UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark
One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended
September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ___________________________ to ___________________________
ENB
Financial Corp
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
|
000-53297
|
|
51-0661129
|
(State or Other Jurisdiction of Incorporation)
|
|
(Commission File Number)
|
|
(IRS Employer Identification No)
|
|
|
|
|
|
|
|
|
|
|
31 E. Main St., Ephrata, PA
|
|
17522-0457
|
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
|
|
Registrant’s
telephone number, including area code
(717) 733-4181
Former
name, former address, and former fiscal year, if changed since last report
Not Applicable
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
ý
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes
ý
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
£
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of
November 2, 2012,
the registrant had
2,855,235
shares of $0.20 (par) Common Stock outstanding.
ENB
FINANCIAL CORP
INDEX
TO FORM 10-Q
September
30, 2012
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENB Financial Corp
Consolidated Balance Sheets (Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
10,198
|
|
|
|
12,511
|
|
|
|
10,541
|
|
Interest-bearing deposits in other banks
|
|
|
24,754
|
|
|
|
19,375
|
|
|
|
24,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
34,952
|
|
|
|
31,886
|
|
|
|
35,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale (at fair value)
|
|
|
304,481
|
|
|
|
284,011
|
|
|
|
284,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
897
|
|
|
|
1,926
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (net of unearned income)
|
|
|
401,644
|
|
|
|
412,638
|
|
|
|
408,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
7,644
|
|
|
|
8,480
|
|
|
|
8,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
394,000
|
|
|
|
404,158
|
|
|
|
400,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
|
21,112
|
|
|
|
21,366
|
|
|
|
20,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory stock
|
|
|
4,033
|
|
|
|
4,148
|
|
|
|
4,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance
|
|
|
19,015
|
|
|
|
16,552
|
|
|
|
16,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
6,349
|
|
|
|
7,099
|
|
|
|
7,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
784,839
|
|
|
|
771,146
|
|
|
|
768,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
|
149,839
|
|
|
|
149,510
|
|
|
|
139,426
|
|
Interest-bearing
|
|
|
470,095
|
|
|
|
456,168
|
|
|
|
463,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
619,934
|
|
|
|
605,678
|
|
|
|
603,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
70,500
|
|
|
|
73,000
|
|
|
|
80,500
|
|
Accounts payable for security purchases not yet settled
|
|
|
2,097
|
|
|
|
6,964
|
|
|
|
—
|
|
Other liabilities
|
|
|
3,394
|
|
|
|
3,033
|
|
|
|
3,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
695,925
|
|
|
|
688,675
|
|
|
|
687,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.20;
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares: Authorized 12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 2,869,557 and Outstanding 2,857,475
|
|
|
|
|
|
|
|
|
|
|
|
|
(Issued 2,869,557 and Outstanding 2,858,831 as of 12-31-11)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Issued 2,869,557 and Outstanding 2,859,035 as of 9-30-11)
|
|
|
574
|
|
|
|
574
|
|
|
|
574
|
|
Capital surplus
|
|
|
4,315
|
|
|
|
4,304
|
|
|
|
4,317
|
|
Retained earnings
|
|
|
77,611
|
|
|
|
73,632
|
|
|
|
72,450
|
|
Accumulated other comprehensive income, net of tax
|
|
|
6,711
|
|
|
|
4,221
|
|
|
|
4,655
|
|
Less: Treasury stock shares at cost 12,082 (10,726 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
as of 12-31-11 and 10,522 shares as of 9-30-11)
|
|
|
(297
|
)
|
|
|
(260
|
)
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
88,914
|
|
|
|
82,471
|
|
|
|
81,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
|
784,839
|
|
|
|
771,146
|
|
|
|
768,829
|
|
See Notes to the Unaudited Consolidated Interim Financial Statements
ENB Financial Corp
Consolidated Statements of Income (Unaudited)
Periods Ended September 30, 2012 and 2011
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
|
5,011
|
|
|
|
5,386
|
|
|
|
15,272
|
|
|
|
16,271
|
|
Interest on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
977
|
|
|
|
1,603
|
|
|
|
3,336
|
|
|
|
4,710
|
|
Tax-exempt
|
|
|
924
|
|
|
|
867
|
|
|
|
2,711
|
|
|
|
2,565
|
|
Interest on deposits at other banks
|
|
|
24
|
|
|
|
11
|
|
|
|
60
|
|
|
|
29
|
|
Dividend income
|
|
|
31
|
|
|
|
28
|
|
|
|
86
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
6,967
|
|
|
|
7,895
|
|
|
|
21,465
|
|
|
|
23,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
1,061
|
|
|
|
1,270
|
|
|
|
3,271
|
|
|
|
4,005
|
|
Interest on long-term debt
|
|
|
499
|
|
|
|
785
|
|
|
|
1,655
|
|
|
|
2,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
1,560
|
|
|
|
2,055
|
|
|
|
4,926
|
|
|
|
6,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,407
|
|
|
|
5,840
|
|
|
|
16,539
|
|
|
|
17,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for loan losses
|
|
|
(250
|
)
|
|
|
450
|
|
|
|
(850
|
)
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision (credit) for loan losses
|
|
|
5,657
|
|
|
|
5,390
|
|
|
|
17,389
|
|
|
|
15,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment services income
|
|
|
248
|
|
|
|
253
|
|
|
|
816
|
|
|
|
847
|
|
Service fees
|
|
|
393
|
|
|
|
435
|
|
|
|
1,259
|
|
|
|
1,320
|
|
Commissions
|
|
|
490
|
|
|
|
469
|
|
|
|
1,454
|
|
|
|
1,376
|
|
Gains on securities transactions, net
|
|
|
342
|
|
|
|
269
|
|
|
|
1,003
|
|
|
|
1,346
|
|
Impairment losses on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses on investment securities
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
(55
|
)
|
|
|
(171
|
)
|
Non-credit related (gains) losses on securities not expected
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to be sold in other comprehensive income before tax
|
|
|
—
|
|
|
|
11
|
|
|
|
(31
|
)
|
|
|
(129
|
)
|
Net impairment losses on investment securities
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
(86
|
)
|
|
|
(300
|
)
|
Gains on sale of mortgages
|
|
|
52
|
|
|
|
28
|
|
|
|
183
|
|
|
|
108
|
|
Losses on sale of loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(263
|
)
|
Earnings on bank owned life insurance
|
|
|
164
|
|
|
|
148
|
|
|
|
762
|
|
|
|
441
|
|
Other income
|
|
|
69
|
|
|
|
88
|
|
|
|
265
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
1,758
|
|
|
|
1,609
|
|
|
|
5,656
|
|
|
|
5,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,020
|
|
|
|
2,904
|
|
|
|
9,326
|
|
|
|
8,566
|
|
Occupancy
|
|
|
420
|
|
|
|
410
|
|
|
|
1,261
|
|
|
|
1,217
|
|
Equipment
|
|
|
221
|
|
|
|
206
|
|
|
|
657
|
|
|
|
604
|
|
Advertising & marketing
|
|
|
65
|
|
|
|
74
|
|
|
|
285
|
|
|
|
239
|
|
Computer software & data processing
|
|
|
418
|
|
|
|
397
|
|
|
|
1,216
|
|
|
|
1,174
|
|
Bank shares tax
|
|
|
202
|
|
|
|
208
|
|
|
|
618
|
|
|
|
625
|
|
Professional services
|
|
|
262
|
|
|
|
287
|
|
|
|
850
|
|
|
|
974
|
|
FDIC insurance
|
|
|
90
|
|
|
|
88
|
|
|
|
270
|
|
|
|
433
|
|
Other expense
|
|
|
373
|
|
|
|
401
|
|
|
|
1,282
|
|
|
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,071
|
|
|
|
4,975
|
|
|
|
15,765
|
|
|
|
14,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,344
|
|
|
|
2,024
|
|
|
|
7,280
|
|
|
|
6,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for federal income taxes
|
|
|
384
|
|
|
|
293
|
|
|
|
1,160
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,960
|
|
|
|
1,731
|
|
|
|
6,120
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock
|
|
|
0.69
|
|
|
|
0.61
|
|
|
|
2.14
|
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share
|
|
|
0.25
|
|
|
|
0.24
|
|
|
|
0.75
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
2,854,723
|
|
|
|
2,858,809
|
|
|
|
2,855,555
|
|
|
|
2,857,626
|
|
See Notes to the Unaudited Consolidated Interim Financial Statements
ENB Financial Corp
Consolidated Statements of Comprehensive Income (Unaudited)
Periods Ended September 30, 2012 and 2011
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
(DOLLARS IN THOUSANDS)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,960
|
|
|
|
1,731
|
|
|
|
6,120
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (income) loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (gains) losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporarily impaired securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising during the quarter
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
(55
|
)
|
|
|
(171
|
)
|
Income tax effect
|
|
|
—
|
|
|
|
31
|
|
|
|
18
|
|
|
|
58
|
|
|
|
|
—
|
|
|
|
(61
|
)
|
|
|
(37
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in earnings
|
|
|
—
|
|
|
|
81
|
|
|
|
86
|
|
|
|
300
|
|
Income tax effect
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
(29
|
)
|
|
|
(103
|
)
|
|
|
|
—
|
|
|
|
54
|
|
|
|
57
|
|
|
|
197
|
|
Unrealized holding gains (losses) on other-than-temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities available for sale, net of tax
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
20
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale not other-than-temporarily impaired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains arising during the period
|
|
|
2,568
|
|
|
|
3,021
|
|
|
|
4,745
|
|
|
|
7,602
|
|
Income tax effect
|
|
|
(873
|
)
|
|
|
(1,027
|
)
|
|
|
(1,613
|
)
|
|
|
(2,585
|
)
|
|
|
|
1,695
|
|
|
|
1,994
|
|
|
|
3,132
|
|
|
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains recognized in earnings
|
|
|
(342
|
)
|
|
|
(269
|
)
|
|
|
(1,003
|
)
|
|
|
(1,346
|
)
|
Income tax effect
|
|
|
116
|
|
|
|
91
|
|
|
|
341
|
|
|
|
458
|
|
|
|
|
(226
|
)
|
|
|
(178
|
)
|
|
|
(662
|
)
|
|
|
(888
|
)
|
Unrealized holding (losses) gains on securities available for sale not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other-than-temporarily impaired, net of tax
|
|
|
1,469
|
|
|
|
1,816
|
|
|
|
2,470
|
|
|
|
4,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
1,469
|
|
|
|
1,809
|
|
|
|
2,490
|
|
|
|
4,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
3,429
|
|
|
|
3,540
|
|
|
|
8,610
|
|
|
|
9,493
|
|
See Notes to the Unaudited Consolidated Interim Financial Statements
ENB Financial Corp
Consolidated Statements of Cash Flows (Unaudited)
(DOLLARS IN THOUSANDS)
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,120
|
|
|
|
5,280
|
|
Adjustments to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Net amortization of securities premiums and discounts and loan fees
|
|
|
2,649
|
|
|
|
1,353
|
|
Increase in interest receivable
|
|
|
(205
|
)
|
|
|
(35
|
)
|
Decrease in interest payable
|
|
|
(175
|
)
|
|
|
(158
|
)
|
Provision (credit) for loan losses
|
|
|
(850
|
)
|
|
|
1,350
|
|
Gains on securities transactions, net
|
|
|
(1,003
|
)
|
|
|
(1,346
|
)
|
Impairment losses on securities
|
|
|
86
|
|
|
|
300
|
|
Losses on the sale of student loans
|
|
|
—
|
|
|
|
263
|
|
Gains on sale of mortgages
|
|
|
(183
|
)
|
|
|
(108
|
)
|
Loans originated for sale
|
|
|
(10,212
|
)
|
|
|
(7,277
|
)
|
Proceeds from sales of loans
|
|
|
11,424
|
|
|
|
7,946
|
|
Earnings on bank-owned life insurance
|
|
|
(762
|
)
|
|
|
(441
|
)
|
Gains on sale of other real estate owned
|
|
|
(15
|
)
|
|
|
—
|
|
Depreciation of premises and equipment and amortization of software
|
|
|
1,001
|
|
|
|
999
|
|
Deferred income tax
|
|
|
598
|
|
|
|
(212
|
)
|
Decrease in prepaid federal deposit insurance
|
|
|
236
|
|
|
|
395
|
|
Decrease in accounts payable for securities purchased not yet settled
|
|
|
(4,867
|
)
|
|
|
—
|
|
Other assets and other liabilities, net
|
|
|
(485
|
)
|
|
|
(400
|
)
|
Net cash provided by operating activities
|
|
|
3,357
|
|
|
|
7,909
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Proceeds from maturities, calls, and repayments
|
|
|
70,460
|
|
|
|
41,795
|
|
Proceeds from sales
|
|
|
29,624
|
|
|
|
58,530
|
|
Purchases
|
|
|
(118,512
|
)
|
|
|
(119,762
|
)
|
Purchase of other real estate owned
|
|
|
(112
|
)
|
|
|
—
|
|
Proceeds from sale of other real estate owned
|
|
|
132
|
|
|
|
|
|
Purchase of regulatory bank stock
|
|
|
(230
|
)
|
|
|
—
|
|
Redemptions of regulatory bank stock
|
|
|
345
|
|
|
|
578
|
|
Purchase of bank-owned life insurance
|
|
|
(2,527
|
)
|
|
|
(61
|
)
|
Proceeds from bank-owned life insurance
|
|
|
826
|
|
|
|
—
|
|
Proceeds from sale of student loans
|
|
|
—
|
|
|
|
7,981
|
|
Net decrease (increase) in loans
|
|
|
10,729
|
|
|
|
(1,682
|
)
|
Purchases of premises and equipment
|
|
|
(582
|
)
|
|
|
(1,226
|
)
|
Purchase of computer software
|
|
|
(33
|
)
|
|
|
(107
|
)
|
Net cash used for investing activities
|
|
|
(9,880
|
)
|
|
|
(13,954
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in demand, NOW, and savings accounts
|
|
|
13,104
|
|
|
|
15,606
|
|
Net increase (decrease) in time deposits
|
|
|
1,152
|
|
|
|
(7,779
|
)
|
Proceeds from long-term debt
|
|
|
15,000
|
|
|
|
10,500
|
|
Repayments of long-term debt
|
|
|
(17,500
|
)
|
|
|
(4,500
|
)
|
Dividends paid
|
|
|
(2,141
|
)
|
|
|
(2,056
|
)
|
Treasury stock sold
|
|
|
317
|
|
|
|
334
|
|
Treasury stock purchased
|
|
|
(343
|
)
|
|
|
(266
|
)
|
Net cash provided by financing activities
|
|
|
9,589
|
|
|
|
11,839
|
|
Increase in cash and cash equivalents
|
|
|
3,066
|
|
|
|
5,794
|
|
Cash and cash equivalents at beginning of period
|
|
|
31,886
|
|
|
|
29,226
|
|
Cash and cash equivalents at end of period
|
|
|
34,952
|
|
|
|
35,020
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
5,100
|
|
|
|
6,501
|
|
Income taxes paid
|
|
|
745
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Securities purchased not yet settled
|
|
|
2,097
|
|
|
|
—
|
|
Net transfer of other real estate owned held for sale from loans
|
|
|
278
|
|
|
|
—
|
|
Fair value adjustments for securities available for sale
|
|
|
3,773
|
|
|
|
6,383
|
|
See Notes to the Unaudited Consolidated Interim Financial Statements
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
1.
Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general
practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered
necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the
current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
ENB Financial Corp (“the Corporation”) is the bank holding
company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the third quarter of
2012, is reporting on the results of operations and financial condition of ENB Financial Corp.
Operating results for the three and nine months ended September
30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. For further
information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual
Report on Form 10-K for the year ended December 31, 2011.
2.
Securities Available for Sale
The amortized cost and fair value of securities held at September 30, 2012, and December 31, 2011, are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
36,741
|
|
|
|
1,935
|
|
|
|
(60
|
)
|
|
|
38,616
|
|
U.S. agency mortgage-backed securities
|
|
|
54,425
|
|
|
|
1,234
|
|
|
|
(11
|
)
|
|
|
55,648
|
|
U.S. agency collateralized mortgage obligations
|
|
|
47,503
|
|
|
|
285
|
|
|
|
(368
|
)
|
|
|
47,420
|
|
Private collateralized mortgage obligations
|
|
|
6,352
|
|
|
|
62
|
|
|
|
(479
|
)
|
|
|
5,935
|
|
Corporate bonds
|
|
|
47,606
|
|
|
|
1,382
|
|
|
|
(36
|
)
|
|
|
48,952
|
|
Obligations of states and political subdivisions
|
|
|
96,686
|
|
|
|
6,428
|
|
|
|
(160
|
)
|
|
|
102,954
|
|
Total debt securities
|
|
|
289,313
|
|
|
|
11,326
|
|
|
|
(1,114
|
)
|
|
|
299,525
|
|
Marketable equity securities
|
|
|
5,000
|
|
|
|
—
|
|
|
|
(44
|
)
|
|
|
4,956
|
|
Total securities available for sale
|
|
|
294,313
|
|
|
|
11,326
|
|
|
|
(1,158
|
)
|
|
|
304,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
44,669
|
|
|
|
1,959
|
|
|
|
(14
|
)
|
|
|
46,614
|
|
U.S. agency mortgage-backed securities
|
|
|
54,264
|
|
|
|
874
|
|
|
|
(9
|
)
|
|
|
55,129
|
|
U.S. agency collateralized mortgage obligations
|
|
|
55,908
|
|
|
|
462
|
|
|
|
(321
|
)
|
|
|
56,049
|
|
Private collateralized mortgage obligations
|
|
|
8,251
|
|
|
|
25
|
|
|
|
(1,051
|
)
|
|
|
7,225
|
|
Corporate bonds
|
|
|
25,579
|
|
|
|
230
|
|
|
|
(511
|
)
|
|
|
25,298
|
|
Obligations of states and political subdivisions
|
|
|
84,945
|
|
|
|
4,852
|
|
|
|
(52
|
)
|
|
|
89,745
|
|
Total debt securities
|
|
|
273,616
|
|
|
|
8,402
|
|
|
|
(1,958
|
)
|
|
|
280,060
|
|
Marketable equity securities
|
|
|
4,000
|
|
|
|
—
|
|
|
|
(49
|
)
|
|
|
3,951
|
|
Total securities available for sale
|
|
|
277,616
|
|
|
|
8,402
|
|
|
|
(2,007
|
)
|
|
|
284,011
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The amortized cost and fair value of debt securities available for
sale at September 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities
due to certain call or prepayment provisions.
CONTRACTUAL MATURITY OF DEBT SECURITIES
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
$
|
|
|
$
|
|
Due in one year or less
|
|
|
36,641
|
|
|
|
36,979
|
|
Due after one year through five years
|
|
|
104,948
|
|
|
|
107,512
|
|
Due after five years through ten years
|
|
|
74,391
|
|
|
|
76,672
|
|
Due after ten years
|
|
|
73,333
|
|
|
|
78,362
|
|
Total debt securities
|
|
|
289,313
|
|
|
|
299,525
|
|
Securities available for sale with a par value of $83,331,000 and
$73,049,000 at September 30, 2012, and December 31, 2011, respectively, were pledged or restricted for public funds, borrowings,
or other purposes as required by law. The fair value of these pledged securities was $89,138,000 at September 30, 2012, and $77,874,000
at December 31, 2011.
Proceeds from active sales of securities available for sale, along
with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on
the basis of specific identification.
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Proceeds from sales
|
|
|
6,720
|
|
|
|
12,542
|
|
|
|
29,624
|
|
|
|
58,530
|
|
Gross realized gains
|
|
|
351
|
|
|
|
315
|
|
|
|
1,080
|
|
|
|
1,567
|
|
Gross realized losses
|
|
|
9
|
|
|
|
46
|
|
|
|
77
|
|
|
|
221
|
|
SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Gross realized gains
|
|
|
351
|
|
|
|
315
|
|
|
|
1,080
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized losses
|
|
|
9
|
|
|
|
46
|
|
|
|
77
|
|
|
|
221
|
|
Impairment on securities
|
|
|
—
|
|
|
|
81
|
|
|
|
86
|
|
|
|
300
|
|
Total gross realized losses
|
|
|
9
|
|
|
|
127
|
|
|
|
163
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains on securities
|
|
|
342
|
|
|
|
188
|
|
|
|
917
|
|
|
|
1,046
|
|
The bottom portion of the above table shows the net gains on security
transactions, including any impairment taken on securities held by the Corporation. Unlike the sale of a security, impairment is
a write-down of the book value of the security which produces a loss and does not provide any proceeds. The net gain or loss from
security transactions is also reflected on the Corporation’s Consolidated Statements of Income and Consolidated Statements
of Cash Flows.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
Management evaluates all of the Corporation’s securities for
other than temporary impairment (OTTI) on a periodic basis. As of September 30, 2012, no impairment was needed on any of the Corporation’s
securities; however, three private collateralized mortgage obligations (PCMOs) were being held that had experienced prior impairment.
Analysis of these three securities as of September 30, 2012, based on the projected future cash flows, including prepayment speeds,
delinquencies, foreclosures, and the severity of losses, did not indicate a need to take additional impairment. While there was
no security impairment recorded in the second or third quarters of 2012, in the first quarter of 2012, $86,000 of impairment was
recorded on two PCMO securities considered to be other than temporarily impaired. Impairment was taken on four PCMO securities
in the third quarter of 2011 that amounted to $81,000 and year-to-date impairment on these securities as of September 30, 2011,
was $300,000. One of the four PCMOs that experienced impairment in 2011 was sold in May 2012, leaving only three PCMOs that had
experienced impairment. Information pertaining to securities with gross unrealized losses at September 30, 2012, and December 31,
2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
TEMPORARY IMPAIRMENTS OF SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
More than 12 months
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
As of September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
3,975
|
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,975
|
|
|
|
(60
|
)
|
U.S. agency mortgage-backed securities
|
|
|
5,638
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,638
|
|
|
|
(11
|
)
|
U.S. agency collateralized mortgage obligations
|
|
|
27,612
|
|
|
|
(270
|
)
|
|
|
5,719
|
|
|
|
(98
|
)
|
|
|
33,331
|
|
|
|
(368
|
)
|
Private collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
4,844
|
|
|
|
(479
|
)
|
|
|
4,844
|
|
|
|
(479
|
)
|
Corporate bonds
|
|
|
1,971
|
|
|
|
(28
|
)
|
|
|
992
|
|
|
|
(8
|
)
|
|
|
2,963
|
|
|
|
(36
|
)
|
Obligations of states & political subdivisions
|
|
|
9,817
|
|
|
|
(131
|
)
|
|
|
2,005
|
|
|
|
(29
|
)
|
|
|
11,822
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
49,013
|
|
|
|
(500
|
)
|
|
|
13,560
|
|
|
|
(614
|
)
|
|
|
62,573
|
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
956
|
|
|
|
(44
|
)
|
|
|
956
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
|
49,013
|
|
|
|
(500
|
)
|
|
|
14,516
|
|
|
|
(658
|
)
|
|
|
63,529
|
|
|
|
(1,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
5,995
|
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
5,995
|
|
|
|
(14
|
)
|
U.S. agency mortgage-backed securities
|
|
|
4,998
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,998
|
|
|
|
(9
|
)
|
U.S. agency collateralized mortgage obligations
|
|
|
23,631
|
|
|
|
(321
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
23,631
|
|
|
|
(321
|
)
|
Private collateralized mortgage obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
4,919
|
|
|
|
(1,051
|
)
|
|
|
4,919
|
|
|
|
(1,051
|
)
|
Corporate bonds
|
|
|
12,392
|
|
|
|
(497
|
)
|
|
|
491
|
|
|
|
(14
|
)
|
|
|
12,883
|
|
|
|
(511
|
)
|
Obligations of states & political subdivisions
|
|
|
2,767
|
|
|
|
(17
|
)
|
|
|
2,977
|
|
|
|
(35
|
)
|
|
|
5,744
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
49,783
|
|
|
|
(858
|
)
|
|
|
8,387
|
|
|
|
(1,100
|
)
|
|
|
58,170
|
|
|
|
(1,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
951
|
|
|
|
(49
|
)
|
|
|
951
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
|
49,783
|
|
|
|
(858
|
)
|
|
|
9,338
|
|
|
|
(1,149
|
)
|
|
|
59,121
|
|
|
|
(2,007
|
)
|
In the debt security portfolio, there are 47 positions that were
considered temporarily impaired at September 30, 2012. Based on analysis conducted as of September 30, 2012, no securities indicated
impairment, and therefore, no securities were considered other-than-temporarily impaired.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The Corporation evaluates both equity and fixed maturity positions
for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant
such evaluation. The Corporation adopted a provision of U.S. generally accepted accounting principles which provides for the bifurcation
of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from
the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors,
which is recognized, net of taxes, as a component of accumulated other comprehensive income. The adoption of this provision was
only applicable to four of the Corporation’s PCMOs since these were the only instruments management deemed to be other-than-temporarily
impaired and have experienced some impairment.
A cumulative total of $1,143,000 of impairment has been recorded
on the three impaired PCMO securities currently held, plus the PCMO that was sold in May 2012. Impairment of $340,000 was first
recorded in 2009 on two of these securities. Additional impairment was recorded in 2010 for a total of $393,000 on the same two
PCMO securities. During 2011, there was an additional $324,000 of impairment recorded on the three PCMO securities, currently identified
as other than temporarily impaired, plus the impaired PCMO that was sold in May 2012. In the first quarter of 2012, an additional
$86,000 of impairment was recorded on two of the PCMO securities. There was no impairment recorded in the second or third quarters
of 2012.
The impairment on the PCMOs is a result of a deterioration of expected
cash flows on these securities due to higher projected credit losses than the amount of credit protection carried by these securities.
Specifically, the foreclosure and severity rates have been running at levels where expected principal losses are in excess of the
remaining credit protection on these instruments. The projected principal losses are based on prepayment speeds that are equal
to or slower than the actual last twelve-month prepayment speeds the particular securities have experienced. Every quarter, management
evaluates third-party reporting that shows projected principal losses based on various prepayment speed and severity rate scenarios.
Based on the assumption that all loans over 60 days delinquent will default and at a severity rate equal to or above that previously
experienced, and based on historical and expected prepayment speeds, management determined that it was appropriate to take additional
impairment on two PCMOs in the first quarter of 2012, with no impairment necessary in the second or third quarters.
The following tables reflect the amortized cost, market value,
and unrealized loss as of September 30, 2012 and 2011, on the PCMO securities held which had impairment taken in each respective
year. The values shown are after the Corporation recorded year-to-date impairment charges of $86,000 through September 30, 2012,
and $300,000 through September 30, 2011. The $86,000 and $300,000 are deemed to be credit losses and are the amounts that management
expects the principal losses will be by the time these securities mature. The remaining $308,000 and $1,031,000 of unrealized
losses are deemed to be market value losses that are considered temporary.
SECURITY IMPAIRMENT CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012
|
|
|
|
Amortized
|
|
Market
|
|
Unrealized
|
|
Impairment
|
|
|
Cost
|
|
Value
|
|
Loss
|
|
Charge
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private collateralized mortgage obligations
|
|
|
3,605
|
|
|
|
3,297
|
|
|
|
(308
|
)
|
|
|
(86
|
)
|
|
|
As of September 30, 2011
|
|
|
|
Amortized
|
|
Market
|
|
Unrealized
|
|
Impairment
|
|
|
Cost
|
|
Value
|
|
Loss
|
|
Charge
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private collateralized mortgage obligations
|
|
|
7,427
|
|
|
|
6,396
|
|
|
|
(1,031
|
)
|
|
|
(300
|
)
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following table provides a cumulative roll forward of credit
losses recognized in earnings for debt securities held:
CREDIT LOSSES RECOGNIZED IN EARNINGS ON DEBT SECURITIES
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
977
|
|
|
|
951
|
|
|
|
1,057
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit losses on debt securities for which other-than-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
temporary impairment has not been previously recognized
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional credit losses on debt securities for which other-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
than-temporary impairment was previously recognized
|
|
|
—
|
|
|
|
81
|
|
|
|
86
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of debt securities with previously recognized impairment
|
|
|
|
|
|
|
—
|
|
|
|
(166
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
977
|
|
|
|
1,032
|
|
|
|
977
|
|
|
|
1,032
|
|
Recent market conditions throughout the financial sector have made
the evaluation regarding the possible impairment of PCMOs difficult to fully determine given the volatility of their pricing, based
not only on interest rate changes, but on collateral uncertainty as well. The Corporation’s mortgage-backed securities (MBS)
and collateralized mortgage obligations (CMO) holdings are backed by the U.S. government, and therefore, experience significantly
less volatility and uncertainty than the PCMO securities. The Corporation has not experienced any impairment on U.S. government
MBS or CMO securities and does not expect impairment in the future on these instruments. The Corporation’s PCMO holdings
make up a minority of the total MBS, CMO, and PCMO securities held. As of September 30, 2012, on an amortized cost basis, PCMOs
accounted for 5.9% of the Corporation’s total MBS, CMO, and PCMO holdings, compared to 7.0% as of December 31, 2011. As of
September 30, 2012, four PCMOs were held with one of the four rated AAA by either Moody’s or S&P. The remaining three
securities were rated below investment grade. Impairment charges, as detailed above, were taken on two of these securities in the
first quarter of 2012, with no impairment taken in the second or third quarters of 2012.
Management conducts impairment analysis on a quarterly basis and
currently plans to continue to hold these securities as cash flow analysis performed under severe stress testing does not indicate
a need to take further impairment on the bonds that are considered impaired. The unrealized loss position of all of the Corporation’s
PCMOs has improved since December 31, 2011. The PCMO net unrealized losses stood at $1.0 million as of December 31, 2011, and
improved to a $417,000 net unrealized loss as of September 30, 2012. One of the four PCMOs is carrying an unrealized gain. Management
has concluded that, as of September 30, 2012, the unrealized losses outlined in the above table represent temporary declines.
Management currently does not intend to sell these securities as a result of unrealized holding losses carried and impairment
taken, and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at
maturity. While management does not intend to sell these securities related to their impairment, it is standard practice to sell
off smaller MBS, CMO, and PCMO instruments once normal principal payments have reduced the size of the security to less than $1
million. This is done to reduce the administrative costs and improve the efficiency of the entire portfolio. One previously impaired
PCMO instrument was sold in the second quarter of 2012 with proceeds of $1,051,000 at a minimal loss of $8,000. Management will
continue to monitor the remaining PCMO instruments.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
3.
Loans and Allowance for Loan Losses
The following tables present the Corporation’s loan portfolio
by category of loans as of September 30, 2012, and December 31, 2011.
LOAN PORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
86,941
|
|
|
|
95,347
|
|
Agriculture mortgages
|
|
|
76,675
|
|
|
|
73,287
|
|
Construction
|
|
|
17,525
|
|
|
|
18,957
|
|
Total commercial real estate
|
|
|
181,141
|
|
|
|
187,591
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate (a)
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages
|
|
|
130,762
|
|
|
|
133,959
|
|
Home equity loans
|
|
|
13,525
|
|
|
|
14,687
|
|
Home equity lines of credit
|
|
|
15,907
|
|
|
|
15,004
|
|
Total consumer real estate
|
|
|
160,194
|
|
|
|
163,650
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
25,612
|
|
|
|
25,913
|
|
Tax-free loans
|
|
|
17,774
|
|
|
|
19,072
|
|
Agriculture loans
|
|
|
13,058
|
|
|
|
12,884
|
|
Total commercial and industrial
|
|
|
56,444
|
|
|
|
57,869
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
3,798
|
|
|
|
3,590
|
|
|
|
|
|
|
|
|
|
|
Gross loans prior to deferred fees
|
|
|
401,577
|
|
|
|
412,700
|
|
Less:
|
|
|
|
|
|
|
|
|
Deferred loan fees (costs), net
|
|
|
(67
|
)
|
|
|
62
|
|
Allowance for loan losses
|
|
|
7,644
|
|
|
|
8,480
|
|
Total net loans
|
|
|
394,000
|
|
|
|
404,158
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Real estate loans serviced for Fannie Mae, which are not included in the Consolidated Balance Sheets, totaled $7,345,000 and $8,904,000
as of September 30, 2012, and December 31, 2011, respectively.
|
The Corporation grades commercial credits differently
than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally
assigned grades as of September 30, 2012, and December 31, 2011. The grading analysis estimates the capability of the borrower
to repay the contractual obligations under the loan agreements as scheduled or at all. The Corporation's internal commercial credit
risk grading system is based on experiences with similarly graded loans.
The Corporation's internally assigned grades
for commercial credits are as follows:
|
·
|
Pass – loans which are protected by the current net worth and paying capacity of the obligor
or by the value of the underlying collateral.
|
|
·
|
Special Mention – loans where a potential weakness or risk exists, which could cause a more
serious problem if not corrected.
|
|
·
|
Substandard – loans that have a well-defined weakness based on objective evidence and characterized
by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
·
|
Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard
asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on
existing circumstances.
|
COMMERCIAL CREDIT EXPOSURE
|
CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
Commercial
Mortgages
|
|
|
Agriculture
Mortgages
|
|
|
Construction
|
|
|
Commercial
and
Industrial
|
|
|
Tax-free
Loans
|
|
|
Agriculture
Loans
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
77,946
|
|
|
|
73,400
|
|
|
|
13,054
|
|
|
|
23,198
|
|
|
|
17,534
|
|
|
|
12,161
|
|
|
|
217,293
|
|
Special Mention
|
|
|
619
|
|
|
|
419
|
|
|
|
—
|
|
|
|
338
|
|
|
|
—
|
|
|
|
88
|
|
|
|
1,464
|
|
Substandard
|
|
|
8,376
|
|
|
|
2,856
|
|
|
|
4,471
|
|
|
|
2,076
|
|
|
|
240
|
|
|
|
809
|
|
|
|
18,828
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
86,941
|
|
|
|
76,675
|
|
|
|
17,525
|
|
|
|
25,612
|
|
|
|
17,774
|
|
|
|
13,058
|
|
|
|
237,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Commercial
Mortgages
|
|
|
Agriculture
Mortgages
|
|
|
Construction
|
|
|
Commercial
and
Industrial
|
|
|
Tax-free
Loans
|
|
|
Agriculture
Loans
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
76,532
|
|
|
|
67,235
|
|
|
|
13,869
|
|
|
|
21,561
|
|
|
|
19,072
|
|
|
|
11,943
|
|
|
|
210,212
|
|
Special Mention
|
|
|
3,872
|
|
|
|
773
|
|
|
|
132
|
|
|
|
1,173
|
|
|
|
—
|
|
|
|
65
|
|
|
|
6,015
|
|
Substandard
|
|
|
14,943
|
|
|
|
5,279
|
|
|
|
4,956
|
|
|
|
3,179
|
|
|
|
—
|
|
|
|
876
|
|
|
|
29,233
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
95,347
|
|
|
|
73,287
|
|
|
|
18,957
|
|
|
|
25,913
|
|
|
|
19,072
|
|
|
|
12,884
|
|
|
|
245,460
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
For consumer loans, the Corporation evaluates credit quality based
on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days
delinquent and non-accrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio
based on payment performance as of September 30, 2012, and December 31, 2011:
CONSUMER CREDIT EXPOSURE
|
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
|
(DOLLARS IN THOUSANDS)
|
September 30, 2012
|
|
1-4 Family
Residential
Mortgages
|
|
|
Home Equity
Loans
|
|
|
Home Equity
Lines of
Credit
|
|
|
Consumer
|
|
|
Total
|
|
Payment performance:
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
130,451
|
|
|
|
13,384
|
|
|
|
15,907
|
|
|
|
3,794
|
|
|
|
163,536
|
|
Non-performing
|
|
|
311
|
|
|
|
141
|
|
|
|
—
|
|
|
|
4
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
130,762
|
|
|
|
13,525
|
|
|
|
15,907
|
|
|
|
3,798
|
|
|
|
163,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
1-4 Family
Residential
Mortgages
|
|
|
Home Equity
Loans
|
|
|
Home Equity
Lines of
Credit
|
|
|
Consumer
|
|
|
Total
|
|
Payment performance:
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
133,643
|
|
|
|
14,541
|
|
|
|
15,004
|
|
|
|
3,590
|
|
|
|
166,778
|
|
Non-performing
|
|
|
316
|
|
|
|
146
|
|
|
|
—
|
|
|
|
—
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
133,959
|
|
|
|
14,687
|
|
|
|
15,004
|
|
|
|
3,590
|
|
|
|
167,240
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following tables present an age analysis of the Corporation’s
past due loans, segregated by loan portfolio class, as of September 30, 2012, and December 31, 2011:
AGING OF LOANS RECEIVABLE
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
Receivable >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
than 90
|
|
|
Total Past
|
|
|
|
|
|
Total Loans
|
|
|
90 Days and
|
|
September 30, 2012
|
|
Past Due
|
|
|
Past Due
|
|
|
Days
|
|
|
Due
|
|
|
Current
|
|
|
Receivable
|
|
|
Accruing
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
128
|
|
|
|
225
|
|
|
|
—
|
|
|
|
353
|
|
|
|
86,588
|
|
|
|
86,941
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76,675
|
|
|
|
76,675
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,525
|
|
|
|
17,525
|
|
|
|
—
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages
|
|
|
640
|
|
|
|
21
|
|
|
|
172
|
|
|
|
833
|
|
|
|
129,929
|
|
|
|
130,762
|
|
|
|
172
|
|
Home equity loans
|
|
|
132
|
|
|
|
—
|
|
|
|
—
|
|
|
|
132
|
|
|
|
13,393
|
|
|
|
13,525
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
15,890
|
|
|
|
15,907
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32
|
|
|
|
25,580
|
|
|
|
25,612
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,774
|
|
|
|
17,774
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,058
|
|
|
|
13,058
|
|
|
|
—
|
|
Consumer
|
|
|
5
|
|
|
|
—
|
|
|
|
2
|
|
|
|
7
|
|
|
|
3,791
|
|
|
|
3,798
|
|
|
|
—
|
|
Total
|
|
|
954
|
|
|
|
246
|
|
|
|
174
|
|
|
|
1,374
|
|
|
|
400,203
|
|
|
|
401,577
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
Receivable >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
than 90
|
|
|
Total Past
|
|
|
|
|
|
Total Loans
|
|
|
90 Days and
|
|
December 31, 2011
|
|
Past Due
|
|
|
Past Due
|
|
|
Days
|
|
|
Due
|
|
|
Current
|
|
|
Receivable
|
|
|
Accruing
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
390
|
|
|
|
—
|
|
|
|
—
|
|
|
|
390
|
|
|
|
94,957
|
|
|
|
95,347
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,287
|
|
|
|
73,287
|
|
|
|
—
|
|
Construction
|
|
|
132
|
|
|
|
—
|
|
|
|
—
|
|
|
|
132
|
|
|
|
18,825
|
|
|
|
18,957
|
|
|
|
—
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages
|
|
|
1,684
|
|
|
|
140
|
|
|
|
107
|
|
|
|
1,931
|
|
|
|
132,028
|
|
|
|
133,959
|
|
|
|
107
|
|
Home equity loans
|
|
|
79
|
|
|
|
101
|
|
|
|
—
|
|
|
|
180
|
|
|
|
14,507
|
|
|
|
14,687
|
|
|
|
—
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
|
|
14,989
|
|
|
|
15,004
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
49
|
|
|
|
—
|
|
|
|
101
|
|
|
|
150
|
|
|
|
25,763
|
|
|
|
25,913
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,072
|
|
|
|
19,072
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,884
|
|
|
|
12,884
|
|
|
|
—
|
|
Consumer
|
|
|
18
|
|
|
|
5
|
|
|
|
—
|
|
|
|
23
|
|
|
|
3,567
|
|
|
|
3,590
|
|
|
|
—
|
|
Total
|
|
|
2,352
|
|
|
|
261
|
|
|
|
208
|
|
|
|
2,821
|
|
|
|
409,879
|
|
|
|
412,700
|
|
|
|
107
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following table presents nonaccrual loans by classes of the
loan portfolio as of September 30, 2012, and December 31, 2011:
NONACCRUAL LOANS BY LOAN CLASS
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
963
|
|
|
|
1,265
|
|
Agriculture mortgages
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
Consumer real estate
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages
|
|
|
184
|
|
|
|
209
|
|
Home equity loans
|
|
|
141
|
|
|
|
146
|
|
Home equity lines of credit
|
|
|
—
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
54
|
|
|
|
242
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
4
|
|
|
|
—
|
|
Total
|
|
|
1,346
|
|
|
|
1,862
|
|
As of September 30, 2012, and December 31, 2011, all of the Corporation’s
commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and
nine months ended September 30, 2012, and September 30, 2011, is as follows:
IMPAIRED LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded balance of impaired loans
|
|
|
3,074
|
|
|
|
3,645
|
|
|
|
3,286
|
|
|
|
4,075
|
|
Interest income recognized on impaired loans
|
|
|
50
|
|
|
|
29
|
|
|
|
106
|
|
|
|
92
|
|
Interest income on impaired loans would
have increased by approximately $4,000 and
$65,000 for the three and nine months ended September
30, 2012, and $35,000 and
$114
,000
for the three and nine months ended September
30, 2011, had these loans performed in accordance with their original terms.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following tables summarize information in regards to impaired
loans by loan portfolio class as of September 30, 2012, and December 31, 2011:
IMPAIRED LOAN ANALYSIS
|
(DOLLARS IN THOUSANDS)
|
September 30, 2012
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
304
|
|
|
|
304
|
|
|
|
—
|
|
|
|
416
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
1,640
|
|
|
|
1,640
|
|
|
|
—
|
|
|
|
1,646
|
|
|
|
83
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
1,944
|
|
|
|
1,944
|
|
|
|
—
|
|
|
|
2,062
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
54
|
|
|
|
95
|
|
|
|
—
|
|
|
|
155
|
|
|
|
20
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
54
|
|
|
|
95
|
|
|
|
—
|
|
|
|
155
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance
|
|
|
1,998
|
|
|
|
2,039
|
|
|
|
—
|
|
|
|
2,217
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
983
|
|
|
|
1,080
|
|
|
|
162
|
|
|
|
1,069
|
|
|
|
3
|
|
Agriculture mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
983
|
|
|
|
1,080
|
|
|
|
162
|
|
|
|
1,069
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with a related allowance
|
|
|
983
|
|
|
|
1,080
|
|
|
|
162
|
|
|
|
1,069
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by loan class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
1,287
|
|
|
|
1,384
|
|
|
|
162
|
|
|
|
1,485
|
|
|
|
3
|
|
Agriculture mortgages
|
|
|
1,640
|
|
|
|
1,640
|
|
|
|
—
|
|
|
|
1,646
|
|
|
|
83
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
2,927
|
|
|
|
3,024
|
|
|
|
162
|
|
|
|
3,131
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
54
|
|
|
|
95
|
|
|
|
—
|
|
|
|
155
|
|
|
|
20
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
54
|
|
|
|
95
|
|
|
|
—
|
|
|
|
155
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,981
|
|
|
|
3,119
|
|
|
|
162
|
|
|
|
3,286
|
|
|
|
106
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
IMPAIRED LOAN ANALYSIS
|
(DOLLARS IN THOUSANDS)
|
December 31, 2011
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
473
|
|
|
|
473
|
|
|
|
—
|
|
|
|
641
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
1,658
|
|
|
|
1,658
|
|
|
|
—
|
|
|
|
1,667
|
|
|
|
119
|
|
Construction
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
|
|
44
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
2,131
|
|
|
|
2,198
|
|
|
|
—
|
|
|
|
2,352
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
137
|
|
|
|
137
|
|
|
|
—
|
|
|
|
226
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
137
|
|
|
|
137
|
|
|
|
—
|
|
|
|
226
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance
|
|
|
2,268
|
|
|
|
2,335
|
|
|
|
—
|
|
|
|
2,578
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
1,147
|
|
|
|
1,244
|
|
|
|
140
|
|
|
|
1,245
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
1,147
|
|
|
|
1,244
|
|
|
|
140
|
|
|
|
1,245
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
105
|
|
|
|
105
|
|
|
|
61
|
|
|
|
71
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
105
|
|
|
|
105
|
|
|
|
61
|
|
|
|
71
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with a related allowance
|
|
|
1,252
|
|
|
|
1,349
|
|
|
|
201
|
|
|
|
1,316
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by loan class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
1,620
|
|
|
|
1,717
|
|
|
|
140
|
|
|
|
1,886
|
|
|
|
—
|
|
Agriculture mortgages
|
|
|
1,658
|
|
|
|
1,658
|
|
|
|
—
|
|
|
|
1,667
|
|
|
|
119
|
|
Construction
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
|
|
44
|
|
|
|
—
|
|
Total commercial real estate
|
|
|
3,278
|
|
|
|
3,442
|
|
|
|
140
|
|
|
|
3,597
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
242
|
|
|
|
242
|
|
|
|
61
|
|
|
|
297
|
|
|
|
—
|
|
Tax-free loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total commercial and industrial
|
|
|
242
|
|
|
|
242
|
|
|
|
61
|
|
|
|
297
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,520
|
|
|
|
3,684
|
|
|
|
201
|
|
|
|
3,894
|
|
|
|
119
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following tables detail activity in the allowance for loan losses by portfolio segment for the nine months
ended September 30, 2012, and September 30, 2011:
ALLOWANCE FOR CREDIT LOSSES
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
Consumer
Real Estate
|
|
|
Commercial
and Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - December 31, 2011
|
|
|
3,441
|
|
|
|
1,424
|
|
|
|
2,825
|
|
|
|
61
|
|
|
|
729
|
|
|
|
8,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
42
|
|
|
|
5
|
|
|
|
—
|
|
|
|
47
|
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
5
|
|
|
|
—
|
|
|
|
25
|
|
Provision
|
|
|
(371
|
)
|
|
|
(103
|
)
|
|
|
214
|
|
|
|
(6
|
)
|
|
|
16
|
|
|
|
(250
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2012
|
|
|
3,070
|
|
|
|
1,321
|
|
|
|
3,017
|
|
|
|
55
|
|
|
|
745
|
|
|
|
8,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
2
|
|
|
|
—
|
|
|
|
7
|
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
|
3
|
|
|
|
—
|
|
|
|
26
|
|
Provision
|
|
|
41
|
|
|
|
96
|
|
|
|
(434
|
)
|
|
|
4
|
|
|
|
(57
|
)
|
|
|
(350
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2012
|
|
|
3,111
|
|
|
|
1,417
|
|
|
|
2,601
|
|
|
|
60
|
|
|
|
688
|
|
|
|
7,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
Recoveries
|
|
|
15
|
|
|
|
—
|
|
|
|
3
|
|
|
|
1
|
|
|
|
—
|
|
|
|
19
|
|
Provision
|
|
|
296
|
|
|
|
(14
|
)
|
|
|
(457
|
)
|
|
|
(5
|
)
|
|
|
(70
|
)
|
|
|
(250
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - September 30, 2012
|
|
|
3,422
|
|
|
|
1,403
|
|
|
|
2,147
|
|
|
|
54
|
|
|
|
618
|
|
|
|
7,644
|
|
(1)
|
|
The Corporation recognized a $250,000 credit provision in the first quarter
of 2012, a $350,000 credit provision in the second quarter of 2012, and a $250,000 credit provision in the third quarter
of 2012, as a result of lower levels of non-performing and delinquent loans, minimum charge-offs, and a decline in loan
balances.
|
|
|
Commercial
Real Estate
|
|
|
Consumer
Real Estate
|
|
|
Commercial
and Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - December 31, 2010
|
|
|
2,605
|
|
|
|
1,254
|
|
|
|
2,816
|
|
|
|
75
|
|
|
|
382
|
|
|
|
7,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
97
|
|
|
|
13
|
|
|
|
30
|
|
|
|
9
|
|
|
|
—
|
|
|
|
149
|
|
Recoveries
|
|
|
—
|
|
|
|
2
|
|
|
|
145
|
|
|
|
3
|
|
|
|
—
|
|
|
|
150
|
|
Provision
|
|
|
527
|
|
|
|
39
|
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
49
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2011
|
|
|
3,035
|
|
|
|
1,282
|
|
|
|
2,766
|
|
|
|
69
|
|
|
|
431
|
|
|
|
7,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
1
|
|
|
|
285
|
|
|
|
1
|
|
|
|
—
|
|
|
|
287
|
|
Recoveries
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
55
|
|
|
|
2
|
|
|
|
—
|
|
|
|
55
|
|
Provision
|
|
|
167
|
|
|
|
(7
|
)
|
|
|
396
|
|
|
|
(11
|
)
|
|
|
(95
|
)
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2011
|
|
|
3,202
|
|
|
|
1,272
|
|
|
|
2,932
|
|
|
|
59
|
|
|
|
336
|
|
|
|
7,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
|
|
14
|
|
Recoveries
|
|
|
—
|
|
|
|
2
|
|
|
|
15
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
16
|
|
Provision
|
|
|
8
|
|
|
|
93
|
|
|
|
(37
|
)
|
|
|
17
|
|
|
|
369
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - September 30, 2011
|
|
|
3,210
|
|
|
|
1,368
|
|
|
|
2,910
|
|
|
|
60
|
|
|
|
705
|
|
|
|
8,253
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The following tables present, by portfolio segment, the recorded
investment in loans at September 30, 2012, and December 31, 2011.
ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
Consumer
Real Estate
|
|
|
Commercial and
Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
3,422
|
|
|
|
1,403
|
|
|
|
2,147
|
|
|
|
54
|
|
|
|
618
|
|
|
|
7,644
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
162
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
162
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
3,260
|
|
|
|
1,403
|
|
|
|
2,147
|
|
|
|
54
|
|
|
|
618
|
|
|
|
7,482
|
|
Ending balance: loans acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with deteriorated credit quality
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
181,141
|
|
|
|
160,194
|
|
|
|
56,444
|
|
|
|
3,798
|
|
|
|
|
|
|
|
401,577
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
2,931
|
|
|
|
—
|
|
|
|
54
|
|
|
|
—
|
|
|
|
|
|
|
|
2,985
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
178,210
|
|
|
|
160,194
|
|
|
|
56,390
|
|
|
|
3,798
|
|
|
|
|
|
|
|
398,592
|
|
Ending balance: loans acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with deteriorated credit quality
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
Commercial
Real Estate
|
|
|
Consumer
Real Estate
|
|
|
Commercial and
Industrial
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
3,441
|
|
|
|
1,424
|
|
|
|
2,825
|
|
|
|
61
|
|
|
|
729
|
|
|
|
8,480
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
140
|
|
|
|
—
|
|
|
|
61
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
3,301
|
|
|
|
1,424
|
|
|
|
2,764
|
|
|
|
61
|
|
|
|
729
|
|
|
|
8,279
|
|
Ending balance: loans acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with deteriorated credit quality
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
187,591
|
|
|
|
163,650
|
|
|
|
57,869
|
|
|
|
3,590
|
|
|
|
|
|
|
|
412,700
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
3,278
|
|
|
|
—
|
|
|
|
242
|
|
|
|
—
|
|
|
|
|
|
|
|
3,520
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
|
184,313
|
|
|
|
163,650
|
|
|
|
57,627
|
|
|
|
3,590
|
|
|
|
|
|
|
|
409,180
|
|
Ending balance: loans acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with deteriorated credit quality
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
During the first nine months of 2012, there was no loan modification
made that would cause a loan to be considered a troubled debt restructuring (TDR). Three loans that were previously considered
TDRs in 2011 due to principal deferments, continue to pay based on contractual terms without delinquency. These loans were no longer
considered TDRs in 2012, since they resumed normal principal and interest payments without delinquency and the interest rate was
considered a market interest rate. A TDR is a loan where management has granted a concession to the borrower from the original
terms. A concession is generally granted in order to improve the financial condition of the borrower and improve the likelihood
of full collection by the lender. In the case of these three previous TDRs, the concession was in the form of a principal deferment.
4. Fair Value Presentation
U.S. generally accepted accounting principles
establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities
at fair value. The three broad levels defined by the hierarchy are as follows:
|
Level I:
|
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
|
|
|
|
|
Level II:
|
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
|
|
|
|
|
Level III:
|
Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
The following tables present the assets reported on the consolidated
balance sheets at their fair value as of September 30, 2012, and December 31, 2011, by level within the fair value hierarchy. As
required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based
on the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements:
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
—
|
|
|
$
|
38,616
|
|
|
$
|
—
|
|
|
$
|
38,616
|
|
U.S. agency mortgage-backed securities
|
|
|
—
|
|
|
|
55,648
|
|
|
|
—
|
|
|
|
55,648
|
|
U.S. agency collateralized mortgage obligations
|
|
|
—
|
|
|
|
47,420
|
|
|
|
—
|
|
|
|
47,420
|
|
Private collateralized mortgage obligations
|
|
|
—
|
|
|
|
5,935
|
|
|
|
—
|
|
|
|
5,935
|
|
Corporate bonds
|
|
|
—
|
|
|
|
48,952
|
|
|
|
—
|
|
|
|
48,952
|
|
Obligations of states & political subdivisions
|
|
|
—
|
|
|
|
102,954
|
|
|
|
—
|
|
|
|
102,954
|
|
Marketable equity securities
|
|
|
4,956
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
4,956
|
|
|
$
|
299,525
|
|
|
$
|
—
|
|
|
$
|
304,481
|
|
On September 30, 2012, the Corporation held no securities valued using
level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available
and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s
CRA fund investments are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market.
As of September 30, 2012, the CRA fund investments had a $5,000,000 book value with a fair market value of $4,956,000.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
Fair Value Measurements:
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
—
|
|
|
$
|
46,614
|
|
|
$
|
—
|
|
|
$
|
46,614
|
|
U.S. agency mortgage-backed securities
|
|
|
—
|
|
|
|
55,129
|
|
|
|
—
|
|
|
|
55,129
|
|
U.S. agency collateralized mortgage obligations
|
|
|
—
|
|
|
|
56,049
|
|
|
|
—
|
|
|
|
56,049
|
|
Private collateralized mortgage obligations
|
|
|
—
|
|
|
|
7,225
|
|
|
|
—
|
|
|
|
7,225
|
|
Corporate bonds
|
|
|
—
|
|
|
|
25,298
|
|
|
|
—
|
|
|
|
25,298
|
|
Obligations of states & political subdivisions
|
|
|
—
|
|
|
|
89,745
|
|
|
|
—
|
|
|
|
89,745
|
|
Marketable equity securities
|
|
|
3,951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
3,951
|
|
|
$
|
280,060
|
|
|
$
|
—
|
|
|
$
|
284,011
|
|
On December 31, 2011, the Corporation held no securities valued using level III inputs. All of the Corporation’s
debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes
on identical securities traded in active markets on a daily basis. As of December 31, 2011, the Corporation’s CRA fund investments
had a book value of $4,000,000 and a fair market value of $3,951,000 utilizing level I pricing.
Financial instruments are considered level III when their values
are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model
assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments
typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments
also include those for which the determination of fair value requires significant management judgment or estimation. There were
no level III securities as of September 30, 2012 or December 31, 2011.
The following tables present the assets measured on a nonrecurring
basis on the Consolidated Balance Sheets at their fair value as of September 30, 2012, and December 31, 2011, by level within the
fair value hierarchy:
ASSETS MEASURED ON A NONRECURRING BASIS
(
Dollars
in Thousands
)
|
|
September 30, 2012
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,823
|
|
|
$
|
2,823
|
|
OREO
|
|
|
—
|
|
|
|
—
|
|
|
|
264
|
|
|
|
264
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,087
|
|
|
$
|
3,087
|
|
|
|
December 31, 2011
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,319
|
|
|
$
|
3,319
|
|
OREO
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,319
|
|
|
$
|
3,319
|
|
|
|
September 30, 2011
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,409
|
|
|
$
|
3,409
|
|
OREO
|
|
|
—
|
|
|
|
—
|
|
|
|
400
|
|
|
|
400
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,809
|
|
|
$
|
3,809
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The Corporation had a total of $2,985,000 of
impaired loans as of September 30, 2012, with $162,000 of specifically allocated allowance against these loans. The Corporation
had a total of $3,520,000 of impaired loans as of December 31, 2011, with $201,000 of specifically allocated allowance against
these loans. This compares to a total of $3,584,000 of impaired loans as of September 30, 2011, with $175,000 of specifically allocated
allowance against these loans. Impaired loans are valued based on a discounted present value of expected future cash flows.
Other real estate owned (OREO) is measured at fair value, less estimated
costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management. The assets are carried at the lower of carrying amount or fair value, less estimated costs to sell. The
Corporation’s OREO balance consists of one residential property that was classified as OREO in the third quarter of 2012.
Management has estimated the current value of the OREO property at $264,000 utilizing level III pricing. Income and expenses from
operations and changes in valuation allowance are included in the net expenses from OREO.
The following table presents additional quantitative information
about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine
fair value:
QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Valuation
|
|
|
Unobservable
|
|
|
Range
|
|
September 30, 2012:
|
|
Estimate
|
|
Techniques
|
|
|
Input
|
|
|
(Weighted Avg)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
2,823
|
|
|
|
Appraisal of
|
|
|
|
Appraisal
|
|
|
|
0% to -20% (-20%)
|
|
|
|
|
|
|
|
|
collateral (1)
|
|
|
|
adjustments (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation
|
|
|
|
0% to -10% (-10%)
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
|
264
|
|
|
|
Appraisal of
|
|
|
|
Liquidation
|
|
|
|
-2% to -10% (-6%)
|
|
|
|
|
|
|
|
|
collateral (1),(3)
|
|
|
|
expenses (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally
include various level III inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated
liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments
are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
5.
Interim Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instrument:
Cash and Cash
Equivalents
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities Available
for Sale
Management utilizes quoted market pricing for the fair value of
the Corporation's securities that are available for sale, if available. If a quoted market rate is not available, fair value is
estimated using quoted market prices for similar securities.
Regulatory Stock
Regulatory stock is valued at a stable dollar price, which is the
price used to purchase or liquidate shares; therefore, the carrying amount is a reasonable estimate of fair value.
Loans Held for
Sale
Loans held for sale are individual loans for which the Corporation
has a firm sales commitment; therefore, the carrying value is a reasonable estimate of the fair value.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
Loans
The fair value of fixed and variable rate loans is estimated by
discounting back the scheduled future cash flows of the particular loan product, using the market interest rates of comparable
loan products in the Corporation’s greater market area, with the same general structure, comparable credit ratings, and for
the same remaining maturities.
Accrued Interest Receivable
The carrying amount of accrued interest receivable is a reasonable
estimate of fair value.
Bank Owned Life
Insurance
Fair value is equal to the cash surrender value of the life insurance
policies.
Mortgage Servicing
Assets
The fair value of mortgage servicing assets is based on the present
value of future cash flows for pools of mortgages, stratified by rate and maturity date.
Deposits
The fair value of non-interest bearing demand deposit accounts and
interest bearing demand, savings, and money market deposit accounts is based on the amount payable on demand at the reporting date.
The fair value of fixed-maturity time deposits is estimated by discounting back the expected cash flows of the time deposit using
market interest rates from the Corporation’s greater market area currently offered for similar time deposits with similar
remaining maturities.
Long-term Borrowings
The fair value of a long-term borrowing is estimated by comparing
the rate currently offered for the same type of borrowing instrument with a matching remaining term.
Accrued Interest Payable
The carrying amount of accrued interest payable is a reasonable
estimate of fair value.
Firm Commitments to Extend Credit, Lines of Credit, and Open
Letters of Credit
These financial instruments are generally not subject to sale and
estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized
commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the
commitment, using fees currently charged to enter into similar agreements with similar credit risk, is not considered material
for disclosure purposes. The contractual amounts of unfunded commitments are presented in Note 6.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Corporation's
financial instruments at September 30, 2012, are summarized as follows:
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level II)
|
|
|
(Level III)
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
34,952
|
|
|
|
34,952
|
|
|
|
34,952
|
|
|
|
—
|
|
|
|
—
|
|
Securities available for sale
|
|
|
304,481
|
|
|
|
304,481
|
|
|
|
4,956
|
|
|
|
299,525
|
|
|
|
—
|
|
Regulatory stock
|
|
|
4,033
|
|
|
|
4,033
|
|
|
|
4,033
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
897
|
|
|
|
897
|
|
|
|
—
|
|
|
|
897
|
|
|
|
—
|
|
Loans, net of allowance
|
|
|
394,000
|
|
|
|
404,707
|
|
|
|
—
|
|
|
|
—
|
|
|
|
404,707
|
|
Accrued interest receivable
|
|
|
3,362
|
|
|
|
3,362
|
|
|
|
3,362
|
|
|
|
—
|
|
|
|
—
|
|
Bank owned life insurance
|
|
|
19,015
|
|
|
|
19,015
|
|
|
|
19,015
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage servicing assets
|
|
|
19
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
149,839
|
|
|
|
149,839
|
|
|
|
149,839
|
|
|
|
—
|
|
|
|
—
|
|
Interest-bearing demand deposits
|
|
|
7,385
|
|
|
|
7,385
|
|
|
|
7,385
|
|
|
|
—
|
|
|
|
—
|
|
NOW accounts
|
|
|
61,107
|
|
|
|
61,107
|
|
|
|
61,107
|
|
|
|
—
|
|
|
|
—
|
|
Savings accounts
|
|
|
109,618
|
|
|
|
109,618
|
|
|
|
109,618
|
|
|
|
—
|
|
|
|
—
|
|
Money market deposit accounts
|
|
|
53,159
|
|
|
|
53,159
|
|
|
|
53,159
|
|
|
|
—
|
|
|
|
—
|
|
Time deposits
|
|
|
238,826
|
|
|
|
244,036
|
|
|
|
—
|
|
|
|
—
|
|
|
|
244,036
|
|
Total deposits
|
|
|
619,934
|
|
|
|
625,144
|
|
|
|
381,108
|
|
|
|
—
|
|
|
|
244,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
70,500
|
|
|
|
74,375
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
830
|
|
|
|
830
|
|
|
|
830
|
|
|
|
—
|
|
|
|
—
|
|
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
The carrying amounts and estimated
fair values of the Corporation’s financial instruments at December 31, 2011, and September 30, 2011, are summarized as follows:
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
31,886
|
|
|
|
31,886
|
|
|
|
35,020
|
|
|
|
35,020
|
|
Securities available for sale
|
|
|
284,011
|
|
|
|
284,011
|
|
|
|
284,644
|
|
|
|
284,644
|
|
Regulatory stock
|
|
|
4,148
|
|
|
|
4,148
|
|
|
|
4,102
|
|
|
|
4,102
|
|
Loans held for sale
|
|
|
1,926
|
|
|
|
1,926
|
|
|
|
210
|
|
|
|
210
|
|
Loans, net of allowance
|
|
|
404,158
|
|
|
|
412,796
|
|
|
|
400,197
|
|
|
|
417,286
|
|
Accrued interest receivable
|
|
|
3,157
|
|
|
|
3,157
|
|
|
|
3,079
|
|
|
|
3,079
|
|
Bank owned life insurance
|
|
|
16,552
|
|
|
|
16,552
|
|
|
|
16,393
|
|
|
|
16,393
|
|
Mortgage servicing assets
|
|
|
26
|
|
|
|
26
|
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
149,510
|
|
|
|
149,510
|
|
|
|
139,426
|
|
|
|
139,426
|
|
NOW accounts
|
|
|
61,246
|
|
|
|
61,246
|
|
|
|
62,608
|
|
|
|
62,608
|
|
Savings accounts
|
|
|
100,377
|
|
|
|
100,377
|
|
|
|
98,673
|
|
|
|
98,673
|
|
Money market deposit accounts
|
|
|
56,872
|
|
|
|
56,872
|
|
|
|
58,385
|
|
|
|
58,385
|
|
Time deposits
|
|
|
237,673
|
|
|
|
242,536
|
|
|
|
244,329
|
|
|
|
247,926
|
|
Total deposits
|
|
|
605,678
|
|
|
|
610,541
|
|
|
|
603,421
|
|
|
|
607,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
73,000
|
|
|
|
77,180
|
|
|
|
80,500
|
|
|
|
84,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
1,005
|
|
|
|
1,005
|
|
|
|
1,110
|
|
|
|
1,110
|
|
6. Commitments and Contingent Liabilities
In order to meet the financing needs of its customers in the normal
course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial
statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As
of September 30, 2012, firm loan commitments were $9.3 million, unused lines of credit were $102.2 million, and open letters of
credit were $8.0 million. The total of these commitments was $119.5 million, which represents the Corporation’s exposure
to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit
losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience
on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations
as it does for balance sheet financial instruments.
7. Recently Issued Accounting Standards
In May 2011, the FASB issued ASU 2011-04,
Fair
Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs.
The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and
IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair
value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively.
For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic
entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities
is not permitted. The Corporation has provided the necessary disclosure in Note 5.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220):
Presentation of Comprehensive Income.
The amendments in this Update improve the
comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other
comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence
of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’
equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach,
the first statement should present total net income and its components followed consecutively by a second statement that should
present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.
All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update.
For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and
annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. The
Corporation has provided the necessary disclosure in the Consolidated Statements of Comprehensive Income.
In September 2011, the FASB issued ASU 2011-08,
Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment
. The objective of this Update
is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity
to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test
described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the
amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines
that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all
entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and
annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including
for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial
statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been
made available for issuance. This ASU is not expected to have a significant impact on the Corporation’s financial statements.
In December 2011,
the FASB issued ASU 2011-10,
Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification.
The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance
real estate as a result of default on the subsidiary's nonrecourse debt. Under the amendments in this Update, when a parent (reporting
entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default
on the subsidiary's nonrecourse debt, the reporting entity should apply the guidance in
Subtopic
360-20
to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would
not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender
and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling
financial interest under
Subtopic 810-10
, the reporting entity would continue to
include the real estate, debt, and the results of the subsidiary's operations in its consolidated financial statements until legal
title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied on a prospective
basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting
entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments
in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For
nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods
thereafter. Early adoption is permitted. This ASU is not expected to have a significant impact on the Corporation’s financial
statements.
In December 2011,
the FASB issued ASU 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
. The amendments
in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance
with either
Section 210-20-45
or
Section
815-10-45
or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure
requirements on offsetting in
Section 210-20-50
. This information will enable users
of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial
position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative
instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on
or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by
those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on
the Corporation’s financial statements.
Index
ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements
|
In December 2011,
the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
. In
order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs
in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out
of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other
requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either
in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply
these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities
should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods
thereafter. The Corporation has provided the necessary disclosure in the Consolidated Statements of Comprehensive Income.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis represents management’s
view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction
with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction
with the 2011 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are
not indicative of future performance.
Forward-Looking Statements
The U.S. Private Securities Litigation Reform Act of 1995 provides
safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference.
Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking
statements are generally identified when terms such as: “believe,” “estimate,” “anticipate,”
“expect,” “project,” “forecast,” and other similar wordings are used. The readers of this report
should take into consideration that these forward-looking statements represent management’s expectations as to future forecasts
of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or
predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally,
management may change estimates of future performance, or the likelihood of future events, as additional information is obtained.
This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative
of actual results.
Readers should note that many factors affect this forward-looking
information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into
this document. These factors include, but are not limited to, the following:
|
·
|
Monetary and interest rate policies of the Federal Reserve Board
|
|
·
|
Volatility of the securities markets
|
|
·
|
Effects of deteriorating economic conditions, specifically the effect on loan customers to repay loans
|
|
·
|
Political changes and their impact on new laws and regulations
|
|
·
|
Changes in deposit flows, loan demand, or real estate and investment securities values
|
|
·
|
Changes in accounting principles, policies, or guidelines
|
|
·
|
Ineffective business strategy due to current or future market and competitive conditions
|
|
·
|
Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk
|
|
·
|
Operation, legal, and reputation risk
|
|
·
|
The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them
could be unsuccessful
|
|
·
|
The impact of new laws and regulations, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 and the regulations issued thereunder
|
Readers should be aware if any of the above factors change significantly,
the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation
is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the
date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with
the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form
10-K, and Current Reports on Form 8-K.
Results of Operations
Overview
The Corporation recorded net income of $1,960,000 and $6,120,000
for the three and nine-month periods ended September 30, 2012, a 13.2% and 15.9% increase, over the $1,731,000 and $5,280,000 earned
during the same periods in 2011. Earnings per share, basic and diluted, were $0.69 and $2.14 for the three and nine months ended
September 30, 2012, compared to $0.61 and $1.85 for the same periods in 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The Corporation’s net interest income for the three
and nine months ended September 30, 2012, decreased from the same periods in 2011. Net interest income was $5,407,000 for the
third quarter of 2012, compared to $5,840,000 for the same quarter of 2011, a 7.4% decrease. Year-to-date net interest income
was $16,539,000 as of September 30, 2012, a 4.5% decrease, from the $17,326,000 earned in the first nine months of 2011. The Corporation’s
net interest margin was 3.31% for the third quarter of 2012, compared to 3.59% for the third quarter of 2011. The Corporation’s
year-to-date net interest margin was 3.39% through September 30, 2012, as compared to 3.59% for the same period in 2011.
The Corporation recorded a credit provision for loan losses of $250,000
for the third quarter of 2012, and $850,000 for the year-to-date period compared to an expense of $450,000 and $1,350,000 for the
respective periods in 2011. Improvements in asset quality, as evidenced by lower levels of non-performing and delinquent loans,
minimal charge-offs, and a decline in outstanding loan balances, allowed the Corporation to reverse a portion of the allowance
for loan losses into earnings in 2012 while still maintaining strong coverage ratios. Previously, in 2010 and 2011, the provision
expense was at an increased level to provide for high levels of classified loans. When classified loans first began to decline
in late 2011, the provision for loan losses was initially reduced. With further declines in classified assets, along with low levels
of non-performing and delinquent loans, and an overall decrease in outstanding loan balances, the first, second, and third quarter
2012 allowance for loan losses calculation supported a decrease in this balance. With the reductions in 2012, the allowance for
loan losses as a percentage of total loans was 1.90% as of September 30, 2012, compared to 2.02% as of September 30, 2011. More
detail is provided in the Provision for Loan Losses section that follows and the Allowance for Loan Losses section under Financial
Condition.
Other income, excluding the gain or loss on the sale of securities
and impairment losses on securities, decreased 0.4%, or $5,000, for the third quarter of 2012, compared to 2011. For the first
nine months of 2012, other income, excluding the gain or loss on the sale of securities and impairment losses on securities, increased
15.8%, or $646,000, compared to the same period in 2011. Meanwhile, operational costs for the three months ended September 30,
2012, compared to the same period in 2011, increased at a pace of 1.9%, or $96,000. For the first nine months of 2012, total operational
costs increased by 5.3%, or $800,000, over the same period in 2011.
The financial services industry uses two primary performance
measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently
a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating
income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders.
The ROA and ROE increased for the three-month and nine-month periods ended September 30, 2012, compared to the same periods in
the prior year due to the increase in the Corporation’s income.
Key Ratios
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets
|
|
|
1.00%
|
|
|
|
0.90%
|
|
|
|
1.06%
|
|
|
|
0.94%
|
|
Return on Average Equity
|
|
|
8.93%
|
|
|
|
8.69%
|
|
|
|
9.60%
|
|
|
|
9.23%
|
|
The results of the Corporation’s operations are best
explained by addressing, in further detail, the five major sections of the income statement, which are as follows:
|
·
|
Provision for loan losses
|
|
·
|
Provision for income taxes
|
The following discussion analyzes each of these
five components.
Net Interest Income
Net interest income (NII) represents the largest portion of the
Corporation’s operating income. Net interest income typically generates approximately 75% of the Corporation’s gross
revenue stream. The overall performance of the Corporation is highly dependent on the changes in net interest income since it
comprises such a significant portion of operating income.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The following table shows a summary analysis of net interest income
on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements
such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest
income shown in both tables below will exceed the NII reported on the consolidated statements of income. The amount of FTE adjustment
totaled $549,000 and $1,619,000 for the three and nine months ended September 30, 2012, respectively, compared to $528,000 and
$1,570,000 for the same periods in 2011.
The amount of the tax adjustment varies depending on the amount
of income earned on tax-free assets. The Corporation had been in an alternative minimum tax (AMT) position for years 2006 through
2009. As a result, tax–free loans and securities did not offer the full tax advantage they did when the Corporation was not
subject to AMT. During 2008 and early 2009, management was actively reducing the tax-free municipal bond portfolio in an effort
to reduce the Corporation’s AMT position, which acted to reduce the tax-equivalent adjustments. However, because of legislation
that followed the credit crisis in the fall of 2008, financial institutions were permitted to treat 2009 and 2010 newly issued
tax-free municipal bonds as AMT-exempt for the life of the bond. Additionally, financial institutions were still able to purchase
AMT-exempt for life municipal bonds in 2011 and 2012, if they were first issued during 2009 and 2010. As a result, management resumed
normal purchasing of municipal bonds, but only purchased AMT-exempt municipal bonds. This action began to increase the size of
the tax-free municipal bond portfolio, which resulted in a higher tax-equivalent adjustment in 2011 and 2012. The tax-equivalent
adjustment is expected to remain stable throughout the remainder of 2012.
NET INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Total interest income
|
|
|
6,967
|
|
|
|
7,895
|
|
|
|
21,465
|
|
|
|
23,669
|
|
Total interest expense
|
|
|
1,560
|
|
|
|
2,055
|
|
|
|
4,926
|
|
|
|
6,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,407
|
|
|
|
5,840
|
|
|
|
16,539
|
|
|
|
17,326
|
|
Tax equivalent adjustment
|
|
|
549
|
|
|
|
528
|
|
|
|
1,619
|
|
|
|
1,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (fully taxable equivalent)
|
|
|
5,956
|
|
|
|
6,368
|
|
|
|
18,158
|
|
|
|
18,896
|
|
NII is the difference between interest income earned on assets and
interest expense incurred on liabilities. Accordingly, two factors affect net interest income:
|
·
|
The rates charged on interest earning assets and paid on interest bearing liabilities
|
|
·
|
The average balance of interest earning assets and interest bearing liabilities
|
The Federal funds rate, the Prime rate, and the shape of the U.S.
Treasury curve all affect net interest income.
On December 16, 2008, the Federal Reserve Bank last cut the Federal
funds rate from 1.00% to a target rate of 0.00% to 0.25%. The Federal funds rate has effectively remained at 0.25% ever since
and is the rate at the time of this filing, nearly four years later. The Federal funds rate is the overnight rate financial institutions
charge other financial institutions to borrow or invest overnight funds. The historically low Federal funds rate, along with historically
low U.S. Treasury and other market rates, has allowed the Corporation to reduce interest rates paid on deposit products and has
reduced the cost of all types of borrowings, allowing management to reduce the cost of funds and reduce the Corporation’s
interest expense. The Prime rate declined in tandem with the Federal funds rate over the same period mentioned above, reducing
the loan rates for Prime-based loans. Market interest rates have remained very low from a historical perspective since the last
Fed action in late 2008; however, mid-term and longer-term yields such as the 5-year and 10-year U.S. Treasuries have varied with
a relatively wide range. For example, the 10-year U.S. Treasury yield stood at 2.47% on December 16, 2008, the date of the last
Fed action, but traded with yields as high as 4.01% in April 2010 and was back down to 1.65% as of September 30, 2012. Despite
the wide range, market rates have been at historically low levels for a long period and the predominant trend from the end of
2008 to present has been declining U.S. Treasury yields. At the time of this report, U.S. Treasury yields were at historically
low levels, never before experienced, even during the Great Depression. The prolonged low rate period has resulted in lower fixed
rates on loans and securities, which management purchases with excess liquidity. The historically low interest rates have generally
had offsetting positive and negative impacts to the Corporation’s NII, but more recently, the decline in asset yields has
exceeded the reductions to the funding costs, resulting in a lower margin. This trend was not evident until the end of 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The decrease in the Prime rate, and a prolonged period with a Prime
rate of 3.25%, has reduced the yield on the Corporation’s Prime-based loans, having a direct negative impact on the interest
income for the Corporation. The Corporation’s fixed-rate loans do not reprice as rates change; however, with the historic
decline in interest rates, more customers have moved into Prime-based loans or have refinanced into lower fixed-rate loans. Management
instituted floors on consumer Prime-based loans at the end of 2008 and phased in floors on business and commercial Prime-based
loans in 2009 and 2010 and revised pricing standards to help minimize the reduction of loan yield during this historically low-rate
period.
Even though the Federal funds rate remains at a historic low of
0.25%, the Treasury yield curve has retained some slope to allow banks the ability to invest or lend at longer terms with slightly
higher yields. Mid-term and longer-term Treasury yields have been decreasing since the end of 2011. As of September 30, 2012, the
yield curve only offered about 142 basis points of slope between the 2-year and 10-year Treasury, down from approximately 165 basis
points as of December 31, 2011. Since deposits and borrowings generally price off short-term rates, the extremely low cost of short-term
funds permitted management to continue to reduce the overall cost of funds during the third quarter of 2012. Management continued
to reprice time deposits and borrowings to lower levels. Meanwhile, management continued to invest in securities and originate
loans at longer terms, where the U.S. Treasury curve and market rates are slightly higher, but down from levels experienced in
2011.
Management anticipates that interest rates will remain near these
historically low levels for the remainder of 2012 and well into 2013 because of the current economic conditions. Continued economic
concerns include unemployment rates, weaker retail sales, low gross national product projections, the European Union debt crisis,
and the U.S. government’s “fiscal cliff”. The lack of any material improvement in our rapidly growing national debt would
only put more pressure on mid-term and long-term interest rates to increase, while the weak economy and relatively high levels
of unemployment and low levels of inflation have kept the Federal Reserve from increasing overnight interest rates. These concerns
will likely weigh on the market and result in the U.S. Treasury curve retaining a positive slope for the remainder of 2012, and
into 2013. Depending on how the U.S. deficit issue is addressed, the yield curve could gain additional slope in 2013 if mid-term
and long-term rates were to increase. The current slope, while not large by historical standards, still allows management to continue
to price the vast majority of liabilities off lower short-term rates, while pricing loans and investing in longer securities, which
are based off the five-year and ten-year U.S. Treasury rates that are moderately higher.
The Corporation’s margin was 3.31% for the third quarter of
2012, a 28 basis-point decrease from the 3.59% for the third quarter of 2011. For the year-to-date period, the Corporation’s
margin was 3.39%, a 20 basis-point decline from the 3.59% for the nine months ended September 30, 2011. Although it has become
challenging to prevent margin declines, the Corporation has done well in consistently reducing its cost of funds in order to maintain
a sufficient margin. Management believes this will get progressively more difficult if interest rates remain at these levels well
out into 2013 as cost of funds savings will slow and the decline in asset yields will continue.
For the third quarter of 2012, the Corporation’s NII on an
FTE basis decreased by $412,000, or 6.5%, compared to the same period in 2011. For the nine months ended September 30, 2012, the
Corporation’s NII on an FTE basis decreased by $738,000, or 3.9%, compared to the nine months ended September 30, 2011. As
shown on the tables that follow, interest income, on an FTE basis for the quarter ending September 30, 2012, decreased by $907,000,
or 10.8%, and interest expense decreased by $495,000, or 24.1%, compared to the same period in 2011. For the first nine months
of 2012, interest income and interest expense on an FTE basis decreased by $2,155,000, or 8.5%, and $1,417,000, or 22.3%, respectively,
compared to the first nine months of 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The following tables show a more detailed analysis of net interest
income on an FTE basis with all the major elements of the Corporation’s consolidated balance sheet, which consists of interest
earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides
the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield
on interest earning assets and the rate paid on interest bearing liabilities. A deficiency of the net interest spread is that it
does not give credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets.
For this reason, management emphasizes the net yield on interest earning assets, also referred to as the net interest margin (NIM).
The NIM is calculated by dividing net interest income on an FTE basis into total average interest earning assets. NIM is generally
the benchmark used by analysts to measure how efficiently a bank generates net interest income. For example, a financial institution
with a NIM of 3.50% would be able to use fewer interest-earning assets and still achieve the same level of net interest income
as a financial institution with a NIM of 3.25%.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
|
|
For the Three Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
Average
|
|
|
|
|
|
Annualized
|
|
|
Average
|
|
|
|
|
|
Annualized
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
$
|
|
|
%
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on deposits at other banks
|
|
|
22,208
|
|
|
|
24
|
|
|
|
0.42
|
|
|
|
18,319
|
|
|
|
11
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
198,287
|
|
|
|
1,005
|
|
|
|
2.03
|
|
|
|
197,070
|
|
|
|
1,628
|
|
|
|
3.30
|
|
Tax-exempt
|
|
|
92,348
|
|
|
|
1,380
|
|
|
|
5.98
|
|
|
|
80,104
|
|
|
|
1,292
|
|
|
|
6.45
|
|
Total securities (d)
|
|
|
290,635
|
|
|
|
2,385
|
|
|
|
3.29
|
|
|
|
277,174
|
|
|
|
2,920
|
|
|
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (a)
|
|
|
402,523
|
|
|
|
5,104
|
|
|
|
5.06
|
|
|
|
410,937
|
|
|
|
5,490
|
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory stock
|
|
|
4,077
|
|
|
|
3
|
|
|
|
0.34
|
|
|
|
4,145
|
|
|
|
2
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
719,443
|
|
|
|
7,516
|
|
|
|
4.18
|
|
|
|
710,575
|
|
|
|
8,423
|
|
|
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets (d)
|
|
|
58,033
|
|
|
|
|
|
|
|
|
|
|
|
52,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
777,476
|
|
|
|
|
|
|
|
|
|
|
|
762,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
121,162
|
|
|
|
68
|
|
|
|
0.22
|
|
|
|
122,066
|
|
|
|
98
|
|
|
|
0.32
|
|
Savings deposits
|
|
|
110,416
|
|
|
|
30
|
|
|
|
0.11
|
|
|
|
99,097
|
|
|
|
26
|
|
|
|
0.10
|
|
Time deposits
|
|
|
237,583
|
|
|
|
963
|
|
|
|
1.61
|
|
|
|
240,550
|
|
|
|
1,146
|
|
|
|
1.89
|
|
Borrowed funds
|
|
|
70,972
|
|
|
|
499
|
|
|
|
2.80
|
|
|
|
81,967
|
|
|
|
785
|
|
|
|
3.80
|
|
Total interest bearing liabilities
|
|
|
540,133
|
|
|
|
1,560
|
|
|
|
1.15
|
|
|
|
543,680
|
|
|
|
2,055
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
146,335
|
|
|
|
|
|
|
|
|
|
|
|
136,466
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3,722
|
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
690,190
|
|
|
|
|
|
|
|
|
|
|
|
683,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
87,286
|
|
|
|
|
|
|
|
|
|
|
|
79,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & stockholders' equity
|
|
|
777,476
|
|
|
|
|
|
|
|
|
|
|
|
762,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
5,956
|
|
|
|
|
|
|
|
|
|
|
|
6,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (b)
|
|
|
|
|
|
|
|
|
|
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
3.23
|
|
Effect of non-interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing funds
|
|
|
|
|
|
|
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
0.36
|
|
Net yield on interest earning assets (c)
|
|
|
|
|
|
|
|
|
|
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
3.59
|
|
(a) Includes balances
of nonaccrual loans and the recognition of any related interest income. The quarter-to-date average balances include net
deferred loan fees and costs of $42,000 as of September 30, 2012, and ($90,000) as of September 30, 2011. Such fees and
costs recognized through income and included in the interest amounts totaled ($4,000) in 2012, and $4,000 in 2011.
(b) Net interest spread
is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also
referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.
(d) Securities recorded at amortized
cost. Unrealized holding gains and losses are included in non-interest earning assets.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
Average
|
|
|
|
|
|
Annualized
|
|
|
Average
|
|
|
|
|
|
Annualized
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
$
|
|
|
%
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on deposits at other banks
|
|
|
20,100
|
|
|
|
60
|
|
|
|
0.40
|
|
|
|
17,884
|
|
|
|
29
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
194,317
|
|
|
|
3,412
|
|
|
|
2.34
|
|
|
|
184,493
|
|
|
|
4,797
|
|
|
|
3.47
|
|
Tax-exempt
|
|
|
88,067
|
|
|
|
4,049
|
|
|
|
6.13
|
|
|
|
79,441
|
|
|
|
3,818
|
|
|
|
6.41
|
|
Total securities (d)
|
|
|
282,384
|
|
|
|
7,461
|
|
|
|
3.52
|
|
|
|
263,934
|
|
|
|
8,615
|
|
|
|
4.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (a)
|
|
|
407,461
|
|
|
|
15,552
|
|
|
|
5.09
|
|
|
|
415,662
|
|
|
|
16,588
|
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory stock
|
|
|
4,216
|
|
|
|
11
|
|
|
|
0.34
|
|
|
|
4,345
|
|
|
|
7
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
714,161
|
|
|
|
23,084
|
|
|
|
4.31
|
|
|
|
701,825
|
|
|
|
25,239
|
|
|
|
4.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets (d)
|
|
|
57,022
|
|
|
|
|
|
|
|
|
|
|
|
50,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
771,183
|
|
|
|
|
|
|
|
|
|
|
|
752,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
119,363
|
|
|
|
216
|
|
|
|
0.24
|
|
|
|
118,654
|
|
|
|
292
|
|
|
|
0.34
|
|
Savings deposits
|
|
|
107,729
|
|
|
|
86
|
|
|
|
0.11
|
|
|
|
97,925
|
|
|
|
76
|
|
|
|
0.10
|
|
Time deposits
|
|
|
236,868
|
|
|
|
2,969
|
|
|
|
1.67
|
|
|
|
241,049
|
|
|
|
3,637
|
|
|
|
2.02
|
|
Borrowed funds
|
|
|
74,619
|
|
|
|
1,655
|
|
|
|
2.96
|
|
|
|
80,906
|
|
|
|
2,338
|
|
|
|
3.86
|
|
Total interest bearing liabilities
|
|
|
538,579
|
|
|
|
4,926
|
|
|
|
1.22
|
|
|
|
538,534
|
|
|
|
6,343
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
143,964
|
|
|
|
|
|
|
|
|
|
|
|
133,795
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
3,483
|
|
|
|
|
|
|
|
|
|
|
|
3,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
686,026
|
|
|
|
|
|
|
|
|
|
|
|
676,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
85,157
|
|
|
|
|
|
|
|
|
|
|
|
76,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & stockholders' equity
|
|
|
771,183
|
|
|
|
|
|
|
|
|
|
|
|
752,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
18,158
|
|
|
|
|
|
|
|
|
|
|
|
18,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (b)
|
|
|
|
|
|
|
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
|
|
|
3.22
|
|
Effect of non-interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing funds
|
|
|
|
|
|
|
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
0.37
|
|
Net yield on interest earning assets (c)
|
|
|
|
|
|
|
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
3.59
|
|
(a) Includes balances
of nonaccrual loans and the recognition of any related interest income. The year-to-date average balances include net deferred
loan fees and costs of ($4,000) as of September 30, 2012, and ($116,000) as of September 30, 2011. Such fees and costs recognized
through income and included in the interest amounts totaled ($1,000) in 2012, and $7,000 in 2011.
(b) Net interest spread
is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also
referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.
(d) Securities recorded at amortized cost. Unrealized holding gains and losses are included in non-interest earning assets.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Earnings and yields on loans have
been negatively impacted by the very low Prime rate of 3.25% and the increased volume in Prime-based loans. Previously in 2011,
management was able to price the majority of new Prime-based loans with a Prime floor of 4.00%, which acted to limit the loss
in yield as customers converted to variable rate Prime- based pricing. However, as the competitive forces continued to intensify
and treasury rates further declined, management had to revert to pricing most commercial customers at the Prime rate later in
2011. The Prime rate is materially below typical fixed-rate business and commercial loans, which generally range between 4.00%
and 6.50%, depending on term and credit risk. Management was able to price customers with higher levels of credit risk at Prime
plus pricing but these rates were still generally below the fixed rate loan-pricing levels. While Prime-based loans will aid the
Corporation when interest rates rise, any increase in Prime-based loans will generally cause the Corporation’s average loan
yield to decrease. There are times when sufficient growth in the loan portfolio can make up for decreases in yield and provide
a higher overall interest income on loans. However, with the Prime rate at extremely low levels, even with Prime-plus loans being
originated, the net impact is generally a reduction of loan yield. This occurs as more variable rate loan growth is occurring
than fixed rate loan growth. Additionally, many consumers and businesses are taking the opportunity presented by the historically
low Prime rate to borrow additional amounts on existing lines of credit not fully utilized. Nearly all of the Prime or Prime-plus
rates on the Corporation’s business and commercial lines of credit are below the business and commercial fixed rates. Growth
in this type of loan does not provide the amount of income generated on fixed rate loans.
Management instituted floors on certain types of consumer home equity
lines of credit at the end of 2008, and instituted limited floors on business or commercial Prime-based loans in 2009. Effective
January 1, 2010, all new commercial and business Prime-based lines of credit were floored at 4.00%. This policy did not change
until the second quarter of 2011, when lower Prime-based pricing for commercial and business borrowers became available. Additionally,
in January 2010, a Prime-plus tiered rating system was implemented on business or commercial borrowers that factor in downgrades
in credit rating. As downgrades occurred, the interest rate would be increased based on a set of conditions. These actions were
designed to preserve loan yield and more effectively assign higher Prime-based loan rates to weaker credits to be adequately compensated
for the higher degree of credit risk. In the second quarter of 2011, due to lower loan growth, increased competition, and lower
cost of funds, management did grant new Prime-based loans at Prime to customers with the highest credit ratings, and at 3.50% and
3.75% to strong-rated credits, with average and lower credits receiving higher interest rates. Later in 2011, due to further competitive
pressures and additional reductions in the cost of funds, management granted loans at Prime to customers with credit grades of
average, above average, and minimum with higher interest rates assigned to acceptable and lower credit grades. As a result, most
variable rates being originated in 2011 were between 3.25% and 4.00%, while in 2012 most variable rate loans were being granted
at Prime. Management believes Prime-based loan growth is critical to strengthen the Corporation’s asset liability position
in preparation for higher interest rates. As such, management will remain competitive with Prime-based loans, as these loans will
significantly outperform fixed rate loans given a rise in interest rates. Management also believes there is a very large opportunity
cost in not booking Prime-based loans due to competitive reasons and therefore having to reinvest cash flows into securities that
are at much lower yields and model as much longer instruments from an interest rate risk standpoint.
Earnings and yields on the Corporation’s securities have also
been negatively impacted by the historically low interest rates. The Corporation’s securities portfolio consists of nearly
all fixed income debt instruments. The U.S. Treasury rates have remained at historically low levels since the Federal funds rate
was reduced to 0.25% in December 2008. As the low-rate period continues to extend, larger amounts of securities are maturing forcing
the proceeds to be reinvested into lower-yielding instruments. The Corporation’s taxable securities experienced a 127 basis-point
reduction in yield for the three months ended September 30, 2012, and a 113 basis-point reduction for the nine months ended September
30, 2012, compared to the same periods in 2011, due to reinvesting into lower-yielding instruments. Tax-exempt security yields
decreased by 47 basis points for the three months ended September 30, 2012, and by 28 basis points for the nine months ended September
30, 2012, compared to the same periods in 2011.
The average balance of the Corporation’s interest bearing
liabilities declined during 2011 only as a result of a significant decline in time deposits. The other areas of NOW, MMDA, and
savings grew but not sufficiently enough to compensate for the decline in time deposits. The average balance of interest bearing
liabilities remained steady through the first nine months of 2012, however with lower interest rates, total interest expense declined
significantly. Interest expense on deposits declined by $209,000 for the three months ended September 30, 2012, and $734,000 for
the nine months ended September 30, 2012, compared to the same periods in 2011. Demand and savings deposits reprice in entirety
whenever the offering rates are changed. This allows management to reduce interest costs rapidly; however, it becomes difficult
to continue to gain cost savings once offering rates decline to these historically low levels. Due to the size of rate decreases
relative to the initial interest rate, the percentage decreases in the actual interest rates are very high. The annualized rate
on interest bearing demand accounts decreased by 31.3%, and 29.4%, for the three and nine-month periods ended September 30, 2012,
compared to the prior year’s periods. Importantly, while the percentage of rate decreases is large, the scope of further
reductions in dollar amount of interest expense is very limited since rates cannot feasibly be reduced much lower. For the first
nine months of 2012, the average balances of interest bearing demand deposits increased by $0.7 million, or 0.6%, over the same
period in 2011, while the average balance of savings accounts increased by $9.8 million, or 10.0%, over the same period in 2011.
This increase in balances of lower cost accounts has helped to reduce the Corporation’s overall interest expense in 2012
compared to 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Time deposits
reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over
time. During 2011 and through the third quarter of 2012, time deposit balances decreased. The decrease can be attributed to the
lowest rates paid historically on time deposits, which has caused the differential between time deposit rates and interest rates
on non-maturing deposits to be minimal. As a result, customers have elected to keep more of their funds in non-maturity deposits
and fewer in time deposits. Because time deposits are the most expensive deposit product for the Corporation and the largest dollar
expense from a funding standpoint, the reduction in time deposits, along with the increases in interest-bearing checking, savings,
and non-interest bearing checking, has allowed the Corporation to achieve a lower cost and more balanced deposit funding position.
The Corporation was able to reduce interest expense on time deposits by $183,000 for the third quarter of 2012, and $668,000 for
the year-to-date period compared to the same periods in 2011. Average balances decreased by $3.0 million for the three months
ended September 30, 2012, and $4.2 million for the nine months ended September 30, 2012, compared to the same periods in 2011.
The annualized rate paid on time deposits decreased by 28 basis points when comparing the three-month periods in both years and
35 basis points when comparing the nine-month periods in both years.
The Corporation historically uses both short-term and long-term
borrowings to supplement liquidity generated by deposit growth. In 2012, the Corporation took advantage of some competitively priced
short-term advances in addition to the normal portfolio of long-term borrowings. No short-term advances were utilized in 2011.
The short-term borrowings at September 30, 2012, only accounted for $1.4 million of the year-to-date average borrowings balance.
Management has used long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source
of liquidity. The Corporation decreased average total borrowings by $11.0 million in the third quarter of 2012 compared to the
same quarter in 2011, and interest expense was $286,000 lower for the same time period as a result. The year-to-date period shows
a decrease in average borrowings of $6.3 million with a corresponding decrease in interest expense of $683,000 compared to the
year-to-date period in 2011.
The NIM was 3.31% for the third quarter of 2012, and 3.39% for the
nine months ended September 30, 2012, compared to 3.59% for both the three-month and nine-month periods in 2011. For the three-month
period ended September 30, 2012, the net interest spread decreased twenty basis points to 3.03%, from 3.23% for the same period
in 2011. For the nine-month period ended September 30, 2012, the net interest spread decreased thirteen basis points to 3.09%,
from 3.22% for the same period in 2011. The effect of non-interest bearing funds dropped eight basis points for the three-month
period and seven basis points for the nine-month period compared to the prior year. The effect of non-interest bearing funds refers
to the benefit gained from deposits on which the Corporation does not pay interest. As rates go lower, the benefit of non-interest
bearing deposits is reduced because there is less difference between no-cost funds and interest bearing liabilities. For example,
if a savings account with $10,000 earns 1%, the benefit for $10,000 non-interest bearing deposits is equivalent to $100; but if
the rate is reduced to 0.20%, then the benefit is only $20. This assumes dollar-for-dollar replacement, which is not realistic,
but demonstrates the way the lower cost of funds affects the benefit to non-interest bearing deposits.
The Asset Liability Committee (ALCO) carefully monitors the NIM
because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on
the plans and strategies in place to protect the NIM and moderate the impact of rising rates, please see Quantitative and Qualitative
Disclosures about Market Risk.
Provision for Loan Losses
The allowance for loan losses provides for losses inherent in the
loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount
of the provision reflects the adjustment management determines necessary to ensure the allowance for loan losses is adequate to
cover any losses inherent in the loan portfolio. The Corporation had a credit provision of $250,000 for the quarter ended September
30, 2012, and a credit provision of $850,000 for the nine months ended September 30, 2012, compared to a provision expense of
$450,000 and $1,350,000, respectively, for the same periods in 2011. The analysis of the loan loss allowance takes into consideration,
among other things, the following factors:
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
|
·
|
levels and trends in delinquencies, nonaccruals, and charge-offs,
|
|
·
|
trends within the loan portfolio,
|
|
·
|
changes in lending policies and procedures,
|
|
·
|
experience of lending personnel and management oversight,
|
|
·
|
national and local economic trends,
|
|
·
|
concentrations of credit,
|
|
·
|
external factors such as legal and regulatory requirements,
|
|
·
|
changes in the quality of loan review and board oversight,
|
|
·
|
changes in the value of underlying collateral.
|
The provision for 2012 was lower than
the provision for 2011 due to the following factors:
|
·
|
Lower levels of delinquent and non-performing loans
|
|
·
|
Increased allowance as a percentage of total loans
|
|
·
|
Declines in total loans
|
Coupled with the prolonged period of economic decline, specifically
the weaker housing market and ongoing credit concerns, the Corporation had experienced a general increase in loan delinquencies
since the beginning of 2009 through 2010. However, in 2011 and through the third quarter of 2012, delinquencies declined from a
January 31, 2011 high of 1.45% of total loans to 0.68% of total loans as of September 30, 2012. The reduction in loan delinquencies
was affected by the 2011 payoff of approximately $1.5 million related to a commercial borrower who had several loans on nonaccrual
status. The Corporation’s classified loans, which include those loans rated substandard, doubtful and loss, are down significantly
from the high in December 2011. Classified loans were $33.3 million as of September 30, 2011, $33.4 million as of December 31,
2011, and $23.8 million as of September 30, 2012, net of specific allocations of $175,000, $201,000, and $162,000, respectively.
Total delinquencies, as a percentage of total loans, stood at 0.92% as of September 30, 2011, 1.11% as of December 31, 2011, and
0.68% as of September 30, 2012.
Management has been closely tracking delinquencies and classified
loans as a percentage of the loan portfolio. The vast majority of the Corporation’s loan customers have remained very steadfast
in making their loan payments and avoiding delinquency, even during challenging economic conditions. The delinquency ratios speak
to the long-term health, conservative nature, and, importantly, the character of the Corporation’s customers and lending
practices. Classified loans are determined strictly by the loan-to-value and debt-to-income ratios. The prolonged economic downturn,
including devaluation of residential and commercial real estate, has stressed these ratios to the point that many long-term strong
borrowers now fall below industry guidelines for loan-to-value ratios. Higher levels of classified loans have not resulted in higher
delinquencies or higher loan losses; however, management is committed to reversing the trend of higher classified loans. This includes
seeking additional collateral, limiting the Corporation’s credit exposure, and working out of classified loans that are not
in the Corporation’s best interests to continue to hold. During the second quarter of 2012, a classified loan relationship
paid off resulting in a decline of approximately $4.2 million of substandard loans. The delinquency and classified loan information
is utilized in the quarterly allowance for loan loss (ALLL) calculation, which directly affects the provision expense. A sharp
increase or decrease in delinquencies and/or classified loans during the quarter would be cause for management to increase or decrease
the provision expense. Generally, management will evaluate and adjust, if necessary, the provision expense each quarter upon completion
of the quarterly ALLL calculation.
Improvements in asset quality, as evidenced by lower levels of non-performing
and delinquent loans, minimal charge-offs, along with declines in total loans outstanding, allowed the Corporation to reverse a
portion of the allowance for loan losses into earnings in 2012 while still maintaining strong coverage ratios. Previously, in 2010
and 2011, the provision expense was at an increased level to provide for high levels of classified loans. When classified loans
first began to decline in late 2011, the provision for loan losses was initially reduced. With further declines in classified assets,
along with low levels of non-performing and delinquent loans, the first, second, and third quarter of 2012 allowance for loan losses
calculation supported decreases in this balance. Adding to these favorable trends, the charge-offs for the nine months ended September
30, 2012, were $56,000 compared to $450,000 of charge-offs for the same period in 2011. The culmination of all of these factors
supported reducing the allowance for loan losses.
In addition to the above, provision expense is impacted by three major components
that are all included in the quarterly calculation of the ALLL. First, specific allocations are made for any loans where management
has determined an exposure that needs to be provided for. These specific allocations are reviewed each quarter to determine if
adjustments need to be made. It is common for specific allocations to be reduced as additional principal payments are made, so
while some specific allocations are being added, others are being reduced. Second, management provides for estimated losses on
pools of similar loans based on historical loss experience. Finally, management utilizes qualitative factors every quarter to adjust
historical loss experience to take into consideration the current trends in loan volume, delinquencies, charge-offs, changes in
lending practices, and the quality of the Corporation’s underwriting, credit analysis, lending staff, and Board oversight.
National and local economic trends and conditions are helpful to determine
the amount of loan loss allowance the Corporation should be carrying on the various types of loans. Management evaluates and adjusts,
if necessary, the qualitative factors on a quarterly basis.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Several higher qualitative adjustments were made in the third
quarter of 2012, with the majority related to changes in the agriculture loan portfolio. In the third quarter of 2012 the agricultural
portfolio was broken out into dairy and non-dairy. This resulted in modifications to five of the qualitative factors under dairy
and non-dairy as the factors were re-analyzed based on these more specific categories. The net impact of all of these changes was
a slightly higher composite total for all of the qualitative factors. The new dairy-only sector had higher qualitative factors
than the non-dairy agricultural sector due to higher known and perceived risks to the dairy industry. Other than the agricultural
qualitative factor changes, the only other qualitative adjustments made were in regard to business loans and business mortgages
where a slight increase in the factor occurred to consider minor changes in lending procedures. The other sectors that did not
experience any change in qualitative factors were residential real estate, home equity loans, personal loans, and credit lines.
The net of all qualitative
factor changes over the past several years has resulted in higher required allowance for loan losses, assuming all other factors
remained constant.
The periodic adjustment of qualitative factors allows the Corporation’s historical loss experience
to be continually brought current to more accurately reflect estimated credit losses, based on the current environment. Despite
the general trend of higher qualitative factors, there are other significant considerations in the allowance calculations that
supported a reduction in the allowance. The impact of lower levels of delinquencies, non-performing and classified loans, as well
as a declining outstanding loan portfolio has more than offset the trend of higher qualitative factors in terms of arriving at
lower levels of allowance.
Management monitors the allowance as a percentage of total loans and has
increased this percentage over time. Because of the credit provision recorded for the first nine months of 2012, this percentage
has decreased slightly since December 31, 2011, but still remains very high compared to historical percentages. As of September
30, 2012, the allowance as a percentage of total loans was 1.90%, down from 2.06% at December 31, 2011, and 2.02% at September
30, 2011. More detail is provided under Allowance for Loan Losses in the Financial Condition section that follows.
Management continues to evaluate the allowance for loan losses in
relation to the size of the loan portfolio and changes to the segments within the loan portfolio and their associated credit risk.
Management believes the allowance for loan losses is adequate to provide for future loan losses based on the current portfolio
and the current economic environment. For further discussion of the calculation, see the Allowance for Loan Losses section under
Financial Condition.
Other Income
Other income for the third quarter of 2012 was $1,758,000, an increase
of $149,000, or 9.3%, compared to the $1,609,000 earned during the third quarter of 2011. For the year-to-date period ended September
30, 2012, other income totaled $5,656,000, an increase of $517,000, or 10.1%, compared to the same period in 2011. The following
tables detail the categories that comprise other income.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
OTHER INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment services
|
|
|
248
|
|
|
|
253
|
|
|
|
(5
|
)
|
|
|
(2.0
|
)
|
Service charges on deposit accounts
|
|
|
254
|
|
|
|
329
|
|
|
|
(75
|
)
|
|
|
(22.8
|
)
|
Other service charges and fees
|
|
|
139
|
|
|
|
106
|
|
|
|
33
|
|
|
|
31.1
|
|
Commissions
|
|
|
490
|
|
|
|
469
|
|
|
|
21
|
|
|
|
4.5
|
|
Gains on securities transactions
|
|
|
342
|
|
|
|
269
|
|
|
|
73
|
|
|
|
27.1
|
|
Impairment losses on securities
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
81
|
|
|
|
(100.0
|
)
|
Gains on sale of mortgages
|
|
|
52
|
|
|
|
28
|
|
|
|
24
|
|
|
|
85.7
|
|
Earnings on bank owned life insurance
|
|
|
164
|
|
|
|
148
|
|
|
|
16
|
|
|
|
10.8
|
|
Other miscellaneous income
|
|
|
69
|
|
|
|
88
|
|
|
|
(19
|
)
|
|
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
1,758
|
|
|
|
1,609
|
|
|
|
149
|
|
|
|
9.3
|
|
OTHER INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment services
|
|
|
816
|
|
|
|
847
|
|
|
|
(31
|
)
|
|
|
(3.7
|
)
|
Service charges on deposit accounts
|
|
|
860
|
|
|
|
972
|
|
|
|
(112
|
)
|
|
|
(11.5
|
)
|
Other service charges and fees
|
|
|
399
|
|
|
|
348
|
|
|
|
51
|
|
|
|
14.7
|
|
Commissions
|
|
|
1,454
|
|
|
|
1,376
|
|
|
|
78
|
|
|
|
5.7
|
|
Gains on securities transactions
|
|
|
1,003
|
|
|
|
1,346
|
|
|
|
(343
|
)
|
|
|
(25.5
|
)
|
Impairment losses on securities
|
|
|
(86
|
)
|
|
|
(300
|
)
|
|
|
214
|
|
|
|
(71.3
|
)
|
Gains on sale of mortgages
|
|
|
183
|
|
|
|
108
|
|
|
|
75
|
|
|
|
69.4
|
|
Losses on sale of loans
|
|
|
—
|
|
|
|
(263
|
)
|
|
|
263
|
|
|
|
(100.0
|
)
|
Earnings on bank owned life insurance
|
|
|
762
|
|
|
|
441
|
|
|
|
321
|
|
|
|
72.8
|
|
Other miscellaneous income
|
|
|
265
|
|
|
|
264
|
|
|
|
1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
5,656
|
|
|
|
5,139
|
|
|
|
517
|
|
|
|
10.1
|
|
Trust and investment services revenue consists of income from traditional
trust services and income from alternative investment services provided through a third party. For the three months ended September
30, 2012, traditional trust services income decreased $20,000, or 10.5%, from the same period in 2011, while income from alternative
investment services increased by $15,000, or 23.0%. For the nine months ended September 30, 2012, traditional trust service income
decreased by $20,000, or 3.3%, from the same period in 2011, while income from alternative investment services decreased by $11,000,
or 4.5%. It has been more difficult to grow the trust and investment services area in the past several years due to a very weak
stock market that coincided with the sub-prime and credit crisis that began in 2008.
Service charges on deposit accounts decreased by $75,000, or 22.8%,
and $112,000, or 11.5%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. Overdraft
service charges are the largest component of this category and comprised between 84% and 86% of the total deposit service charges
for the three and nine months ended September 30, 2012. Total overdraft fees decreased by $69,000, or 24.4%, and $101,000, or 12.0%,
for the three and nine-month periods ended September 30, 2012, compared to the same periods in 2011. Management continues to experience
changes in customer behavior related to past regulatory changes on overdrafts, with customers being more proactive in preventing
overdrafts from occurring. Most of the other service charge areas remained stable from the third quarter of 2011 to the third quarter
of 2012.
Other fees increased by $33,000, or 31.1%, and $51,000, or 14.7%,
for the three and nine months ended September 30, 2012, compared to the same periods in 2011. This is primarily due to an increase
in loan-related fees. When customers choose to amend the original terms of their mortgage agreement, to change the length of the
term, or to change the rate, they are assessed fees based on the remaining loan balance. These amendments allow customers to obtain
favorable terms without completely rewriting the loan. These loan amendments do not involve delinquent loans, or loans with collateral
quality deterioration, which are restructured loans. These fees increased by $32,000 for the three months ended September 30,
2012, and $44,000 for the nine months ended September 30, 2012. Various other fee income categories increased or decreased slightly
accounting for the remainder of the change.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Commission income increased $21,000, or 4.5%, and $78,000, or 5.7%,
for the three and nine months ended September 30, 2012, compared to the same periods in 2011. The largest component of commission
income is from Debit MasterCard® commissions. The amount of customer usage of cards at point of sale transactions determines
the level of commission income received. The debit card income increased $10,000, or 2.5%, and $78,000, or 6.5%, for the three
months and nine months ended September 30, 2012, compared to the same periods in 2011. Customers have become more comfortable with
the use of debit cards, as they are now widely accepted by merchants, thereby increasing the number of transactions processed.
Another significant component of commission income is from MasterCard and Visa® commissions, which provided income of $37,000
for the three months ended September 30, 2012, and $125,000 for the nine months ended September 30, 2012. This represents decreases
of $13,000, or 25.4%, and $18,000, or 12.7%, compared to the same periods in 2011. MasterCard and Visa commissions are the amount
the Corporation earns on transactions processed through the MasterCard and Visa systems for business customers. This revenue had
declined due to lower levels of business activity. Another component of commission income is income received from Banker’s
Settlement Services for title insurance commissions. This income increased by $23,000 for the three months ended September 30,
2012, and $18,000 for the nine months ended September 30, 2012, compared to the same periods in 2011.
For the three months ended September 30, 2012, $342,000 of gains
on securities transactions were recorded compared to $269,000 for the same period in 2011. For the nine months ended September
30, 2012, $1,003,000 of gains on securities transactions were recorded compared to $1,346,000 for the same period in 2011. Gains
or losses on securities transactions fluctuate based on opportunities to reposition the securities portfolio to improve long-term
earnings, or as part of management’s asset liability goals to improve liquidity or reduce interest rate risk or fair value
risk. The gains or losses on this type of activity fluctuate based on current market prices and the volume of security sales. Due
to favorable market conditions, with U.S. Treasury rates lower and bond prices higher, management had opportunities to sell securities
at favorable gains in the first three quarters of 2012 and 2011.
There were no impairment losses on securities for the three months
ended September 30, 2012, and impairment losses totaled $86,000 for the nine months ended September 30, 2012, compared to $81,000
and $300,000 for the same periods in 2011. Impairment losses occur when securities are written down to a lower value based on anticipated
credit losses. The other than temporary impairment losses recorded in 2012 were related to two private collateralized mortgage
obligations. The impairment losses recorded in 2011 were related to four private collateralized mortgage obligations. Further information
on securities and other than temporary impairment is provided in the Securities Available for Sale section, under Financial Condition,
in this filing.
Gains on the sale of mortgages were $52,000 and $183,000 for the
three and nine-month periods ended September 30, 2012, compared to $28,000 and $108,000 for the same periods in 2011. Secondary
mortgage financing activity drives the gains on the sale of mortgages, and this activity increased towards the end of 2011 and
has continued in 2012 as refinancing activity was high due to the extremely low interest rate environment.
For the three and nine months ended September 30, 2012, earnings
on BOLI were $164,000 and $762,000, compared to $148,000 and $441,000 for the same periods in 2011. Increases and decreases in
BOLI income depend on insurance cost components on the Corporation’s BOLI policies, the actual annual return of the policies,
and any benefits paid upon death that exceed the policy’s cash surrender value. Increases in cash surrender value are a function
of the return of the policy net of all expenses. Management made an additional BOLI purchase in the first quarter of 2012 that
contributed to the increase in BOLI income from the third quarter of 2011 to the third quarter of 2012. In addition, the death
of a former director resulted in further BOLI income of $256,000 in 2012.
The miscellaneous income category decreased $19,000, or 21.6%,
and increased $1,000, or 0.4%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. In
the third quarter of 2011, the provision for off balance sheet credit losses was reduced by $37,000, which was recorded as miscellaneous
income. In the third quarter of 2012, this provision was reduced by $18,000, representing a $19,000 decrease from the same quarter
in 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Operating Expenses
The following tables provide details of the Corporation’s
operating expenses for the three and nine-month periods ended September 30, 2012, compared to the same periods in 2011.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,020
|
|
|
|
2,904
|
|
|
|
116
|
|
|
|
4.0
|
|
Occupancy expenses
|
|
|
420
|
|
|
|
410
|
|
|
|
10
|
|
|
|
2.4
|
|
Equipment expenses
|
|
|
221
|
|
|
|
206
|
|
|
|
15
|
|
|
|
7.3
|
|
Advertising & marketing expenses
|
|
|
65
|
|
|
|
74
|
|
|
|
(9
|
)
|
|
|
(12.2
|
)
|
Computer software & data processing expenses
|
|
|
418
|
|
|
|
397
|
|
|
|
21
|
|
|
|
5.3
|
|
Bank shares tax
|
|
|
202
|
|
|
|
208
|
|
|
|
(6
|
)
|
|
|
(2.9
|
)
|
Professional services
|
|
|
262
|
|
|
|
287
|
|
|
|
(25
|
)
|
|
|
(8.7
|
)
|
FDIC Insurance
|
|
|
90
|
|
|
|
88
|
|
|
|
2
|
|
|
|
2.3
|
|
Other operating expenses
|
|
|
373
|
|
|
|
401
|
|
|
|
(28
|
)
|
|
|
(7.0
|
)
|
Total Operating Expenses
|
|
|
5,071
|
|
|
|
4,975
|
|
|
|
96
|
|
|
|
1.9
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Increase (Decrease)
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
9,326
|
|
|
|
8,566
|
|
|
|
760
|
|
|
|
8.9
|
|
Occupancy expenses
|
|
|
1,261
|
|
|
|
1,217
|
|
|
|
44
|
|
|
|
3.6
|
|
Equipment expenses
|
|
|
657
|
|
|
|
604
|
|
|
|
53
|
|
|
|
8.8
|
|
Advertising & marketing expenses
|
|
|
285
|
|
|
|
239
|
|
|
|
46
|
|
|
|
19.2
|
|
Computer software & data processing expenses
|
|
|
1,216
|
|
|
|
1,174
|
|
|
|
42
|
|
|
|
3.6
|
|
Bank shares tax
|
|
|
618
|
|
|
|
625
|
|
|
|
(7
|
)
|
|
|
(1.1
|
)
|
Professional services
|
|
|
850
|
|
|
|
974
|
|
|
|
(124
|
)
|
|
|
(12.7
|
)
|
FDIC Insurance
|
|
|
270
|
|
|
|
433
|
|
|
|
(163
|
)
|
|
|
(37.6
|
)
|
Other operating expenses
|
|
|
1,282
|
|
|
|
1,133
|
|
|
|
149
|
|
|
|
13.2
|
|
Total Operating Expenses
|
|
|
15,765
|
|
|
|
14,965
|
|
|
|
800
|
|
|
|
5.3
|
|
Salaries and employee benefits are the largest category of operating
expenses. In general, they comprise between 55% and 60% of the Corporation’s total operating expenses. For the three and
nine months ended September 30, 2012, salaries and benefits increased $116,000, or 4.0%, and $760,000, or 8.9%, over the same periods
in 2011. Salaries increased by $76,000, or 3.5%, and $549,000, or 8.7%, and employee benefits increased by $40,000, or 5.5%, and
$211,000, or 9.5%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. In addition to
the normal wage and cost of living increases, the salary and benefits costs increased due to the addition of multiple new professional
staff members, primarily in the loan function.
Occupancy expenses consist of the following:
|
·
|
Depreciation of bank buildings
|
|
·
|
Real estate taxes and property insurance
|
|
·
|
Building repair and maintenance
|
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Occupancy expenses increased $10,000, or 2.4%, and $44,000, or 3.6%,
for the three and nine months ended September 30, 2012, compared to the same periods in 2011. The majority of this increase was
due to a $13,000 and a $19,000 increase in building repair and maintenance expenses for the three and nine months ended September
30, 2012, compared to the same periods in 2011. Various other occupancy categories had minimal increases and decreases accounting
for the remainder of the quarterly and year-to-date variances.
Equipment expenses increased $15,000, or 7.3%, and $53,000, or 8.8%,
for the three and nine months ended September 30, 2012, compared to the same periods in the prior year. This expense category includes
equipment depreciation, repair and maintenance, and various other equipment-related expenses. Depreciation expense increased by
$7,000, or 5.4%, and $21,000, or 5.6%, for the three and nine months ended September 30, 2012, compared to the same periods in
2011. Equipment assets have shorter asset depreciation lives, generally five to seven years. In addition, expenses related to equipment
repair and maintenance increased by $14,000 and $35,000 for the three and nine-month periods ended September 30, 2012, when compared
to the same periods in 2011. Partially offsetting these increases, equipment service contract expenses decreased by $9,000 and
$6,000 for the three and nine-month periods ended September 30, 2012, compared to the same periods in the prior year. Other equipment
expenses changed minimally.
Advertising and marketing expenses decreased by $9,000, or 12.2%,
and increased by $46,000, or 19.2%, for the three and nine months ended September 30, 2012, compared to the same periods in the
prior year. The expenses of this category support the overall business strategies of the Corporation; therefore, the timing of
these expenses is dependent upon those strategies and fluctuations are normal.
The computer software and data processing expenses are comprised
of STAR® network processing fees, software amortization, software purchases, and software maintenance agreements. This expense
category increased $21,000, or 5.3%, and $42,000, or 3.6%, for the three and nine months ended September 30, 2012, compared to
the same periods in 2011. Software-related expenses increased $9,000, or 4.2%, and decreased $10,000, or 1.6%, for the three and
nine months ended September 30, 2012, compared to the same periods in 2011, as a result of an increase in software maintenance
agreement expense for the quarter and year-to-date periods and a decrease in software amortization costs for the year-to-date period
. STAR network fees were up $12,000, or 6.3%, and $52,000, or 10.0%, for the three and nine months ended September 30, 2012, compared
to the same periods in 2011. The STAR network fees are the fees paid to process all ATM and debit card transactions.
Bank shares tax expense decreased $6,000, or 2.9%, and $7,000, or
1.1%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. The shares tax is a calculation
based on the Bank’s capital net of shares tax-exempt assets. The shares tax will generally increase as the Bank’s capital
levels grow unless the Bank purchases more shares tax-exempt assets. Management continually weighs the benefits of holding more
bank shares tax-exempt assets versus the costs in terms of the lower yield that these securities produce compared to other securities.
Professional services expense decreased $25,000, or 8.7%, and $124,000,
or 12.7%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. These services include
accounting and auditing fees, legal fees, loan review fees, and fees for other third-party services. Accounting and auditing fees
decreased by $29,000 and $20,000 for the three and nine months ended September 30, 2012, compared to the same periods in 2011,
due to an adjustment made in 2011 for fees that were over-accrued in 2010. The fee accruals in 2010 were elevated due to an expected
increase in internal and external audit fees related to compliance with the Sarbanes-Oxley Act. However, due to the deferral of
the external audit attestation piece of the Sarbanes-Oxley Act, the Corporation was not required to pay these additional audit
fees. In addition, student loan servicing expense decreased $35,000 and $191,000 for the three and nine months ended September
30, 2012, compared to the same periods in 2011. Management decided to stop originating student loans in the first quarter of 2010
and sold the remaining portfolio of student loans in the second quarter of 2011. Other outside services expense increased $35,000
and $66,000 for the three and nine months ended September 30, 2012, compared to the same periods in 2011. Several other professional
services expenses increased or decreased slightly making up the remainder of the variance.
The expenses associated with FDIC insurance increased by $2,000,
or 2.3%, and decreased by $163,000, or 37.6%, for the three and nine months ended September 30, 2012, compared to the same periods
in 2011. The FDIC expenses for 2012 were reduced primarily because of a change in assessment base. Prior to 2011, assessments
were calculated based on the total deposits of a financial institution. Beginning in the second quarter of 2011, the assessment
base was changed from deposits to total assets less tangible equity. This change resulted in significant savings for the Corporation
beginning in the second quarter of 2011. FDIC premiums were prepaid at the end of 2009 for the 2010 to 2012 period. The Corporation
had a total of $1,014,000 outstanding in the prepaid FDIC insurance assessment asset account as of September 30, 2012. In addition
to FDIC insurance costs, the Corporation is subject to assessments to pay the interest on Financing Corporation Bonds, which is
also recorded as FDIC insurance expense. Congress created the Financing Corporation to issue bonds to finance the resolution of
failed thrift institutions. The total Financing Corporation assessments paid by the Corporation in the first three quarters of
2012 were approximately $34,000 and were approximately 23% lower than the assessments paid in the first three quarters of 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Other operating expenses are comprised of the remainder of the Corporation’s
operating expenses. Some of the larger items included in this category are:
|
·
|
Director fees and expense
|
|
·
|
Charitable contributions
|
|
·
|
Delinquent loan expenses
|
|
·
|
Deposit account charge-offs and recoveries
|
Other operating expenses decreased by $28,000, or 7.0%, and increased
by $149,000, or 13.2%, for the three and nine months ended September 30, 2012, compared to the same periods in 2011. The year-to-date
increase can be attributed to an increase in the allowance for off-balance sheet credit losses of $77,000, additional charitable
contributions expenses of $33,000, and additional fraud related charge-off expenses of $115,000 for the nine months ended September
30, 2012. Operating supplies expenses decreased by $21,000 and postage expenses decreased by $19,000, partially offsetting these
increases. Several other expense categories had minimal increases and decreases making up the remaining variance.
Income Taxes
The majority of the Corporation’s income is taxed at a corporate
rate of 34% for Federal income tax purposes. The Corporation is also subject to Pennsylvania Corporate Net Income Tax; however,
the Corporation has no taxable corporate net income activities. The Corporation’s wholly owned subsidiary, Ephrata National
Bank, is not subject to state corporate income tax, but does pay Pennsylvania Bank Shares Tax. The Bank Shares Tax expense appears
on the Corporation’s Consolidated Statements of Income, under operating expenses.
Certain items of income are not subject to Federal income tax, such
as tax-exempt interest income on loans and securities, and BOLI income; therefore, the effective income tax rate for the Corporation
is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation’s provision for income
tax by the pre-tax income for the applicable period.
For the three and nine months ended September 30, 2012, the Corporation
recorded tax expense of $384,000 and $1,160,000, compared to tax expense of $293,000 and $870,000 for the three and nine months
ended September 30, 2011. The effective tax rate for the Corporation was 15.9% for the nine months ended September 30, 2012, compared
to 14.1% for the same period in 2011. The effective tax rate was higher because the Corporation’s level of pre-tax income
was 18.4% higher for the nine months ended September 30, 2012, compared to the same period in 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Financial Condition
Securities Available for Sale
The Corporation classifies all of its securities as available for
sale and reports the portfolio at fair market value. As of September 30, 2012, the Corporation had $304.5 million of securities
available for sale, which accounted for 38.8% of assets, compared to 36.8% as of December 31, 2011, and 37.0% as of September 30,
2011. Based on ending balances, the securities portfolio increased 7.0% from September 30, 2011, and 7.2% from December 31, 2011.
The Corporation typically invests excess liquidity into securities,
primarily fixed-income bonds. The securities portfolio provides interest and dividend income to supplement the interest income
on loans. Additionally, the securities portfolio assists in the management of both liquidity risk and interest rate risk. In order
to provide maximum flexibility for management of liquidity and interest rate risk, the securities portfolio is classified as available
for sale and reported at fair value. Management adjusts the value of all the Corporation’s securities on a monthly basis
to fair market value as determined in accordance with U.S. generally accepted accounting principles
.
Management has the
ability and intent to hold all debt securities until maturity, and does not generally record impairment on bonds that are currently
valued below book value. In addition to the fixed-income bonds, the Corporation also has two small equity holdings with a book
value of $5 million in the form of two CRA-qualified mutual funds. These equity funds make up less than 2% of the Corporation’s
securities available for sale. The one CRA fund is a Small Business Association (SBA) variable rate fund with a stable dollar price,
while the other CRA fund is an equity fund subject to fair value adjustment.
All securities, bonds, and equity holdings are evaluated for impairment
on a quarterly basis. Should any impairment occur, management would write down the security to a fair market value in accordance
with U.S. generally accepted accounting principles, with the amount of the write down recorded as a loss on securities.
Each quarter, management sets portfolio allocation guidelines and
adjusts the security portfolio strategy generally based on the following factors:
|
·
|
Relative performance of the various instruments
|
|
·
|
Duration and average length of the portfolio
|
|
·
|
Volatility of the portfolio
|
|
·
|
Direction of interest rates
|
|
·
|
Slope of the yield curve
|
|
·
|
ALCO positions as to liquidity, credit risk, interest rate risk, and net portfolio value
|
|
·
|
Economic factors impacting debt securities
|
The investment policy of the Corporation imposes guidelines to ensure
diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize
yield, and mitigate credit risk. The composition of the securities portfolio based on fair market value is shown in the following
table.
SECURITIES PORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
September 30, 2011
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
38,616
|
|
|
|
12.7
|
|
|
|
46,614
|
|
|
|
16.4
|
|
|
|
51,537
|
|
|
|
18.1
|
|
U.S. agency mortgage-backed securities
|
|
|
55,648
|
|
|
|
18.3
|
|
|
|
55,129
|
|
|
|
19.4
|
|
|
|
51,585
|
|
|
|
18.1
|
|
U.S. agency collateralized mortgage obligations
|
|
|
47,420
|
|
|
|
15.6
|
|
|
|
56,049
|
|
|
|
19.8
|
|
|
|
60,568
|
|
|
|
21.3
|
|
Private collateralized mortgage obligations
|
|
|
5,935
|
|
|
|
1.9
|
|
|
|
7,225
|
|
|
|
2.5
|
|
|
|
10,245
|
|
|
|
3.6
|
|
Corporate debt securities
|
|
|
48,952
|
|
|
|
16.1
|
|
|
|
25,298
|
|
|
|
8.9
|
|
|
|
22,297
|
|
|
|
7.8
|
|
Obligations of states and political subdivisions
|
|
|
102,954
|
|
|
|
33.8
|
|
|
|
89,745
|
|
|
|
31.6
|
|
|
|
84,458
|
|
|
|
29.7
|
|
Equity securities
|
|
|
4,956
|
|
|
|
1.6
|
|
|
|
3,951
|
|
|
|
1.4
|
|
|
|
3,954
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
304,481
|
|
|
|
100.0
|
|
|
|
284,011
|
|
|
|
100.0
|
|
|
|
284,644
|
|
|
|
100.0
|
|
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The largest movements within the securities portfolio were
shaped by market factors, such as:
|
·
|
interest spread versus U.S. Treasury rates on the various securities
|
|
·
|
pricing of the instruments, including supply and demand for the product
|
|
·
|
structure of the instruments, including duration and average life
|
|
·
|
portfolio weightings versus policy guidelines
|
|
·
|
prepayment speeds on mortgage-backed securities and collateralized mortgage obligations
|
|
·
|
risk-based capital reasons
|
|
·
|
federal income tax considerations with regard to obligations of states and political subdivisions.
|
Since September of 2011, the most significant shift occurring in
the Corporation’s securities portfolio was an increase in corporate bonds. Corporate bonds increased $26.7 million, or 119.5%,
from September 30, 2011 to September 30, 2012. The Corporation invested in additional corporate bonds in order to add diversity
to the portfolio and provide strong yields for shorter maturities. In addition to strong performance for a relatively short maturity,
a number of government-backed foreign financial corporate bonds now carry a favorable 20% risk weighting rather than the normal
100% risk weighting. The 100% risk weighting of corporate bonds has been a major reason why U.S. financial institutions were limited
on their corporate bond purchases as they strove to increase their risk-based capital levels. The Corporation already maintains
a high total risk-based capital level and the new opportunity of investing in corporate bonds with a 20% risk weighting makes them
a more attractive investment. As of September 30, 2012, nearly 45% of the Corporation’s corporate bonds carried a favorable
20% risk weighting. Corporate bonds had historically been a relatively small percentage of the securities portfolio, accounting
for only 7.8% of the portfolio as of September 30, 2011. As a result of the added investments, corporate bonds now account for
16.1% of the portfolio as of September 30, 2012.
The next highest growth in the portfolio occurred with municipal
bonds, which grew $18.5 million, or 21.9%, since September 30, 2011. The Corporation has historically maintained large municipal
bond holdings that have generally averaged between 30% and 34% of the portfolio. Because of the substantial growth that has occurred
in the portfolio, a large dollar increase is necessary just to maintain municipal bonds in this preferred range. The other areas
of the securities portfolio, with the exception of mortgage-backed securities (MBS) and equity securities, declined in dollar amount
or as a percentage of the portfolio. The areas that declined were U.S. government agencies, collateralized mortgage obligations
(CMOs), and private collateralized mortgage obligations (PCMOs). Equity securities are a very small percentage of the portfolio
and increased by $1.0 million, or 25.3%, from September 30, 2011 to September 30, 2012. The MBS sector grew out of a strategy to
reinvest CMO maturities and cash flow back into MBS rather than into shorter structure CMOs to limit excessive cash flows and reduce
reinvestment risk. The more significant components of the securities portfolio along with a more detailed explanation of their
changes are discussed below.
The decrease in the Corporation’s U.S. government agencies
sector occurred primarily due to calls and maturities, but also as payments were received in the form of normally scheduled principal
payments on the portion of agencies that are structured notes. As agencies were called or matured, only a portion of these proceeds
were reinvested back into the agency sector because of the extremely low yields available on these bonds. Management continues
to invest in agencies when advantageous to maintain a minimum sector weighting, maintain adequate risk weightings of the portfolio,
to ensure sufficient U.S. government securities for pledging purposes, and importantly to ladder out a schedule of agency and corporate
maturities over the next 5 years to avoid any concentration of maturities. Next to U.S. Treasuries, U.S. agencies are viewed as
the safest instruments and are considered by management as foundational to the portfolio. Management prefers to maintain U.S. agencies
at a minimum of 15% of the portfolio. As of September 30, 2012, U.S. agencies represented 12.7% of the fair market value of the
portfolio. Management has a goal of returning to the 15% level by the end of 2012.
The increase in the Corporation’s U.S. agency MBS sector
since September 30, 2011, occurred due to the strategy of reinvesting CMO dollars into MBS as mentioned above. Investments in
a substantial amount of MBS assist management in maintaining a stable five-year ladder of cash flows, which is important in providing
stable liquidity and interest rate risk positions. Unlike the typical U.S. agency paper, corporate bonds, and obligations of states
and political subdivisions, which only pay principal at final maturity, the U.S. agency MBS, CMO, and PCMO securities pay monthly
principal and interest and are subject to prepayment of principal. The combined effect of all of these instruments paying monthly
principal and interest provides the Corporation with a significant and reasonably stable cash flow. Cash flows coming off of MBS,
CMOs, and PCMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s
length and yield. As interest rates decline, prepayment of principal on securities increases, the duration of the security shortens,
and the yield declines as more amortization is required on premium bonds. If interest rates were to increase, the opposite of
this would occur. In this prolonged period of historically low interest rates, the shorter structure of the CMO securities has
not benefited the Corporation as increased cash flows have to be reinvested at historically low rates. Therefore, management has
been purchasing structures that limit the amount of cash flow that can be returned over the next year or two. Despite the fluctuations
that occur in terms of monthly cash flow as a result of changing prepayment speeds, the monthly cash flow generated by U.S. agency
MBS, CMO, and PCMO securities as a group is significant, and helps to soften or smooth out the Corporation’s total monthly
cash flow from all securities.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Obligations of states and political subdivisions, or municipal bonds,
are tax-free securities that generally provide the highest yield in the securities portfolio. From 2006 through 2009, the Corporation
was in an alternative minimum tax (AMT) position when income levels fell and tax-exempt income remained high. The AMT requires
the payment of a minimum level of tax should an entity have excessive amounts of tax preference items relative to a Corporation’s
income. The Corporation’s primary tax preference item is the large amount of tax-free income generated by tax-free loans
and tax-exempt securities. As a result of the Corporation’s AMT position in 2008, management had determined that the size
of the municipal bond holdings in relation to the rest of the securities portfolio should be decreased. However, because of legislation
that followed the credit crisis in the fall of 2008, beginning in 2009, financial institutions were permitted to purchase 2009
and 2010 issued tax-free municipal bonds, which are AMT-exempt for the life of the bond. In addition, management could continue
to purchase AMT exempt municipals in 2011 and 2012 as long as they were originally issued in 2009 and 2010. In 2010, 2011, and
through the first nine months of 2012, management increased the amount of tax-free municipal bonds due to very favorable tax-free
yields that far surpassed the yields available on similar length taxable instruments and the favorable AMT-exempt for life tax
treatment that exists. Management views this as a unique opportunity to both take advantage of the more favorable tax-equivalent
yields on municipal bonds without causing the Corporation to be subject to AMT, typically caused by carrying too many tax-free
investments. Municipal bonds as a percentage of the total investment portfolio have increased slightly from 29.7% at September
30, 2011, compared to 31.6% as of December 31, 2011, and 33.8% at September 30, 2012. Management is comfortable with municipal
bonds at approximately 34% of the portfolio and does not anticipate growth beyond this level.
The harsh economic and credit environment, that began in 2008 and
continues to this day, has caused the downgrading of many securities. This phenomenon has affected all segments of the Corporation’s
portfolio not backed by the U.S. government, specifically PCMOs, corporate bonds, and municipal bonds. By policy, management is
to identify and recommend whether to hold or sell securities with credit ratings that have fallen below minimum policy credit ratings
required at the time of purchase, or below investment grade. Management monitors the security ratings on a monthly basis and reviews
quarterly with the Board of Directors. Management, with Board approval, determines whether it is in the Corporation’s best
interest to continue to hold any security that has fallen below policy guidelines or below investment grade based on the expectation
of recovery of market value or improved performance. At this time management has elected, and the Board has approved holding securities
that have fallen below initial policy guidelines or investment grade.
As of September 30, 2012, the Corporation held four PCMO securities
with an amortized cost of $6.4 million, a reduction of $1.9 million from the balance as of December 31, 2011. One of the four PCMO
securities, with an amortized cost of $1.0 million, carried an AAA credit rating by at least one of the major credit rating services.
The three remaining PCMOs, with an amortized cost of $5.4 million, had credit ratings below investment grade, which is BBB- for
S&P and Baa3 for Moody’s. Management currently has no plans to sell these securities as management believes the current
market values are not true indications of the value of the bonds based on cash flow analysis performed under severe stress testing.
Management’s September 30, 2012 cash flow analysis did not indicate a need to take additional impairment on any of the PCMO
securities; however, impairment charges of $86,000 were recognized on two of these bonds in the first quarter of 2012. The $86,000
of year-to-date impairment in 2012 is down from $300,000 of impairment recorded in the first nine months of 2011. Should any future
analysis reflect the need for additional impairment, management would expect it to be diminished as projected loss numbers were
increased in the first quarter of 2012 and have now been provided for. Additionally, all of these securities continue to pay down
in terms of monthly principal payments.
For all of the PCMO bonds with impairment recorded, the cash flow
analysis, conducted at slower prepayment speeds than the securities had been paying, revealed that there was an expectation that
these particular bonds would suffer some loss of principal at the time of analysis, resulting in the impairment charge. Based
on management’s methodology, current data does not support additional impairment on these PCMO securities, but it is possible
further impairment would be necessary if both default and severity of loss rates rose to levels that have not yet been experienced,
and if prepayment speeds slowed to speeds not previously experienced. Management will continue to update cash flow analysis quarterly
that incorporates the most current default rates and prepayment speeds. Prepayment speeds on all of the Corporation’s PCMOs
have been relatively fast, which is assisting in the cash flow analysis. Faster prepayment speeds make it more likely that the
Corporation’s principal will be returned before additional credit losses are incurred.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
As of September 30, 2012, the Corporation held corporate bonds with
a total amortized cost of $47.6 million and fair market value of $49.0 million. Management increased its holdings in corporate
securities to 16.1% of the portfolio, compared to 8.9% at December 31, 2011. Like any security, corporate bonds have both positive
and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity
to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level
of credit risk should the entity experience financial difficulties. Management stands to possibly lose the entire principal amount
if the entity that issued the corporate paper fails. As a result of the higher level of credit risk taken by purchasing a corporate
bond, management has in place minimal credit ratings that must be met in order for management to purchase a corporate bond.
As of September 30, 2012, three of the forty-four corporate securities
held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 98.8%
of book value. The Corporation’s investment policy requires that corporate bonds have a minimum credit rating of A3 by Moody’s
or A- by S&P or Fitch at the time of purchase, or an average or composite rating of A-. As of September 30, 2012, all of the
corporate bonds had at least one A3 or A- rating by one of the major credit rating services. As of September 30, 2012, there were
nine corporate bonds with $8 million of par value that were carrying split ratings with one rating within policy limit and another
rating below the initial policy purchase requirement but above investment grade. These securities are monitored on an ongoing basis
to ensure these credits do not deteriorate further and remain at investment grade. Currently, there are no indications that any
of these bonds would discontinue contractual payments.
Since 2008, the municipal bond ratings have been adversely affected
by downgrades on nearly all of the insurance companies backing municipal bond issues. Previous to the sharp decline in the health
of the insurance companies in 2008, nearly 95% of the Corporation’s municipal bonds carried AAA credit ratings with the added
insurance protection. Now, with the health of most of the insurers greatly diminished, the final rating of most municipal bonds
has fallen to AA or A. As of September 30, 2012, approximately 3.9% of the Corporation’s municipal bonds carried an AAA rating.
The Corporation’s investment policy requires that municipal bonds not carrying insurance have a minimum credit rating of
A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of September 30, 2012, two municipal bonds with an amortized
cost of $1.1 million carried credit ratings under these levels. In the current environment, the major rating services have tightened
their credit underwriting procedures and are more apt to downgrade municipalities. Additionally, the very weak economy has reduced
revenue streams for many municipalities and has called into question the basic premise that municipalities have unlimited power
to tax, i.e. the ability to raise taxes to compensate for revenue shortfalls. Presently, despite the lower credit ratings on the
two municipal securities, management has the intent and the ability to hold these securities to maturity and believes that full
recovery of principal is probable.
The entire securities portfolio is reviewed monthly for credit risk
and evaluated quarterly for possible impairment. In terms of credit risk and impairment, management views the Corporation’s
one CRA fund with a $1 million book value differently because it is an equity investment with no maturity date. Bond investments
could have larger unrealized losses but significantly less probability of impairment due to having a fixed maturity date. As of
September 30, 2012, this CRA fund was showing unrealized losses of $44,000, or a 4.4% price decline. The prices on this fund tend
to lag behind decreases in U.S. Treasury rates. Management believes that the price declines are primarily rate driven, and temporary
as opposed to permanent. The other $4 million CRA SBA fund is a variable rate fund with a stable dollar price that does not carry
fair value risk. Corporate bonds and private collateralized mortgage obligations have the most potential credit risk out of the
Corporation’s debt instruments. Due to the rapidly changing credit environment and weak economic conditions, management is
closely monitoring all corporate bonds and all private label securities. As of September 30, 2012, two private collateralized mortgage
obligations were considered to be other-than-temporarily impaired. These two securities were written down by $86,000 during the
first quarter of 2012, which was the only impairment taken during the year.
Loans
Net loans outstanding decreased by 1.5%, to $394.0 million at September
30, 2012, from $400.2 million at September 30, 2011. Net loans decreased by $10.2 million, or 2.5%, since December 31, 2011. The
following table shows the composition of the loan portfolio as of September 30, 2012, December 31, 2011, and September 30, 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
LOANS BY MAJOR CATEGORY
|
(DOLLARS IN THOUSANDS)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgages
|
|
|
86,941
|
|
|
|
21.6
|
|
|
|
95,347
|
|
|
|
23.1
|
|
|
|
94,991
|
|
|
|
23.3
|
|
Agriculture mortgages
|
|
|
76,675
|
|
|
|
19.1
|
|
|
|
73,287
|
|
|
|
17.7
|
|
|
|
69,436
|
|
|
|
17.0
|
|
Construction
|
|
|
17,525
|
|
|
|
4.4
|
|
|
|
18,957
|
|
|
|
4.6
|
|
|
|
14,874
|
|
|
|
3.6
|
|
Total commercial real estate
|
|
|
181,141
|
|
|
|
45.1
|
|
|
|
187,591
|
|
|
|
45.4
|
|
|
|
179,301
|
|
|
|
43.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential mortgages
|
|
|
130,762
|
|
|
|
32.5
|
|
|
|
133,959
|
|
|
|
32.5
|
|
|
|
137,731
|
|
|
|
33.7
|
|
Home equity loans
|
|
|
13,525
|
|
|
|
3.4
|
|
|
|
14,687
|
|
|
|
3.6
|
|
|
|
15,652
|
|
|
|
3.8
|
|
Home equity lines of credit
|
|
|
15,907
|
|
|
|
4.0
|
|
|
|
15,004
|
|
|
|
3.6
|
|
|
|
14,258
|
|
|
|
3.5
|
|
Total consumer real estate
|
|
|
160,194
|
|
|
|
39.9
|
|
|
|
163,650
|
|
|
|
39.7
|
|
|
|
167,641
|
|
|
|
41.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
25,612
|
|
|
|
6.4
|
|
|
|
25,913
|
|
|
|
6.3
|
|
|
|
26,107
|
|
|
|
6.4
|
|
Tax-free loans
|
|
|
17,774
|
|
|
|
4.4
|
|
|
|
19,072
|
|
|
|
4.6
|
|
|
|
20,161
|
|
|
|
4.9
|
|
Agriculture loans
|
|
|
13,058
|
|
|
|
3.3
|
|
|
|
12,884
|
|
|
|
3.1
|
|
|
|
11,295
|
|
|
|
2.8
|
|
Total commercial and industrial
|
|
|
56,444
|
|
|
|
14.1
|
|
|
|
57,869
|
|
|
|
14.0
|
|
|
|
57,563
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
3,798
|
|
|
|
0.9
|
|
|
|
3,590
|
|
|
|
0.9
|
|
|
|
4,023
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
401,577
|
|
|
|
100.0
|
|
|
|
412,700
|
|
|
|
100.0
|
|
|
|
408,528
|
|
|
|
100.0
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees (costs), net
|
|
|
(67
|
)
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
Allowance for loan losses
|
|
|
7,644
|
|
|
|
|
|
|
|
8,480
|
|
|
|
|
|
|
|
8,253
|
|
|
|
|
|
Total net loans
|
|
|
394,000
|
|
|
|
|
|
|
|
404,158
|
|
|
|
|
|
|
|
400,197
|
|
|
|
|
|
(a)
|
Residential real estate loans do not include mortgage loans sold to Fannie Mae and serviced by ENB. These loans totaled $7,345,000
as of September 30, 2012, $8,904,000 as of December 31, 2011, and $9,225,000 as of September 30, 2011.
|
The composition of the loan portfolio has undergone relatively minor changes in recent years. The total of
all categories of real estate loans comprises 85% of total loans. At $181.1 million, commercial real estate is the largest category
of the loan portfolio, consisting of 45.1% of total loans. This category includes commercial mortgages, agriculture mortgages,
and construction loans. Commercial real estate loans increased from $179.3 million as of September 30, 2011, to $181.1 million
as of September 30, 2012, a $1.8 million, or 1.0% increase.
The growth in commercial real estate loans has occurred in those
secured by farmland and construction loans. Agricultural mortgages increased from $69.4 million, or 38.7% of commercial real estate
loans as of September 30, 2011, to $76.7 million, or 42.3% of commercial real estate loans as of September 30, 2012. Similarly,
commercial construction loans increased from $14.9 million, or 8.3% of commercial real estate loans as of September 30, 2011, to
$17.5 million, or 9.7% of commercial real estate loans as of September 30, 2012. Unlike other commercial areas, agricultural and
construction related projects have started to move forward in 2012. As construction projects are completed, some of the loans are
converted from construction loans to permanent commercial mortgages.
The commercial mortgage segment of the commercial real estate category
of loans has declined from September 30, 2011, to September 30, 2012. This area represented $95.0 million, or 53.0%, of commercial
real estate loans as of September 30, 2011, and $86.9 million, or 48.0%, of commercial real estate loans as of September 30, 2012.
Growth in this area over the past twelve months has slowed significantly since most businesses are unwilling to expand during
uncertain economic conditions. Management believes the commercial real estate growth rate will remain low going forward and attributes
this to a lag effect in terms of the economic conditions impacting Lancaster County. Locally, commercial loan growth continued
during 2008 and 2009 while the national economic slowdown was occurring. That growth continued into the first part of 2010, but
slowed as the year progressed and tapered off in 2011 and through the third quarter of 2012. The long-term economic weakness is
now having an effect on many commercial projects causing them to be placed on hold. Management also would expect that any rebound
in the growth of commercial real estate would lag a recovery by the economy.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Residential real estate loans make up just under 40% of the total
loan portfolio with balances of $160.2 million. These loans include 1-4 family residential mortgages, home equity term loans, and
home equity lines of credit. Personal residential mortgages account for 81.6% of total residential real estate loans and 32.5%
of total loans. Traditional 10 to 20-year personal mortgages originated from and held by the Corporation have consistently been
the largest single product of the Corporation’s loan portfolio, varying between 20% and 24% of the loan portfolio over the
past five years. The Corporation has experienced some slowdown in the residential mortgage area in the latter part of 2012 as the
secondary mortgage market rates became extremely competitive and more customers were opting for this alternative. Payoffs and paydowns
of existing mortgages held by the Corporation were exceeding new mortgages issued resulting in a decline in portfolio mortgages
through the third quarter of 2012. The Corporation has taken action to lower internal mortgage rates to be more competitive and
expects there will be an increase in volume throughout the remainder of 2012 and into 2013. The Corporation’s personal residential
mortgages declined modestly to $130.8 million at September 30, 2012, a decrease of $7.0 million, or 5.1%, from balances as of September
30, 2011. The weaker economic conditions, including continued weakness in home prices and home building, have had some impact on
demand for the 10 to 20-year mortgages held by the Corporation. The Corporation generally only holds 10, 15, and 20-year mortgages,
and will sell any mortgage originated over 20 years. While terms of 10, 15, 20, and 30 years are offered to the customer, the most
popular term is the 30-year, which are all sold on the secondary market. Therefore, to grow the Corporation’s residential
real estate loans, a sufficient number of 10, 15, and 20-year residential mortgages must be originated to compensate for normal
principal pay downs and still grow the portfolio.
Second mortgages and home equity loans, fixed or variable, make
up the remainder of the Corporation’s residential real estate loans. Requests for fixed-rate home equity loans have slowed
in the current environment, while home equity lines of credit, which float on the Prime rate, have increased. From September 30,
2011, to September 30, 2012, fixed rate home equity loans have decreased from $15.7 million to $13.5 million, a $2.2 million, or
16.3% decrease. Meanwhile, home equity lines of credit increased from $14.3 million to $15.9 million, a $1.6 million, or 11.2%
increase. The net of these two trends is a $0.6 million reduction in total home equity loan balances. Consumers are borrowing less
in total due to economic conditions and a general desire to pay off household debt, while at the same time seeking the lowest interest
rate to borrow money against their home value. The trends of lower levels of home equity borrowing and more variable rate versus
fixed rate financing is likely to continue until economic conditions improve and home valuations improve. Management does not anticipate
any marked improvement in the economy through the remainder of 2012 and into 2013. While management does not anticipate any rate
increase from the Federal Reserve in the near future, it is highly expected that when the Federal Reserve eventually acts to increase
the overnight rate, and the Prime rate increases, the reaction will be that floating rate loans will become less attractive to
borrowers who will act to protect themselves against further rate increases by converting to a fixed rate loan. Management anticipates
slow growth in the residential real estate area throughout the remainder of 2012.
Commercial loans not secured by real estate are significantly smaller
than the Corporation’s commercial loans secured by real estate portfolio. These loans are generally extended based on the
health of the commercial borrower. They include both fixed rate loans and Prime-based variable rate loans. The variable rate loans
are generally in the form of a business line of credit. The Corporation’s position as to these loans can be further strengthened
by obtaining the personal guarantees of the owners. This is a preferred approach on commercial accounts as it allows the Corporation
to pursue assets of the owner in addition to assets of the commercial entity. Management can also obtain additional collateral
by securitizing the inventory of the business. This portfolio of loans in total showed a decline of $1.1 million, or 1.9%, from
September 30, 2011, to September 30, 2012. As of September 30, 2012, this category of commercial loans was made up of $25.6 million
of commercial and industrial loans, $17.8 million of tax-free loans, and $13.1 million of agriculture loans. In the case of the
Corporation, all of the $17.8 million of tax-free loans are to local municipalities. These loans declined by $2.4 million, or
11.9%, from September 30, 2011, to September 30, 2012, due to several loan payoffs. Agriculture loans increased by $1.8 million,
or 15.6%, from September 30, 2011, to September 30, 2012, while other non-real estate secured commercial and industrial purpose
loans were down from $26.1 million as of September 30, 2011, to $25.6 million as of September 30, 2012, primarily due to weak
economic conditions and a lack of new commercial projects.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The consumer loan portfolio continued to decline from $4.0 million
as of September 30, 2011, to $3.8 million as of September 30, 2012. Consumer loans made up 1.0% of total loans on September 30,
2011, and 0.9% of total loans on September 30, 2012. The long-term trend over the past decade has seen homeowners turning to the
equity in their homes to finance cars and education rather than traditional consumer loans for those expenditures. More recently,
management has seen the need for additional unsecured credit increase; however, this increased need for credit has only resulted
in low levels of consumer loans for the Corporation. Slightly higher demand for unsecured credit is being offset by principal payments
on existing loans. In the current weak economy, customers delay purchasing new and used cars which has the impact of reducing the
consumer loan portfolio, as lower amounts of new loans are going on the books. Management anticipates that the Corporation’s
level of consumer loans will likely be relatively unchanged in the near future, as the need for additional unsecured credit in
the current weaker economic conditions is generally offset by those borrowers wishing to reduce debt levels and move away from
the higher cost of unsecured financing relative to other forms of real estate secured financing.
Non-Performing Assets
Non-performing assets include:
|
·
|
Loans past due 90 days or more and still accruing
|
|
·
|
Troubled debt restructurings
|
|
·
|
Other real estate owned
|
NON-PERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
|
1,346
|
|
|
|
1,862
|
|
|
|
1,916
|
|
Loans past due 90 days or more and still accruing
|
|
|
172
|
|
|
|
107
|
|
|
|
462
|
|
Troubled debt restructurings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-performing loans
|
|
|
1,518
|
|
|
|
1,969
|
|
|
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
264
|
|
|
|
—
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
1,782
|
|
|
|
1,969
|
|
|
|
2,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to net loans
|
|
|
0.45%
|
|
|
|
0.49%
|
|
|
|
0.69%
|
|
The total balance of non-performing assets declined by $1.0 million,
or 35.9%, from September 30, 2011, to September 30, 2012. The non-performing assets declined slightly, by $187,000, or 9.5%, from
December 31, 2011, to September 30, 2012. There were no loans classified as a TDR as of September 30, 2011, December 31, 2011,
or September 30, 2012. Management is monitoring delinquency trends and the level of non-performing loans closely in light of the
slightly improved but continued weak economic conditions. At this time, management believes that the potential for material losses
related to non-performing loans has declined with the level of non-performing assets down significantly and the Corporation’s
total exposure reduced. Additionally, the direction of the risk is viewed as declining from the higher levels experienced in 2010
and early 2011.
As of September 30, 2012, other real estate owned (OREO) is shown
at the lower of cost or fair market value, net of anticipated selling costs, of $264,000. The balance consists of one residential
property that was placed in OREO in the third quarter of 2012. As of September 30, 2011, there was one OREO property, consisting
of a manufacturing property with a fair market value of $400,000. The manufacturing property had environmental conditions that
had to be remediated in order for the property to be approved for future commercial purposes. These remediation efforts were completed
in late 2011, after which management determined that the property was suitable for bank purposes in the future. As such, the property
was removed from OREO and classified as land as of December 31, 2011.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Allowance for Loan Losses
The allowance for loan losses is established to cover any losses
inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and
calculation of the allowance for loan losses. This calculation is based upon a systematic methodology for determining the allowance
for loan losses in accordance with generally accepted accounting principles. The calculation includes estimates and is based upon
losses inherent in the loan portfolio. The allowance calculation includes specific provisions for under-performing loans and general
allocations to cover anticipated losses on all loan types based on historical losses. Based on the quarterly loan loss calculation,
management will adjust the allowance for loan losses through the provision as necessary. Changes to the allowance for loan losses
during the year are primarily affected by four main factors:
|
·
|
Growth or decline of the loan portfolio
|
|
·
|
Charge off of loans considered not recoverable
|
|
·
|
Recovery of loans previously charged off
|
|
·
|
Provision for loan losses
|
Strong credit and collateral policies have been instrumental in
producing a favorable history of loan losses. The Allowance for Loan Losses table below shows the activity in the allowance for
loan losses for the nine-month periods ended September 30, 2012, and September 30, 2011. At the bottom of the table, two benchmark
percentages are shown. The first is net charge-offs as a percentage of average loans outstanding for the year. The second is the
total allowance for loan losses as a percentage of total loans.
ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
|
|
|
8,480
|
|
|
|
7,132
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
—
|
|
|
|
97
|
|
Commercial and industrial
|
|
|
47
|
|
|
|
315
|
|
Consumer
|
|
|
9
|
|
|
|
38
|
|
Total charged off
|
|
|
56
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
15
|
|
|
|
—
|
|
Commercial and industrial
|
|
|
46
|
|
|
|
215
|
|
Consumer
|
|
|
9
|
|
|
|
6
|
|
Total recovered
|
|
|
70
|
|
|
|
221
|
|
Net loans (recovered) charged off
|
|
|
(14
|
)
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
Provision (credited) charged to operating expense
|
|
|
(850
|
)
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30,
|
|
|
7,644
|
|
|
|
8,253
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a % of average total loans outstanding
|
|
|
0.00%
|
|
|
|
0.06%
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period as a % of total loans
|
|
|
1.90%
|
|
|
|
2.02%
|
|
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Charge-offs for the nine months ended September 30, 2012, were $56,000,
compared to $450,000 for the same period in 2011. Management typically charges off unsecured debt over 90 days delinquent with
little likelihood of recovery. The real estate and consumer charge-offs were lower in the first nine months of 2012 compared to
2011, due to a single real estate loan that was charged off for $97,000 in the first quarter of 2011. Commercial and industrial
loan charge-offs were lower in the first nine months of 2012 due to three commercial and industrial loans that were charged off
in 2011 with no similar activity in 2012. These charge-offs included two agriculture purpose loans to different borrowers totaling
$188,000, and a commercial line of credit totaling $97,000.
The allowance as a percentage of total loans represents the portion
of the total loan portfolio for which an allowance has been provided. The composition of the Corporation’s loan portfolio
has undergone only minor changes since September 30, 2011, however the decline in the balance of loans is having a significant
impact on the allowance. All other factors held constant, a decline in the loan portfolio would require less of an allowance to
cover losses inherent in the portfolio. Management regularly reviews the overall risk profile of the loan portfolio and the impact
that current economic trends have on the Corporation’s loans. The financial industry typically evaluates the quality of loans
on a scale with “unclassified” representing healthy loans, “special mention” being the first indication
of credit concern, and several successive classified ratings indicating further credit declines of “substandard,” “doubtful,”
and, ultimately, “loss.”
During 2011, continued downgrades by management in the business
loan and business mortgage portfolios resulted in more classified loans. Real estate loans represent a more substantial portion
of the outstanding loan portfolio and more of these types of loans indicated either further devaluation of collateral and/or deteriorating
financial health that could result in future losses to the Corporation. Conversely, the commercial and industrial loans not secured
by real estate represent a smaller portion of the outstanding loan portfolio and these loans have shown improved financial health
resulting in less of a need for reserve allocations. Total classified loans, net of specific allowances, reached a peak on December
31, 2011, at $33.4 million, or 39.0% of risked-based capital, and have since declined to $23.8 million, or 26.8% of risked-based
capital as of September 30, 2012. The decline is primarily due to one commercial borrower who paid off $4.2 million of loans rated
substandard, plus principal payments on many of the remaining classified loans. The Corporation’s total classified loans
were $33.3 million as of September 30, 2011, $33.4 million as of December 31, 2011, and $23.8 million as of September 30, 2012,
net of specifically allocated allowance against these loans of $175,000, $201,000, and $162,000, respectively. The classified loans
require larger provision amounts due to a higher potential risk of loss, so as the classified loan balance declines, the associated
specific allowance applied to them declines, resulting in a lower required allowance. The allowance as a percentage of total loans
was 2.02% as of September 30, 2011, 2.06% as of December 31, 2011, and 1.90% as of September 30, 2012. Management anticipates that
the allowance percentage will remain fairly constant throughout the remainder of 2012.
The net charge-offs as a percentage of average total loans outstanding
indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period, after reducing
charge-offs by recoveries. The Corporation has historically experienced very low net charge-off percentages due to strong credit
practices. Management continually monitors delinquencies, classified loans, and charge-off activity closely, and is not anticipating
significant increases throughout the remainder of 2012. Management practices are in place to reduce the number and severity of
losses. In regard to severely delinquent loans, management attempts to improve the Corporation’s collateral or credit position
and, in the case of a loan workout, intervene to minimize additional charge-offs.
Premises and Equipment
Premises and equipment, net of accumulated depreciation,
increased by $200,000, or 1.0%, to $21,112,000 as of September 30, 2012, from $20,912,000, as of September 30, 2011. The renovations
at the Corporation’s Main Office location were completed and placed into service during the third quarter of 2011. As of
September 30, 2012, $304,000 was classified as construction in process.
Regulatory Stock
The Corporation owns multiple forms of regulatory
stock that is required in order to be a member of the Federal Reserve Bank (FRB) and members of banks such as the Federal Home
Loan Bank (FHLB) and Atlantic Central Bankers Bank (ACBB). The Corporation’s $4,033,000 of regulatory stock holdings as of
September 30, 2012, consisted of $3,845,000 of FHLB of Pittsburgh stock, $151,000 of FRB stock, and $37,000 of ACBB stock. All
of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the investment
is carried at book value and there is no fair market value adjustment.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The Corporation’s investment in FHLB stock
is required for membership in the organization. The amount of stock required is dependent upon the relative size of outstanding
borrowings from FHLB. Excess stock is typically repurchased from the Corporation at par if the borrowings decline to a predetermined
level. The Corporation earned a return or dividend on the FHLB stock since becoming a member until the end of 2008, when the FHLB
announced that it had suspended the payment of dividends and the repurchase of excess capital stock to preserve its capital level.
That decision was based on FHLB’s analysis and consideration of certain negative market trends and the impact those trends
had on their financial condition. As a result, for years 2009, 2010, and 2011, no dividends were received on the Corporation’s
FHLB stock.
In the fourth quarter of 2010, as a first indication
of improved financial position and capital levels, the FHLB of Pittsburgh announced the resumption of excess capital stock repurchases,
that have continued on a quarterly basis to date. The resumption of excess capital stock repurchases was primarily the reason why
the Corporation’s capital stock position declined from $4,492,000 as of December 31, 2010, to $3,845,000 as of September
30, 2012. As of September 30, 2012, the Corporation held no excess capital stock. Management believes future capital stock repurchases
will continue.
On February 22, 2012, the FHLB of Pittsburgh announced
payment of their first dividend to shareholders since suspension of the dividend in December 2008. The dividend payment was equivalent
to 0.10 percent annualized and is a significant step towards the restoration of ongoing dividend payments. Also, on April 30, 2012,
and July 31, 2012, the FHLB paid two more dividend payments of 0.10 percent annualized. Prior to the filing of this third quarter
2012 Form 10-Q, on October 30, 2012, FHLB announced their fourth consecutive quarterly dividend and an increase to 0.43 percent
annualized. They also announced an increase in the planned excess capital stock repurchase. This news is further evidence of improved
financial results at the FHLB of Pittsburgh. While the FHLB has not committed to regular quarterly dividend payments, they have
stated they will continue to monitor the overall financial performance of the bank in order to determine the status of future dividends.
This sustained pattern of purchasing back excess capital stock, based on the improved financial performance of the FHLB, and the
resumption of a quarterly dividend, and further increase in that dividend, has resulted in management’s conclusion that its
investment in FHLB stock is not other-than-temporarily impaired. The Corporation will continue to monitor the financial condition
of the FHLB quarterly to assess its ability to continue to periodically repurchase excess capital stock and pay a quarterly dividend.
Management believes that the FHLB will continue
to be a primary source of wholesale liquidity for both short-term and long-term funding. Management’s strategy in terms of
future use of FHLB borrowings is addressed under the Borrowings section of this Management’s Discussion and Analysis.
Deposits
The Corporation’s total ending deposits increased $16.5 million,
or 2.7%, and $14.3 million, or 2.4%, from September 30, 2011, and December 31, 2011, respectively. Customer deposits are the Corporation’s
primary source of funding for loans and securities. During 2011 and continuing into 2012, the economic concerns and poor performance
of other types of investments led customers back to banks for safe places to invest money, despite historically low interest rates.
The mix of the Corporation’s deposit categories has changed marginally since September 30, 2011, with a $10.4 million increase
in non-interest demand deposit accounts, a $7.4 million increase in the Corporation’s new interest bearing demand deposit
account, which was introduced in March of 2012, and a $10.9 million increase in savings account balances. Offsetting these increases,
money market accounts declined by $5.2 million and time deposits decreased by $7.0 million.
The increase in savings account balances is the result of historically
low interest rates, which have resulted in little difference between savings rates and other core deposit rates and even short-term
time deposit rates. Customers view savings as the safest, most convenient place to maintain funds for maximum flexibility. Management
believes savings accounts will continue to hold higher balances until short-term interest rates increase.
The Corporation’s new interest-bearing demand deposit product
is a direct result of the repeal of Regulation Q, which prohibited financial institutions from paying interest on demand deposits.
Regulation Q, which existed since 1933, was repealed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Under that legislation, beginning on July 21, 2011, financial institutions have been allowed, but not required, to offer interest-bearing
demand deposits. When the product was first offered by the Corporation in March 2012, a number of the cash management money market
deposit accounts were transferred over to the new interest-bearing demand deposit product. This accounts for the $3.7 million reduction
in money market deposit accounts from December 31, 2011 to September 30, 2012.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The Deposits by Major Classification table, shown below, provides
the balances of each category for September 30, 2012, December 31, 2011, and September 30, 2011.
DEPOSITS BY MAJOR CLASSIFICATION
|
|
|
|
|
|
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
|
149,839
|
|
|
|
149,510
|
|
|
|
139,426
|
|
Interest bearing demand
|
|
|
7,385
|
|
|
|
—
|
|
|
|
—
|
|
NOW accounts
|
|
|
61,107
|
|
|
|
61,246
|
|
|
|
62,608
|
|
Money market deposit accounts
|
|
|
53,159
|
|
|
|
56,872
|
|
|
|
58,385
|
|
Savings accounts
|
|
|
109,618
|
|
|
|
100,377
|
|
|
|
98,673
|
|
Time deposits
|
|
|
231,304
|
|
|
|
231,629
|
|
|
|
238,288
|
|
Brokered time deposits
|
|
|
7,522
|
|
|
|
6,044
|
|
|
|
6,041
|
|
Total deposits
|
|
|
619,934
|
|
|
|
605,678
|
|
|
|
603,421
|
|
The growth and mix of deposits is often driven by several factors including:
|
·
|
Convenience and service provided
|
|
·
|
Current rates paid on deposits relative to competitor rates
|
|
·
|
Level of and perceived direction of interest rates
|
|
·
|
Financial condition and perceived safety of the institution
|
|
·
|
Possible risks associated with other investment opportunities
|
|
·
|
Level of fees on deposit products
|
The Corporation has been a stable presence in the local area and
offers convenient locations, low service fees, and competitive interest rates because of a strong commitment to the customers and
the communities that it serves. Management has always priced products and services in a manner that makes them affordable for all
customers. This in turn creates a high degree of customer loyalty and a stable deposit base. Additionally, as financial institutions
have come under increased scrutiny from both regulators and customers, the Corporation has maintained an outstanding reputation.
The Corporation’s deposit base increased as a result of customers seeking a longstanding, reliable institution as a partner
to meet their financial needs.
Time deposits are typically a more rate-sensitive product, making
them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s
time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market,
with less allegiance to any particular financial institution. As of September 30, 2012, time deposit balances, excluding brokered
deposits, had decreased $7.0 million, or 2.9%, and $0.3 million, or 0.1%, from September 30, 2011, and December 31, 2011, respectively.
The Corporation has recently seen a shift in deposit trends as customers have moved money from time deposits into core checking
and savings accounts. With minimal differences between shorter term CD rates and interest bearing non-maturity deposits, customers
are more inclined to accumulate their funds in a liquid account that can be accessed at any time. This has resulted in slower growth
in time deposit balances and more significant growth in the core deposit areas.
Time deposits are a safe investment with FDIC coverage insuring
no loss of principal up to certain levels. Prior to October 3, 2008, FDIC coverage was $100,000 on non-IRA time deposits and $250,000
on IRA time deposits. Effective October 3, 2008, the FDIC insurance increased to $250,000 for all deposit accounts with the signing
of the Emergency Economic Stabilization Act of 2008, which was made permanent under the Dodd-Frank Wall Street Reform and Consumer
Protection Act. As the equity markets continued to decline in 2008 and 2009, customers began placing more and more time deposits
in financial institutions; however, they did not want to exceed the FDIC insurance limits. The increase in FDIC coverage generally
enabled time deposit customers to increase their deposit balances held with the Corporation. Previously, a significant segment
of the Corporation’s larger CD customers would limit their deposit by account title to $100,000. Now customers can deposit
up to $250,000 with full FDIC coverage, under each form of eligible account ownership. Management anticipates that the recent
declines in time deposits will likely continue until interest rates increase and cause more of a separation between longer-term
rates and overnight rates.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Borrowings
Total borrowings were $70.5 million, $73.0 million, and $80.5 million
as of September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The Corporation was purchasing no short-term
funds as of September 30, 2012, December 31, 2011, or September 30, 2011. Short-term funds are used for immediate liquidity needs
and are not typically part of an ongoing liquidity or interest rate risk strategy; therefore, they fluctuate more rapidly. The
short-term funds are purchased through correspondent and member bank relationships as overnight borrowings.
Total long-term borrowings, borrowings initiated for terms longer
than one year, were $70.5 million, $73.0 million, and $80.5 million as of September 30, 2012, December 31, 2011, and September
30, 2011. The Corporation uses two main sources for long-term borrowings: FHLB advances and repurchase agreements obtained through
brokers. The repurchase agreement portion of the long-term debt was $25.0 million at September 30, 2011, and declined to $15.0
million by September 30, 2012. FHLB advances were $55.5 million at September 30, 2011, and remained at $55.5 million as of September
30, 2012. Both FHLB advances and repurchase agreements are used as a secondary source of funding and to mitigate interest rate
risk. These long-term funding instruments are typically a more manageable funding source in regard to amount, timing, and rate
for interest rate risk and liquidity purposes compared to deposits. Over the course of the past twelve months, the Corporation
has minimally changed the ladder of long-term FHLB borrowings, by replacing maturing advances with new long-term advances at significant
rate savings. In the current interest rate environment, management has preferred to seek new long-term borrowings from FHLB rather
than through repurchase agreements. For this reason, it is likely the FHLB portion of long-term debt will increase with the repurchase
agreements reducing as they mature. Management will continue to analyze and compare the costs and benefits of borrowing versus
obtaining funding from deposits.
In order to limit the Corporation’s exposure and reliance
to a single funding source, the Corporation’s Asset Liability Policy sets a goal of maintaining the amount of borrowings
from the FHLB to 15% of asset size. As of September 30, 2012, the Corporation was within this policy guideline at 7.1% of asset
size with $55.5 million of total FHLB borrowings. The Corporation also has a policy that limits total borrowings from all sources
to 150% of the Corporation’s capital. As of September 30, 2012, the Corporation was within this policy guideline at 79.3%
of capital with $70.5 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings
within these policy guidelines throughout all of 2011 and through the third quarter of 2012.
The Corporation continues to be well under the FHLB maximum borrowing
capacity (MBC), which is currently $192.0 million. The Corporation’s two internal policy limits mentioned above are far more
restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.
Stockholders’ Equity
Federal regulatory authorities require banks to meet minimum capital
levels. The Corporation maintains capital ratios well above those minimum levels and higher than the Corporation’s national
peer group average. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory
guidelines determine the risk-weighted assets by assigning assets to one of four risk-weighted categories. The calculation of tier
I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for loan losses,
thereby making this ratio lower than the total capital to risk-weighted assets ratio.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
The following tables reflect the capital ratios for the Corporation
and Bank compared to the regulatory capital requirements.
REGULATORY CAPITAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Requirements
|
|
|
|
|
|
|
Adequately
|
|
Well
|
|
As of September 30, 2012
|
|
Capital Ratios
|
|
|
Capitalized
|
|
|
Capitalized
|
|
Total Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
18.6%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Bank
|
|
|
18.5%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Tier I Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
17.4%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Bank
|
|
|
17.2%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Tier I Capital to Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
10.6%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
Bank
|
|
|
10.5%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
17.9%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Bank
|
|
|
17.7%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Tier I Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
16.6%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Bank
|
|
|
16.4%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Tier I Capital to Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
10.2%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
Bank
|
|
|
10.1%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
As of September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
18.0%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Bank
|
|
|
17.8%
|
|
|
|
8.0%
|
|
|
|
10.0%
|
|
Tier I Capital to Risk-Weighted Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
16.8%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Bank
|
|
|
16.5%
|
|
|
|
4.0%
|
|
|
|
6.0%
|
|
Tier I Capital to Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
10.1%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
Bank
|
|
|
10.0%
|
|
|
|
4.0%
|
|
|
|
5.0%
|
|
The Corporation’s dividends per share for the nine
months ended September 30, 2012, were $0.75 per share, compared to $0.72 per share for the same period of 2011. Dividends are paid
from current earnings and available retained earnings. Management’s current capital plan calls for management to maintain
tier I capital to average assets between 10.0% and 12.0%. The Corporation’s current tier I capital ratio is 10.6%. Management
also desires a dividend payout ratio to be approximately 35%. This ratio will vary according to income, but over the long term,
management’s goal is to average a payout ratio within this range. For the first nine months of 2012 the payout ratio was
35.0%. Due to improved financial performance and increased capital levels, the Corporation increased the dividend amount to $0.25
per share in the first quarter of 2012.
The amount of unrealized gain or loss on the securities portfolio
is reflected, net of tax, as an adjustment to capital, as required by U.S. generally accepted accounting principles. This is recorded
as accumulated other comprehensive income or loss in the capital section of the consolidated balance sheet. An unrealized gain
increases capital, while an unrealized loss reduces capital. This requirement takes the position that, if the Corporation liquidated
the securities portfolio at the end of each period, the current unrealized gain or loss on the securities portfolio would directly
impact the Corporation’s capital. As of September 30, 2012, the Corporation showed unrealized gains, net of tax, of $6,711,000,
compared to unrealized gains of $4,221,000 as of December 31, 2011, and unrealized gains of $4,655,000 as of September 30, 2011.
These unrealized gains or losses, net of tax are excluded from capital when calculating the tier I capital to average assets numbers
above. The amount of unrealized net gain or loss on the securities portfolio, shown net of tax, as an adjustment to capital, does
not include any actual impairment taken on securities, which are shown as a reduction to income on the Corporation’s Consolidated
Statements of Income. The changes in unrealized gains and losses are due to normal changes in market valuations of the Corporation’s
securities as a result of interest rate movements.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Proposed Regulatory Capital Changes
In June 2012, the Federal Reserve Bank, the FDIC, and the
OCC issued proposed rules that would revise bank regulatory capital requirements and the risk-weighted asset rules. These
rules represent the most extensive changes to bank capital requirements in the recent past. The rules will extend large parts
of a regulatory capital administration to all U.S. banks and their holding companies, other than the smallest bank
holding companies (generally, those with under $500 million in consolidated assets). Prior to the filing of this report,
but subsequent to September 30, 2012, a joint statement was issued by the regulators postponing the original January 1, 2013
implementation date for these rules. A summary of the proposed rules is as follows:
Summary of proposed rules for capital
|
·
|
Revise the definition of regulatory capital components and related calculations, which would include conservative guidelines
for determining whether an instrument could qualify as regulatory capital;
|
|
·
|
Add common equity tier 1 capital as a new regulatory capital component;
|
|
·
|
Increase the minimum tier 1 capital ratio requirement;
|
|
·
|
Create a capital conservation buffer that would limit payment of capital distributions and certain discretionary bonus payments
to executive officers if the institution does not hold enough common equity tier 1 capital;
|
|
·
|
Provide for a transition period for several aspects of the rule; and
|
|
·
|
Incorporate the new and revised regulatory capital requirements into the Prompt Corrective Action rules.
|
Summary of proposed rules for risk-weighted assets
The proposal would expand the number of risk-weighted categories
and increase the required capital for certain categories of assets, including higher-risk residential mortgages and higher-risk
construction real estate loans. In addition, the rule would:
|
·
|
revise risk weights for residential mortgages based on LTV ratios and certain loan characteristics, assigning risk weights
between 35% and 200%;
|
|
·
|
increase capital requirements for past due loans from 100% to 150% and set the risk weight for high volatility commercial real
estate loans at 150%; and
|
|
·
|
revise the risk-weighted percentage for unused commitments with an original maturity of one year or less from 0% to 20% unless
the commitment is unconditionally cancelable by the bank.
|
The risk-weighted asset rule will apply to all U.S. banks and savings
banks and almost all of their holding companies, although smaller, “non-complex” banking organizations will not need
to comply with some of the rule’s requirements. The rule would be effective on January 1, 2015. The Corporation is in the
process of assessing the impact of these proposed changes on the regulatory ratios of the Corporation and the Bank on the capital,
operations, liquidity, and earnings of the Corporation and Bank.
Off-Balance Sheet Arrangements
In the normal course of business, the Corporation typically has
off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation’s financial
condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section,
the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information
on the commitments by the Corporation as of September 30, 2012.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
OFF-BALANCE SHEET ARRANGEMENTS
|
|
|
|
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
|
$
|
|
Commitments to extend credit:
|
|
|
|
|
Revolving home equity
|
|
|
20,384
|
|
Construction loans
|
|
|
16,120
|
|
Real estate loans
|
|
|
8,376
|
|
Business loans
|
|
|
61,645
|
|
Consumer loans
|
|
|
1,689
|
|
Other
|
|
|
3,323
|
|
Standby letters of credit
|
|
|
7,972
|
|
Total
|
|
|
119,509
|
|
Jumpstart Our Business Startups Act
On April 5, 2012, President Obama signed the Jumpstart Our Business
Startups Act (the “JOBS Act”) into law. The JOBS Act is aimed at facilitating capital raising by smaller companies
and banks and bank holding companies by implementing the following changes:
|
·
|
raising the threshold requiring registration under the Securities Exchange Act of 1934 (the "Exchange Act") for banks
and bank holding companies from 500 to 2,000 holders of record;
|
|
·
|
raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to
1,200 holders of record;
|
|
·
|
raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings
from state blue sky laws;
|
|
·
|
permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
|
|
·
|
allowing private companies to use "crowdfunding" to raise up to $1 million in any 12-month period, subject to certain
conditions; and
|
|
·
|
creating a new category of issuer, called an "Emerging Growth Company," for companies with less than $1 billion in
annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity IPO and
complying with public company reporting obligations for up to five years.
|
While the JOBS Act is not expected to have any immediate application
to the Corporation, management will continue to monitor the implementation rules for potential effects which might benefit the
Corporation.
Dodd-Frank Wall Street Reform and Consumer Protection Act
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to effect a fundamental restructuring of federal banking regulation.
Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial
system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates
a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant
impact on the Corporation’s business operations as its provisions take effect.
It is difficult
to predict at this time what specific impact Dodd-Frank and the yet-to-be-written implementing rules and regulations will have
on community banks. However, it is expected that, at a minimum, they will increase the Corporation’s operating and compliance
costs and could increase interest expense.
Among the provisions that are likely to affect the Corporation are the following:
Holding Company Capital Requirements
Dodd-Frank requires the Federal Reserve to apply consolidated capital
requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under
these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19,
2010, by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators
issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and
decreases in times of economic contraction, are consistent with safety and soundness.
Index
ENB FINANCIAL CORP
Management’s Discussion and Analysis
|
Deposit Insurance
Dodd-Frank permanently increases the maximum deposit insurance amount
for banks, savings institutions, and credit unions to $250,000 per depositor, and extends unlimited deposit insurance to non-interest
bearing transaction accounts through December 31, 2012. Previous to 2011, unlimited deposit insurance on non-interest bearing
transaction accounts was covered through the Transaction Account Guarantee (TAG) program. The TAG program expired December 31,
2010, and Dodd-Frank has incorporated this unlimited deposit insurance coverage for another two years. Dodd-Frank also broadens
the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity
capital of a financial institution. Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from
1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions
when the reserve ratio exceeds certain thresholds. Effective one year from the date of enactment, Dodd-Frank eliminated the federal
statutory prohibition against the payment of interest on business checking accounts, formerly known as Reg Q.
Corporate Governance
Dodd-Frank requires publicly traded companies to give stockholders
a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote
on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection
with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing
these requirements which took effect on January 21, 2011. The Corporation is exempt from these requirements until January 21, 2013,
due to its status as a smaller reporting company. Additionally, Dodd-Frank directs the federal banking regulators to promulgate
rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets
in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit
broker discretionary voting on elections of directors and executive compensation matters.
Limits on Interchange Fees
Dodd-Frank amends the Electronic Fund Transfer Act to, among other
things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions
by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable
and proportional to the actual cost of a transaction to the issuer.
Consumer Financial Protection Bureau
Dodd-Frank creates a new, independent federal agency called the
Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various
federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley
Act, and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions
with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to
be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent
unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the
CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s
ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan
other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws
and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys
general to enforce compliance with both the state and federal laws and regulations.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
As a financial institution, the Corporation is subject to three
primary risks:
The Board of Directors has established an Asset Liability Management
Committee (ALCO) to measure, monitor, and manage these primary market risks. The Asset Liability Policy has instituted guidelines
for all of these primary risks, as well as other financial performance measurements with target ranges. The Asset Liability goals
and guidelines are consistent with the Strategic Plan goals.
Credit Risk
For discussion on credit risk refer to the sections in Item
2. Management’s Discussion and Analysis, on securities, non-performing assets, and allowance for loan losses.
Liquidity Risk
Liquidity refers to having an adequate supply of cash available
to meet business needs. Financial institutions must ensure that there is adequate liquidity to meet a variety of funding needs,
at a minimal cost. Minimal cost is an important component of liquidity. If a financial institution is required to take significant
action to obtain funding, and is forced to utilize an expensive source, it has not properly planned for its liquidity needs. Funding
new loans and covering deposit withdrawals are the primary liquidity needs of the Corporation. The Corporation uses a variety of
funding sources to meet liquidity needs, such as:
|
·
|
Maturities and sales of securities
|
|
·
|
Borrowings from correspondent and member banks
|
As noted in the discussion on deposits, customers have historically
provided the Corporation with a reliable and steadily increasing source of funds liquidity. The Corporation also has in place relationships
with other banking institutions for the purpose of buying and selling Federal funds. The lines of credit with these institutions
provide immediate sources of additional liquidity. The Corporation currently has unsecured lines of credit totaling $42 million.
This does not include amounts available from member banks such as the Federal Reserve Discount Window or the FHLB of Pittsburgh.
Management uses a cumulative maturity gap analysis to measure the
amount of assets maturing within various periods versus liabilities maturing in those same periods. Management monitors six-month,
one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. The Corporation was within internal
gap guidelines for all ratios as of September 30, 2012. During the second quarter of 2010, management implemented prepayment speed
assumptions for its securities portfolio to more accurately model principal paydowns received on securities. Additionally, as
of September 30, 2011, management purchased software that allows prepayment speed assumptions from the bond accounting software
provider to be directly imported into the ALM model on a security-by-security basis. It is management’s opinion that these
securities are now modeled as accurately as possible utilizing current software, and the cash flows received on each bond are
reflected appropriately. After the initial prepayment speed changes were made, as of June 30, 2010, the Corporation was within
the internal gap guidelines for the one-year and three-year gap ratios, with the one-year gap at 66% and the three-year gap at
87%. As of December 31, 2010, these ratios were further improved and all were within the internal guidelines with the one-year
gap at 84% and the three-year gap at 101%. As of December 31, 2011, these ratios were further improved and all were within the
internal guidelines with the one-year gap at 93% and the three-year gap at 103%. The gap ratios as of September 30, 2012, had
increased with a one-year gap of 103% and a three-year gap of 110%. The primary reason for the increase in gap ratios can be attributed
to higher cash levels, faster principal payments on securities, purchasing securities with shorter durations, and a lengthening
of the Corporation’s liabilities. Management has been maintaining higher levels of cash and cash equivalents since 2011
to assist in offsetting the Corporation’s relatively long securities portfolio. The strategy of maintaining higher cash
levels to improve gap ratios and act as an immediate hedge against liquidity risk and interest rate risk is expected to continue
until the securities portfolio is materially shorter in duration.
Generally, through 2011 and into 2012, management had a bias towards
rates remaining unchanged for a longer period of time and preferred to maintain gap ratios on the low end of gap guidelines, as
it is advantageous to have a smaller amount of assets subject to repricing while interest rates are at historically low levels.
Management took the position that rates could remain low for an extended period of time, which has occurred. Management also believes
that the Corporation’s large securities portfolio, with the vast majority of these securities carrying unrealized gains,
is a readily accessible source of liquidity in the event any repositioning of assets is needed. Management believes at this point
that current economic conditions need to improve significantly before short term interest rates could be increased. The most recent
economic data indicate slight improvement in unemployment and housing data. Gross national domestic product still remains at levels
around 2% or less, which is lower than desired. The October 24
th
2012 Federal Open Market Committee (FOMC) Policy Statement
states that, “Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced
a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown further signs of improvement,
albeit from a depressed level.” The Committee goes on further to state, “A highly accommodative stance of monetary
policy will remain appropriate for a considerable time after the economic recovery strengthens.” The Committee concludes
that, “Exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” Therefore,
based on the present economic conditions, and FOMC’s forward guidance, the likelihood of sharp increases in market interest
rates in the near future is remote. However, it is only prudent to be planning for possible higher mid-term and long-term market
interest rates in 2013 and higher short term rates in 2014 and beyond.
Ideally, management would prefer to maintain lower six-month and
one-year gap ratios to limit reinvestment risk at historically low levels while maintaining a higher three-year gap ratio to be
positioned to reinvest assets after interest rates have increased significantly over a period of time. For example, even if the
FOMC were to act a year earlier than planned in 2014, it would be at least until late 2015 that interest rates would near the highs
of the next rate cycle. Therefore, it is important for the Corporation to keep the one-year gap ratio on the low side of management’s
preferred range, while maintaining the three-year gap ratio on the high end of the preferred range. To this regard, the Corporation
is already higher on the one-year gap ratio than would be preferred, while the three-year gap ratio is already on the higher side
of the preferred range to ensure adequate performance out three years, given higher interest rates. The risk to positioning for
higher interest rates too early is subjecting the Corporation to more repricing risk and lower net interest margin. That is already
occurring to a moderate degree. Management will make future asset liability decisions that are consistent with reducing the one-year
gap ratio while maintaining the three-year gap ratio at a higher level to protect against future interest rate increases.
Management expects that the gap ratios will remain within the established
guidelines throughout the remainder of 2012.
In addition to the cumulative maturity gap analysis discussed above,
management utilizes a number of liquidity measurements that management believes has advantages over and gives better clarity to
the Corporation’s present and projected liquidity that the static gap analysis offers.
The Corporation analyzes the following additional liquidity measurements
in an effort to monitor and mitigate liquidity risk:
|
·
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Core Deposit Ratio – Core deposits as a percentage of assets
|
|
·
|
Funding Concentration Analysis – Alternative funding sources outside of core deposits as a percentage of assets
|
|
·
|
Short-term Funds Availability – Readily available short-term funds as a percentage of assets
|
|
·
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Securities Portfolio Liquidity – Cash flows maturing in one year or less as a percentage of assets and securities portfolio
|
|
·
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Borrowing Limits – Internal borrowing limits in terms of both FHLB and total borrowings
|
|
·
|
Three, Six, and Twelve-month Projected Sources and Uses of Funds – Projection of future liquidity positions
|
These measurements are designed to prevent undue reliance on outside
sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease
in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available
liquidity sources. As of September 30, 2012, the Corporation was within guidelines for all of the above measurements except the
securities portfolio liquidity as a percentage of assets. The policy calls for the Corporation to maintain securities portfolio
cash flows maturing in one year or less between 5% and 10% of total assets. As of September 30, 2012, these cash flows represented
4.6% of total assets, just under the lower guideline. However, when factoring in available overnight cash, the Corporation’s
securities portfolio liquidity represented 7.8% of total assets. It is important for the Corporation to prepare for a rates-up
environment and having more liquidity is advantageous as funds can be reinvested in higher yielding assets faster when sufficient
liquidity exists. Management has been carrying an average of $15 million or more of readily available cash on hand and approximately
$30 to $35 million of cash and cash equivalents on a daily basis throughout most of 2012, and expects this will continue in the
near future. All liquidity measurements are tracked and reported quarterly by management to both observe trends and ensure the
measurements stay within desired ranges. Management is confident that a sufficient amount of internal and external liquidity exists
to provide for significant unanticipated liquidity needs.
Interest Rate Risk
Interest rate risk is measured using two analytical tools:
|
·
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Changes in net interest income
|
|
·
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Changes in net portfolio value
|
Financial modeling is used to forecast net interest
income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under
seven different interest rate scenarios. The scenarios consist of a projection of net interest income if rates remain flat, increase
100, 200, 300, or 400 basis points, or decrease 50 or 100 basis points. The results obtained through the use of forecasting models
are based on a variety of factors. Both the net interest income and fair value forecasts make use of the maturity and repricing
schedules to determine the changes to the balance sheet over the course of time. Additionally, there are many assumptions that
factor into the results. These assumptions include, but are not limited to, the following:
|
·
|
Projected interest rates
|
|
·
|
Timing of interest rate changes
|
|
·
|
Changes to the yield curve
|
|
·
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Prepayment speeds on the loans and mortgage-backed securities
|
|
·
|
Anticipated calls on financial instruments with call options
|
|
·
|
Deposit and loan balance fluctuations
|
|
·
|
Consumer reaction to interest rate changes
|
For the interest rate sensitivity analysis and
net portfolio value analysis discussed below, results are based on a static balance sheet reflecting no projected growth from balances
as of September 30, 2012. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis
of this sort to be the most conservative and most accurate means to evaluate fair value and future interest rate risk. Management
does run expected growth scenarios through the asset liability model to most accurately predict future financial performance. This
is done separately and apart from the static balance sheet approach discussed above to test fair value and future interest rate
risk. The static balance sheet approach is used to reduce the number of variables in calculating the model’s accuracy in
predicting future net interest income. It is appropriate to pull out various balance sheet growth scenarios which could be utilized
to compensate for a declining margin. By testing the model using a base model assuming no growth, this variable is eliminated and
management can focus on predicted net interest income based on the current existing balance sheet.
As a result of the many assumptions, this information
should not be relied upon to predict future results. Additionally, both of the analyses discussed below do not consider any action
that management could take to minimize or offset the negative effect of changes in interest rates. These tools are used to assist
management in identifying possible areas of risk in order to address them before a greater risk is posed. Personnel perform an
in-depth annual validation and a quarterly review of the settings and assumptions used in the model to ensure reliability of the
forecast results. Back testing of the model to actual results is performed quarterly to ensure the validity of the assumptions
in the model. Both the validation and back testing indicate that the model assumptions are reliable.
Changes in Net Interest Income
The change in net interest income measures the
amount of net interest income fluctuation that would be experienced over one year, assuming interest rates change immediately and
remain the same for one year. This is considered to be a short-term view of interest rate risk. The analysis of changes in net
interest income due to changes in interest rates is commonly referred to as interest rate sensitivity. The Corporation has historically
been liability sensitive; meaning that as interest rates go up, the Corporation would likely achieve lower levels of net interest
income due to sharper increases in the cost of funds than increases in asset yield. Conversely, if rates go down, there would be
sharper reductions in the cost of funds than decreases to asset yield, causing an increase to net interest income. However, more
recently the Corporation is becoming more balanced or neutral to the impact of interest rate changes on net interest income. The
Corporation’s one-year gap ratio of 103% as of September 30, 2012 indicates a balanced amount of cumulative assets maturing
versus liabilities maturing. However, because the interest rate sensitivity analysis, based on the repricing of assets and liabilities,
shows a slight negative exposure to increased rates in two of the modeled interest rate scenarios, the Corporation’s asset
liability position would still be categorized as liability sensitive.
The third quarter 2012 analysis projects the net
interest income expected in the seven modified rate scenarios on a one-year time horizon. As of September 30, 2012, the Corporation
was within guidelines for the maximum amount of net interest income declines, given five of the seven rate scenarios. Importantly,
the unchanged and all four rates up scenarios were within guidelines, with only the two rates down scenarios slightly outside of
guidelines. Any reduction in rates is highly unlikely due to the current Federal funds level and the relationship between Prime
rate and the Federal funds rate. Prime rate is the driver rate on the Corporation’s asset liability model. Since the Prime
rate has consistently remained at 300 basis points over the Federal funds rate for well over a decade and the Federal funds rate
is at 0.25%, it is unlikely we would see even a 0.25% reduction in rates as this would drive the target Federal funds rate to zero.
The only possible change to allow the Prime rate to drop by more than 0.25% would require a change in the historical 300 basis
point relationship between Prime and the Federal funds rate. The Corporation’s projected net interest income fluctuations
given the different rate scenarios have changed slightly since December 31, 2011, with all scenarios reasonable and plausible.
The rates-down 50 and 100 basis point scenarios
showed a decline in net interest income that is just outside of the Corporation’s established guidelines of 2.5% and 5.0%,
respectively. However, given the unlikelihood of any rate decreases at this time, management was not concerned about these measurements.
As of September 30, 2012, the Federal funds stated target rate remained between 0.00% and 0.25%, but effectively the rate has been
0.25% since December 2008. It is very unlikely the Federal Reserve would lower any key rates, including Federal funds or the Discount
rate further.
Management’s primary concern in this current
rate environment is with higher interest rate scenarios; therefore, they are reviewed with more scrutiny. For the rates-up 100
and 200 basis-point scenarios, net interest income decreased when compared to the rates unchanged scenario, by 4.1% in the rates
up 100 basis-point scenario, and 2.7% in the rates up 200 basis-point scenario. The decreases are primarily due to the fact that
the Corporation would not experience an increase in interest income on its portfolio of fixed rate loans and securities, but would
see an increase in its cost of funds as deposit costs increase even if they are held to a percentage of the rate increase. Nearly
all the Corporation’s securities are fixed rate instruments, while approximately 72% of the loan portfolio is at fixed rates.
Only about one-sixth of the Corporation’s primary assets would reprice to a higher rate given an increase in the Prime rate.
Also contributing to higher decreases in net interest income in the rates up 100 basis-point scenario, is a minority segment of
Prime-based commercial lines of credit floored at 4.00% or higher. Given a 100 basis point increase in interest rates, the loans
already floored at 4.00% would only see a 0.25% increase in interest rate rather than the full 1.00%. This is unique to the up
100 basis point scenario and helps explain why there is less of a reduction in net interest income given rates up 200 basis points.
Additionally, for all scenarios, projections are diminished slightly since the interest rate sensitivity analysis is now based
on a balance sheet projection showing no asset growth, meaning there are fewer interest earning assets that will have the ability
to reprice as rates increase. The analysis is based on assuming no loan growth from current balances, as well as no securities
or deposit growth. With such an assumption, it is harder to achieve net interest income growth and it would be expected that this
income would decline or grow at a very slow rate.
For the rates up 300 and 400 basis-point scenarios,
the net interest income increases, by 2.5% in the rates up 300 basis-point scenario, and by 9.3% in the rates up 400 basis-point
scenario, compared to the rates unchanged scenario. The positive impact of significantly higher rates is primarily due to the favorable
impact of all of the Corporation’s variable rate loans repricing by the full amount of the Federal rate change, assisted
by the Corporation’s relatively high interest earning cash balances and that component of the loans and securities portfolios
that reprice in less than one year. This more than offsets the normal liability sensitivity of the Corporation, where a larger
amount of liabilities reprice than assets, but they are only repricing by a fraction of the rate change. The more aggressive rates
up scenarios also benefit from known historical experience of deposit rate increases lagging and slowing in the pace of the increase
as interest rates continue to rise. For example, in the initial 100 and 200 rate increases, savings accounts may reprice 25 basis
points higher for every 100 basis point of interest rate increase, while in the 300 and 400 rates up scenarios that scale may drop
to 20 and 15 basis points, respectively. This in essence allows management the ability to neutralize the impact of higher rates
by controlling the large amount of liabilities that are repricing. Management does not expect the Corporation’s exposure
to interest rate changes to increase or change significantly over the next twelve months.
Changes in Net Portfolio Value
The change in net portfolio value is considered
a tool to measure long-term interest rate risk. The analysis measures the exposure of the balance sheet to valuation changes due
to changes in interest rates. The calculation of net portfolio value discounts future cash flows to the present value based on
current market rates. The change in net portfolio value estimates the gain or loss that would occur on market sensitive instruments
given an interest rate increase or decrease in the same seven scenarios mentioned under “Changes in Net Interest Income”
above. As of September 30, 2012, the Corporation was within guidelines for all scenarios with the rates up exposures showing slightly
more volatility compared to the December 31, 2011 measurements. Generally, the rates up scenarios showed between 2% and 4% more
exposure than the December 31, 2011 measurements. The slight increase in fair value exposure can be attributed to a larger securities
portfolio which had a larger impact on the overall length of the Corporation’s assets. This indicates that, as rates rise,
the Corporation loses net portfolio value, with the value of assets declining at a faster rate than the decrease in the value of
deposits. As a result, beginning in the third quarter of 2012, management acted to reduce the securities portfolio duration by
purchasing shorter instruments. The securities portfolio duration has been declining throughout 2012 and management expects further
declines in the future. Management has also reviewed the duration and price volatility of all of the Corporation’s securities
to identify and target those taxable securities with the most exposure to higher interest rates for possible sale when it is advantageous
to do so, based on market conditions. It is anticipated that these actions, along with carrying larger cash levels, will allow
the Corporation to show slight reductions in the rates up exposure to net portfolio value in the final quarter of 2012 and into
2013.
The weakness with the net portfolio value analysis
is that it assumes liquidation of the Corporation rather than as a going concern. For that reason, it is considered a secondary
measurement of interest rate risk to “Changes in Net Interest Income” discussed above.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Management carried out an evaluation, under the supervision and
with the participation of the Chief Executive Officer and Treasurer (Principal Financial Officer), of the effectiveness of the
design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of September 30, 2012, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure
controls and procedures as of September 30, 2012, are effective to ensure that information required to be disclosed in the reports
that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the Securities and Exchange Commission.
(b) Changes in Internal Controls.
There have been no changes in the Corporation’s internal controls
over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Corporation’s internal control over financial reporting.
PART II – OTHER INFORMATION
September 30, 2012
Item 1.
|
Legal Proceedings
|
Management is not aware of any litigation that would
have a material adverse effect on the financial position of the Corporation. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Corporation. In addition, no material proceedings are pending, are known to
be threatened, or contemplated against the Corporation by governmental authorities.
The Corporation continually monitors the risks related
to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry.
Management has not identified any new risk factors since the December 31, 2011 Form 10-K filing.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds – Nothing to Report
|
Item 3.
|
Defaults Upon Senior Securities – Nothing to Report
|
Item 4.
|
Mine Safety Disclosures – Not Applicable
|
Item 5.
|
Other Information – Nothing to Report
|
Exhibits - The following exhibits are filed as part
of this filing on Form 10-Q or incorporated by reference hereto:
|
|
Page
|
3 (i)
|
Articles of Incorporation of the Registrant, as amended
|
*
|
|
|
|
3 (ii)
|
By-Laws of the Registrant, as amended
|
**
|
|
|
|
10.1
|
Form of Deferred Income Agreement.
|
***
|
|
|
|
10.2
|
2011 Employee Stock Purchase Plan
|
****
|
|
|
|
10.3
|
2010 Non-Employee Directors’ Stock Plan
|
*****
|
|
|
|
11
|
Statement re: computation of per share earnings (Included on page 4 herein)
|
4
|
|
|
|
31.1
|
Section 302 Chief Executive Officer Certification
|
71
|
|
|
|
31.2
|
Section 302 Principal Financial Officer Certification
|
72
|
|
|
|
32.1
|
Section 1350 Chief Executive Officer Certification
|
73
|
|
|
|
32.2
|
Section 1350 Principal Financial Officer Certification
|
74
|
|
*
|
Incorporated herein by reference to Exhibit 4.1 of the Corporation’s Registration Statement on Form S-8 filed with the
SEC on June 28, 2012.
|
|
**
|
Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.
|
|
***
|
Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q, filed with the SEC
on August 13, 2008.
|
|
****
|
Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December
31, 2011, filed with the SEC on March 29, 2012.
|
|
*****
|
Incorporated herein by reference to Exhibit 10 of the Corporation’s Registration Statement on Form S-8 filed with the
SEC on June 4, 2010.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
ENB Financial Corp
|
|
|
(Registrant)
|
|
|
|
|
|
|
Dated:
November 14, 2012
|
By:
|
/s/ Aaron L. Groff, Jr.
|
|
|
Aaron L. Groff, Jr.
|
|
|
Chairman of the Board,
|
|
|
President & CEO
|
|
|
|
|
|
|
Dated:
November 14, 2012
|
By:
|
/s/ Scott E. Lied
|
|
|
Scott E. Lied, CPA
|
|
|
Treasurer
|
|
|
Principal Financial Officer
|
EXHIBIT INDEX
Exhibit No.
|
Description
|
Page number
on Manually
Signed
Original
|
3(i)
|
Articles of Incorporation of the Registrant, as amended. (Incorporated herein by reference to Exhibit 4.1 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 28, 2012.)
|
|
3 (ii)
|
By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.)
|
|
10.1
|
Form of Deferred Income Agreement. (Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August 13, 2008.)
|
|
10.2
|
2011 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 29, 2012.)
|
|
10.3
|
2010 Non-Employee Directors’ Stock Plan. (Incorporated herein by reference to Exhibit 10 of the Corporation’s Form S-8 filed with the SEC on June 4, 2010.)
|
|
11
|
Statement re: Computation of Earnings Per Share as found on page 4 of Form 10-Q, which is included herein.
|
Page 4
|
31.1
|
Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)).
|
Page 71
|
31.2
|
Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)).
|
Page 72
|
32.1
|
Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)).
|
Page 73
|
32.2
|
Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)).
|
Page 74
|
Grafico Azioni ENB Financial (QX) (USOTC:ENBP)
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