ACNB Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited. ACNB provides banking, trust and insurance services in southcentral Pennsylvania and northern Maryland.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $9.831m | $9.030m | $19.297m | $18.037m |
| Net income | $2.722m | $2.982m | $5.359m | $5.529m |
| Basic earnings per share | $0.45 | $0.49 | $0.88 | $0.91 |
| Cash dividends declared per share | $0.20 | $0.20 | $0.40 | $0.40 |
| Net interest margin | 3.39% | 3.37% | 3.38% | 3.40% |
Q2 pretax income was $3.725m versus $4.029m; other income declined 7.4% to $3.528m, while other expenses rose 9.3% to $9.634m. For the first half, pretax income was $7.273m versus $7.399m; other income decreased 1.1% to $6.610m and expenses increased 7.6% to $18.634m. No loan-loss provision was recorded in either comparison period.
At June 30, assets were $1.262bn, loans before allowance were $969.675m, deposits were $1.000bn, and stockholders’ equity was $123.844m. Versus June 30, 2016, assets grew 7.9%, loans 11.9%, and deposits 8.4%. The allowance for loan losses was $14.148m, or 1.46% of loans, compared with 1.69% a year earlier. Cash and cash equivalents were $26.280m.
First-half cash flows: operating activities provided $7.196m; investing activities used $48.059m, primarily reflecting a $61.811m net increase in loans; financing activities provided $48.212m. Long-term borrowings were $95.850m and short-term borrowings $30.837m. The bank subsidiary reported capital ratios of 8.80% Tier 1 leverage, 12.66% common Tier 1 and Tier 1 risk-based, and 13.91% total risk-based; management said it remained well capitalized. It reported $421m of available FHLB borrowing capacity, of which $289m was considered practicably available for additional borrowing.
Changes, outlook and material items
- Net income declined 8.7% in Q2 and 3.1% in the first half, despite higher net interest income. Management attributed the net interest income increase mainly to loan growth; deposit-rate increases and greater use of higher-cost borrowing raised interest expense.
- Q2 other income comparison included a $449,000 premises-sale gain in 2016 that did not recur. Insurance commissions rose, while mortgage-related income fell. Higher salaries, professional and equipment costs, and merger-related costs contributed to increased expenses.
- ACNB completed its acquisition of New Windsor Bancorp on July 1, 2017, after quarter-end. Consideration included approximately 950,000 ACNB shares and $4.520m cash. Management estimated the combined company would have approximately $1.6bn in assets, $1.3bn in deposits and $1.2bn in loans. Acquisition fair values remained preliminary; the filing reports $370,000 of direct merger expenses for the first half, plus other merger-related expenses.
- Management described credit quality as stable, charge-offs as low and past-due loans as manageable, and considered the allowance adequate. However, nonaccrual loans rose 65.8% from year-end to $7.465m, including two commercial real estate troubled debt restructurings moved to nonaccrual after borrowers indicated further payments were unlikely. Total past-due loans were $9.545m; $1.636m were over 90 days past due and still accruing.
- Management’s longer-term strategy is to increase asset yield and interest income through loan growth and a changed earning-asset mix. It noted that competition and local economic conditions could limit lending, and anticipated continued pressure on funding costs. No specific earnings or financial guidance was provided.
Risks, contingencies and other considerations
- Interest-rate changes may affect loan yields, securities values, deposit pricing and funding costs. Management reported no material change in market risks since year-end 2016.
- The loan book is concentrated in the regional market and includes substantial commercial real estate exposure. Management cited local economic conditions, collateral values, refinancing competition and potential property-market weakness as credit risks.
- Other risks include acquisition integration, deposit competition, insurance-account nonrenewals and carrier commission reductions, regulatory costs, and cybersecurity or merchant data breaches that can cause debit-card reimbursements and processing costs.
- Unfunded commitments to extend credit were approximately $236.211m and standby letters of credit $5.437m. Management said the standby-letter liability was not material and collateral or guarantees generally support the commitments.
- Management was evaluating the potential impact of the new revenue-recognition, lease and expected-credit-loss standards; it noted CECL adoption could increase the allowance and accelerate recognition of credit losses. The 2017 pension contribution had not yet been determined.
- The filing reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Key facts for investors to verify
- Whether post-quarter New Windsor acquisition accounting, integration costs and realized synergies materially change earnings, assets, deposits, loans or capital.
- Whether nonaccrual loans, troubled debt restructurings, past-due loans and collateral valuations stabilize, and whether the allowance remains adequate as loan balances grow.
- Whether loan growth can sustain net interest income as deposit and borrowing costs rise, and how net interest margin and deposit mix develop.
- Whether insurance commissions, debit-card fraud costs and other expense growth affect recurring noninterest income and profitability.
- How CECL adoption and the unresolved pension contribution affect future reserves, earnings and capital.