ACNB Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance sheet compared with December 31, 2017 and March 31, 2017. Amounts are in millions unless stated otherwise. ACNB provides community banking, wealth management and insurance services in southcentral Pennsylvania and northern Maryland. The July 2017 New Windsor acquisition materially affects year-over-year comparisons.
Financial performance and position
| Metric | Q1 2018 | Comparable period / change |
|---|---|---|
| Net interest income | $13.562 | $9.466 in Q1 2017; up 43.3% |
| Net interest margin | 3.80% | 3.37% in Q1 2017 |
| Net interest spread | 3.68% | 3.28% in Q1 2017 |
| Provision for loan losses | $0.250 | None in Q1 2017 |
| Other income | $3.712 | $3.082 in Q1 2017; up 20.4% |
| Other expenses | $10.986 | $9.000 in Q1 2017; up 22.1% |
| Income before taxes | $6.038 | $3.548 in Q1 2017 |
| Net income / basic EPS | $4.913 / $0.70 | $2.637 / $0.43 in Q1 2017 |
| Effective tax rate | 18.6% | 25.7% in Q1 2017 |
| Cash dividends declared per share | $0.20 | $0.20 in Q1 2017 |
- Balance sheet: Total assets were $1,611.0 at March 31, up 1.0% from year-end and 29.7% from March 2017. Loans were $1,237.8, down 0.5% from year-end and up 30.0% year over year. Deposits totaled $1,313.4, up 1.1% from year-end and 32.6% year over year.
- Cash flow: Operating activities provided $7.6; investing activities provided $7.2; financing activities provided $10.9. Cash and cash equivalents increased $25.8 to $60.2.
- Credit quality: Allowance for loan losses was $13.4, or 1.08% of loans, versus 1.12% at year-end and 1.49% a year earlier. Net charge-offs were $0.809, compared with $0.049 in Q1 2017. Nonaccrual loans declined to $4.5 from $6.4 at year-end; loans over 90 days past due and still accruing were $2.0.
- Debt and liquidity: Short-term borrowings were $33.4 and long-term borrowings $95.3, totaling $128.8. ACNB reported $381 million of practicable additional FHLB borrowing capacity. Regulatory capital ratios at March 31 included a 9.09% Tier 1 leverage ratio and 13.90% total risk-based capital ratio; the bank was categorized as well capitalized.
- Equity: Stockholders’ equity was $156.6, versus $154.0 at year-end. Other comprehensive loss for the quarter was $1.189.
Material changes and management commentary
- Net income rose 86.3% year over year, reflecting New Windsor’s contribution, organic revenue growth and a lower effective tax rate following the federal corporate tax rate reduction. The acquisition also contributed to higher average earning assets and loan balances, so reported growth is not solely organic.
- Net interest margin increased partly because purchase-accounting adjustments added 23 basis points. Management said higher funding costs—including deposit rate increases and greater use of higher-cost borrowings—were expected to continue.
- Expenses increased with the larger operation, including salaries and benefits, occupancy, equipment and intangible amortization. No merger-related expense was recorded in Q1 2018, versus $0.162 in Q1 2017.
- Management characterized credit quality as stable, with low charge-offs and manageable past-due loans, while citing commercial real estate growth, limited property value appreciation and liquidity as areas to monitor. It considered the allowance adequate.
- No earnings or financial guidance is provided. Management’s longer-term strategy is to grow lending and rebalance earning assets toward higher yields. It noted intense lending competition, loan payoffs and refinancing, and deposit pricing pressure.
Outlook, risks and unusual items
- Key exposures include interest-rate changes affecting funding costs, loan demand, collateral and securities values; local economic conditions; competition; and the concentration of lending in the region, including commercial real estate. Securities unrealized losses increased during the quarter, which management attributed principally to interest-rate movements; it reported no intent or requirement to sell securities and no other-than-temporary impairment.
- Other disclosed risks include acquisition integration, cybersecurity and merchant data breaches, regulatory and compliance costs, and insurance commission pressure or loss of large commercial accounts. ACNB recorded $0.056 in debit-card fraud-related reimbursement expense in Q1 2018, versus $0.015 a year earlier.
- The company adopted revenue recognition and financial-instrument accounting updates on January 1, 2018; management reported no material effect from adoption. The expected-credit-loss standard (CECL) was still under evaluation and could increase the allowance or accelerate loss recognition.
- Unfunded commitments to extend credit were approximately $260.2; standby letters of credit were $4.6. Management stated commitments may expire undrawn. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of reported earnings, loan growth and margin improvement is sustainable after separating New Windsor contributions and purchase-accounting accretion?
- Whether deposit pricing and borrowing costs continue to rise faster than yields on loans and other earning assets.
- Whether the $0.809 in net charge-offs and higher past-due balances signal changing credit trends, particularly in commercial real estate.
- The sensitivity of securities values, net interest income and regulatory capital to further rate changes, and the impact of CECL when adopted.
- Whether acquisition integration, cost growth, and the stated risks to insurance commissions and debit-card activity affect future profitability.