ACNB Corporation — FY 2022 Form 10-K
Business and period: ACNB is a Pennsylvania-based financial holding company operating ACNB Bank and an insurance agency. The bank serves south-central Pennsylvania and northern Maryland; insurance services are licensed in 44 states. This annual report covers the year ended December 31, 2022. The filing also reports fourth-quarter results.
Financial results and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $83.4 million | $71.2 million |
| Net interest margin | 3.33% | 2.82% |
| Provision for loan losses | $0 | $50,000 |
| Other income | $21.8 million | $22.8 million |
| Other expenses | $60.3 million | $59.0 million |
| Net income | $35.8 million | $27.8 million |
| Basic earnings per share | $4.15 | $3.19 |
Management reported record annual earnings. Net income increased 28.4%; basic EPS increased 30.1%. Fourth-quarter net income was $10.2 million, or $1.20 per share, compared with $4.5 million, or $0.52 per share, in Q4 2021. Full-year pretax income was $45.0 million and the effective tax rate was 20.5%.
- Revenue and margin: Net interest income rose 17.1%, reflecting higher rates, investment of excess cash into securities, lower funding costs, and growth in higher-yielding assets. Interest expense fell 47.6% to $3.6 million. Other income declined 4.3%, primarily from lower mortgage-sale income and equity-security fair-value losses; insurance commissions increased 35.1% to $8.3 million, partly due to the Hockley & O’Donnell acquisition.
- Loans and credit: Period-end loans were $1.539 billion, up 4.8% (6.0% excluding PPP loan payoffs), with growth concentrated in commercial real estate and construction. Nonperforming loans were $3.9 million, or 0.25% of loans, versus $6.2 million, or 0.42%, in 2021. Net charge-offs were 0.08% of average loans in both years. The allowance was $17.9 million, or 1.16% of loans, versus $19.0 million, or 1.30%.
- Assets, deposits, and securities: Total assets were $2.526 billion, down 9.4%; deposits were $2.199 billion, down 9.4%, as customers sought higher-yielding alternatives. Securities rose 39.0% to $620.3 million, including approximately $250 million of purchases funded from excess cash. Cash and cash equivalents fell $542.0 million to $168.2 million.
- Cash flow: Operating activities provided $39.2 million; investing activities used $331.7 million; financing activities used $249.4 million. Cash and cash equivalents decreased $542.0 million during the year.
- Capital, debt, and distributions: Stockholders’ equity was $245.0 million versus $272.1 million, primarily reflecting securities-related accumulated other comprehensive losses. The company paid $1.06 per share in dividends and repurchased $6.7 million of stock. Year-end borrowings totaled $62.954 million: $41.954 million short-term and $21.0 million long-term. The Bank remained “well capitalized”; its Tier 1 leverage ratio was 9.50% and total risk-based capital ratio was 15.76%.
- Liquidity: Management cited available FHLB capacity of $808.3 million, Federal Reserve Discount Window capacity of $5.6 million, and $75 million of correspondent-bank Fed Funds lines. The loan-to-deposit ratio was 69.97%.
Changes, outlook, and risks
- Compared with 2021, earnings and margin improved while deposits and cash declined. Loan growth and investment purchases partly redeployed excess liquidity. Lower mortgage-sale income and higher operating costs offset some revenue gains.
- Available-for-sale securities had a $52.7 million net-of-tax unrealized loss at year-end, compared with $3.5 million a year earlier. Management attributed the change to rising market rates and said portfolio credit quality remained strong; it reported no intent or requirement to sell impaired securities. The filing also reports a $48.5 million 2022 other comprehensive loss, largely securities-related.
- ACNB acquired Hockley & O’Donnell Insurance Agency for $7.8 million in cash in February 2022. It also opened a consolidated Upper Adams branch and closed three other branches in December. Its Maryland banking divisions adopted the ACNB Bank name effective January 1, 2023.
- No numeric earnings or revenue guidance is provided. Management’s strategy emphasizes local loan growth, disciplined underwriting, and competitive funding. It planned to adopt CECL on January 1, 2023; the size of the initial allowance adjustment and overall financial impact had not yet been determined.
- Key risks include rate sensitivity and deposit competition, commercial real estate and construction concentration, potential credit-loss reserve changes, unrealized securities losses, inflation and local economic conditions, cybersecurity and technology disruption, regulatory requirements, and execution/integration risks from acquisitions. Approximately 70% of loans were in commercial and industrial, construction, or commercial real estate categories.
- At year-end, unfunded commitments to extend credit were $401.8 million and standby letters of credit were $11.4 million. Management did not anticipate material losses from these commitments. The company reported no material pending legal proceedings and stated that controls over financial reporting were effective; the 2022 audit opinion was unqualified.
Important facts for investors to verify
- Deposit trends, customer rate sensitivity, deposit pricing, and the cost and availability of replacement funding.
- Commercial real estate and construction credit quality, including collateral values, criticized loans, delinquencies, and allowance adequacy.
- CECL adoption effects and subsequent allowance levels, including any material first-quarter 2023 adjustment.
- Whether securities unrealized losses remain recoverable without forced sales, and the effects of rates on tangible equity and capital.
- Post-acquisition insurance performance, branch optimization costs or savings, and any material changes to earnings or liquidity.