ACNB Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a stand-alone fourth-quarter report. ACNB is a Pennsylvania-based financial holding company operating community banking, wealth management and insurance businesses in southcentral Pennsylvania and northern Maryland.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $73.1 million | $59.4 million |
| Net interest margin | 3.35% | 3.81% |
| Provision for loan losses | $9.1 million | $0.6 million |
| Other income | $19.9 million | $18.2 million |
| Other expenses | $61.2 million | $47.6 million |
| Net income | $18.4 million | $23.7 million |
| Basic earnings per share | $2.13 | $3.36 |
| Cash dividends declared per share | $1.00 | $0.98 |
| Year-end total assets | $2.56 billion | $1.72 billion |
| Year-end loans, net | $1.62 billion | $1.26 billion |
| Year-end deposits | $2.19 billion | $1.41 billion |
| Year-end borrowings | $92.2 million | $99.7 million |
Net income fell 22.5%; diluted earnings per share are not provided in the selected data. Return on average assets declined to 0.78% from 1.40%, and return on average equity to 7.39% from 13.33%. Management’s non-GAAP net income excluding after-tax merger expenses was $23.0 million, or $2.67 per basic share, versus $24.3 million, or $3.44, in 2019; this adjustment excludes merger costs, not the elevated credit provision.
Net cash provided by operating activities was $25.5 million, compared with $25.7 million in 2019. Investing activities used $114.8 million (versus providing $8.0 million), while financing activities provided $374.4 million. Cash and cash equivalents rose to $399.4 million from $114.4 million, primarily reflecting deposit growth and balance-sheet expansion.
At year-end, the allowance for loan losses was $20.2 million, or 1.23% of loans, compared with $13.8 million, or 1.09%. Nonperforming loans were $7.9 million (0.48% of loans), up from $5.1 million (0.40%); nonperforming assets were 0.31% of assets. The bank’s regulatory capital ratios included a 9.01% Tier 1 leverage ratio and a 15.10% total risk-based capital ratio; it was classified as well capitalized.
Material changes and drivers
- ACNB acquired Frederick County Bancorp on January 11, 2020, for approximately $57.9 million, primarily in ACNB shares. The acquisition added approximately $443 million of assets, including $329 million of loans and $374 million of deposits, and $22.5 million of goodwill. The acquisition materially expands the year-over-year balance-sheet comparison.
- Net interest income grew 23.0%, mainly from the acquisition, loan growth and PPP activity. However, lower market rates, more low-yield liquidity and securities, and asset repricing reduced net interest margin by 46 basis points.
- The loan-loss provision increased to $9.1 million. Management cited COVID-related uncertainty and approximately $4.1 million of additional qualitative allowance, as well as charge-offs, including a $2.0 million loan charge-off not related to COVID-19. Net charge-offs were $2.7 million, versus $0.7 million.
- Merger-related expenses rose to $6.0 million from $0.8 million, principally for legal, advisory, severance and systems-integration costs. Total other expenses increased 28.4%, including higher compensation, occupancy, equipment and regulatory costs.
- Other income increased 9.7%, supported by mortgage-loan sales and wealth-management fees. Insurance commissions declined 3.4% to $6.1 million, and deposit service charges declined 14.0% to $3.4 million; ATM and debit-card revenue increased 20.5% to $2.9 million.
Outlook, risks and unusual items
- Management described 2020 as challenging because of COVID-19 and Federal Reserve rate cuts, but stated ACNB remained profitable, well capitalized and operationally sound. The filing gives no numerical earnings or revenue guidance.
- ACNB originated about 1,440 PPP loans totaling $160.9 million. Approximately $2.9 million of PPP fee income was recognized in 2020, with remaining fees expected to be recognized in future periods. PPP-related litigation, servicing and SBA-guaranty risks are disclosed.
- At year-end, 48 borrowers had temporary COVID-related modifications totaling $36.1 million, mostly commercial loans, with deferrals of up to six months. Management warned that pandemic duration and its effects on borrowers, credit quality and local economic conditions remained uncertain.
- Key ongoing risks include commercial real estate and business-loan concentrations (about 68% of loans were commercial and industrial, construction, or commercial real estate), interest-rate and funding-cost changes, competition, cybersecurity, regulatory requirements and dependence of parent-company dividends on regulated bank distributions. CECL adoption was expected to be deferred, likely until January 1, 2023; the eventual allowance impact was not yet quantifiable.
- No material pending legal proceedings were reported. The independent auditor issued an unqualified opinion; highlighted critical audit matters were the subjective qualitative factors in the loan-loss allowance and valuation of acquired loans. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-related borrower stress, loan modifications and commercial real estate exposure result in additional delinquencies, charge-offs or allowance increases.
- How quickly ACNB integrates the FCBI franchise and whether merger costs, expected efficiencies and acquired-loan fair-value assumptions develop as anticipated.
- Whether deposit growth persists and how excess liquidity, loan demand and low interest rates affect future net interest margin and earnings.
- The timing and magnitude of CECL adoption effects, and any changes to capital, dividends or shareholder dilution following the acquisition and announced repurchase authorization.
- Trends in insurance commissions, fee income and PPP fee recognition, which influenced noninterest revenue and may not repeat at 2020 levels.