ACNB (ACNB) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS 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) 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] - Total Deposits increased by $152.5 million (7.0%) from December 31, 2020, to June 30, 2021, and by $305.2 million (15.0%) from June 30, 2020, to June 30, 2021[6] CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) The Consolidated Statements of Income show a significant increase in net income for both the three and six months ended June 30, 2021, compared to the same periods in 2020, driven by stable net interest income, a substantial reduction in the provision for loan losses, and growth in other income, despite a decrease in total interest income | Metric | Three Months Ended June 30, 2021 ($ 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] - 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 $6.550 million YoY)[8] CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) The Consolidated Statements of Comprehensive Income show an increase in total comprehensive income for the three months ended June 30, 2021, primarily due to higher net income and positive unrealized gains on securities, but for the six-month period, total comprehensive income decreased due to significant unrealized losses on securities, despite higher net income | Metric | Three Months Ended June 30, 2021 ($ 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] - 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 $3.903 million for the six months ended June 30, 2021[9] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) The Consolidated Statements of Changes in Stockholders' Equity show an increase in total stockholders' equity from January 1, 2021, to June 30, 2021, primarily driven by net income and other comprehensive income, partially offset by cash dividends declared, with a similar trend observed in the prior year | Metric | January 1, 2021 ($ 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] - Accumulated Other Comprehensive Loss increased from $(5,638) thousand at January 1, 2021, to $(9,053) thousand at June 30, 2021, indicating a net loss in other comprehensive income during the period[13] CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) The Consolidated Statements of Cash Flows indicate a significant increase in net cash provided by operating activities for the six months ended June 30, 2021, compared to the prior year, with investing activities shifting from a net use of cash to a net provision of cash, while financing activities saw a decrease in net cash provided, primarily due to lower net increases in deposits and higher repayments on long-term borrowings | Metric | Six Months Ended June 30, 2021 ($ 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] - 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] - 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] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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] - ACNB Bank operates 31 community banking offices in Pennsylvania and Maryland, including divisions from acquisitions (NWSB Bank and FCB Bank)[16][17][18] - Primary revenue sources are interest income on loans and investment securities, and fee income on products and services[18] 2. Acquisition of Frederick County Bancorp, Inc. 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 $22.5 million in goodwill - ACNB acquired Frederick County Bancorp, Inc. (FCBI) on January 11, 2020, to expand into Frederick, Maryland[23] | Metric | Amount ($ 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] - 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] 3. Earnings Per Share and Restricted Stock 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] - 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][46] 4. Retirement Benefits 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] - The Corporation had 347 active, vested, terminated, and retired persons in the defined benefit plan as of the last annual census[48] 5. Guarantees 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] - 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] 6. Accumulated Other Comprehensive Loss 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] 7. Segment Reporting 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 $14.638 million (305.7%) for the six months ended June 30, 2021, compared to the same period in 2020[53] 8. Securities ACNB's securities portfolio includes available-for-sale (AFS) and held-to-maturity (HTM) debt securities, and equity securities, with AFS securities recorded at fair value with unrealized gains/losses in OCI, and HTM securities at amortized cost, with no other-than-temporary impairment identified despite changes in unrealized gains/losses due to interest rate fluctuations | Security Type (June 30, 2021) | Amortized Cost ($ 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 $337.718 million at December 31, 2020[59] - The Corporation did not sell any securities available for sale during 2021 or 2020[76] 9. Loans ACNB's loan portfolio, primarily mortgage loans in southcentral Pennsylvania and northern Maryland, decreased by 4.9% from December 31, 2020, to June 30, 2021, largely due to PPP loan payoffs and residential mortgage sales, with credit quality monitored through internal risk ratings and an allowance for loan losses established based on collectibility, historical experience, and economic conditions | Loan Class (June 30, 2021) | Pass ($ 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 $80.008 million (4.9%) from December 31, 2020, to June 30, 2021, primarily due to PPP loan payoffs and residential mortgage sales[228] | Loan Type (June 30, 2021) | Number of Loans | Balance ($) | 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][133] - The outstanding balance under the Paycheck Protection Program (PPP) was $93.354 million as of June 30, 2021, net of repayments and forgiveness[230] 10. Fair Value Measurements ACNB uses fair value measurements for financial instruments, categorized into a three-level hierarchy based on input observability, with most securities available for sale and held to maturity valued using Level 2 inputs, while collateral-dependent impaired loans and a significant portion of loans were valued using Level 3 inputs, reflecting management's estimates and appraisals | Asset Category (June 30, 2021) | Total ($ 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][147] 11. Securities Sold Under Agreements to Repurchase (Repurchase Agreements) 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] 12. Borrowings 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] - A $5.0 million trust preferred subordinated debt was paid off during the quarter[162] 13. Goodwill and Other Intangible Assets 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 ($22.528 million)[165][166] - Goodwill is evaluated for impairment annually, with no impairment identified in the most recent testing[166] | Intangible Asset | Gross Carrying Amount ($ 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 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] - 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] - Revenue from fiduciary, investment management, and brokerage activities is earned and collected monthly, based on investment funds and fee schedules[172] 15. New Accounting Pronouncements 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] - 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] - ASU 2020-04 (Reference Rate Reform) provides optional guidance for LIBOR transition, effective through December 31, 2022, and ACNB is evaluating its impact[180] ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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] - Forward-looking statements are subject to risks and uncertainties including local economic conditions, competitive factors, regulatory limitations, and the impact of COVID-19[184] CRITICAL ACCOUNTING POLICIES 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] - Evaluation of securities for other-than-temporary impairment involves judgment on fair value, issuer's condition, and intent to sell[187] - Goodwill is tested for impairment at least annually, with no impairment identified in recent tests for RIG or the Bank's goodwill[188] RESULTS OF OPERATIONS 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 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 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] Net Interest Income 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] Provision for Loan Losses 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] Other Income 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] Other Expenses 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][202] Provision for Income Taxes 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] Six Months ended June 30, 2021, compared to Six Months ended June 30, 2020 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 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] Net Interest Income 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] Provision for Loan Losses 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] Other Income 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] Other Expenses 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][220] Provision for Income Taxes 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] FINANCIAL CONDITION 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] - 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] Investment Securities 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] 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] - The decrease is largely attributable to PPP loan payoffs and the sale of most new residential mortgages[228] - 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] Allowance for Loan Losses 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] | 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] 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] - Deposit interest expense decreased by 53.0% due to lower rates, despite an increase in deposit volume[256] 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] - 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] 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][272] 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] - Securities sold under repurchase agreements provided $29.758 million in liquidity at June 30, 2021[275] - 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] Off-Balance Sheet Arrangements 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] Market Risks 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] - No material changes in market risks have been identified since year-end 2020[298] Acquisition of Frederick County Bancorp, Inc. 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] - 1,590,547 shares of ACNB common stock were issued as part of the acquisition[281] - 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] RECENT DEVELOPMENTS 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) 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] - ACNB's banking subsidiary has a BSA and USA PATRIOT Act compliance program commensurate with its risk profile[283] TAX CUTS AND JOBS ACT 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] - ACNB recognized an approximately $1.7 million reduction to earnings in 2017 due to the revaluation of net deferred tax assets[284] DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (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] - Dodd-Frank permanently increased the maximum deposit insurance amount to $250,000 per depositor and broadened the base for FDIC insurance assessments[286] - The Act created the Consumer Financial Protection Bureau (CFPB) with broad rulemaking, supervisory, and enforcement powers over consumer financial protection laws[291] Holding Company Capital Requirements 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] - 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] Deposit Insurance 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] - FDIC insurance assessments are now based on average consolidated total assets less tangible equity capital[286] Corporate Governance 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] - Federal banking regulators are directed to prohibit excessive compensation for executives of depository institutions and holding companies with assets over $1.0 billion[287] Prohibition Against Charter Conversions of Troubled Institutions 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] Interstate Branching Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted, 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] Limits on Interstate Acquisitions and Mergers 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][290] Limits on Interchange Fees 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] Consumer Financial Protection Bureau 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] - The CFPB establishes minimum standards for residential mortgage originations, including the borrower's ability to repay[291] ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE 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] - Qualified mortgages generally exclude features like negative amortization, interest-only payments, or terms exceeding 30 years, and have points and fees below 3%[292] DEPARTMENT OF DEFENSE MILITARY LENDING RULE 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] - The rule requires financial institutions to verify whether customers are military personnel subject to the rule[293] SUPERVISION AND REGULATION 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 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] - Federal and state laws regulate the payment of dividends by ACNB's subsidiary bank[295] Regulation of Bank 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] - Examinations by regulatory bodies focus on depositor protection and cover areas such as reserves, loans, investments, and management practices[297] Monetary and Fiscal Policy 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