ACNB Corporation — Second Quarter 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless noted otherwise, dollar amounts are in millions. ACNB provides community banking, wealth management and insurance services in southcentral Pennsylvania and Maryland. Its January 11, 2020 acquisition of Frederick County Bancorp (FCBI) expanded its Maryland operations and materially affects comparisons with prior periods.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $18.3 | $15.0 | $35.8 | $29.6 |
| Provision for loan losses | $2.6 | $0.1 | $6.6 | $0.3 |
| Other income | $4.9 | $4.8 | $9.1 | $8.8 |
| Other expenses | $13.5 | $11.7 | $32.9 | $22.9 |
| Net income | $5.8 | $6.5 | $4.6 | $12.3 |
| Basic EPS | $0.67 | $0.92 | $0.53 | $1.75 |
| Net interest margin | 3.50% | 3.89% | 3.53% | 3.91% |
Q2 net income fell 10.3% year over year; first-half net income fell 62.9%. First-half results included $6.0 million of FCBI merger and integration expense and sharply higher credit-loss provisions. Q2 net interest income rose 22.5%, largely reflecting FCBI, loan growth and purchase-accounting effects, while lower market rates and a greater mix of lower-yielding liquidity and securities pressured margins.
- Balance sheet at June 30: Assets were $2.412 billion; loans, net of allowance, $1.715 billion; deposits $2.033 billion; cash and cash equivalents $232.2 million; and stockholders’ equity $252.2 million. Year-end 2019 assets were $1.720 billion and deposits $1.412 billion.
- Credit costs: The allowance for loan losses was $18.4 million, or 1.06% of total loans (1.45% excluding acquired loans). First-half net charge-offs were $2.0 million, including an approximately $2.0 million unsecured-loan charge-off. Nonaccrual loans were $4.9 million, versus $3.9 million at year-end 2019; loans over 90 days past due and still accruing were $2.9 million.
- Cash flow, first half: Operating activities provided $16.5 million, investing activities used $134.5 million and financing activities provided $235.9 million. Cash and cash equivalents increased $117.9 million to $232.2 million.
- Borrowings and liquidity: Short-term borrowings were $34.0 million and long-term borrowings $68.4 million. ACNB reported $796.6 million of available FHLB capacity, of which it considered $580 million practicably available. The banking subsidiary’s Tier 1 leverage ratio was 9.46%; management said it remained well capitalized and had elected the community bank leverage ratio framework.
- Dividends: The declared dividend was $0.25 per share in each quarter; first-half dividends paid were $4.3 million.
Material changes and notable items
- FCBI added five Maryland branches and, at acquisition, approximately $329.3 million of loans and $374.1 million of deposits. ACNB issued approximately 1.59 million shares; acquisition goodwill was $22.5 million. Reported growth in assets, loans, deposits and expenses therefore includes acquired operations.
- At June 30, ACNB reported 466 temporary COVID-19 loan modifications totaling $234.6 million, most with deferrals of up to six months. The first-half provision reflected a $2.2 million COVID-related qualitative allowance factor, in addition to the large charge-off and other factors.
- ACNB participated in the Paycheck Protection Program. The filing reports about $6.0 million in fees before costs and $677,000 recognized in Q2. The loan count and amount differ between disclosures: the notes report approximately 1,382 applications and $159.0 million, while MD&A reports approximately 1,400 loans and $158.2 million.
- Available-for-sale securities were $257.6 million, with a $5.2 million after-tax unrealized gain at June 30, compared with $190.8 million and a $1.3 million gain at year-end 2019. Management attributed valuation changes mainly to interest rates and said it had identified no securities it intended or expected to be required to sell.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management described a long-term strategy of growing loans and shifting earning assets toward commercial loans, but said future lending and results depend on COVID-19 effects, market rates, competition and customer repayment capacity. Management stated that the pandemic’s duration and economic effects could not be estimated reliably and could lead to further credit losses, higher provisions, securities impairments, operational disruption and pressure on revenue, capital or liquidity.
- COVID-sensitive commercial exposures include hospitality, food services and commercial real estate. The filing also warns of risk from property values, local economic conditions, loan concentrations, interest-rate movements and acquired-loan integration.
- Unfunded commitments to extend credit were approximately $393.8 million; standby letters of credit were $11.6 million. The filing states that no material legal proceedings were pending and that the liability for standby-letter guarantees was not material.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s differing PPP loan counts and balances, and track fee recognition and forgiveness or repayment outcomes.
- Monitor COVID-related deferrals as they expire, including borrower performance, migration to delinquency or nonaccrual, charge-offs and the adequacy of the allowance.
- Assess whether acquired FCBI operations deliver expected synergies and whether merger-related costs, purchase-accounting adjustments and goodwill or intangible balances change.
- Track margin pressure, deposit pricing and mix, and the effects of interest rates on loan yields, securities values and funding costs.
- Review future earnings against the first-half dividend payout, liquidity capacity and regulatory capital position.