Should You Be Concerned About ACNB Corporation’s (NASDAQ:ACNB) Risks?

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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$279m, ACNB Corporation’s (NASDAQ:ACNB) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting ACNB’s bottom line. Today we will analyse ACNB’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

Check out our latest analysis for ACNB

NasdaqCM:ACNB Historical Debt, February 21st 2019
NasdaqCM:ACNB Historical Debt, February 21st 2019

How Good Is ACNB At Forecasting Its Risks?

ACNB’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. We generally prefer to see that a provisions covers close to 100% of what it actually writes off, as this could imply a sensible and conservative approach towards bad loans. With a non-performing loan allowance to non-performing loan ratio of 212.79%, the bank has extremely over-provisioned by 112.79% compared to the industry-average. We wonder if this might indicate the bank is expecting to incur further non-performing loans in the near future.

What Is An Appropriate Level Of Risk?

ACNB’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes out directly from ACNB’s profit. Since bad loans only make up an insignificant 0.50% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.

How Big Is ACNB’s Safety Net?

Handing Money Transparent ACNB operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. The general rule is the higher level of deposits a bank holds, the less risky it is considered to be. Since ACNB’s total deposit to total liabilities is very high at 91% which is well-above the prudent level of 50% for banks, ACNB may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will ACNB’s recent acquisition impact the business going forward? Should you be concerned about the future of ACNB and the sustainability of its financial health? The list below is my go-to checks for ACNB. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.

  1. Future Outlook: What are well-informed industry analysts predicting for ACNB’s future growth? Take a look at our free research report of analyst consensus for ACNB’s outlook.
  2. Valuation: What is ACNB worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether ACNB is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.