ACNB Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. ACNB is a Pennsylvania-based financial holding company providing banking, insurance, and financial services in southcentral Pennsylvania and northern Maryland. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
- Q2 net income: $9.524 million, up 10.4% from $8.630 million; diluted EPS was $1.12 versus $0.99.
- First-half net income: $18.547 million, up 21.8% from $15.229 million; diluted EPS was $2.17 versus $1.75.
- Net interest income: Q2 was $21.990 million, up 11.0%; first half was $45.082 million, up 22.3%. Fully taxable equivalent net interest margin increased to 4.11% in Q2 from 3.15%, and to 4.16% for the first half from 2.92%. Management attributed improvement to higher rates and a shift toward higher-yielding assets.
- Credit costs: Q2 included a $273,000 reversal of credit-loss provision and $121,000 provision for unfunded commitments. First-half figures were a $176,000 credit-loss provision reversal and $397,000 provision for unfunded commitments. The reported loan allowance was $19.148 million, or 1.22% of loans, at June 30.
- Other income and expenses: Q2 other income rose 1.9% to $6.194 million; other expenses rose 8.5% to $16.281 million. First-half other income rose 6.1% to $11.178 million, while expenses rose 15.1% to $32.563 million.
- Cash flow, first half: Operating activities provided $24.473 million; investing activities provided $61.310 million; financing activities used $169.901 million. Cash and cash equivalents fell $84.118 million to $84.043 million.
Financial condition, funding, and capital
- Assets and loans: Total assets were $2.378 billion, down from $2.526 billion at year-end 2022. Total loans were $1.574 billion, up 2.3% from year-end; commercial real estate loans were $873.8 million.
- Deposits and borrowings: Deposits declined 10.7% from year-end to $1.964 billion. Total borrowings increased 110.8% to $132.7 million, including $60 million in new long-term FHLB advances and a $25 million short-term FHLB advance. Management cited deposit outflows and loan growth as funding drivers.
- Liquidity: The loan-to-deposit ratio was 80.14%. ACNB reported $728.7 million of available FHLB capacity, $222 million available through the Bank Term Funding Program, $75 million available on correspondent Fed Funds lines, and $3.7 million available at the Federal Reserve Discount Window.
- Capital: ACNB Bank was categorized as well capitalized. At June 30, its reported Tier 1 leverage, common Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 10.93%, 14.99%, 14.99%, and 16.07%, respectively. June ratios were identified as estimated for the Corporation.
- Shareholder returns: First-half dividends paid were $4.773 million; the payout ratio was 25.7%. The company repurchased 850 shares under its current authorization through June 30.
Material changes and notable items
- Deposits fell $235.2 million from year-end as customers sought higher-yielding alternatives; cash and securities balances also declined. Loans grew $35.2 million over the same period.
- Available-for-sale securities had a $52.9 million net-of-tax unrealized loss at June 30. Held-to-maturity securities had amortized cost of $64.9 million and fair value of $58.1 million. Management attributed securities valuation declines principally to higher market interest rates and said portfolio credit quality remained strong.
- ACNB sold three previously closed banking offices, recognizing a $323,000 gain. It also recorded $739,000 of net securities sale losses in the first half, a $142,000 write-off of a title-agency investment, and an $83,000 SBIC fund mark-to-market loss.
- ACNB adopted CECL on January 1, 2023, recording a $2.4 million after-tax reduction to retained earnings. Management’s allowance estimates rely on forecasts and significant judgment; actual losses may differ.
- Nonaccrual loans were $2.890 million, compared with $2.654 million at year-end; loans over 90 days past due and still accruing were $769,000. There were no modified loans disclosed as of June 30.
Outlook, risks, and contingencies
The filing provides no quantified earnings or operating guidance. Management said results for the six months are not necessarily indicative of full-year results. It highlighted banking-sector instability, potential deposit volatility and liquidity demands, interest-rate changes, inflation, economic conditions, credit quality, and possible higher FDIC premiums or special assessments as risks. The company reported $435.5 million of unfunded credit commitments and $18.0 million of standby letters of credit; it said letters of credit are generally collateralized or supported by guarantees. No material pending legal proceedings were reported. Management stated disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether deposit outflows continue, and the associated effects on funding costs, liquidity, and net interest margin.
- The composition and stability of deposits, including the reported 18.1% ratio of uninsured and non-collateralized deposits to total deposits.
- Interest-rate sensitivity and potential consequences of realizing securities losses; review available-for-sale and held-to-maturity portfolio values and pledges.
- Commercial real estate exposure, including $463.9 million in loans to lessors of non-residential properties, and future trends in nonperforming and past-due loans.
- The assumptions and future effects of CECL reserves, including the $2.1 million allowance for unfunded commitments.
- Borrowing costs, maturities, collateral requirements, and remaining contingent liquidity capacity.