ACNB Corporation — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019; balance-sheet comparisons are primarily with December 31, 2019. ACNB provides community banking, wealth management and insurance services in southcentral Pennsylvania and Maryland. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $17.455; up 19.0% | $14.665 in Q1 2019 |
| Other income | $4.166; up 5.7% | $3.940 in Q1 2019 |
| Net interest margin | 3.67% | 3.93% in Q1 2019 |
| Provision for loan losses | $4.000 | $0.150 in Q1 2019 |
| Merger-related expenses | $5.965 | None in Q1 2019 |
| Net income (loss) | $(1.223); basic EPS $(0.14) | $5.864; basic EPS $0.83 in Q1 2019 |
| Cash dividends declared per share | $0.25 | $0.23 in Q1 2019 |
| Total assets | $2,180.1 | $1,720.3 at Dec. 31, 2019; $1,671.2 at Mar. 31, 2019 |
| Loans, net of allowance | $1,590.2 | $1,258.8 at Dec. 31, 2019 |
| Total deposits | $1,811.4 | $1,412.3 at Dec. 31, 2019 |
| Cash and cash equivalents | $129.2 | $114.4 at Dec. 31, 2019 |
| Allowance for loan losses | $15.852, or 0.99% of loans | $13.835, or 1.09%, at Dec. 31, 2019 |
| Shareholders’ equity | $247.0 | $189.5 at Dec. 31, 2019 |
Operating cash flow was $8.416 million, compared with $6.822 million in Q1 2019. Investing activities used $5.120 million, including $42.404 million of purchases of available-for-sale securities and the acquisition’s net cash inflow. Financing activities provided $11.518 million. Short-term borrowings were $26.104 million and long-term borrowings were $71.723 million at quarter-end. Management reported the bank subsidiary remained well-capitalized: its Tier 1 leverage ratio was 10.21%, common Tier 1 ratio 13.83%, and total risk-based capital ratio 14.86%.
Material changes and notable items
- ACNB completed its acquisition of Frederick County Bancorp, Inc. on January 11, 2020, adding five Maryland banking offices. The filing reports $329.9 million of acquired loans, $374.1 million of deposits and $22.1 million of goodwill. ACNB issued approximately 1.59 million shares; total consideration was about $57.9 million. Acquired operations are included from the closing date.
- Assets, loans and deposits increased substantially, principally due to the acquisition. Year over year, loans outstanding rose 23.4%; deposits rose 32.5%.
- Net interest income increased with higher average earning assets and acquisition-related volume, but margin declined. Management cited lower market rates, asset mix and increased deposit costs as factors.
- The Q1 loss reflected the $5.965 million of FCBI merger and integration costs and the higher loan-loss provision. The provision included a roughly $2.0 million charge-off of an unsecured loan and a $1.5 million qualitative reserve for COVID-19 effects.
- Other income included a $0.475 million loss on equity securities, attributed to COVID-related market-value declines. Available-for-sale securities had a $4.463 million net unrealized gain, after tax, at March 31.
Outlook, risks and contingencies
- Management said the pandemic’s economic effects, duration and impact on borrowers could not be reliably estimated. It warned that prolonged business closures or recession could impair repayment, increase credit losses and the allowance, affect securities values, and disrupt operations and financial results. No specific earnings or revenue guidance was provided.
- As of March 31, ACNB had approved 287 temporary loan modifications totaling $134.4 million, mainly three-month commercial deferrals. Commercial loans in identified potentially affected industries totaled $132.9 million, or 8.27% of the loan portfolio and 53.80% of Tier 1 capital.
- As of April 16, the company had received about 822 applications for up to $119 million of Paycheck Protection Program loans. It projected approximately $4.5 million of related fee income before costs, to be recognized in future quarters.
- Liquidity included approximately $470 million of practicable additional FHLB borrowing capacity, according to management. Unfunded commitments to extend credit were approximately $373.6 million; standby letters of credit were $12.2 million.
- Other risks include acquisition integration and realizing expected savings, commercial real estate and local economic exposure, interest-rate changes, deposit competition, and future adoption of CECL. ACNB expected to qualify for the delayed CECL effective date of January 1, 2023, but had not quantified the adoption impact. Management reported no material pending legal proceedings and no material change in market risks since year-end.
Important facts for investors to verify
- Whether the $4.0 million provision and 0.99% allowance adequately reflect pandemic-related credit risk, especially as loan deferrals expire and borrower performance becomes clearer.
- The scale and timing of further COVID-related modifications, PPP originations and the realization of the projected $4.5 million in PPP fees.
- Progress on FCBI integration, additional merger costs, and whether expected cost savings and synergies are achieved.
- Margin trends as market rates and deposit costs change, and the effect of deposit competition on funding and liquidity.
- Credit quality changes in commercial real estate and other exposed industries, including nonaccrual loans, delinquencies and charge-offs.
- Capital and liquidity levels after acquisition integration, dividend payments and any deterioration in asset quality.