ACNB Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. ACNB is a Pennsylvania-based community banking, wealth management and insurance holding company. Financial statement amounts below are in U.S. dollars; amounts are shown in millions unless otherwise noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $14.970 | $14.091 | $29.635 | $27.653 |
| Provision for loan losses | $0.125 | $0.320 | $0.275 | $0.570 |
| Other income | $4.820 | $4.317 | $8.760 | $8.029 |
| Other expenses | $11.685 | $11.251 | $22.946 | $22.237 |
| Net income | $6.466 | $5.507 | $12.330 | $10.420 |
| Basic earnings per share | $0.92 | $0.78 | $1.75 | $1.48 |
- Q2 net income rose 17.4%; first-half net income rose 18.3%. Management attributed the gains primarily to higher net interest income from growth and improved yields on earning assets.
- Q2 net interest margin was 3.89%, up from 3.79%; first-half margin was 3.91%, up from 3.78%. Q2 net interest spread was 3.67% versus 3.64%.
- Interest expense increased 40.2% in Q2 and 35.7% for the first half, reflecting higher deposit rates, deposit growth and higher-cost funding. Management noted continued deposit-pricing competition and an inverted yield curve as concerns.
- Other income grew 11.7% in Q2 and 9.1% for the first half. Growth included deposit fees and insurance agency revenue; Q2 also included a $0.129 million gain on equity securities. Insurance contingent commissions were $0.110 million lower year over year in the first half.
- Other expenses rose 3.9% in Q2 and 3.2% for the first half, chiefly due to salary and benefits costs, including higher pension expense, and the deposit rewards program. The effective tax rate was 19.0% in Q2 and 18.7% for the first half, below the 21% federal statutory rate, partly due to tax-exempt income and tax credits.
Financial position, cash flow and capital
- At June 30, 2019, total assets were $1.679 billion, up 3.4% year over year and 1.9% from December 31, 2018. Total deposits were $1.377 billion, up 3.2% year over year and 2.2% year to date.
- Gross loans were $1.279 billion, up 2.6% year over year but down 1.8% from year-end. Management cited residential mortgage sales and early payoffs for the year-to-date decline. The allowance for loan losses was $14.057 million, or 1.10% of loans, versus 1.05% a year earlier and 1.07% at year-end.
- Cash and cash equivalents were $76.606 million, compared with $40.905 million at year-end. For the first half, operating cash flow was $12.864 million, investing cash flow was positive $12.221 million, financing cash flow was positive $10.616 million, and cash increased $35.701 million.
- Short-term borrowings were $24.137 million and long-term borrowings were $78.288 million at quarter-end. Total stockholders’ equity was $180.884 million, versus $160.307 million a year earlier. The banking subsidiary was reported as well-capitalized: Tier 1 leverage 9.85%, common Tier 1 risk-based 13.80%, Tier 1 risk-based 13.80%, and total risk-based capital 15.00%.
- Management reported approximately $700.262 million of FHLB borrowing capacity, with $603.122 million available and $450 million considered practicably available. Cash dividends declared were $0.25 per share for Q2 and $0.48 for the first half.
Credit quality, outlook and risks
- Management characterized credit quality as stable, with low charge-offs and manageable past-due loans. First-half net charge-offs were $0.182 million, down from $1.403 million in 2018. Nonaccrual loans were $2.564 million, down from $3.417 million at year-end; loans over 90 days past due and still accruing were $1.831 million. Management stated that the allowance was adequate, while noting the judgment involved in estimating losses and the commercial real estate exposure.
- Management expected higher competitive deposit rates to continue, while noting that a declining-rate environment, yield-curve inversion, intense loan competition and loan payoffs could pressure future interest income and margins. RIG faces risks from commercial account nonrenewals and insurers reducing agency commissions. Other cited risks include cybersecurity and debit-card fraud, technology investment needs, pension-cost volatility and regional economic or collateral weakness.
- On July 2 and 3, 2019, ACNB announced a definitive agreement to acquire Frederick County Bancorp, Inc. (FCBI). Based on March 31 results, the combined company would have approximately $2.2 billion of assets, $1.8 billion of deposits and $1.7 billion of loans. The transaction was expected to close in Q4 2019 or Q1 2020, subject to shareholder, regulatory and other approvals; approximately 1,600,596 ACNB shares were expected to be issued. The filing identifies integration, execution, transaction-cost and approval risks. These are forward-looking expectations, not completed results.
- ACNB adopted the new lease standard in 2019 and recorded approximately $4 million each in right-of-use assets and lease liabilities; management said the effect on operations and capital adequacy was not material. The company was evaluating the expected-credit-loss (CECL) standard, effective for it in 2020, and had not quantified its impact.
- Off-balance-sheet commitments included approximately $293.9 million of unfunded credit commitments and $3.36 million of standby letters of credit. Management stated that no material legal proceedings were pending and reported no material changes in market risk since year-end 2018.
Key facts for investors to verify
- Track the effect of deposit repricing, interest-rate changes and yield-curve conditions on net interest margin and funding costs.
- Review loan growth, payoffs, commercial real estate concentrations, delinquencies, nonaccruals, charge-offs and allowance adequacy.
- Monitor FCBI transaction approvals, expected share issuance, integration costs and realization of anticipated benefits.
- Assess RIG revenue and contingent commissions, operating-cost trends, pension assumptions and potential CECL allowance effects.
- Confirm liquidity availability against seasonal deposit movements and outstanding lending commitments.