ACNB Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. ACNB is a Pennsylvania-based financial holding company operating a community bank and Russell Insurance Group, serving southcentral Pennsylvania and northern Maryland.
Financial results and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $64.5 million | $51.8 million |
| Net interest income | $57.1 million | $46.4 million |
| Net interest margin | 3.81% | 3.51% |
| Other income | $15.9 million | $14.1 million |
| Provision for loan losses | $1.6 million | None |
| Other expenses | $44.7 million | $44.1 million |
| Net income | $21.7 million | $9.8 million |
| Basic earnings per share | $3.09 | $1.50 |
| Cash dividends declared per share | $0.89 | $0.80 |
- Combined interest income and other income were $80.4 million, up from $65.9 million. Return on average assets was 1.34% versus 0.69%; return on average equity was 13.62% versus 7.12%.
- Year-end assets were $1.648 billion; net loans were $1.289 billion; deposits were $1.348 billion; and stockholders’ equity was $168.1 million.
- Cash and cash equivalents were $40.9 million, up $6.5 million. Operating cash flow was $29.5 million; investing cash outflow was $53.6 million; and financing cash inflow was $30.5 million.
- Short- and long-term borrowings totaled $118.2 million, down from $131.5 million. The bank reported a 9.44% Tier 1 leverage ratio and a 14.07% total risk-based capital ratio and was categorized as well capitalized.
- Asset quality improved on several measures: nonperforming loans were 0.52% of total loans versus 0.63%; nonperforming assets were 0.42% of assets versus 0.52%. Net charge-offs rose to $1.6 million from $0.2 million. The allowance was $14.0 million, or 1.07% of loans.
Changes versus the prior comparable period
- Net income increased 122%, but the comparison is affected by the July 2017 New Windsor acquisition, so 2017 included only six months of its operations while 2018 included a full year.
- 2017 also included $4.7 million of merger-related expenses and an approximately $1.7 million noncash charge from remeasuring deferred tax assets after federal tax reform. Excluding these items, ACNB reported 2017 non-GAAP net income of $14.5 million and basic EPS of $2.22, compared with 2018 GAAP net income of $21.7 million and EPS of $3.09.
- Net interest margin expanded 30 basis points, reflecting higher loan yields and purchase-accounting accretion; management said purchase-accounting adjustments contributed about 20 basis points. Deposit and borrowing costs also rose.
- Other income growth included higher insurance commissions, deposit service charges, ATM/debit-card revenue, and wealth-management fees. Salaries and benefits rose 8.4%, while merger-related expenses fell to zero.
Outlook, risks, and unusual items
- Management emphasized local loan growth and maintaining a stable funding base. It cautioned that preserving margins may be difficult as deposit rates rise faster than some loan rates, with competition constraining loan pricing. No specific earnings or revenue guidance was provided.
- Key exposures include interest-rate changes, competition for deposits and loans, and credit concentration: commercial and industrial, construction, and commercial real estate loans comprised about 57% of the portfolio. Management described credit quality as stable, but reported higher 2018 net charge-offs.
- ACNB reported approximately $1.7 million of unrealized after-tax losses on available-for-sale securities and a $2.1 million deterioration in other comprehensive income, mainly reflecting securities values and pension-related changes.
- The company identified CECL, effective January 1, 2020, as a potentially material accounting change that could increase the loan-loss allowance; it had not determined the impact. It estimated adoption of the leases standard would add approximately $4 million of right-of-use assets and lease liabilities, with no material effect expected on operations or capital.
- Liquidity sources include deposits, loan and securities cash flows, and FHLB borrowing capacity. ACNB estimated $417 million of practicable additional FHLB capacity. Off-balance-sheet commitments included $279.7 million of lending commitments and $3.9 million of standby letters of credit.
- No material pending legal proceedings were reported. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Normalize earnings comparisons for New Windsor’s partial-year contribution in 2017 and the 2017 merger and tax-reform charges.
- Track deposit pricing, funding costs, and net interest margin as rates and competition change.
- Review commercial real estate exposure, nonperforming and past-due loans, charge-offs, and allowance adequacy.
- Assess the eventual CECL transition adjustment and the related effect on earnings and regulatory capital.
- Confirm that available liquidity, capital ratios, and subsidiary dividend capacity remain adequate; parent-company dividends depend substantially on regulated bank distributions.