ACNB Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. ACNB is a Pennsylvania-based banking and insurance holding company operating primarily in southcentral Pennsylvania and northern Maryland. Figures are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 / Mar. 31, 2022 | Comparable period / prior date |
|---|---|---|
| Total interest income | $18.077 million | $19.370 million in Q1 2021 |
| Net interest income | $17.053 million | $17.325 million in Q1 2021 |
| Net interest margin | 2.67% | 2.94% in Q1 2021 |
| Net interest spread | 2.61% | 2.81% in Q1 2021 |
| Other income | $4.459 million | $5.913 million in Q1 2021 |
| Other expenses | $13.282 million | $13.787 million in Q1 2021 |
| Net income / basic EPS | $6.599 million / $0.76 | $7.471 million / $0.86 in Q1 2021 |
| Cash dividends declared per share | $0.26 | $0.25 in Q1 2021 |
| Total assets | $2.746 billion | $2.787 billion at Dec. 31, 2021; $2.655 billion at Mar. 31, 2021 |
| Loans, net of allowance | $1.465 billion | $1.449 billion at Dec. 31, 2021; $1.590 billion at Mar. 31, 2021 |
| Deposits | $2.411 billion | $2.426 billion at Dec. 31, 2021; $2.279 billion at Mar. 31, 2021 |
| Allowance for loan losses | $18.963 million; 1.28% of loans (1.61% of non-acquired loans) | $19.033 million; 1.30% at Dec. 31, 2021 |
| Shareholders’ equity | $256.009 million | $272.114 million at Dec. 31, 2021 |
| Borrowings | $30.028 million short-term; $30.200 million long-term | $35.202 million short-term; $34.700 million long-term at Dec. 31, 2021 |
Cash flow: Operating activities provided $7.161 million, investing activities used $212.183 million, and financing activities used $27.489 million. Cash and cash equivalents decreased $232.511 million to $477.620 million, largely as ACNB shifted liquidity into securities.
Material changes and business drivers
- Net income decreased 11.7% year over year, while basic EPS fell 11.6%. Management attributed the decline mainly to lower mortgage-sale fees as refinancing activity weakened in the higher-rate environment.
- Net interest income declined 1.6%. Interest income fell 6.7%, more than the reduction in interest expense; the margin declined amid lower loan balances, low-yielding excess liquidity and securities, and lower purchase-accounting and PPP fee contributions.
- Other income fell 24.6%, including a $1.002 million reduction in mortgage-sale income. Deposit-account fees and wealth-management income increased, partly offsetting the decline. Equity securities recorded a $109,000 fair-value loss versus a $365,000 gain in Q1 2021.
- Other expenses declined 3.7%, principally due to lower salaries and benefits, including a year-end incentive accrual adjustment and restricted stock awards issued in lieu of cash awards. Equipment costs increased 17.6%, partly reflecting the new core application system.
- Loans increased 1.1% from year-end but were down 7.8% year over year. Commercial-purpose loans grew during the quarter; residential mortgage balances declined. Outstanding PPP loans were $9.844 million, and $468,000 of PPP fees were recognized in Q1.
- Deposits were down 0.6% from year-end and up 5.8% year over year. Management reported that deposit growth had exceeded loan growth, creating excess liquidity; approximately $185 million was moved from cash into higher-yielding securities late in the quarter.
Outlook, risks and unusual items
- Management provided no specific earnings or financial guidance. It described longer-term priorities as growing loans and increasing the share of commercial lending, while noting that competition and lingering pandemic effects constrained loan growth. Results for the quarter are not necessarily indicative of full-year results.
- Available-for-sale securities had $32.295 million of gross unrealized losses at March 31, 2022; the related after-tax accumulated other comprehensive loss was $24.912 million, versus $3.474 million at year-end. Management attributed the increase to rising market rates, stated it did not consider the securities credit-impaired, and said the unrealized losses did not affect net income or regulatory capital. The banking subsidiary remained well capitalized.
- Credit indicators included $4.543 million of nonaccrual loans, down from $5.489 million at year-end, and $70,000 of net charge-offs. No loan-loss provision was recorded in Q1. Management considered the allowance adequate, but noted uncertainty around economic, geopolitical and collateral conditions.
- Liquidity sources included cash, securities, deposits and FHLB borrowing capacity. ACNB reported approximately $576 million of practicable additional FHLB borrowing capacity. Unfunded commitments to extend credit were approximately $431.938 million; standby letters of credit were $9.672 million.
- ACNB Insurance Services acquired Hockley & O’Donnell Insurance Agency on February 28, 2022. The purchase added approximately $2.077 million of goodwill and $5.835 million of intangible assets; a $1.5 million local-bank loan helped fund the purchase.
- Key stated risks include interest-rate and securities-value movements, deposit competition and potential deposit repricing, loan and collateral performance, commercial real estate exposure, inflation, regulatory and technology costs, cybersecurity, and acquisition integration. The company planned to adopt CECL on January 1, 2023; it had not determined the magnitude of the transition adjustment.
- Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and no material change in market risk since year-end 2021.
Most important facts for investors to verify
- Whether loan growth and net interest margin improve as rates and asset mix change, and whether planned investment purchases deliver the expected returns.
- Whether the securities portfolio’s unrealized losses remain interest-rate-driven and manageable, particularly if liquidity needs require securities sales.
- Whether credit quality, commercial real estate exposure, nonaccrual loans and the allowance remain consistent with management’s assessment.
- The effects of CECL adoption in 2023 on the allowance, earnings and capital, and the financial contribution and integration costs of the insurance-agency acquisition.
- Deposit retention and funding costs, including the availability and practical capacity of FHLB borrowing under changing market conditions.