Acnb Corp: Form 10-Q for the period ended Mar 31, 2025

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 primarily through its network of 33 community banking offices. 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 economies 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.

Traditions Acquisition

ACNB closed the Acquisition of Traditions effective February 1, 2025. Traditions contributed, after acquisition accounting adjustments, $877.7 million in assets, $648.5 million in loans and $741.5 million in deposits at the Acquisition date. Financial results for the three months ended March 31, 2025 were impacted by two discrete items that were related to the Acquisition: a provision for credit losses on non-PCD loans of $4.2 million, net of taxes, and merger-related expenses, net of taxes, totaling $6.2 million.

The following table presents a summary of the Corporation’s earnings and selected performance and asset quality 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 Loss/Income — Net loss for the three months ended March 31, 2025 was $272 thousand compared to net income of $6.8 million for the same period of 2024, a decrease of $7.0 million. Diluted loss per share for the three months ended March 31, 2025 was $0.03 compared to diluted earnings per share of $0.80 for the same period of 2024.
• Net Interest Income — Net interest income was $27.1 million for the three months ended March 31, 2025 compared to $20.6 million for the same period of 2024, an increase of $6.5 million. The increase in net interest income was driven primarily by the Acquisition.
• Net Interest Margin — The Corporation’s FTE net interest margin increased to 4.07% for the three months ended March 31, 2025 compared to 3.77% in the same period of 2024, an increase of 30 bps. The accretion impact of acquisition accounting adjustments on loans and deposits from the Acquisition was $1.5 million for the three months ended March 31, 2025.
• Yield on Average Earning Assets — For the three months ended March 31, 2025, the yield on average earning assets was 5.45%, an increase of 71 bps compared to the same period of 2024 driven primarily by the accretion impact of the acquisition accounting adjustments on loans.
• Loan Growth — Average loans increased $499.3 million for the three months ended March 31, 2025 compared to the same period of 2024 driven by the Acquisition.
• Deposit Growth — Average interest-bearing deposits increased $421.8 million for the three months ended March 31, 2025 compared to the same period of 2024, driven primarily by the Acquisition.
• Asset Quality — The provision for credit losses was $6.0 million and the reversal of the provision for unfunded commitments was $480 thousand for the three months ended March 31, 2025 compared to the provision for credit losses of $223 thousand and a $151 thousand reversal of the provision for unfunded commitments for the same period of 2024.
• The allowance for credit losses was $24.6 million at March 31, 2025 compared to $17.3 million at December 31, 2024. The increase was driven primarily by an initial allowance for credit losses of $5.5 million for non-PCD loans and $1.5 million for accruing PCD loans at the Acquisition date.
• Non-performing loans were $10.0 million, or 0.43%, of total loans at March 31, 2025 compared to $6.8 million, or 0.40%, of total loans at December 31, 2024. The increase was driven primarily by the Acquisition.
• Annualized net charge-offs for the three months ended March 31, 2025 were 0.01% of total average loans compared to 0.00% for the same period of 2024.
• Noninterest income — Noninterest income was $7.2 million for the three months ended March 31, 2025, an increase of $1.5 million from $5.7 million for the same period of 2024. The increase was driven primarily by the Acquisition, an increase in wealth management income and an increase in life insurance proceeds.
• Noninterest expenses — Noninterest expenses increased to $29.3 million for the three months ended March 31, 2025 compared to $17.7 million in the same period of 2024. The increase was driven primarily by the Acquisition.

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 estimate is 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, 2025 compared to three months ended March 31, 2024

Net loss for the three months ended March 31, 2025 was $272 thousand, or $0.03 diluted loss per share, compared to net income of $6.8 million, or $0.80 diluted earnings per share for the same period of 2024, a decrease of $7.0 million, or $0.83 diluted earnings per share. The decrease in net income for the three months ended March 31, 2025 was impacted by two discrete items that were related to the Acquisition of Traditions: a provision for credit losses on non-PCD loans of $4.2 million, net of taxes, and merger-related expenses, net of taxes, totaling $6.2 million.

Net Interest Income

Net interest income totaled $27.1 million for the three months ended March 31, 2025 compared to $20.6 million for the same period of 2024, an increase of $6.5 million. The FTE net interest margin for the three months ended March 31, 2025 was 4.07%, a 30 bps increase from 3.77% for the same period of 2024. The increase in FTE net interest income and margin was driven primarily by the Acquisition. The accretion impact of acquisition accounting adjustments on loans and deposits from the Acquisition was $1.5 million for the three months ended March 31, 2025. 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 the 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 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, 2025 compared to the same period in 2024:

(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.

The increases in FTE interest income and interest expense were primarily driven by the Acquisition. Total FTE interest income increased $10.3 million during the three months ended March 31, 2025 compared to the same period of 2024. ACNB experienced a $6.9 million increase in FTE interest income due to an increase in the average balance of interest earning assets and $3.4 million attributable to an increase in the yield on interest earning assets. FTE interest income on total loans increased $10.2 million compared to the same period of 2024. The yield on total loans increased 71 bps, contributing $3.4 million to the increase. Average loans increased $499.3 million contributing $6.8 million to the increase in FTE interest income.

Total interest expense increased $3.8 million during the three months ended March 31, 2025 compared to the same period of 2024. Total average interest-bearing deposits increased $421.8 million for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Interest expense increased $2.5 million due to higher rates on interest-bearing deposits and increased $1.4 million as a result of the increase in average interest-bearing deposits. The cost of interest-bearing deposits was 1.38% for the three months ended March 31, 2025, an increase of 73 bps from the three months ended March 31, 2024. The largest increases in rates were in time deposits and money markets which increased 123 and 93 bps, respectively.

The increases to average interest-earning assets and liabilities was driven primarily by the Acquisition. The accretion impact of acquisition accounting adjustments on loans and deposits from the Acquisition was $1.5 million for the three months ended March 31, 2025.

Provision for Credit Losses and Unfunded Commitments

The provision for credit losses was $6.0 million and a reversal of the provision for unfunded commitments was $480 thousand for the three months ended March 31, 2025 compared to a provision for credit losses of $223 thousand and a reversal of the provision for unfunded commitments of $151 thousand for the same period of 2024. ACNB recorded an allowance for credit losses of $6.9 million at the Acquisition date, comprised of $5.5 million for non-PCD loans, which was recognized through the provision for credit losses, and $1.5 million for accruing PCD loans, which was recognized as an acquisition accounting adjustment to the amortized cost basis of the acquired loans. The determination of the provisions was a result of the analysis of the adequacy of the ACL 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 $7.2 million for the three months ended March 31, 2025 compared to $5.7 million for the same period of 2024. The increase was driven primarily by the Acquisition unless noted otherwise. The more significant fluctuations by category are explained below:

• Service charges on deposits totaled $1.1 million for the three months ended March 31, 2025, an increase of $103 thousand compared to the same period of 2024.
• Wealth management income for the three months ended March 31, 2025 increased $98 thousand compared to the same period of 2024 driven primarily by increased sales activity and market performance.
• Gain from mortgage loans held for sale totaled $855 thousand compared to $48 thousand in the same period of 2024.
• Earnings on investment in bank-owned life insurance increased $103 thousand from the same period of 2024.
• Gain on life insurance proceeds was $254 thousand for the three months ended March 31, 2025 as a result of a death benefit paid on a life insurance policy.

Noninterest Expenses

The following table presents the components of noninterest expense:

(In thousands)

Noninterest expenses increased $11.7 million for the three months ended March 31, 2025 compared to the same period of 2024 driven primarily by the Acquisition. The more significant fluctuations by category are explained below:

• Salaries and employee benefits, the largest component of noninterest expenses, increased $1.7 million during the three months ended March 31, 2025 to $12.9 million compared to $11.2 million in the same period of 2024. The increase was driven primarily by higher base wages as a result of the Acquisition, higher restricted stock compensation and higher payroll taxes.
• Equipment expenses increased $551 thousand for the three months ended March 31, 2025 compared to the same period of 2024 driven primarily by the Acquisition.
• Other tax increased $157 thousand for the three months ended March 31, 2025 compared to the same period of 2024.
• Net occupancy increased $312 thousand for the three months ended March 31, 2025 compared to the same period of 2024 driven primarily by the Acquisition and increased seasonal maintenance.
• Intangible assets amortization increased $536 thousand for the three months ended March 31, 2025 compared to the same period of 2024 driven by the Acquisition.
• Merger-related expenses include legal, external accounting, loan review, advisory fees, severance and change in control expenses incurred for the Acquisition.

Provision for Income Taxes

The Corporation recognized an income tax benefit of $277 thousand during the three months ended March 31, 2025 compared to a provision for income taxes of $1.8 million during the same period of 2024. The income tax benefit for the three months ended March 31, 2025 was due to the net loss driven by the Acquisition. 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 bank-owned life insurance policies, federal income tax credits, and the impact of non-tax deductible expense. Additionally, ACNB has incurred non-deductible costs related to the Acquisition which are recorded within merger-related costs on the Consolidated Statements of (Loss) Income.

FINANCIAL CONDITION

Assets totaled $3.27 billion at March 31, 2025 and $2.39 billion at December 31, 2024. The Acquisition contributed $877.7 million to total assets.

Investment Securities

ACNB uses investment securities to manage interest rate risk, provide collateral for certain funding products, provide liquidity and generate interest and dividend income. The investment portfolio is comprised of U.S. Government and agencies, 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 $521.3 million at March 31, 2025 compared to $459.5 million at December 31, 2024, an increase of 13.5%. Following the Acquisition date, ACNB completed the sale of approximately $98.0 million of investment securities previously held by Traditions with a yield of 5.03%. ACNB paid off $40.2 million of Traditions’ FHLB borrowings with a cost of 4.73% with the proceeds from the sale of the investment securities, and invested the remainder of the proceeds into investment securities with a yield of 5.07%. At March 31, 2025, the securities balance included a net unrealized loss on AFS securities of $31.8 million on amortized cost of $495.5 million compared to a net unrealized loss of $38.2 million on amortized cost of $441.6 million at December 31, 2024. At March 31, 2025, the securities balance included HTM securities with an amortized cost of $64.6 million and a fair value of $56.2 million as compared to an amortized cost of $64.6 million and a fair value of $56.9 million at December 31, 2024.

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 $639.3 million, or 38.0%, from December 31, 2024 to March 31, 2025. The increase was driven primarily by the Acquisition. ACNB acquired $648.5 million in loans at the Acquisition date. As of March 31, 2025, total acquisition accounting adjustments on loans were $24.5 million. The majority of the loan acquisition accounting adjustments are expected to accrete back through as income as loans pay off or mature. 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, which includes farmland, multifamily, owner-occupied and non-owner occupied commercial real-estate, grew $284.9 million, or 29.4%, in 2025. The following data related to the commercial real estate portfolio through the breakout charts excludes the impact of the acquisition accounting adjustments on loans. The collateral for these loans is primarily spread across Pennsylvania and Maryland, 65.3% and 32.5%, respectively, at March 31, 2025, compared to 56.0% and 42.1%, respectively, at December 31, 2024. Less than 3% of the portfolio is for real estate in Urban areas of Baltimore, Maryland and Philadelphia, Pennsylvania. The largest sectors of the commercial real estate portfolio are retail and mixed-use commercial rental units, office complexes and hotels, motels and bed and breakfast entities. Non-owner occupied commercial real estate represented 66.3% 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 253.1% of total risk-based capital of the Bank as of March 31, 2025 compared to 207.0% of total risk-based capital of the Bank as of December 31, 2024. The increase was a result of the addition of Traditions’ portfolio.

Residential real estate mortgages totaled $591.5 million, an increase of $189.5 million, or 47.2%, in 2025. Included in the residential real estate mortgages were $56.4 million in 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.

Commercial and industrial loans totaled $220.8 million, an increase of $79.9 million, or 56.7% in 2025. This segment includes loans to school districts, municipalities (including townships) and essential purpose authorities. In many cases, these loans are obtained through a bid process that includes other local and regional banks and are especially subject to refinancing in certain rate environments.

Allowance for Credit Losses and Asset Quality

The ACL at March 31, 2025 was $24.6 million, or 1.06% of total loans, net of unearned income as compared to $17.3 million, or 1.03% of loans, at December 31, 2024 and $20.2 million, or 1.21% of loans, at March 31, 2024. The increase of $7.4 million compared to December 31, 2024 and $4.5 million compared to March 31, 2024 was driven primarily by an initial $5.5 million allowance for credit losses for non-PCD loans, which was recognized through the provision for credit losses, and a $1.5 million allowance for credit losses for accruing PCD loans, which was recognized as an acquisition accounting adjustment to the amortized cost basis of the acquired loans, at the Acquisition date.

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

(In thousands)

Nonaccrual loans increased $2.2 million during the three months ended March 31, 2025 driven primarily by the Acquisition. Information on nonaccrual loans, by collateral type rather than loan segment, at March 31, 2025, as compared to December 31, 2024, 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 or were part of the Acquisition and were originated by Traditions’ 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 $2.54 billion as of March 31, 2025. Deposits increased by $747.5 million, or 41.7%, from December 31, 2024 to March 31, 2025 driven primarily by the

Acquisition. ACNB acquired $741.5 million in deposits at the Acquisition date. Historically, deposit balances fluctuate reflecting different balance levels held by local companies, government units and school districts during different times of the year. Included in total deposits at March 31, 2025 were municipal deposits totaling $137.2 million, or 5.4%, compared to $111.0 million, or 6.2%, at December 31, 2024. Time deposits increased $204.1 million, or 74.8%. Time deposits include brokered deposits totaling $54.0 million at March 31, 2025 compared to $24.1 million at December 31, 2024. In January 2025, ACNB Bank issued $20.0 million in brokered time deposits to offset seasonal fluctuations in commercial deposits during the quarter, and as a result of the Acquisition, ACNB assumed $15.0 million of brokered time deposits of which $5.0 million matured in February 2025. The loan-to-deposit ratio was 91.43% at March 31, 2025 compared to 93.89% at December 31, 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. Based on total Bank deposits outstanding, consumer and commercial constituted approximately 61% and 39%, respectively, of total Bank deposits as of March 31, 2025 compared to approximately 63% and 37%, respectively, as of December 31, 2024. The ratio of uninsured and non-collateralized Bank deposits to total Bank deposits was approximately 19.7% at March 31, 2025. As of March 31, 2025, 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 242.3% of uninsured and non-collateralized Bank deposits. At March 31, 2025, deposits from the 20 largest unrelated depositors, excluding internal accounts, of the Bank totaled $187.0 million, or 7.3%, of total Bank deposits compared to $143.4 million, or 7.9%, of total Bank deposits at December 31, 2024.

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, 2025, short-term borrowings were $44.2 million, an increase of $28.4 million compared to $15.8 million at December 31, 2024. 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, 2024, securities sold under repurchase agreements balances decreased by $1.8 million, or 11.2%, due to normal changes in the cash flow position of ACNB’s commercial and local government customer base. Short-term FHLB advances at March 31, 2025 were $25.0 million compared to none at December 31, 2024. Short-term FHLB borrowings are used for general balance sheet management.

Long-term borrowings consist of longer-term advances from the FHLB, trust preferred subordinated debt and subordinated debt and totaled $255.3 million at March 31, 2025 and at December 31, 2024. 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 $386.9 million at March 31, 2025 compared to $303.3 million at December 31, 2024. The primary driver of the increase to stockholders’ equity was the issuance of 2,035,246 shares of common stock, or $83.6 million, to acquire Traditions. Other impacts to stockholders’ equity during the quarter were due to a $6.4 million change in unrealized gains in AFS investment securities, cash dividends paid to ACNB Corporation stockholders of $3.4 million, a net loss of $272 thousand and common stock repurchases of $3.1 million.

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, 2025, 6,470 shares were issued under this plan with proceeds in the amount of $267 thousand.

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 OBS 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, 2025, ACNB’s banking subsidiary had borrowing capacity of approximately $950.9 million from the FHLB, of which $688.6 million was available. At March 31, 2025, ACNB’s banking subsidiary could borrow approximately $61.4 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, 2025, Fed Funds line capacity at the banking subsidiary was $192.0 million, of which the full amount was available. ACNB 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, 2025. The Corporation also 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, 2025.

Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling approximately $14.1 million and $15.8 million at March 31, 2025, and December 31, 2024, 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 OBS 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, 2025, the Corporation had unfunded outstanding commitments to extend credit of $569.1 million and outstanding standby letters of credit of $25.2 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, 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 statement of condition 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 statement of condition 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, derivatives 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 statement of condition 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, which define guidelines and limits on the level of risk. ALCO 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, 2025, 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.

12-Month Earnings at Risk Ramps

49

Economic Value

Net present value analysis provides information on the risk inherent in the statement of condition that might not be considered in the simulation analysis due to the short time horizon used. The net present value of the statement of condition 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 statement of condition.

The results at March 31, 2025 and December 31, 2024 are reflected in the following table. 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 statement of condition; thus, the results do not reflect actions management may take through the normal course of business that would impact results.

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 three months ended March 31, 2025, 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, 2024 except as described below:

Changes to trade policies and tariffs can have an adverse impact on our business and our customers.

Changes in trade policies, including the imposition of tariffs or the escalation of a trade war, could negatively impact the economic conditions in the markets we serve. Our customers-particularly local businesses engaged in agriculture, manufacturing, and retail-may face higher costs for imported goods and materials, reduced export demand, and supply chain disruptions due to increased tariffs. These challenges could lead to lower revenues, reduced profitability, and potential layoffs, all of which may impair our customers' ability to meet their financial obligations. Furthermore, prolonged trade tensions and economic uncertainty could lead to market volatility, declining asset values, and weakened consumer confidence. If our customers experience financial stress, we could see an increase in loan delinquencies and credit losses, negatively affecting our asset quality and overall financial performance. Additionally, any decline in local economic activity could reduce loan demand, deposit growth, and fee income, which are critical to our long-term success. While we actively monitor economic and policy developments, we cannot predict the outcome of trade negotiations or the full impact of tariffs and trade restrictions on our business, customers, and the broader economy. Any adverse effects from tariffs or a trade war could materially and negatively impact our financial condition, results of operations, and future growth prospects.