ACNB Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited consolidated results. ACNB provides community banking, wealth management and insurance services in Pennsylvania and Maryland. Comparisons are primarily with Q1 2020 for results and March 31, 2020 or December 31, 2020 for balance-sheet measures.
Key financial results
| Metric | Q1 2021 / March 31, 2021 | Comparable period |
|---|---|---|
| Net income (loss) | $7.471 million | Q1 2020: $(1.223) million |
| Basic EPS | $0.86 | Q1 2020: $(0.14) |
| Net interest income | $17.325 million | Q1 2020: $17.455 million |
| Net interest margin | 2.94% | Q1 2020: 3.55% |
| Provision for loan losses | $0.050 million | Q1 2020: $4.000 million |
| Other income | $5.913 million | Q1 2020: $4.166 million |
| Total assets | $2.655 billion | December 31, 2020: $2.555 billion; March 31, 2020: $2.180 billion |
| Total deposits | $2.279 billion | December 31, 2020: $2.186 billion; March 31, 2020: $1.811 billion |
| Loans, net of allowance | $1.590 billion | December 31, 2020: $1.618 billion |
| Cash and cash equivalents | $506.758 million | December 31, 2020: $399.352 million |
Net income improved by $8.694 million year over year. The main drivers were the much lower loan-loss provision, higher fee income, and the absence of $5.965 million in Q1 2020 merger expenses. Net interest income declined 0.7% as lower interest income outweighed lower funding costs. Interest income fell 7.4%; interest expense fell 40.8%. The net interest spread was 2.81%, versus 3.30% a year earlier.
Operating cash flow was $9.038 million and investing cash flow was $2.745 million. Financing cash flow was $95.623 million, mainly reflecting deposit growth and $15 million of subordinated-note proceeds, partly offset by borrowing repayments and dividends. Cash and cash equivalents increased $107.406 million during the quarter.
Material changes and balance-sheet developments
- Year-over-year asset and deposit growth reflects, in part, the January 2020 acquisition of Frederick County Bancorp (FCBI), as well as pandemic-era liquidity and PPP-related deposits. Deposits rose 4.3% from year-end 2020; loans declined 1.7% from year-end.
- Other income rose 41.9%, led by mortgage-sale income, which increased to $1.283 million from $0.318 million, and a $0.365 million fair-value gain on equity securities versus a $0.475 million loss in Q1 2020. Deposit service charges fell 21.8%.
- Other expenses declined 29.1%, principally because Q1 2020 included FCBI merger-related costs; Q1 2021 had no such costs. Salaries and benefits rose 2.0%.
- The allowance for loan losses was $20.237 million, or 1.26% of total loans (1.66% of non-acquired loans), versus 1.23% at year-end 2020. Net charge-offs were $39,000, compared with $1.983 million in Q1 2020.
- Nonaccrual loans were $7.692 million, up from $7.041 million at year-end; loans over 90 days past due and still accruing were $0.675 million. Management reported 30 temporary COVID-related loan modifications totaling $23.720 million at quarter-end.
- Available-for-sale securities had a $1.434 million after-tax unrealized loss at quarter-end, compared with a $4.645 million unrealized gain at year-end. Management attributed the change primarily to rising market rates and said it did not intend, and was not required, to sell securities in unrealized-loss positions.
- ACNB issued $15 million of 4.00% fixed-to-floating subordinated notes due March 31, 2031. Total short- and long-term borrowings were $96.898 million at quarter-end.
Outlook, risks and contingencies
No specific earnings or financial guidance was provided. Management said loan growth and a shift toward commercial lending remain strategic priorities, but lending is affected by competition, customer demand and the ongoing effects of COVID-19. Management cautioned that pandemic-related effects on borrowers and the regional economy may lag and cannot yet be fully estimated. It considered the allowance adequate but emphasized the judgment and uncertainty involved in credit-loss estimates.
PPP loans outstanding were approximately $142.0 million at March 31, 2021. ACNB reported approximately $8.7 million of gross PPP fees collected, of which about $0.953 million was recognized through Q1 2021; the remaining fees are expected to be recognized in future periods. Other risks discussed include interest-rate changes, commercial real estate and borrower credit quality, deposit competition, cybersecurity and payment-card fraud, regulatory requirements, and execution of the Bank’s core-system conversion. The filing reported $358.944 million of unfunded commitments to extend credit and $8.094 million of standby letters of credit; management said these commitments do not necessarily represent future cash needs.
Liquidity included approximately $566 million of practicable additional FHLB borrowing capacity. The Bank was categorized as well-capitalized; its March 31, 2021 ratios included a 9.21% Tier 1 leverage ratio and a 15.58% total risk-based capital ratio. ACNB declared a $0.25 per-share cash dividend, unchanged from Q1 2020, and announced a repurchase authorization for up to 261,000 shares; no shares were repurchased during the quarter. Management reported no material change in risk factors from the 2020 Form 10-K and no material pending legal proceedings.
Important facts for investors to verify
- Whether the sharp year-over-year earnings improvement is sustainable after excluding the prior-year merger costs and unusually high prior-year loan-loss provision.
- How net interest margin responds to low asset yields, future rate changes, and the substantial cash and securities balances.
- Credit performance of commercial real estate, hospitality and other COVID-sensitive borrowers, including the status of temporary modifications, nonaccrual loans and allowance assumptions.
- Timing and remaining recognition of PPP fees, and the effects of PPP forgiveness and repayments on loan balances, interest income and deposits.
- Use and capital impact of the $15 million subordinated-note proceeds, and progress under the authorized share-repurchase plan.