ACNB Corporation — FY2021 Form 10-K
Business context and reporting period. This audited annual report covers the fiscal year ended December 31, 2021, with comparisons to 2020. Gettysburg-based ACNB is a financial holding company operating a community bank and an insurance agency in southcentral Pennsylvania and northern Maryland. The bank is the principal business; insurance is reported separately. The 2020 comparison includes the Frederick County Bancorp acquisition, completed in January 2020.
Financial performance and condition
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net interest income | $71.2 million | $73.1 million |
| Provision for loan losses | $0.05 million | $9.14 million |
| Other income | $22.8 million | $20.1 million |
| Other expenses | $59.0 million | $61.3 million |
| Net income | $27.8 million | $18.4 million |
| Basic earnings per share | $3.19 | $2.13 |
| Return on average assets / equity | 1.03% / 10.52% | 0.78% / 7.39% |
| Net interest margin | 2.82% | 3.35% |
Revenue, earnings and margins. Net income rose 51.3% and EPS rose 49.8%. Earnings benefited principally from the sharply lower loan-loss provision, higher fee income and the absence of 2020 merger expenses; lower net interest income partly offset these gains. Net interest income declined 2.5%, as lower loan yields and loan balances more than offset reduced funding costs. The annual net interest margin fell 53 basis points. In Q4, net income was $4.5 million versus $7.0 million a year earlier; net interest income was $17.4 million versus $18.9 million, and net interest margin was 2.59% versus 3.17%.
Balance sheet and liquidity. At year-end, assets were $2.787 billion, deposits $2.426 billion, net loans $1.449 billion, securities $446.2 million and stockholders’ equity $272.1 million. Total borrowings were approximately $69.9 million, comprising $35.2 million short-term and $34.7 million long-term. Cash and cash equivalents were $710.1 million. Operating cash flow was $42.1 million; investing activities provided $60.5 million and financing activities provided $208.1 million. Management reported approximately $560 million of practicable additional FHLB borrowing capacity.
Credit and capital. Gross loans declined 10.3% to $1.468 billion. Nonperforming loans were $6.2 million, or 0.42% of loans, compared with $7.9 million, or 0.48%, in 2020. The allowance was $19.0 million, equal to 1.30% of loans; net charge-offs were $1.2 million, or 0.08% of average loans. The bank’s total risk-based capital ratio was 17.57%, and management reported it was well capitalized.
Material changes versus 2020
- Net income increased $9.4 million, while the provision for loan losses fell by $9.1 million and 2020 included $6.0 million of merger-related expenses.
- Interest income declined $7.1 million, but interest expense fell $5.3 million. Average earning assets increased 15.9%, driven substantially by liquidity, while average loans declined 7.1%.
- Other income rose 13.4%, including higher wealth management, mortgage-sale, deposit-service and debit-card income. Insurance commissions increased slightly to $6.2 million.
- Year-end deposits increased 11.0%; net loans fell, while available-for-sale securities increased. The securities portfolio’s net unrealized position shifted from a $4.6 million gain to a $3.5 million loss, net of tax, largely reflecting interest-rate movements.
- Long-term borrowings declined from $53.7 million to $34.7 million. ACNB issued $15 million of 4.00% fixed-to-floating subordinated notes in March 2021 and used liquidity to repay other debt.
Outlook, commentary, risks and unusual items
Management provided no quantified earnings or balance-sheet guidance. It described a strategy of growing local commercial lending and improving asset yields, while noting competition, pandemic-related uncertainty, and the challenge of redeploying excess liquidity. Management cautioned that PPP fee income and acquisition-related purchase-accounting income are finite and are not expected to recur at 2021 levels. PPP fees recognized in 2021 were $5.6 million; $1.0 million of deferred PPP fees remained at year-end. PPP loans outstanding were $18.5 million.
Key risks include credit exposure to commercial, construction and commercial real estate lending (about 69% of the loan portfolio by management’s stated measure); local economic concentration; interest-rate and margin sensitivity; deposit competition; COVID-19 effects; cybersecurity and technology risks; regulatory and compliance burdens; and possible future CECL allowance impacts. All temporary pandemic-related loan modifications and deferrals had ended by September 30, 2021. Management reported no material pending litigation and believed the allowance was adequate, but the allowance’s qualitative judgments were identified by the auditor as a critical audit matter. The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Unusual or notable items included a $125,000 early debt repayment penalty and a $103,000 accrual for a garnished-funds loss; the latter was settled in 2022 for 47% less than accrued. ACNB also recorded a $101,000 gain on life insurance proceeds. The insurance subsidiary was rebranded as ACNB Insurance Services effective January 1, 2022, and acquired Hockley & O’Donnell Insurance Agency on February 28, 2022.
Important facts for investors to verify
- Whether loan growth can resume and whether commercial real estate concentration or local economic weakness leads to higher delinquencies, losses or reserve needs.
- How rising rates affect net interest margin, securities values, deposit retention and funding costs; the 2021 margin had already declined to 2.82%.
- How earnings normalize as PPP and purchase-accounting fees run off, and whether fee-income growth can offset ongoing technology and personnel costs.
- The sustainability and quality of the unusually low 2021 loan-loss provision, including the assumptions underlying the allowance’s qualitative factors.
- CECL adoption timing and its eventual effect on reserves and capital; the filing says the impact was still being evaluated and could not yet be quantified.
- Capital allocation and liquidity use, including the $15 million subordinated debt, share repurchases, dividend capacity and planned branch investment.