ACNB Corporation — Q3 2018 Form 10-Q
Business context and reporting period
ACNB is a community banking, wealth management and insurance company serving south-central Pennsylvania and northern Maryland. Its two reporting segments are banking and Russell Insurance Group (RIG). This filing covers the quarter and nine months ended September 30, 2018; financial amounts below are in millions unless stated otherwise. The New Windsor acquisition closed July 1, 2017, so year-over-year comparisons reflect different periods of contribution from the acquired business and are affected by prior-year merger costs.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $14.413 | $13.562 | $42.066 | $32.859 |
| Provision for loan losses | $0.200 | $0 | $0.770 | $0 |
| Other income | $4.125 | $3.930 | $12.154 | $10.540 |
| Other expenses | $10.856 | $14.867 | $33.093 | $33.501 |
| Income before taxes | $7.482 | $2.625 | $20.357 | $9.898 |
| Net income | $6.039 | $1.912 | $16.459 | $7.271 |
| Basic earnings per share | $0.86 | $0.27 | $2.34 | $1.14 |
| Net interest margin | 3.78% | 3.62% | 3.78% | 3.55% |
Q3 net income rose 215.8%; nine-month net income rose 126.4%. The reported increase includes the absence of $4.305 million in Q3 2017 merger expenses and $4.675 million for the first nine months of 2017, as well as acquisition-related revenue, organic growth and a lower 2018 tax rate. Effective tax rates were 19.3% for Q3 2018 and 19.1% for the first nine months, versus 27.2% and 26.5%, respectively, in 2017.
At September 30, 2018, total assets were $1.648 billion, up from $1.608 billion a year earlier; loans, net of allowance, were $1.259 billion, versus $1.222 billion; and deposits were $1.347 billion, versus $1.312 billion. Cash and cash equivalents were $63.696 million. Stockholders’ equity was $164.512 million. Short-term and long-term borrowings totaled $123.250 million, compared with $130.656 million at September 30, 2017.
For the first nine months, operating cash flow was $21.487 million, investing cash flow was negative $28.487 million and financing cash flow was positive $36.255 million. Cash and cash equivalents increased $29.255 million from year-end 2017. The allowance for loan losses was $13.414 million, or 1.05% of loans, compared with 1.14% at September 30, 2017. Net charge-offs for the first nine months were $1.332 million.
Material changes and management commentary
- Net interest income increased 6.3% in Q3 and 28.0% year to date. Management attributed growth to higher earning-asset volumes, acquisition effects and improved yields; purchase-accounting adjustments contributed 16 basis points to Q3 margin and 19 basis points year to date.
- Interest expense rose 20.8% in Q3 and 42.5% year to date, reflecting deposit-rate increases, acquired deposits and higher-cost funding. Management expected funding-cost pressure to continue as market rates and competitors’ rates increased.
- Loan balances increased 2.3% from December 2017. Management cited intense competition, customer payoffs and slow residential lending as constraints on growth, while describing credit quality as stable, charge-offs as low and past-due loans as manageable.
- Nonaccrual loans declined to $3.962 million from $6.355 million at year-end 2017. Total loans past due over 90 days and still accruing were $2.342 million. The filing reports no defaulted troubled debt restructurings at September 30, 2018.
- Banking subsidiary capital ratios exceeded the disclosed “well-capitalized” thresholds: Tier 1 leverage 9.29%, common Tier 1 risk-based 12.75%, and total risk-based capital 13.90%. The company reported approximately $413 million of practicable additional FHLB borrowing capacity.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management’s stated direction is to grow lending and rebalance earning assets to improve asset yields, while noting that competition and local economic conditions may limit loan growth. It also warned of rising funding costs and interest-rate exposure, including potential effects on deposits, loan demand, collateral and securities values.
Available-for-sale securities had a $3.199 million after-tax net unrealized loss at September 30, 2018, compared with a $0.957 million loss at year-end 2017; management attributed the decline in fair value principally to higher market rates and stated it did not intend, or expect to be required, to sell loss-position securities before recovery. The company is evaluating the future CECL credit-loss standard, which could increase the allowance and accelerate loss recognition. It expected the new lease standard to create right-of-use assets and lease liabilities, with no material effect on operations or capital adequacy expected.
Other disclosed risks include commercial real estate and regional economic exposure, competition, cybersecurity and debit-card fraud costs, potential loss of insurance commissions or large accounts, regulatory and compliance costs, pension expense volatility, and the execution and integration of acquired businesses. Off-balance-sheet commitments included $289.190 million of unfunded credit commitments and $4.479 million of standby letters of credit. The filing reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth is sustainable organic growth versus acquisition contribution, merger-cost comparisons and tax-rate effects.
- Whether net interest margin can hold up as deposit and borrowing costs rise, and how sensitive results are to further rate changes.
- Loan growth, commercial real estate concentrations, charge-offs, delinquencies and allowance adequacy, including the eventual CECL impact.
- Whether deposit growth and available borrowing capacity remain adequate under competitive or stressed liquidity conditions.
- Whether securities valuation losses, insurance commission pressure, technology and fraud costs, and pending accounting-standard changes materially affect future results.