# ACNB CORP (ACNB) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from ACNB CORP's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/715579/000071557924000028/acnb-20231231.htm Accession: 0000715579-24-000028 Filing date: 2024-03-14 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/ACNB/ All MD&A years: /company/ACNB/mda/ Previous year: /company/ACNB/mda/fy2022/ (FY 2022) Next year: /company/ACNB/mda/fy2024/ (FY 2024) ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management’s discussion and analysis of the significant changes in the financial condition, results of operations, 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. 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. ACNB reported earnings of $31.7 million in 2023 impacted by the repositioning of the investment securities portfolio as announced on Form 8-K on December 15, 2023. ACNB completed a repositioning of the investment securities portfolio by selling $51.1 million in book value of available for sale investment securities for an after-tax loss of $3.5 million. The following table presents a summary of the Corporation’s earnings and selected performance ratios for the years ended December 31: [[GREPCENT_TABLE]] [["(Dollars in thousands, except per share data)","2023","","2022"],["Net income","$","31,688","","","$","35,752"],["Diluted earnings per share","$","3.71","","$","4.15"],["Cash dividends declared","$","1.14","","","$","1.06"],["Return on average assets","1.32","%","","1.31","%"],["Return on average equity","12.23","%","","14.35","%"],["Net interest margin (1)","4.07","%","","3.36","%"],["Non-performing assets to total assets","0.19","%","","0.17","%"],["Net charge-offs to average loans outstanding","0.02","%","","0.08","%"],["Allowance for credit losses to total loans","1.23","%","","1.16","%"]] [[/GREPCENT_TABLE]] ———————————————— (1) Income on interest-earning assets has been computed on a fully taxable equivalent basis using the 21% federal income tax statutory rate. CECL Adoption On January 1, 2023, the Corporation adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology and is referred to as CECL. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans, HTM securities and purchased financial assets, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar instruments. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses. In addition, Topic 326 amends the accounting for credit losses on certain other debt securities. The Corporation did not record any allowance for credit losses on its debt securities as a result of adopting Topic 326. See Note 1 — “Summary of 30 Table of Contents Significant Accounting Policies” in the Notes to Consolidated Financial Statements for detailed information. Summary Financial Results for the year ended December 31, 2023 •Net Income - Net income was $31.7 million, a $4.1 million, or 11.4%, decrease compared to $35.8 million for the same period in 2022. The decrease was driven primarily by the loss on the repositioning of the investment securities portfolio in 2023. •Net Interest Income - Net interest income was $88.3 million in 2023 compared to $83.4 million in 2022, an increase of $4.9 million, or 5.9%, driven primarily by higher interest rates. ◦Net Interest Margin - The Corporation’s FTE net interest margin increased to 4.07% in 2023 compared to 3.36% in 2022, an increase of 71 basis points. ◦Yield on Average Interest-earning Assets - 4.45% for 2023, an increase of 95 basis points compared to the same period of 2022. ◦Loan Growth - Average loans grew $67.3 million, or 4.5%, compared to the same period of 2022. The growth was largely driven by increases in commercial real estate and residential mortgages. ◦Deposit Decline - Average interest-bearing deposits decreased $266.3 million, or 15.4%, compared to the same period of 2022. During the same period, average noninterest-bearing deposits decreased $65.8 million, or 10.8%. 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 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 $860 thousand and the provision for unfunded commitments was a reversal of $16 thousand for the year ended December 31, 2023 compared to no provision for credit losses or unfunded commitments for the year ended December 31, 2022. Non-performing loans were $4.2 million, or 0.26%, of total loans at December 31, 2023 compared to $3.9 million, or 0.25%, of total loans at December 31, 2022. The increase in the provision for credit losses for the year ended December 31, 2023 and non-performing loans at December 31, 2023 compared to the prior was primarily driven by one commercial and industrial relationship and was not indicative of a general weakness in the overall loan portfolio. Annualized net charge-offs for the year ended December 31, 2023 were 0.02% of total average loans compared to 0.08% for the year ended December 31, 2022. •Noninterest income - Noninterest income was $18.4 million and $21.8 million in 2023 and 2022, respectively. The decrease was driven primarily by the net loss on sales of securities as a result of the repositioning of the investment securities portfolio in 2023. The decrease was partially offset by higher insurance commissions and wealth management income in 2023 compared to 2022. •Noninterest expenses - Noninterest expenses increased to $66.1 million, or by 9.6%, in 2023, as compared to $60.3 million in 2022. The increase was driven primarily by higher salary and employee benefits expense, other expense, marketing and corporate relations, FDIC and regulatory and professional services, partially offset by decreases in several expense categories. 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 presentation of its financial condition and results of operations, because they 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. 31 Table of Contents 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 Net Interest Income The primary source of ACNB’s traditional banking revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, and interest-bearing deposits with banks. Interest-bearing liabilities include deposits and borrowings. Net interest income is affected by changes in interest rates, volume of interest bearing assets and liabilities, and the composition of those assets and liabilities. Interest income and yields are presented on a FTE basis. The discussion following this table is based on these tax-equivalent amounts. 32 Table of Contents The following table provides a comparative average balance sheet and net interest income analysis for the years ended December 31: [[GREPCENT_TABLE]] [["","2023","","2022"],["(Dollars in thousands)","Average Balance","","Interest (1)","","Yield/ Rate","","Average Balance","","Interest (1)","","Yield/ Rate"],["ASSETS"],["Loans:"],["Taxable","$","1,499,635","","","$","79,433","","","5.30","%","","$","1,428,150","","","$","68,898","","","4.82","%"],["Tax-exempt","73,993","","","1,778","","","2.40","","","78,204","","","1,706","","","2.18"],["Total Loans (2)","1,573,628","","","81,211","","","5.16","","","1,506,354","","","70,604","","","4.69"],["Investment Securities:"],["Taxable","491,208","","","11,316","","","2.30","","","516,126","","","9,799","","","1.90"],["Tax-exempt","57,670","","","1,478","","","2.56","","","53,242","","","1,448","","","2.72"],["Total Investment Securities (3)","548,878","","","12,794","","","2.33","","","569,368","","","11,247","","","1.98"],["Interest-bearing deposits with banks","66,246","","","3,318","","","5.01","","","427,706","","","5,860","","","1.37"],["Total Earning Assets","2,188,752","","","97,323","","","4.45","","","2,503,428","","","87,711","","","3.50"],["Cash and due from banks","30,684","","","","","","","31,511"],["Premises and equipment","26,582","","","","","","","29,205"],["Other assets","165,175","","","","","","","175,492"],["Allowance for credit losses","(18,915)","","","","","","","(18,679)"],["Total Assets","$","2,392,278","","","","","","","$","2,720,957"],["LIABILITIES"],["Interest-bearing demand deposits","$","569,357","","","$","757","","","0.13","%","","$","600,366","","","$","749","","","0.12","%"],["Money markets","283,918","","","1,192","","","0.42","","","346,498","","","342","","","0.10"],["Savings deposits","377,498","","","122","","","0.03","","","409,839","","","167","","","0.04"],["Time deposits","230,431","","","1,624","","","0.70","","","370,766","","","1,303","","","0.35"],["Total Interest-Bearing Deposits","1,461,204","","","3,695","","","0.25","","","1,727,469","","","2,561","","","0.15"],["Short-term borrowings","49,433","","","898","","","1.82","","","35,882","","","77","","","0.21"],["Long-term borrowings","78,262","","","3,727","","","4.76","","","24,814","","","986","","","3.97"],["Total Borrowings","127,695","","","4,625","","","3.62","","","60,696","","","1,063","","","1.75"],["Total Interest-Bearing Liabilities","1,588,899","","","8,320","","","0.52","","","1,788,165","","","3,624","","","0.20"],["Noninterest-bearing demand deposits","543,843","","","","","","","609,622"],["Other liabilities","442","","","","","","","74,096"],["Stockholders\u2019 Equity","259,094","","","","","","","249,074"],["Total Liabilities and Stockholders\u2019 Equity","$","2,392,278","","","","","","","$","2,720,957"],["Taxable Equivalent Net Interest Income","","","$","89,003","","","","","","","$","84,087"],["Taxable Equivalent Adjustment","","","(683)","","","","","","","(662)"],["Net Interest Income","","","$","88,320","","","","","","","$","83,425"],["Cost of Funds","","","","","0.39","%","","","","","","0.15","%"],["FTE Net Interest Margin","","","","","4.07","%","","","","","","3.36","%"]] [[/GREPCENT_TABLE]] ———————————————— (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. FTE net interest income totaled $89.0 million for the year ended December 31, 2023, compared to $84.1 million for the same period in 2022, an increase of $4.9 million, or 5.8%. Net interest income increased driven primarily by higher interest rates. The FTE net interest margin for 2023 was 4.07%, a 71 basis points increase from 3.36% for the comparable period of last year. Paycheck Protection Program fees and purchase accounting accretion for the year ended December 31, 2023 totaled $1.2 million compared to $3.8 million for the year ended December 31, 2022. 33 Table of Contents The following table analyzes the relative impact on net interest income attributed to changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates: [[GREPCENT_TABLE]] [["","","2023 versus 2022"],["","","Increase (decrease) due to changes in"],["(In thousands)","","Volume","","Yield/Rate (1)","","Net"],["INTEREST INCOME:"],["Loans:"],["Taxable","","$","2,505","","","$","8,030","","","$","10,535"],["Tax-exempt","","(148)","","","220","","","72"],["Total Loans (2)","","2,357","","","8,250","","","10,607"],["Investment Securities:"],["Taxable","","(873)","","","2,390","","","1,517"],["Tax-exempt","","155","","","(125)","","","30"],["Total Investment Securities","","(718)","","","2,265","","","1,547"],["Interest-bearing deposits with banks","","(12,664)","","","10,122","","","(2,542)"],["Total Interest Income","","$","(11,025)","","","$","20,637","","","$","9,612"],["INTEREST EXPENSE:"],["Interest-bearing demand deposits","","$","(47)","","","$","55","","","$","8"],["Money markets","","(95)","","","945","","","850"],["Savings deposits","","(49)","","","4","","","(45)"],["Time deposits","","(212)","","","533","","","321"],["Total Interest-Bearing Deposits","","(403)","","","1,537","","","1,134"],["Short-term borrowings","","20","","","801","","","821"],["Long-term borrowings","","81","","","2,660","","","2,741"],["Total Borrowings","","101","","","3,461","","","3,562"],["Total Interest Expense","","(302)","","","4,998","","","4,696"],["Change in Net Interest Income","","$","(10,723)","","","$","15,639","","","$","4,916"]] [[/GREPCENT_TABLE]] ———————————————— (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. FTE total interest income increased $9.6 million, or 11.0%, compared to 2022. ACNB experienced a $20.6 million increase in interest income due to an increase in the yield on interest earning assets partially offset by an $11.0 million decrease attributable to lower volume. FTE interest income on loans increased $10.6 million, or 15.0%, compared to 2022 primarily due to an increase of $8.3 million attributable to changes in the yield. The yield increased 47 basis points. Average loans increased $67.3 million, or 4.5%, contributing $2.4 million to the increase in FTE interest income. FTE interest income on investment securities increased $1.5 million, or 13.8%, due to an increase in the yield, partially offset by a lower volume of investment securities. The higher FTE interest income was partially offset by a decrease in interest income from interest-bearing deposits with banks of $2.5 million, or 43.4%. During 2022, additional cash retained was invested primarily at the Federal Reserve to maintain liquidity and due to the fact that investment securities yields were low during that period. During 2023, this additional cash retained was used to fund loan growth and to replace higher cost deposits that were strategically not retained by the Bank. Total interest expense increased $4.7 million, or 129.6%, during 2023 compared to 2022. The increase was primarily due to a higher cost of funds. The rate on interest-bearing deposits increased 10 basis points during 2023. Interest expense increased $1.5 million as a result of the higher rates. The largest increases in rates were in time deposits and money markets which increased 35 and 32 basis points, respectively. The rates on total borrowings increased 187 basis points. The average balance of total borrowings increased $67.0 million, or 110.4%, to fund loan growth and deposit outflows during 2023. Provision for Credit Losses and Unfunded Commitments Based on the forward-looking metrics utilized within the CECL model, combined with the current market environment applied to the Bank’s loan portfolio, the provision for credit losses for the year ended December 31, 2023 was $860 thousand, and the 34 Table of Contents provision for unfunded commitments was a reversal of $16 thousand compared to no provision for credit losses and unfunded commitments for the year ended December 31, 2022. The determination of the provisions was a result of the analysis of the adequacy of the allowances for credit losses and unfunded commitments calculations. Each quarter, the Corporation assesses risks and reserves required compared with the balances in the allowance for credit losses and unfunded commitments. The provision during 2023 was primarily driven by one commercial and industrial relationship and was not indicative of a general weakness in the overall loan portfolio. For additional discussion of the provision and the associated loans, please refer to the Asset Quality section of this Management’s Discussion and Analysis. Noninterest Income [[GREPCENT_TABLE]] [["","","","","","","Increase (Decrease)"],["(In thousands)","","2023","","2022","","$","","%"],["NONINTEREST INCOME"],["Insurance commissions","","$","9,319","","","$","8,307","","","$","1,012","","","12.2","%"],["Service charges on deposits","","3,958","","","4,066","","","(108)","","","(2.7)"],["Wealth management","","3,644","","","3,160","","","484","","","15.3"],["ATM debit card charges","","3,348","","","3,322","","","26","","","0.8"],["Gain from mortgage loans held for sale","","56","","","487","","","(431)","","","(88.5)"],["Earnings on investment in bank-owned life insurance","","1,878","","","1,532","","","346","","","22.6"],["Net losses on sales or calls of securities","","(5,240)","","","(234)","","","(5,006)","","","N/M"],["Net gains (losses) on equity securities","","18","","","(298)","","","316","","","106.0"],["Net gains on sales of low-income housing partnership","","\u2014","","","421","","","(421)","","","(100.0)"],["Gain on assets held for sale","","337","","","\u2014","","","337","","","100.0"],["Other","","1,127","","","1,044","","","83","","","8.0"],["Total Noninterest Income","","$","18,445","","","$","21,807","","","$","(3,362)","","","(15.4)","%"]] [[/GREPCENT_TABLE]] Total noninterest income, excluding net losses on sales or call of securities, totaled $23.7 million in 2023 compared to $22.0 million in 2022, a $1.6 million, or 7.5% increase. On December 15, 2023, ACNB completed a repositioning of the investment securities portfolio by selling $51.1 million in book value of AFS debt securities, consisting of lower-yielding agency debt securities, for an estimated after-tax loss of $3.5 million. Insurance commissions in 2023 increased $1.0 million, or 12.2%, compared to 2022 driven primarily by higher contingent income, organic growth and the full year contribution from the acquisition of the business and assets of Hockley & O’Donnell in early 2022. Wealth management income for 2023 increased $484 thousand, or 15.3%, in comparison to 2022 driven primarily by strong market returns, greater sales activity and new business generation. Gain from mortgage loans held for sale decreased $431 thousand, or 88.5%, as rising rates negatively impacted mortgage income, as well as management’s decision to portfolio certain residential mortgages. Earnings on investment in bank-owned life insurance totaled $1.9 million, a $346 thousand, or 22.6%, increase compared to 2022. The increase was driven primarily by additional purchases of bank-owned life insurance in the third quarter of 2022, and to a lesser extent, a higher net annualized yield. Net gains (losses) on equity securities were $18 thousand in 2023 compared to $298 thousand loss in 2022, a $316 thousand increase. 35 Table of Contents Noninterest Expenses [[GREPCENT_TABLE]] [["","","","","","","Increase (Decrease)"],["(In thousands)","","2023","","2022","","$","","%"],["NONINTEREST EXPENSES"],["Salaries and employee benefits","","$","40,931","","","$","35,979","","","$","4,952","","","13.8","%"],["Net occupancy","","3,908","","","4,076","","","(168)","","","(4.1)"],["Equipment","","6,514","","","6,612","","","(98)","","","(1.5)"],["Other tax","","1,269","","","1,632","","","(363)","","","(22.2)"],["Professional services","","2,320","","","2,086","","","234","","","11.2"],["Supplies and postage","","808","","","823","","","(15)","","","(1.8)"],["Marketing and corporate relations","","612","","","299","","","313","","","104.7"],["FDIC and regulatory","","1,388","","","1,128","","","260","","","23.0"],["Intangible assets amortization","","1,424","","","1,492","","","(68)","","","(4.6)"],["Other","","6,898","","","6,154","","","744","","","12.1"],["Total Noninterest Expenses","","$","66,072","","","$","60,281","","","$","5,791","","","9.6","%"]] [[/GREPCENT_TABLE]] Noninterest expenses increased 9.6% to $66.1 million in 2023 compared to 2022. The more significant fluctuations in expenses by category are explained below: •Salaries and employee benefits, the largest component of noninterest expenses, increased 13.8% in 2023 to $40.9 million compared to $36.0 million in 2022. The increase was driven primarily by an increase to incentive compensation, partly due to a partial reversal of incentive compensation in 2022, an increase in stock-based compensation, a general increase in base wages and commissions partially due to the full year impact of the acquisition of the business and assets of Hockley & O’Donnell, an increase in pension expense, a partial reversal of expenses in 2022 related to loan originations, and an increase in ACNB Bank’s supplemental executive retirement plan and split dollar life insurance expenses. •Other tax decreased $363 thousand, or 22.2%, driven primarily by a decrease in state tax related expenses. •Professional services increased $234 thousand, or 11.2%, driven primarily by an increase in recruiting, external audit and consulting expenses. •Marketing and corporate relations increased $313 thousand driven primarily by an increase of $283 thousand related to the rebranding of the Bank’s Maryland banking locations. •FDIC and regulatory increased $260 thousand, or 23.0%, as a result of a higher FDIC assessment due to changes in the composition of the Bank’s balance sheet. •Other noninterest expense increased $744 thousand, or 12.1%, driven primarily by the write-off of an investment in a title company partnership, an increase in director expenses, a mark-to-market loss on a SBIC fund and internet banking expenses. Provision for Income Taxes ACNB recognized income taxes of $8.2 million during 2023 compared to $9.2 million during 2022. The provision for income taxes reflects an ETR of 20.5% for both 2023 and 2022. The variances from the federal statutory rate of 21% are generally due to tax-free income, which includes interest income on tax-free loans, investment securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expense. Note 13 — “Income Taxes”, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” includes a reconciliation of the federal statutory tax rate to the Corporation’s ETR, which measures income tax expense as a percentage of pretax income. 36 Table of Contents FINANCIAL CONDITION Total assets were $2.4 billion at December 31, 2023 compared to $2.5 billion at December 31, 2022, a decrease of 4.2%. The decrease was driven primarily by a reduction in cash and cash equivalents of $102.2 million and investment securities of $103.0 million partially offset by loan growth. 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 agencies, mortgaged-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. CECL Adoption On January 1, 2023, the Corporation adopted ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, universally referred to as CECL. ASU 2016-13 applies to all financial instruments carried at amortized cost, including HTM securities, and makes targeted improvements to the accounting for credit losses on AFS securities. In addition, Topic 326 amends the accounting for credit losses on certain other debt securities. The Corporation did not record any allowance for credit losses on its debt securities as a result of adopting Topic 326. ACNB conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero-credit loss assumption applies to direct debt issuances of the U.S. Treasury and U.S. agencies. The reasons behind the adoption of the zero-credit loss assumption are as follows: •     High credit rating; •     Long history with no credit losses; •     Guaranteed by a sovereign entity; •     Widely recognized as “risk-free rate”; •     Can print its own currency; •     Currency is routinely held by central banks, used in international commerce, and commonly viewed as reserve currency; and, •     Currently under the U.S. Government conservatorship or receivership. ACNB will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt ACNB to reconsider its zero-credit loss assumption. As of December 31, 2023, no HTM debt securities required an ACL. The Bank monitors non-U.S. Treasury and non-U.S. agency debt for potential credit deterioration on a quarterly basis. An analysis of the materiality of the impact to the ACL is performed. If it is determined there is a material impact, ACNB will book a reserve to the ACL. As of December 31, 2023 no allowances were booked related to these securities. Total investment securities were $517.2 million at December 31, 2023 compared to $620.3 million at December 31, 2022, a decrease of 16.6%. The corporation sold securities and did not reinvest the portfolio cash flows throughout 2023 as a result of general balance sheet management. On December 15, 2023, ACNB completed a repositioning of the investment securities portfolio by selling $51.1 million in book value of AFS debt securities, consisting of lower-yielding agency debt securities, for an estimated after-tax loss of $3.5 million. The debt securities sold had an average book yield of approximately 0.99% with a weighted-average remaining life of approximately 2.6 years. Net proceeds of $46.1 million from the sale were used to purchase higher-yielding debt securities that were all classified as AFS. The investment securities purchased consisted of $31.9 million of agency multi-family debt securities and $14.2 million of other investment-grade bank holding company corporate debt. The repositioning is estimated to improve interest income on the securities portfolio by approximately $1.9 million over the next 12 months. ACNB currently expects to recover the $3.5 million after-tax loss on the sale of investment securities in approximately 2.5 years. At December 31, 2023, the investment securities balance included a net unrealized loss on AFS investment securities of $41.0 million, net of taxes, on amortized cost of $501.9 million versus a net unrealized loss of $52.7 million, net of taxes, on 37 Table of Contents amortized cost of $617.6 million at December 31, 2022. The changes in value are deemed to be related solely to changes in market interest rates as the credit quality of the portfolio remained strong. At December 31, 2023, the securities balance included HTM investment securities with an amortized cost of $64.6 million and a fair value of $59.1 million, as compared to an amortized cost of $65.0 million and a fair value of $58.1 million at December 31, 2022. The Corporation does not own investments consisting of pools of Alt-A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments. The following table discloses investment securities at the scheduled maturity date and weighted average rate at December 31, 2023. Many securities have call features that make their redemption possible before the stated maturity date. [[GREPCENT_TABLE]] [["","Maturing"],["","1 Year or Less","","Over 1 - 5 Years","","Over 5 - 10 Years","","Over 10 Years or No Maturity","","Total"],["(Dollars in thousands)","Amount","","Rate","","Amount","","Rate","","Amount","","Rate","","Amount","","Rate","","Amount","","Rate"],["U.S. Government and agencies","$","15,155","","","2.25","%","","$","108,272","","","2.00","%","","$","53,031","","","2.31","%","","$","\u2014","","","\u2014","%","","$","176,458","","","2.12","%"],["Mortgage-backed securities","\u2014","","","\u2014","","","29,042","","","3.93","","","21,164","","","3.43","","","245,389","","","2.32","","","295,595","","","2.55"],["State and municipal","\u2014","","","\u2014","","","1,394","","","1.16","","","25,391","","","2.87","","","35,348","","","3.13","","","62,133","","","2.98"],["Corporate bonds","509","","","4.33","","","1,500","","","2.81","","","28,317","","","4.31","","","2,000","","","5.25","","","32,326","","","4.30"],["Total","$","15,664","","","2.32","%","","$","140,208","","","2.40","%","","$","127,903","","","3.05","%","","$","282,737","","","2.43","%","","$","566,512","","","2.56","%"]] [[/GREPCENT_TABLE]] Investment securities are at amortized cost. Mortgage-backed securities are allocated based upon scheduled maturities. The fair value of CRA Mutual Fund equity security has a readily determinable fair value of $928 thousand at December 31, 2023 with no stated maturity. Loans Loans at December 31 were as follows: [[GREPCENT_TABLE]] [["","","","","","Increase (Decrease)"],["(In thousands)","2023","","2022","","$","","%"],["Commercial real estate","$","898,709","","","$","824,111","","","$","74,598","","","9.1","%"],["Residential mortgage","394,189","","","361,905","","","32,284","","","8.9"],["Commercial and industrial","152,344","","","180,958","","","(28,614)","","","(15.8)"],["Home equity lines of credit","90,163","","","83,463","","","6,700","","","8.0"],["Real estate construction","84,341","","","80,491","","","3,850","","","4.8"],["Consumer","9,954","","","11,336","","","(1,382)","","","(12.2)"],["Gross loans","1,629,700","","","1,542,264","","","87,436","","","5.7"],["Unearned income","(1,712)","","","(3,654)","","","1,942","","","(53.1)"],["Total Loans, Net of Unearned Income","$","1,627,988","","","$","1,538,610","","","$","89,378","","","5.8","%"]] [[/GREPCENT_TABLE]] Total loans outstanding increased by $89.4 million, or 5.8%, in 2023 as compared to 2022. The increase was driven mainly by growth in the commercial real estate and residential mortgage portfolios. Growth in both portfolios 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. Unemployment rates in the subsidiary bank’s market recently, and historically, have been better than those for Pennsylvania and Maryland as a whole, and similar to the United States. The commercial real estate portfolio grew $74.6 million, or 9.1%, in 2023. The collateral for these loans is primarily spread across Pennsylvania and Maryland, 54.0% and 44.0%, respectively at December 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 38 Table of Contents 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 60.9% of the commercial real estate portfolio. 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 segments included in the portfolio: The concentration of non-owner occupied commercial real estate, construction, and multi-family was 206.1% of total capital of the Bank. Residential real estate mortgages grew $32.3 million, or 8.9%, in 2023. Growth was driven primarily by an increase in 10 year fixed adjustable rate mortgages. Included in residential real estate mortgages were $45.4 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 decreased $28.6 million, or 15.8%. 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. During 2023 the Company did not actively pursue these types of loans contributing approximately $14 million to the decrease in commercial and industrial loans driven primarily by the current interest rate environment. 39 Table of Contents The repricing range of the loan portfolio at December 31, 2023, and the amounts of loans with predetermined and fixed rates are presented in the tables below: LOANS MATURING [[GREPCENT_TABLE]] [["(In thousands)","One Year or Less","","Greater Than One to Five Years","","Over Five Years","","Total"],["Commercial real estate","$","43,721","","","$","79,252","","","$","775,736","","","$","898,709"],["Residential mortgage","5,320","","","17,371","","","371,498","","","394,189"],["Commercial and industrial","42,508","","","49,092","","","60,744","","","152,344"],["Home equity lines of credit","6,997","","","427","","","82,739","","","90,163"],["Real estate construction","35,269","","","12,783","","","36,289","","","84,341"],["Consumer","234","","","4,340","","","5,380","","","9,954"],["Total","$","134,049","","","$","163,265","","","$","1,332,386","","","$","1,629,700"]] [[/GREPCENT_TABLE]] LOANS BY REPRICING OPPORTUNITY [[GREPCENT_TABLE]] [["(In thousands)","One Year or Less","","Greater Than One to Five Years","","Over Five Years","","Total"],["Commercial real estate","$","91,309","","","$","593,673","","","$","213,727","","","$","898,709"],["Residential mortgage","13,158","","","146,842","","","234,189","","","394,189"],["Commercial and industrial","45,137","","","52,898","","","54,309","","","152,344"],["Home equity lines of credit","32,277","","","29,452","","","28,434","","","90,163"],["Real estate construction","37,252","","","34,871","","","12,218","","","84,341"],["Consumer","263","","","4,374","","","5,317","","","9,954"],["Total","$","219,396","","","$","862,110","","","$","548,194","","","$","1,629,700"],["Loans with a fixed interest rate","$","123,666","","","$","845,602","","","$","415,751","","","$","1,385,019"],["Loans with a variable interest rate","95,730","","","16,508","","","132,443","","","244,681"],["Total","$","219,396","","","$","862,110","","","$","548,194","","","$","1,629,700"]] [[/GREPCENT_TABLE]] Asset Quality The ACNB loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated through prudent and disciplined underwriting standards, ongoing credit review, and monitoring and reporting asset quality measures. Additionally, loan portfolio diversification, limiting exposure to a single industry or borrower, and requiring collateral also reduces ACNB’s credit risk. ACNB’s commercial, consumer and residential mortgage loans are principally to borrowers in ACNB’s Market Area. As the majority of ACNB’s loans are located in this area, a substantial portion of the debtor’s ability to honor the obligation may be affected by the level of economic activity in the Market Area. Non-performing loans were $4.2 million, or 0.26% of total loans, at December 31, 2023, compared to $3.9 million, or 0.25% of total loans, at December 31, 2022. Non-performing assets were $4.6 million, or 0.19% of total assets, at December 31, 2023, compared to $4.3 million, or 0.17% of total assets, at December 31, 2022. Non-performing assets include nonaccrual loans and accruing loans past due 90 days or more, and foreclosed assets. The increase in non-performing loans was the result of one commercial relationship and not indicative of a general weakness in the overall loan portfolio. Net charge-offs for the year ended December 31, 2023 were 0.02% of total average loans, compared to 0.08% for the year ended December 31, 2022. The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan categories) are typically charged off no later than 120 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. ACNB occasionally returns nonaccrual loans to performing status when the borrower brings the loan current and performs in accordance with contractual terms for a reasonable period of time. 40 Table of Contents The following table sets forth the Corporation’s non-performing assets as of December 31: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","2023","","2022"],["Nonaccrual loans","","$","3,011","","","$","2,654"],["Accruing loans 90 days past due","","1,162","","","1,203"],["Total Non-Performing Loans","","4,173","","","3,857"],["Foreclosed assets","","467","","","474"],["Total Non-Performing Assets","","$","4,640","","","$","4,331"],["Ratios:"],["Non-performing loans to total loans","","0.26","%","","0.25","%"],["Non-performing assets to total assets","","0.19","%","","0.17","%"],["Allowance for credit losses to non-performing loans","","478.53","%","","463.08","%"]] [[/GREPCENT_TABLE]] For loans to borrowers with commercial purposes, an internal risk rating process is used to monitor credit quality. For a complete description of the Corporation’s risk ratings, refer to the “Allowance for Credit Losses” section within “Note 1 - Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in Item 8. “Financial Statements and Supplementary Data.” Total internally risk rated loans were $1.3 billion as of December 31, 2023 with a related allowance for credit losses of $17.4 million. Foreclosed assets held for resale consist of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed assets held for resale totaled $467 thousand, consisting of one property, at December 31, 2023. This same property was recorded in foreclosed assets held for resale at December 31, 2022. Allowance for Credit Losses As mentioned above in the “Executive Overview,” the Corporation adopted CECL in 2023 which replaced the incurred loss methodology. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans, HTM securities and purchased financial assets, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. It also applies to OBS credit exposures, such as loan commitments, standby letters of credit, financial guarantees and other similar instruments. Financial institutions and other organizations will now use forecasted information to better inform their credit loss estimates. Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses. CECL requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model, which was in effect for periods prior to 2023. Accordingly, ACL disclosures subsequent to January 1, 2023 are not always comparable to prior periods. As a result, the tables that follow present the appropriate method for each period. ACNB maintains the allowance for credit losses at a level believed to be adequate by management to absorb current expected losses in the loan portfolio, and it is funded through a provision for credit losses charged to earnings. The allowance for credit losses at December 31, 2023 was $20.0 million, or 1.23% of loans, as compared to $17.9 million, or 1.16% of loans, at December 31, 2022. The ratio of non-performing loans plus foreclosed assets to total assets was 0.19% at December 31, 2023 compared to 0.17% at December 31, 2022. 41 Table of Contents A summary of ACNB’s activity in the ACL as of December 31: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","2023","","2022"],["Beginning balance","","$","17,861","","","$","19,033"],["Impact of CECL adoption","","1,618","","","\u2014"],["Provision for loan losses","","860","","","\u2014"],["Loans charged-off:"],["Commercial and industrial","","110","","","238"],["Commercial real estate and construction","","\u2014","","","831"],["Residential mortgage and home equity lines of credit","","\u2014","","","36"],["Consumer","","396","","","181"],["Total Loans Charged-Off","","506","","","1,286"],["Recoveries:"],["Commercial and industrial","","64","","","58"],["Residential mortgage and home equity lines of credit","","\u2014","","","27"],["Consumer","","72","","","29"],["Total Recoveries","","136","","","114"],["Net charge-offs","","370","","","1,172"],["Ending balance","","$","19,969","","","$","17,861"],["Ratios:"],["Net charge-offs to average loans","","0.02","%","","0.08","%"],["Allowance for credit losses to total loans","","1.23","%","","1.16","%"]] [[/GREPCENT_TABLE]] The provision for 2023 was $860 thousand compared to no provision for 2022. The ACL as a percentage of total loans was 1.16% at December 31, 2022 compared to 1.23% at December 31, 2023. Loans past due 90 days and still accruing were $1.2 million at both December 31, 2023 and 2022. Nonaccrual loans were $3.0 million and $2.7 million as of December 31, 2023 and 2022, respectively. Under CECL, loans individually evaluated consist of nonaccrual loans. The allocation of the allowance for credit losses as of December 31: [[GREPCENT_TABLE]] [["","","2023","","2022"],["(Dollars in thousands)","","Amount","","Percent of Loan Type to Total Loans","","Amount","","Percent of Loan Type to Total Loans"],["Commercial real estate","","$","12,010","","","55.2","%","","$","10,016","","","53.5","%"],["Residential mortgage","","3,303","","","24.2","","","3,029","","","23.5"],["Commercial and industrial","","2,048","","","9.3","","","2,848","","","11.7"],["Home equity lines of credit","","397","","","5.5","","","347","","","5.4"],["Real estate construction","","2,070","","","5.2","","","1,000","","","5.2"],["Consumer","","141","","","0.6","","","376","","","0.7"],["Unallocated","","\u2014","","","N/A","","245","","","N/A"],["Total","","$","19,969","","","100.0","%","","$","17,861","","","100.0","%"]] [[/GREPCENT_TABLE]] 42 Table of Contents Additional information on nonaccrual loans at December 31, 2023 and 2022, is as follows: [[GREPCENT_TABLE]] [["(Dollars in thousands)","","Number of Credit Relationships","","Balance","","Current Specific Loss Allocations","","Current Year Charge-Offs","","Location","","Originated"],["December 31, 2023"],["Owner occupied commercial real estate","","7","","","$","1,822","","","$","175","","","$","\u2014","","","In market","","2006-2019"],["Commercial and industrial","","4","","","1,004","","","901","","","\u2014","","","In market","","2014-2021"],["Home equity line of credit","","1","","","185","","","\u2014","","","\u2014","","","In market","","2009"],["Total","","12","","","$","3,011","","","$","1,076","","","$","\u2014"],["December 31, 2022"],["Owner occupied commercial real estate","","5","","","$","1,772","","","$","192","","","$","\u2014","","","In market","","2012-2019"],["Investment/rental residential real estate","","1","","","101","","","\u2014","","","\u2014","","","In market","","2016"],["Commercial and industrial","","2","","","781","","","628","","","\u2014","","","In market","","2017-2018"],["Total","","8","","","$","2,654","","","$","820","","","$","\u2014"]] [[/GREPCENT_TABLE]] All nonaccrual loans are to borrowers located within the Market Area served by the Corporation in southcentral Pennsylvania and northern Maryland. All nonaccrual individually evaluated loans were originated by ACNB’s banking subsidiary. Premises and Equipment ACNB Bank opened a full-service community banking office to serve the Upper Adams area of Adams County, PA in 2022, consolidating three community banking offices into the new community banking office. Also, as part of the Bank’s branch optimization program, in 2022, the Bank closed three additional community banking offices. As a result, four branch office buildings transferred to assets held for sale and had a carrying value of $3.4 million at December 31, 2022. During 2023, the Bank sold all four community banking offices for a net gain on sale of $337 thousand which was recorded as a gain on assets held for sale. Restricted investment in bank stocks Restricted investment in bank stocks increased $8.0 million in 2023 compared to 2022, primarily due to increases in the Corporation’s holdings of Federal Home Loan Bank stock. The Corporation is required to purchase and hold stock as a condition of membership in the FHLB and this ownership is directly correlated with the amount of borrowings that the Corporation holds at any given time. Other Assets Other assets increased $7.3 million, or 15.6%, in 2023 compared to 2022, due primarily to an increase in deferred tax assets, prepaid expenses, interest receivable and pension related assets, as well as normal variations in a number of non-earning asset accounts. Deposits The following table presents ending deposits, by type as of December 31: [[GREPCENT_TABLE]] [["","","","","","Increase (Decrease)"],["(In thousands)","2023","","2022","","$","","%"],["Noninterest-bearing demand deposits","$","500,332","","","$","595,049","","","$","(94,717)","","","(15.9)","%"],["Interest-bearing demand deposits","524,289","","","592,586","","","(68,297)","","","(11.5)"],["Money market","264,907","","","310,911","","","(46,004)","","","(14.8)"],["Savings","340,134","","","407,299","","","(67,165)","","","(16.5)"],["Total demand and savings","1,629,662","","","1,905,845","","","(276,183)","","","(14.5)"],["Time","232,151","","","293,130","","","(60,979)","","","(20.8)"],["Total Deposits","$","1,861,813","","","$","2,198,975","","","$","(337,162)","","","(15.3)","%"]] [[/GREPCENT_TABLE]] ACNB relies on deposits as a primary source of funds for lending activities with total deposits of $1.9 billion at December 31, 2023. The Bank’s deposit pricing function employs a disciplined approach based upon liquidity needs and alternative funding 43 Table of Contents 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. Given the Corporation’s funding level during 2023, the Corporation continued to restrain deposit rates despite an increase in market interest rates and increases in rates by competitors. Total deposits were $1.9 billion at December 31, 2023, a decrease of $337.2 million, or 15.3%, since December 31, 2022. The decrease in deposits were in both interest-bearing and noninterest-bearing deposits. Based on total Bank deposits outstanding, consumer and commercial constituted approximately 59% and 41% of total deposits as of December 31, 2023 and 2022. During 2023, the Bank restrained deposit rates for the majority of the year despite an increase in market interest rates and an increase in rates by competitors. As a result, total deposits decreased during 2023 as customers sought higher yielding alternative deposit and investment products. Interest-bearing deposit costs for 2023 were 0.25% compared to 0.15% for 2022. Despite the decline in deposits in 2023, the loan-to-deposit ratio was 87.44% at December 31, 2023. Included in total deposits at December 31, 2023 were municipal deposits totaling $176.6 million, or 9.5%, of total deposits compared to $231.3 million, or 10.5%, of total deposits at December 31, 2022. The decrease in public funds was the result of public entities reinvesting excess stimulus funds in alternative investment products outside the Corporation. The ratio of uninsured and non-collateralized deposits to total Bank deposits was approximately 17.3% at December 31, 2023. As of December 31, 2023, 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 328% of uninsured and non-collateralized Bank deposits. At December 31, 2023 deposits from the 20 largest depositors, excluding internal accounts, of the Bank totaled $192.7 million, or 10.3%, of total Bank deposits compared to $227.0 million, or 10.3%, of total Bank deposits at December 31, 2022. See Note 9 — “Deposits”, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for more information. Borrowings The Corporation’s borrowings as of December 31: [[GREPCENT_TABLE]] [["(In thousands)","","2023","","2022"],["Securities sold under repurchase agreements","","$","26,882","","","$","41,954"],["Short-term FHLB advances","","30,000","","","\u2014"],["Total short-term borrowings","","56,882","","","41,954"],["Long-term FHLB advances","","175,000","","","\u2014"],["Trust preferred subordinated debt","","5,292","","","6,000"],["Subordinated debt","","15,000","","","15,000"],["Total long-term borrowings","","195,292","","","21,000"],["Total Borrowings","","$","252,174","","","$","62,954"]] [[/GREPCENT_TABLE]] Short-term borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As of December 31, 2023, short-term borrowings were $56.9 million, an increase of $14.9 million, or 35.6%, from December 31, 2022. 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, 2022, repurchase agreement balances were down due to normal changes in the cash flow position of ACNB’s commercial and local government customer base. There were $30.0 million in short-term FHLB borrowings at December 31, 2023 compared to none at December 31, 2022. 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 $195.3 million at December 31, 2023, compared to $21.0 million at December 31, 2022. During 2023 the Bank borrowed $175.0 million from the FHLB at a weighted average fixed rate of 4.59% for a weighted average term of 3.6 years to fund loan growth and deposit outflows. 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 stockholders, while maintaining levels above its internal minimums and “well capitalized” regulatory position in relationship to its risk exposure. Total stockholders’ equity was $277.5 million at December 31, 2023, compared to $245.0 44 Table of Contents million at December 31, 2022. The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During 2023, ACNB retained $22.0 million, or 69.4%, of its net income compared to $26.6 million, or 74.5%, in 2022. Quarterly cash dividends paid to ACNB Corporation stockholders in 2023 totaled $9.7 million, or $1.14 per common share compared to $9.1 million, or $1.06 per common share in 2022, an increase of 7.5%. Stockholders’ equity also increased primarily due to a $13.1 million change in unrealized gains in AFS investment securities and pension plan assets. ACNB has a Dividend Reinvestment and Stock Purchase Plan that provides registered holders of ACNB 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. Cumulative to December 31, 2023, 255,764 shares were issued under this plan. Proceeds are used for general corporate purposes. 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 December 31, 2023, there were 61,066 treasury shares purchased under this new plan. Regulatory Capital Requirements 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. ACNB considers the capital ratios of the banking subsidiary to be the relevant measurement of capital adequacy. The banking subsidiary’s capital ratios are as follows: [[GREPCENT_TABLE]] [["","2023","","2022","","To be Well Capitalized under Prompt Corrective Action Regulations"],["Tier 1 leverage ratio (to average assets)","11.12","%","","9.50","%","","5.00","%"],["Common Tier 1 capital (to risk-weighted assets)","14.86","%","","14.68","%","","6.50","%"],["Tier 1 risk-based capital ratio (to risk-weighted assets)","14.86","%","","14.68","%","","8.00","%"],["Total risk-based capital ratio (to risk-weighted assets)","15.99","%","","15.76","%","","10.00","%"]] [[/GREPCENT_TABLE]] Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average and risk adjusted assets. Management believes, as of December 31, 2023 and 2022, that ACNB’s banking subsidiary met all minimum capital adequacy requirements to which it is subject and is categorized as “well capitalized” for regulatory purposes. There are no subsequent conditions or events that management believes have changed the banking subsidiary’s category. For further information on the actual and required capital amounts and ratios, please refer to Note 14 — “Regulatory Matters” in the Notes to Consolidated Financial Statements. 45 Table of Contents Liquidity Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, 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 and Federal Reserve Discount Window and unsecured Federal Funds line providers. At December 31, 2023, ACNB’s banking subsidiary could borrow $867.2 million from the FHLB of which $661.7 million was available. At December 31, 2023, ACNB’s banking subsidiary could borrow approximately $3.5 million from the Discount Window, of which the full amount was available. The underlying collateral at the Discount Window is made up of investment securities held in a joint-custody account under the Corporation’s name. ACNB’s banking subsidiary maintains several unsecured Fed Funds lines with correspondent banks. As of December 31, 2023, 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, Inc., 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. The Corporation maintains a $5.0 million unsecured line of credit with a correspondent bank, all of which was available for borrowing at December 31, 2023. Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling $26.9 million and $42.0 million at December 31, 2023 and 2022, 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 stockholders 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. For a discussion of ACNB’s dividend restrictions, please refer to Item 1 — “Business” and Note 14 — “Regulatory Matters” in the Notes to Consolidated Financial Statements. 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 December 31, 2023 the Corporation had unfunded outstanding commitments to extend credit of $403.3 million and outstanding standby letters of credit of $21.0 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. Please refer to Note 15 — “Commitments and Contingencies” in the Notes to Consolidated Financial Statements for a discussion of the nature, business purpose, and importance of the Corporation’s off-balance sheet arrangements. New Accounting Pronouncements See Note 1 — “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a summary of these new accounting pronouncements not yet adopted.