ACNB Corporation — Q3 2019 Form 10-Q
Business context and reporting period. ACNB is a Pennsylvania-based financial holding company operating a community bank and an insurance agency, serving south-central Pennsylvania and northern Maryland. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018 and September 30, 2018. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Year-to-date 2019 | Year-to-date 2018 |
|---|---|---|---|---|
| Net interest income | $15.0 | $14.4 | $44.7 | $42.1 |
| Other income | $4.9 | $4.1 | $13.7 | $12.2 |
| Provision for loan losses | $0.2 | $0.2 | $0.4 | $0.8 |
| Other expenses | $12.0 | $10.9 | $34.9 | $33.1 |
| Net income | $6.3 | $6.0 | $18.6 | $16.5 |
| Basic earnings per share | $0.89 | $0.86 | $2.64 | $2.34 |
| Net interest margin | 3.80% | 3.78% | 3.87% | 3.78% |
- Q3 net income rose 4.5%; nine-month net income increased 13.3%. Management attributed improvement primarily to higher net interest income from growth and yields on earning assets, plus increased fee and insurance income.
- Q3 net interest spread was 3.58%, down from 3.64% a year earlier. For the first nine months, spread was 3.66% versus 3.64%. Interest expense grew faster than interest income in percentage terms, reflecting higher deposit rates and deposit growth.
- At September 30, total assets were $1,735.8, loans net of allowance were $1,274.4, deposits were $1,417.6, and stockholders’ equity was $186.1. Total assets increased $88.1 from year-end 2018; deposits rose $69.5.
- Cash and cash equivalents were $117.7, up from $40.9 at year-end 2018. For the first nine months, operating cash flow was $19.7 versus $21.5 in 2018; investing cash used was $3.4 versus $28.5; financing cash provided was $60.5 versus $36.3.
- Short-term borrowings were $41.5 and long-term borrowings were $72.1. The allowance for loan losses was $13.9, or 1.08% of loans, compared with $14.0, or 1.07%, at year-end 2018. Nine-month net charge-offs were $0.5, down from $1.3.
- Bank subsidiary regulatory capital ratios at September 30 included a 9.97% Tier 1 leverage ratio and a 14.87% total risk-based capital ratio. Management reported the bank remained “well capitalized.”
Material changes versus comparable periods
- Q3 net interest income increased 4.4% year over year, while nine-month net interest income increased 6.2%. Nine-month total interest income rose 9.8%, partly offset by a 37.9% increase in interest expense.
- Other income increased 19.8% in Q3 and 12.7% year to date. Drivers included deposit fees linked to a retail rewards program and higher insurance agency revenue. Nine-month insurance commissions were affected by lower contingent commissions.
- Other expenses rose 10.3% in Q3 and 5.5% year to date. Salaries and benefits were higher, and Q3 and year-to-date expenses included $0.5 million of costs related to the proposed Frederick County Bancorp acquisition.
- Loans were down 1.1% from year-end 2018, but up 1.2% year over year. Management cited residential mortgage sales and early payoffs for the year-to-date decline; commercial-purpose lending increased from year-end.
- Available-for-sale securities were $184.7 at September 30, versus $161.7 at year-end. Their net unrealized position improved to a $1.3 gain, net of tax, from a $1.7 loss.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described continued competition for loans and deposits and noted that the inverted yield curve and changing interest rates could affect loan yields, funding costs and net interest income.
- ACNB’s proposed acquisition of Frederick County Bancorp was expected to close in Q1 2020, subject to shareholder, regulatory and other approvals. Approximately 1.6 million ACNB shares were expected to be issued. The filing highlights execution, integration, expense, customer-retention and approval risks; pro forma figures based on March 31, 2019 results were $2.2 billion in assets, $1.8 billion in deposits and $1.7 billion in loans.
- Management said credit quality was stable, charge-offs were low and past-due loans manageable. However, commercial real estate concentration, collateral values and local economic conditions remain credit risks. Loans past due over 90 days and still accruing were $1.7; nonaccrual loans were $3.1.
- The expected-credit-loss (CECL) standard could increase the allowance and add earnings volatility. Following the announced deferral for qualifying smaller reporting companies, ACNB expected to defer adoption to January 1, 2023; the eventual financial effect was not yet determinable.
- Liquidity sources included $460 million of practicable additional FHLB borrowing capacity. Off-balance-sheet commitments included $311.8 million of unfunded lending commitments and $6.9 million of standby letters of credit; management said many commitments may expire unused.
- Other noted risks include deposit-rate competition, insurance-carrier pressure on commissions, pension-cost volatility, debit-card fraud and cybersecurity, and regulatory or litigation exposure. The company reported no material pending legal proceedings.
Important facts for investors to verify
- Whether the Frederick County Bancorp acquisition received required approvals, closed on schedule and achieved expected integration benefits without materially higher costs.
- Whether deposit pricing and funding costs continue to outpace asset-yield growth, and how the yield curve affects net interest margin.
- Trends in loan balances, commercial real estate exposure, past-due and nonaccrual loans, charge-offs, and the adequacy of the allowance.
- The actual impact and timing of CECL adoption, including any opening allowance adjustment.
- Whether fee and insurance revenue growth persists despite contingent-commission pressure, competition and fraud-related costs.
- Liquidity and capital levels as the company funds lending, dividends and the proposed acquisition.