INTRODUCTION AND FORWARD-LOOKING STATEMENTS

introduction

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

Forward-looking statements

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

CRITICAL ACCOUNTING POLICIES

The accounting policies that the Corporation's management deems to be most
important to the portrayal of its financial condition and results of operations,
and that require management's most difficult, subjective or complex judgment,
often result
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in the need to make estimates on the effect of such questions which are inherently uncertain. The following policies are considered critical accounting policies by management:

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

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

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

RESULTS OF OPERATIONS

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

Abstract

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

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Net interest income

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

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

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

Allowance for loan losses

The provision for loan losses was $0 in the third quarter of 2021 and $1,550,000
in the third quarter of 2020. The determination of the provision was a result of
the analysis of the adequacy of the allowance for loan losses calculation. The
allowance for loan and lease losses generally does not include the loans
acquired from the FCBI acquisition or the New Windsor Bancorp, Inc. acquisition
completed in 2017 (New Windsor), which were recorded at fair value as of the
acquisition dates. Total impaired loans at September 30, 2021 were (14.0)% lower
when compared to December 31, 2020. Nonaccrual loans decreased by 20.2%, or
$1,423,000, since December 31, 2020; all substandard loans decreased by 9.5% in
that period. Each quarter, the Corporation assesses risk in the loan portfolio
compared with the balance in the allowance for loan losses and the current
evaluation factors. The third quarter of 2021 provision was calculated to be
much lower due to the intervening provisioning for the impact of the COVID-19
pandemic and the continued reduction in modifications made in prior periods
because of COVID-19. This customer base includes businesses in the
hospitality/tourism industry, restaurants and related businesses and lessors of
commercial real estate properties. The qualitative factor for this event and a
related factor on commercial and industrial loan collateral was
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stable. The lack of the provision in the third quarter of 2021, was despite loss
incurred in 2021 charge-offs as allowance for the losses were calculated in
prior periods. Otherwise Management concluded that the loan portfolio exhibited
continued general stability in quantitative and qualitative measurements as
shown in the tables and narrative in this Management's Discussion and Analysis
and the Notes to the Consolidated Financial Statements. The long term effect of
the ongoing COVID-19 event cannot be currently estimated other than the
calculation that resulted in the above mentioned special qualitative factors.
This same analysis concluded that the unallocated allowance should be in the
same range in the third quarter of 2021 compared with the previous quarter. For
more information, please refer to Allowance for Loan Losses in the following
Financial Condition section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations. ACNB charges confirmed loan
losses to the allowance and credits the allowance for recoveries of previous
loan charge-offs. For the third quarter of 2021, the Corporation had net
charge-offs of $1,066,000, as compared to net charge-offs of $703,000 for the
third quarter of 2020.

Other Income

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

Other Expenses

Other expenses for the quarter ended September 30, 2021 were $ 13,976,000, an augmentation of $ 666,000 or 5.0%, most of it attributable to expenditure management during the current period of low economic activity.

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

• the challenges of replacing and maintaining staff in contact with customers due to a competitive labor market;

• variations in the back-office workforce due to strong demand for employees;

• increase in organic growth initiatives at RIG;

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• retention of staff in support functions and the mix of more qualified employees required by regulation and growth;

• normal merit increases for employees and associated social charges;

• the variation and timing of performance-based commissions, restricted share grants and incentives;

• market changes in actively managing the costs of benefit plans, including medicare;

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

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

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

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

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

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

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

Other tax expense increased by $72,000, or 22.4%, mostly due to the FCB
acquisition comparing the three months ended September 30, 2021 and 2020,
including higher Pennsylvania Bank Shares Tax. The Pennsylvania Bank Shares Tax
is a shareholders' equity-based tax and is subject to increases based on state
government parameters and the level of the stockholders' equity base that
increased due to retained earnings equity and acquisitions. Supplies and postage
expense increased by 36.6% due to variation in the timing of necessary
replenishments. FDIC and regulatory expense increased 17.1% due to prior period
use of credits that did not repeat in the current period. Intangible
amortization decreased 8.9% on bank acquisition calculations while RIG was
stable on books of business purchases. Other operating expenses increased by
$85,000,
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or 6.7%, in the third quarter of 2021, as compared to the third quarter of 2020.
Increases included electronic banking and telecommunication related costs. In
addition, other expenses include the expense of reimbursing checking and debit
card customers for unauthorized transactions to their accounts and other
third-party fraudulent use, which added approximately $37,000 to other expenses
in the third quarter of 2021 compared to $47,000 in the third quarter of 2020.
The expense related to reimbursements is unpredictable and varying, but ACNB has
policies and procedures to limit exposure recognizing the value of electronic
and other banking channels to customers and the significant revenue generated
especially in the debit card arena.

Provision for income taxes

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

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

Abstract

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

Net interest income

Net interest income totaled $53,894,000 for the nine months ended September 30,
2021, compared to $54,166,000 for the same period in 2020, a decrease of
$272,000, or 0.5%. Net interest income decreased due to a decrease in interest
income to a greater extent than a decrease in interest expense. Interest income
decreased $4,333,000, or 6.8%, due to the change in mix of average earning
assets, in addition to decreased rates due to market events. The decrease in
interest expense resulted from deposit rate decreases in addition to a favorable
change in deposit mix (as discussed below). Decreased loans outstanding was a
result of active participation in the short term PPP loans and their subsequent
paydown, despite concerted effort by management to offset the recent year trend
of the market area's heightened competition and the COVID-19 related slow
economic conditions. Loan yields were negatively impacted by declines in the
U.S. Treasury yields and other market driver interest rates. The first three
quarters of 2021 saw continued lower market yields and the difference between
longer term rates and shorter term rates was generally modest. These driver
rates affect new loan originations and are indexed to a portion of the loan
portfolio in that a change in the driver rates changes the yield on new loans
and on existing loans at subsequent interest rate reset dates. From these
changes, interest income yield was negatively affected as new loans replace
paydowns on existing loans and variable rate loans reset to new current rates in
these years. Partially offsetting lower yields were FCBI purchase accounting
adjustments that increased yield. Interest income increased on investment
securities due to new purchases despite lower rates than rates on maturing
investments. An elevated amount of earning assets remained in short-term,
low-rate money market type accounts during the first nine months of 2021; and
there exists ample ability to borrow for liquidity needs. The ability to
increase lending is contingent on the effects of COVID-19 on current and
potential customers even with intense competition that has reduced new loans and
may result in the payoff of existing loans, as economic conditions in the
Corporation's marketplace eventually return to its previous stable state. As to
funding costs, interest rates on alternative funding sources, such as the FHLB,
and other market driver rates are factors in and influence the rates the
Corporation and the local market pay for deposits. However, after
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COVID-19 FOMC actions, rates on transaction, savings and time deposits were
sharply reduced in order to match sharply reduced market earning asset yields.
Interest expense decreased $4,061,000, or 42.1%, due to lower rates offsetting
higher volume on transaction deposits, certificate of deposit rate decreases and
lower volume, and by less use of higher cost borrowings in the first three
quarters of 2021. The medical need to stop the spread of COVID-19 caused
government officials to close or restrict operations of many businesses and
their workers. One of the responses was for the Federal Reserve to decrease
rates to 0% to 0.25%. Over the longer term, the Corporation continues its
strategic direction to increase asset yield and interest income by means of loan
growth and rebalancing the composition of earning assets to commercial loans.

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

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

Allowance for loan losses

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

Other income

Total other income was $17,143,000 for the nine months ended September 30, 2021,
up $3,072,000, or 21.8%, from the first nine months of 2020. At the
Corporation's wholly-owned insurance subsidiary, Russell Insurance Group, Inc.
(RIG), revenue was up by $206,000, or 4.3%, to $4,951,000 during the period due
to increases in contingent commission volume, net of lower commission on
recurring books of business due to economic activity factors. A continuing risk
to RIG revenue is nonrenewal of large commercial accounts and actions by
insurance carriers to reduce commissions paid to agencies such as
RIG. Contingent or extra commission payments from insurance carriers are
received in the second quarter of each year. Contingent commissions were higher
than the prior year, due to specific claims at RIG and trends in the entire
insurance marketplace in general in prior periods. Heightened pressure on
commissions is expected to continue in this business line from insurance company
actions. Estimation of upcoming contingent commission is not calculable at
September 30, 2021. Revenue from ATM and debit card
                                       46
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transactions increased by $375,000 or 17.4%, to $2,536,000 due to variations in
volume and mix, including COVID-19 related higher online volume. The longer term
trend had been increases resulting from consumer desire to use more electronic
delivery channels (Internet and mobile applications); however, regulations or
legal challenges for large financial institutions may impact industry pricing
for such transactions and fees in connection therewith in future periods, the
effects of which cannot be currently quantified. Another challenge to this
revenue source is the general COVID-19 event and related impact caused decrease
in retail activity and the retail system-wide security breaches in the merchant
base that are negatively affecting consumer confidence in the debit card
channel. Income for sold mortgages included in other income, increased earlier
in the year by $1,218,000 or 95.2% due to demand for refinancing in the low rate
environment; such demand is rate dependent and therefore volatile. Fees from
deposit accounts decreased by $32,000, or 1.3%, due to COVID-19 related decrease
in economic activity that reduced fee generating activity. Fee volume varies
with balance levels, account transaction activity, and customer-driven events
such as overdrawing account balances. Various specific government regulations
effectively limit fee assessments related to deposit accounts, making future
revenue levels uncertain. Income from fiduciary, investment management and
brokerage activities, which includes fees from both institutional and personal
trust, investment management services, estate settlement and brokerage services,
totaled $2,363,000 for the nine months ended September 30, 2021, as compared to
$1,982,000 for the first nine months of 2020, a 19.2% net increase as a net
result of higher fee volume from increased assets under management, lower
sporadic estate fee income and varying fees on brokerage relationship
transactions. Earnings on bank-owned life insurance decreased by $24,000, or
2.2%, as a net result of varying crediting rates and administrative cost. Other
income in the nine months ended September 30, 2021, was up by $88,000, or 10.5%,
to $925,000 due to a variety of other fee income variances, mostly volume
related. A $377,000 net fair value gain was recognized on local bank and
CRA-related equity securities during the first nine months of 2021 due to less
concern on COVID-19 related negative market value effect on publicly-traded
stocks, compared to a $483,000 net fair value loss during the first nine months
of 2020 when such concerns were high. No equity securities were sold in either
quarter. There were no gains or losses on sales of securities during the first
nine months of 2021 and 2020.

Other Expenses

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

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

• the challenges of replacing and maintaining staff in contact with customers due to a competitive labor market;

• variations in the back-office workforce due to the strong demand for employees in the market;

• increase in organic growth initiatives at RIG;

• retention of staff in support functions and the mix of more qualified employees required by regulation and growth;

• normal merit increases for employees and associated social charges;

• the variation and timing of performance-based commissions, restricted share grants and incentives;

• market changes in actively managing the costs of benefit plans, including medicare;

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

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

                                       47
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The Corporation's overall pension plan investment strategy is to achieve a mix
of investments to meet the long-term rate of return assumption and near-term
pension obligations with a diversification of asset types, fund strategies, and
fund managers. The mix of investments is adjusted periodically by retaining an
advisory firm to recommend appropriate allocations after reviewing the
Corporation's risk tolerance on contribution levels, funded status, plan
expense, as well as any applicable regulatory requirements. However, the
determination of future benefit expense is also dependent on the fair value of
assets and the discount rate on the year-end measurement date, which in recent
years has experienced fair value volatility and low discount rates. The expense
could also be higher in future years due to volatility in the discount rates at
the latest measurement date, lower plan returns, and change in mortality tables
utilized.

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

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

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

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

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

Provision for income taxes

The Corporation recognized income taxes of $6,154,000, or 20.9% of pretax
income, during the first nine months of 2021, as compared to $2,570,000, or
18.5% of pretax income, during the same period in 2020. The variances from the
federal statutory rate of 21% in the respective periods are generally due to
tax-exempt income from investments in and loans to state and local
                                       48
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units of government at below-market rates (an indirect form of taxation),
investment in bank-owned life insurance, and investments in low-income housing
partnerships (which qualify for federal tax credits). In addition, both years
include Maryland corporation income taxes. Low-income housing tax credits were
$211,000 and $193,000 for the nine months ended September 30, 2021 and 2020,
respectively.

FINANCIAL CONDITION

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

Investment security

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

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

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

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

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

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Loans

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

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

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

Allowance for loan losses

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

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

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

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

• existing market conditions.

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

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

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

• nature and volume of the portfolio and loan terms;

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

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

• existence and effect of possible credit concentrations and changes in the level of these concentrations.

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

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

• the risk of imprecision in the allocation of specific and general reserves;

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

• other potential exposures of the loan portfolio;

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

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

The unallocated portion of the allowance is deemed to be appropriate as it
reflects an uncertainty that remains in the loan portfolio; specifically
reserves where the Corporation believes that tertiary losses are probable above
the loss amount derived using appraisal-based loss estimation, where such
additional loss estimates are in accordance with regulatory and GAAP guidance.
Appraisal-based loss derivation does not fully develop the loss present in
certain unique, ultimately bank-owned collateral. The Corporation has determined
that the amount of provision in 2021 and the resulting allowance at
September 30, 2021, are appropriate given the continuing level of risk in the
loan portfolio. Further, management believes the unallocated allowance is
appropriate, because even though the impaired loans added since 2020 demonstrate
generally low risk due to adequate real estate collateral, the value of such
collateral can decrease; plus, the growth in the loan portfolio is centered
around commercial real estate which continues to have little increase in value
and low liquidity. In addition, there are certain loans that, although they did
not meet the criteria for impairment, management believes there was a strong
possibility that these loans
                                       51
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represented potential losses to September 30, 2021. The amount of the unallocated part of the allowance has been $ 472,000 To September 30, 2021. Prior to the COVID-19 event, management concluded that the loan portfolio exhibited continuous general improvement in both quantitative and qualitative metrics.

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

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

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

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

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

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

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



Loans past due 90 days and still accruing were $430,000 and nonaccrual loans
were $5,618,000 as of September 30, 2021. $79,000 of the nonaccrual balance at
September 30, 2021, were in troubled debt restructured loans. $3,600,000 of the
impaired loans were accruing troubled debt restructured loans. Loans past due 90
days and still accruing were $1,743,000 at September 30, 2020, while nonaccruals
were $6,885,000. $143,000 of the nonaccrual balance at September 30, 2020, was
in troubled debt restructured loans. $3,707,000 of the impaired loans were
accruing troubled debt restructured loans. Loans past due 90 days and still
accruing were $855,000 at December 31, 2020, while nonaccruals were
$7,041,000. $127,000 of the nonaccrual balance at December 31, 2020, were in
troubled debt restructured loans. $3,680,000 of the impaired loans were accruing
troubled debt restructured loans. Total additional loans classified as
substandard (potential problem loans) at
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September 30, 2021, September 30, 2020, and December 31, 2020, were around $ 2,351,000, $ 5,181,000 and $ 2,607,000, respectively.

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

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

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

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

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

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

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

December 31, 2020

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

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

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

The Company had no impaired and unrecognized loans included in the construction of commercial buildings in the September 30, 2021.

Owner occupied commercial real estate at September 30, 2021, includes seven
unrelated loan relationships. A $957,000 relationship in food service that was
performing when acquired was added in the first quarter of 2020 after becoming
90 days past due early in the year, subsequent payments have been received under
a forbearance agreement. An $802,000 merger-
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acquired loan relationship for a light manufacturing enterprise which was
performing when acquired is working through bankruptcy. The other loans in this
category have balances of less than $228,000 each, for which the real estate is
collateral and is used in connection with a business enterprise that is
suffering economic stress or is out of business. The loans in this category were
originated between 2008 and 2014 and are business loans impacted by specific
borrower credit situations. Most loans in this category are making principal
payments. Collection efforts will continue unless it is deemed in the best
interest of the Corporation to initiate foreclosure procedures.

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

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

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

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

Premises and Equipment

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

Seized property held for resale

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

Deposits

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

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

Loans

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

Capital city

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

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

Since the end of 2020 a $ 4,865,000 the increase in accumulated other comprehensive income results from a net decrease in fair value

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value of the investment portfolio as a result of the increase in market rates at the end of the quarter and changes in the net funded position of the defined benefit pension plan. Other comprehensive income is primarily caused by fixed rate investment securities that gain or lose value in different interest rate environments and changes in the net funded position of the defined benefit pension plan.

The primary source of additional capital to ACNB is earnings retention, which
represents net income less dividends declared.
During the first nine months of 2021, ACNB earned $23,339,000 and paid dividends
of $6,710,000 for a dividend payout ratio of 28.8%. During the first nine months
of 2020, ACNB earned $11,345,000 and paid dividends of $6,509,000 for a dividend
payout ratio of 57.4%.

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

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

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

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

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

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

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

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Changes in regulatory capital

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

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

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

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

• a minimum leverage ratio of 4.0%.

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

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

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

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

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

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

The Company calculated the regulatory ratios as of September 30, 2021, and confirmed the absence of significant impact on the capital, operations, liquidity and profits of the Company and the banking subsidiary of the changes made to the regulations.

Capital risk

ACNB Company considers the bank subsidiary’s capital ratios as the relevant measure of capital adequacy.

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

The capital ratios of the banking subsidiary are as follows:

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



Liquidity

Effective liquidity management ensures that the cash requirements of depositors and borrowers, as well as the operational cash requirements of the ACNB, are met.

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

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

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

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

 On March 30, 2021, the Corporation issued $15 million of subordinated debt in
order to pay off existing higher rate debt, to potentially repurchase ACNB
common stock and to use for inorganic growth opportunities. Otherwise, the $15
million of subordinated debt qualifies as Tier 2 capital at the Holding Company
level, but can be transferred to the Bank where it qualifies as Tier 1 Capital.
The debt has a 4.00% fixed-to-floating rate and a stated maturity of March 31,
2031. The debt is redeemable
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by the Company at its option, in whole or in part, on or after March 30, 2026, and at any time upon the occurrence of certain unlikely events such as insolvency in receivership or liquidation of ACNB or ACNB Bank.

Off-balance sheet provisions

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

Market risks

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

The acquisition of Frederick County Bancorp, Inc.

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

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

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

RECENT DEVELOPMENTS

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

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

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

Capital requirements of the holding company

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

Deposit insurance

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

Corporate governance

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

Prohibition of conversions based on the charter of institutions in difficulty

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

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Interstate connection

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

Limits on interstate acquisitions and mergers

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

Interchange Fee Limits

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

Consumer Financial Protection Bureau

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

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

DEPARTMENT OF DEFENSE MILITARY LENDING RULE - In 2015, the U.S. Department of
Defense issued a final rule which restricts pricing and terms of certain credit
extended to active duty military personnel and their families. This rule, which
was implemented effective October 3, 2016, caps the interest rate on certain
credit extensions to an annual percentage rate of
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36% and restricts other fees. The rule requires financial institutions to verify
whether customers are military personnel subject to the rule. The impact of this
final rule, and any subsequent amendments thereto, on the Corporation's lending
activities and the Corporation's statements of income or condition has had
little or no impact; however, management will continue to monitor the
implementation of the rule for any potential effects on the Corporation's
business.

SUPERVISION AND REGULATION

Dividends

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

Bank regulations

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

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

Monetary and Fiscal Policy

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

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