Acnb Corp: Form 10-Q for the period ended Mar 31, 2024

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, 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 may contain 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, noninterest 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 national, regional and 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: short-term and long-term effects of inflation and rising costs on the Corporation, customers and economy; legislative and regulatory changes; banking system instability caused by failures and continuing financial uncertainty of various banks which may adversely impact the Corporation and its securities and loan values, deposit stability, capital adequacy, financial condition, operations, liquidity, and results of operations; effects of governmental and fiscal policies, as well as legislative and regulatory changes; effects of new laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and their application with which the Corporation and its subsidiaries must comply; impacts of the capital and liquidity requirements of the Basel III standards or any similar standards; 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-term 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; effects of economic conditions particularly with regard to the negative impact of any pandemic, epidemic or health-related crisis and the responses thereto on the operations of the Corporation and current customers, specifically the effect of the economy on loan customers’ ability to repay loans; effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; inflation, securities market and monetary fluctuations; 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; effects of technology changes; effects of general economic conditions and more specifically in the Corporation’s Market Areas; failure of assumptions underlying the establishment of reserves for credit losses and estimations of values of collateral and various financial assets and liabilities; acts of war or terrorism or geopolitical instability; disruption of credit and equity markets; ability to manage current levels of impaired assets; loss of certain key officers; 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. Management considers subsequent events occurring after the balance sheet date for matters which may require adjustments to, or disclosure in, the consolidated financial statements. 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 SEC, including the Annual Reports on Form 10-K and the Quarterly Reports on Form 10-Q. Please also carefully review any Current Reports on Form 8-K filed by the Corporation with the SEC.

Executive Overview

ACNB Corporation is the financial holding company for the wholly-owned subsidiaries of ACNB Bank and ACNB Insurance Services. ACNB Bank provides a full range of retail and commercial financial services in Pennsylvania and Maryland. ACNB Insurance Services offers a broad range of property, casualty, health, life and disability insurance serving personal and commercial clients through office locations in Westminster and Jarrettsville, Maryland, and Gettysburg, Pennsylvania and is licensed to do business in 46 states.

The primary source of the Corporation’s revenues is net interest income derived from interest earned on loans and investments, less deposit and borrowing funding costs. Revenues are influenced by general economic factors, including market interest rates, the economy of the markets served, stock market conditions, as well as competitive forces within the markets. The Corporation also generates revenue through commissions and fees earned on various services and financial products offered to its customers and through gains on sales of assets, such as loans, investments and properties. The Corporation incurs expenses to generate the revenue through provision for credit losses, noninterest expense and income taxes. The Corporation’s overall strategy is to increase loan growth in its local markets, while maintaining a reasonable funding base by offering competitive deposit products and services.

The following table presents a summary of the Corporation’s earnings and selected performance ratios:

(Dollars in thousands, except per share data)

(1) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

Summary Financial Results

• Net Income - Net income was $6.8 million, a $2.3 million, or 25.0%, decrease for the three months ended March 31, 2024 compared to $9.0 million for the same period in 2023. The decrease was driven primarily by lower net interest income.
• Net Interest Income - Net interest income was $20.6 million for the three months ended March 31, 2024 compared to $23.1 million in 2023, a decrease of $2.5 million, or 10.8%. The decline in net interest income was driven primarily by an increase in funding costs due to an increase in wholesale borrowings and deposit promotions.
• Net Interest Margin - The Corporation’s FTE net interest margin decreased to 3.77% in the first three months of 2024 compared to 4.22% in the same period in 2023, a decrease of 45 bps.
• Yield on Average Interest-earning Assets - 4.74% for the three months ended March 31, 2024, an increase of 37 bps compared to the same period of 2023.
• Loan Growth - Average loans grew $106.7 million, or 7.0%, during the three months ended March 31, 2024 compared to the same period of 2023. The growth was primarily driven by increases in the commercial real estate portfolio.
• Deposit Decline - Average interest-bearing deposits decreased $222.0 million, or 14.2%, during the three months ended March 31, 2024 compared to the same period of 2023. During the same period, average noninterest-bearing deposits decreased $70.9 million, or 12.7%. ACNB Bank restrained deposit rates for the majority of 2023 despite an increase in market interest rates and an increase in rates by competitors. As a

result, total deposits declined during 2023 and into the first quarter of 2024 as customers sought higher yielding alternative deposit and investment products.

• Asset Quality - Asset quality metrics continue to be stable. The provision for credit losses was $223 thousand and the provision for unfunded commitments was a reversal of $151 thousand for the three months ended March 31, 2024 compared to a $97 thousand provision for credit losses and a $276 thousand provision for unfunded commitments for the three months ended March 31, 2023. Non-performing loans were $3.9 million, or 0.24%, of total loans at March 31, 2024 compared to $3.8 million, or 0.25%, of total loans at March 31, 2023. Annualized net charge-offs for the year ended March 31, 2024 were 0.00% of total average loans compared to 0.02% for the three months ended March 31, 2023.
• Noninterest income - Noninterest income was $5.7 million and $5.0 million in the first three months of 2024 and 2023, respectively. The increase was driven primarily by a net gain on sales of securities compared to a net loss in the same period of 2023, higher insurance commissions and increases in wealth management income.
• Noninterest expenses - Noninterest expenses increased to $17.7 million, or by 8.5%, in the first three months of 2024, as compared to $16.3 million in the same period of 2023. The increase was driven primarily by higher salary and employee benefits expense, professional services, other expense, FDIC and regulatory, and equipment.

A more thorough discussion of the Corporation’s results of operations and financial condition is included in the following pages.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Credit Losses - The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision for credit losses, which is recorded as a current period operating expense.

Determination of an appropriate ACL is inherently complex and requires the use of significant and highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determinations about the ACL and that it has established the existing allowance in accordance with GAAP. However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes in the interest rate environment which may directly impact prepayment and curtailment rate assumption, and changes in the financial condition of borrowers.

RESULTS OF OPERATIONS

Three months ended March 31, 2024, compared to three months ended March 31, 2023

Net income for the three months ended March 31, 2024 was $6.8 million compared to net income of $9.0 million for the comparable period of the prior year, a decrease of $2.3 million or 25.0%. Basic and diluted earnings per share for the three months ended March 31, 2024 and 2023 were $0.80 and $1.06, respectively, a 24.5% decrease. The decrease in net income for the first quarter of 2024 was driven primarily by a decrease in net interest income and higher noninterest expenses, partially offset by an increase in noninterest income.

Net Interest Income

Net interest income totaled $20.6 million for the three months ended March 31, 2024 compared to $23.1 million for the comparable quarter of the prior year, a decrease of $2.5 million, or 10.8%. The FTE net interest margin for the three months ended March 31, 2024 was 3.77%, a 45 bps decrease from 4.22% for the comparable quarter of the prior year. The Corporation manages the risk associated with changes in interest rates through the techniques described within Item 3, “Quantitative and Qualitative Disclosures About Market Risk” in this Quarterly Report on Form 10-Q. The following table provides a comparative average balance sheet and net interest income analysis for the periods presented. The discussion following this table is based on these taxable-equivalent amounts.

(Dollars in thousands)

(1) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate.

(2) Average balances include non-accrual loans and are net of unearned income.

(3) Average balance of investment securities is computed at fair value.

The decrease in net interest income was driven primarily by an increase in funding costs related to an increase in borrowings and deposit promotions for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The following table analyzes the relative impact on FTE net interest income attributed to changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates for the three months ended March 31, 2024 compared to the same period in 2023:

(Dollars in thousands)

(1) The effect of changing volume and rate, which cannot be segregated, has been allocated entirely to the rate column.

(2) Based on average balances and includes non-accrual loans and are net of unearned income.

Total FTE interest income increased $2.0 million, or 8.5%, during the three months ended March 31, 2024 compared to the same period of 2023. ACNB experienced a $1.5 million increase in FTE interest income due to an increase in the yield on interest earning assets and a $519 thousand increase attributable to higher volume. FTE interest income on total loans increased $2.5 million, or 13.0%, compared to 2023. The yield increased 25 bps, contributing $1.0 million to the increase. Average loans increased $106.7 million, or 7.0%, contributing $1.5 million to the increase in FTE interest income. FTE interest income on investment securities decreased $214 thousand, or 5.7%, primarily driven by a lower volume of investment securities, partially offset by a higher yield on investment securities. The higher FTE interest income was offset by a decrease in interest income from interest-bearing deposits with banks of $264 thousand, or 26.0%, attributable to lower average balances of interest-bearing cash used to fund loan growth and deposit outflows, offset slightly by a higher interest rate environment.

Total interest expense increased $4.6 million, or 558.6%, during the three months ended March 31, 2024 compared to the same period of 2023. The increase was primarily due to an increase in long-term borrowings. The rate on interest-bearing deposits increased 53 bps during the first quarter of 2024. Interest expense increased $1.7 million as a result of the higher rates on interest-bearing deposits. The largest increases in rates were in time deposits and money markets which increased 186 and 77 bps, respectively. The rates on total borrowings increased 223 bps during the three months ended March 31, 2024 compared to the same period of 2023. The average balance of total borrowings increased $231.0 million, or 356.4%, compared to the same period in 2023 and were used to fund loan growth and deposit outflows since March 31, 2023.

Provision for Credit Losses and Unfunded Commitments

The provision for credit losses for the three months ended March 31, 2024 was $223 thousand, and the provision for unfunded commitments was a reversal of $151 thousand compared to a provision for credit losses of $97 thousand and a provision for unfunded commitments of $276 thousand for the comparable quarter of the prior year. The determination of the provisions was a result of the analysis of the adequacy of the allowances for credit losses and unfunded commitments calculations. Each quarter, the Corporation assesses risks and reserves required compared with the balances in the allowance for credit losses and unfunded commitments.

Noninterest Income

The following table presents the components of noninterest income:

(In thousands)

Total noninterest income was $5.7 million for three months ended March 31, 2024 compared to $5.0 million for the same period of 2023, a $683 thousand, or 13.7% increase. The more significant fluctuations by category are explained below:

• Insurance commissions increased $213 thousand, or 11.2%, compared to the three months ended March 31, 2023 driven primarily by organic growth and timing of commissions.
• Wealth management income for the three months ended March 31, 2024 increased $122 thousand, or 14.5%, in comparison to the same period in 2023 driven primarily by market appreciation and new business generation.
• Gain from mortgage loans held for sale increased $31 thousand, or 182.4%, as there was a higher volume of mortgage loans sold.
• Net gains (losses) on sales or calls of securities increased $262 thousand as a result of a gain of $69 thousand for the three months ended March 31, 2024 compared to a loss of $193 thousand in the same period of 2023.

Noninterest Expenses

The following table presents the components of noninterest expense:

(In thousands)

Noninterest expenses totaled $17.7 million during the three months ended March 31, 2024, an 8.5% increase compared to the same period of 2023. The more significant fluctuations by category are explained below:

• Salaries and employee benefits, the largest component of noninterest expenses, increased 7.0% in 2024 to $11.2 million compared to $10.4 million in 2023. The increase was driven primarily by higher health insurance costs and base wages.
• Equipment expense increased $122 thousand, or 7.6%, driven primarily by purchases of office equipment.
• Professional services increased $234 thousand, or 61.3%, driven primarily by higher maintenance expenses related to a foreclosed asset held for resale and recruiting expenses for talent acquisition.
• FDIC and regulatory increased $126 thousand, or 50.6%, as a result of a higher FDIC assessment due to changes in the composition of the Bank’s balance sheet.
• Marketing and corporate relations decreased $66 thousand, or 42.9% driven primarily by the rebranding of the Bank’s Maryland banking locations in 2023.
• Other noninterest expense increased $166 thousand, or 11.0%, driven primarily by higher directors fees and operating losses.

Provision for Income Taxes

The Corporation recognized income taxes of $1.8 million during the three months ended March 31, 2024 compared to $2.4 million during the comparable period in 2023. The provision for income taxes for the three months ended March 31, 2024 reflects a combined Federal and State ETR of 20.6% compared to an ETR of 21.0% for the comparable period of 2023. Any variances from the federal statutory rate of 21% are generally due to tax-free income, which includes interest income on tax-free loans and investment securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expense.

FINANCIAL CONDITION

Assets totaled $2.4 billion at both March 31, 2024 and December 31, 2023.

Investment Securities

ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity. The investment portfolio is comprised of U.S. Government and agency, mortgage-backed, state and 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.

Total investment securities were $490.6 million at March 31, 2024 compared to $517.2 million at December 31, 2023, a decrease of 5.1%. The Corporation sold securities and did not reinvest the portfolio cash flows during the first quarter of 2024 as a result of general balance sheet management.

At March 31, 2024, the securities balance included a net unrealized loss on AFS securities of $42.9 million, net of taxes, on amortized cost of $478.1 million compared to a net unrealized loss of $41.0 million, net of taxes, on amortized cost of $501.9 million at December 31, 2023. The change in fair value of AFS securities was a result of an increase in market interest rates in 2024. The changes in value are deemed to be related solely to changes in market interest rates as the credit quality of the portfolio remains strong.

At March 31, 2024, the securities balance included HTM securities with an amortized cost of $64.6 million and a fair value of $58.1 million as compared to an amortized cost of $64.6 million and a fair value of $59.1 million at December 31, 2023.

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

Loans

The following table presents the composition of the loan portfolio as follows:

(In thousands)

Total loans, net of unearned income, outstanding increased $37.0 million, or 2.3%, from December 31, 2023 to March 31, 2024. The increase was driven primarily by growth in the commercial real estate portfolio. Growth in the commercial real estate portfolio was spread throughout the footprint and across various property types. Despite the intense competition in the Corporation’s Market Areas, management continues to focus on asset quality and disciplined underwriting standards in the loan origination process. ACNB does not have a significant concentration of credit risk with any single borrower, industry or geographic location. Most of the Corporation’s lending activities are with customers located within the Bank’s Market Area.

The commercial real estate portfolio grew $31.4 million, or 3.5%, in 2024. The collateral for these loans is primarily spread across Pennsylvania and Maryland, 53.8% and 43.9%, respectively at March 31, 2024 compared to 52.2% and 46.4%, respectively at March 31, 2023. Approximately 3% of the portfolio is for real estate in Urban areas such as Baltimore, Maryland and Philadelphia, Pennsylvania. The largest sectors of the commercial real estate portfolio are retail and mixed-use commercial rental units, hotels, motels and bed and breakfast entities and office complexes. Non-owner occupied commercial real estate represented 61.7% of the commercial real estate portfolio. Non-owner occupied commercial real estate borrowers are geographically dispersed throughout ACNB’s Market Area 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.

The following chart details the percentage of the various categories included in the portfolio:

(1) Constitutes over 40 loan categories that do not fit into the categories presented above.

The concentration of non-owner occupied commercial real estate, construction, and multi-family was 213.3% of total capital of the Bank.

Allowance for Credit Losses and Asset Quality

The ACL at March 31, 2024 was $20.2 million, or 1.21% of total loans, net of unearned income as compared to $20.0 million, or 1.23% of loans, at December 31, 2023 and $19.5 million, or 1.27% of loans, at March 31, 2023.

Changes in the ACL were as follows for the periods presented:

(In thousands)

Loans greater than or equal to 90 days past due and still accruing were $1.2 million as of both March 31, 2024 and December 31, 2023. Nonaccrual loans totaled $2.7 million and $3.0 million as of March 31, 2024 and December 31, 2023, respectively. The ratio of non-performing loans plus foreclosed assets to total assets was 0.18% at March 31, 2024 compared to 0.19% at December 31, 2023 and 0.18% at March 31, 2023.

Information on nonaccrual loans, by collateral type rather than loan segment, at March 31, 2024, as compared to December 31, 2023, is as follows:

(Dollars in thousands)

All nonaccrual loans are to borrowers located within ACNB’s Market Area and were originated by ACNB’s banking subsidiary.

Deposits

Deposits were comprised of the following for the periods presented:

(In thousands)

ACNB relies on deposits as a primary source of funds for lending activities with total deposits of $1.8 billion as of March 31, 2024. Deposits decreased by $26.6 million, or 1.4%, from December 31, 2023, to March 31, 2024, driven primarily by an outflow of municipal deposits. Historically, deposits vary between quarters mostly reflecting different levels held by local companies, government units and school districts during different times of the year. Included in total deposits at March 31, 2024 were municipal deposits totaling $142.2 million, or 7.7%, of total deposits compared to $176.6 million, or 9.5%, of total deposits at December 31, 2023. Time deposits increased $25.1 million, or 10.8%, as a result of special deposit promotions that occurred during the first quarter of 2024.

ACNB’s deposit pricing function employs a disciplined pricing approach based upon liquidity needs and alternative funding rates, but also strives to price deposits to be competitive with relevant local competition, including local government investment trusts, credit unions and larger regional banks. Interest bearing deposit costs for the first quarter of 2024 were 0.65% compared to 0.12% for the first quarter of 2023. Based on total Bank deposits outstanding, consumer and commercial constituted approximately 60% and 40% of total deposits as of March 31, 2024. The loan-to-deposit ratio was 90.72% at March 31, 2024. The ratio of uninsured and non-collateralized Bank deposits to total Bank deposits was approximately 17.76% at March 31, 2024. As of March 31, 2024, cash on hand, the fair value of unencumbered investment securities and collateralized borrowing capacities at the FHLB and the Federal Reserve discount window at the Bank were 325.3% of uninsured and non-collateralized Bank deposits. At March 31, 2024, deposits from the 20 largest unrelated depositors, excluding internal accounts, of the Bank totaled $162.6 million, or 8.8%, of total Bank deposits compared to $192.7 million, or 10.3%, of total Bank deposits at December 31, 2023.

Borrowings

Short-term borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As of March 31, 2024, short-term borrowings were $17.3 million, a decrease of $39.6 million, or 69.6%, compared to $56.9 million at December 31, 2023. 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. Compared to December 31, 2023, securities sold under repurchase agreements balances decreased by $9.6 million, or 35.6%, due to normal changes in the cash flow position of ACNB’s commercial and local government customer base. There were no short-term FHLB borrowings at March 31, 2024 compared to $30.0 million at December 31, 2023. Short-term FHLB borrowings are used to supplement Bank funding from seasonal and daily fluctuations in the deposit base.

Long-term borrowings consist of longer-term advances from the FHLB, trust preferred subordinated debt and subordinated debt. Long-term borrowings totaled $255.3 million at March 31, 2024, compared to $195.3 million at December 31, 2023. During the first quarter of 2024, the bank borrowed $60.0 million from the FHLB at a weighted average fixed rate of 4.31% for a weighted average term of 4.01 years to fund deposit outflows and loan growth. Further borrowings will be used when necessary for a variety of risk management and funding purposes. Please refer to the Liquidity discussion below for more information on the Corporation’s ability to borrow.

Capital

ACNB’s capital management strategies have been developed to provide an appropriate rate of return, in the opinion of management, to shareholders, while maintaining levels above its internal minimums and “well-capitalized” regulatory position in relationship to its risk exposure. Total stockholders’ equity was $279.9 million at March 31, 2024, compared to $277.5 million at December 31, 2023. The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During the first three months of 2024, ACNB retained $4.2 million, or 62.4%, of its net income compared to $6.6 million, or 73.6%, for the same period of 2023. Quarterly cash dividends paid to ACNB Corporation stockholders during the first quarter of 2024 totaled $2.5 million, or $0.30 per common share. The dividend payout ratio was 37.63% first three months of 2024. Comparatively, during the first three months of 2023, ACNB earned $9.0 million and paid dividends of $2.4 million for a dividend payout ratio of 26.42%.

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. During the three months ended March 31, 2024, 4,898 shares were issued under this plan with proceeds in the amount of $174 thousand and during the three months March 31, 2023, 5,889 shares were issued under this plan with proceeds in the amount of $188 thousand.

On October 24, 2022, the Corporation announced that the Board of Directors approved on October 18, 2022, a new plan to repurchase, in open market and privately negotiated transactions, up to 255,575, or approximately 3%, of the outstanding shares of the Corporation’s common stock. This new common stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. As of March 31, 2024, 65,266 shares of common stock have been repurchased under this new plan.

Regulatory Capital

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

Minimum regulatory capital requirements established by Basel III rules require the Corporation and the Bank to:

• Meet a minimum Tier 1 leverage capital ratio of 4.0% of average assets;
• Meet a minimum Common Equity Tier 1 capital ratio of 4.5% of risk-weighted assets;
• Meet a minimum Tier 1 capital ratio of 6.0% of risk-weighted assets;
• Meet a minimum Total capital ratio of 8.0% of risk-weighted assets;
• Maintain a “capital conservation buffer” of 2.5% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonus; and,
• Comply with the definition of capital to improve the ability of regulatory capital instruments to absorb losses.

The capital ratios are as follows:

(1) Ratios do not include capital conservation buffer.

(2) N/A - Not applicable as “well capitalized” applies only to banks.

Liquidity

Effective liquidity management ensures the cash flow requirements of depositors and borrowers as well as the operating cash needs of ACNB are met. ACNB’s funds are available from a variety of sources, including assets that are readily convertible such as interest-bearing deposits with banks, maturities and repayments from the securities portfolio, scheduled repayments of loans receivable, the core deposit base, the ability to raise brokered deposits, and the ability to borrow from the FHLB, Federal Reserve Discount Window and unsecured Federal Funds line providers.

At March 31, 2024, ACNB’s banking subsidiary could borrow approximately $883.2 million from the FHLB, of which $647.1 million was available. At March 31, 2024, ACNB’s banking subsidiary could borrow approximately $66.0 million from the Discount Window, of which the full amount was available. The underlying collateral at the Discount Window is made up of eligible loan collateral held in a joint-custody account under the Bank’s name.

ACNB’s banking subsidiary maintains several unsecured Fed Funds lines with correspondent banks. As of March 31, 2024, Fed Funds line capacity at the banking subsidiary was $192.0 million, of which the full amount was available. In 2018, ACNB Corporation executed a guaranty for a note related to a $1.5 million commercial line of credit from a local bank, with customary terms and conditions for such a line, for ACNB Insurance Services, the borrower and a wholly-owned subsidiary of ACNB Corporation. The commercial line of credit is for general working capital needs as they arise by ACNB Insurance Services and did not have any outstanding balance as of March 31, 2024. The Corporation maintains a $5.0 million unsecured line of credit with a correspondent bank, all of which was available for borrowing as of March 31, 2024.

Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling approximately $17.3 million and $26.9 million at March 31, 2024, and December 31, 2023, 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 for liquidity and capital resource requirements for all material short- and long-term cash requirements from known contractual and other obligations.

Off-Balance Sheet Arrangements

The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At March 31, 2024, the Corporation had unfunded outstanding commitments to extend credit of $391.2 million and outstanding standby letters of credit of $17.9 million. 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.

The primary objective of ACNB’s ALCO with direct oversight from the board of directors is to maximize net interest income within established policy parameters. This objective is accomplished through the management of balance sheet composition and duration, market risk exposures arising from changing economic conditions, and liquidity risk.

Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. Specific to the banking industry, one of the greatest risk exposures is to that of changing market interest rates. The primary objective of monitoring ACNB’s interest rate sensitivity risk is to provide management the flexibility necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. FOMC monetary policy, economic uncertainty, and fiscal policy changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

ACNB’s ALCO is a management committee responsible for monitoring and managing interest rate risk within approved policy limits, utilizing earnings sensitivity simulation and economic value-at-risk models. These models are highly dependent on various assumptions, which change regularly as the balance sheet composition and market interest rates change. The key assumptions and strategies employed are analyzed, reviewed and documented at least annually by the ALCO as well as provided to the Board.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Bank’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and contractual loan interest rate changes.

Management attempts to manage the level of repricing and maturity mismatch through its asset/liability management processes so that fluctuations in net interest income are maintained within policy limits across a range of market conditions while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate, and necessary to ensure the Bank’s profitability. Thus, the goal of the Bank’s interest rate risk management is to minimize the fluctuations of net interest income across all interest rate scenarios.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing, and making decisions based on its risk position. The Bank primarily uses its securities portfolio, FHLB advances and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion, and product development activities are directed in an effort to emphasize the loan and deposit repricing characteristics that best meet current interest rate risk objectives.

ACNB uses simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of its interest rate risk exposure. These analyses require numerous assumptions including, but are not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread, and deposit sensitivity. Assumptions are based on management’s best estimates, but may not accurately reflect actual results under certain changes in interest rates due to the timing, magnitude, and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of the Corporation’s interest rate risk position over time.

ACNB’S ALCO operates under management policies, approved by the board of directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews its interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing the analyses, management can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates, and other economic data to inform the committee. Regulatory authorities also monitor the Corporation’s interest rate risk position along with other liquidity ratios.

Net Interest Income Sensitivity

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of Corporation’s short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.

The simulation analysis results are presented in the table below. At March 31, 2024, results in the falling interest rate scenario project a decrease in net interest income. The Bank is currently modestly asset-sensitive according to the model as interest-earning assets are expected to reprice faster than interest-bearing liabilities.

Economic Value

Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer-term repricing risk and options embedded in the balance sheet.

The results at March 31, 2024 and December 31, 2023 reflect the impact of the FOMC’s interest rate increases in effect at the end of each period. Funding cost and repricing speed will continue to be a factor in the results of the model. The behavior of the business and retail clients also varies across the rate scenarios, which is reflected in the results. To improve comparability across periods, the Bank strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take through the normal course of business that would impact results.

12-Month Earnings at Risk Ramps

Value at Risk Ramps

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

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

There were no changes in the Corporation’s internal control over financial reporting during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. Risk Factors of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2023.