ACNB Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context
ACNB is a Pennsylvania-based financial holding company operating a community bank and Russell Insurance Group. On July 1, 2017, it completed its acquisition of New Windsor Bancorp, adding seven Maryland branches. The $33.3 million transaction included 938,360 ACNB shares and approximately $4.5 million cash; acquired assets were $319.8 million, including $263.5 million in loans, and assumed deposits were $293.3 million. Results include the acquired business from the closing date.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $13.562m | $9.185m | $32.859m | $27.222m |
| Other income | $3.930m | $3.301m | $10.540m | $9.984m |
| Merger-related expense | $4.305m | — | $4.675m | — |
| Income before taxes | $2.625m | $3.706m | $9.898m | $11.105m |
| Net income | $1.912m | $2.768m | $7.271m | $8.297m |
| Basic EPS | $0.27 | $0.46 | $1.14 | $1.37 |
Net interest margin was 3.66% in Q3, versus 3.30% a year earlier, and 3.48% year to date, versus 3.36%. Management attributed the improvement primarily to the acquisition, loan growth, and purchase-accounting adjustments. No loan-loss provision was recorded in either 2017 comparison period. Cash dividends declared were $0.20 per share for Q3 and $0.60 year to date, unchanged from 2016.
At September 30, 2017, total assets were $1.608 billion, up from $1.206 billion at December 31, 2016; loans, net of allowance, were $1.222 billion and deposits were $1.312 billion. The allowance for loan losses was $14.105 million, or 1.14% of loans, compared with 1.56% at year-end 2016. Nonaccrual loans were $6.695 million, up from $4.502 million at year-end; loans past due 90 days and still accruing were $1.626 million.
Cash and cash equivalents were $49.491 million at quarter-end. For the nine months, operating cash flow was $9.955 million, investing cash flow was negative $43.691 million, and financing cash flow was positive $64.296 million. Total liabilities included $33.806 million in short-term borrowings and $96.850 million in long-term borrowings. Stockholders’ equity was $153.256 million, including equity issued in the acquisition. The bank’s regulatory capital ratios were 8.77% Tier 1 leverage, 12.28% common Tier 1 and Tier 1 risk-based, and 13.53% total risk-based; management reported the bank was well-capitalized.
Changes, outlook, and risks
- Quarterly net income fell 30.9% and nine-month net income fell 12.4%, principally because of acquisition and integration costs. Excluding these costs, other expenses still rose, reflecting staffing, branch, technology, and operating costs associated with the expanded business.
- Interest income and net interest income increased with higher earning-asset volume, including acquired assets. Deposit rate increases and greater use of higher-cost borrowings also raised interest expense. Management expected funding-cost pressures to continue and described loan growth and rebalancing earning assets toward higher yields as ongoing strategic priorities; no quantified earnings or financial guidance was provided.
- Management said credit quality was generally stable, charge-offs were low, and past-due loans were manageable, supporting no provision. However, nonaccrual loans and substandard balances increased from year-end, including two restructured commercial real estate loans moved to nonaccrual.
- Liquidity sources include deposits, liquid assets, loan and securities cash flows, and FHLB borrowing. The bank reported approximately $439 million of FHLB capacity available, of which it considered $303 million practicably available. Unfunded commitments to lend were approximately $268.9 million; standby letters of credit were $7.0 million.
- Key disclosed risks include local economic and real-estate conditions, commercial real estate concentration, competition and interest-rate changes, deposit pricing and retention, acquisition integration, regulatory costs, cybersecurity and debit-card fraud, and pressure on insurance commissions. ACNB reported no material change in market risks since year-end, no material pending legal proceedings, and no material change in previously disclosed risk factors.
Most important facts for investors to verify
- How much of the acquisition-related expense is nonrecurring, and whether integration produces the cost savings and synergies management anticipates.
- Post-acquisition loan performance, especially nonaccrual and substandard commercial real estate exposures, acquired-loan fair-value assumptions, and allowance adequacy.
- Whether deposit costs rise faster than asset yields and how that affects net interest margin and earnings.
- Actual usable liquidity and funding costs relative to stated FHLB capacity, alongside growth in deposits, loans, and borrowings.
- Acquisition accounting remains preliminary and subject to refinement for up to one year; verify final fair values, goodwill, and core-deposit intangible amounts.