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EX-32.2 - EX-32.2 - ENB Financial Corpex32-2.htm
EX-32.1 - EX-32.1 - ENB Financial Corpex32-1.htm
EX-31.2 - EX-31.2 - ENB Financial Corpex31-2.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, 2017    

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer o Accelerated filer o
  Non-accelerated filer o (Do not check if a smaller reporting company)
      Smaller reporting company x
      Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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 1, 2017, the registrant had 2,848,741 shares of $0.20 (par) Common Stock outstanding.

 

 

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2017

 

 

Part I – FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
  Consolidated Balance Sheets at March 31, 2017 and 2016 and December 31, 2016 (Unaudited)   3
       
  Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited)  4
       
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited)  5
       
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 6
       
  Notes to the Unaudited Consolidated Interim Financial Statements 7-30
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   31-62
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 63-67
       
  Item 4. Controls and Procedures 68
       
       
       

Part II – OTHER INFORMATION

69
       
  Item 1. Legal Proceedings 69
       
  Item 1A.  Risk Factors 69
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
       
  Item 3. Defaults Upon Senior Securities 69
       
  Item 4. Mine Safety Disclosures 69
       
  Item 5. Other Information 69
       
  Item 6. Exhibits 70
       
       
SIGNATURE PAGE 71
       
EXHIBIT INDEX 72

 

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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, 
   2017   2016   2016 
   $   $   $ 
ASSETS               
Cash and due from banks   16,161    19,852    11,989 
Interest-bearing deposits in other banks   43,127    25,780    28,689 
                
   Total cash and cash equivalents   59,288    45,632    40,678 
                
Securities available for sale (at fair value)   315,176    308,111    287,270 
                
Loans held for sale   3,127    2,552    804 
                
Loans (net of unearned income)   572,876    571,567    544,784 
                
   Less: Allowance for loan losses   7,672    7,562    7,040 
                
   Net loans   565,204    564,005    537,744 
                
Premises and equipment   23,881    22,568    21,466 
Regulatory stock   5,455    5,372    4,675 
Bank owned life insurance   24,856    24,687    24,082 
Other assets   10,836    11,326    8,102 
                
       Total assets   1,007,823    984,253    924,821 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
                
Liabilities:               
  Deposits:               
    Noninterest-bearing   287,799    280,543    243,647 
    Interest-bearing   547,831    536,948    506,084 
                
    Total deposits   835,630    817,491    749,731 
                
  Short-term borrowings   14,774    8,329    11,467 
  Long-term debt   58,819    61,257    64,883 
  Other liabilities   2,188    2,237    1,866 
                
       Total liabilities   911,411    889,314    827,947 
                
Stockholders' equity:               
  Common stock, par value $0.20;               
Shares:  Authorized 12,000,000               
             Issued 2,869,557 and Outstanding  2,853,741               
            (Issued 2,869,557 and Outstanding 2,850,382 as of 12/31/16)               
          (Issued 2,869,557 and Outstanding  2,851,394 as of 3/31/16)   574    574    574 
  Capital surplus   4,411    4,403    4,395 
  Retained earnings   96,504    95,475    92,172 
  Accumulated other comprehensive income (loss) net of tax   (4,559)   (4,885)   318 
  Less: Treasury stock cost on 15,816 shares (19,175 shares               
   as of 12/31/16 and 18,163 shares as of 3/31/16)   (518)   (628)   (585)
                
       Total stockholders' equity   96,412    94,939    96,874 
                
       Total liabilities and stockholders' equity   1,007,823    984,253    924,821 

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

 

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

   Three Months ended March 31, 
   2017   2016 
   $   $ 
Interest and dividend income:          
Interest and fees on loans   5,832    5,439 
Interest on securities available for sale          
Taxable   888    473 
Tax-exempt   1,120    867 
Interest on deposits at other banks   54    26 
Dividend income   88    81 
           
Total interest and dividend income   7,982    6,886 
           
Interest expense:          
Interest on deposits   467    546 
Interest on borrowings   235    265 
           
Total interest expense   702    811 
           
Net interest income   7,280    6,075 
           
Provision (credit) for loan losses   90    (50)
           
Net interest income after provision (credit) for loan losses   7,190    6,125 
           
Other income:          
Trust and investment services income   482    387 
Service fees   562    478 
Commissions   547    515 
Gains on securities transactions, net   140    728 
Gains on sale of mortgages   355    155 
Earnings on bank-owned life insurance   173    194 
Other income   153    194 
           
Total other income   2,412    2,651 
           
Operating expenses:          
Salaries and employee benefits   4,719    3,971 
Occupancy   599    514 
Equipment   282    263 
Advertising & marketing   237    135 
Computer software & data processing   530    420 
Shares tax   215    227 
Professional services   389    377 
Other expense   547    575 
           
Total operating expenses   7,518    6,482 
           
Income before income taxes   2,084    2,294 
           
Provision for federal income taxes   257    382 
           
Net income   1,827    1,912 
           
Earnings per share of common stock   0.64    0.67 
           
Cash dividends paid per share   0.28    0.27 
           
Weighted average shares outstanding   2,850,689    2,849,954 

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

   Three Months ended March 31, 
   2017   2016 
   $   $ 
         
Net income   1,827    1,912 
           
Other comprehensive income, net of tax:          
Securities available for sale not other-than-temporarily impaired:          
           
   Unrealized gains arising during the period   633    1,591 
   Income tax effect   (215)   (541)
    418    1,050 
           
   Gains recognized in earnings   (140)   (728)
   Income tax effect   48    248 
    (92)   (480)
           
Other comprehensive income, net of tax   326    570 
           
Comprehensive Income   2,153    2,482 

 

See Notes to the Unaudited Consolidated Interim Financial Statements        

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Index 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

    Three Months Ended March 31, 
   2017   2016 
   $   $ 
Cash flows from operating activities:          
Net income   1,827    1,912 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Net amortization of securities premiums and discounts and loan fees   1,015    1,758 
Decrease in interest receivable   508    105 
Decrease in interest payable   (2)   (13)
Provision (credit) for loan losses   90    (50)
Gains on securities transactions, net   (140)   (728)
Gains on sale of mortgages   (355)   (155)
Loans originated for sale   (5,221)   (5,120)
Proceeds from sales of loans   5,001    5,597 
Earnings on bank-owned life insurance   (173)   (194)
Depreciation of premises and equipment and amortization of software   406    404 
Deferred income tax   55    238 
Other assets and other liabilities, net   (343)   (1,076)
Net cash provided by operating activities   2,668    2,678 
           
Cash flows from investing activities:          
Securities available for sale:          
   Proceeds from maturities, calls, and repayments   5,391    19,915 
   Proceeds from sales   13,687    48,099 
   Purchases   (26,416)   (65,953)
Purchase of regulatory bank stock   (873)   (670)
Redemptions of regulatory bank stock   790    309 
Purchase of bank-owned life insurance       (19)
Net increase in loans   (1,397)   (24,564)
Purchases of premises and equipment, net   (1,657)   (129)
Purchase of computer software   (3)   (194)
Net cash used for investing activities   (10,478)   (23,206)
           
Cash flows from financing activities:          
Net increase in demand, NOW, and savings accounts   21,789    20,881 
Net decrease in time deposits   (3,650)   (11,212)
Net increase in short-term borrowings   6,445    2,731 
Proceeds from long-term debt   5,062    10,289 
Repayments of long-term debt   (7,500)   (5,000)
Dividends paid   (798)   (769)
Proceeds from sale of treasury stock   118    124 
Treasury stock purchased       (65)
Net cash provided by financing activities   21,466    16,979 
Increase (decrease) in cash and cash equivalents   13,656    (3,549)
Cash and cash equivalents at beginning of period   45,632    44,227 
Cash and cash equivalents at end of period   59,288    40,678 
           
Supplemental disclosures of cash flow information:          
    Interest paid   704    823 
    Income taxes paid       625 
           
Supplemental disclosure of non-cash investing and financing activities:          
Fair value adjustments for securities available for sale   493    863 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

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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 2017, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ended December 31, 2017. 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, 2016.

 

2.       Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at March 31, 2017, and December 31, 2016, are as follows:        

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
March 31, 2017            
U.S. government agencies   33,119        (847)   32,272 
U.S. agency mortgage-backed securities   59,782    12    (927)   58,867 
U.S. agency collateralized mortgage obligations   43,437    93    (774)   42,756 
Corporate bonds   53,046    14    (640)   52,420 
Obligations of states and political subdivisions   127,183    254    (4,144)   123,293 
Total debt securities   316,567    373    (7,332)   309,608 
Marketable equity securities   5,517    51        5,568 
Total securities available for sale   322,084    424    (7,332)   315,176 
                     
December 31, 2016                    
U.S. government agencies   33,124        (863)   32,261 
U.S. agency mortgage-backed securities   56,826    22    (979)   55,869 
U.S. agency collateralized mortgage obligations   38,737    41    (842)   37,936 
Corporate bonds   52,928    8    (845)   52,091 
Obligations of states and political subdivisions   128,428    346    (4,344)   124,430 
Total debt securities   310,043    417    (7,873)   302,587 
Marketable equity securities   5,469    55        5,524 
Total securities available for sale   315,512    472    (7,873)   308,111 

 

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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, 2017, 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   17,333    17,145 
Due after one year through five years   102,411    101,140 
Due after five years through ten years   72,919    71,403 
Due after ten years   123,904    119,920 
Total debt securities   316,567    309,608 

 

Securities available for sale with a par value of $63,945,000 and $63,726,000 at March 31, 2017, and December 31, 2016, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $65,816,000 at March 31, 2017, and $65,770,000 at December 31, 2016.

 

Proceeds from active sales of securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

   Three Months Ended March 31,
   2017  2016
   $  $
Proceeds from sales   13,687    48,099 
Gross realized gains   172    730 
Gross realized losses   32    2 

 

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 three months of 2017 or 2016.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Information pertaining to securities with gross unrealized losses at March 31, 2017, and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)    

   Less than 12 months  More than 12 months  Total
      Gross     Gross     Gross
   Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   Value  Losses  Value  Losses  Value  Losses
   $  $  $  $  $  $
As of March 31, 2017                              
U.S. government agencies   32,272    (847)           32,272    (847)
U.S. agency mortgage-backed securities   49,382    (784)   3,658    (143)   53,040    (927)
U.S. agency collateralized mortgage obligations   33,111    (774)           33,111    (774)
Corporate bonds   42,451    (634)   2,009    (6)   44,460    (640)
Obligations of states & political subdivisions   99,061    (3,840)   9,006    (304)   108,067    (4,144)
                               
Total debt securities   256,277    (6,879)   14,673    (453)   270,950    (7,332)
                               
Marketable equity securities                        
                               
Total temporarily impaired securities   256,277    (6,879)   14,673    (453)   270,950    (7,332)
                               
As of December 31, 2016                              
U.S. government agencies   32,261    (863)           32,261    (863)
U.S. agency mortgage-backed securities   47,418    (856)   3,989    (123)   51,407    (979)
U.S. agency collateralized mortgage obligations   33,206    (842)           33,206    (842)
Corporate bonds   45,335    (830)   2,002    (15)   47,337    (845)
Obligations of states & political subdivisions   101,229    (4,063)   8,041    (281)   109,270    (4,344)
                               
Total debt securities   259,449    (7,454)   14,032    (419)   273,481    (7,873)
                               
Marketable equity securities                        
                               
Total temporarily impaired securities   259,449    (7,454)   14,032    (419)   273,481    (7,873)

 

In the debt security portfolio there were 201 positions that were carrying unrealized losses as of March 31, 2017. In the equity security portfolio there were no positions that were carrying unrealized losses as of March 31, 2017. There were no instruments considered to be other-than-temporarily impaired at March 31, 2017.

 

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.

 

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 was 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 $479,000 of amortization in 2016. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018.

 

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Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

On April 26, 2016, management became aware of an AgriBank bond call. AgriBank is another cooperative of the FCA. The Corporation owned $6.4 million par of the AgriBank issue maturing on July 15, 2019. AgriBank went public with this call, stating they intended to call the bonds on July 15, 2016. As a result of this par call notice, management accelerated the amortization of the remaining premium on the AgriBank bond, beginning in April and running until the call date of July 15, 2016. This resulted in $1,202,000 of accelerated amortization recorded on this bond in 2016.

 

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 pursuing litigation against CoBank and AgriBank to contest the process that was undertaken to exercise these regulatory calls. Management cannot make any prediction or draw any conclusion as to the outcome of any negotiations and/or litigation in connection with these matters.

 

3.        Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of March 31, 2017, and December 31, 2016:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)      

   March 31,  December 31,
   2017  2016
   $  $
Commercial real estate          
Commercial mortgages   86,008    86,434 
Agriculture mortgages   158,190    163,753 
Construction   20,381    24,880 
Total commercial real estate   264,579    275,067 
           
Consumer real estate (a)          
1-4 family residential mortgages   157,509    150,253 
Home equity loans   11,287    10,391 
Home equity lines of credit   54,944    53,127 
Total consumer real estate   223,740    213,771 
           
Commercial and industrial          
Commercial and industrial   43,890    42,471 
Tax-free loans   14,089    13,091 
Agriculture loans   20,773    21,630 
Total commercial and industrial   78,752    77,192 
           
Consumer   4,773    4,537 
           
Gross loans prior to deferred fees   571,844    570,567 
Less:          
Deferred loan costs, net   (1,032)   (1,000)
Allowance for loan losses   7,672    7,562 
Total net loans   565,204    564,005 

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $73,161,000 and $66,767,000 as of March 31, 2017, and December 31, 2016, respectively.  

10 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of March 31, 2017 and December 31, 2016. 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.

 

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, 2017  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   79,359    149,357    19,381    38,497    14,089    19,182    319,865 
Special Mention   1,228    4,617        252        514    6,611 
Substandard   5,421    4,216    1,000    5,141        1,077    16,855 
Doubtful                            
Loss                            
                                    
    Total   86,008    158,190    20,381    43,890    14,089    20,773    343,331 
                                    

 

December 31, 2016  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   81,945    155,820    23,880    36,887    13,091    20,245    331,868 
Special Mention   1,282    5,360        1,955        653    9,250 
Substandard   3,207    2,573    1,000    3,629        732    11,141 
Doubtful                            
Loss                            
                                    
    Total   86,434    163,753    24,880    42,471    13,091    21,630    352,259 

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, 2017 and December 31, 2016:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)          

March 31, 2017

 

  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   156,918    11,287    54,944    4,773    227,922 
Non-performing   591                591 
                          
   Total   157,509    11,287    54,944    4,773    228,513 
                          

 

December 31, 2016

 

  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   149,873    10,388    53,127    4,536    217,924 
Non-performing   380    3        1    384 
                          
   Total   150,253    10,391    53,127    4,537    218,308 

 

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, 2017 and December 31, 2016:

 

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, 2017  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages   258    130    572    960    85,048    86,008     
   Agriculture mortgages                   158,190    158,190     
   Construction                   20,381    20,381     
Consumer real estate                                   
   1-4 family residential mortgages   519        591    1,110    156,399    157,509    591 
   Home equity loans   40            40    11,247    11,287     
   Home equity lines of credit                   54,944    54,944     
Commercial and industrial                                   
   Commercial and industrial   217    3    75    295    43,595    43,890     
   Tax-free loans   67            67    14,022    14,089     
   Agriculture loans                   20,773    20,773     
Consumer   3            3    4,770    4,773     
       Total   1,104    133    1,238    2,475    569,369    571,844    591 

 

 

                     Loans
         Greater           Receivable >
   30-59 Days  60-89 Days  than 90  Total Past     Total Loans  90 Days and
December 31, 2016  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages       419    417    836    85,598    86,434     
   Agriculture mortgages   165            165    163,588    163,753     
   Construction                   24,880    24,880     
Consumer real estate                                   
   1-4 family residential mortgages   572    662    380    1,614    148,639    150,253    380 
   Home equity loans   81        3    84    10,307    10,391    3 
   Home equity lines of credit   90            90    53,037    53,127     
Commercial and industrial                                   
   Commercial and industrial   266        75    341    42,130    42,471     
   Tax-free loans                   13,091    13,091     
   Agriculture loans                   21,630    21,630     
Consumer   16    4    1    21    4,516    4,537    1 
       Total   1,190    1,085    876    3,151    567,416    570,567    384 

 

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, 2017 and December 31, 2016:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

   March 31  December 31,
   2017  2016
   $  $
       
Commercial real estate          
  Commercial mortgages   760    646 
  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   75    75 
  Tax-free loans        
  Agriculture loans        
Consumer        
             Total   835    721 

 

As of March 31, 2017 and December 31, 2016, 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, 2017 and March 31, 2016 is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)      

   Three months ended March 31,
   2017  2016
   $  $
       
Average recorded balance of impaired loans   1,957    1,672 
Interest income recognized on impaired loans   14    14 

 

Interest income on impaired loans would have increased by approximately $7,000 for the three months ended March 31, 2017, compared to $4,000 for the three months ended March 31, 2016, had these loans performed in accordance with their original terms.

 

During the three months ended March 31, 2017 and 2016, 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 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, 2017, December 31, 2016, and March 31, 2016:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)      

March 31, 2017  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   $  $  $  $  $
                
With no related allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   760    857        644    3 
    Agriculture mortgages   1,229    1,229        1,238    11 
    Construction                    
Total commercial real estate   1,989    2,086        1,882    14 
                          
Commercial and industrial                         
    Commercial and industrial   75    75        75     
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   75    75        75     
                          
Total with no related allowance   2,064    2,161        1,957    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   760    857        644    3 
    Agriculture mortgages   1,229    1,229        1,238    11 
    Construction                    
Total commercial real estate   1,989    2,086        1,882    14 
                          
Commercial and industrial                         
    Commercial and industrial   75    75        75     
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   75    75        75     
                          
Total   2,064    2,161        1,957    14 

 

15 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)    

December 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   646    743        768    2 
    Agriculture mortgages   1,248    1,248        1,285    55 
    Construction                    
Total commercial real estate   1,894    1,991        2,053    57 
                          
Commercial and industrial                         
    Commercial and industrial   75    75        76     
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   75    75        76     
                          
Total with no related allowance   1,969    2,066        2,129    57 
                          
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   646    743        768    2 
    Agriculture mortgages   1,248    1,248        1,285    55 
    Construction                    
Total commercial real estate   1,894    1,991        2,053    57 
                          
Commercial and industrial                         
    Commercial and industrial   75    75        76     
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial   75    75        76     
                          
Total   1,969    2,066        2,129    57 

 

16 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 

 

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, 2017:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

   Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Beginning balance - December 31, 2016   3,795    1,652    1,552    82    481    7,562 
                               
    Charge-offs           (7)   (4)       (11)
    Recoveries       20    9    2        31 
    Provision (credit)   (275)   163    95    3    104    90 
                               
Ending Balance - March 31, 2017   3,520    1,835    1,649    83    585    7,672 

 

During the three months ended March 31, 2017, a credit provision was recorded for the commercial real estate segment with provision expense recorded in all other loan categories. For the entire portfolio, $90,000 of additional provision expense was recorded for the first three months of 2017. Delinquency rates among most loan pools remain very low with the total amount of delinquent loans lower on March 31, 2017 than on December 31, 2016. The Corporation received $20,000 more recoveries than charge-offs for the three months ended March 31, 2017. These favorable results acted to offset higher levels of classified loans and non-accruals resulting in $90,000 of additional provision being sufficient to cover projected losses inherent in the loan portfolio and still retain a sufficient unallocated portion of the allowance. Changes in qualitative factors were minimal during the first quarter and the provision expense recorded was primarily the result of higher levels of classified loans.  

18 

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
   $  $  $  $  $  $
Allowance for credit losses:                              
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 (credit)   (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 were extremely low requiring fewer reserves. Qualitative factors continued to shift, with net declines in non-dairy agriculture and home equity loans. Our three-year historical loss rate was declining 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.

19 

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, 2017 and December 31, 2016:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of March 31, 2017:  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   3,520    1,835    1,649    83    585    7,672 
                               
Loans receivable:                              
Ending balance   264,579    223,740    78,752    4,773         571,844 
Ending balance: individually evaluated                              
  for impairment   1,989        75             2,064 
Ending balance: collectively evaluated                              
  for impairment   262,590    223,740    78,677    4,773         569,780 
                               

 

As of December 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   3,795    1,652    1,552    82    481    7,562 
                               
Loans receivable:                              
Ending balance   275,067    213,771    77,192    4,537         570,567 
Ending balance: individually evaluated                              
  for impairment   1,894        75             1,969 
Ending balance: collectively evaluated                              
  for impairment   273,173    213,771    77,117    4,537         568,598 

20 

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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, 2017, and December 31, 2016, 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, 2017
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       32,272        32,272 
U.S. agency mortgage-backed securities       58,867        58,867 
U.S. agency collateralized mortgage obligations       42,756        42,756 
Corporate bonds       52,420        52,420 
Obligations of states & political subdivisions       123,293        123,293 
Marketable equity securities   5,568            5,568 
                     
Total securities   5,568    309,608        315,176 

 

On March 31, 2017, 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, 2017, the CRA fund investments had a $5,273,000 book and fair market value and the bank stock portfolio had an amortized cost of $244,000, and fair market value of $295,000.

 

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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, 2016
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       32,261        32,261 
U.S. agency mortgage-backed securities       55,869        55,869 
U.S. agency collateralized mortgage obligations       37,936        37,936 
Corporate bonds       52,091        52,091 
Obligations of states & political subdivisions       124,430        124,430 
Marketable equity securities   5,524            5,524 
                     
Total securities   5,524    302,587        308,111 

 

On December 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 December 31, 2016, the CRA fund investments had a $5,250,000 book and market value and the bank stocks had an amortized cost of $219,000 and a market value of $274,000.

 

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, 2017 or December 31, 2016.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of March 31, 2017 and December 31, 2016, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

   March 31, 2017
   Level I
$
  Level II
$
  Level III
$
  Total
$
Assets:                    
   Impaired Loans           2,064    2,064 
Total           2,064    2,064 

 

 

   December 31, 2016
   Level I
$
  Level II
$
  Level III
$
  Total
$
Assets:                    
   Impaired Loans           1,969    1,969 
Total           1,969    1,969 

 

The Corporation had a total of $2,064,000 of impaired loans as of March 31, 2017, with no specific allocation against these loans and $1,969,000 of impaired loans as of December 31, 2016, with no specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

22 

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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, 2017  
  Fair Value Valuation Unobservable Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans  2,064 Appraisal of Appraisal -20% (-20%)  
    collateral (1) adjustments (2)    
      Liquidation -10% (-10%)  
      expenses (2)    

 

  December 31, 2016  
   Fair Value  Valuation Unobservable  Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans             1,969 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.        

 

23 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

 

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.

 

24 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of the Corporation's financial instruments at March 31, 2017 and December 31, 2016, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

   March 31, 2017
         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   59,288    59,288    59,288         
Securities available for sale   315,176    315,176    5,568    309,608     
Regulatory stock   5,455    5,455    5,455         
Loans held for sale   3,127    3,127    3,127         
Loans, net of allowance   565,204    562,923            562,923 
Accrued interest receivable   3,242    3,242    3,242         
Bank owned life insurance   24,856    24,856    24,856         
                          
Financial Liabilities:                         
Demand deposits   287,799    287,799    287,799         
Interest-bearing demand deposits   18,614    18,614    18,614         
NOW accounts   86,147    86,147    86,147         
Money market deposit accounts   98,431    98,431    98,431         
Savings accounts   186,686    186,686    186,686         
Time deposits   157,953    159,272            159,272 
     Total deposits   835,630    836,949    677,677        159,272 
                          
Short-term borrowings   14,774    14,774    14,774         
Long-term debt   58,819    58,928            58,928 
Accrued interest payable   382    382    382         

 

25 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

   December 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   45,632    45,632    45,632         
Securities available for sale   308,111    308,111    5,524    302,587     
Regulatory stock   5,372    5,372    5,372         
Loans held for sale   2,552    2,552    2,552         
Loans, net of allowance   564,005    563,418            563,418 
Accrued interest receivable   3,750    3,750    3,750         
Bank owned life insurance   24,687    24,687    24,687         
                          
Financial Liabilities:                         
Demand deposits   280,543    280,543    280,543         
Interest-bearing demand deposits   20,108    20,108    20,108         
NOW accounts   85,540    85,540    85,540         
Money market deposit accounts   93,943    93,943    93,943         
Savings accounts   175,753    175,753    175,753         
Time deposits   161,604    163,464            163,464 
     Total deposits   817,491    819,351    655,887        163,464 
                          
Short-term borrowings   8,329    8,329    8,329         
Long-term debt   61,257    61,372            61,372 
Accrued interest payable   384    384    384         

 

 

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, 2017, firm loan commitments were $38.6 million, unused lines of credit were $192.8 million, and open letters of credit were $10.2 million. The total of these commitments was $241.6 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.

 

26 

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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, 2017 and 2016 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, 2016   (4,885)
  Other comprehensive income before reclassifications   418 
  Amount reclassified from accumulated other comprehensive income (loss)   (92)
Period change   326 
      
Balance at March 31, 2017   (4,559)
      
      
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 

 

(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,   
   2017  2016  Affected Line Item in the
   $  $  Consolidated Statements of Income
Securities available-for-sale:             
  Net securities gains reclassified into earnings   140    728   Gains on securities transactions, net
     Related income tax expense   (48)   (248)  Provision for federal income taxes
  Net effect on accumulated other comprehensive             
     income for the period   92    480    

 

(1) Amounts in parentheses indicate debits.      

 

8. 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. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or an of the amendments, to result in a material change from our current accounting for revenue because the majority of the Corporation’s financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

27 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim 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 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.

 

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. The Corporation is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the Corporation’s balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.

 

28 

Index 

ENB FINANCIAL CORP

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 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.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

 

29 

Index 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

 

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which represents changes to clarify, correct errors, or make minor improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. 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 2016 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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ENB FINANCIAL CORP

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 $1,827,000 for the three-month period ended March 31, 2017, a 4.4% decrease from the $1,912,000 earned during the same period in 2016. The earnings per share, basic and diluted, were $0.64 for the three months ended March 31, 2017, compared to $0.67 for the same period in 2016.

 

The primary reasons for the decrease in earnings were a decrease in gains on securities and a significant increase in operating expenses, offset by an increase in net interest income. Net interest income increased by $1,205,000, or 19.8%, for the three months ended March 31, 2017, compared to the same period in 2016. The Corporation recorded a provision for loan losses of $90,000 for the three months ended March 31, 2017, compared to a credit provision of $50,000 for the three months ended March 31, 2016, representing an aggregate decrease in income of $140,000. The Corporation’s net interest margin was 3.41% for the first quarter of 2017, compared to 3.09% for the first quarter of 2016. Net interest margin was positively affected by the Federal Reserve Bank raising the overnight interest rates by 0.25% in December of 2016 and again in March of 2017. Increases in NII are discussed further under the Net Interest Income section below.

 

Other operating income decreased by $239,000, or 9.0% for the three months ended March 31, 2017, compared to the same period in the prior year. The decrease was primarily related to a decline in securities gains, which were $140,000 in the first quarter of 2017, compared to $728,000 in the first quarter of 2016. The gains the Corporation was able to generate in the first quarter of 2016 were much higher primarily due to the low interest rate environment resulting in opportunities to sell securities to generate gains and reposition assets to support the financial performance of the Corporation. Interest rates began to rise beginning in the fourth quarter of 2016, resulting in fewer gains taken in the first quarter of 2017. Mortgage gains contributed to higher other operating income for the three-month period ended March 31, 2017. The gain on the sale of mortgages increased by $200,000, or 129.0%, for the three-month period ended March 31, 2017, compared to the prior year’s period. Both mortgage production and margins made on sold mortgages were higher in the first quarter of 2017. More detail is provided under the Other Income section under Results of Operations.

 

Partially offsetting the increased income mentioned above, operating expenses increased by $1,036,000, or 16.0%, for the three months ended March 31, 2017, compared to the same period in the prior year. Personnel costs increased by $748,000, or 18.8%, driven higher in the first quarter of 2017 due to the hiring of staff to support new branch offices as well as commercial sales positions and back office support. In addition, benefit costs increased as a result of higher health insurance premiums.

 

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 decreased for the three months ended March 31, 2017, due to a decrease in earnings as well as an increase in the Corporation’s assets and equity compared to the prior year.

 

Key Ratios  Three Months Ended 
   March 31, 
   2017   2016 
         
Return on Average Assets   0.75%    0.84% 
Return on Average Equity   7.81%    8.01% 
           

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

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:

 

·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 2017, NII generated 75.1% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 69.6% in the first three months of 2016. 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. With the increases in overnight rates occurring December 14, 2016 and March 15, 2017, and with no unusual security amortization events in the first quarter of 2017, the Corporation’s NII has significantly increased compared to the three months ended March 31, 2016.

 

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 NII 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 $606,000 for the three months ended March 31, 2017, compared to $511,000 for the same period in 2016.

 

NET INTEREST INCOME        
(DOLLARS IN THOUSANDS)        
   Three Months Ended 
   March 31, 
   2017   2016 
   $   $ 
Total interest income   7,982    6,886 
Total interest expense   702    811 
           
Net interest income   7,280    6,075 
Tax equivalent adjustment   606    511 
           
Net interest income (fully taxable equivalent)   7,886    6,586 

 

 

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%. On December 14, 2016, the Federal funds rate was increased 25 basis points to 0.75% and on March 15, 2017, the Federal funds rate was again increased 25 basis points to 1.00%. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been a lower net interest margin to the Corporation and generally across the financial industry. The increase in December of 2015, December of 2016, and March of 2017 resulted in higher short-term U.S. Treasury rates, but the long-term rates initially decreased after the Federal Reserve’s decision to increase rates in December of 2015, resulting in a flattening of the yield curve. It was only during the fourth quarter of 2016 that long-term rates saw an increase but they then declined slightly throughout the first quarter of 2017. Long-term rates like the ten-year U.S. Treasury were 160 basis points under the 4.00% Prime rate as of March 31, 2017. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continue for 2017. Management anticipates the next 0.25% Federal Reserve rate increase could occur as early as June 2017, with at least one more 0.25% Federal Reserve rate increase in the remainder of 2017. It remains to be seen whether mid and long-term U.S. Treasury rates will also increase to the same degree that the Federal Reserve will move the overnight Federal funds rate. If they do not, the yield curve would further flatten making it harder for the Corporation to increase asset yield.

 

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ENB FINANCIAL CORP

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, from 3.50% to 3.75% on December 14, 2016, and from 3.75% to 4.00% on March 15, 2017. 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 vast majority of the Corporation’s Prime-based consumer loans reprice the day after the Federal Reserve rate action.

 

As a result of the December 2015 Federal Reserve rate increase the Corporation’s NII on a tax equivalent basis began to increase in 2016 with the Corporation’s margin increasing to 3.12% for the year, compared to 3.07% in 2015. The December 2016 Federal Reserve rate increase again came too late in the year to significantly impact the 2016 margin but did have a positive impact to first quarter of 2017 margin. The Corporation’s, NII for the first quarter of 2017 increased substantially over the first quarter of 2016, by $1,205,000, or 19.8%, with the margin increasing to 3.41%. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given further Federal Reserve rate increases. Actual results over the past five quarters have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any additional Federal Reserve rate increases in 2017 would further improve both margin and NII.

 

The extended extremely low Federal funds rate has enabled management to reduce the cost of funds on overnight borrowings and allowed lower interest rates paid on deposits, reducing the Corporation’s interest expense. It was only after the third 25-basis point Fed rate increase in March of 2017 that the Corporation raised some deposit rates minimally. While the low Prime rate reduced the yield on the Corporation’s loans for many years, the rate increases through March of 2017 did act to boost interest income and help improve the Corporation’s margin. With a higher Prime rate and elevated Treasury rates, higher asset yields should be possible throughout the remainder of 2017. 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, 2016, and in March of 2017 did cause higher NII in the month of December 2015, and for the entire year of 2016. The full impact of all of these increases will be experienced in the second quarter of 2017. Additionally, with one or two more anticipated Fed rate increases in 2017, the Corporation should see even more benefit due to the near immediate repricing of the Prime-based variable loans.

 

Security yields fluctuate more rapidly than loan yields based primarily on the changes to the U.S. Treasury rates and yield curve. During 2016, management did generally direct a large portion of the security sale proceeds into loan growth resulting in higher overall asset yields. With higher Treasury rates in the first quarter of 2017 compared to the first quarter of 2016, security reinvestment has been occurring at slightly higher yields and amortization has slowed resulting in higher yields. The Corporation’s loan yield has continued to decline as new loans are going on at among the lowest loan rates of this interest rate cycle. 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. Therefore, any increases in total variable rate loans will generally reduce overall loan portfolio yield. 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.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

Mid-term and long-term interest rates on average were higher in 2017 compared to 2016. The average rate of the 10-year U.S. Treasury was 2.45% in the first quarter of 2017 compared to 1.91% in the first quarter of 2016, and it stood at 2.40% on March 31, 2017, compared to 1.78% at March 31, 2016. The slope of the yield curve has been compressed throughout most of 2016 and through the first quarter of 2017, but with the Fed rate increase in March of 2017, there was slightly more slope between the short end and long end of the curve compared to the prior year. There was a difference of 140 basis points between overnight rates and the 10-year U.S. Treasury as of March 31, 2017, compared to 103 basis points as of March 31, 2016. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 2.60% in 2016 and 2.62% in 2017, and as low as 1.37% in 2016 and 2.31% in 2017. Although the yield curve is still relatively flat, the slightly higher slope in the curve allowed for security reinvestment during the first quarter of 2017 at slightly higher rates but management was not able to increase loan rates to improve yield. The non-recurring sub-agency amortization of $1,681,000 during 2016 negatively affected security yield resulting in artificially low yields during 2016 and higher yields during 2017. With higher long-term rates in 2017 and the likelihood of further Fed rate increases, the Corporation’s asset yield is projected to increase throughout 2017.

 

While it is becoming increasingly difficult to achieve savings on the Corporation’s overall cost of funds, management was able to selectively reprice time deposits and borrowings to lower levels during the first quarter of 2017 resulting in savings on these instruments. Generally, it was longer-term CDs repricing at lower rates that helped to achieve interest expense savings on deposits. It is anticipated that interest rates on interest bearing core deposits will need to be increased during the remainder of 2017 if the Federal Reserve does act to raise interest rates. Management selectively repriced some CD rates higher after the March Fed increase. 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 some borrowings at lower rates in 2016 but it will be difficult to do this going forward as rates are higher now and most borrowings are already at lower interest rates relative to their term.

 

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels until June of 2017 with the possibility of at least one 0.25% rate increase by mid-year and another 0.25% increase before year-end. It is likely that mid and long-term U.S. Treasury rates will increase throughout 2017 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. However, it is also possible that even after Federal Reserve rate increases the yield curve could flatten, making it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. Additionally, Federal Reserve rate increases would continue to affect the repricing of the Corporation’s liabilities. Management would expect to have to increase deposit rates further to remain competitive in the market and maturing borrowings would likely begin to reprice to higher rates.

 

The Corporation has benefited from a gradual increase in the amount of variable rate loans. Over 35% 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 and deposit rates had to be increased.

 

The Corporation’s margin was 3.41% for the first quarter of 2017, a 32 basis-point increase from the 3.09% for the first quarter of 2016. The margin increase for the quarter-to-date period was partially due to non-recurring accelerated amortization on U.S. Sub-Agency bonds during the first quarter of 2016 that reduced interest income on securities. Without this event, NIM would have been 3.28% (Non-GAAP) for the first quarter of 2016. Aside from the non-recurring amortization, the Corporation’s NIM improvement was primarily due to higher balances of earning assets at similar or slightly better yields compared to the prior year’s quarter as well as lower costs on interest-bearing liabilities.

 

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 because of reduced amortization and higher yields being available at the time of purchase.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

As shown in the table that follows, interest income, on an FTE basis increased by $1,191,000, or 16.1%, for the three months ended March 31, 2017, compared to the same period in 2016. Interest expense decreased by $109,000, or 13.4%, for the three-month period when comparing both years, resulting in a $1,300,000, or 19.7% increase in net interest income on an FTE basis for both periods.

 

The following table shows a more detailed comparative analysis of net interest income on an FTE basis for the three-month period ended March 31, 2017. It is 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.

 

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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,
   2017  2016
         (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   23,387    54    0.92    19,127    26    0.55 
                               
Securities available for sale:                              
Taxable   191,403    913    1.91    192,712    496    1.03 
Tax-exempt   130,175    1,672    5.14    102,371    1,299    5.08 
Total securities (d)   321,578    2,585    3.22    295,083    1,795    2.43 
                               
Loans (a)   575,169    5,886    4.09    534,226    5,517    4.14 
                               
Regulatory stock   5,445    63    4.63    4,644    59    5.08 
                               
Total interest earning assets   925,579    8,588    3.72    853,080    7,397    3.47 
                               
Non-interest earning assets (d)   59,724              59,950           
                               
Total assets   985,303              913,030           
                               
LIABILITIES &                              
STOCKHOLDERS' EQUITY                              
Interest bearing liabilities:                              
Demand deposits   203,064    73    0.15    176,288    65    0.15 
Savings deposits   181,189    23    0.05    153,203    20    0.05 
Time deposits   160,040    371    0.94    175,065    461    1.06 
Borrowed funds   73,879    235    1.29    78,531    265    1.36 
Total interest bearing liabilities   618,172    702    0.46    583,087    811    0.56 
                               
Non-interest bearing liabilities:                              
                               
Demand deposits   269,617              231,048           
Other   2,626              2,920           
                               
Total liabilities   890,415              817,055           
                               
Stockholders' equity   94,888              95,975           
                               
Total liabilities & stockholders' equity   985,303              913,030           
                               
Net interest income (FTE)        7,886              6,586      
                               
Net interest spread (b)             3.26              2.91 
Effect of non-interest                              
     bearing deposits             0.15              0.18 
Net yield on interest earning assets (c)             3.41              3.09 

 

(a) Includes balances of nonaccrual loans and the recognition of any related interest income.  The quarter-to-date average balances include net deferred loan costs of $1,012,000 as of March 31, 2017, and $728,000 as of March 31, 2016.  Such fees and costs recognized through income and included in the interest amounts totaled ($108,000) in 2017, and ($75,000) in 2016.

(b) Net interest spread is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.

(c) Net yield, also referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.

(d) Securities recorded at amortized cost.  Unrealized holding gains and losses are included in non-interest earning assets.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

The Corporation’s interest income increased and interest expense decreased for the quarter-to-date period in 2017 compared to 2016 resulting in a higher NIM of 3.41% for the first quarter of 2017, compared to 3.09% for the first quarter of 2016. The yield earned on assets increased by 25 basis points for the quarter while the rate paid on liabilities dropped 10 basis points. Management does anticipate further improvements in NIM during the remainder of 2017 with higher short-term rates and the possibility of further Fed rate increases. Loan yields were at historically low levels during 2016 and in the first three months of 2017 due to the extended low-rate environment as well as extremely competitive pricing for the loan opportunities in the market. It is anticipated that these yields will improve slightly throughout the remainder of 2017 as the economy improves and loan demand increases, reducing pricing pressures and intense competition for loans. The Corporation’s loan yield decreased five basis points in the first quarter of 2017 compared to the first quarter of 2016. Despite the lower yields, the growth in the loan portfolio resulted in fully tax equivalent interest income on loans increasing by $369,000, or 6.7%, for the three months ended March 31, 2017, compared to the same period in 2016.

 

Loan pricing was a challenge in 2016, and continues to be in 2017 as a result of intense competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate or below. The Prime rate is generally lower than typical fixed-rate business and commercial loans, which typically range between 4.50% and 6.50%, depending on term and credit risk. Management is able to price loan customers with higher levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, currently 4.75%. However, there are relatively few of these higher rate loans in the commercial and agricultural portfolios due to the strong credit quality of the Corporation’s borrowers. These rates are actually above some shorter-term commercial fixed rates, which are still around 4.00%. Competition in the immediate market area is keeping commercial and agricultural lending rates below 4.00% for the better loan credits. This current market environment is preventing the Corporation from gaining yield on fixed rate commercial and agricultural loans. The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, please refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Earnings and yields on the Corporation’s securities increased by 79 basis points for the three months ended March 31, 2017, compared to the same period in 2016. The Corporation’s securities portfolio consists of nearly all fixed income debt instruments. The Corporation’s taxable securities experienced an 88 basis-point increase in yield for the three months ended March 31, 2017, compared to the same period in 2016. This was largely due to accelerated amortization that caused significantly lower interest income for the first three months of 2016. Additionally, some security reinvestment in the first quarter of 2017 has been occurring at higher rates and regular amortization has been lower due to the slightly higher interest rate environment. These variables have caused taxable security yields to increase significantly. The yield on tax-exempt securities increased by six basis points for the first quarter of 2017, compared to the same period in 2016. As the 10-year U.S. Treasury rates increased, the spreads available on these securities increased, resulting in higher yields. Management was also selling out of lower yielding municipal bonds in an effort to improve overall municipal bond yield.

 

Prior to 2017, with short-term rates extremely low and with small rate differences for longer-term deposits, the consumer generally elected to stay short and maintain funds in accessible deposit instruments. During the first quarter of 2017, with higher short-term rates but still low longer-term rates, the customer still prefers keeping balances in both non-interest and interest bearing checking products and savings accounts. In addition to the consumer staying liquid with their available funds, there has been a general trend of funds flowing from time deposit accounts into both non-interest checking, NOW and savings accounts. The average balance of the Corporation’s interest bearing liabilities increased during the three months ended March 31, 2017. The average balance of time deposits declined during this period compared to 2016, but the other areas of NOW, MMDA, and savings grew sufficiently enough to compensate for the decline in time deposits, causing total interest bearing funds to increase. However, with more of the interest bearing funds in the form of NOW, MMDA, and savings accounts the average interest rate paid on these instruments is significantly less than what is paid on time deposits, resulting in less interest expense.

 

Interest expense on deposits declined by $79,000, or 14.5%, for the three months ended March 31, 2017, compared to the same period in 2016. Demand and savings deposits reprice in entirety whenever the offering rates are changed. This allows management to reduce interest costs rapidly; however, it becomes difficult to continue to gain cost savings once offering rates decline to these historically low levels. For the first quarter of 2017, the average balances of interest bearing demand deposits increased by $26.8 million, or 15.2%, over the same period in 2016, while the average balance of savings accounts increased by $28.0 million, or 18.3%. This increase in balances of lower cost accounts has helped to reduce the Corporation’s overall interest expense in 2017 compared to 2016.

 

38 

Index 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During the three months ended March 31, 2017, time deposit balances decreased compared to balances at March 31, 2016. The decrease can be attributed to the lowest rates paid historically on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be minimal. As a result, customers have elected to keep more of their funds in non-maturity deposits and less funds in time deposits. Because time deposits are the most expensive deposit product for the Corporation and the largest dollar expense from a funding standpoint, the reduction in time deposits, along with the increases in interest-bearing checking, savings, and non-interest bearing checking, has allowed the Corporation to achieve a lower cost and more balanced deposit funding position. The Corporation was able to reduce interest expense on time deposits by $90,000, or 19.5%, for the first quarter of 2017, compared to the same period in 2016. Average balances of time deposits decreased by $15.0 million, or 8.6%, for the three months ended March 31, 2017, compared to the same period in 2016. The average annualized interest rate paid on time deposits decreased by 12 basis points for the three-month period when comparing both years.

 

The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of $15,139,000 were utilized in the three months ended March 31, 2017, while average short-term advances of $12,755,000 were utilized in the three months ended March 31, 2016. Management has used long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source of liquidity. Average total borrowings decreased by $4.7 million, or 5.9%, for the three months ended March 31, 2017, compared to the same period in 2016. Interest expense on borrowed funds was $30,000, or 11.3% lower, for the three-month period when comparing 2017 to 2016, as a result of management refinancing maturing long-term advances to lower rates.

 

For the quarter ended March 31, 2017, the net interest spread increased 35 basis points to 3.26%, from 2.91% for the first quarter of 2016. The effect of non-interest bearing funds dropped three basis points for the three-month period compared to the same period in the prior year. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go lower, the benefit of non-interest bearing deposits is reduced because there is less difference between non-interest bearing funds and interest bearing liabilities. For example, if an interest checking account with $10,000 earns 1%, the benefit for $10,000 of non-interest bearing deposits is equivalent to $100; but if the interest-checking rate is reduced to 0.20%, then the benefit of the non-interest bearing funds is only $20. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the lower cost of funds affects the benefit to non-interest bearing deposits.

 

The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk.

 

 

Provision for Loan Losses

 

The allowance for loan losses (ALLL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ALLL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a provision expense of $90,000 for the three months ended March 31, 2017, compared to a credit provision of $50,000 for the three months ended March 31, 2016. The analysis of the ALLL takes into consideration, among other things, the following factors: