Act impose obligations on financial institutions to detect and report money laundering and terrorism financing[283](index=283&type=chunk) - ACNB's banking subsidiary has a BSA and USA PATRIOT Act compliance program commensurate with its risk profile[283](index=283&type=chunk) [TAX CUTS AND JOBS ACT](index=62&type=page&id=TAX%20CUTS%20AND%20JOBS%20ACT) The Tax Cuts and Jobs Act, signed into law on December 22, 2017, reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018, which ACNB anticipates will reduce future federal income tax liability, though it recognized an approximately $1.7 million reduction to earnings in 2017 due to the revaluation of net deferred tax assets - The Tax Cuts and Jobs Act reduced the federal corporate tax rate from **35% to 21%** effective January 1, 2018[284](index=284&type=chunk) - ACNB recognized an approximately **$1.7 million reduction to earnings** in 2017 due to the revaluation of net deferred tax assets[284](index=284&type=chunk) [DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK)](index=63&type=section&id=DODD-FRANK%20WALL%20STREET%20REFORM%20AND%20CONSUMER%20PROTECTION%20ACT%20(DODD-FRANK)) The Dodd-Frank Act, enacted in 2010, fundamentally restructured federal banking regulation, impacting ACNB's business operations through new capital requirements, deposit insurance changes, corporate governance mandates, and consumer protection measures, while increasing operating and compliance costs - Dodd-Frank requires consolidated capital requirements for bank holding companies to be no less stringent than those for depository institutions, excluding certain trust preferred securities from Tier 1 capital[285](index=285&type=chunk) - Dodd-Frank permanently increased the maximum deposit insurance amount to **$250,000 per depositor** and broadened the base for FDIC insurance assessments[286](index=286&type=chunk) - The Act created the Consumer Financial Protection Bureau (CFPB) with broad rulemaking, supervisory, and enforcement powers over consumer financial protection laws[291](index=291&type=chunk) [Holding Company Capital Requirements](index=63&type=page&id=Holding%20Company%20Capital%20Requirements) Dodd-Frank mandates that the Federal Reserve apply consolidated capital requirements to bank holding companies that are at least as stringent as those for depository institutions, including excluding trust preferred securities from Tier 1 capital (with exceptions for smaller institutions) and requiring countercyclical capital requirements - Dodd-Frank requires consolidated capital requirements for bank holding companies to be no less stringent than those for depository institutions[285](index=285&type=chunk) - Trust preferred securities are excluded from Tier 1 capital, with exceptions for bank holding companies with less than **$15 billion in assets** as of December 31, 2009[285](index=285&type=chunk) [Deposit Insurance](index=63&type=page&id=Deposit%20Insurance) Dodd-Frank permanently increased the maximum deposit insurance amount to $250,000 per depositor and broadened the base for FDIC insurance assessments to average consolidated total assets less tangible equity capital, also requiring the FDIC to increase the Deposit Insurance Fund reserve ratio to 1.35% by 2020 - Dodd-Frank permanently increased the maximum deposit insurance amount to **$250,000 per depositor**[286](index=286&type=chunk) - FDIC insurance assessments are now based on **average consolidated total assets less tangible equity capital**[286](index=286&type=chunk) [Corporate Governance](index=63&type=page&id=Corporate%20Governance) Dodd-Frank introduced new corporate governance requirements for publicly-traded companies, including non-binding shareholder votes on executive compensation (at least every three years) and the frequency of such votes (at least every six years), also mandating non-binding votes on "golden parachute" payments and directing federal banking regulators to prohibit excessive executive compensation - Publicly-traded companies must provide non-binding shareholder votes on executive compensation at least every **three years**[287](index=287&type=chunk) - Federal banking regulators are directed to prohibit excessive compensation for executives of depository institutions and holding companies with assets over **$1.0 billion**[287](index=287&type=chunk) [Prohibition Against Charter Conversions of Troubled Institutions](index=63&type=page&id=Prohibition%20Against%20Charter%20Conversions%20of%20Troubled%20Institutions) Dodd-Frank prohibits depository institutions from converting their charter if they are under a cease and desist order or other formal enforcement action, unless the appropriate federal banking agency is notified and does not object within 30 days, and the converting institution provides a plan to address the supervisory matter - Dodd-Frank prohibits charter conversions for depository institutions under formal enforcement actions without regulatory approval and a plan to address supervisory matters[288](index=288&type=chunk) [Interstate Branching](index=63&type=page&id=Interstate%20Branching) 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, allowing banks to enter new markets more freely by removing previous restrictions - Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state[289](index=289&type=chunk) [Limits on Interstate Acquisitions and Mergers](index=63&type=page&id=Limits%20on%20Interstate%20Acquisitions%20and%20Mergers) Dodd-Frank imposes stricter requirements for interstate acquisitions and mergers, requiring the acquiring bank holding company or surviving institution to be "well capitalized" and "well managed," a change from the previous standard of "adequately capitalized" and "adequately managed" - Dodd-Frank requires bank holding companies to be **"well capitalized"** and **"well managed"** for interstate acquisitions, a stricter standard than previously required[289](index=289&type=chunk)[290](index=290&type=chunk) [Limits on Interchange Fees](index=64&type=page&id=Limits%20on%20Interchange%20Fees) Dodd-Frank amended the Electronic Fund Transfer Act, granting the Federal Reserve authority to regulate interchange fees for electronic debit transactions by payment card issuers with assets over $10 billion, ensuring these fees are reasonable and proportional to the actual cost of the transaction - Dodd-Frank grants the Federal Reserve authority to establish rules for interchange fees on electronic debit transactions for issuers with assets over **$10 billion**[290](index=290&type=chunk) [Consumer Financial Protection Bureau](index=64&type=page&id=Consumer%20Financial%20Protection%20Bureau) The Consumer Financial Protection Bureau (CFPB), established by Dodd-Frank, possesses broad rulemaking, supervisory, and enforcement powers over federal consumer financial protection laws, with primary enforcement authority for depository institutions with $10 billion or more in assets, and sets minimum standards for residential mortgage originations - The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws[291](index=291&type=chunk) - The CFPB establishes minimum standards for residential mortgage originations, including the borrower's ability to repay[291](index=291&type=chunk) [ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE](index=64&type=page&id=ABILITY-TO-REPAY%20AND%20QUALIFIED%20MORTGAGE%20RULE) Effective January 10, 2014, the CFPB's Ability-to-Repay and Qualified Mortgage Rule (Regulation Z) requires mortgage lenders to make a reasonable, good-faith determination of a consumer's ability to repay a loan, either by assessing eight underwriting factors or originating "qualified mortgages" which offer a presumption of compliance - The rule requires mortgage lenders to determine a consumer's ability to repay based on eight underwriting factors or by originating **"qualified mortgages"**[292](index=292&type=chunk) - Qualified mortgages generally exclude features like negative amortization, interest-only payments, or terms exceeding **30 years**, and have points and fees below **3%**[292](index=292&type=chunk) [DEPARTMENT OF DEFENSE MILITARY LENDING RULE](index=64&type=page&id=DEPARTMENT%20OF%20DEFENSE%20MILITARY%20LENDING%20RULE) The U.S. Department of Defense's Military Lending Rule, effective October 3, 2016, restricts pricing and terms for certain credit extended to active duty military personnel and their families, capping the annual percentage rate at 36% and limiting other fees, while requiring financial institutions to verify military status - The Military Lending Rule caps the interest rate on certain credit extensions to active duty military personnel and their families at an annual percentage rate of **36%**[293](index=293&type=chunk) - The rule requires financial institutions to verify whether customers are military personnel subject to the rule[293](index=293&type=chunk) [SUPERVISION AND REGULATION](index=65&type=section&id=SUPERVISION%20AND%20REGULATION) ACNB and its subsidiary bank are subject to extensive supervision and regulation by federal and state agencies, including the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC, which impacts dividend payments from the subsidiary bank to the parent company and influences the cost and availability of funds for lending and investment through monetary and fiscal policies [Dividends](index=65&type=page&id=Dividends) ACNB Corporation's primary revenue source, on a parent company-only basis, is dividends received from its subsidiary bank, which are subject to legal restrictions and other safety and soundness limitations imposed by federal and state banking laws - ACNB's parent company revenues primarily come from dividends paid by its subsidiary bank[295](index=295&type=chunk) - Federal and state laws regulate the payment of dividends by ACNB's subsidiary bank[295](index=295&type=chunk) [Regulation of Bank](index=65&type=page&id=Regulation%20of%20Bank) ACNB's subsidiary bank is regulated by Pennsylvania banking laws, the Federal Reserve, and the FDIC, undergoing regular examinations by the Pennsylvania Department of Banking and Securities and the FDIC, covering areas like reserves, loans, investments, and management practices, with a focus on depositor protection - The subsidiary bank is subject to regulation by the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC[296](index=296&type=chunk) - Examinations by regulatory bodies focus on depositor protection and cover areas such as reserves, loans, investments, and management practices[297](index=297&type=chunk) [Monetary and Fiscal Policy](index=65&type=page&id=Monetary%20and%20Fiscal%20Policy) ACNB and its subsidiary bank are influenced by the monetary and fiscal policies of government agencies, particularly the Federal Reserve, whose actions significantly affect the cost and availability of funds for lending and investment, with the future impact of these policies and potential new legislation on ACNB's business and earnings being unpredictable - Monetary and fiscal policies, especially from the Federal Reserve, influence the cost

[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section presents the unaudited consolidated financial statements and related disclosures for ACNB Corporation, along with management's discussion and analysis of financial condition and results of operations [ITEM 1 - FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201%20-%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements of ACNB Corporation, including the Statements of Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows for the quarter ended March 31, 2021, and comparative periods [Consolidated Statements of Condition (Unaudited)](index=3&type=section&id=Consolidated%20Statements%20of%20Condition%20(Unaudited)) This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific reporting dates Consolidated Statements of Condition (Unaudited) | Dollars in thousands | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :------------------- | :------------- | :---------------- | :------------- | | **ASSETS** | | | | | Total Cash and Cash Equivalents | $506,758 | $399,352 | $129,170 | | Debt securities available for sale | $355,008 | $337,718 | $253,048 | | Loans, net of allowance for loan losses | $1,590,481 | $1,617,558 | $1,590,187 | | Goodwill | $42,108 | $42,108 | $41,700 | | Total Assets | $2,654,617 | $2,555,362 | $2,180,065 | | **LIABILITIES** | | | | | Total Deposits | $2,278,622 | $2,185,525 | $1,811,357 | | Total Liabilities | $2,397,005 | $2,297,390 | $1,933,071 | | **STOCKHOLDERS' EQUITY** | | | | | Total Stockholders' Equity | $257,612 | $257,972 | $246,994 | | Total Liabilities and Stockholders' Equity | $2,654,617 | $2,555,362 | $2,180,065 | [Consolidated Statements of Income (Unaudited)](index=5&type=section&id=Consolidated%20Statements%20of%20Income%20(Unaudited)) This statement details the company's revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Income (Unaudited) | Dollars in thousands, except per share data | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total Interest Income | $19,370 | $20,909 | | Total Interest Expense | $2,045 | $3,454 | | Net Interest Income | $17,325 | $17,455 | | Provision for Loan Losses | $50 | $4,000 | | Net Interest Income after Provision for Loan Losses | $17,275 | $13,455 | | Total Other Income | $5,913 | $4,166 | | Total Other Expenses | $13,787 | $19,457 | | Income (Loss) before Income Taxes | $9,401 | $(1,836) | | Provision (Benefit) for Income Taxes | $1,930 | $(613) | | Net Income (Loss) | $7,471 | $(1,223) | | Basic earnings (loss) per share | $0.86 | $(0.14) | | Cash dividends declared | $0.25 | $0.25 | [Consolidated Statements of Comprehensive Income (Unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Unaudited)) This statement presents net income alongside other comprehensive income items, reflecting changes in equity not resulting from owner transactions Consolidated Statements of Comprehensive Income (Unaudited) | Dollars in thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------- | :-------------------------------- | :-------------------------------- | | NET INCOME (LOSS) | $7,471 | $(1,223) | | OTHER COMPREHENSIVE INCOME | | | | Securities: Unrealized (losses) gains arising during the period, net of income taxes | $(6,079) | $3,202 | | Pension: Amortization of pension net loss, transition liability, and prior service cost, net of income taxes | $244 | $131 | | TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | $(5,835) | $3,333 | | TOTAL COMPREHENSIVE INCOME | $1,636 | $2,110 | [Consolidated Statements of Changes in Stockholders' Equity (Unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity%20(Unaudited)) This statement outlines the changes in each component of stockholders' equity over specific reporting periods Consolidated Statements of Changes in Stockholders' Equity (March 31, 2021) | Dollars in thousands | Common Stock (March 31, 2021) | Treasury Stock (March 31, 2021) | Additional Paid-in Capital (March 31, 2021) | Retained Earnings (March 31, 2021) | Accumulated Other Comprehensive Loss (March 31, 2021) | Total Stockholders' Equity (March 31, 2021) | | :------------------- | :---------------------------- | :------------------------------ | :------------------------------------------ | :--------------------------------- | :---------------------------------------------------- | :------------------------------------------ | | BALANCE – JANUARY 1, 2021 | $21,918 | $(728) | $94,048 | $148,372 | $(5,638) | $257,972 | | Net income | — | — | — | $7,471 | — | $7,471 | | Other comprehensive loss, net of taxes | — | — | — | — | $(5,835) | $(5,835) | | Common stock shares issued | $14 | — | $(195) | — | — | $(181) | | Restricted stock compensation expense | — | — | $362 | — | — | $362 | | Cash dividends declared | — | — | — | $(2,177) | — | $(2,177) | | BALANCE – MARCH 31, 2021 | $21,932 | $(728) | $94,215 | $153,666 | $(11,473) | $257,612 | Consolidated Statements of Changes in Stockholders' Equity (March 31, 2020) | Dollars in thousands | Common Stock (March 31, 2020) | Treasury Stock (March 31, 2020) | Additional Paid-in Capital (March 31, 2020) | Retained Earnings (March 31, 2020) | Other Comprehensive Loss (March 31, 2020) | Total Stockholders' Equity (March 31, 2020) | | :------------------- | :---------------------------- | :------------------------------ | :------------------------------------------ | :--------------------------------- | :---------------------------------------- | :------------------------------------------ | | BALANCE – JANUARY 1, 2020 | $17,855 | $(728) | $39,579 | $138,663 | $(5,853) | $189,516 | | Net loss | — | — | — | $(1,223) | — | $(1,223) | | Other comprehensive income, net of taxes | — | — | — | — | $3,333 | $3,333 | | Common stock shares issued | $3,964 | — | $53,309 | — | — | $57,273 | | Restricted stock compensation expense | — | — | $262 | — | — | $262 | | Cash dividends declared | — | — | — | $(2,167) | — | $(2,167) | | BALANCE – MARCH 31, 2020 | $21,819 | $(728) | $93,150 | $135,273 | $(2,520) | $246,994 | [Consolidated Statements of Cash Flows (Unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) This statement categorizes cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows (Unaudited) | Dollars in thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------- | :-------------------------------- | :-------------------------------- | | CASH FLOWS FROM OPERATING ACTIVITIES | | | | Net Cash Provided by Operating Activities | $9,038 | $8,416 | | CASH FLOWS FROM INVESTING ACTIVITIES | | | | Net Cash Provided by (Used in) Investing Activities | $2,745 | $(5,120) | | CASH FLOWS FROM FINANCING ACTIVITIES | | | | Net Cash Provided by Financing Activities | $95,623 | $11,518 | | Net Increase in Cash and Cash Equivalents | $107,406 | $14,814 | | CASH AND CASH EQUIVALENTS — BEGINNING | $399,352 | $114,356 | | CASH AND CASH EQUIVALENTS — ENDING | $506,758 | $129,170 | [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS](index=10&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides detailed explanations and disclosures for the consolidated financial statements, covering the basis of presentation, significant accounting policies, recent acquisitions, earnings per share, retirement benefits, guarantees, comprehensive loss, segment reporting, securities, loans, fair value measurements, borrowings, goodwill and intangible assets, revenue recognition, and new accounting pronouncements [1. Basis of Presentation and Nature of Operations](index=10&type=section&id=1.%20Basis%20of%20Presentation%20and%20Nature%20of%20Operations) This section describes the company's business activities and the accounting principles used in preparing the financial statements - ACNB Corporation provides banking, insurance, and financial services through its wholly-owned subsidiaries, ACNB Bank and Russell Insurance Group, Inc. (RIG)[18](index=18&type=chunk) - ACNB Bank operates **31 community banking offices** in Pennsylvania and Maryland, including divisions 'NWSB Bank, A Division of ACNB Bank' and 'FCB Bank, A Division of ACNB Bank' from prior acquisitions[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) - The Corporation's primary revenue sources are interest income on loans and investment securities, and fee income on products and services[20](index=20&type=chunk) - The unaudited consolidated financial statements are prepared in accordance with US GAAP for interim financial information and Form 10-Q instructions, with all adjustments being normal and recurring[21](index=21&type=chunk) [2. Acquisition of Frederick County Bancorp, Inc.](index=11&type=section&id=2.%20Acquisition%20of%20Frederick%20County%20Bancorp%2C%20Inc.) This section details the acquisition of Frederick County Bancorp, Inc., including its financial impact and strategic rationale - ACNB completed the acquisition of Frederick County Bancorp, Inc. (FCBI) on **January 11, 2020**, expanding its presence in Frederick, Maryland[26](index=26&type=chunk) - The acquisition was accounted for as a business combination, with assets acquired and liabilities assumed recorded at estimated fair values[27](index=27&type=chunk) FCBI Acquisition Details (January 11, 2020) | Item | Value (in thousands) | | :-------------------------------- | :------------------- | | Total Assets Acquired | $443,400 | | Loans Acquired | $329,300 | | Deposits Acquired | $374,100 | | Goodwill Recorded | $22,500 | | ACNB Common Stock Issued | 1,590,547 shares | | Equity Portion of Purchase Price | $57,620,595 | | Total Consideration Paid | $57,908,593 | - Acquisition-related expenses for FCBI totaled **$6.0 million** for the three months ended March 31, 2020, covering legal, accounting, system conversion, and integration costs[40](index=40&type=chunk) [3. Earnings Per Share and Restricted Stock](index=15&type=section&id=3.%20Earnings%20Per%20Share%20and%20Restricted%20Stock) This section provides information on the calculation of earnings per share and the company's restricted stock plans Basic Earnings Per Share (EPS) Data | Period | Weighted Average Shares Outstanding | Basic EPS | | :-------------------------------- | :-------------------------------- | :-------- | | Three Months Ended March 31, 2021 | 8,710,393 | $0.86 | | Three Months Ended March 31, 2020 | 8,477,642 | $(0.14) | - The ACNB Corporation 2009 Restricted Stock Plan expired on **February 24, 2019**, with all **25,945 issued shares fully vested** and no further shares issuable under this plan[42](index=42&type=chunk) - The ACNB Corporation 2018 Omnibus Stock Incentive Plan, approved May 1, 2018, authorizes up to **400,000 shares** plus unissued shares from the 2009 plan, with **35,587 shares issued** as of March 31, 2021[43](index=43&type=chunk) Restricted Stock Compensation Expense | Period | Expense (in thousands) | | :-------------------------------- | :--------------------- | | Three Months Ended March 31, 2021 | $28 | | Three Months Ended March 31, 2020 | $33 | [4. Retirement Benefits](index=15&type=section&id=4.%20Retirement%20Benefits) This section outlines the company's defined benefit pension plan and related periodic benefit expenses Net Periodic Benefit Expense (Income) for Defined Benefit Pension Plan | In thousands | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------- | :-------------------------------- | :-------------------------------- | | Service cost | $220 | $188 | | Interest cost | $236 | $270 | | Expected return on plan assets | $(704) | $(687) | | Amortization of net loss | $314 | $169 | | Net Periodic Benefit Expense (Income) | $66 | $(60) | - The Corporation had not yet determined the 2021 contribution amount to the defined benefit plan as of March 31, 2021[46](index=46&type=chunk) [5. Guarantees](index=15&type=section&id=5.%20Guarantees) This section discloses the company's commitments related to standby letters of credit and their potential financial impact - The Corporation issues standby letters of credit as conditional commitments to guarantee customer performance to third parties[48](index=48&type=chunk) - As of March 31, 2021, standby letters of credit totaled **$8,094,000**, with management believing collateral and guarantees are sufficient to cover potential future payments[48](index=48&type=chunk) [6. Accumulated Other Comprehensive Loss](index=16&type=section&id=6.%20Accumulated%20Other%20Comprehensive%20Loss) This section details the components of accumulated other comprehensive loss, net of taxes, affecting stockholders' equity Components of Accumulated Other Comprehensive Loss (Net of Taxes) | In thousands | Unrealized (Losses) Gains on Securities | Pension Liability | Accumulated Other Comprehensive Loss | | :----------- | :-------------------------------------- | :---------------- | :----------------------------------- | | BALANCE — MARCH 31, 2021 | $(1,434) | $(10,039) | $(11,473) | | BALANCE — DECEMBER 31, 2020 | $4,645 | $(10,283) | $(5,638) | | BALANCE — MARCH 31, 2020 | $4,463 | $(6,983) | $(2,520) | [7. Segment Reporting](index=16&type=section&id=7.%20Segment%20Reporting) This section provides financial information broken down by the company's operating segments: Banking and Insurance - The Corporation operates in two reporting segments: Banking (ACNB Bank and related financial services) and Insurance (Russell Insurance Group, Inc. or RIG)[51](index=51&type=chunk) Segment Information (Three Months Ended March 31) | In thousands | Banking (2021) | Insurance (2021) | Total (2021) | Banking (2020) | Insurance (2020) | Total (2020) | | :----------- | :------------- | :--------------- | :----------- | :------------- | :--------------- | :----------- | | Net interest income and other income from external customers | $21,866 | $1,372 | $23,238 | $20,186 | $1,435 | $21,621 | | Income (Loss) before income taxes | $9,185 | $216 | $9,401 | $(2,001) | $165 | $(1,836) | | Total assets | $2,641,782 | $12,835 | $2,654,617 | $2,167,427 | $12,638 | $2,180,065 | | Capital expenditures | $76 | — | $76 | $406 | — | $406 | [8. Securities](index=16&type=section&id=8.%20Securities) This section details the classification, valuation, and fair value of the company's debt and equity securities - Debt securities are classified as 'held to maturity' (amortized cost) or 'available for sale' (fair value with unrealized gains/losses in OCI), while equity securities with readily determinable fair values are recorded at fair value with changes recognized in net income[53](index=53&type=chunk) Securities Available for Sale (March 31, 2021) | In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :----------- | :------------- | :--------------------- | :---------------------- | :--------- | | U.S. Government and agencies | $199,033 | $1,378 | $4,281 | $196,130 | | Mortgage-backed securities, residential | $113,145 | $2,366 | $1,210 | $114,301 | | State and municipal | $35,899 | $225 | $418 | $35,706 | | Corporate bonds | $8,775 | $100 | $4 | $8,871 | | Total | $356,852 | $4,069 | $5,913 | $355,008 | Securities Held to Maturity (March 31, 2021) | In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :----------- | :------------- | :--------------------- | :---------------------- | :--------- | | Mortgage-backed securities, residential | $9,155 | $296 | — | $9,451 | | Total | $9,155 | $296 | — | $9,451 | - At March 31, 2021, various available-for-sale securities had unrealized losses, primarily due to changes in interest rates, but management determined none were other-than-temporarily impaired[60](index=60&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk) [9. Loans](index=20&type=section&id=9.%20Loans) This section provides an overview of the company's loan portfolio, including its composition and geographic concentration - The loan portfolio primarily consists of commercial, residential mortgage, home equity, and consumer loans, with a substantial portion in southcentral Pennsylvania and northern Maryland[68](index=68&type=chunk) - Interest accrual on residential mortgage and commercial loans is discontinued at **90 days past due**, while consumer loans are typically charged off by **120 days past due**[69](index=69&type=chunk) [Allowance for Credit Losses](index=20&type=section&id=Allowance%20for%20Credit%20Losses) This section details the methodology and components of the allowance for credit losses, including loan loss provisions - The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded lending commitments, established through a provision for loan losses charged to earnings[71](index=71&type=chunk) - The allowance is evaluated quarterly based on historical experience, portfolio nature/volume, borrower ability to repay, collateral value, and economic conditions, and consists of specific, general, and unallocated components[72](index=72&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk) Allowance for Loan Losses (March 31, 2021) | In thousands | Commercial and Industrial | Commercial Real Estate | Commercial Real Estate Construction | Residential Mortgage | Home Equity Lines of Credit | Consumer | Unallocated | Total | | :----------- | :------------------------ | :--------------------- | :---------------------------------- | :------------------- | :-------------------------- | :------- | :---------- | :---- | | Beginning balance - January 1, 2021 | $4,037 | $9,569 | $503 | $3,395 | $693 | $648 | $1,381 | $20,226 | | Charge-offs | $(18) | — | — | — | — | $(37) | — | $(55) | | Recoveries | $8 | — | — | — | — | $8 | — | $16 | | Provisions (credits) | $476 | $(29) | $40 | $(29) | $(64) | $(11) | $(333) | $50 | | Ending balance - March 31, 2021 | $4,503 | $9,540 | $543 | $3,366 | $629 | $608 | $1,048 | $20,237 | [Loan Modifications/Troubled Debt Restructurings/COVID-19](index=33&type=section&id=Loan%20Modifications%2FTroubled%20Debt%20Restructurings%2FCOVID-19) This section discusses the impact of COVID-19 on loan modifications and troubled debt restructurings - Under the CARES Act, COVID-19 related loan modifications for loans less than **30 days past due** as of December 31, 2019, are not considered troubled debt restructurings (TDRs)[123](index=123&type=chunk) Temporary Loan Modifications (March 31, 2021) | Type of Loans | Number of Loans | Deferral Period | Balance (in thousands) | 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% | | Total | 30 | | $23,720,360 | | Commercial Loans by Industry Potentially Affected by COVID-19 (March 31, 2021) | Type of Loans | Number of Loans | Balance (in thousands) | Percentage of Total Loan Portfolio | Percentage of Capital | | :------------ | :-------------- | :--------------------- | :--------------------------------- | :-------------------- | | Lessors of Commercial Real Estate | 6 | $6,105,203 | 0.38% | 2.37% | | Hospitality Industry (Hotels/Bed & Breakfast) | 5 | $13,479,711 | 0.84% | 5.24% | | Food Services Industry | 1 | $55,248 | 0.00% | 0.02% | | Other | 16 | $3,922,589 | 0.24% | 1.52% | | Total | 28 | $23,562,751 | 1.46% | 9.15% | [Paycheck Protection Program](index=34&type=section&id=Paycheck%20Protection%20Program) This section provides details on the company's participation in the SBA Paycheck Protection Program - The Corporation actively participated in the SBA Paycheck Protection Program (PPP) under the CARES Act and Economic Aid Act, originating loans for first-time and second-time borrowers[127](index=127&type=chunk)[128](index=128&type=chunk) Paycheck Protection Program (PPP) Loan Data (March 31, 2021) | Item | Amount | | :-------------------------------- | :------------- | | Applications Originated | 2,049 | | Loans Originated | $213,977,091 | | Outstanding Balance (net of repayments/forgiveness) | $142,036,347 | | Total Fee Income (before costs) | $8,700,000 | | Fee Income Recognized in 2020 | $2,800,000 | | Fee Income Recognized through March 31, 2021 | $953,000 | [10. Fair Value Measurements](index=34&type=section&id=10.%20Fair%20Value%20Measurements) This section explains the company's approach to fair value measurements and the hierarchy of inputs used - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants[132](index=132&type=chunk) - The fair value hierarchy prioritizes inputs: **Level 1** (unadjusted quoted prices in active markets), **Level 2** (quoted prices in inactive markets or observable inputs), and **Level 3** (unobservable inputs significant to measurement)[133](index=133&type=chunk)[134](index=134&type=chunk) Assets Measured at Fair Value (March 31, 2021) | In thousands | Total | Level 1 | Level 2 | Level 3 | | :----------- | :-------- | :-------- | :-------- | :-------- | | Total securities available for sale | $355,008 | — | $355,008 | — | | Equity securities with readily determinable fair values | $2,535 | $2,535 | — | — | | Collateral dependent impaired loans | $6,430 | — | — | $6,430 | Financial Instruments Carrying Amount vs. Fair Value (March 31, 2021) | In thousands | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | | :----------- | :-------------- | :--------- | :-------- | :-------- | :-------- | | **Financial assets:** | | | | | | | Cash and due from banks | $24,305 | $24,305 | $10,252 | $14,053 | — | | Interest-bearing deposits in banks | $482,453 | $482,453 | $482,453 | — | — | | Loans, less allowance for loan losses | $1,590,481 | $1,616,326 | — | — | $1,616,326| | **Financial liabilities:** | | | | | | | Demand deposits and savings | $1,816,731 | $1,816,731 | — | $1,816,731| — | | Time deposits | $461,891 | $465,265 | — | $465,265 | — | | Long-term borrowings | $54,616 | $55,329 | — | $55,329 | — | [11. Securities Sold Under Agreements to Repurchase (Repurchase Agreements)](index=38&type=section&id=11.%20Securities%20Sold%20Under%20Agreements%20to%20Repurchase%20(Repurchase%20Agreements)) This section describes the accounting treatment and details of the company's repurchase agreements - Repurchase agreements are accounted for as collateralized financing agreements, with the obligation reflected as a liability and underlying securities remaining in asset accounts[144](index=144&type=chunk) Short-term Borrowings Subject to Repurchase Agreements (March 31, 2021) | In thousands | Gross Amounts Recognized Liabilities | Net of Amounts Liabilities Presented in the Statements of Condition | | :----------- | :----------------------------------- | :------------------------------------------------------------------ | | Repurchase agreements: Commercial customers and government entities | $31,282 | $31,282 | - As of March 31, 2021, the fair value of securities pledged in connection with repurchase agreements was **$40,147,000**[147](index=147&type=chunk) [12. Borrowings](index=39&type=section&id=12.%20Borrowings) This section outlines the company's short-term and long-term debt, including recent issuances Long-term Debt Outstanding (in thousands) | Item | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | FHLB advances | $35,716 | $38,716 | | Loan payable to local bank | $1,200 | $1,329 | | Loan payable variable rate | $2,700 | $2,700 | | Trust preferred subordinated debt (New Windsor) | $5,000 | $5,000 | | Trust preferred subordinated debt (FCBI) | $6,000 | $6,000 | | Subordinated debt | $15,000 | — | | Total | $65,616 | $53,745 | - On March 30, 2021, ACNB Corporation issued **$15.0 million** in **4.00% fixed-to-floating rate subordinated notes** due March 31, 2031, to retire debt, repurchase shares, support growth, and meet regulatory capital requirements[154](index=154&type=chunk) [13. Goodwill and Other Intangible Assets](index=40&type=section&id=13.%20Goodwill%20and%20Other%20Intangible%20Assets) This section details the company's goodwill and other intangible assets, including their carrying values and impairment testing - Combined goodwill totaled **$42,108,000**, resulting from acquisitions of Russell Insurance Group, Inc. (**$6.3M**), New Windsor Bancorp, Inc. (**$13.3M**), and Frederick County Bancorp, Inc. (**$22.5M**)[155](index=155&type=chunk)[156](index=156&type=chunk) - Goodwill is evaluated for impairment annually, with no impairment identified in the most recent testing, while other intangible assets with finite lives are amortized and subject to periodic impairment testing[156](index=156&type=chunk)[157](index=157&type=chunk)[159](index=159&type=chunk) Carrying Value and Accumulated Amortization of Intangible Assets (in thousands) | Item | Gross carrying amount | Accumulated amortization | | :--- | :-------------------- | :----------------------- | | RIG amortized intangible assets | $10,428 | $7,226 | | New Windsor core deposit intangibles | $2,418 | $1,418 | | FCBI core deposit intangibles | $3,560 | $793 | [14. Revenue Recognition](index=41&type=section&id=14.%20Revenue%20Recognition) This section explains the company's policies for recognizing revenue from various sources, including non-interest income - The Corporation adopted ASU 2014-09 (Topic 606) on **January 1, 2018**, with no material impact on revenue measurement or recognition[160](index=160&type=chunk) - Performance obligations are generally satisfied as services are rendered, and transaction prices are typically fixed, involving little judgment in applying Topic 606[160](index=160&type=chunk) - Key non-interest income sources include fiduciary, investment management, and brokerage activities (fees based on assets under management), service charges on deposit accounts (overdraft, ATM, monthly fees), and interchange revenue from debit card transactions[161](index=161&type=chunk)[163](index=163&type=chunk)[165](index=165&type=chunk) [15. New Accounting Pronouncements](index=42&type=section&id=15.%20New%20Accounting%20Pronouncements) This section discusses the potential impact of recently issued accounting standards on the company's financial statements - ASU 2016-13 (CECL model) requires measuring credit losses over the instrument's contractual term, with the Corporation, as a smaller reporting company, expecting to defer implementation until **January 1, 2023**[166](index=166&type=chunk)[168](index=168&type=chunk) - ASU 2019-12 simplifies income tax accounting by removing certain exceptions in Topic 740, effective for fiscal years beginning after **December 15, 2020**, with no material effect expected[169](index=169&type=chunk)[170](index=170&type=chunk) - ASU 2020-04 (Reference Rate Reform) provides optional guidance for accounting for the transition away from LIBOR, effective **March 12, 2020**, through **December 31, 2022**, with the Corporation evaluating its impact[171](index=171&type=chunk) [ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=45&type=section&id=ITEM%202%20%E2%80%93%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective and analysis of ACNB Corporation's financial condition, results of operations, comprehensive income, capital resources, and liquidity [Introduction and Forward-Looking Statements](index=45&type=section&id=Introduction%20and%20Forward-Looking%20Statements) This section introduces the management discussion and analysis, highlighting the inherent risks in forward-looking statements - The discussion analyzes significant changes in financial condition, results of operations, comprehensive income, capital resources, and liquidity for ACNB Corporation[174](index=174&type=chunk) - Forward-looking statements are subject to risks and uncertainties, including local economic conditions, competitive factors, regulatory limitations, and the ongoing impact of COVID-19[175](index=175&type=chunk) [Critical Accounting Policies](index=45&type=section&id=Critical%20Accounting%20Policies) This section outlines the key accounting policies that require significant judgment and estimation by management - The allowance for loan losses is a critical accounting policy, representing management's estimate of probable losses inherent in the loan portfolio, requiring significant judgment and quarterly assessment[177](index=177&type=chunk) - Evaluating securities for other-than-temporary impairment involves significant judgment, considering factors like fair value duration below cost, issuer financial condition, and management's intent to sell[178](index=178&type=chunk) - Goodwill is not amortized but tested for impairment annually or more frequently if events indicate impairment, while other intangible assets with finite lives are amortized and periodically tested for impairment[179](index=179&type=chunk) [Results of Operations](index=46&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, including detailed discussions of income, expenses, and net income [Executive Summary](index=46&type=section&id=Executive%20Summary) This section provides a high-level overview of the company's financial performance and key drivers for the reporting period Key Financial Highlights (Three Months Ended March 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :----- | :------------------ | :------------------ | :-------------- | :--------- | | Net Income (Loss) | $7,471 | $(1,223) | $8,694 | 710.9% | | Basic Earnings (Loss) Per Share | $0.86 | $(0.14) | | 714.3% | | Net Interest Income | $17,325 | $17,455 | $(130) | (0.7%) | | Provision for Loan Losses | $50 | $4,000 | $(3,950) | (98.8%) | | Other Income | $5,913 | $4,166 | $1,747 | 41.9% | | Other Expenses | $13,787 | $19,457 | $(5,670) | (29.1%) | - The significant increase in net income for Q1 2021 was primarily driven by **higher fee income**, substantially **lower loan loss provision**, and the absence of one-time merger expenses present in Q1 2020[180](index=180&type=chunk) [Net Interest Income](index=47&type=section&id=Net%20Interest%20Income) This section analyzes the components and trends of the company's net interest income, spread, and margin - Net interest income decreased by **$130,000 (0.7%)** to **$17,325,000** in Q1 2021, as a larger decrease in interest income (**7.4%**) outweighed the decrease in interest expense (**40.8%**)[181](index=181&type=chunk) - The net interest spread decreased from **3.30%** in Q1 2020 to **2.81%** in Q1 2021, and net interest margin decreased from **3.55%** to **2.94%** due to lower market yields and changes in earning asset mix[182](index=182&type=chunk) Average Earning Assets and Interest Bearing Liabilities (Q1) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (in thousands) | | :--- | :------------------ | :------------------ | :-------------------- | | Average Earning Assets | $2,387,000 | $1,976,000 | $411,000 | | Average Interest Bearing Liabilities | $1,721,000 | $1,455,000 | $266,000 | [Provision for Loan Losses](index=47&type=section&id=Provision%20for%20Loan%20Losses) This section discusses the provision for loan losses, including factors influencing its changes and net charge-offs Provision for Loan Losses (Q1) | Period | Amount (in thousands) | | :----- | :-------------------- | | 2021 | $50 | | 2020 | $4,000 | - The Q1 2021 provision was significantly lower due to prior period provisioning for COVID-19 impacts and continued reduction in related loan modifications[184](index=184&type=chunk) Net Charge-offs (Q1) | Period | Amount (in thousands) | | :----- | :-------------------- | | 2021 | $39 | | 2020 | $1,983 | [Other Income](index=48&type=section&id=Other%20Income) This section details the various sources of non-interest income and their contributions to overall revenue Other Income (Three Months Ended March 31) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :------------------ | :------------------ | :-------------- | :--------- | | Total Other Income | $5,913 | $4,166 | $1,747 | 41.9% | | Commissions from insurance sales | $1,383 | $1,440 | $(57) | (4.0%) | | Service charges on deposit accounts | $774 | $990 | $(216) | (21.8%) | | Income from fiduciary, investment management and brokerage activities | $703 | $668 | $35 | 5.2% | | Income from mortgage loans held for sale | $1,283 | $318 | $965 | 303.5% | | Net gains (losses) on equity securities | $365 | $(475) | $840 | (176.8%) | | Service charges on ATM and debit card transactions | $778 | $638 | $140 | 21.9% | - The increase in other income was primarily driven by a significant rise in income from mortgage loans held for sale (**303.5%**) due to refinancing demand and a shift from net losses to net gains on equity securities[186](index=186&type=chunk) [Other Expenses](index=48&type=section&id=Other%20Expenses) This section analyzes the company's operating expenses, highlighting significant changes and their underlying causes Other Expenses (Three Months Ended March 31) | Item | 2021 (in thousands) | 2020 (in thousands) | Change (Amount) | Change (%) | | :--- | :------------------ | :------------------ | :-------------- | :--------- | | Total Other Expenses | $13,787 | $19,457 | $(5,670) | (29.1%) | | Salaries and employee benefits | $8,668 | $8,501 | $167 | 2.0% | | Net occupancy | $1,167 | $981 | $186 | 19.0% | | Professional services | $224 | $402 | $(178) | (44.3%) | | Marketing and corporate relations | $77 | $184 | $(107) | (58.2%) | | FDIC and regulatory | $232 | $41 | $191 | 465.9% | | Merger related expenses | — | $5,965 | $(5,965) | (100.0%) | - The substantial decrease in total other expenses was primarily due to the absence of **$5,965,000** in merger-related expenses incurred in Q1 2020[187](index=187&type=chunk) - Salaries and employee benefits increased by **2.0%** due to competitive labor market, staff retention for FCBI market, organic growth initiatives at RIG, and increased support functions[187](index=187&type=chunk)[188](index=188&type=chunk) [Provision for Income Taxes](index=50&type=section&id=Provision%20for%20Income%20Taxes) This section discusses the company's income tax provision and the factors affecting its effective tax rate Provision (Benefit) for Income Taxes (Three Months Ended March 31) | Period | Amount (in thousands) | Effective Tax Rate | | :----- | :-------------------- | :----------------- | | 2021 | $1,930 | 20.5% | | 2020 | $(613) | 33.4% | - Variances from the federal statutory rate of **21%** are generally due to tax-exempt income from investments, bank-owned life insurance, and low-income housing partnerships[195](index=195&type=chunk) [Financial Condition](index=50&type=section&id=FINANCIAL%20CONDITION) This section provides an in-depth analysis of the company's balance sheet, including assets, liabilities, and equity [Investment Securities](index=50&type=section&id=Investment%20Securities) This section details the company's investment securities portfolio, including unrealized gains and losses Total Assets (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $2,654,617 | | December 31, 2020 | $2,555,362 | | March 31, 2020 | $2,180,065 | Net Unrealized Gains (Losses) on Available for Sale Securities (Net of Taxes) | Date | Amount (in thousands) | | :--- | :-------------------- | | March 31, 2021 | $(1,434) | | December 31, 2020 | $4,645 | | March 31, 2020 | $4,463 | - The shift to a net unrealized loss on available-for-sale securities at March 31, 2021, was due to an increase in U.S. Treasury yield curve rates, despite the Federal Reserve's Quantitative Easing program[197](index=197&type=chunk) [Loans](index=51&type=section&id=Loans) This section provides an overview of the company's loan portfolio, including outstanding balances and changes Loans Outstanding (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $1,610,718 | | December 31, 2020 | $1,637,784 | | March 31, 2020 | $1,606,039 | - Loans outstanding increased by **0.3% year-over-year** but decreased by **1.7%** from December 31, 2020, primarily due to residential mortgage sales and early payoffs, partially offset by PPP participation[200](index=200&type=chunk) - Commercial purpose loans increased by **$6,494,000 (0.6%)** from December 31, 2020, including **$142,036,000** in PPP loans[200](index=200&type=chunk) [Allowance for Loan Losses](index=52&type=section&id=Allowance%20for%20Loan%20Losses) This section discusses the adequacy and composition of the allowance for loan losses and related ratios - The allowance for loan losses is maintained at a level deemed adequate to absorb probable losses, determined quarterly through specific credit reviews, historical losses, and qualitative factors[203](index=203&type=chunk) Allowance for Loan Losses and Ratios | Date | Allowance (in thousands) | % of Total Loans | % of Non-Acquired Loans | | :--- | :----------------------- | :--------------- | :---------------------- | | March 31, 2021 | $20,237 | 1.26% | 1.66% | | December 31, 2020 | $20,226 | 1.23% | | | March 31, 2020 | $15,852 | 0.99% | | - Nonaccrual loans increased to **$7,692,000** at March 31, 2021, from **$7,041,000** at December 31, 2020, with **$111,000** in troubled debt restructured loans[214](index=214&type=chunk) [Premises and Equipment](index=57&type=section&id=Premises%20and%20Equipment) This section details the company's premises and equipment, including deferred gains and valuation of acquired properties - A deferred gain of **$700,000** from a building sale and leaseback in 2016 is being recognized over the lease term, with an **$18,000 reduction** in lease expense in Q1 2021 and 2020[227](index=227&type=chunk) - The Corporation valued six buildings acquired from New Windsor at **$8,624,000** (July 2017) and five properties from FCBI at **$7,514,000** (January 2020)[227](index=227&type=chunk) [Foreclosed Assets Held for Resale](index=57&type=section&id=Foreclosed%20Assets%20Held%20for%20Resale) This section reports on the carrying value and anticipated activity related to foreclosed assets - Foreclosed assets held for resale had a carrying value of **$0** at March 31, 2021, and December 31, 2020, as all properties were sold in 2020[228](index=228&type=chunk) - The Corporation anticipates acquiring and marketing additional foreclosed assets throughout 2021, though the total amount and timing remain uncertain[228](index=228&type=chunk) [Deposits](index=57&type=section&id=Deposits) This section analyzes the trends and drivers of the company's deposit base and related interest expenses Total Deposits (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $2,278,622 | | December 31, 2020 | $2,185,525 | | March 31, 2020 | $1,811,357 | - Deposits increased by **$467,265,000 (25.8%) year-over-year** and by **$93,097,000 (4.3%)** from December 31, 2020, driven by PPP proceeds and increased liquidity due to COVID-19[229](index=229&type=chunk) - Despite increased volume, deposit interest expense decreased by **43.4%** due to lower rates[229](index=229&type=chunk) [Borrowings](index=57&type=section&id=Borrowings) This section details the company's short-term and long-term borrowings, including recent debt issuances Short-term Bank Borrowings (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $31,282 | | December 31, 2020 | $38,464 | | March 31, 2020 | $26,104 | Long-term Borrowings (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $65,616 | | December 31, 2020 | $53,745 | | March 31, 2020 | $71,723 | - On March 30, 2021, ACNB Corporation issued **$15 million** in **4.00% fixed-to-floating rate subordinated debt** due March 31, 2031, to support general corporate purposes, growth, and regulatory capital[231](index=231&type=chunk) [Capital](index=58&type=section&id=Capital) This section discusses the company's capital structure, including shareholders' equity, dividends, and regulatory capital ratios Total Shareholders' Equity (in thousands) | Date | Amount | | :--- | :----- | | March 31, 2021 | $257,612 | | December 31, 2020 | $257,972 | | March 31, 2020 | $246,994 | - Shareholders' equity decreased by **$360,000** in Q1 2021, primarily due to an increase in accumulated other comprehensive loss, partially offset by retained earnings[232](index=232&type=chunk) Dividend Payout Ratio (Three Months Ended March 31) | Period | Net Income (Loss) (in thousands) | Dividends Paid (in thousands) | Payout Ratio | | :----- | :------------------------------- | :---------------------------- | :----------- | | 2021 | $7,471 | $2,177 | 29.1% | | 2020 | $(1,223) | $2,167 | (177.2%) | Banking Subsidiary Capital Ratios (March 31, 2021) | Ratio | Amount | | :---- | :----- | | Tier 1 leverage ratio | 9.21% | | Common Tier 1 capital ratio | 14.33% | | Tier 1 risk-based capital ratio | 14.33% | | Total risk-based capital ratio | 15.58% | [Liquidity](index=60&type=section&id=Liquidity) This section describes the company's liquidity management strategies and available funding sources - ACNB ensures liquidity through interest-bearing deposits, securities maturities, loan repayments, core deposits, and FHLB borrowing capacity[247](index=247&type=chunk)[248](index=248&type=chunk) - At March 31, 2021, the banking subsidiary had an FHLB borrowing capacity of approximately **$825,196,000**, with **$775,330,000 available**, and a practicable additional borrowing capacity of **$566,000,000**[248](index=248&type=chunk) - The parent company's liquidity is primarily from subsidiary dividends, subject to federal and state banking regulations[251](index=251&type=chunk) [Off-Balance Sheet Arrangements](index=61&type=section&id=Off-Balance%20Sheet%20Arrangements) This section discloses the company's off-balance sheet commitments, such as credit extensions and standby letters of credit - The Corporation uses off-balance sheet financial instruments, including commitments to extend credit and standby letters of credit, to meet customer financing needs[253](index=253&type=chunk) Off-Balance Sheet Commitments (March 31, 2021) | Item | Amount | | :--- | :------------- | | Unfunded outstanding commitments to extend credit | $358,944,000 | | Outstanding standby letters of credit | $8,094,000 | [Market Risks](index=61&type=section&id=Market%20Risks) This section identifies and discusses the primary market risks faced by the company, particularly interest rate risk - ACNB's primary market risk is interest rate risk, arising from managing funds purchased at various terms and rates and invested into earning assets[254](index=254&type=chunk) [Acquisition of Frederick County Bancorp, Inc.](index=61&type=section&id=Acquisition%20of%20Frederick%20County%20Bancorp%2C%20Inc.) This section reiterates the details and impact of the FCBI acquisition on the company's financial position - The acquisition of FCBI, effective **January 11, 2020**, expanded ACNB Corporation's consolidated assets to approximately **$2.7 billion**, deposits to **$2.3 billion**, and loans to **$1.6 billion**[255](index=255&type=chunk)[257](index=257&type=chunk) - FCBI stockholders received **0.9900 shares of ACNB common stock** for each FCBI common stock share, resulting in **1,590,547 ACNB shares issued**[256](index=256&type=chunk) [Recent Developments](index=62&type=section&id=RECENT%20DEVELOPMENTS) This section provides updates on significant regulatory and legislative changes affecting the company [BANK SECRECY ACT (BSA)](index=62&type=section&id=BANK%20SECRECY%20ACT%20(BSA)) This section outlines the company's compliance with the Bank Secrecy Act and related anti-money laundering regulations - The BSA, as amended by the USA PATRIOT Act, mandates financial institutions to implement policies and controls to detect and report money laundering and terrorism financing[258](index=258&type=chunk) - Effective **May 11, 2018**, the Bank began compliance with the new Customer Due Diligence Rule, strengthening obligations for identifying customers and conducting ongoing due diligence[258](index=258&type=chunk) [TAX CUTS AND JOBS ACT](index=62&type=section&id=TAX%20CUTS%20AND%20JOBS%20ACT) This section discusses the impact of the Tax Cuts and Jobs Act on the company's federal corporate tax rate and deferred tax assets - The Tax Cuts and Jobs Act, signed **December 22, 2017**, reduced the federal corporate tax rate from **35% to 21%** effective **January 1, 2018**, which is expected to reduce future federal income tax liability[259](index=259&type=chunk) - The Corporation revalued its net deferred tax assets in Q4 2017, resulting in an approximately **$1.7 million reduction to earnings** in 2017 due to the tax law changes[259](index=259&type=chunk) [DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK)](index=62&type=section&id=DODD-FRANK%20WALL%20STREET%20REFORM%20AND%20CONSUMER%20PROTECTION%20ACT%20(DODD-FRANK)) This section provides an overview of the Dodd-Frank Act and its implications for federal banking regulation and the company's operations - Dodd-Frank, signed in **2010**, fundamentally restructured federal banking regulation, creating new authorities for systemic risk identification and liquidation of financial firms[260](index=260&type=chunk) - The Act is expected to increase ACNB's operating and compliance costs and potentially the banking subsidiary's interest expense[260](index=260&type=chunk) [Holding Company Capital Requirements](index=62&type=section&id=Holding%20Company%20Capital%20Requirements) This section details the Dodd-Frank Act's impact on capital requirements for bank holding companies - Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies no less stringent than those for depository institutions, excluding trust preferred securities from Tier 1 capital unless issued before **May 19, 2010**, by smaller holding companies[260](index=260&type=chunk) [Deposit Insurance](index=62&type=section&id=Deposit%20Insurance) This section explains the changes to deposit insurance limits and assessment bases under the Dodd-Frank Act - Dodd-Frank permanently increased maximum deposit insurance to **$250,000 per depositor** and broadened the base for FDIC insurance assessments to average consolidated total assets less tangible equity capital[261](index=261&type=chunk) [Corporate Governance](index=63&type=section&id=Corporate%20Governance) This section outlines the Dodd-Frank Act's mandates regarding shareholder votes on executive compensation and M&A payments - Dodd-Frank mandates non-binding shareholder votes on executive compensation (every three years) and its frequency (every six years), and on 'golden parachute' payments during M&A[263](index=263&type=chunk) [Prohibition Against Charter Conversions of Troubled Institutions](index=63&type=section&id=Prohibition%20Against%20Charter%20Conversions%20of%20Troubled%20Institutions) This section describes the Dodd-Frank Act's restrictions on charter conversions for troubled depository institutions - Dodd-Frank prohibits troubled depository institutions from converting charters without notice to the issuing authority and a plan to address supervisory matters, subject to agency non-objection[264](index=264&type=chunk) [Interstate Branching](index=63&type=section&id=Interstate%20Branching) This section discusses the Dodd-Frank Act's provisions allowing interstate branching for national and state banks - Dodd-Frank allows national and state banks to establish branches in other states to the same extent as a bank chartered by that state, facilitating entry into new markets[265](index=265&type=chunk) [Limits on Interstate Acquisitions and Mergers](index=63&type=section&id=Limits%20on%20Interstate%20Acquisitions%20and%20Mergers) This section details the stricter capital and management standards for interstate acquisitions and mergers under Dodd-Frank - Dodd-Frank requires bank holding companies and banks to be 'well capitalized' and 'well managed' to engage in interstate acquisitions or mergers, a stricter standard than previous 'adequately capitalized and managed'[265](index=265&type=chunk) [Limits on Interchange Fees](index=63&type=section&id=Limits%20on%20Interchange%20Fees) This section explains the Federal Reserve's authority under Dodd-Frank to regulate interchange fees for debit card transactions - Dodd-Frank granted the Federal Reserve authority to regulate interchange fees for electronic debit transactions by payment card issuers with assets over **$10 billion**, requiring fees to be reasonable and proportional to transaction costs[266](index=266&type=chunk) [Consumer Financial Protection Bureau](index=63&type=section&id=Consumer%20Financial%20Protection%20Bureau) This section describes the establishment and broad powers of the CFPB under the Dodd-Frank Act - Dodd-Frank established the CFPB with broad rulemaking, supervisory, and enforcement powers over federal consumer financial protection laws, including preventing unfair practices and setting mortgage origination standards[267](index=267&type=chunk) [ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE](index=64&type=section&id=ABILITY-TO-REPAY%20AND%20QUALIFIED%20MORTGAGE%20RULE) This section discusses the CFPB's rule requiring mortgage lenders to assess borrowers' repayment ability or originate qualified mortgages - The CFPB's Ability-to-Repay and Qualified Mortgage Rule (effective **January 10, 2014**) requires mortgage lenders to determine a consumer's reasonable ability to repay based on eight underwriting factors or by originating 'qualified mortgages'[268](index=268&type=chunk) - The rule has had little to no impact on the Corporation's lending activities or financial statements, but management continues to monitor its potential effects[268](index=268&type=chunk) [DEPARTMENT OF DEFENSE MILITARY LENDING RULE](index=64&type=section&id=DEPARTMENT%20OF%20DEFENSE%20MILITARY%20LENDING%20RULE) This section outlines the Department of Defense's rule restricting credit terms for military personnel and their families - The U.S. Department of Defense's Military Lending Rule (effective **October 3, 2016**) restricts pricing and terms for credit extended to active duty military personnel and their families, capping interest rates at **36% APR**[269](index=269&type=chunk) - This rule has had little to no impact on the Corporation's lending activities or financial statements, but management continues to monitor its potential effects[269](index=269&type=chunk) [Supervision and Regulation](index=64&type=section&id=SUPERVISION%20AND%20REGULATION) This section describes the regulatory oversight of the company and its subsidiary bank by various federal and state authorities [Dividends](index=64&type=section&id=Dividends) This section explains that the parent company's revenues are primarily from regulated subsidiary bank dividends - ACNB's parent company revenues primarily come from dividends paid by its subsidiary bank, which are regulated by federal and state laws[270](index=270&type=chunk) [Regulation of Bank](index=64&type=section&id=Regulation%20of%20Bank) This section details the regulatory bodies and examinations governing the subsidiary bank - The subsidiary bank is subject to statutes and regulations from the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC, which conduct regular examinations[270](index=270&type=chunk)[271](index=271&type=chunk) [Monetary and Fiscal Policy](index=64&type=section&id=Monetary%20and%20Fiscal%20Policy) This section discusses the influence of monetary and fiscal policies on the company's operations and financial performance - ACNB and its subsidiary bank are affected by monetary and fiscal policies, including those of the Federal Reserve and FDIC, which influence the cost and availability of funds[271](index=271&type=chunk) - Management cannot predict the material effect of proposed federal and state legislation on the business[273](index=273&type=chunk) [ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=65&type=section&id=ITEM%203%20%E2%80%93%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section confirms that management regularly monitors and evaluates changes in market conditions - Management monitors market conditions regularly and has determined no material changes in market risks since year-end 2020[274](index=274&type=chunk) [ITEM 4 – CONTROLS AND PROCEDURES](index=65&type=section&id=ITEM%204%20%E2%80%93%20CONTROLS%20AND%20PROCEDURES) This section details the evaluation of the Corporation's disclosure controls and procedures, confirming their effectiveness in ensuring timely and accurate reporting of material information [Evaluation of Disclosure Controls and Procedures](index=65&type=section&id=EVALUATION%20OF%20DISCLOSURE%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of the company's disclosure controls and the absence of material changes to internal control over financial reporting - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of **March 31, 2021**, in timely alerting them to material information for SEC filings[275](index=275&type=chunk) - No material changes occurred in the Corporation's internal control over financial reporting during the quarter ended **March 31, 2021**[276](index=276&type=chunk) [PART II – OTHER INFORMATION](index=66&type=section&id=PART%20II%20%E2%80%93%20OTHER%20INFORMATION) This section provides additional information not covered in the financial statements or management's discussion and analysis [ITEM 1 – LEGAL PROCEEDINGS](index=66&type=section&id=ITEM%201%20%E2%80%93%20LEGAL%20PROCEEDINGS) This section reports on legal proceedings, stating that as of March 31, 2021, there were no material pending legal proceedings, other than routine litigation, that could adversely affect ACNB or its subsidiaries - As of **March 31, 2021**, there were no material pending legal proceedings or threatened proceedings by governmental authorities that could have a material adverse effect on ACNB or its subsidiaries[278](index=278&type=chunk) [ITEM 1A – RISK FACTORS](i

Part I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) ACNB Corporation operates ACNB Bank and Russell Insurance Group, Inc., expanding services in Pennsylvania and Maryland through the 2020 FCBI acquisition, while navigating a competitive and highly regulated market - ACNB Corporation is the financial holding company for **ACNB Bank** and **Russell Insurance Group, Inc. (RIG)**, providing banking and insurance services across multiple states[8](index=8&type=chunk) - On January 11, 2020, ACNB acquired **Frederick County Bancorp, Inc. (FCBI)** for **$57.9 million**, issuing **1,590,547 shares** of common stock[10](index=10&type=chunk)[63](index=63&type=chunk) ACNB Bank Key Financials (as of Dec 31, 2020) | Metric | Amount (in millions) | | :--- | :--- | | Total Assets | $2,541 | | Total Gross Loans | $1,638 | | Total Deposits | $2,193 | | Total Equity Capital | $252 | - The company faces **intense competition** from various financial institutions, many with larger lending limits and greater market share[19](index=19&type=chunk) - The Corporation is subject to **extensive federal and state regulations**, impacting operations, capital requirements, and compliance costs[20](index=20&type=chunk)[24](index=24&type=chunk)[33](index=33&type=chunk) [Item 1A. Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from COVID-19 impacts, credit portfolio, interest rate volatility, competition, cybersecurity, and evolving regulations including CECL - The **COVID-19 pandemic** has adversely impacted business and financial results, with its ultimate impact remaining highly uncertain, potentially affecting revenue, operations, and capital ratios[65](index=65&type=chunk)[66](index=66&type=chunk) - Participation in the **SBA's Paycheck Protection Program (PPP)** exposes ACNB to litigation risks and potential non-honor of loan guarantees by the SBA[68](index=68&type=chunk)[69](index=69&type=chunk)[71](index=71&type=chunk) - The company is subject to **significant credit risk**, with approximately **68% of its loan portfolio** in commercial and industrial, construction, and commercial real estate loans, which generally carry higher default risk[74](index=74&type=chunk) - ACNB's earnings are **highly sensitive to interest rate changes**, which can materially impact net interest income, loan origination, and the fair value of financial assets[72](index=72&type=chunk)[73](index=73&type=chunk) - The company faces **substantial competition** in lending and deposit-gathering from other financial institutions, many with greater resources and wider geographic presence[77](index=77&type=chunk)[78](index=78&type=chunk) - The upcoming implementation of the **Current Expected Credit Loss (CECL) model** is expected to materially affect the allowance for loan losses, potentially requiring a significant increase and creating more volatility[132](index=132&type=chunk)[133](index=133&type=chunk) [Item 1B. Unresolved Staff Comments](index=26&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - No unresolved staff comments are reported[148](index=148&type=chunk) [Item 2. Properties](index=26&type=section&id=Item%202.%20Properties) As of December 31, 2020, ACNB Bank operated 32 community banking offices and several loan production offices across Pennsylvania and Maryland, with most locations owned - As of December 31, 2020, ACNB Bank operated **32 community banking offices** and loan production offices in Pennsylvania and Maryland, with **23 owned** and **13 leased** bank office locations[148](index=148&type=chunk) [Item 3. Legal Proceedings](index=26&type=section&id=Item%203.%20Legal%20Proceedings) The company states that as of December 31, 2020, there were no material pending legal proceedings that would adversely affect its financial condition or operations - As of December 31, 2020, there were **no material pending legal proceedings** against ACNB or its subsidiaries, beyond ordinary routine litigation incidental to the business[149](index=149&type=chunk) [Item 4. Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[150](index=150&type=chunk) Part II [Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=27&type=section&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ACNB Corporation's common stock trades on NASDAQ under ACNB, with **8,709,393 shares outstanding** as of December 31, 2020, and the company has a stock repurchase program and a Dividend Reinvestment and Stock Purchase Plan - ACNB Corporation's common stock trades on NASDAQ under the symbol **ACNB**, with **8,709,393 shares outstanding** and approximately **2,604 shareholders** of record as of December 31, 2020[151](index=151&type=chunk) - A stock repurchase program, approved in October 2008, had **57,400 shares remaining** for purchase at year-end 2020, superseded by a new plan approved in February 2021 to repurchase up to **261,000 shares**[151](index=151&type=chunk)[156](index=156&type=chunk) - The company offers a **Dividend Reinvestment and Stock Purchase Plan**, through which **190,611 shares** have been issued as of December 31, 2020[154](index=154&type=chunk) [Item 6. Selected Financial Data](index=28&type=section&id=Item%206.%20Selected%20Financial%20Data) The company presents a five-year summary of key financial data, showing **net income of $18.4 million** in 2020, a decrease from 2019, with **total assets growing to $2.56 billion** due to the FCBI acquisition Selected Financial Data (2019-2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | **Income Statement Data** | | | | Net Interest Income | $73,068 | $59,418 | | Provision for Loan Losses | $9,140 | $600 | | Net Income | $18,394 | $23,721 | | **Balance Sheet Data (Year-End)** | | | | Total Assets | $2,555,362 | $1,720,253 | | Loans, net | $1,617,558 | $1,258,766 | | Deposits | $2,185,525 | $1,412,260 | | Stockholders' Equity | $257,972 | $189,516 | | **Common Share Data** | | | | Earnings per share — basic | $2.13 | $3.36 | | Cash dividends declared | $1.00 | $0.98 | | Book value per share | $29.62 | $26.77 | | **Profitability Ratios** | | | | Return on average assets | 0.78% | 1.40% | | Return on average equity | 7.39% | 13.33% | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant impact of the FCBI acquisition and COVID-19 on 2020 financial results, noting a decrease in net income to **$18.4 million** due to higher loan loss provisions and merger expenses, despite growth in net interest income and assets [Executive Overview](index=29&type=section&id=Executive%20Overview) The 2020 financial results were significantly shaped by the FCBI acquisition and the COVID-19 pandemic, leading to a **22.5% decrease in GAAP net income** to **$18.4 million**, primarily due to merger expenses and increased loan loss provisions GAAP vs. Non-GAAP Performance (2019-2020) | Metric (in thousands, except per share) | 2020 | 2019 | | :--- | :--- | :--- | | **Net Income (GAAP)** | **$18,394** | **$23,721** | | Merger-related expenses, net of tax | $4,639 | $595 | | **Net Income (Non-GAAP)** | **$23,033** | **$24,316** | | Basic EPS (GAAP) | $2.13 | $3.36 | | Basic EPS (Non-GAAP) | $2.67 | $3.44 | - Net interest margin decreased to **3.35%** in 2020 from **3.81%** in 2019, while net interest income increased to **$73.1 million** from **$59.4 million** over the same period[170](index=170&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) Net interest income increased by **23.0% to $73.1 million** in 2020 due to the FCBI acquisition and PPP loans, despite a **46 basis point decline in net interest margin**, while the provision for loan losses surged to **$9.1 million** and other expenses rose **28.4%** due to merger costs and workforce expansion - Net interest income increased by **$13.7 million (23.0%)** in 2020, driven by higher loan volume from the FCBI acquisition and PPP lending, though the net interest margin decreased from **3.81%** in 2019 to **3.35%** in 2020[180](index=180&type=chunk)[183](index=183&type=chunk) - The provision for loan losses increased significantly to **$9,140,000** in 2020 from **$600,000** in 2019, primarily due to specific charge-offs and a **$4,100,000 qualitative factor** for COVID-19 risks[189](index=189&type=chunk) - Other income increased by **$1.8 million (9.7%)** in 2020, largely due to a **$1.6 million increase** in income from sold mortgages, offsetting a **3.4% decrease** in insurance commissions[190](index=190&type=chunk)[192](index=192&type=chunk) - Other expenses increased by **28.4%** in 2020, driven by a **22.5% rise** in salaries and employee benefits due to the merger and **$5,965,000** in merger-related expenses[196](index=196&type=chunk)[203](index=203&type=chunk) [Financial Condition](index=37&type=section&id=Financial%20Condition) Total assets grew **48.5% to $2.56 billion** at year-end 2020, driven by the FCBI acquisition and PPP loans, with the allowance for loan losses increasing to **1.23% of total loans** to reflect economic uncertainty, while non-performing assets remained stable - Total loans increased by **$365.2 million (28.7%)** in 2020, primarily due to the FCBI acquisition and active participation in the Paycheck Protection Program (PPP)[217](index=217&type=chunk) - As of December 31, 2020, the Corporation originated approximately **1,440 PPP loans** totaling **$160.9 million**, generating approximately **$6 million** in fee income before costs[219](index=219&type=chunk)[453](index=453&type=chunk) Non-Performing Assets (as of Dec 31) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Non-Performing Loans | $7,896 | $5,138 | | Total Non-Performing Assets | $7,896 | $5,502 | | Non-performing loans to total loans | 0.48% | 0.40% | | Non-performing assets to total assets | 0.31% | 0.32% | - The allowance for loan losses increased to **$20.2 million**, or **1.23% of total loans**, at year-end 2020, up from **$13.8 million**, or **1.09% of loans**, at year-end 2019[243](index=243&type=chunk) - As of December 31, 2020, the company had **48 temporary COVID-19 related loan modifications** with principal balances totaling **$36.1 million**[247](index=247&type=chunk)[248](index=248&type=chunk) - Total shareholders' equity increased to **$258.0 million** at year-end 2020 from **$189.5 million** in 2019, primarily due to the issuance of **$57.7 million** in common stock for the FCBI acquisition[262](index=262&type=chunk) [Liquidity and Capital Resources](index=51&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains a strong liquidity position, primarily funded by its core deposit base, supplemented by substantial borrowing capacity with the FHLB, and robust capital levels exceeding "well capitalized" thresholds - The company's primary liquidity source is its core deposit base, supplemented by **$847.9 million** in borrowing capacity from the FHLB of Pittsburgh, with **$791.9 million available** as of December 31, 2020[279](index=279&type=chunk) Bank Subsidiary Capital Ratios (as of Dec 31, 2020) | Ratio | 2020 Actual | Well Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 leverage ratio | 9.01% | 5.00% | | Common Tier 1 capital ratio | 13.86% | 6.50% | | Tier 1 risk-based capital ratio | 13.86% | 8.00% | | Total risk-based capital ratio | 15.10% | 10.00% | - The company has unfunded commitments to extend credit of **$367.6 million** and standby letters of credit of **$8.1 million** as of December 31, 2020[284](index=284&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=52&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This disclosure is not required for smaller reporting companies like ACNB Corporation - Not required for smaller reporting companies[287](index=287&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=53&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for ACNB Corporation for 2020 and 2019, including the independent auditor's report and detailed notes on financial position, operations, equity, and cash flows - The independent auditor's report from RSM US LLP expresses an **unqualified opinion** and identifies the Allowance for Loan Losses (Qualitative Factors) and the Valuation of the Acquired Loan Portfolio as **Critical Audit Matters**[293](index=293&type=chunk)[298](index=298&type=chunk)[301](index=301&type=chunk) Consolidated Statement of Condition Highlights (as of Dec 31) | Account (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Cash and Cash Equivalents | $399,352 | $114,356 | | Loans, net | $1,617,558 | $1,258,766 | | Goodwill | $42,108 | $19,580 | | **Total Assets** | **$2,555,362** | **$1,720,253** | | Total Deposits | $2,185,525 | $1,412,260 | | Total Borrowings | $92,209 | $99,731 | | **Total Liabilities** | **$2,297,390** | **$1,530,737** | | **Total Stockholders' Equity** | **$257,972** | **$189,516** | Consolidated Statement of Income Highlights (Year Ended Dec 31) | Account (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $73,068 | $59,418 | | Provision for Loan Losses | $9,140 | $600 | | Total Other Income | $19,934 | $18,169 | | Total Other Expenses | $61,160 | $47,621 | | **Net Income** | **$18,394** | **$23,721** | - Note T details the acquisition of **Frederick County Bancorp, Inc. (FCBI)** on January 11, 2020, which resulted in **$22.5 million of goodwill** and the issuance of **1,590,547 shares** of ACNB common stock[553](index=553&type=chunk)[555](index=555&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=108&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - No changes in or disagreements with accountants are reported[578](index=578&type=chunk) [Item 9A. Controls and Procedures](index=108&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting during the fourth quarter - The CEO and CFO concluded that the Corporation's **disclosure controls and procedures were effective** as of December 31, 2020[579](index=579&type=chunk)[580](index=580&type=chunk) - Management assessed and concluded that internal control over financial reporting was **effective** as of December 31, 2020, based on the **COSO 2013 framework**[586](index=586&type=chunk) [Item 9B. Other Information](index=110&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - No other information is reported for this item[588](index=588&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=111&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is **incorporated by reference** from the registrant's 2021 definitive Proxy Statement[589](index=589&type=chunk) [Item 11. Executive Compensation](index=111&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is **incorporated by reference** from the registrant's 2021 definitive Proxy Statement[591](index=591&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=111&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership is incorporated by reference from the company's 2021 definitive Proxy Statement, with **538,468 shares available** for future issuance under equity compensation plans as of December 31, 2020 - Information required by this item is **incorporated by reference** from the registrant's 2021 definitive Proxy Statement[592](index=592&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Number of securities to be issued upon exercise | Weighted-average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | — | $ — | 538,468 | | Equity compensation plans not approved by security holders | — | $ — | — | | **Total** | **—** | **$ —** | **538,468** | [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=111&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is **incorporated by reference** from the registrant's 2021 definitive Proxy Statement[594](index=594&type=chunk) [Item 14. Principal Accountant Fees and Services](index=111&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2021 definitive Proxy Statement - Information required by this item is **incorporated by reference** from the registrant's 2021 definitive Proxy Statement[595](index=595&type=chunk) Part IV [Item 15. Exhibits and Financial Statement Schedules](index=112&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including the independent auditor's report and various organizational and contractual documents - This section lists the financial statements filed with the report, including the Report of Independent Registered Public Accounting Firm, Consolidated Statements of Condition, Income, Comprehensive Income, Changes in Stockholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements[596](index=596&type=chunk) - A list of exhibits filed with the report is provided, including various agreements, bylaws, compensation plans, and required certifications from the CEO and CFO[598](index=598&type=chunk)[599](index=599&type=chunk)[600](index=600&type=chunk) [Item 16. Form 10-K Summary](index=115&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports no summary for this item - No Form 10-K summary is provided[601](index=601&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Title of each classTrading Symbol Name of each exchange on which registered Common Stock, $2.50 par value per share ACNB The NASDAQ Stock Market, LLC FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 1-35015 ACNB CORPORATION (Exact name of Registrant as specified in its charter) Pennsylvania 23-2233457 (State or other ...

[PART I - FINANCIAL INFORMATION](index=2&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=2&type=section&id=ITEM%201%20-%20FINANCIAL%20STATEMENTS) The unaudited statements reflect significant balance sheet growth and a net loss due to the FCBI acquisition [Consolidated Statements of Condition](index=2&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CONDITION) Total assets grew to $2.18 billion, driven by the FCBI acquisition which increased loans and deposits Key Balance Sheet Items (in thousands) | Metric | March 31, 2020 | December 31, 2019 | March 31, 2019 | | :--- | :--- | :--- | :--- | | **Total Assets** | **$2,180,065** | **$1,720,253** | **$1,671,159** | | Loans, net | $1,590,187 | $1,258,766 | $1,287,315 | | Goodwill | $41,700 | $19,580 | $19,580 | | **Total Deposits** | **$1,811,357** | **$1,412,260** | **$1,367,058** | | Total Liabilities | $1,933,071 | $1,530,737 | $1,497,366 | | **Total Stockholders' Equity** | **$246,994** | **$189,516** | **$173,793** | [Consolidated Statements of Income](index=3&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20INCOME) The company reported a net loss of $1.22 million due to merger expenses and increased loan loss provisions Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $17,455 | $14,665 | | Provision for Loan Losses | $4,000 | $150 | | Total Other Income | $4,166 | $3,940 | | Merger related expenses | $5,965 | $0 | | Total Other Expenses | $19,457 | $11,261 | | **Net (Loss) Income** | **$(1,223)** | **$5,864** | | **Basic (loss) earnings per share** | **$(0.14)** | **$0.83** | [Consolidated Statements of Cash Flows](index=8&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Net cash increased by $14.8 million, with operating and financing inflows offsetting investing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2020 | | :--- | :--- | | Net Cash Provided by Operating Activities | $8,416 | | Net Cash (Used in) Investing Activities | $(5,120) | | Net Cash Provided by Financing Activities | $11,518 | | **Net Increase in Cash and Cash Equivalents** | **$14,814** | - The acquisition of FCBI provided a **net cash inflow of $35.3 million**, which was a major component of investing activities for the quarter[8](index=8&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Notes detail the FCBI acquisition, loan portfolio composition, credit quality, and COVID-19 pandemic impacts - On January 11, 2020, ACNB completed its acquisition of Frederick County Bancorp, Inc (FCBI), acquiring total assets of **$444.4 million**, including **$329.9 million in loans** and **$374.1 million in deposits**[23](index=23&type=chunk) - The FCBI acquisition resulted in the recording of **$22.1 million in goodwill** and the issuance of **1,590,547 shares** of its common stock as part of the transaction[24](index=24&type=chunk) - The company has deferred the implementation of the new **CECL accounting standard** (ASU 2016-13) to fiscal years beginning after December 31, 2022[22](index=22&type=chunk)[190](index=190&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=43&type=section&id=ITEM%202%20-%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) The Q1 2020 net loss was driven by merger expenses and a higher provision for loan losses due to a specific charge-off and COVID-19 [Results of Operations](index=44&type=section&id=Results%20of%20Operations) A $1.22 million net loss resulted from merger expenses and a higher loan loss provision, despite growth in net interest income - The net loss for Q1 2020 was primarily a result of **$5,965,000 in merger/system conversion related expenses** for the acquisition of FCBI[201](index=201&type=chunk)[208](index=208&type=chunk) - The provision for loan losses increased to **$4,000,000** in Q1 2020 from $150,000 in Q1 2019, driven by a **$2.0 million charge-off** and a **$1.5 million COVID-19 adjustment**[206](index=206&type=chunk) - Net interest margin decreased to **3.67%** for Q1 2020 from 3.93% in Q1 2019, impacted by a lower-yielding asset mix[204](index=204&type=chunk) [Financial Condition](index=48&type=section&id=Financial%20Condition) The FCBI acquisition drove a 26.7% increase in total assets to $2.18 billion, with strong regulatory capital ratios maintained - Loans outstanding increased by **26.2%** from December 31, 2019, to March 31, 2020, primarily attributable to the FCBI acquisition[224](index=224&type=chunk) - Total deposits increased by **28.3%** from December 31, 2019, to March 31, 2020, with deposits acquired from FCBI totaling approximately **$330 million**[254](index=254&type=chunk) - The banking subsidiary's capital ratios remain strong, with a **Tier 1 leverage ratio of 10.21%** and a **Total risk-based capital ratio of 14.86%**, both well above "well capitalized" requirements[274](index=274&type=chunk) [Loan Portfolio and COVID-19 Response](index=33&type=section&id=Loan%20Portfolio%20and%20COVID-19%20Response) The company responded to COVID-19 by modifying $134.4 million in loans and actively participating in the Paycheck Protection Program Loan Modifications as of March 31, 2020 | Type of Loans | Number of Loans | Deferral Period | Balance | Percentage of Tier 1 Capital | | :--- | :--- | :--- | :--- | :--- | | Commercial Purpose | 216 | 3 months | $132,898,838 | 53.80% | | Consumer Purpose | 71 | 1-3 months | $1,498,218 | 0.61% | | **Total** | **287** | | **$134,397,056** | | - As of April 16, 2020, the Corporation had received approximately **822 applications for up to $119 million** of loans under the Paycheck Protection Program (PPP)[143](index=143&type=chunk)[225](index=225&type=chunk) Commercial Loan Exposure to Industries Impacted by COVID-19 (as of March 31, 2020) | Type of Loans | Balance | Percentage of Total Loan Portfolio | | :--- | :--- | :--- | | Lessors of Commercial Real Estate | $26,538,223 | 1.65% | | Hospitality Industry (Hotels/B&B) | $35,882,974 | 2.23% | | Food Services Industry | $15,517,902 | 0.97% | | Other | $54,959,739 | 3.42% | | **Total** | **$132,898,838** | **8.27%** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=ITEM%203%20-%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The Corporation's primary market risk exposure, mainly interest rate risk, has not materially changed since year-end 2019 - The Corporation's primary market risk is **interest rate risk**, stemming from its core business of taking deposits and making loans and investments[282](index=282&type=chunk) [Item 4. Controls and Procedures](index=62&type=section&id=ITEM%204%20-%20CONTROLS%20AND%20PROCEDURES) Executive management concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2020 - Management, including the CEO and CFO, concluded that the company's **disclosure controls and procedures were effective** as of the end of the period covered by the report[306](index=306&type=chunk) [PART II - OTHER INFORMATION](index=63&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=63&type=section&id=ITEM%201%20-%20LEGAL%20PROCEEDINGS) The Corporation was not party to any material pending legal proceedings outside the ordinary course of business - There were **no material pending legal proceedings** against the Corporation or its subsidiaries as of March 31, 2020[308](index=308&type=chunk) [Item 1A. Risk Factors](index=64&type=section&id=ITEM%201A%20-%20RISK%20FACTORS) Key risks include the uncertain impact of the COVID-19 pandemic, the future adoption of the CECL standard, and merger integration challenges - The **COVID-19 pandemic** is identified as a major risk factor, with potential negative impacts on loan demand, credit losses, and securities valuations[309](index=309&type=chunk)[310](index=310&type=chunk) - The future adoption of the **CECL accounting standard** is expected to materially affect how the allowance for loan losses is determined and could require a significant increase[313](index=313&type=chunk)[314](index=314&type=chunk) - Risks related to the **FCBI merger** include incurring significant transaction costs, potential management distraction, and difficulties in post-merger integration[318](index=318&type=chunk)[319](index=319&type=chunk)[320](index=320&type=chunk)[322](index=322&type=chunk)

Use these links to rapidly review the document Table of Contents ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Title of each class Trading Symbol Name of each exchange on which registered Common Stock, $2.50 par value per share ACNB The NASDAQ Stock Market, LLC Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year-ended December 31, 2019 OR o ...