ENB Financial Corp - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - ENB Financial Corp	ex32-2.htm
EX-32.1 - EX-32.1 - ENB Financial Corp	ex32-1.htm
EX-31.2 - EX-31.2 - ENB Financial Corp	ex31-2.htm
EX-31.1 - EX-31.1 - ENB Financial Corp	ex31-1.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 September 30, 2018

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 every Interactive Data File required to be submitted 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, a 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	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 November 1, 2018, the registrant had 2,857,874 shares of $0.20 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2018

Part I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2018 and 2017, and December 31, 2017 (Unaudited)		3

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)		4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)		5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)		6

	Notes to the Unaudited Consolidated Interim Financial Statements		7-31

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32-67

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68-73

	Item 4.	Controls and Procedures	74



Part II – OTHER INFORMATION			75

	Item 1.	Legal Proceedings	75

	Item 1A.	Risk Factors	75

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

	Item 3.	Defaults Upon Senior Securities	75

	Item 4.	Mine Safety Disclosures	75

	Item 5.	Other Information	75

	Item 6.	Exhibits	76


SIGNATURE PAGE			77

Index

Part I - Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	September 30,			December 31,			September 30,
	2018			2017			2017
	$			$			$
ASSETS
Cash and due from banks		17,097			21,867			18,426
Interest-bearing deposits in other banks		11,091			31,206			25,814

Total cash and cash equivalents		28,188			53,073			44,240

Securities available for sale (at fair value)		295,335			314,078			315,078
Equity securities (at fair value)		5,789			5,583			5,617

Loans held for sale		2,804			2,892			3,809

Loans (net of unearned income)		667,769			597,553			584,077

Less: Allowance for loan losses		8,428			8,240			8,028

Net loans		659,341			589,313			576,049

Premises and equipment		25,730			25,687			24,402
Regulatory stock		6,392			5,794			6,139
Bank owned life insurance		27,901			27,814			25,161
Other assets		10,715			9,388			9,583

Total assets		1,062,195			1,033,622			1,010,078

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits:
Noninterest-bearing		346,827			314,917			301,978
Interest-bearing		544,099			551,560			536,847

Total deposits		890,926			866,477			838,825

Short-term borrowings		1,074			—			—
Long-term debt		68,361			65,850			68,350
Other liabilities		2,632			1,536			2,036

Total liabilities		962,993			933,863			909,211

Stockholders' equity:
Common stock, par value $0.20;
Shares: Authorized 12,000,000
Issued 2,869,557 and Outstanding 2,861,274 as of 9/30/18
Issued 2,869,557 and Outstanding 2,849,823 as of 12/31/17
Issued 2,869,557 and Outstanding 2,848,679 as of 9/30/17		574			574			574
Capital surplus		4,436			4,415			4,413
Retained earnings		102,670			98,629			98,815
Accumulated other comprehensive loss net of tax		(8,200	)		(3,195	)		(2,232	)
Less: Treasury stock cost on 8,283 shares as of 9/30/18
19,734 shares as of 12/31/17 and 20,878 shares as of 9/30/17		(278	)		(664	)		(703	)

Total stockholders' equity		99,202			99,759			100,867

Total liabilities and stockholders' equity		1,062,195			1,033,622			1,010,078

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

	Three Months ended September 30,				Nine Months ended September 30,
	2018		2017		2018			2017
	$		$		$			$
Interest and dividend income:
Interest and fees on loans		7,157		6,180		20,259			17,996
Interest on securities available for sale
Taxable		1,207		997		3,494			2,818
Tax-exempt		701		1,051		2,196			3,281
Interest on deposits at other banks		141		111		388			257
Dividend income		142		105		432			287

Total interest and dividend income		9,348		8,444		26,769			24,639

Interest expense:
Interest on deposits		512		489		1,503			1,438
Interest on borrowings		360		265		985			749

Total interest expense		872		754		2,488			2,187

Net interest income		8,476		7,690		24,281			22,452

Provision for loan losses		190		240		470			450

Net interest income after provision for loan losses		8,286		7,450		23,811			22,002

Other income:
Trust and investment services income		449		427		1,477			1,335
Service fees		853		648		2,351			1,894
Commissions		658		583		1,899			1,714
Gains (losses) on the sale of debt securities, net		4		170		(24	)		417
Gains on equity securities, net		3		—		50			—
Gains on sale of mortgages		515		510		1,102			1,302
Earnings on bank-owned life insurance		186		170		1,477			514
Other income		119		114		463			370

Total other income		2,787		2,622		8,795			7,546

Operating expenses:
Salaries and employee benefits		5,197		4,840		15,378			14,370
Occupancy		624		624		1,889			1,828
Equipment		296		299		875			878
Advertising & marketing		147		143		583			539
Computer software & data processing		590		575		1,708			1,654
Shares tax		226		215		669			644
Professional services		438		377		1,376			1,260
Other expense		553		574		1,644			1,707

Total operating expenses		8,071		7,647		24,122			22,880

Income before income taxes		3,002		2,425		8,484			6,668

Provision for federal income taxes		425		391		960			935

Net income		2,577		2,034		7,524			5,733

Earnings per share of common stock		0.90		0.71		2.64			2.01

Cash dividends paid per share		0.29		0.28		0.86			0.84

Weighted average shares outstanding		2,858,002		2,848,504		2,854,010			2,849,849

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months ended September 30,						Nine Months ended September 30,
	2018			2017			2018			2017
	$			$			$			$

Net income		2,577			2,034			7,524			5,733

Other comprehensive income (loss), net of tax:
Securities available for sale not other-than-temporarily impaired:

Unrealized gains (losses) arising during the period		(1,796	)		(406	)		(5,562	)		4,437
Income tax effect		377			138			1,172			(1,509	)
		(1,419	)		(268	)		(4,390	)		2,928


Gain/(loss) on sale of debt securities recognized in earnings		(4	)		(170	)		24			(417	)
Income tax effect		1			58			(5	)		142
		(3	)		(112	)		19			(275	)


Other comprehensive income (loss), net of tax		(1,422	)		(380	)		(4,371	)		2,653

Comprehensive Income		1,155			1,654			3,153			8,386

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)	Nine Months Ended September 30,
	2018			2017
	$			$
Cash flows from operating activities:
Net income		7,524			5,733
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees		3,024			2,936
Decrease (increase) in interest receivable		(36	)		359
Increase in interest payable		33			7
Provision for loan losses		470			450
(Gain) loss on sale of debt securities, net		24			(417	)
Gain on equity securities, net		(50	)		—
Gain on sale of mortgages		(1,102	)		(1,302	)
Loans originated for sale		(32,227	)		(34,064	)
Proceeds from sales of loans		33,417			34,109
Earnings on bank-owned life insurance		(1,477	)		(514	)
Depreciation of premises and equipment and amortization of software		1,217			1,229
Deferred income tax		(10	)		(159	)
Other assets and other liabilities, net		2,241			(71	)
Net cash provided by operating activities		13,048			8,296

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		13,048			14,855
Proceeds from sales		45,734			60,404
Purchases		(50,279	)		(86,007	)
Proceeds from the sale of equity securities		222			—
Purchase of regulatory bank stock		(1,860	)		(2,537	)
Redemptions of regulatory bank stock		1,262			1,770
Purchase of bank-owned life insurance		26			—
Net increase in loans		(70,880	)		(12,829	)
Purchases of premises and equipment, net		(1,135	)		(2,882	)
Purchase of computer software		(58	)		(102	)
Net cash used for investing activities		(63,920	)		(27,328	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		35,324			30,680
Net decrease in time deposits		(10,875	)		(9,346	)
Net increase (decrease) in short-term borrowings		1,074			(8,329	)
Proceeds from long-term debt		14,161			17,093
Repayments of long-term debt		(11,650	)		(10,000	)
Dividends paid		(2,454	)		(2,393	)
Proceeds from sale of treasury stock		407			403
Treasury stock purchased		—			(468	)
Net cash provided by financing activities		25,987			17,640
Decrease in cash and cash equivalents		(24,885	)		(1,392	)
Cash and cash equivalents at beginning of period		53,073			45,632
Cash and cash equivalents at end of period		28,188			44,240

Supplemental disclosures of cash flow information:
Interest paid		2,457			2,180
Income taxes paid		375			1,175

Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale		5,479			(4,020	)

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1. Summary of Significant Accounting Policies

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 third quarter of 2018, is reporting on the results of operations and financial condition of ENB Financial Corp.

Operating results for the nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. 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, 2017.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Financial Instruments

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 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 (g) 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.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASU 2016-01 was effective for the Corporation on January 1, 2018, and resulted in separate classification of equity securities previously included in available for sale securities on the consolidated balance sheets with changes in the fair value of the equity securities captured in the consolidated statements of income. See Note 3 – Securities for disclosures related to equity securities. Adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 5 – Fair Value Presentation for further information regarding the valuation of these loans.

Nonrefundable Fees and Other Costs

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The Corporation elected to early adopt the Update effective January 1, 2018. Upon adoption, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $1.7 million. The net effect was a decrease to retained earnings.

Reporting Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. Upon adoption in February 2018, the Corporation made a one-time cumulative effect adjustment from accumulated other comprehensive income to retained earnings of $634,000. The net effect was an increase to retained earnings.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

2. Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of securities held at September 30, 2018, and December 31, 2017, are as follows:

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
September 30, 2018
U.S. government agencies		35,083		—		(1,593	)		33,490
U.S. agency mortgage-backed securities		48,542		—		(2,292	)		46,250
U.S. agency collateralized mortgage obligations		56,545		20		(2,021	)		54,544
Asset-backed securities		7,772		1		(26	)		7,747
Corporate bonds		59,748		—		(1,503	)		58,245
Obligations of states and political subdivisions		98,025		7		(2,973	)		95,059
Total debt securities available for sale		305,715		28		(10,408	)		295,335

December 31, 2017
U.S. government agencies		35,101		—		(749	)		34,352
U.S. agency mortgage-backed securities		52,981		8		(916	)		52,073
U.S. agency collateralized mortgage obligations		55,493		46		(898	)		54,641
Corporate bonds		61,334		24		(589	)		60,769
Obligations of states and political subdivisions		114,047		243		(2,047	)		112,243
Total debt securities		318,956		321		(5,199	)		314,078
Equity securities		5,547		36		—			5,583
Total securities available for sale		324,503		357		(5,199	)		319,661

The amortized cost and fair value of debt securities available for sale at September 30, 2018, 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		13,818		13,310
Due after one year through five years		140,922		136,039
Due after five years through ten years		38,896		37,280
Due after ten years		112,079		108,706
Total debt securities		305,715		295,335

Securities available for sale with a par value of $63,950,000 and $64,580,000 at September 30, 2018, and December 31, 2017, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $63,360,000 at September 30, 2018, and $66,157,000 at December 31, 2017.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	$		$		$		$
Proceeds from sales		13,092		20,319		45,734		60,404
Gross realized gains		20		243		130		631
Gross realized losses		16		73		154		214

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 nine months of 2018 or 2017.

Information pertaining to securities with gross unrealized losses at September 30, 2018, and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

TEMPORARY IMPAIRMENTS OF SECURITIES
(DOLLARS IN THOUSANDS)
	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	$		$			$		$			$		$
As of September 30, 2018
U.S. government agencies		5,809		(191	)		27,681		(1,402	)		33,490		(1,593	)
U.S. agency mortgage-backed securities		6,667		(141	)		39,583		(2,151	)		46,250		(2,292	)
U.S. agency collateralized mortgage obligations		15,815		(267	)		37,153		(1,754	)		52,968		(2,021	)
Asset-backed securities		4,828		(26	)		—		—			4,828		(26	)
Corporate bonds		28,509		(521	)		27,721		(982	)		56,230		(1,503	)
Obligations of states & political subdivisions		35,787		(803	)		57,246		(2,170	)		93,033		(2,973	)

Total temporarily impaired securities		97,415		(1,949	)		189,384		(8,459	)		286,799		(10,408	)


As of December 31, 2017
U.S. government agencies		9,941		(59	)		24,411		(690	)		34,352		(749	)
U.S. agency mortgage-backed securities		10,326		(78	)		37,123		(838	)		47,449		(916	)
U.S. agency collateralized mortgage obligations		29,551		(280	)		20,980		(618	)		50,531		(898	)
Corporate bonds		38,543		(282	)		15,019		(307	)		53,562		(589	)
Obligations of states & political subdivisions		15,188		(142	)		68,278		(1,905	)		83,466		(2,047	)

Total temporarily impaired securities		103,549		(841	)		165,811		(4,358	)		269,360		(5,199	)

In the debt security portfolio there were 201 positions that were carrying unrealized losses as of September 30, 2018. There were no instruments considered to be other-than-temporarily impaired at September 30, 2018.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation evaluates 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.

3. Equity Securities

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at September 30, 2018.

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
September 30, 2018
CRA-qualified mutual funds		5,374		—		—			5,374
Bank stocks		396		25		(6	)		415
Total equity securities		5,770		25		(6	)		5,789

As of January 1, 2018, the Corporation adopted ASU 2016-01, resulting in the reclassification of equity securities from available-for-sale.

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the quarter and year-to-date periods ended September 30, 2018, and the portion of unrealized gains and losses for the periods that relates to equity investments held as of September 30, 2018.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS
(DOLLARS IN THOUSANDS)
	Three Months Ended			Nine Months Ended
	September 30, 2018			September 30, 2018
	$			$

Net gains (losses) recognized in equity securities during the period		3			50

Less: Net gains realized on the sale of equity securities during the period		10			40

Unrealized gains (losses) recognized in equity securities held at reporting date		(7	)		10

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4. Loans and Allowance for Loan Losses

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2018, and December 31, 2017:

LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
	September 30,			December 31,
	2018			2017
	$			$
Commercial real estate
Commercial mortgages		100,871			90,072
Agriculture mortgages		157,057			152,050
Construction		19,245			18,670
Total commercial real estate		277,173			260,792

Consumer real estate (a)
1-4 family residential mortgages		207,992			176,971
Home equity loans		10,328			11,181
Home equity lines of credit		64,151			61,104
Total consumer real estate		282,471			249,256

Commercial and industrial
Commercial and industrial		54,836			41,426
Tax-free loans		23,008			20,722
Agriculture loans		19,274			18,794
Total commercial and industrial		97,118			80,942

Consumer		9,471			5,320

Gross loans prior to deferred fees		666,233			596,310
Less:
Deferred loan costs, net		1,536			1,243
Allowance for loan losses		(8,428	)		(8,240	)
Total net loans		659,341			589,313

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $117,655,000 and $98,262,000 as of September 30, 2018, and December 31, 2017, respectively.

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2018 and December 31, 2017. 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.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

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)

September 30, 2018	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		98,282		145,991		17,715		52,774		22,806		18,219		355,787
Special Mention		315		3,251		1,530		570		202		508		6,376
Substandard		2,274		7,815		—		1,492		—		547		12,128
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		100,871		157,057		19,245		54,836		23,008		19,274		374,291

December 31, 2017	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		86,259		143,037		17,670		37,947		20,514		17,798		323,225
Special Mention		160		3,873		—		1,015		208		270		5,526
Substandard		3,653		5,140		1,000		2,464		—		726		12,983
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		90,072		152,050		18,670		41,426		20,722		18,794		341,734

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 September 30, 2018 and December 31, 2017:

CONSUMER CREDIT EXPOSURE
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
(DOLLARS IN THOUSANDS)
September 30, 2018	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		207,430		10,192		64,122		9,470		291,214
Non-performing		562		136		29		1		728

Total		207,992		10,328		64,151		9,471		291,942

December 31, 2017	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		176,576		11,181		61,074		5,305		254,136
Non-performing		395		—		30		15		440

Total		176,971		11,181		61,104		5,320		254,576

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 2018 and December 31, 2017:

AGING OF LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
September 30, 2018	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		17		17		100,854		100,871		17
Agriculture mortgages		432		—		—		432		156,625		157,057		—
Construction		—		—		—		—		19,245		19,245		—
Consumer real estate
1-4 family residential mortgages		243		518		55		816		207,176		207,992		55
Home equity loans		61		—		—		61		10,267		10,328		—
Home equity lines of credit		—		—		29		29		64,122		64,151		29
Commercial and industrial
Commercial and industrial		—		—		—		—		54,836		54,836		—
Tax-free loans		—		—		—		—		23,008		23,008		—
Agriculture loans		—		128		—		128		19,146		19,274		—
Consumer		7		2		1		10		9,461		9,471		1
Total		743		648		102		1,493		664,740		666,233		102

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
December 31, 2017	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		372		372		89,700		90,072		—
Agriculture mortgages		—		—		—		—		152,050		152,050		—
Construction		—		—		—		—		18,670		18,670		—
Consumer real estate
1-4 family residential mortgages		533		248		395		1,176		175,795		176,971		395
Home equity loans		40		—		—		40		11,141		11,181		—
Home equity lines of credit		—		—		30		30		61,074		61,104		30
Commercial and industrial
Commercial and industrial		65		109		—		174		41,252		41,426		—
Tax-free loans		—		—		—		—		20,722		20,722		—
Agriculture loans		—		—		—		—		18,794		18,794		—
Consumer		8		3		15		26		5,294		5,320		15
Total		646		360		812		1,818		594,492		596,310		440

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2018 and December 31, 2017:

NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
	September 30,		December 31,
	2018		2017
	$		$

Commercial real estate
Commercial mortgages		375		393
Agriculture mortgages		—		—
Construction		—		—
Consumer real estate
1-4 family residential mortgages		507		—
Home equity loans		136		—
Home equity lines of credit		—		—
Commercial and industrial
Commercial and industrial		—		—
Tax-free loans		—		—
Agriculture loans		—		—
Consumer		—		—
Total		1,018		393

As of September 30, 2018 and December 31, 2017, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and nine months ended September 30, 2018 and September 30, 2017, is as follows:

IMPAIRED LOANS
(DOLLARS IN THOUSANDS)
	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	$		$		$		$

Average recorded balance of impaired loans		1,388		2,152		2,153		2,394
Interest income recognized on impaired loans		11		17		42		49

There were no loan modifications made during the nine months ended September 30, 2018 causing a loan to be considered a troubled debt restructuring (TDR). However, there was a loan modification made during the nine months ended September 30, 2017, that constituted a TDR. A TDR is a loan where management has granted a concession to a borrower that is experiencing financial difficulty. 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. The loan classified as a TDR during the three months ended March 31, 2017, was an agricultural loan. The concession initially granted to the borrower during the first quarter of 2017 was an interest-only period initially running for three months to March 31, 2017. However, on March 31, 2017, that deferral period was extended for an additional three months, causing management to classify the loan as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest payments as of July 2017. This loan subsequently paid off in the third quarter of 2018.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information regarding impaired loans by loan portfolio class as of September 30, 2018, December 31, 2017, and September 30, 2017:

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		429		958		—		506		—
Agriculture mortgages		884		884		—		1,017		35
Construction		—		—		—		—		—
Total commercial real estate		1,313		1,842		—		1,523		35

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with no related allowance		1,313		1,842		—		1,523		35

With an allowance recorded:
Commercial real estate
Commercial mortgages		589		629		116		464		—
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		589		629		116		464		—

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		166		6
Total commercial and industrial		—		—		—		166		6

Total with a related allowance		589		629		116		630		6

Total by loan class:
Commercial real estate
Commercial mortgages		1,018		1,587		116		970		—
Agriculture mortgages		884		884		—		1,017		35
Construction		—		—		—		—		—
Total commercial real estate		1,902		2,471		116		1,987		35

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		166		6
Total commercial and industrial		—		—		—		166		6

Total		1,902		2,471		116		2,153		41

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 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		393		690		—		585		4
Agriculture mortgages		1,174		1,174		—		1,210		54
Construction		—		—		—		—		—
Total commercial real estate		1,567		1,864		—		1,795		58

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		245		245		—		163		7
Total commercial and industrial		245		245		—		163		7

Total with no related allowance		1,812		2,109		—		1,958		65

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		393		690		—		585		4
Agriculture mortgages		1,174		1,174		—		1,210		54
Construction		—		—		—		—		—
Total commercial real estate		1,567		1,864		—		1,795		58

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		245		245		—		163		7
Total commercial and industrial		245		245		—		163		7

Total		1,812		2,109		—		1,958		65

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		195		292		—		281		4
Agriculture mortgages		1,193		1,193		—		1,220		40
Construction		—		—		—		—		—
Total commercial real estate		1,388		1,485		—		1,501		44

Commercial and industrial
Commercial and industrial		75		75		—		75		—
Tax-free loans		—		—		—		—		—
Agriculture loans		263		263		—		400		5
Total commercial and industrial		338		338		—		475		5

Total with no related allowance		1,726		1,823		—		1,976		49

With an allowance recorded:
Commercial real estate
Commercial mortgages		418		418		98		418		—
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		418		418		98		418		—

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with a related allowance		418		418		98		418		—

Total by loan class:
Commercial real estate
Commercial mortgages		613		710		98		699		4
Agriculture mortgages		1,193		1,193		—		1,220		40
Construction		—		—		—		—		—
Total commercial real estate		1,806		1,903		98		1,919		44

Commercial and industrial
Commercial and industrial		75		75		—		75		—
Tax-free loans		—		—		—		—		—
Agriculture loans		263		263		—		400		5
Total commercial and industrial		338		338		—		475		5

Total		2,144		2,241		98		2,394		49

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 nine months ended September 30, 2018:

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, 2017		3,863			2,052			1,829			98			398			8,240

Charge-offs		(224	)		—			(110	)		(18	)		—			(352	)
Recoveries		—			—			4			1			—			5
Provision		408			137			(422	)		(9	)		76			190

Balance - March 31, 2018		4,047			2,189			1,301			72			474			8,083

Charge-offs		—			—			—			(8	)		—			(8	)
Recoveries		—			—			2			4			—			6
Provision		(43	)		(7	)		(21	)		63			98			90

Ending Balance - June 30, 2018		4,004			2,182			1,282			131			572			8,171

Charge-offs		—			(20	)		—			—			—			(20	)
Recoveries		30			—			55			2			—			87
Provision		90			192			90			(16	)		(166	)		190

Ending Balance - September 30, 2018		4,124			2,354			1,427			117			406			8,428

During the nine months ended September 30, 2018, management charged off $380,000 in loans while recovering $98,000 and added $470,000 to the provision. The level of charge-offs along with the growth in the loan portfolio was primarily responsible for the $470,000 of additional provision.

During the nine months ended September 30, 2018, provision expenses were recorded for the commercial real estate, consumer real estate, and consumer segments with a credit provision recorded for the commercial and industrial segment. The increase in the allowance for commercial real estate loans was primarily a result of higher levels of charge-offs in the first nine months of 2018 as well as the addition of $116,000 of specific reserves allocated to this loan segment. The increase in the amount of the allowance for loan losses allocated to the consumer real estate and consumer segment was primarily a result of growth in these portfolios during the nine months ended September 30, 2018. The decrease in commercial and industrial loans from December 31, 2017 to September 30, 2018, was caused by a qualitative factor change across the portfolio and also by the declining level of substandard commercial and industrial loans. The qualitative factors were adjusted across the loan portfolio to better reflect the forward risk in each portfolio. Commercial and consumer real estate carried heavier risk factors, while commercial and industrial was adjusted down. While commercial and industrial did have charge-offs in the first quarter of 2018 they were relative to the size of the allowance and sufficiently covered with prior provisions. There was no commercial and industrial charge-offs in the second or third quarters of 2018, and the amount of commercial and industrial loans rated substandard declined from $2.5 million on December 31, 2017, to $1.5 million on September 30, 2018. While the balances of commercial and industrial loans increased moderately from December 31, 2017 to September 30, 2018, the required allowance and related provision for these loans is influenced more heavily by the amount of classified loans.

Delinquency rates among the Corporation's loan pools remain low and made up 0.34% of total loans as of September 30, 2018, compared to 0.31% of total loans as of December 31, 2017. Charge-offs for the nine months ended September 30, 2018, were $380,000, however $352,000 of the charge-offs came in the first quarter of 2018, with third quarter 2018 charge-offs being very low at $20,000. Classified loans continued to decline in the first nine months of 2018, from $16.6 million on December 31, 2017, to $15.9 million as of September 30, 2018. Classified loans were significantly higher at $21.0 million as of September 30, 2017. The agricultural lending sector has generally been under stress over the past several years due to lower milk and egg prices. These are the two indicators that have the most immediate impact to the majority of the Corporation's agricultural borrowers. In 2018, egg prices improved with better pricing on average than 2017. After a first quarter spike, egg prices have stabilized over the past two quarters, while closing in on the three-year average. However, milk prices remain at a three-year low, with 2018 prices lower on average than in 2017. Milk prices have slightly improved as of the end of the third quarter of 2018, but margins are very thin and overcapacity remains an issue with some consolidation occurring in the local dairy industry. The health of the Corporation's commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Commercial borrowers that have exposure to agriculture are subject to more financial stress in the current environment.

Outside of the above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the potential credit risks across the Corporation's various loan types. The majority of the qualitative factors had little change during 2018. Minor adjustments to the qualitative factors covering trends in the nature of the loan portfolio and levels and trends of delinquencies and charge-offs were made throughout the year as these levels increased or decreased. The qualitative factor covering experience, ability and depth of lending management was reduced as loan teams remained consistent with more experience in all aspects of lending. The qualitative factor for external factors such as competition and legal and regulatory changes was increased for agricultural dairy loans to be consistent with the higher qualitative factor for economic conditions, which already was in place as of December 31, 2017. The same qualitative factor for external influence was reduced for residential real estate and consumer lending where loan underwriting personnel have grown accustomed to the most recently enacted regulatory requirements.

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 nine months ended September 30, 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		(275	)		163			95			3			104			90

Balance - March 31, 2017		3,520			1,835			1,649			83			585			7,672

Charge-offs		—			—			—			(3	)		—			(3	)
Recoveries		—			—			10			3			—			13
Provision		208			83			(42	)		36			(165	)		120

Balance - June 30, 2017		3,728			1,918			1,617			119			420			7,802

Charge-offs		—			—			(7	)		(9	)		—			(16	)
Recoveries		—			—			2			—			—			2
Provision		31			(16	)		201			(18	)		42			240

Balance - September 30, 2017		3,759			1,902			1,813			92			462			8,028

During the nine months ended September 30, 2017, provision expenses were recorded for the consumer real estate, commercial and industrial, and consumer loan segments, with a credit provision recorded in the commercial real estate loan category. The decrease in the amount of allowance for loan losses allocated to commercial real estate was primarily due to a material decrease in commercial real estate loans over the first nine months of 2017. As of December 31, 2016, 50.2% of the Corporation’s allowance for loan losses was allocated to commercial real estate loans, which consisted of 48.2% of all loans. As of September 30, 2017, 46.8 % of the allowance was allocated to commercial real estate loans which consisted of 44.5% of total loans.

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 September 30, 2018 and December 31, 2017:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)

As of September 30, 2018:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment		116		—		—		—		—		116
Ending balance: collectively evaluated
for impairment		4,008		2,354		1,427		117		406		8,312

Loans receivable:
Ending balance		277,173		282,471		97,118		9,471				666,233
Ending balance: individually evaluated
for impairment		1,902		—		—		—				1,902
Ending balance: collectively evaluated
for impairment		275,271		282,471		97,118		9,471				664,331

As of December 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		3,863		2,052		1,829		98		398		8,240

Loans receivable:
Ending balance		260,792		249,256		80,942		5,320				596,310
Ending balance: individually evaluated
for impairment		1,567		—		245		—				1,812
Ending balance: collectively evaluated
for impairment		259,225		249,256		80,697		5,320				594,498

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

5. 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 provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of September 30, 2018, and December 31, 2017, 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.

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
	September 30, 2018
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. government agencies		—		33,490		—		33,490
U.S. agency mortgage-backed securities		—		46,250		—		46,250
U.S. agency collateralized mortgage obligations		—		54,544		—		54,544
Asset-backed securities		—		7,747		—		7,747
Corporate bonds		—		58,245		—		58,245
Obligations of states & political subdivisions		—		95,059		—		95,059
Equity securities		5,789		—		—		5,789

Total securities		5,789		295,335		—		301,124

On September 30, 2018, 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 September 30, 2018, the CRA fund investments had a $5,374,000 book and fair market value and the bank stock portfolio had a book value of $396,000, and fair market value of $415,000.

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.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
	December 31, 2017
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. government agencies		—		34,352		—		34,352
U.S. agency mortgage-backed securities		—		52,073		—		52,073
U.S. agency collateralized mortgage obligations		—		54,641		—		54,641
Corporate bonds		—		60,769		—		60,769
Obligations of states & political subdivisions		—		112,243		—		112,243
Equity securities		5,583		—		—		5,583

Total securities		5,583		314,078		—		319,661

On December 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 December 31, 2017, the CRA fund investments had a $5,280,000 book and market value and the bank stocks had a book value of $267,000 and a market value of $303,000.

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

	September 30, 2018
	Level I $		Level II $		Level III $		Total $
Assets:
Impaired Loans		—		—		1,786		1,786
Total		—		—		1,786		1,786

	December 31, 2017
	Level I $		Level II $		Level III $		Total $
Assets:
Impaired Loans		—		—		1,812		1,812
Total		—		—		1,812		1,812

The Corporation had a total of $1,902,000 of impaired loans as of September 30, 2018, with $116,000 of specific allocation against these loans and $1,812,000 of impaired loans as of December 31, 2017, with no specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

Index

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)
	September 30, 2018
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)

Impaired loans	1,786	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

	December 31, 2017
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)

Impaired loans	1,812	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.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017:

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	September 30, 2018
					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		28,188		28,188		28,188		—		—
Regulatory stock		6,392		6,392		6,392		—		—
Loans held for sale		2,804		2,804		2,804		—		—
Loans, net of allowance		659,341		653,495		—		—		653,495
Mortgage servicing assets		837		946		—		—		946
Accrued interest receivable		3,719		3,719		3,719		—		—
Bank owned life insurance		27,901		27,901		27,901		—		—

Financial Liabilities:
Demand deposits		346,827		346,827		346,827		—		—
Interest-bearing demand deposits		19,379		19,379		19,379		—		—
NOW accounts		86,031		86,031		86,031		—		—
Money market deposit accounts		103,080		103,080		103,080		—		—
Savings accounts		197,075		197,075		197,075		—		—
Time deposits		138,534		138,313		—		—		138,313
Total deposits		890,926		890,705		752,392		—		138,313

Short-term borrowings		1,074		1,074		1,074		—		—
Long-term debt		68,361		68,361		—		—		68,361
Accrued interest payable		417		417		417		—		—

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	December 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		53,073		53,073		53,073		—		—
Regulatory stock		5,794		5,794		5,794		—		—
Loans held for sale		2,892		2,892		2,892		—		—
Loans, net of allowance		589,313		590,415		—		—		590,415
Mortgage servicing assets		661		751		—		—		751
Accrued interest receivable		3,684		3,684		3,684		—		—
Bank owned life insurance		27,814		27,814		27,814		—		—

Financial Liabilities:
Demand deposits		314,917		314,917		314,917		—		—
Interest-bearing demand deposits		20,230		20,230		20,230		—		—
NOW accounts		86,758		86,758		86,758		—		—
Money market deposit accounts		105,994		105,994		105,994		—		—
Savings accounts		189,169		189,169		189,169		—		—
Time deposits		149,409		150,165		—		—		150,165
Total deposits		866,477		867,233		717,068		—		150,165

Long-term debt		65,850		65,850		—		—		65,850
Accrued interest payable		385		385		385		—		—

7. Commitments and Contingent Liabilities

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of September 30, 2018, firm loan commitments were $55.7 million, unused lines of credit were $234.5 million, and open letters of credit were $10.8 million. The total of these commitments was $301.0 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.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

8. Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss for the nine months ended September 30, 2018 and 2017 is as follows:

ACCUMULATED OTHER COMPREHENSIVE LOSS (1) (2)
(DOLLARS IN THOUSANDS)
	Unrealized
	Gains (Losses)
	on Securities
	Available-for-Sale
	$
Balance at December 31, 2017		(3,195	)
Other comprehensive loss before reclassifications		(2,685	)
Amount reclassified from accumulated other comprehensive loss		(27	)
Reclassification of certain income tax effects from accumulated other comprehensive income (loss)		(634	)
Period change		(3,346	)

Balance at March 31, 2018		(6,541	)
Other comprehensive loss before reclassifications		(286	)
Amount reclassified from accumulated other comprehensive loss		49
Period change		(237	)

Balance at June 30, 2018		(6,778	)
Other comprehensive loss before reclassifications		(1,419	)
Amount reclassified from accumulated other comprehensive loss		(3	)
Period change		(1,422	)

Balance at September 30, 2018		(8,200	)




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

Balance at March 31, 2017		(4,559	)
Other comprehensive income before reclassifications		2,778
Amount reclassified from accumulated other comprehensive loss		(71	)
Period change		2,707

Balance at June 30, 2017		(1,852	)
Other comprehensive income before reclassifications		(268	)
Amount reclassified from accumulated other comprehensive loss		(112	)
Period change		(380	)

Balance at September 30, 2017		(2,232	)

(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of 21% for 2018 periods and 34% for 2017 periods.

(2) Amounts in parentheses indicate debits.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 September 30,
	2018	2017	Affected Line Item in the
	$	$	Consolidated Statements of Income
Securities available-for-sale:
Net securities gains (losses),	4	170	Gains (losses) on the sale of
reclassified into earnings			debt securities, net
Related income tax expense	(1)	(58)	Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period	3	112

(1) Amounts in parentheses indicate debits.

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Nine Months
	Ended September 30,
	2018	2017	Affected Line Item in the
	$	$	Consolidated Statements of Income
Securities available-for-sale:
Net securities gains (losses),	(24)	417	Gains (losses) on the sale of
reclassified into earnings			debt securities, net
Related income tax expense	5	(142)	Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period	(19)	275

(1) Amounts in parentheses indicate debits.

9. Recently Issued Accounting Standards

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 on 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 percent increase in assets and liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Corporation’s financial statements.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. This Update is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117. This Update is not expected to have a significant impact on the Corporation’s financial statements.

ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118, ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118. SAB 118 addresses the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Corporation’s financial statements.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Corporation’s financial statements.

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2017 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

Index

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 $2,577,000 and $7,524,000 for the three and nine-month periods ended September 30, 2018, a 26.7% and 31.2% increase respectively, from the $2,034,000 and $5,733,000 earned during the same periods in 2017. The earnings per share, basic and diluted, were $0.90 and $2.64 for the three and nine months ended September 30, 2018, compared to $0.71 and $2.01 for the same periods in 2017. The increase in the Corporation’s 2018 earnings was caused primarily by insurance proceeds from a bank owned life insurance (BOLI) policy. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on select officers. Due to the death of a participant during the first quarter of 2018, the Corporation recorded additional BOLI income of $913,000. This net death benefit caused an increase in the Corporation’s 2018 earnings. The Corporation also experienced growth in net interest income (NII) for the nine-month period ended September 30, 2018, largely driven by the Federal Reserve rate increases which have positively impacted the yield on earning assets.

The Corporation’s NII increased by $786,000, or 10.2%, and $1,829,000, or 8.1%, for the three and nine months ended September 30, 2018, compared to the same periods in 2017. The increase in NII primarily resulted from an increase in interest and fees on loans of $977,000, or 15.8%, and $2,263,000, or 12.6%, for the three and nine-month periods ended September 30, 2018. The increase in NII was partially offset by an increase in interest expense. The Corporation’s interest expense on deposits and borrowings increased by $118,000, or 15.6%, and $301,000, or 13.8%, for the three and nine-month periods ended September 30, 2018, compared to 2017.

The Corporation recorded $50,000 less provision expense in the third quarter of 2018 compared to the same quarter of 2017, with $190,000 of provision compared to $240,000 of provision for the third quarter of 2017. However, for the nine-month period ended September 30, 2018, the Corporation recorded $20,000 additional provision expense, with $470,000 of provision expense compared to $450,000 in the same period of 2017. The gains from securities were $7,000 for the three months ended September 30, 2018, compared to gains of $26,000 for the nine months ended September 30, 2018, compared to gains of $170,000 and $417,000 for the same periods in 2017. Market interest rates were lower in 2017, making it more conducive to achieving gains from the sale of securities. The gain on the sale of mortgages increased by $5,000, or 1.0%, and decreased $200,000, or 15.4%, for the three and nine-month periods ended September 30, 2018, compared to the prior year’s periods. Margins made on sold mortgages were lower in the first nine months of 2018 compared to 2017 primarily causing the decrease in gain income. Total operating expenses increased $424,000, or 5.5%, and $1,242,000, or 5.4%, for the three and nine months ended September 30, 2018, compared to the same periods in 2017.

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the three and nine months ended September 30, 2018, compared to the same periods in the prior year due primarily to higher earnings.

Key Ratios	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017

Return on Average Assets		0.97%		0.80%		0.97%		0.77%
Return on Average Equity		10.33%		8.06%		10.28%		7.86%

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:

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Net interest income

Provision for loan losses

Other income

Operating expenses

Provision for income taxes

The following discussion analyzes each of these five components.

Net Interest Income

NII represents the largest portion of the Corporation’s operating income. In the first nine months of 2018, NII generated 73.4% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 74.8% in the first nine months of 2017. The overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income.

The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $217,000 and $670,000 for the three and nine months ended September 30, 2018, compared to $582,000 and $1,793,000 for the same periods in 2017.

NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
	$		$		$		$
Total interest income		9,348		8,444		26,769		24,639
Total interest expense		872		754		2,488		2,187

Net interest income		8,476		7,690		24,281		22,452
Tax equivalent adjustment		217		582		670		1,793

Net interest income (fully taxable equivalent)		8,693		8,272		24,951		24,245

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, a period of seven years. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. On December 14, 2016, one year later, the Federal funds rate was increased 25 basis points to 0.75%. During 2017, the Federal funds rate was increased three times so that the rate was 1.50% as of December 31, 2017. In March, June, and September of 2018, the Federal Reserve again increased the Federal funds rate by 25 basis points so that the rate was 2.25% as of September 30, 2018. 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 margi

ENB Financial Corp - FORM 10-Q - November 14, 2018

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