ACNB Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. ACNB is a Pennsylvania-based bank holding company providing banking, wealth management and insurance services in southcentral Pennsylvania and Maryland. Amounts below are in U.S. dollars; financial figures are generally stated in millions.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $18.00 | $18.37 | $53.89 | $54.17 |
| Provision for loan losses | $0.00 | $1.55 | $0.05 | $8.10 |
| Other income | $5.27 | $5.01 | $17.14 | $14.07 |
| Other expenses | $13.98 | $13.31 | $41.49 | $46.22 |
| Net income | $7.36 | $6.77 | $23.34 | $11.35 |
| Basic earnings per share | $0.84 | $0.79 | $2.67 | $1.32 |
| Net interest margin | 2.79% | 3.21% | 2.90% | 3.42% |
- For the quarter, net income rose 8.7%; for the nine months, it more than doubled. The company attributed the year-to-date improvement principally to lower loan-loss provisioning, the absence of 2020 FCBI merger expenses, and higher fee income.
- At September 30, assets were $2,792.8 million, deposits $2,417.6 million, loans net of allowance $1,467.7 million, and stockholders’ equity $269.8 million. Cash and cash equivalents were $722.8 million.
- Loans declined 9.2% from year-end 2020, largely reflecting PPP repayments, residential mortgage sales and other loan payoffs. Deposits increased 10.6% over that period.
- The allowance for loan losses was $19.1 million, or 1.29% of total loans (1.67% of non-acquired loans). Nine-month net charge-offs were $1.14 million. Nonaccrual loans were $5.62 million, down from $7.04 million at year-end 2020; loans over 90 days past due and still accruing were $0.43 million.
- Cash from operating activities was $33.8 million for the nine months; investing activities provided $70.6 million and financing activities provided $219.0 million. Cash and equivalents increased $323.4 million from year-end 2020.
- Short-term and long-term borrowings totaled $86.3 million at quarter-end, versus $92.2 million at year-end. ACNB issued $15 million of 4.00% fixed-to-floating subordinated notes due 2031 during March 2021; it used proceeds in part to retire existing debt.
- The banking subsidiary reported a 9.04% Tier 1 leverage ratio and 17.07% total risk-based capital ratio, above the stated well-capitalized thresholds of 5.00% and 10.00%, respectively. Management said the bank remained well capitalized.
Changes versus comparable periods
- Q3 net interest income fell 2.0% year over year, while nine-month net interest income fell 0.5%. Lower asset yields and a greater share of lower-yielding liquidity and investments weighed on margins; lower deposit costs partly offset this pressure.
- The reduction in credit-loss provision was substantial: $0.05 million for the first nine months of 2021 versus $8.10 million in 2020. Management cited prior pandemic-related provisioning and generally stable credit measures.
- Year-to-date other income increased 21.8%, including higher mortgage-sale income earlier in the year, fiduciary and debit-card fees, and a $0.38 million equity-securities fair-value gain versus a $0.48 million loss in 2020.
- Year-to-date other expenses decreased 10.2%, mainly because 2020 included $5.97 million of FCBI merger and integration costs. Excluding that comparison, expenses included higher compensation, occupancy, regulatory and technology-related costs.
- Available-for-sale securities had a $0.95 million after-tax unrealized loss at September 30, 2021, compared with a $4.65 million after-tax unrealized gain at December 31, 2020. ACNB attributed the decline mainly to higher market interest rates; the change contributed to accumulated other comprehensive loss.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management’s stated longer-term strategy is to grow lending and shift earning assets toward commercial loans; loan growth remains subject to competition, market conditions and the continuing effects of COVID-19.
- PPP activity was a material but finite source of income: ACNB reported $40.8 million of PPP loans outstanding at quarter-end and recognized about $4.4 million of PPP fees in nine-month 2021 interest income. Management cautioned that PPP fees and purchase-accounting adjustments would not recur at the same level; $2.205 million of PPP deferred fees remained to be recognized.
- Management said there were no temporary COVID-19 loan modifications at September 30, 2021, and no loans then expected to suffer greater losses as a result of COVID-19. It also cautioned that longer-term pandemic effects on borrowers could not be estimated.
- Interest-rate risk is significant: low asset yields and possible deposit repricing or outflows could pressure earnings and margins. Higher rates also reduced securities fair values during the period.
- Liquidity included approximately $760.9 million of FHLB borrowing capacity available, of which management considered $562 million practicably available. There were $384.6 million of unfunded commitments to extend credit and $9.6 million of standby letters of credit; management said the commitments do not necessarily represent future cash needs.
- ACNB repurchased 15,101 shares during the quarter under a program authorizing repurchases of up to 261,000 shares. A Rule 10b5-1 broker arrangement authorized repurchases through March 31, 2022, subject to constraints.
- The bank executed a core-system conversion during Q3 as part of its digital transformation; management said the eventual effect on expenses could not yet be fully estimated. The filing reported no material pending legal proceedings, no material change in previously disclosed risk factors, and no material change in market risks since year-end.
- CECL implementation was expected to be deferred to January 1, 2023, because ACNB expected to remain a smaller reporting company. Management had not determined the magnitude of the eventual allowance adjustment.
Investor verification priorities
- Track whether loan balances stabilize or continue to decline, and distinguish organic lending trends from PPP repayments and mortgage sales.
- Assess recurring earnings apart from PPP fee recognition, purchase-accounting adjustments, securities fair-value changes and the unusually low loan-loss provision.
- Monitor credit quality, including commercial real estate concentrations, nonaccrual and classified loans, charge-offs, and the adequacy of the allowance as pandemic effects evolve.
- Review net interest margin sensitivity to market rates, deposit pricing and liquidity deployment, as well as the effect of securities valuation changes on equity.
- Verify capital, liquidity and debt trends following the subordinated-note issuance, share repurchases and any changes in available FHLB capacity.
- Follow core-system conversion costs, insurance commission trends and the timing and impact of CECL adoption.