ACNB Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. ACNB is a Pennsylvania-based financial holding company operating a community bank and an insurance agency, primarily serving southcentral Pennsylvania and northern Maryland. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net interest income | $14.665 | $13.562 |
| Other income | $3.940 | $3.712 |
| Provision for loan losses | $0.150 | $0.250 |
| Other expenses | $11.261 | $10.986 |
| Income before taxes | $7.194 | $6.038 |
| Net income | $5.864 | $4.913 |
| Basic earnings per share | $0.83 | $0.70 |
| Cash dividends declared per share | $0.23 | $0.20 |
| Net cash from operating activities | $6.822 | $7.621 |
Net income rose 19.4% year over year. Management attributed the improvement primarily to higher interest income from growth and yields on earning assets; net interest income increased 8.1%. Net interest margin was 3.93%, versus 3.77%, and net interest spread was 3.74%, versus 3.64%. Interest expense increased 31.1%, reflecting higher deposit rates and higher-cost funding. The effective tax rate was 18.5%, compared with 18.6%.
Financial position, credit, and liquidity
- Assets and loans: Total assets were $1.671 billion at March 31, up from $1.648 billion at year-end 2018 and $1.611 billion a year earlier. Loans outstanding were $1.301 billion, up 5.1% year over year but down 0.1% from year-end.
- Deposits and cash: Deposits totaled $1.367 billion, up 4.1% year over year and 1.4% from year-end. Cash and cash equivalents were $61.353 million, compared with $40.905 million at December 31, 2018.
- Credit quality: The allowance for loan losses was $14.020 million, or 1.08% of loans, versus 1.07% at year-end. Net charge-offs were $94,000, compared with $559,000 in Q1 2018. Nonaccrual loans were $3.333 million; loans over 90 days past due and still accruing were $2.871 million. Management characterized credit quality as stable, charge-offs as low, and past-due loans as manageable.
- Debt: Short-term borrowings were $29.759 million and long-term borrowings were $82.407 million at March 31. The company also recorded a $3.804 million lease liability following adoption of the new lease standard.
- Capital: Stockholders’ equity was $173.793 million, up from $168.137 million at year-end. The banking subsidiary was reported as well capitalized: Tier 1 leverage ratio 9.77%, common Tier 1 and Tier 1 risk-based ratios 13.24%, and total risk-based capital ratio 14.42%.
- Liquidity: Management reported $600.103 million of available FHLB borrowing capacity, with $450 million considered practicably available for additional borrowing. Q1 cash flow from operating, investing, and financing activities was $6.822 million, $2.266 million, and $11.360 million, respectively.
Material changes and notable items
- Compared with Q1 2018, net interest income increased $1.103 million, other income increased $228,000, and other expenses increased $275,000. Higher deposit service charges and insurance revenue contributed to other-income growth; salaries and benefits were the largest cited expense increase.
- Average earning assets increased $55 million year over year. Average interest-bearing liabilities increased $18 million, and average non-interest-bearing deposits increased about $22 million.
- Available-for-sale securities had a $541,000 net unrealized loss, after tax, at March 31, improved from $1.651 million at year-end. Management attributed the changes primarily to interest-rate movements and said it did not intend, nor expect to be required, to sell securities with unrealized losses.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of approximately $4 million of right-of-use assets and lease liabilities; management said the effect on operations and capital adequacy was not material.
- The 2009 restricted-stock plan expired in February 2019; remaining authorized but unissued shares were transferred to the 2018 Omnibus Stock Incentive Plan.
Outlook, risks, and contingencies
The filing gives no quantified earnings or revenue guidance. Management said competition could constrain loan growth and lead to customer refinancing or payoffs; deposit pricing pressure and rising funding costs were expected to continue. Insurance commissions face pressure, and contingent commissions in 2019 were expected to be lower than in 2018. Other identified risks include local economic conditions and borrower repayment, interest-rate changes, commercial real estate collateral values, regulation, cybersecurity and fraud, and acquisition integration. The company is evaluating the expected-credit-loss standard (CECL), which could increase its allowance and accelerate loss recognition. Its 2019 pension contribution had not yet been determined.
Unfunded commitments to extend credit were approximately $282.896 million and standby letters of credit were $3.757 million; management said commitments may expire undrawn and the recorded liability for standby letters was not material. No material pending legal proceedings were reported. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan and deposit growth can be sustained amid competitive pressure, and whether deposit-rate increases continue to outpace asset-yield gains.
- Trends in delinquencies, nonaccruals, classified loans, charge-offs, and the adequacy of the allowance—particularly given commercial real estate exposure.
- Actual implementation impact of CECL on reserves, earnings, and capital.
- Insurance agency renewal and commission trends, including the expected reduction in contingent commissions.
- Future pension contributions and expense, and the availability of reported borrowing capacity under stressed conditions.