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EX-32.1 - EX-32.1 - ENB Financial Corpex32-1.htm
EX-31.2 - EX-31.2 - ENB Financial Corpex31-2.htm
EX-32.2 - EX-32.2 - ENB Financial Corpex32-2.htm
EX-31.1 - EX-31.1 - ENB Financial Corpex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended          March 31, 2016          

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 x           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 x           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  x

 

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

Yes o           No x

 

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 May 4, 2016, the registrant had 2,851,394 shares of $0.20 (par) Common Stock outstanding.

 

 

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2016

 

Part I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets at March 31, 2016 and 2015 and December 31, 2015 (Unaudited) 3
     
  Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (Unaudited) 6
     
  Notes to the Unaudited Consolidated Interim Financial Statements 7-33
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34-64
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 65-70
     
Item 4. Controls and Procedures 71
     
     
     
Part II – OTHER INFORMATION 72
     
Item 1. Legal Proceedings 72
     
Item 1A. Risk Factors 72
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 72
     
Item 3. Defaults Upon Senior Securities 72
     
Item 4. Mine Safety Disclosures 72
     
Item 5. Other Information 72
     
Item 6. Exhibits 73
     
     
SIGNATURE PAGE 74
     
EXHIBIT INDEX 75

 

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Index 

ENB FINANCIAL CORP

 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

   March 31,   December 31,   March 31, 
   2016   2015   2015 
   $   $   $ 
ASSETS               
Cash and due from banks   11,989    15,426    13,423 
Interest-bearing deposits in other banks   28,689    28,801    26,933 
                
   Total cash and cash equivalents   40,678    44,227    40,356 
                
Securities available for sale (at fair value)   287,270    289,423    292,808 
                
Loans held for sale   804    1,126    648 
                
Loans (net of unearned income)   544,784    520,283    482,626 
                
   Less: Allowance for loan losses   7,040    7,078    7,140 
                
   Net loans   537,744    513,205    475,486 
                
Premises and equipment   21,466    21,696    22,305 
Regulatory stock   4,675    4,314    3,595 
Bank owned life insurance   24,082    23,869    20,765 
Other assets   8,102    7,741    6,752 
                
       Total assets   924,821    905,601    862,715 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
                
Liabilities:               
  Deposits:               
    Noninterest-bearing   243,647    236,214    205,830 
    Interest-bearing   506,084    503,848    489,777 
                
    Total deposits   749,731    740,062    695,607 
                
  Short-term borrowings   11,467    8,736    4,930 
  Long-term debt   64,883    59,594    65,548 
  Other liabilities   1,866    2,107    2,024 
                
       Total liabilities   827,947    810,499    768,109 
                
Stockholders' equity:               
  Common stock, par value $0.20;               
Shares:  Authorized 12,000,000               
             Issued 2,869,557 and Outstanding 2,851,394               
            (Issued 2,869,557 and Outstanding 2,849,524 as of 12/31/15)               
          (Issued 2,869,557 and Outstanding  2,856,413 as of 3/31/15)   574    574    574 
  Capital surplus   4,395    4,395    4,383 
  Retained earnings   92,172    91,029    87,895 
  Accumulated other comprehensive income (loss) net of tax   318    (252)   2,161 
  Less: Treasury stock cost on 18,163 shares (20,033 shares               
   as of 12-31-15 and 13,144 shares as of 3-31-15)   (585)   (644)   (407)
                
       Total stockholders' equity   96,874    95,102    94,606 
                
       Total liabilities and stockholders' equity   924,821    905,601    862,715 

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

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Index 

ENB FINANCIAL CORP

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

 

   Three Months ended March 31, 
   2016   2015 
   $   $ 
Interest and dividend income:          
Interest and fees on loans   5,439    4,949 
Interest on securities available for sale          
Taxable   473    1,000 
Tax-exempt   867    766 
Interest on deposits at other banks   26    14 
Dividend income   81    143 
           
Total interest and dividend income   6,886    6,872 
           
Interest expense:          
Interest on deposits   546    674 
Interest on borrowings   265    340 
           
Total interest expense   811    1,014 
           
Net interest income   6,075    5,858 
           
Provision (credit) for loan losses   (50)   200 
           
Net interest income after provision (credit) for loan losses   6,125    5,658 
           
Other income:          
Trust and investment services income   387    355 
Service fees   478    401 
Commissions   515    465 
Gains on securities transactions, net   728    561 
Gains on sale of mortgages   155    153 
Earnings on bank-owned life insurance   194    160 
Other income   194    106 
           
Total other income   2,651    2,201 
           
Operating expenses:          
Salaries and employee benefits   3,971    3,702 
Occupancy   514    554 
Equipment   263    268 
Advertising & marketing   135    155 
Computer software & data processing   420    374 
Shares tax   227    195 
Professional services   377    318 
Other expense   575    584 
           
Total operating expenses   6,482    6,150 
           
Income before income taxes   2,294    1,709 
           
Provision for federal income taxes   382    243 
           
Net income   1,912    1,466 
           
Earnings per share of common stock   0.67    0.51 
           
Cash dividends paid per share   0.27    0.27 
           
Weighted average shares outstanding   2,849,954    2,857,282 

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

4 

Index 

ENB FINANCIAL CORP

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

   Three Months ended March 31, 
   2016   2015 
   $   $ 
         
Net income   1,912    1,466 
           
Other comprehensive income, net of tax:          
Securities available for sale not other-than-temporarily impaired:          
           
   Unrealized gains arising during the period   1,591    2,317 
   Income tax effect   (541)   (788)
    1,050    1,529 
           
   Gains recognized in earnings   (728)   (561)
   Income tax effect   248    191 
    (480)   (370)
           
Other comprehensive income, net of tax   570    1,159 
           
Comprehensive Income   2,482    2,625 

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

5 

Index 

ENB FINANCIAL CORP

 

CONSOLIDATED STATEMENTS OF CASH FLOWS        
(DOLLARS IN THOUSANDS)  Three Months Ended March 31, 
   2016   2015 
   $   $ 
Cash flows from operating activities:          
Net income   1,912    1,466 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Net amortization of securities premiums and discounts and loan fees   1,758    1,327 
Decrease in interest receivable   105    336 
Decrease in interest payable   (13)   (47)
Provision (credit) for loan losses   (50)   200 
Gains on securities transactions, net   (728)   (561)
Gains on sale of mortgages   (155)   (153)
Loans originated for sale   (5,120)   (5,139)
Proceeds from sales of loans   5,597    5,150 
Earnings on bank-owned life insurance   (194)   (160)
Loss on sale of other real estate owned       21 
Depreciation of premises and equipment and amortization of software   404    378 
Deferred income tax   238    25 
Other assets and other liabilities, net   (1,076)   (885)
Net cash provided by operating activities   2,678    1,958 
           
Cash flows from investing activities:          
Securities available for sale:          
   Proceeds from maturities, calls, and repayments   19,915    16,564 
   Proceeds from sales   48,099    40,235 
   Purchases   (65,953)   (52,754)
Proceeds from sale of other real estate owned       77 
Purchase of regulatory bank stock   (670)   (491)
Redemptions of regulatory bank stock   309    123 
Purchase of bank-owned life insurance   (19)   (2)
Net increase in loans   (24,564)   (11,837)
Purchases of premises and equipment, net   (129)   (215)
Purchase of computer software   (194)   (62)
Net cash used for investing activities   (23,206)   (8,362)
           
Cash flows from financing activities:          
Net increase (decrease) in demand, NOW, and savings accounts   20,881    (1,187)
Net decrease in time deposits   (11,212)   (2,857)
Net increase in short-term borrowings   2,731    4,930 
Proceeds from long-term debt   10,289    6,248 
Repayments of long-term debt   (5,000)   (3,000)
Dividends paid   (769)   (771)
Treasury stock sold   124    130 
Treasury stock purchased   (65)   (145)
Net cash provided by financing activities   16,979    3,348 
Decrease in cash and cash equivalents   (3,549)   (3,056)
Cash and cash equivalents at beginning of period   44,227    43,412 
Cash and cash equivalents at end of period   40,678    40,356 
           
Supplemental disclosures of cash flow information:          
    Interest paid   823    1,061 
    Income taxes paid   625    250 
           
Supplemental disclosure of non-cash investing and financing activities:          
Net transfer of other real estate owned from loans       137 
Fair value adjustments for securities available for sale   863    1,756 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

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Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.Basis of Presentation

 

The accompanying unaudited consolidated interim 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 first quarter of 2016, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. 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, 2015.

 

 

2.Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at March 31, 2016, and December 31, 2015, are as follows:    

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
March 31, 2016            
U.S. government agencies   21,673    26    (11)   21,688 
U.S. agency mortgage-backed securities   50,494    91    (233)   50,352 
U.S. agency collateralized mortgage obligations   44,227    292    (442)   44,077 
Corporate bonds   62,025    84    (294)   61,815 
Obligations of states and political subdivisions   102,615    1,459    (476)   103,598 
Total debt securities   281,034    1,952    (1,456)   281,530 
Marketable equity securities   5,755    13    (28)   5,740 
Total securities available for sale   286,789    1,965    (1,484)   287,270 
                     
December 31, 2015                    
U.S. government agencies   29,829    3    (141)   29,691 
U.S. agency mortgage-backed securities   42,288    39    (347)   41,980 
U.S. agency collateralized mortgage obligations   48,140    125    (934)   47,331 
Corporate bonds   63,825    29    (549)   63,305 
Obligations of states and political subdivisions   100,208    1,780    (405)   101,583 
Total debt securities   284,290    1,976    (2,376)   283,890 
Marketable equity securities   5,515    23    (5)   5,533 
Total securities available for sale   289,805    1,999    (2,381)   289,423 

 

7 

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 March 31, 2016, 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   24,146    24,043 
Due after one year through five years   107,792    107,535 
Due after five years through ten years   51,160    51,409 
Due after ten years   97,936    98,543 
Total debt securities   281,034    281,530 

 

Securities available for sale with a par value of $54,499,000 and $60,295,000 at March 31, 2016, and December 31, 2015, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $58,252,000 at March 31, 2016, and $65,137,000 at December 31, 2015.

 

Proceeds from active sales of debt 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 March 31,
   2016  2015
   $  $
Proceeds from sales   48,099    40,235 
Gross realized gains   730    607 
Gross realized losses   2    46 

 

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first quarter of 2016 or 2015.

 

Information pertaining to securities with gross unrealized losses at March 31, 2016, and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

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Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 March 31, 2016                              
U.S. government agencies   4,994    (6)   1,994    (5)   6,988    (11)
U.S. agency mortgage-backed securities   31,293    (144)   2,986    (89)   34,279    (233)
U.S. agency collateralized mortgage obligations   15,510    (426)   2,041    (16)   17,551    (442)
Corporate bonds   25,978    (198)   9,601    (96)   35,579    (294)
Obligations of states & political subdivisions   22,415    (204)   15,641    (272)   38,056    (476)
                               
Total debt securities   100,190    (978)   32,263    (478)   132,453    (1,456)
                               
Marketable equity securities   364    (28)           364    (28)
                               
Total temporarily impaired securities   100,554    (1,006)   32,263    (478)   132,817    (1,484)
                               
As of December 31, 2015                              
U.S. government agencies   24,968    (106)   1,965    (35)   26,933    (141)
U.S. agency mortgage-backed securities   24,613    (235)   4,827    (112)   29,440    (347)
U.S. agency collateralized mortgage obligations   26,563    (827)   4,652    (107)   31,215    (934)
Corporate bonds   50,530    (532)   2,002    (17)   52,532    (549)
Obligations of states & political subdivisions   21,913    (252)   7,435    (153)   29,348    (405)
                               
Total debt securities   148,587    (1,952)   20,881    (424)   169,468    (2,376)
                               
Marketable equity securities   142    (5)           142    (5)
                               
Total temporarily impaired securities   148,729    (1,957)   20,881    (424)   169,610    (2,381)

 

In the debt security portfolio, there are 103 positions that were carrying unrealized losses as of March 31, 2016. There were no instruments considered to be other-than-temporarily impaired at March 31, 2016.

 

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. U.S. generally accepted accounting principles provide 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.

 

As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impact the value of the bonds by causing accelerated amortization. If a security was purchased at a high premium, or dollar price above par, the remaining premium has to be amortized on a straight line basis to the known call date. Calls can occur in a majority of the securities the Corporation purchases but they are dependent on the structure of the instrument, and can also be dependent on certain conditions. The Corporation experienced a clean-up call on a Ginnie Mae U.S. agency mortgage backed security in the fourth quarter of 2015, which required $385,000 of remaining premium to be amortized. Subsequent to this event, all other high coupon and/or high premium U.S. agency mortgage backed securities and collateralized mortgage obligations were reviewed to determine if there was any other current material exposure to clean-up call provisions. No other securities were identified with impending clean-up calls.

 

On March 15, 2016, management was made aware of a regulatory call provision on a CoBank bond held by the Corporation. CoBank is a sub U.S. agency and cooperative of the Farm Credit Association (FCA), a U.S. government sponsored enterprise (GSE). The bond is classified as a corporate bond for disclosure purposes. The regulatory call was not anticipated and the high coupon bond was purchased at a high premium. The call required accelerated amortization to the April 15, 2016 call date, resulting in an additional $430,000 of first quarter amortization. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018. At the time, the Corporation owned $4.4 million par of the CoBank issue with a book value of $4.9 million.

 

9 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q, management became aware of an AgriBank bond call. AgriBank is another cooperative of the FCA. The Corporation owns $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. AgriBank went public with this call on April 26, 2016, stating they intend to call the bonds on July 15, 2016. As a result of this par call notice, management has accelerated the amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April and running until the call date of July 15, 2016. After July 15, 2016, the Corporation will no longer hold any sub U.S. Agency debt of FCA or any other U.S. GSE. Note 8 to the Corporation’s Consolidated Financial Statements addresses this subsequent event.

 

 

3. Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2016, and December 31, 2015:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

   March 31,  December 31,
   2016  2015
   $  $
Commercial real estate          
Commercial mortgages   88,997    87,613 
Agriculture mortgages   165,211    158,321 
Construction   21,354    14,966 
Total commercial real estate   275,562    260,900 
           
Consumer real estate (a)          
1-4 family residential mortgages   136,307    133,538 
Home equity loans   10,423    10,288 
Home equity lines of credit   40,571    37,374 
Total consumer real estate   187,301    181,200 
           
Commercial and industrial          
Commercial and industrial   40,431    36,189 
Tax-free loans   18,929    19,083 
Agriculture loans   18,087    18,305 
Total commercial and industrial   77,447    73,577 
           
Consumer   3,725    3,892 
           
Gross loans prior to deferred fees   544,035    519,569 
Less:          
Deferred loan costs, net   (749)   (714)
Allowance for loan losses   7,040    7,078 
Total net loans   537,744    513,205 

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets,totaled $41,282,000 and $38,024,000 as of March 31, 2016, and December 31, 2015, 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 March 31, 2016 and December 31, 2015. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

10 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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)

 

March 31, 2016  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   82,796    161,452    20,239    39,418    18,929    17,604    340,438 
Special Mention   508    1,154        39        250    1,951 
Substandard   5,693    2,605    1,115    974        233    10,620 
Doubtful                            
Loss                            
                                    
    Total   88,997    165,211    21,354    40,431    18,929    18,087    353,009 
                                    

 

December 31, 2015  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   81,865    154,507    13,822    35,416    19,083    17,860    322,553 
Special Mention   511    623                125    1,259 
Substandard   5,237    3,191    1,144    773        320    10,665 
Doubtful                            
Loss                            
                                    
    Total   87,613    158,321    14,966    36,189    19,083    18,305    334,477 

11 

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 nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of March 31, 2016 and December 31, 2015:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)  

 

March 31, 2016
 
  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   135,999    10,423    40,548    3,722    190,692 
Non-performing   308        23    3    334 
                          
   Total   136,307    10,423    40,571    3,725    191,026 
                          

 

December 31, 2015
 
  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                          
Performing   133,220    10,278    37,327    3,889    184,714 
Non-performing   318    10    47    3    378 
                          
   Total   133,538    10,288    37,374    3,892    185,092 

 

12 

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 March 31, 2016 and December 31, 2015:

 

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
March 31, 2016  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages   275    594        869    88,128    88,997     
   Agriculture mortgages                   165,211    165,211     
   Construction                   21,354    21,354     
Consumer real estate                                   
   1-4 family residential mortgages   733        308    1,041    135,266    136,307    308 
   Home equity loans   17    56        73    10,350    10,423     
   Home equity lines of credit           23    23    40,548    40,571    23 
Commercial and industrial                                   
   Commercial and industrial   35            35    40,396    40,431     
   Tax-free loans                   18,929    18,929     
   Agriculture loans   15            15    18,072    18,087     
Consumer   18    17    3    38    3,687    3,725    3 
       Total   1,093    667    334    2,094    541,941    544,035    334 

 

                      
                     Loans
         Greater           Receivable >
   30-59 Days  60-89 Days  than 90  Total Past     Total Loans  90 Days and
December 31, 2015  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages       601        601    87,012    87,613     
   Agriculture mortgages                   158,321    158,321     
   Construction                   14,966    14,966     
Consumer real estate                                   
   1-4 family residential mortgages   1,264    123    318    1,705    131,833    133,538    318 
   Home equity loans   27    59    10    96    10,192    10,288    10 
   Home equity lines of credit   35        47    82    37,292    37,374    47 
Commercial and industrial                                   
   Commercial and industrial   20    9        29    36,160    36,189     
   Tax-free loans                   19,083    19,083     
   Agriculture loans                   18,305    18,305     
Consumer   17    17    3    37    3,855    3,892    3 
       Total   1,363    809    378    2,550    517,019    519,569    378 

 

13 

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 March 31, 2016 and December 31, 2015:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

   March 31,  December 31,
   2016  2015
   $  $
       
Commercial real estate          
  Commercial mortgages   337    380 
  Agriculture mortgages        
  Construction        
Consumer real estate          
  1-4 family residential mortgages        
  Home equity loans        
  Home equity lines of credit        
Commercial and industrial          
  Commercial and industrial        
  Tax-free loans        
  Agriculture loans        
Consumer        
             Total   337    380 

 

As of March 31, 2016 and December 31, 2015, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended March 31, 2016 and March 31, 2015, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

   Three months ended March 31,
   2016  2015
   $  $
       
Average recorded balance of impaired loans   1,672    2,111 
Interest income recognized on impaired loans   14    24 

 

Interest income on impaired loans would have increased by approximately $4,000 for the three months ended March 31, 2016, compared to $7,000 for the three months ended March 31, 2015, had these loans performed in accordance with their original terms.

 

During the three months ended March 31, 2016 and 2015, there were no loan modifications made that would cause a loan to be considered a troubled debt restructuring (TDR). 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. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

 

14 

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 March 31, 2016, December 31, 2015, and March 31, 2015:

 

IMPAIRED LOAN ANALYSIS               
(DOLLARS IN THOUSANDS)               
March 31, 2016  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   $  $  $  $  $
                          
With no related allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   337    434        358     
    Agriculture mortgages   1,304    1,304        1,314    14 
    Construction                    
Total commercial real estate   1,641    1,738        1,672    14 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with no related allowance   1,641    1,738        1,672    14 
                          
With an allowance recorded:                         
Commercial real estate                         
    Commercial mortgages                    
    Agriculture mortgages                    
    Construction                    
Total commercial real estate                    
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with a related allowance                    
                          
Total by loan class:                         
Commercial real estate                         
    Commercial mortgages   337    434        358     
    Agriculture mortgages   1,304    1,304        1,314    14 
    Construction                    
Total commercial real estate   1,641    1,738        1,672    14 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total   1,641    1,738        1,672    14 

15 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS               
(DOLLARS IN THOUSANDS)               
December 31, 2015  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   $  $  $  $  $
                
With no related allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   380    952        544     
    Agriculture mortgages   1,325    1,325        1,359    83 
    Construction                    
Total commercial real estate   1,705    2,277        1,903    83 
                          
Commercial and industrial                         
    Commercial and industrial       49        54    3 
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial       49        54    3 
                          
Total with no related allowance   1,705    2,326        1,957    86 
                          
With an allowance recorded:                         
Commercial real estate                         
    Commercial mortgages                    
    Agriculture mortgages                    
    Construction                    
Total commercial real estate                    
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with a related allowance                    
                          
Total by loan class:                         
Commercial real estate                         
    Commercial mortgages   380    952        544     
    Agriculture mortgages   1,325    1,325        1,359    83 
    Construction                    
Total commercial real estate   1,705    2,277        1,903    83 
                          
Commercial and industrial                         
    Commercial and industrial       49        54    3 
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial       49        54    3 
                          
Total   1,705    2,326        1,957    86 

16 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS               
(DOLLARS IN THOUSANDS)               
March 31, 2015  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   $  $  $  $  $
                          
With no related allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   585    1,157        665     
    Agriculture mortgages   1,372    1,372        1,383    23 
    Construction                    
Total commercial real estate   1,957    2,529        2,048    23 
                          
Commercial and industrial                         
    Commercial and industrial   60    67        63    1 
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   60    67        63    1 
                          
Total with no related allowance   2,017    2,596        2,111    24 
                          
With an allowance recorded:                         
Commercial real estate                         
    Commercial mortgages                    
    Agriculture mortgages                    
    Construction                    
Total commercial real estate                    
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with a related allowance                    
                          
Total by loan class:                         
Commercial real estate                         
    Commercial mortgages   585    1,157        665     
    Agriculture mortgages   1,372    1,372        1,383    23 
    Construction                    
Total commercial real estate   1,957    2,529        2,048    23 
                          
Commercial and industrial                         
    Commercial and industrial   60    67        63    1 
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   60    67        63    1 
                          
Total   2,017    2,596        2,111    24 

 

17 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

                   
   Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
                   
Beginning balance - December 31, 2015   3,831    1,403    1,314    62    468    7,078 
                               
    Charge-offs           (4)   (12)       (16)
    Recoveries       10    16    2        28 
    Provision   (303)   (45)   47    15    236    (50)
                               
Balance - March 31, 2016   3,528    1,368    1,373    67    704    7,040 

 

During the first quarter of 2016, credit provisions were recorded for the commercial real estate and consumer real estate segments with provision expenses recorded in all other loan categories. Delinquency rates in the real estate secured segment of loans are extremely low requiring fewer reserves. Qualitative factors continue to shift, with net declines in non-dairy agriculture and home equity loans. Our three-year historical loss rate continues to decline in our business mortgage pool, as the twelve-month charge-off rate fell from 4.43% of loans in the fourth quarter of 2015, to 2.69% of loans in the first quarter of 2016. A substantial paydown of a substandard loan with potential impairment also supported a reduced allowance balance, despite an increase in loan balances.

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

                   
   Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
                   
Beginning balance - December 31, 2014   3,834    1,367    1,301    66    573    7,141 
                               
    Charge-offs   (272)           (1)       (273)
    Recoveries   2        70            72 
    Provision   623    (283)   (147)   (11)   18    200 
                               
Balance - March 31, 2015   4,187    1,084    1,224    54    591    7,140 

 

During the first quarter of 2015, provision expense was recorded for the commercial real estate segment with credit provisions recorded in all other loan categories. There were $272,000 of commercial real estate loan charge-offs during the first quarter of 2015, which increased the historical loss rates and ultimately resulted in a higher required reserve amount for the commercial real estate category. The higher commercial loan charge-offs and loan growth during the first quarter of 2015 overshadowed the reduction in provisions in the other areas, resulting in $200,000 of provision expense.

 

18 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of March 31, 2016 and December 31, 2015:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)            

                   
As of March 31, 2016:  Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Ending balance: individually evaluated                              
  for impairment                        
Ending balance: collectively evaluated                              
  for impairment   3,528    1,368    1,373    67    704    7,040 
                               
Loans receivable:                              
Ending balance   275,562    187,301    77,447    3,725         544,035 
Ending balance: individually evaluated                              
  for impairment   1,641                     1,641 
Ending balance: collectively evaluated                              
  for impairment   273,921    187,301    77,447    3,725         542,394 
                               

 

As of December 31, 2015:  Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Ending balance: individually evaluated                              
  for impairment                        
Ending balance: collectively evaluated                              
  for impairment   3,831    1,403    1,314    62    468    7,078 
                               
Loans receivable:                              
Ending balance   260,900    181,200    73,577    3,892         519,569 
Ending balance: individually evaluated                              
  for impairment   1,705                     1,705 
Ending balance: collectively evaluated                              
  for impairment   259,195    181,200    73,577    3,892         517,864 

19 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 March 31, 2016, and December 31, 2015, 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:

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

   March 31, 2016
             
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       21,688        21,688 
U.S. agency mortgage-backed securities       50,352        50,352 
U.S. agency collateralized mortgage obligations       44,077        44,077 
Corporate bonds       61,815        61,815 
Obligations of states & political subdivisions       103,598        103,598 
Marketable equity securities   5,740            5,740 
                     
Total securities   5,740    281,530        287,270 

 

On March 31, 2016, 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 and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of March 31, 2016, the CRA fund investments had a $5,000,000 book and fair market value and the bank stock portfolio had a book value of $755,000, and fair market value of $740,000.

 

20 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Fair Value Measurements:

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)        

   December 31, 2015
             
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       29,691        29,691 
U.S. agency mortgage-backed securities       41,980        41,980 
U.S. agency collateralized mortgage obligations       47,331        47,331 
Corporate bonds       63,305        63,305 
Obligations of states & political subdivisions       101,583        101,583 
Marketable equity securities   5,533            5,533 
                     
Total securities   5,533    283,890        289,423 

 

On December 31, 2015, 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, 2015, the Corporation’s CRA fund investments had a book and fair market value of $5,000,000 and the bank stock portfolio had a book value of $515,000 and a market value of $533,000 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 March 31, 2016 or December 31, 2015.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of March 31, 2016 and December 31, 2015, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

   March 31, 2016 
   Level I
$
   Level II
$
   Level III
$
   Total
$
 
Assets:                    
   Impaired Loans           1,641    1,641 
Total           1,641    1,641 

 

 

   December 31, 2015 
   Level I
$
   Level II
$
   Level III
$
   Total
$
 
Assets:                    
   Impaired Loans           1,705    1,705 
Total           1,705    1,705 

 

The Corporation had a total of $1,641,000 of impaired loans as of March 31, 2016, with no specific allocation against these loans and $1,705,000 of impaired loans as of December 31, 2015, with no specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

21 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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)          

 

  March 31, 2016  
  Fair Value Valuation Unobservable Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans  1,641 Appraisal of Appraisal -20% (-20%)  
    collateral (1) adjustments (2)    
      Liquidation -10% (-10%)  
      expenses (2)    
           

 

  December 31, 2015  
   Fair Value  Valuation Unobservable  Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans 1,705 Appraisal of Appraisal -20% (-20%)  
    collateral (1) adjustments (2)    
      Liquidation  -10% (-10%)  
      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.

 

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.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

 

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.

 

Borrowings

The carrying amount of short-term borrowing is a reasonable estimate of fair value. The fair value of 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.

 

23 

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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 March 31, 2016 and December 31, 2015, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

   March 31, 2016
         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   40,678    40,678    40,678         
Securities available for sale   287,270    287,270    5,740    281,530     
Regulatory stock   4,675    4,675    4,675         
Loans held for sale   804    804    804         
Loans, net of allowance   537,744    532,772            532,772 
Accrued interest receivable   3,495    3,495    3,495         
Bank owned life insurance   24,082    24,082    24,082         
                          
Financial Liabilities:                         
Demand deposits   243,647    243,647    243,647         
Interest-bearing demand deposits   12,467    12,467    12,467         
NOW accounts   76,865    76,865    76,865         
Money market deposit accounts   87,647    87,647    87,647         
Savings accounts   159,213    159,213    159,213         
Time deposits   169,892    171,185            171,185 
     Total deposits   749,731    751,024    579,839        171,185 
                          
Short-term borrowings   11,467    11,467    11,467         
Long-term debt   64,883    65,593            65,593 
Accrued interest payable   443    443    443         

 

24 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

   December 31, 2015
         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   44,227    44,227    44,227         
Securities available for sale   289,423    289,423    5,533    283,890     
Regulatory stock   4,314    4,314    4,314         
Loans held for sale   1,126    1,126    1,126         
Loans, net of allowance   513,205    512,481            512,481 
Accrued interest receivable   3,600    3,600    3,600         
Bank owned life insurance   23,869    23,869    23,869         
                          
Financial Liabilities:                         
Demand deposits   236,214    236,214    236,214         
Interest-bearing demand deposits   14,737    14,737    14,737         
NOW accounts   77,180    77,180    77,180         
Money market deposit accounts   82,507    82,507    82,507         
Savings accounts   148,320    148,320    148,320         
Time deposits   181,104    182,887            182,887 
     Total deposits   740,062    741,845    558,958        182,887 
                          
Short-term borrowings   8,736    8,736    8,736         
Long-term debt   59,594    59,805            59,805 
Accrued interest payable   456    456    456         

 

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 March 31, 2016, firm loan commitments were $54.9 million, unused lines of credit were $162.1 million, and open letters of credit were $11.8 million. The total of these commitments was $228.8 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.

25 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

7. Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (1) (2)

(DOLLARS IN THOUSANDS)  

 

   Unrealized
   Gains (Losses)
   on Securities
   Available-for-Sale
   $
Balance at December 31, 2015   (252)
  Other comprehensive income before reclassifications   1,050 
  Amount reclassified from accumulated other comprehensive income   (480)
Period change   570 
      
Balance at March 31, 2016   318 
      
      
Balance at December 31, 2014   1,002 
  Other comprehensive loss before reclassifications   1,529 
  Amount reclassified from accumulated other comprehensive loss   (370)
Period change   1,159 
      
Balance at March 31, 2015   2,161 

 

(1) All amounts are net of tax.  Related income tax expense or benefit is calculated using a Federal income tax rate of 34%.
(2) Amounts in parentheses indicate debits.  

 

 

DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)

(DOLLARS IN THOUSANDS)      

 

  Amount Reclassified from  
  Accumulated Other Comprehensive  
  Income (Loss)  
  For the Three Months  
  Ended March 31,  
  2016 2015 Affected Line Item in the
  $ $ Consolidated Statements of Income
Securities available-for-sale:      
  Net securities gains reclassified into earnings  728 561     Gains on securities transactions, net
     Related income tax expense (248) (191)     Provision for federal income taxes
  Net effect on accumulated other comprehensive      
     income for the period 480 370  
       
(1) Amounts in parentheses indicate debits.

26 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

  

8. Subsequent Event

 

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q report, the Corporation was made aware on April 26, 2016, of AgriBank’s intention to conduct a regulatory par call on their 9.125% Notes maturing July 15, 2019, with the call date as of July 15, 2016. AgriBank is a farm Credit System Bank, regulated by the Farm Credit Administration (FCA), a U.S. government sponsored enterprise (GSE).

 

The Corporation owns $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. As a result of this par call notice, management has accelerated the amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April 2016 and running until the call date of July 15, 2016. After July 15, 2016, the Corporation will no longer hold any sub-U.S. Agency debt of FCA or any other U.S. GSE.

 

The AgriBank action is very similar to the CoBank regulatory par call that was announced on March 11, 2016, with a call date of April 15, 2016. As a result of the CoBank regulatory par call, management recorded $430,000 of accelerated amortization in the first quarter of 2016, with an additional $70,000 to be recorded in the first fifteen days of April. This first quarter event was discussed previously in the Notes to the Corporation’s Consolidated Financial Statements.

 

Both CoBank and AgriBank are co-operatives of the FCA. The FCA has four such co-operatives. Debt issued by these co-operatives of the FCA is considered sub U.S. agency debt. The debt carries single A credit ratings similar to other investment grade rated corporate bonds and therefore is reflected in the corporate bond sector of the Corporation’s securities portfolio. The only sub-U.S agency debt the Corporation purchased was CoBank and AgriBank debt. The Corporation does not own any other sub-U.S. agency debt of either the FCA or any other U.S. GSE.

 

The Corporation, as well as a vast majority of the CoBank and AgriBank bondholders, purchased these high coupon instruments at significant premiums subsequent to their issue date. These large premiums were being amortized on a straight-line basis to the maturity date of the bond. When an unexpected regulatory call occurs, the holder is forced to amortize all remaining premium to the new call date. This causes a significant amount of accelerated amortization, which will cause a negative yield on the security given a sufficiently high premium. The higher amortization reduces the income generated from the securities portfolio and diminishes the Corporation’s net interest income and net interest margin.

 

Management and the investment community were not anticipating these first-time regulatory calls, which require an extraordinary event to occur before a call can be conducted. These two regulatory calls have been justified by both CoBank and AgriBank declaring that a regulatory event has occurred as a result of capital phase-ins from the Basel III capital accord, with these changes being sufficient to exercise a regulatory call provision. In both the CoBank and AgriBank matters investors, including the Corporation, have contested the ability of both CoBank and AgriBank to conduct these regulatory calls. Presently, management is exploring all avenues of action, including litigation, and cannot make any prediction or conclusion as to the outcome of any negotiations and/or litigation in connection with these matters.

 

9. Recently Issued Accounting Standards

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Corporation is evaluating the effect of adopting this new accounting Update.

 

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

27 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

28 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

 

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (“EITF”) Issue No. 07-4, Application of the Two-Class Method Under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method are also required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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Notes to the Unaudited Consolidated Interim Financial Statements

 

In May 2015, the FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosure About Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services – Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Corporation is evaluating the effect of adopting this new accounting Update.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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Notes to the Unaudited Consolidated Interim Financial Statements

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

 

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Notes to the Unaudited Consolidated Interim Financial Statements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2016, the FASB issued ASU 2016-04, Liabilities Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In March 2016, the FASB issued ASU 2016-07, Investments Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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Notes to the Unaudited Consolidated Interim Financial Statements

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

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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 2015 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:

 

·National and local economic conditions
·Effects of slow economic conditions or prolonged economic weakness, specifically the effect on loan customers to repay loans
·Health of the housing market
·Real estate valuations and its impact on the loan portfolio
·Interest rate and monetary policies of the Federal Reserve Board
·Volatility of the securities markets including the valuation of securities
·Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government
·Political changes and their impact on new laws and regulations
·Competitive forces
·Impact of mergers and acquisition activity in the local market and the effects thereof
·Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses
·Changes in customer behavior impacting deposit levels and loan demand
·Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters
·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
·Results of the regulatory examination and supervision process
·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
·Possible impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules
·Disruptions due to flooding, severe weather, or other natural disasters
·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

 

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Management’s Discussion and Analysis

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 $1,912,000 for the three-month period ended March 31, 2016, a 30.4% increase, over the $1,466,000 earned during the same period in 2015. The earnings per share, basic and diluted, were $0.67 for the three months ended March 31, 2016, compared to $0.51 for the same period in 2015.

 

The primary reasons for the increase in earnings were an increase in net interest income, a decrease in the provision for loan loss expense, and an increase in other income. Net interest income increased by $217,000, or 3.7%, for the three months ended March 31, 2016, compared to the same period in 2015. The Corporation recorded a credit provision for loan losses of $50,000 for the three months ended March 31, 2016, compared to provision expense of $200,000 for the three months ended March 31, 2015, representing an increase in income of $250,000. Low levels of delinquent, non-performing, and classified loans, as well as a net recovery position in the first quarter of 2016, resulted in the need to reduce the allowance for loan losses by recording a credit provision. The allowance as a percentage of total loans was 1.29% as of March 31, 2016, compared to 1.48% as of March 31, 2015. More detail is provided in the Provision for Loan Losses section that follows and the Allowance for Loan Losses section under Financial Condition.

 

Other operating income increased by $450,000, or 20.4%, for the first quarter of 2016 compared to the prior year. This increase was driven by an increase in security gains as well as smaller increases in other categories of other income. Net gains on securities increased by $167,000, or 29.8%, for the three-month period ended March 31, 2016, compared to the same period in 2015. More detail is provided under the Other Income and Operating Expense sections under Results of Operations.

 

Partially offsetting the increased income mentioned above, operating expenses increased by $332,000, or 5.4%, for the three months ended March 31, 2016, compared to the same period in the prior year. Personnel costs increased by $269,000, or 7.3%, due to new staff positions as well as higher benefit costs associated with new and existing staff.

 

The Corporation’s net interest income for the three months ended March 31, 2016, increased from the same period in 2015. Net interest income was $6,075,000 for the first quarter of 2016, compared to $5,858,000 for the same quarter in 2015, a $217,000, or 3.7% increase. The Corporation’s net interest margin was 3.09% for the first quarter of 2016, compared to 3.13% for the first quarter of 2015. Net interest margin did increase by twelve basis points on a sequential basis from 2.97% in the fourth quarter of 2015.

 

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 period ended March 31, 2016, compared to the same period in the prior year due to the increase in the Corporation’s income.

 

Key Ratios  Three Months Ended
   March 31,
   2016  2015
       
Return on Average Assets   0.84%    0.69% 
Return on Average Equity   8.01%    6.38% 

 

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:

 

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Management’s Discussion and Analysis

·Net interest income
·Provision for loan losses
·Other income
·Operating expenses
·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. In the first three months of 2016, NII generated 69.6% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 72.7% in the first three months of 2015. 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.

 

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, which is not shown on an FTE basis. The amount of FTE adjustment totaled $511,000 for the three months ended March 31, 2016, compared to $438,000 for the same period in 2015.

 

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 

   Three Months Ended
   March 31,
   2016  2015
   $  $
Total interest income   6,886    6,872 
Total interest expense   811    1,014 
           
Net interest income   6,075    5,858 
Tax equivalent adjustment   511    438 
           
Net interest income (fully taxable equivalent)   6,586    6,296 

 

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 earned 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, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. Until December 16, 2015, the Federal funds rate had not changed since December 16, 2008. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. This period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been lower margin to the Corporation and generally across the financial industry. The increase in December resulted in higher short-term U.S. Treasury rates, but the long-term rates have actually decreased since the Federal Reserve’s decision to increase rates, resulting in a flattening of the yield curve. This low rate environment continued during the first quarter of 2016, and it appears it will continue through the second quarter, although there is a possibility that the Federal Reserve could increase overnight rates again later in 2016.

 

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Management’s Discussion and Analysis

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate increased from 3.25% to 3.50% on December 16, 2015. Depending on the loan instrument, the Corporation’s Prime-based loans would reprice either a day after the Federal Reserve rate movement or after a 45-day notification period. Commercial rates generally reprice the next business day while some consumer loans require the 45-day notification period.

 

The fact that the Federal funds rate and the Prime rate had remained at these very low levels for seven years and only increased by 25 basis points in December of 2015 had made it difficult to grow the NII of the Corporation as the net interest margin has declined. During the first quarter of 2016, the Corporation was able to grow interest earning assets fast enough to offset the decline in margin resulting in higher NII compared to the previous year’s first quarter. For the three months ended March 31, 2016, NII on a tax equivalent basis increased by $290,000, or 4.6%, but the Corporation’s margin still showed a decline from 3.13% in 2015, to 3.09% in 2016. This is typical in a prolonged low rate environment when additional savings on interest expense are limited, while yields on the Corporation’s longer assets continue to reprice to lower levels. This causes a decline in the Corporation’s margin, but the impact of the decrease in margin can be offset by sufficient increases in interest earning assets, causing an increase in NII. Factoring out $430,000 of accelerated amortization caused by an unexpected regulatory par call on the Corporation’s CoBank sub-U.S. Agency that was recorded during the first quarter of 2016, the Corporation’s NIM would have been 3.29%, a significant increase of 16 basis points over the 3.13% NIM achieved in the first quarter of 2015.

 

The extended extremely low short-term rates have enabled management to reduce the cost of funds on borrowings and allowed lower interest rates paid on deposits, reducing the Corporation’s interest expense, while the increase in the Prime rate in December of 2015 has increased the yield on the Corporation’s Prime-based loans. However, in this environment the Corporation’s fixed rate loans and securities have generally repriced to lower rates as they mature or reach the end of their fixed rate period. This has occurred over the past seven years and continues to cause lower yields on the Corporation’s assets. Due to the increasing number of variable rate loans in the Corporation’s loan portfolio, the 25 basis point increase in the Prime rate at the end of 2015 did cause higher NII in the first quarter of 2016, and if the Fed increases rates again in the latter part of 2016, NII will see another increase.

 

Security yields fluctuate more rapidly than loan yields based primarily on the changes to the U.S. Treasury rates and yield curve. With lower U.S. Treasury rates on average in the first quarter of 2016 compared to 2015, most of the security reinvesting was occurring at lower rates. As the volume of securities sold at gains continued at a higher level, this also resulted in more reinvestment at lower rates. Management did generally direct a large portion of the security sale proceeds into loan growth particularly in the fourth quarter of 2015 and the first quarter of 2016 when loan growth was significant. The Corporation’s loan yield has continued to decline slightly as new loans are going on at among the lowest loan rates of this interest rate cycle. Partially offsetting these lower rates on new loans, the increased rate on Prime-based loans is having a positive impact on yield. Management does price above the Prime rate on variable rate loans, which helps with loan yield, however, these rates on average are still lower than the typical fixed rate loan. An element of the Corporation’s Prime-based commercial loans is priced above the Prime rate based on the level of credit risk of the borrower. Additionally, certain variable-rate consumer loans are priced above Prime. Prime-based pricing continues to be driven largely by local competition.

 

Mid-term and long-term interest rates on average were slightly lower in the first quarter of 2016 compared to 2015. The average rate of the 10-year U.S. Treasury was 1.91% in the first quarter of 2016 compared to 1.97% in the first quarter of 2015, but it stood at 1.78% on March 31, 2016, compared to 1.94% at March 31, 2015. The slope of the yield curve was already compressed, but with the Fed rate increase in December of 2015, there was even less slope between the short end and long end of the curve. There was only a difference of 128 basis points between overnight rates and the 10-year U.S. Treasury as of March 31, 2016, compared to 169 basis points as of March 31, 2015. With a flatter yield curve and lower mid and long-term interest rates, management was not able to increase loan rates to improve yield although the 25 basis point increase in the Prime rate did act to increase the yield on Prime-based variable rate loans. Additionally, with lower rates, security amortization increased and yields on new purchases were low resulting in a lower overall securities yield. As a result, the Corporation’s asset yield continued to decline.

 

While it is becoming increasingly difficult to achieve savings on the Corporation’s overall cost of funds, management was still achieving savings on select long-term CDs and repricing FHLB borrowings in the first quarter of 2016. It is not anticipated that interest rates on interest bearing core deposits can be reduced further in 2016 as these rates have already been reduced significantly over the course of the past few years. While CD rate reductions are also limited, there are still small savings to be achieved in CDs repricing down from higher rates five years ago. Borrowing costs and the wholesale borrowing curves that they are based on generally follow the direction and slope of the U.S. Treasury curve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation was able to refinance most borrowings at lower rates in 2015 and in the first quarter of 2016. Management expects this trend to continue to a lesser degree during the remainder of 2016 based on the current rates on the instruments maturing.

 

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Index 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels through the first half of 2016 with the possibility of at least one small rate increase in the second half of the year. It is likely that the mid and long-term Treasury rates could increase throughout the course of the year in anticipation of additional Federal Reserve rate movements. This would allow management to achieve higher earnings on assets if the opportunity for higher yielding securities and the ability to price new loans at higher market rates occurred. If the Federal Reserve would act to increase overnight rates, it is also possible that the yield curve could flatten more, making it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. Additionally, with another Federal Reserve rate increase in 2016, management would expect to have to increase deposit rates to remain competitive in the market.

 

Generally, a flatter yield curve is not conducive to increasing net interest margin and net interest income. However, the Corporation has benefited from a gradual increase in the amount of variable rate loans. Over 30% of the Corporation’s loans are variable rate, which would reprice to a higher rate based on the Prime rate with any Federal Reserve increase. Higher amounts of variable rate loans would help in the event of a flatter yield curve but would likely not be sufficient alone to offset higher funding costs if short-term rates were to increase materially, therefore a lower margin would occur.

 

The Corporation’s margin was 3.09% for the first quarter of 2016, a four basis-point decline from the 3.13% for the first quarter of 2015. On a sequential basis, margin did improve from the 2.97% for the fourth quarter of 2015. There were two non-recurring accelerated amortization events on unrelated bonds that impacted the fourth quarter 2015 margin as well as the first quarter 2016 margin. Without these events, NIM would have been 3.16% for the fourth quarter of 2015, and 3.29% for the first quarter of 2016.

 

In the fourth quarter of 2015, interest income was reduced by $385,000 because of an unexpected clean up call issued on a GNMA CMO security. The security had paid down to below 2% of the original par value allowing the trustee of the issuer to call the security. In the past these calls were not exercised, but one trustee, U.S. Bancorp, has exercised these calls with respect to GNMA securities. The corporation owned the security at a significant premium with $385,000 of premium required to be amortized to the November 20, 2015 call date. In the first quarter of 2016, CoBank, a farm Credit System Bank, regulated by the FCA, a U.S. GSE, announced on March 11, 2016, they were prematurely calling their 7.875% notes maturing April 16, 2018, on April 15, 2016, using an extra ordinary redemption provision. CoBank based their call on a regulatory event occurring. This event caught the investment community by surprise as the holders viewed the instruments as not generally callable and this marked the first instance that such a call was conducted on these securities. This call required that the Corporation accelerate the amortization on these bonds causing an additional $430,000 of amortization in March of 2016 with another $70,000 falling in the first fifteen days of April 2016.

 

Subsequent to March 31, 2016, but prior to the filing of this Form 10-Q Report, the Corporation was made aware on April 26, 2016 of AgriBank’s intention to conduct a regulatory par call on their 9.125% Notes maturing on July 15, 2019, with the call date of July 15, 2016. Similar to CoBank, AgriBank is a co-operative of the FCA. The Corporation owns $6.4 million par value of the AgriBank issue maturing on July 15, 2019, with a book value of $7.7 million. As a result of this par call notice, management has accelerated amortization of the remaining $1.3 million of premium on the AgriBank bond, beginning in April 2016, and running until the call date of July 15, 2016. This regulatory call will effectively cause the Corporation to take $1.2 million more amortization than it would have previously to the July 15, 2016 call date, with about $1,020,000 of negative impact to the second quarter, and about $170,000 of negative impact to the third quarter. Therefore, the Corporation’s second quarter net interest income and margin will be negatively impacted to a significant degree, whereas the third quarter will have a relatively smaller negative impact.

 

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Index 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The sequential improvement of the Corporation’s margin from the fourth quarter of 2015 to the first quarter of 2016 was aided by the increase in the Prime rate, which had a positive impact on variable-rate loans. Although loan growth is occurring, it has been a challenge to increase loan pricing to the point where it is contributing to an increase in overall asset yield. As cost of funds savings become harder to achieve, the only way to materially increase net interest margin going forward will be through increases in asset yield. Any significant improvement in asset yields would be dependent on either additional Prime rate increases or on mid-term and longer-term market interest rates increasing. This would assist with increased loan pricing and higher securities yields as a result of reduced amortization and higher yields being available at the time of purchase.

 

As shown on the table that follows, interest income, on an FTE basis for the quarter ended March 31, 2016, increased by $87,000, or 1.2%, and interest expense decreased by $203,000, or 20.0%, compared to the same period in 2015, resulting in a $290,000 increase in net interest income on an FTE basis.

 

The following table shows a more detailed analysis of net interest income on an FTE basis shown with all the major elements of the Corporation’s 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 interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving 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. The NIM is generally the benchmark used by analysts to measure how efficiently a bank generates NII.

 

39 

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 March 31,
   2016  2015
         (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   19,127    26    0.55    20,155    14    0.29 
                               
Securities available for sale:                              
Taxable   192,712    496    1.03    210,254    1,018    1.94 
Tax-exempt   102,371    1,299    5.08    91,029    1,147    5.04 
Total securities (d)   295,083    1,795    2.43    301,283    2,165    2.87 
                               
Loans (a)   534,226    5,517    4.14    479,177    5,005    4.19 
                               
Regulatory stock   4,644    59    5.08    3,471    126    14.52 
                               
Total interest earning assets   853,080    7,397    3.47    804,086    7,310    3.65 
                               
Non-interest earning assets (d)   59,950              57,140           
                               
Total assets   913,030              861,226           
                               
LIABILITIES &                              
STOCKHOLDERS' EQUITY                              
Interest bearing liabilities:                              
Demand deposits   176,288    65    0.15    157,754    70    0.18 
Savings deposits   153,203    20    0.05    135,264    18    0.05 
Time deposits   175,065    461    1.06    198,802    586    1.20 
Borrowed funds   78,531    265    1.36    72,556    340    1.90 
Total interest bearing liabilities   583,087    811    0.56    564,376    1,014    0.73 
                               
Non-interest bearing liabilities:                              
                               
Demand deposits   231,048              200,747           
Other   2,920              2,858           
                               
Total liabilities   817,055              767,981           
                               
Stockholders' e