ENB Financial Corp - FORM 10-Q

Attached files

file	filename
EX-31.3 - EXHIBIT 31.2 - ENB Financial Corp	ex31_2.htm
EX-32.2 - EXHIBIT 32.1 - ENB Financial Corp	ex32_1.htm
EX-32.3 - EXHIBIT 32.2 - ENB Financial Corp	ex32_2.htm
EX-31.1 - EXHIBIT 31.1 - ENB Financial Corp	ex31_1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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 T 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 T 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 o	Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company T

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No T

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 August 10, 2011, the registrant had 2,861,362 shares of $0.20 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2011

Part I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets at June 30, 2011 and 2010 and December 31, 2010 (Unaudited)		3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)		4

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)		5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)		6

	Notes to the Unaudited Consolidated Interim Financial Statements		7-24

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-54

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	55-58

	Item 4.	Controls and Procedures	58

	Item 4T.	Controls and Procedures	58

Part II – OTHER INFORMATION			59

	Item 1.	Legal Proceedings	59

	Item 1A.	Risk Factors	59

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

	Item 3.	Defaults Upon Senior Securities	59

	Item 4.	(Removed and Reserved)	59

	Item 5.	Other Information	59

	Item 6.	Exhibits	60

SIGNATURE PAGE			61

EXHIBIT INDEX			62

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENB Financial Corp

Consolidated Balance Sheets (Unaudited)

	June 30,			December 31,			June 30,
	2011			2010			2010
(Dollars in thousands, except share data)	$			$			$
ASSETS
Cash and due from banks		10,335			9,388			10,588
Intererest-bearing deposits in other banks		28,237			16,838			9,765
Federal funds sold		-			3,000			3,000

Total cash and cash equivalents		38,572			29,226			23,353

Securities available for sale (at fair value)		265,637			259,138			256,079

Loans held for sale		253			771			111

Loans (net of unearned income)		409,002			415,234			426,713

Less: Allowance for loan losses		7,801			7,132			6,413

Net loans		401,201			408,102			420,300

Premises and equipment, net		20,523			20,487			20,844

Regulatory stock		4,242			4,680			4,916

Bank owned life insurance		16,213			15,891			15,567

Other assets		7,933			9,474			10,675

Total assets		754,574			747,769			751,845

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits:
Noninterest-bearing		137,928			131,534			124,260
Interest-bearing		455,561			464,060			468,242

Total deposits		593,489			595,594			592,502

Long-term debt		79,000			74,500			80,000
Other liabilities		3,157			3,442			4,975

Total liabilities		675,646			673,536			677,477

Stockholders' equity:
Common stock, par value $0.20;
Shares: Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,860,877
(Issued 2,869,557 and Outstanding 2,856,039 as of 12-31-10)
(Issued 2,869,557 and Outstanding 2,848,270 as of 6-30-10)		574			574			574
Capital surplus		4,315			4,325			4,364
Retained earnings		71,404			69,226			67,368
Accumulated other comprehensive income, net of tax		2,847			442			2,597
Less: Treasury stock shares at cost 8,680 (13,518 shares
as of 12-31-10 and 21,287 shares as of 6-30-10)		(212	)		(334	)		(535	)

Total stockholders' equity		78,928			74,233			74,368

Total liabilities and stockholders' equity		754,574			747,769			751,845

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB Financial Corp

Consolidated Statements of Income (Unaudited)

Periods Ended June 30, 2011 and 2010

	Three Months						Six Months
	2011			2010			2011			2010
(Dollars in thousands, except share data)	$			$			$			$
Interest and dividend income:

Interest and fees on loans		5,444			5,657			10,885			11,245
Interest on securities available for sale
Taxable		1,607			1,910			3,107			3,841
Tax-exempt		836			739			1,698			1,341
Interest on federal funds sold		13			2			18			4
Dividend income		31			32			66			63

Total interest and dividend income		7,931			8,340			15,774			16,494

Interest expense:
Interest on deposits		1,301			1,885			2,735			3,812
Interest on short-term borrowings		-			-			-			1
Interest on long-term debt		791			830			1,553			1,713

Total interest expense		2,092			2,715			4,288			5,526

Net interest income		5,839			5,625			11,486			10,968

Provision for loan losses		450			450			900			900

Net interest income after provision for loan losses		5,389			5,175			10,586			10,068

Other income:
Trust and investment services income		316			277			594			564
Service fees		455			578			885			1,122
Commissions		482			408			907			761
Gains on securities transactions, net		593			350			1,077			558
Impairment losses on securities:
Impairment losses on investment securities		(1,267	)		(666	)		(1,414	)		(715	)
Non-credit related losses on securities not expected
to be sold in other comprehensive income before tax		1,195			611			1,195			611
Net impairment losses on investment securities		(72	)		(55	)		(219	)		(104	)
Gains on sale of mortgages		26			48			80			63
Losses on sale of loans		(263	)		-			(263	)		-
Earnings on bank owned life insurance		147			142			293			289
Other Income		66			51			176			227

Total other income		1,750			1,799			3,530			3,480

Operating expenses:
Salaries and employee benefits		2,810			2,728			5,662			5,420
Occupancy		396			408			807			815
Equipment		202			208			398			416
Advertising & marketing		94			122			165			234
Computer software & data processing		392			396			777			759
Bank shares tax		208			191			416			382
Professional services		386			414			687			784
FDIC Insurance		123			172			345			340
Other Expense		373			452			733			794

Total operating expenses		4,984			5,091			9,990			9,944

Income before income taxes		2,155			1,883			4,126			3,604

Provision for federal income taxes		303			233			577			486

Net income		1,852			1,650			3,549			3,118

Earnings per share of common stock		0.65			0.58			1.24			1.10

Cash dividends paid per share		0.24			0.24			0.48			0.48

Weighted average shares outstanding		2,858,564			2,843,176			2,857,170			2,841,311

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB Financial Corp

Consolidated Statements of Comprehensive Income (Unaudited)

Three and Six Months Ended June 30, 2011 and 2010

	Three Months						Six Months
	2011			2010			2011			2010
(Dollars in thousands)	$			$			$			$

Net income		1,852			1,650			3,549			3,118

Other comprehensive income arising during the period		2,862			1,910			2,786			3,872

Reclassification adjustment for gains realized in income		(593	)		(350	)		(1,077	)		(558	)

Reclassification adjustment for other-than-temporary impairment
losses realized in income		72			55			219			104

Other comprehensive income before tax		3,383			2,205			3,644			4,326

Income taxes related to comprehensive income		1,150			750			1,239			1,471

Other comprehensive income		2,233			1,455			2,405			2,855

Comprehensive income		4,085			3,105			5,954			5,973

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB Financial Corp

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)	Six Months Ended June 30,
	2011			2010
	$			$
Cash flows from operating activities:
Net income		3,549			3,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities and loan fees		866			590
Increase in interest receivable		(12	)		(171	)
Decrease in interest payable		(150	)		(91	)
Provision for loan losses		900			900
Gains on securities transactions		(1,077	)		(558	)
Impairment losses on securities		219			104
Losses on the sale of student loans		263			-
Gains on sale of mortgages		(80	)		(63	)
Loans originated for sale		(5,452	)		(4,226	)
Proceeds from sales of loans		6,050			4,357
Earnings on bank-owned life insurance		(293	)		(289	)
Losses on sale of other real estate owned		-			34
Depreciation of premises and equipment and amortization of software		677			680
Deferred income tax		(20	)		(282	)
Decrease in federal deposit insurance		315			305
Other assets and other liabilities, net		(176	)		(647	)
Net cash provided by operating activities		5,579			3,761

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		28,470			27,126
Proceeds from sales		45,988			24,689
Purchases		(77,324	)		(67,401	)
Redemptions of regulatory bank stock		438			-
Purchase of bank-owned life insurance		(29	)		(30	)
Proceeds from sale of student loans		7,981			-
Net (increase) decrease in loans		(2,239	)		343
Purchases of premises and equipment		(568	)		(530	)
Purchase of computer software		(86	)		(230	)
Net cash provided by (used in) investing activities		2,631			(16,033	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		12,358			16,326
Net (decrease)/increase in time deposits		(14,463	)		6,233
Proceeds from long-term debt		7,500			7,500
Repayments of long-term debt		(3,000	)		(10,000	)
Dividends paid		(1,371	)		(1,363	)
Treasury stock sold		231			182
Treasury stock purchased		(119	)		-
Net cash provided by financing activities		1,136			18,878
Increase in cash and cash equivalents		9,346			6,606
Cash and cash equivalents at beginning of period		29,226			16,747
Cash and cash equivalents at end of period		38,572			23,353

Supplemental disclosures of cash flow information:
Interest paid		4,438			5,617
Income taxes paid		690			940

Supplemental disclosure of non-cash investing and financing activities:
Net transfer of other real estate owned held for sale from loans		-			429
Fair value adjustments for securities available for sale		3,644			4,326

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 Ephrata National Bank (the “Bank”), which is a wholly-owned subsidiary of ENB Financial Corp. This Form 10-Q, for the second quarter of 2011, is reporting on the results of operations and financial condition of ENB Financial Corp.

Operating results for the three and six months ended June 30, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. 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, 2010.

2.	Securities Available for Sale

The amortized cost and fair value of securities held at June 30, 2011, and December 31, 2010, are as follows:

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
June 30, 2011
U.S. treasuries & government agencies		45,650		1,782		-			47,432
U.S. agency mortgage-backed securities		46,881		683		(6	)		47,558
U.S. agency collateralized mortgage obligations		56,962		869		(122	)		57,709
Private collateralized mortgage obligations		11,898		104		(1,195	)		10,807
Corporate bonds		17,765		312		(22	)		18,055
Obligations of states and political subdivisions		78,167		2,166		(207	)		80,126
Total debt securities		257,323		5,916		(1,552	)		261,687
Marketable equity securities		4,000		-		(50	)		3,950
Total securities available for sale		261,323		5,916		(1,602	)		265,637

December 31, 2010
U.S. treasuries & government agencies		46,701		1,310		(125	)		47,886
U.S. agency mortgage-backed securities		38,201		844		(207	)		38,838
U.S. agency collateralized mortgage obligations		64,713		886		(206	)		65,393
Private collateralized mortgage obligations		12,900		132		(1,220	)		11,812
Corporate bonds		11,749		234		(74	)		11,909
Obligations of states and political subdivisions		80,204		602		(1,405	)		79,401
Total debt securities		254,468		4,008		(3,237	)		255,239
Marketable equity securities		4,000		-		(101	)		3,899
Total securities available for sale		258,468		4,008		(3,338	)		259,138

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 June 30, 2011, 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		27,004		27,332
Due after one year through five years		88,951		90,682
Due after five years through ten years		66,165		67,337
Due after ten years		75,203		76,336
Total debt securities		257,323		261,687

Securities available for sale with a par value of $70,609,000 and $66,801,000 at June 30, 2011, and December 31, 2010, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $75,315,000 at June 30, 2011, and $70,718,000 at December 31, 2010.

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)

	Six Months Ended June 30,
	2011		2010
	$		$
Proceeds from sales		45,988		24,689
Gross realized gains		1,252		591
Gross realized losses		175		33

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2011		2010
	$		$
Gross realized gains		1,252		591

Gross realized losses		175		33
Impairment on securities		219		104
Total gross realized losses		394		137

Net gains on securities		858		454

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The bottom portion of the above chart 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 income statements and consolidated statements of cash flows.

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. As of June 30, 2011, four private collateralized mortgage obligations (PCMO) were considered to be other-than-temporarily impaired, and the cash flow analysis on two of these four securities indicated a need to take additional impairment charges. Impairment charges of $72,000 were recorded on these two securities as of June 30, 2011. Impairment charges of $147,000 were recorded on the four PCMO securities considered to be other-than-temporarily impaired as of March 31, 2011, resulting in total impairment in 2011 of $219,000. As of December 31, 2010, the same four PCMOs were considered to be other-than-temporarily impaired. Of these four securities, only two had impairment taken during 2010 in the amount of $393,000. Cumulative impairment on the four PCMO securities deemed impaired as of June 30, 2011, was $951,000. Information pertaining to securities with gross unrealized losses at June 30, 2011, and December 31, 2010, 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 June 30, 2011
U.S. treasuries & government agencies		-		-			-		-			-		-
U.S. agency mortgage-backed securities		3,084		(6	)		-		-			3,084		(6	)
U.S. agency collateralized mortgage obligations		7,181		(122	)		-		-			7,181		(122	)
Private collateralized mortgage obligations		-		-			6,719		(1,195	)		6,719		(1,195	)
Corporate bonds		3,500		(22	)		-		-			3,500		(22	)
Obligations of states & political subdivisions		10,238		(147	)		2,756		(60	)		12,994		(207	)

Total debt securities		24,003		(297	)		9,475		(1,255	)		33,478		(1,552	)

Marketable equity securities		-		-			950		(50	)		950		(50	)

Total temporarily impaired securities		24,003		(297	)		10,425		(1,305	)		34,428		(1,602	)

As of December 31, 2010
U.S. treasuries & government agencies		5,904		(125	)		-		-			5,904		(125	)
U.S. agency mortgage-backed securities		16,331		(207	)		-		-			16,331		(207	)
U.S. agency collateralized mortgage obligations		21,256		(206	)		-		-			21,256		(206	)
Private collateralized mortgage obligations		-		-			7,377		(1,220	)		7,377		(1,220	)
Corporate bonds		4,588		(74	)		-		-			4,588		(74	)
Obligations of states & polititcal subdivisions		42,453		(1,294	)		3,568		(111	)		46,021		(1,405	)

Total debt securities		90,532		(1,906	)		10,945		(1,331	)		101,477		(3,237	)

Marketable equity securities		-		-			1,899		(101	)		1,899		(101	)

Total temporarily impaired securities		90,532		(1,906	)		12,844		(1,432	)		103,376		(3,338	)

In the debt security portfolio, there are 40 positions that are considered temporarily impaired at June 30, 2011. Of those 40 positions, four PCMOs were the only instruments considered other-than-temporarily impaired at June 30, 2011.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation evaluates both equity and debt securities with fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such an 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 the four PCMOs since these were the only instruments management deemed to be other-than-temporarily impaired.

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 showing 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 four PCMOs in the first half of 2011.

The following table summarizes the cumulative roll-forward of credit losses on the Corporation’s other-than-temporarily impaired PCMOs recorded in earnings, for which a portion was also recognized as a component of other comprehensive income for the six months ended June 30, 2011, and June 30, 2010:

CREDIT LOSSES ON OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES

(DOLLARS IN THOUSANDS)

	2011		2010
	$		$

Balance as of January 1		732		369

Additional credit losses on debt securities for which other-
than-temporary impairment was previously recognized		219		104

Balance as of June 30		951		473

The following table reflects the book value, market value, and unrealized loss as of June 30, 2011, on the four PCMO securities held which had impairment taken in 2011. The values shown are after the Corporation recorded year-to-date impairment charges of $219,000 through June 30, 2011. The $219,000 is deemed to be a credit loss and is the amount that management expects the principal loss will be by the time these four securities mature. The remaining $1,195,000 of unrealized losses is deemed to be a market value loss that is considered temporary. Prior to the impairment charge, these four securities had unrealized losses of $1,414,000.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

SECURITY IMPAIRMENT CHARGES

(DOLLARS IN THOUSANDS)

	As of June 30, 2011							Year-to-Date 2011
	Book		Market		Unrealized			Impairment
	Value		Value		Loss			Charge
	$		$		$			$

Private collateralized mortgage obligations		7,914		6,719		(1,195	)		(219	)

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 collateral uncertainty as well. The Corporation’s mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) holdings are backed by the U.S. government, and therefore, experience significantly less volatility and uncertainty than the PCMO securities. The Corporation’s PCMO holdings make up a minority of the total MBS, CMO, and PCMO securities held. As of June 30, 2011, on an amortized cost basis, PCMOs accounted for 10.3% of the Corporation’s total MBS, CMO, and PCMO holdings, compared to 11.1% as of December 31, 2010. As of June 30, 2011, six PCMOs were held with one rated AAA by S&P and the remaining five securities rated below investment grade which is considered BBB- for S&P and Baa3 for Moody. On June 7, 2011, one PCMO was rated BB by Fitch but was still rated AAA by S&P. For purposes of reporting, management goes by the lowest grade and, in this case, the PCMO is considered below investment grade. Impairment charges, as detailed above, were taken on four of these securities during 2011.

Management conducts impairment analysis on a quarterly basis and currently has no plans to sell 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 and does not show principal losses on the two bonds that are not deemed as impaired.

The net unrealized loss position on all of the Corporation’s PCMOs has remained nearly unchanged since December 31, 2010, with net unrealized losses of $1,091,000 as of June 30, 2011, compared to $1,088,000 as of December 31, 2010. The same two PCMOs which carried gains of $132,000 as of December 31, 2010, were carrying gains of $104,000 as of June 30, 2011. Due to the steady monthly principal payments that are occurring on all of the PCMO bonds, management anticipates that the net unrealized loss position on these bonds will also generally decline in proportion to the percentage decline in principal value. Management has concluded that, as of June 30, 2011, the unrealized losses outlined in the above table represent temporary declines. The Corporation does not intend to sell, and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.

For U.S agencies, U.S. agency backed MBS and CMOs management analyzes these securities for impairment based on the amount of unrealized loss carried and the length of time the loss was carried. Due to the implied AAA rating and backing of the U.S. government the likelihood of a loss of principal on these bonds is remote. No unrealized losses existed on the Corporation’s U.S. agencies as of June 30, 2011. The unrealized losses that existed on the U.S. agency MBS and U.S. agency CMOs were very low at $6,000 and $122,000 respectively and both existed for less than twelve months. Management performs the same impairment analysis for the Corporation’s tax exempt municipal bond securities, but since these securities are not backed by the U.S. government, management evaluates the credit quality of the municipality by monitoring credit ratings and outlooks, insurance backing if applicable, and tracking all municipalities that have lost their rating or have unrealized losses in excess of 10%. Management has determined that these securities are not other than temporarily impaired but the unrealized losses are a result of interest rate changes.

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 June 30, 2011, and December 31, 2010, and the summary of the allowance for loan losses for the six months ended June 30, 2011, and June 30, 2010.

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

	June 30,		December 31,
	2011		2010
	$		$
Commercial real estate
Commercial mortgages		98,101		96,256
Agriculture mortgages		68,756		60,513
Construction		11,853		14,781
Total commercial real estate		178,710		171,550

Consumer real estate (a)
1-4 family residential mortgages		137,614		137,361
Home equity loans		16,950		17,719
Home equity lines of credit		13,305		12,490
Total consumer real estate		167,869		167,570

Commercial and industrial
Commercial and industrial		26,601		28,434
Tax-free loans		20,956		23,028
Agriculture loans		10,564		11,756
Total commercial and industrial		58,121		63,218

Consumer		4,409		13,045

Gross loans prior to deferred fees		409,109		415,383
Less:
Deferred loan fees, net		107		149
Allowance for loan losses		7,801		7,132
Total net loans		401,201		408,102

(a)	Real estate loans serviced for Fannie Mae, which are not included in the Consolidated Balance Sheets, totaled $9,483,000 and $10,101,000 as of June 30, 2011, and December 31, 2010, respectively.

ALLOWANCE FOR LOAN LOSSES SUMMARY

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2011			2010
	$			$
Balance at January 1		7,132			5,912
Amounts charged off		(436	)		(467	)
Recoveries of amounts previously charged off		205			68
Balance before current year provision		6,901			5,513
Provision charged to operating expense		900			900
Balance at June 30		7,801			6,413

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 June 30, 2011, and December 31, 2010. 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.

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.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

June 30, 2011	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		73,020		63,307		7,856		22,173		20,956		9,729		197,041
Special Mention		7,544		1,604		881		1,271		-		477		11,777
Substandard		17,537		3,845		3,116		3,157		-		358		28,013
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		98,101		68,756		11,853		26,601		20,956		10,564		236,831

December 31, 2010	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		72,541		53,757		11,377		20,286		23,028		10,932		191,921
Special Mention		8,657		5,667		126		2,403		-		589		17,442
Substandard		15,058		1,089		3,278		5,745		-		235		25,405
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		96,256		60,513		14,781		28,434		23,028		11,756		234,768

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

non-performing. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of June 30, 2011, and December 31, 2010:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

June 30, 2011	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		137,239		16,950		13,305		4,409		171,903
Non-performing		375		-		-		-		375

Total		137,614		16,950		13,305		4,409		172,278

December 31, 2010	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		137,268		17,661		12,490		13,044		180,463
Non-performing		93		58		-

ENB Financial Corp - FORM 10-Q - August 12, 2011

Attached files