Executive Summary / Key Takeaways

• ACNB Corporation's first quarter 2025 results were significantly impacted by the recent acquisition of Traditions Bancorp, Inc., leading to a reported net loss driven by one-time merger-related expenses and a substantial provision for credit losses on acquired loans.
• The Traditions acquisition represents a transformative strategic move, significantly expanding ACNB's scale, loan and deposit base, and market presence in Southcentral Pennsylvania, positioning it as a larger regional community bank.
• Excluding acquisition-related noise, underlying operational performance showed improvements in net interest income and margin, benefiting from the larger asset base and favorable acquisition accounting adjustments, though funding costs continue to rise.
• ACNB maintains strong liquidity and robust capital ratios well above regulatory minimums, providing a solid foundation despite the near-term earnings impact of integration costs and asset quality adjustments.
• While facing competitive pressures, particularly in digital services, ACNB's expanded geographic footprint, diversified service offerings (including insurance), and historical community focus provide key differentiators for long-term growth potential as integration progresses.

A Regional Powerhouse in Transition: Setting the Scene

ACNB Corporation, headquartered in Gettysburg, Pennsylvania, stands as a financial holding company deeply rooted in its community, providing a comprehensive suite of banking, wealth management, mortgage, and insurance services. Operating primarily through its subsidiaries, ACNB Bank and ACNB Insurance Services, the company serves businesses and consumers across Southcentral Pennsylvania and Northern Maryland. Its strategic focus centers on driving loan growth within its local markets while cultivating a stable funding base through competitive deposit products.

The company's trajectory has been significantly shaped by strategic acquisitions over the years, including notable deals like those with New Windsor Bancorp and Frederick County Bancorp. This history of inorganic growth culminated in a transformative event effective February 1, 2025, with the completion of the acquisition of Traditions Bancorp, Inc. and its subsidiary, Traditions Bank. This merger dramatically increased ACNB's scale, adding approximately $877.7 million in assets, $648.5 million in loans, and $741.5 million in deposits. The strategic rationale was clear: to bolster ACNB's market share, particularly in the attractive York, Pennsylvania area, and solidify its position as a leading community bank in the state. The integration process is underway, including the consolidation of physical locations, with two former Traditions Bank branches closed in April 2025.

In the competitive landscape, ACNB operates alongside other regional banks such as Franklin Financial Services Corporation (FRAF), Peoples Financial Services Corp. (PFIS), and Orrstown Financial Services Inc. (ORRF), as well as facing indirect competition from larger national banks and fintech firms. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, ACNB's expanded network of 33 community banking offices across its core markets provides a tangible advantage in fostering local relationships and customer loyalty, contributing to higher estimated deposit retention rates compared to some peers. However, competitors like FRAF and ORRF have demonstrated stronger recent revenue growth rates (e.g., FRAF at ~6%, ORRF at ~7% annually vs. ACNB's ~4% prior to the acquisition) and, in some cases, potentially greater efficiency in specific areas or faster adoption of certain digital tools.

Technology plays an increasingly vital role in this competitive environment. While specific details regarding ACNB's proprietary technological differentiators or quantifiable performance metrics were not available, the competitive analysis highlights that rivals are leveraging digital banking tools for faster processing and potentially lower operating costs per transaction. ACNB's ability to effectively integrate technology, both internally for efficiency and externally for customer experience (e.g., digital banking platforms), is crucial for maintaining competitiveness, attracting tech-savvy customers, and potentially reducing customer acquisition costs, an area where it may currently lag some peers. Strategic investment in technology is essential to complement ACNB's community-focused model and ensure long-term relevance.

Q1 2025 Performance: Acquisition Impact Dominates the Narrative

ACNB Corporation's financial results for the first quarter of 2025 were heavily influenced by the Traditions acquisition, presenting a picture significantly different from the prior year. The company reported a net loss of $272 thousand, or $0.03 diluted loss per share, a stark contrast to the net income of $6.8 million, or $0.80 diluted earnings per share, recorded in the first quarter of 2024.

This swing to a net loss was primarily attributable to two discrete, acquisition-related items: a $4.2 million provision for credit losses on non-PCD (purchased credit-deteriorated) loans acquired from Traditions (net of taxes) and $6.2 million in merger-related expenses (net of taxes). These one-time costs masked the underlying operational performance of the combined entity.

Net interest income, a core driver of banking profitability, saw a substantial increase, rising by $6.5 million to $27.1 million in Q1 2025 compared to $20.6 million in Q1 2024. This growth was predominantly fueled by the expanded asset base resulting from the Traditions acquisition. The fully taxable equivalent (FTE) net interest margin also improved, increasing by 30 basis points to 4.07% from 3.77% in the prior year period. A notable contributor to this margin expansion was the accretion impact of acquisition accounting adjustments on acquired loans and deposits, which added $1.5 million to net interest income during the quarter. The yield on average earning assets increased by 71 basis points to 5.45%, largely reflecting this accretion benefit.

Noninterest income also saw a healthy increase, totaling $7.2 million in Q1 2025, up $1.5 million from $5.7 million in Q1 2024. While the acquisition contributed broadly to this increase, specific drivers included higher wealth management income (benefiting from increased sales activity and market performance), a gain on life insurance proceeds ($254 thousand), and increased earnings on bank-owned life insurance ($103 thousand).

However, the impact of the acquisition was most acutely felt in noninterest expenses, which surged by $11.7 million to $29.3 million in Q1 2025 compared to $17.7 million in Q1 2024. This significant increase was primarily due to the inclusion of Traditions' operating costs and the aforementioned merger-related expenses ($8.0 million before tax). Salaries and employee benefits, the largest expense component, rose by $1.7 million, reflecting the larger employee base post-acquisition, higher restricted stock compensation, and increased payroll taxes. Equipment and net occupancy expenses also increased due to the expanded physical footprint and seasonal maintenance. Intangible assets amortization increased by $536 thousand, driven by the core deposit intangible asset recognized in the acquisition accounting.

The reported income tax benefit of $277 thousand in Q1 2025 contrasts with a provision of $1.8 million in Q1 2024, directly reflecting the pre-tax loss resulting from the acquisition-related charges.

Financial Condition and Asset Quality: A Larger, Integrated Balance Sheet

The Traditions acquisition fundamentally reshaped ACNB's balance sheet. Total assets grew significantly to $3.27 billion at March 31, 2025, up from $2.39 billion at December 31, 2024. This 36.8% increase highlights the scale added by the acquired entity.

The loan portfolio, net of unearned income, increased by $639.3 million, or 38.0%, to $2.32 billion at March 31, 2025, from $1.68 billion at December 31, 2024. The acquired loans from Traditions totaled $648.5 million at the acquisition date. Growth was seen across all major categories, including commercial real estate (up $284.9 million, or 29.4%), residential mortgage (up $189.5 million, or 47.2%), commercial and industrial (up $79.9 million, or 56.7%), home equity lines of credit (up $33.4 million, or 39.0%), and real estate construction (up $50.9 million, or 66.3%). The concentration of non-owner occupied commercial real estate, construction, and multi-family loans increased to 253.10% of total risk-based capital of the Bank as of March 31, 2025, up from 207.00% at December 31, 2024, reflecting the addition of the Traditions portfolio and a key area for ongoing monitoring.

Asset quality metrics were impacted by the acquisition accounting. The Allowance for Credit Losses (ACL) increased to $24.6 million, or 1.06% of total loans, at March 31, 2025, compared to $17.3 million, or 1.03%, at December 31, 2024. The primary driver was the initial ACL established for acquired loans, totaling $6.9 million ($5.5 million for non-PCD loans recognized through the provision and $1.5 million for accruing PCD loans recognized as an acquisition accounting adjustment). Non-performing loans also increased, reaching $10.0 million, or 0.43% of total loans, at March 31, 2025, compared to $6.8 million, or 0.40%, at December 31, 2024, primarily due to the acquired portfolio. Annualized net charge-offs remained low at 0.01% of total average loans for the three months ended March 31, 2025.

Deposits, the primary funding source, mirrored the loan growth, increasing by $747.5 million, or 41.7%, to $2.54 billion at March 31, 2025, from $1.79 billion at December 31, 2024. The acquisition contributed $741.5 million in deposits. Growth was observed across all deposit categories, with significant increases in money market accounts (up $298.0 million, or 118.4%) and time deposits (up $204.1 million, or 74.8%). Time deposits included $54.0 million in brokered deposits at quarter-end, up from $24.1 million at the end of 2024, reflecting strategic use to manage liquidity and seasonal fluctuations, as well as acquired balances. The loan-to-deposit ratio remained relatively stable at 91.43% at March 31, 2025, compared to 93.89% at December 31, 2024. Uninsured and non-collateralized Bank deposits represented approximately 19.70% of total Bank deposits at March 31, 2025.

Liquidity remains robust. At March 31, 2025, the banking subsidiary had significant available borrowing capacity, including $688.6 million from the FHLB, $61.4 million from the Federal Reserve Discount Window, and $192.0 million in unsecured Fed Funds lines. These sources, combined with cash on hand and unencumbered securities, provided coverage of 242.30% of uninsured and non-collateralized Bank deposits.

Total stockholders equity increased substantially to $386.9 million at March 31, 2025, from $303.3 million at December 31, 2024. This $83.6 million increase was primarily driven by the issuance of 2.04 million shares of common stock as part of the Traditions acquisition consideration. Regulatory capital ratios for both the Corporation and the Bank remained strong and well above the minimum requirements for a well-capitalized institution at March 31, 2025.

Outlook and Strategic Execution: Integrating for Future Growth

ACNB's immediate outlook is heavily focused on the successful integration of Traditions Bancorp. While the first quarter bore the brunt of one-time costs and initial accounting adjustments, management anticipates realizing cost synergies and operational efficiencies as the integration progresses, including benefits from branch consolidations. The strategic expansion into the York market is expected to provide a platform for future loan and deposit growth, leveraging the combined entity's larger scale and broader geographic reach.

The company's commitment to shareholder returns remains evident, with the Board approving a 6.25% increase in the regular quarterly cash dividend to $0.34 per share for the second quarter of 2025. This increase, coupled with the larger share count post-acquisition, is expected to result in higher aggregate dividend payments, signaling confidence in the future earnings power of the combined organization.

Analyst expectations, as reflected in the Zacks Consensus Estimate, project a significant increase in earnings per share for the full fiscal year 2025 ($4.43 per share), suggesting that the market anticipates a return to profitability and improved performance as integration costs subside and synergies are realized.

The strategic emphasis on increasing loan growth in local markets and maintaining a reasonable funding base through competitive deposits remains central to ACNB's approach. The expanded network and increased capacity post-acquisition should support these objectives. Furthermore, the diversified revenue streams from ACNB Insurance Services and wealth management provide valuable contributions that can help offset potential volatility in core banking income.

Key Risks and Considerations

While the acquisition presents significant opportunities, it also introduces and amplifies certain risks that investors should consider:

• Integration Risk: Successfully merging the operations, systems, and cultures of two financial institutions is complex. Failure to achieve anticipated cost synergies or encountering unexpected integration challenges could negatively impact financial performance and delay the realization of strategic benefits.
• Credit Risk: The increase in the loan portfolio size, particularly in commercial real estate and construction, coupled with the initial allowance for acquired loans, highlights the importance of ongoing credit quality management. The determination of the ACL remains a critical accounting estimate requiring subjective judgment, and future economic conditions or changes in borrower financial health could necessitate further provisions. The increased concentration in certain loan types relative to capital also warrants close monitoring.
• Interest Rate Risk: As a financial institution, ACNB is exposed to fluctuations in interest rates. While the company uses tools like securities, FHLB advances, and derivatives to manage this risk, significant or rapid shifts in rates could impact net interest income, loan demand, deposit costs, and the value of assets. The current modestly asset-sensitive position suggests a potential benefit in a rising rate environment, but falling rates could pressure margins.
• Competitive Pressures: Competition from regional banks, credit unions, larger institutions, and fintech firms remains intense. ACNB's ability to compete effectively on pricing, service, and technology is crucial. Lags in digital innovation compared to some rivals could impact customer acquisition and retention, particularly in certain demographics or market segments.
• Economic Conditions and Trade Policies: General economic conditions in ACNB's market areas directly impact loan demand, credit quality, and deposit levels. Furthermore, changes in trade policies and tariffs, as highlighted in the risk factors, could adversely affect local businesses, particularly in agriculture, manufacturing, and retail, potentially leading to financial stress among borrowers and impacting asset quality.

Conclusion

ACNB Corporation is at a pivotal juncture, having completed the transformative acquisition of Traditions Bancorp. While the first quarter of 2025 reflected the expected near-term financial impact of integration costs and acquisition accounting, the underlying strategic rationale for expanding scale and market presence remains compelling. The combined entity boasts a significantly larger balance sheet, enhanced liquidity, and robust capital levels, providing a solid foundation for future growth.

The success of the investment thesis hinges on ACNB's ability to effectively integrate Traditions, realize anticipated synergies, and leverage its expanded footprint to drive profitable loan and deposit growth. While challenges persist, including managing credit risk in a larger portfolio, navigating competitive pressures (particularly in the digital realm), and adapting to evolving economic conditions, ACNB's historical community focus, diversified service offerings, and strategic commitment to its regional markets position it to capitalize on opportunities as the integration noise subsides. Investors should monitor the pace of synergy realization, trends in asset quality, and the company's ongoing investments in technology as key indicators of its long-term potential.