ACNB (US:ACNB)2020-05-01 16:50PART I - FINANCIAL INFORMATION Item 1. Financial Statements The unaudited statements reflect significant balance sheet growth and a net loss due to the FCBI acquisition Consolidated Statements of Condition Total assets grew to $2.18 billion, driven by the FCBI acquisition which increased loans and deposits Key Balance Sheet Items (in thousands) | Metric | March 31, 2020 | December 31, 2019 | March 31, 2019 | | :--- | :--- | :--- | :--- | | Total Assets | $2,180,065 | $1,720,253 | $1,671,159 | | Loans, net | $1,590,187 | $1,258,766 | $1,287,315 | | Goodwill | $41,700 | $19,580 | $19,580 | | Total Deposits | $1,811,357 | $1,412,260 | $1,367,058 | | Total Liabilities | $1,933,071 | $1,530,737 | $1,497,366 | | Total Stockholders' Equity | $246,994 | $189,516 | $173,793 | Consolidated Statements of Income The company reported a net loss of $1.22 million due to merger expenses and increased loan loss provisions Income Statement Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $17,455 | $14,665 | | Provision for Loan Losses | $4,000 | $150 | | Total Other Income | $4,166 | $3,940 | | Merger related expenses | $5,965 | $0 | | Total Other Expenses | $19,457 | $11,261 | | Net (Loss) Income | $(1,223) | $5,864 | | Basic (loss) earnings per share | $(0.14) | $0.83 | Consolidated Statements of Cash Flows Net cash increased by $14.8 million, with operating and financing inflows offsetting investing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2020 | | :--- | :--- | | Net Cash Provided by Operating Activities | $8,416 | | Net Cash (Used in) Investing Activities | $(5,120) | | Net Cash Provided by Financing Activities | $11,518 | | Net Increase in Cash and Cash Equivalents | $14,814 | - The acquisition of FCBI provided a net cash inflow of $35.3 million, which was a major component of investing activities for the quarter8 Notes to Consolidated Financial Statements Notes detail the FCBI acquisition, loan portfolio composition, credit quality, and COVID-19 pandemic impacts - On January 11, 2020, ACNB completed its acquisition of Frederick County Bancorp, Inc (FCBI), acquiring total assets of $444.4 million, including $329.9 million in loans and $374.1 million in deposits23 - The FCBI acquisition resulted in the recording of $22.1 million in goodwill and the issuance of 1,590,547 shares of its common stock as part of the transaction24 - The company has deferred the implementation of the new CECL accounting standard (ASU 2016-13) to fiscal years beginning after December 31, 202222190 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The Q1 2020 net loss was driven by merger expenses and a higher provision for loan losses due to a specific charge-off and COVID-19 Results of Operations A $1.22 million net loss resulted from merger expenses and a higher loan loss provision, despite growth in net interest income - The net loss for Q1 2020 was primarily a result of $5,965,000 in merger/system conversion related expenses for the acquisition of FCBI201208 - The provision for loan losses increased to $4,000,000 in Q1 2020 from $150,000 in Q1 2019, driven by a $2.0 million charge-off and a $1.5 million COVID-19 adjustment206 - Net interest margin decreased to 3.67% for Q1 2020 from 3.93% in Q1 2019, impacted by a lower-yielding asset mix204 Financial Condition The FCBI acquisition drove a 26.7% increase in total assets to $2.18 billion, with strong regulatory capital ratios maintained - Loans outstanding increased by 26.2% from December 31, 2019, to March 31, 2020, primarily attributable to the FCBI acquisition224 - Total deposits increased by 28.3% from December 31, 2019, to March 31, 2020, with deposits acquired from FCBI totaling approximately $330 million254 - The banking subsidiary's capital ratios remain strong, with a Tier 1 leverage ratio of 10.21% and a Total risk-based capital ratio of 14.86%, both well above "well capitalized" requirements274 Loan Portfolio and COVID-19 Response The company responded to COVID-19 by modifying $134.4 million in loans and actively participating in the Paycheck Protection Program Loan Modifications as of March 31, 2020 | Type of Loans | Number of Loans | Deferral Period | Balance | Percentage of Tier 1 Capital | | :--- | :--- | :--- | :--- | :--- | | Commercial Purpose | 216 | 3 months | $132,898,838 | 53.80% | | Consumer Purpose | 71 | 1-3 months | $1,498,218 | 0.61% | | Total | 287 | | $134,397,056 | | - As of April 16, 2020, the Corporation had received approximately 822 applications for up to $119 million of loans under the Paycheck Protection Program (PPP)143225 Commercial Loan Exposure to Industries Impacted by COVID-19 (as of March 31, 2020) | Type of Loans | Balance | Percentage of Total Loan Portfolio | | :--- | :--- | :--- | | Lessors of Commercial Real Estate | $26,538,223 | 1.65% | | Hospitality Industry (Hotels/B&B) | $35,882,974 | 2.23% | | Food Services Industry | $15,517,902 | 0.97% | | Other | $54,959,739 | 3.42% | | Total | $132,898,838 | 8.27% | Item 3. Quantitative and Qualitative Disclosures About Market Risk The Corporation's primary market risk exposure, mainly interest rate risk, has not materially changed since year-end 2019 - The Corporation's primary market risk is interest rate risk, stemming from its core business of taking deposits and making loans and investments282 Item 4. Controls and Procedures Executive management concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report306 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Corporation was not party to any material pending legal proceedings outside the ordinary course of business - There were no material pending legal proceedings against the Corporation or its subsidiaries as of March 31, 2020308 Item 1A. Risk Factors Key risks include the uncertain impact of the COVID-19 pandemic, the future adoption of the CECL standard, and merger integration challenges - The COVID-19 pandemic is identified as a major risk factor, with potential negative impacts on loan demand, credit losses, and securities valuations309310 - The future adoption of the CECL accounting standard is expected to materially affect how the allowance for loan losses is determined and could require a significant increase313314 - Risks related to the FCBI merger include incurring significant transaction costs, potential management distraction, and difficulties in post-merger integration318319320322