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EX-32.2 - EX-32.2 - ENB Financial Corpex32-2.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2020

OR

 

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          

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None.   N/A   N/A

 

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 ☒          No ☐

 

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 ☒          No ☐

 

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 Accelerated filer
  Non-accelerated filer Smaller reporting company
      Emerging growth company

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. ¨

 

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

Yes ☐          No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 1, 2020, the registrant had 5,568,601 shares of $0.10 (par) Common Stock outstanding.

 

 

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2020

 

 

Part I – FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
  Consolidated Balance Sheets at June 30, 2020 and 2019, and December 31, 2019 (Unaudited) 3
       
  Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 4
       
  Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 5
       
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited) 6
       
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited) 7
       
  Notes to the Unaudited Consolidated Interim Financial Statements 8-35
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36-71
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 72-77
       
  Item 4. Controls and Procedures 78
       
       
Part II – OTHER INFORMATION 79
       
  Item 1. Legal Proceedings 79
       
  Item 1A. Risk Factors 79
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 79
       
  Item 3. Defaults upon Senior Securities 80
       
  Item 4. Mine Safety Disclosures 80
       
  Item 5. Other Information 80
       
  Item 6. Exhibits 81
       
       

SIGNATURE PAGE

82

 

2 

Index 

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

             

 

  June 30,  December 31,  June 30, 
  2020  2019  2019 
  $  $  $ 
ASSETS            
Cash and due from banks  21,320   24,304   17,210 
Interest-bearing deposits in other banks  39,904   16,749   34,460 
             
   Total cash and cash equivalents  61,224   41,053   51,670 
             
Securities available for sale (at fair value)  334,687   308,097   290,927 
Equity securities (at fair value)  6,775   6,708   6,231 
             
Loans held for sale  2,295   2,342   3,473 
             
Loans (net of unearned income)  835,969   753,618   718,356 
             
   Less: Allowance for loan losses  10,770   9,447   8,957 
             
   Net loans  825,199   744,171   709,399 
             
Premises and equipment  24,918   25,033   25,339 
Regulatory stock  6,942   7,291   6,959 
Bank owned life insurance  29,214   28,818   28,429 
Other assets  8,222   8,237   9,218 
             
       Total assets  1,299,476   1,171,750   1,131,645 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
Liabilities:            
  Deposits:            
    Noninterest-bearing  466,392   363,857   345,483 
    Interest-bearing  641,522   610,231   596,123 
             
    Total deposits  1,107,914   974,088   941,606 
             
  Short-term borrowings     200    
  Long-term debt  65,072   77,872   74,628 
  Other liabilities  4,328   2,902   2,897 
             
       Total liabilities  1,177,314   1,055,062   1,019,131 
             
Stockholders' equity:            
  Common stock, par value $0.10            
Shares:  Authorized 24,000,000            
             Issued 5,739,114 and Outstanding  5,574,601 as of 6/30/20,            
             5,640,742 as of 12/31/19, and 5,692,384 as of 6/30/19  574   574   574 
  Capital surplus  4,466   4,482   4,454 
  Retained earnings  115,914   111,944   108,024 
  Accumulated other comprehensive income  4,522   1,600   298 
  Less: Treasury stock cost on 164,513 shares as of 6/30/20, 98,372 as of 12/31/19,            
   and 46,730 as of 6/30/19  (3,314)  (1,912)  (836)
             
       Total stockholders' equity  122,162   116,688   112,514 
             
       Total liabilities and stockholders' equity  1,299,476   1,171,750   1,131,645 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

3 

Index 

 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

  Three Months ended June 30,  Six Months ended June 30, 
  2020  2019  2020  2019 
  $  $  $  $ 
Interest and dividend income:                
Interest and fees on loans  8,636   8,309   17,088   16,332 
Interest on securities available for sale                
Taxable  1,065   1,242   2,286   2,517 
Tax-exempt  644   608   1,210   1,255 
Interest on deposits at other banks  21   119   81   166 
Dividend income  102   184   290   354 
                 
Total interest and dividend income  10,468   10,462   20,955   20,624 
                 
Interest expense:                
Interest on deposits  543   913   1,352   1,737 
Interest on borrowings  456   391   918   746 
                 
Total interest expense  999   1,304   2,270   2,483 
                 
Net interest income  9,469   9,158   18,685   18,141 
                 
Provision for loan losses  975   30   1,325   210 
                 
Net interest income after provision for loan losses  8,494   9,128   17,360   17,931 
                 
Other income:                
Trust and investment services income  416   505   1,038   1,042 
Service fees  635   693   1,314   1,323 
Commissions  649   756   1,335   1,411 
Gains on the sale of debt securities, net  367   106   649   187 
Gains (losses) on equity securities, net  5   27   (225)  44 
Gains on sale of mortgages  1,690   415   2,231   764 
Earnings on bank-owned life insurance  205   179   411   357 
Other income  101   81   82   178 
                 
Total other income  4,068   2,762   6,835   5,306 
                 
Operating expenses:                
Salaries and employee benefits  4,966   5,105   10,662   10,293 
Occupancy  616   590   1,207   1,220 
Equipment  316   287   606   574 
Advertising & marketing  218   166   492   416 
Computer software & data processing  768   609   1,474   1,266 
Shares tax  239   232   479   465 
Professional services  507   556   1,130   1,031 
Other expense  614   672   1,304   1,234 
                 
Total operating expenses  8,244   8,217   17,354   16,499 
                 
Income before income taxes  4,318   3,673   6,841   6,738 
                 
Provision for federal income taxes  719   584   1,077   1,046 
                 
Net income  3,599   3,089   5,764   5,692 
                 
Earnings per share of common stock  0.64   0.54   1.03   1.00 
                 
Cash dividends paid per share  0.160   0.155   0.320   0.305 
                 
Weighted average shares outstanding  5,581,961   5,692,506   5,604,609   5,693,418 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

4 

Index 

 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

  Three Months ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
  $  $  $  $ 
             
Net income  3,599   3,089   5,764   5,692 
                 
Other comprehensive income, net of tax:                
Securities available for sale not other-than-temporarily impaired:                
                 
   Unrealized gains arising during the period  4,695   4,520   4,346   7,751 
   Income tax effect  (986)  (949)  (911)  (1,627)
   3,709   3,571   3,435   6,124 
                 
   Gains recognized in earnings  (367)  (106)  (649)  (187)
   Income tax effect  77   22   136   39 
   (290)  (84)  (513)  (148)
                 
Other comprehensive income, net of tax  3,419   3,487   2,922   5,976 
                 
Comprehensive Income  7,018   6,576   8,686   11,668 

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

5 

Index 

 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

 

           Accumulated       
           Other     Total 
  Common  Capital  Retained  Comprehensive  Treasury  Stockholders' 
  Stock  Surplus  Earnings  Income (Loss)  Stock  Equity 
  $  $  $  $  $  $ 
                   
Balances, December 31, 2018  574   4,435   104,067   (5,678)  (596)  102,802 
                         
Net income        2,603         2,603 
                         
Other comprehensive income net of tax           2,489      2,489 
Treasury stock purchased - 18,800 shares              (330)  (330)
                         
Treasury stock issued - 8,188 shares     3         143   146 
                         
Cash dividends paid, $0.15 per share        (852)        (852)
                         
Balances, March 31, 2019  574   4,438   105,818   (3,189)  (783)  106,858 
                         
Net income        3,089         3,089 
                         
Other comprehensive income net of tax           3,487      3,487 
                        
Treasury stock purchased - 29,366 shares              (204)  (204)
                         
Treasury stock issued - 16,686 shares     16         151   167 
                         
Cash dividends paid, $0.155 per share        (883)        (883)
                         
Balances, June 30, 2019  574   4,454   108,024   298   (836)  112,514 
                         
                         
Balances, December 31, 2019  574   4,482   111,944   1,600   (1,912)  116,688 
                         
Net income        2,165         2,165 
                         
Other comprehensive loss net of tax           (497)     (497)
                         
Treasury stock purchased - 49,911 shares              (1,098)  (1,098)
                         
Treasury stock issued - 7,670 shares     (6)        156   150 
                         
Cash dividends paid, $0.16 per share        (902)        (902)
                         
Balances, March 31, 2020  574   4,476   113,207   1,103   (2,854)  116,506 
                         
Net income        3,599         3,599 
                         
Other comprehensive income net of tax           3,419      3,419 
                         
Treasury stock purchased - 32,966 shares              (627)  (627)
                         
Treasury stock issued - 9,066 shares     (10)        167   157 
                         
Cash dividends paid, $0.16 per share        (892)        (892)
                         
Balances, June 30, 2020  574   4,466   115,914   4,522   (3,314)  122,162 

 

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) Six Months Ended June 30, 
  2020  2019 
  $  $ 
Cash flows from operating activities:        
Net income  5,764   5,692 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Net amortization of securities premiums and discounts and loan fees  1,496   1,692 
Amortization of operating leases right-of-use assets  89   87 
Increase in interest receivable  (396)  (343)
(Decrease) increase in interest payable  (111)  96 
Provision for loan losses  1,325   210 
Gains on the sale of debt securities, net  (649)  (187)
Loss on equity securities, net  225   (44)
Gains on sale of mortgages  (2,231)  (764)
Loans originated for sale  (58,228)  (20,210)
Proceeds from sales of loans  60,506   18,930 
Earnings on bank-owned life insurance  (411)  (357)
Depreciation of premises and equipment and amortization of software  767   783 
Deferred income tax  (373)  (274)
Other assets and other liabilities, net  1,438   123 
Net cash provided by operating activities  9,211   5,434 
         
Cash flows from investing activities:        
Securities available for sale:        
   Proceeds from maturities, calls, and repayments  34,427   10,813 
   Proceeds from sales  43,818   28,648 
   Purchases  (102,034)  (30,115)
Equity securities        
    Proceeds from sales      
    Purchases  (292)  (153)
Purchase of regulatory bank stock  (1,128)  (1,102)
Redemptions of regulatory bank stock  1,477   491 
Net increase in loans  (82,304)  (24,451)
Purchases of premises and equipment, net  (589)  (517)
Purchase of computer software  (29)  (31)
Net cash used for investing activities  (106,654)  (16,417)
         
Cash flows from financing activities:        
Net increase in demand, NOW, and savings accounts  143,139   18,222 
Net (decrease) increase in time deposits  (9,313)  3,650 
Net decrease in short-term borrowings  (200)  (7,870)
Proceeds from long-term debt  12,984   16,212 
Repayments of long-term debt  (25,784)  (6,970)
Dividends paid  (1,794)  (1,735)
Proceeds from sale of treasury stock  307   313 
Treasury stock purchased  (1,725)  (534)
Net cash provided by financing activities  117,614   21,288 
Increase in cash and cash equivalents  20,171   10,305 
Cash and cash equivalents at beginning of period  41,053   41,365 
Cash and cash equivalents at end of period  61,224   51,670 
         
Supplemental disclosures of cash flow information:        
    Interest paid  2,381   2,387 
    Income taxes paid     800 
         
Supplemental disclosure of non-cash investing and financing activities:        
Fair value adjustments for securities available for sale  (3,697)  (7,564)
Initial recognition of operating right-of-use assets     1,075 
Initial recognition of operating lease liabilities     1,075 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

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Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.       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 second quarter of 2020, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. 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, 2019.

 

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.

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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 June 30, 2020,

and December 31, 2019, are as follows:    

 

    Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
  $ $ $ $
June 30, 2020        
U.S. government agencies  8,217   163   (1)  8,379 
U.S. agency mortgage-backed securities  71,241   1,379   (67)  72,553 
U.S. agency collateralized mortgage obligations  45,854   857   (149)  46,562 
Asset-backed securities  33,340      (1,389)  31,951 
Corporate bonds  62,426   1,209   (204)  63,431 
Obligations of states and political subdivisions  107,885   4,103   (177)  111,811 
Total securities available for sale  328,963   7,711   (1,987)  334,687 
                 
December 31, 2019                
U.S. government agencies  32,621   31   (28)  32,624 
U.S. agency mortgage-backed securities  48,859   215   (448)  48,626 
U.S. agency collateralized mortgage obligations  60,124   323   (194)  60,253 
Asset-backed securities  23,646   7   (391)  23,262 
Corporate bonds  54,604   316   (40)  54,880 
Obligations of states and political subdivisions  86,216   2,245   (9)  88,452 
Total securities available for sale  306,070   3,137   (1,110)  308,097 

 

The amortized cost and fair value of securities available for sale at June 30, 2020, 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  38,520   38,932 
Due after one year through five years  111,575   113,440 
Due after five years through ten years  49,932   50,325 
Due after ten years  128,936   131,990 
Total debt securities  328,963   334,687 

 

Securities available for sale with a par value of $90,333,000 and $66,712,000 at June 30, 2020, and December 31, 2019, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $95,814,000 at June 30, 2020, and $68,732,000 at December 31, 2019.

 

9 

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 June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
  $  $  $  $ 
Proceeds from sales  16,409   18,401   43,818   28,648 
Gross realized gains  369   122   666   218 
Gross realized losses  (2)  (16)  (17)  (31)

 

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 six months of 2020 or 2019.

 

Information pertaining to securities with gross unrealized losses at June 30, 2020, and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES                  
(DOLLARS IN THOUSANDS)                  
  Less than 12 months  More than 12 months  Total 
     Gross     Gross     Gross 
  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  Value  Losses  Value  Losses  Value  Losses 
  $  $  $  $  $  $ 
As of June 30, 2020                        
U.S. government agencies  1,195   (1)        1,195   (1)
U.S. agency mortgage-backed securities  5,790   (15)  4,130   (52)  9,920   (67)
U.S. agency collateralized mortgage obligations  17,034   (149)        17,034   (149)
Asset-backed securities  18,904   (672)  13,047   (717)  31,951   (1,389)
Corporate bonds  11,548   (73)  2,903   (131)  14,451   (204)
Obligations of states & political subdivisions  10,873   (177)        10,873   (177)
                         
Total temporarily impaired securities  65,344   (1,087)  20,080   (900)  85,424   (1,987)
                         
                         
As of December 31, 2019                        
U.S. government agencies  1,222   (3)  15,971   (25)  17,193   (28)
U.S. agency mortgage-backed securities  5,040   (32)  24,027   (416)  29,067   (448)
U.S. agency collateralized mortgage obligations  17,457   (50)  17,512   (144)  34,969   (194)
Asset-backed securities  10,278   (169)  9,126   (222)  19,404   (391)
Corporate bonds  2,562   (4)  13,041   (36)  15,603   (40)
Obligations of states & political subdivisions  2,642   (9)        2,642   (9)
                         
Total temporarily impaired securities  39,201   (267)  79,677   (843)  118,878   (1,110)

 

In the debt security portfolio there were 48 positions that were carrying unrealized losses as of June 30, 2020. There were no instruments considered to be other-than-temporarily impaired at June 30, 2020.

 

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.

 

10 

Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

3.       Equity Securities

 

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at June 30, 2020 and December 31, 2019.

 

    Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
  $ $ $ $
June 30, 2020                
CRA-qualified mutual funds  6,148         6,148 
Bank stocks  829      (202)  627 
Total equity securities  6,977      (202)  6,775 
                 

 

    Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
  $ $ $ $
December 31, 2019                
CRA-qualified mutual funds  6,071         6,071 
Bank stocks  614   26   (3)  637 
Total equity securities  6,685   26   (3)  6,708 

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and six months ended June 30, 2020 and 2019, and the portion of unrealized gains and losses for the period that relates to equity investments held as of June 30, 2020 and 2019.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS 
(DOLLARS IN THOUSANDS)         
  Three Months Ended  Six Months Ended 
  June 30, 2020  June 30, 2019  June 30, 2020  June 30, 2019 
  $  $  $  $ 
                 
Net gains (losses) recognized in equity securities during the period  5   27   (225)  44 
                 
Less:  Net gains realized on the sale of equity securities during the period            
                 
Unrealized gains (losses) recognized in equity securities held at reporting date  5   27   (225)  44 

 

 

11 

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 June 30, 2020, and December 31, 2019:

 

LOAN PORTFOLIO      
(DOLLARS IN THOUSANDS)      
  June 30,  December 31, 
  2020  2019 
  $  $ 
Commercial real estate        
Commercial mortgages  125,925   120,212 
Agriculture mortgages  175,108   175,367 
Construction  20,285   16,209 
Total commercial real estate  321,318   311,788 
         
Consumer real estate (a)        
1-4 family residential mortgages  261,772   258,676 
Home equity loans  10,688   9,770 
Home equity lines of credit  69,507   70,809 
Total consumer real estate  341,967   339,255 
         
Commercial and industrial        
Commercial and industrial  129,459   58,019 
Tax-free loans  16,607   16,388 
Agriculture loans  21,581   20,804 
Total commercial and industrial  167,647   95,211 
         
Consumer  5,061   5,416 
         
Gross loans prior to deferred fees  835,993   751,670 
         
Deferred loan costs, net  (24)  1,948 
Allowance for loan losses  (10,770)  (9,447)
Total net loans  825,199   744,171 

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $187,258,000 and $154,577,000 as of June 30, 2020, and December 31, 2019, respectively.  

 

The largest movement within the Corporation’s loan portfolio since December 31, 2019 was the sharp growth in the commercial and industrial loan sector, which experienced a $71.4 million, or 123.1% increase. This was a direct result of the Small Business Administration’s new Paycheck Protection Program (PPP) established as part of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020, and by June 30, 2020 had approved over 950 applications that resulted in $76.1 million in PPP loan balances. The majority of these loans have been written with a two-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2020 with further declines during 2021.

 

12 

Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of June 30, 2020 and December 31, 2019. 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)

June 30, 2020 Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total 
  $  $  $  $  $  $  $ 
Grade:                            
Pass  123,203   159,455   20,285   119,227   16,607   19,192   457,969 
Special Mention  813   3,242      5,062      832   9,949 
Substandard  1,909   12,411      5,139      1,557   21,016 
Doubtful           31         31 
Loss                     
                             
    Total  125,925   175,108   20,285   129,459   16,607   21,581   488,965 

 

December 31, 2019 Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total 
  $  $  $  $  $  $  $ 
Grade:                            
Pass  117,875   158,896   16,209   52,028   16,388   18,530   379,926 
Special Mention  827   4,546      618      939   6,930 
Substandard  1,510   11,925      5,293      1,335   20,063 
Doubtful           80         80 
Loss                     
                             
    Total  120,212   175,367   16,209   58,019   16,388   20,804   406,999 

 

13 

Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Substandard loans increased by $953,000, or 4.8%, while special mention loans have increased by $3.0 million, or 43.6%, from December 31, 2019 to June 30, 2020. Substandard loans increased from $20.1 million to $21.0 million from December 31, 2019, to June 30, 2020 while special mention loans increased from $6.9 million to $9.9 million during this same period. The loan areas that experienced material changes in special mention and substandard loans were commercial and industrial, agricultural mortgages, and commercial mortgages. Under commercial and industrial loans, $4.4 million of pass-rated loans were transferred to special mention with $3.9 million of this amount consisting of loans to a commercial leasing company. Under agricultural mortgages, the changes in both substandard and special mention were caused by a number of unrelated borrowers experiencing grading changes or paying off. During the second quarter of 2020, a livestock operating farm with $1.3 million of balances was transferred into substandard from pass. Partially offsetting this, the Corporation received a $825,000 loan payoff on another real estate secured agricultural mortgage. There was also $745,000 of loans transferred into substandard from special mention in the first quarter of 2020. In addition to these loans, two other dairy farm loans primarily accounted for the remaining variance in substandard agricultural mortgages from December 31, 2019 to June 30, 2020. One dairy farmer with $1,130,000 of loans came off of substandard in the second quarter of 2020, while another dairy farmer with three loans totaling $778,000 was placed into substandard.

 

Two agricultural mortgages were primarily responsible for the $1.3 million reduction in special mention agricultural mortgages between December 31, 2019 and June 30, 2020. One was the $745,000 farm loan that was transferred from special mention to substandard in the first quarter of 2020. The other was a dairy farmer that sold out and paid off $730,000 of special mention agricultural mortgage loans in the second quarter of 2020. Lastly, under commercial mortgages, one residential investment property borrower with $443,000 of loans was placed on substandard in the first quarter of 2020. Note the sharp growth in commercial and industrial pass loans was a result of the introduction of the new PPP loans, which started in April 2020.

 

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 June 30, 2020 and December 31, 2019:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)  

June 30, 2020 1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total 
Payment performance: $  $  $  $  $ 
                
Performing  260,990   10,596   69,497   5,053   346,136 
Non-performing  782   92   10   8   892 
                     
   Total  261,772   10,688   69,507   5,061   347,028 

 

December 31, 2019 1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total 
Payment performance: $  $  $  $  $ 
                
Performing  257,374   9,678   70,799   5,412   343,263 
Non-performing  1,302   92   10   4   1,408 
                     
   Total  258,676   9,770   70,809   5,416   344,671 

 

14 

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 June 30, 2020 and December 31, 2019:

 

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 
June 30, 2020 Past Due  Past Due  Days  Due  Current  Receivable  Accruing 
  $  $  $  $  $  $  $ 
Commercial real estate                            
   Commercial mortgages        221   221   125,704   125,925    
   Agriculture mortgages  305         305   174,803   175,108    
   Construction  1,038         1,038   19,247   20,285    
Consumer real estate                            
   1-4 family residential mortgages  307      782   1,089   260,683   261,772   291 
   Home equity loans  2      92   94   10,594   10,688    
   Home equity lines of credit  9      10   19   69,488   69,507   10 
Commercial and industrial                            
   Commercial and industrial  23      521   544   128,915   129,459    
   Tax-free loans              16,607   16,607    
   Agriculture loans  47         47   21,534   21,581    
Consumer  6   8   8   22   5,039   5,061   8 
       Total  1,737   8   1,634   3,379   832,614   835,993   309 

 

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 
December 31, 2019 Past Due  Past Due  Days  Due  Current  Receivable  Accruing 
  $  $  $  $  $  $  $ 
Commercial real estate                            
   Commercial mortgages        228   228   119,984   120,212    
   Agriculture mortgages  962      1,070   2,032   173,335   175,367    
   Construction              16,209   16,209    
Consumer real estate                            
   1-4 family residential mortgages  2,254   161   1,302   3,717   254,959   258,676   807 
   Home equity loans  52      92   144   9,626   9,770    
   Home equity lines of credit  43      10   53   70,756   70,809   10 
Commercial and industrial                            
   Commercial and industrial  68      538   606   57,413   58,019    
   Tax-free loans              16,388   16,388    
   Agriculture loans  2         2   20,802   20,804    
Consumer  14   12   4   30   5,386   5,416   4 
       Total  3,395   173   3,244   6,812   744,858   751,670   821 

15 

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 June 30, 2020 and December 31, 2019:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

  June 30,  December 31, 
  2020  2019 
  $  $ 
       
Commercial real estate        
  Commercial mortgages  221   228 
  Agriculture mortgages     1,070 
  Construction      
Consumer real estate        
  1-4 family residential mortgages  491   495 
  Home equity loans  92   92 
  Home equity lines of credit      
Commercial and industrial        
  Commercial and industrial  521   538 
  Tax-free loans      
  Agriculture loans      
Consumer      
             Total  1,325   2,423 

 

As of June 30, 2020 and December 31, 2019, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and six months ended June 30, 2020 and June 30, 2019, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

  Three Months Ended June 30,  Six months ended June 30, 
  2020  2019  2020  2019 
  $  $  $  $ 
             
Average recorded balance of impaired loans  3,178   3,412   3,557   3,057 
Interest income recognized on impaired loans  18   11   43   22 

 

 

There were no loan modifications made during the first six months of 2020 that would be considered a troubled debt restructuring (TDR). Deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A modification of the payment terms to a loan customer are considered a TDR if a concession was made 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.

 

In the first quarter of 2019, a loan modification was made on a $718,000 agricultural mortgage which moved the timing of the annual principal payment and changed interest payments from monthly to annually. The farmer had suffered a fire loss in late 2018 impacting one year’s harvest. The principal and interest payment due date was reset to November 15, 2019, when it was paid. No other loans were modified during 2019.

 

Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance of these three TDR loans was $1,941,000 as of June 30, 2020. One of these TDR loans with a balance of $439,000 is also on nonaccrual and is included under 1-4 family residential mortgages shown in the nonaccrual table above. For both of these TDR loans the borrowers have a history of being delinquent. Management will continue to report these loans as TDR loans until they have been paid off or charged off.

16 

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 June 30, 2020, and for the six months ended June 30, 2020, and as of December 31, 2019:

 

IMPAIRED LOAN ANALYSIS          
(DOLLARS IN THOUSANDS)          
June 30, 2020 Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
  $  $  $  $  $ 
                
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  712   759      720    
    Agriculture mortgages  824   853      1,528   43 
    Construction               
Total commercial real estate  1,536   1,612      2,248   43 
                     
Commercial and industrial                    
    Commercial and industrial               
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial               
                     
Total with no related allowance  1,536   1,612      2,248   43 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  92   100   28   92    
    Agriculture mortgages  677   677   5   685    
    Construction               
Total commercial real estate  769   777   33   777    
                     
Commercial and industrial                    
    Commercial and industrial  521   543   31   532    
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  521   543   31   532    
                     
Total with a related allowance  1,290   1,320   64   1,309    
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  804   859   28   812    
    Agriculture mortgages  1,501   1,530   5   2,213   43 
    Construction               
Total commercial real estate  2,305   2,389   33   3,025   43 
                     
Commercial and industrial                    
    Commercial and industrial  521   543   31   532    
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  521   543   31   532    
                     
Total  2,826   2,932   64   3,557   43 

 

17 

Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS             
(DOLLARS IN THOUSANDS)             
December 31, 2019 Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
 
  $  $  $  $  $ 
                
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  724   765      859    
    Agriculture mortgages  1,912   1,928      1,903   43 
    Construction               
Total commercial real estate  2,636   2,693      2,762   43 
                     
Commercial and industrial                    
    Commercial and industrial               
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial               
                     
Total with no related allowance  2,636   2,693      2,762   43 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  92   100   49   93    
    Agriculture mortgages  718   718   60   760    
    Construction               
Total commercial real estate  810   818   109   853    
                     
Commercial and industrial                    
    Commercial and industrial  538   549   80   261    
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  538   549   80   261    
                     
Total with a related allowance  1,348   1,367   189   1,114    
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  816   865   49   952    
    Agriculture mortgages  2,630   2,646   60   2,663   43 
    Construction               
Total commercial real estate  3,446   3,511   109   3,615   43 
                     
Commercial and industrial                    
    Commercial and industrial  538   549   80   261    
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  538   549   80   261    
                     
Total  3,984   4,060   189   3,876   43 

  

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 and six months ended June 30, 2020:

 

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, 2019  4,319   2,855   1,784   41   448   9,447 
                         
    Charge-offs           (6)     (6)
    Recoveries  11      1         12 
    Provision  252   296   171   21   (390)  350 
                         
Balance - March 31, 2020  4,582   3,151   1,956   56   58   9,803 
                         
    Charge-offs           (10)     (10)
    Recoveries        1   1      2 
    Provision  356   146   175   5   293   975 
                         
Ending Balance - June 30, 2020  4,938   3,297   2,132   52   351   10,770 

 

During the six months ended June 30, 2020, management charged off $16,000 in loans while recovering $14,000 and added $1,325,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 3.3% as of June 30, 2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

 

During the six months ended June 30, 2020, net provision expense was recorded for all sectors. The higher provision was primarily caused by increasing the qualitative factors across all industry lines to various degrees as a result of the impact and effect from COVID-19 and the declining economic conditions. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2020, so the provision expense was primarily related to this change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the end of the second quarter of 2020 was slightly higher resulting in slightly more provision expense.

 

As of June 30, 2020, the Corporation’s total delinquencies were 0.41%, a decline from 0.91% at December 31, 2019. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group, which was at 1.05% as of December 31, 2019.

 

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.  In addition, the loan portfolio is sectored out into nine different categories to evaluate these qualitative factors.   A total score of the qualitative factors for each loan sector is calculated to utilize in the allowance for loan loss calculation.  The agricultural dairy sector carries the highest level of qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused a sharp decline in milk prices.

 

19 

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 six months ended June 30, 2019:

 

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, 2018  4,296   2,408   1,428   102   432   8,666 
                         
    Charge-offs           (17)     (17)
    Recoveries  44      13         57 
    Provision  148   (140)  128   16   28   180 
                         
Balance - March 31, 2019  4,488   2,268   1,569   101   460   8,886 
                         
    Charge-offs           (6)     (6)
    Recoveries  43      1   3      47 
    Provision  (114)  122   (204)  (22)  248   30 
                         
Balance - June 30, 2019  4,417   2,390   1,366   76   708   8,957 

 

During the six months ended June 30, 2019, management charged off $23,000 in loans while recovering $104,000 and added $210,000 to the provision. The unallocated portion of the allowance increased from 5.3% as of December 31, 2018, and 5.5% as of March 31, 2019, to 8.6% as of June 30, 2019.

 

During the six months ended June 30, 2019, net provision expense was recorded for the commercial real estate segment, while net credit provisions were recorded in the consumer real estate, commercial and industrial, and consumer segments. This was due to continued very low historical loss experience for these three segments. In the first half of 2019, management adjusted the qualitative factors across the loan portfolio to better reflect the forward risk in each loan segment. This resulted in a slightly larger allowance for commercial real estate loans and slightly lower allowances for consumer real estate, commercial and industrial, and consumer, while the unallocated portion of the allowance increased. The Corporation’s commercial real estate allocation for credit losses was reduced by $114,000 in the second quarter of 2019, influenced by a reduction in real estate secured agricultural delinquencies that declined materially since March 31, 2019. The allowance for credit losses on consumer real estate grew in the second quarter of 2019 relative to the sharper growth in this segment offset partially by lower delinquencies than March 31, 2019 but unchanged from the prior June 30, 2019. The Commercial and industrial allocation for credit losses was reduced by $204,000 in the second quarter of 2019 as delinquencies declined significantly.

 

20 

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 June 30, 2020 and December 31, 2019:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of June 30, 2020: Commercial Real
Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total 
  $  $  $  $  $  $ 
Allowance for credit losses:                        
Ending balance: individually evaluated                        
  for impairment  33      31         64 
Ending balance: collectively evaluated                        
  for impairment  4,905   3,297   2,101   52   351   10,706 
                         
Loans receivable:                        
Ending balance  321,318   341,967   167,647   5,061       835,993 
Ending balance: individually evaluated                        
  for impairment  2,305      521          2,826 
Ending balance: collectively evaluated                        
  for impairment  319,013   341,967   167,126   5,061       833,167 

 

 

As of December 31, 2019: Commercial Real
Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total 
  $  $  $  $  $  $ 
Allowance for credit losses:                        
Ending balance: individually evaluated                        
  for impairment  109      80         189 
Ending balance: collectively evaluated                        
  for impairment  4,210   2,855   1,704   41   448   9,258 
                         
Loans receivable:                        
Ending balance  311,788   339,255   95,211   5,416       751,670 
Ending balance: individually evaluated                        
  for impairment  3,446      538          3,984 
Ending balance: collectively evaluated                        
  for impairment  308,342   339,255   94,673   5,416       747,686 

 

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.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 June 30, 2020, and December 31, 2019, 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)            
  June 30, 2020 
  Level I  Level II  Level III  Total 
  $  $  $  $ 
             
U.S. government agencies     8,379      8,379 
U.S. agency mortgage-backed securities     72,553      72,553 
U.S. agency collateralized mortgage obligations     46,562      46,562 
Asset-backed securities     31,951      31,951 
Corporate bonds     63,431      63,431 
Obligations of states & political subdivisions     111,811      111,811 
Equity securities  6,775         6,775 
                 
Total securities  6,775   334,687      341,462 

 

 

On June 30, 2020, 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 June 30, 2020, the CRA fund investments had a $6,148,000 book and fair market value and the bank stock portfolio had a book value of $829,000, and fair market value of $627,000.

 

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.

22 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS            
(DOLLARS IN THOUSANDS)            
  December 31, 2019 
  Level I  Level II  Level III  Total 
  $  $  $  $ 
             
U.S. government agencies     32,624      32,624 
U.S. agency mortgage-backed securities     48,626      48,626 
U.S. agency collateralized mortgage obligations     60,253      60,253 
Asset-backed securities     23,262      23,262 
Corporate bonds     54,880      54,880 
Obligations of states & political subdivisions     88,452      88,452 
Equity securities  6,708         6,708 
                 
Total securities  6,708   308,097      314,805 

 

On December 31, 2019, 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, 2019, the CRA fund investments had a $6,071,000 book and market value and the bank stocks had a book value of $614,000 and a market value of $637,000.

 

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 June 30, 2020 and December 31, 2019, by level within the fair value hierarchy:

23 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 

  June 30, 2020 
  Level I  Level II  Level III  Total 
  $  $  $  $ 
Assets:                
Impaired Loans $  $  $2,762  $2,762 
Total $  $  $2,762  $2,762 

 

 

  December 31, 2019 
  Level I  Level II  Level III  Total 
  $  $  $  $ 
Assets:                
Impaired Loans $  $  $3,795  $3,795 
Total $  $  $3,795  $3,795 

 

The Corporation had a total of $2,826,000 of impaired loans as of June 30, 2020, with $64,000 of specific allocation against these loans and $3,984,000 of impaired loans as of December 31, 2019, with $189,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

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:

24 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS  
(DOLLARS IN THOUSANDS)          
  June 30, 2020  
  Fair Value Valuation Unobservable Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans  2,762 Appraisal of Appraisal -20% (-20%)  
    collateral (1) adjustments (2)    
      Liquidation -10% (-10%)  
      expenses (2)    

 

  December 31, 2019  
   Fair Value  Valuation Unobservable  Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans 3,795 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.    

25 

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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 June 30, 2020 and December 31, 2019:

 

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

(DOLLARS IN THOUSANDS)

 

  June 30, 2020
      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  61,224   61,224   61,224       
Regulatory stock  6,942   6,942   6,942       
Loans held for sale  2,295   2,295   2,295       
Loans, net of allowance  825,199   833,431         833,431 
Mortgage servicing assets  863   898         898 
Accrued interest receivable  4,164   4,164   4,164       
Bank owned life insurance  29,214   29,214   29,214       
                     
Financial Liabilities:                    
Demand deposits  466,392   466,392   466,392       
Interest-bearing demand deposits  41,083   41,083   41,083       
NOW accounts  104,594   104,594   104,594       
Money market deposit accounts  123,212   123,212   123,212       
Savings accounts  246,763   246,763   246,763       
Time deposits  125,870   128,724         128,724 
     Total deposits  1,107,914   1,110,768   982,044      128,724 
                     
Long-term debt  65,072   61,612         61,612 
Accrued interest payable  410   410   410       

 

26 

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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, 2019
      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  41,053   41,053   41,053       
Regulatory stock  7,291   7,291   7,291       
Loans held for sale  2,342   2,342   2,342       
Loans, net of allowance  744,171   759,011         759,011 
Mortgage servicing assets  892   1,049         1,049 
Accrued interest receivable  3,768   3,768   3,768       
Bank owned life insurance  28,818   28,818   28,818       
                     
Financial Liabilities:                    
Demand deposits  363,857   363,857   363,857       
Interest-bearing demand deposits  25,171   25,171   25,171       
NOW accounts  96,941   96,941   96,941       
Money market deposit accounts  141,649   141,649   141,649       
Savings accounts  211,285   211,285   211,285       
Time deposits  135,185   136,781         136,781 
     Total deposits  974,088   975,684   838,903      136,781 
                     
Short-term borrowings  200   200   200       
Long-term debt  77,872   76,825         76,825 
Accrued interest payable  521   521   521       

 

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 June 30, 2020, firm loan commitments were $64.0 million, unused lines of credit were $305.4 million, and open letters of credit were $8.8 million. The total of these commitments was $378.2 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.

 

27 

Index 

 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

7. Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income for the six months ended June 30, 2020 and 2019 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)  

  Unrealized
  Gains (Losses)
  on Securities
  Available-for-Sale
  $
Balance at December 31, 2019  1,600 
  Other comprehensive loss before reclassifications  (274)
  Amount reclassified from accumulated other comprehensive income  (223)
Period change  (497)
     
Balance at March 31, 2020  1,103 
  Other comprehensive income before reclassifications  3,709 
  Amount reclassified from accumulated other comprehensive income  (290)
Period change  3,419 
     
Balance at June 30, 2020  4,522 
     
Balance at December 31, 2018  (5,678)
  Other comprehensive income before reclassifications  2,553 
  Amount reclassified from accumulated other comprehensive income  (64)
Period change  2,489 
     
Balance at March 31, 2019  (3,189)
  Other comprehensive income before reclassifications  3,571 
  Amount reclassified from accumulated other comprehensive income  (84)
Period change  3,487 
     
Balance at June 30, 2019  298 

 

(1) All amounts are net of tax.  Related income tax expense or benefit is calculated using a Federal income tax rate of 21%.

(2) Amounts in parentheses indicate debits.   

 

28 

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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 June 30,    
  2020 2019   Affected Line Item in the
  $ $   Consolidated Statements of Income
Securities available-for-sale:        
  Net securities gains,  367  106   Gains on the sale of
           reclassified into earnings              debt securities, net
     Related income tax expense (77) (22)   Provision for federal income taxes
  Net effect on accumulated other comprehensive        
     income (loss) for the period 290 84    

 

(1) Amounts in parentheses indicate debits.

  

 

  Amount Reclassified from    
  Accumulated Other Comprehensive    
  Income (Loss)    
  For the Six Months    
  Ended June 30,    
  2020 2019   Affected Line Item in the
  $ $   Consolidated Statements of Income
Securities available-for-sale:        
  Net securities gains,  649 187   Gains on the sale of
           reclassified into earnings              debt securities, net
     Related income tax expense (136) (39)   Provision for federal income taxes
  Net effect on accumulated other comprehensive        
     income (loss) for the period 513 148    

 

(1) Amounts in parentheses indicate debits.  

 

8. Leases

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Corporation adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Corporation is the lessee.

 

All of these leases in which the Corporation is the lessee are comprised of real estate property for branches and office space with terms extending through 2026. All of the Corporation’s leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s Consolidated Balance Sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance Sheets as a right-of use (“ROU”) asset and a corresponding lease liability.

 

The following table represents the Consolidated Balance Sheet classification of the Corporation’s ROU assets and lease liabilities.

29 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Lease Consolidated Balance Sheets Classification      
(Dollars in Thousands) Classification June 30, 2020 December 31, 2019
Lease Right-of-Use Assets      
       
    Operating lease right-of use assets Other Assets $819   908 
           
 Lease Liabilities          
    Operating lease liabilties Other Liabilities $828   916 

 

 

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to determine the present value of the minimum lease payments. The Corporation’s lease agreements often include one or more options to renew at the Corporation’s discretion. If at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As the rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

 

    June 30, 2020 December 31, 2019
Weighted-average remaining lease term            
    Operating leases      4.8 years  5.3 years
 Weighted-average discount rate          
    Operating leases      3.10%  3.09%

 

The following table represents lease costs and other lease information. As the Corporation elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

 

Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2020 were as follows:

 

Lease Payment Schedule  
(Dollars in Thousands) Operating Leases
Twelve Months Ended:    
    June 30, 2021 $202 
    June 30, 2022  197 
    June 30, 2023  150 
    June 30, 2024  155 
    June 30, 2025  155 
Thereafter  35 
Total Future Minimum Lease Payments  894 
Amounts Representing Interests  (66)
Present Value of Net Future Minimum Lease Payments $828 

 

30 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

9. Change in Capital Structure

 

On April 17, 2019 ENB Financial Corp announced the Board of Directors declared a two-for-one stock split of the Corporation’s issued and outstanding common stock pursuant to which one (1) additional share of common stock was issued for each share of common stock held by shareholders of record as of the close of business on May 31, 2019. The additional shares were issued on June 28, 2019. The stock split was effected pursuant to articles of amendment to the articles of incorporation to reduce the par value of the common stock from $0.20 to $0.10 and increase the authorized shares of common stock proportionately from 12,000,000 to 24,000,000. Per share data reflected on the Corporation’s consolidated statements of income are restated as if the stock split had occurred at the beginning of the earliest period presented.

 

 

10. Risks and Uncertainties

 

COVID-19 Update

 

The following table provides information with respect to our commercial loans by type at June 30, 2020.

 

At Risk

 

(Dollars in Thousands)   # $ $ %
    Number Total Principal of Total
    of Loan Balance Loan
Loan Type   Loans Exposure of Loans Balance
  Lessors of Nonresidential Buildings    151   62,901   57,085   6.83% 
  Lessors of Residential Buildings    225   44,104   39,395   4.71% 
  Specialized Freight    30   16,049   11,733   1.40% 
  Residential Remodelers    99   10,256   4,158   0.50% 
  New Single Family Housing Construction    58   8,965   4,189   0.50% 
  Passenger Car Leasing    136   8,808   8,789   1.05% 
  Hotels    12   7,843   3,138   0.38% 
  Religious Organizations    58   7,365   6,269   0.75% 
  Car Washes    11   6,959   5,286   0.63% 
  Concrete & Structural Contrators    27   6,875   4,767   0.57% 
  Other    71   14,945   8,597   1.03% 
                   
Totals    878   195,070   153,406   18.35% 

 

The Corporation has a diversified commercial loan portfolio that is consistent with the diversified economies of Lancaster, Lebanon and Berks Counties in Pennsylvania, the Corporation’s market area. The above chart is focused on loan types that are commonly known to be at risk or negatively impacted by the COVID-19 pandemic and its effects. The Corporation’s largest exposure to at risk loan types are loans on leased commercial property and loans on residential investment properties. The Corporation has a relatively low exposure to the hospitality industry, including restaurants. Single loan type exposures falling under the other category do not exceed 0.5% of total loans and include loan types such as site preparation contractors, fuel dealers, and recreational centers. The above levels of exposure to these at risk loan types have not had significant movements from 2019 to 2020. Management does not expect any significant movements in these exposures going forward.

 

Paycheck Protection Program (PPP)

 

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, providing over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was authorized to originate PPP loans.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In terms of qualifying for a PPP loan, an eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10 million. The PPP loans have the following terms: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is eligible to be reduced by the amount of loan forgiveness available under the PPP, provided the employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses such as utilities.

 

In the initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the end of April. Congress then passed an additional allocation of funds for the PPP loans, allowing a second round of applications to begin. As of June 30, 2020, the Corporation had approved and originated 951 PPP loans totaling $79,710,000 with a current balance of $76,068,000. Management’s focus has been to serve the customers and market area that the Corporation serves. Subsequent to June 30, 2020, but prior to the filing of this report, the Corporation has approved and originated 990 PPP loans totaling $80,821,000 with a current balance of $77,180,000.

 

In accordance with the SBA terms and conditions on these PPP loans, the Corporation expects to receive approximately $3.25 million in fees associated with the processing of these loans. Management received the first $3.15 million in fees in June associated with processing the first $76 million of PPP loans submitted, however all fee income is being deferred over the expected life of each PPP loan. Management will receive the remainder of the fee income as much smaller final batches of PPP loans are processed. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the vast majority of the Corporation’s PPP loans will carry a two year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. It is expected that the vast majority of these PPP borrowers will provide the necessary support in order to have their principal balances forgiven in a period of time significantly shorter than the two-year life of the loan.

 

COVID-19 Loan Forbearance Programs

 

As of June 30, 2020, over 300 of the Corporation’s customers had requested payment deferrals or payments of interest only on loans totaling $61.7 million, or 7.4% of the total loan portfolio. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

 

Of the $61.7 million of loan balances with payments being deferred, $49.5 million, or 77.0% were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $11.9 million of residential mortgage deferrals and $200,000 of consumer loan deferrals. The vast majority all of the COVID-19 loan payment deferrals were for a 90-day period.

 

As of June 30, 2020, the Corporation’s delinquent, non-performing, and impaired loans were not yet materially impacted by the rapidly declining economic conditions brought on by COVID-19. However, due to the magnitude of this economic interruption, management does anticipate that these levels will rise in the third quarter of 2020, and will likely show further deterioration in the remainder of 2020 and into 2021. The significance of a credit deterioration with depend on the length of time business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management has already significantly increased the Corporation’s provision for loan losses in the second quarter of 2020, as qualitative factors have been increased based on predicted prolonged economic weakness, which is expected to impact more and more borrowers.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

11. Recently Issued Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. 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 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.

 

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

 

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Corporation qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction. The Update also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, accounting for tax law changes and year-to-date losses in interim periods, and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Corporation’s financial statements.

 

In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. 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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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Corporation’s financial statements.

 

 

 

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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 2019 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 economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus (COVID-19) and government and business responses thereto, 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
·Possible changes to the capital and liquidity requirements and other regulatory pronouncements, regulations and rules
·Large scale global disruptions such as pandemics, terrorism, trade wars, and armed conflict.
·Local 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 first six months of 2020 were impacted by a number of unprecedented items caused by the onset of the COVID-19 pandemic. The spread of COVID-19 quickly became global and impacted the global economy. This impact was felt rather quickly due to China’s large role in the world economy, second in GDP but first in terms of supply chain impact for basic goods. The immediate impact and forward risk posed by the pandemic caused the Federal Reserve to take the unusual step of reducing the Federal Funds rate by 50 basis points to 1.25% on March 3, 2020, at a special Fed meeting ahead of the regularly scheduled March 18, 2020 meeting. On March 11, 2020, the World Health Organization (WHO) recognized COVID-19 as a pandemic. The quick further expansion of the pandemic then caused the Federal Reserve to take an unprecedented step of a second special meeting on Sunday afternoon of March 15, 2020, to further reduce the Federal Funds rate 100 basis points to 0.25%. This move took the Federal Funds rate to the same historic low of 0.25% that occurred due to the Financial Crisis of 2008. On March 15, 2020, the Fed also reduced the Discount Window rate by 150 basis points, which took this rate down to 0.25%. This move importantly gave all banks easy access to very low cost funds. On March 16, 2020, the Fed also announced action to inject more liquidity into the financial system by purchasing up to $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities. All major stock exchanges experienced dramatic sell-offs. The DOW which had peaked at 29,568 in February, closed on Friday, March 20, 2020 at 19,174, down 10,394 points, or 35%. NASDAQ was down 30%, while the S&P 500 was down 32%. Even with a significant equity market recovery since the initial impact of COVID-19, economic conditions remain uncertain. With the closing of non-essential businesses throughout various part of the country and a continued impact to consumer spending, it is anticipated that the financial impact will be long-term. The U.S. Government passed a massive Coronavirus Relief Bill that included direct small business aid for employers with fewer than 500 employees; direct deposit stimulus payments to American households; enhanced unemployment compensation benefits; and direct aid to hospitals and health care providers. Additional federal and local government support has helped to sustain businesses and individuals in the short-term, but once these programs have ended, the financial impact will be felt more fully.

 

The economic impact of COVID-19 had an impact on the Corporation’s financial results for the first six months of 2020 but is currently expected to have much more measurable results into the future. The Corporation recorded net income of $3,599,000 and $5,764,000 for the three and six-month periods ended June 30, 2020, a 16.5% and 1.3% increase from the $3,089,000 and $5,692,000 earned during the same periods in 2019. The earnings per share (EPS), basic and diluted, were $0.64 for the three months ended June 30, 2020, and $1.03 for the six months ended June 30, 2020, compared to $0.54 and $1.00 for the same periods in 2019, a 18.5% and 3.0% increase, respectively. The increase in the Corporation’s 2020 earnings was caused primarily by an increase in mortgage gains and net interest income, partially offset by a significantly higher provision for loan losses. The larger percentage increases in EPS over the percentage increase in net income are the result of a reduction in average shares outstanding.

 

The Corporation’s NII increased by $311,000, or 3.4%, and $544,000, or 3.0%, for the three and six months ended June 30, 2020, compared to the same periods in 2019. The increase in NII primarily resulted from an increase in interest and fees on loans of $327,000, or 3.9%, and $756,000, or 4.6%, for the three and six months ended June 30, 2020, compared to the same periods in the prior year. The increase in interest and fees on loans was partially offset by decreases of $141,000, or 7.6%, and $276,000, or 7.3%, on interest earned on securities for the three and six months ended June 30, 2020. The Corporation’s interest expense on deposits and borrowings decreased by $305,000, or 23.4%, and $213,000, or 8.6%, for the three and six-month periods ended June 30, 2020, compared to the same periods in 2019.

 

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ENB FINANCIAL CORP
Management’s Discussion and Analysis

The Corporation recorded provision expense of $975,000 for the second quarter of 2020, and $1,325,000 for the year-to-date period, compared to $30,000 and $210,000 for the three and six-month periods in 2019. This represents an increase in quarterly expense of $945,000 and an increase in year-to-date expense of $1,115,000. Provision expense was impacted by economic factors caused by COVID-19, which could have a longer-term impact on asset quality. The gains from the sale of debt securities were $367,000 for the three months ended June 30, 2020, and $649,000 for the six months ended June 30, 2020, compared to gains of $106,000 and $187,000 for the three and six months ended June 30, 2019. Market interest rates were lower in 2020, making it more conducive to achieving gains from the sale of securities. For the six months ended June 30, 2020, there were unrealized losses of $225,000 on the Corporation’s portfolio of equity securities that consists of stocks held in other banks. This loss flows through the income statement and was the result of the devaluation of bank stocks given the economic current environment during the period that began with the COVID-19 pandemic. For the six months ended June 30, 2019, there was an unrealized gain of $44,000 on this portfolio, resulting in a negative impact to income of $269,000 for the first six months of 2020 compared to the prior year. The gain on the sale of mortgages increased by $1,275,000, or 307.2%, and $1,467,000, or 192.0%, for the three and six-month periods ended June 30, 2020, compared to the prior year’s periods. The volume of mortgages sold was significantly higher during the first six months of 2020 compared to the same period in the prior year due to the very low interest rate environment, which caused a surge in refinancing activity. Total operating expenses increased by $27,000, or 0.3%, and $855,000, or 5.2%, for the three and six months ended June 30, 2020, compared to the same periods in 2019. The larger increase in operating expenses for the six month period was driven by higher salary costs in the first quarter related payment of a 2019 performance bonus as well as increases in profession services and other expenses.

 

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 months ended June 30, 2020, compared to the same period in the prior year, but decreased for the year-to-date period due to a much larger balance sheet and only slightly higher earnings.

 

Key Ratios  Three Months Ended  Six Months Ended
   June 30,  June 30,
   2020  2019  2020  2019
             
Return on Average Assets   1.14%   1.11%   0.95%   1.04%
Return on Average Equity   12.31%   11.48%   9.86%   10.87%

 

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

 

NII represents the largest portion of the Corporation’s operating income. In the first six months of 2020, NII generated 73.2% of the Corporation’s revenue stream, which consists of net interest income and non-interest income, compared to 77.4% in the first six months of 2019. 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 $197,000 and $370,000 for the three and six months ended June 30, 2020, compared to $190,000 and $392,000 for the same periods in 2019.

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ENB FINANCIAL CORP
Management’s Discussion and Analysis

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
   $   $   $   $ 
Total interest income   10,468    10,462    20,955    20,624 
Total interest expense   999    1,304    2,270    2,483 
                     
Net interest income   9,469    9,158    18,685    18,141 
Tax equivalent adjustment   197    190    370    392 
                     
Net interest income (fully taxable equivalent)   9,666    9,348    19,055    18,533 

 

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. For the first half of 2019 the Federal funds rate remained at 2.50%, however, in the second half of 2019 the Federal Reserve decreased rates three times, by 25 basis points each, beginning in July of 2019. By December 31, 2019, the Fed funds rate stood at 1.75%. On March 3, 2020, the Federal Reserve dropped the Fed funds rate by 50 basis points to 1.25%, and on March 15, 2020, the Fed dropped the rate by 100 basis points to 0.25%. These rate drops were in response to the COVID-19 global pandemic.

 

The expectations for the remainder of the year are that there will be no further rate drops or increases. Management anticipates a reduction in interest income in the remaining quarters of 2020 as a result of the significant Federal Reserve rate decreases. All of the Corporation’s Prime-based floating rate loans reset lower in March, while floating rate securities reset when the quarterly reset dates were reached. Asset yields are much lower going into the second half of 2020 and interest income will become harder to grow without significant growth in earning assets.

 

The shape of the U.S. Treasury curve also directly impacts the Corporation’s net interest income. The U.S. Treasury curve was flat coming into 2020, and after the rapid decline in short and long-term rates driven by the COVID-19 environment and the Federal Reserve rate drops, the yield curve remained flat, but rates also reached historic lows. This is detrimental to banks as funding sources are typically shorter terms than the assets invested in and asset yields are much lower than they were even a year ago. A sharper yield curve is beneficial to financial institutions as a larger spread can be made on the asset versus the liability utilized. For the first two months of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged around 21 basis points. For the month of March, this spread averaged 42 basis points but the Treasury rates were at much lower levels. For the second quarter of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged 49 basis points. These spreads are very low from a historical perspective.

 

The combination of lower rates, and a generally flat yield curve out to longer rates, makes it more difficult for the Corporation to generate higher net interest income. The Corporation’s net interest margin declined slightly in the first quarter of 2020 and declined more significantly in the second quarter of 2020. It is likely the net interest margin will continue to decline through the remainder of 2020. Any increase in net interest income will need to come from growth of interest earning assets.

 

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 was 5.50% as of June 30, 2019, 4.75% as of December 31, 2019, and 3.25% as of June 30, 2020, after the 150 basis points of Federal Reserve rate drops in March of 2020. The Corporation’s Prime-based loans, including home equity lines of credit and some variable rate commercial loans, reprice a day after the Federal Reserve rate movement.

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Index 

 

ENB FINANCIAL CORP
Management’s Discussion and Analysis

As a result of the significant growth of the loan portfolio and savings on the interest expense side, the Corporation’s NII on a tax equivalent basis has been increasing. Despite a lower net interest margin, the Corporation still achieved a slightly higher NII in the second quarter of 2020 and for the first half of 2020 compared to the same periods in the prior year. The net interest margin began decreasing on a quarterly basis in the latter part of 2019 after the Federal Reserve dropped rates by 75 basis points. This margin decreased slightly in the first quarter of 2020 and more significantly in the second quarter of 2020 with the drastic rate drops in March. The Corporation’s NII on a tax-equivalent basis increased for the three months ended June 30, 2020, by $318,000, or 3.4%, over the same period in 2019. For the six months ended June 30, 2020, NII increased $522,000, or 2.8%, compared to the first six months of 2019. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given Federal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any improvements in NII will be driven primarily by loan growth since asset yields will continue to decline.

 

The Corporation has maintained a low average cost of funds over the past few years but funding costs had increased slightly throughout the first part of 2019 before the Fed rate drops. Deposit rates had been increasing slightly and the cost of borrowings was up due to a higher rate environment. However, with the recent steep drops in market rates, funding costs are once again declining and the Corporation is achieving savings on both the deposit and borrowings side. With a very low Prime rate projected throughout the remainder of 2020, the Corporation’s asset yields will see a decrease, but helping to offset this decline will be a stabilization of costs on the interest expense side. The recent sharp Federal Reserve rate decreases have already reduced the Corporation’s NII and net interest margin (NIM), primarily because of the variable rate portion of the loan portfolio, which resets every time the Prime rate changes. Variable rate loans have averaged between 17% and 20% of the loan portfolio for the first half of 2020.

 

Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With lower Treasury rates in the first six months of 2020 compared to the same period in 2019, security reinvestment has generally been occurring at lower yield levels. Because of the lower market interest rates and very flat yield curve, it is difficult to achieve substantially higher yields in the securities portfolio but there have been some pockets of opportunities to reposition the portfolio by selling securities at gains and reinvesting in slightly higher yielding instruments to benefit the Corporation’s earnings going forward.

 

The Corporation’s loan portfolio yield has decreased from the prior years’ period as the variable rate portion of the loan portfolio repriced lower with each Federal Reserve rate movement and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation’s commercial Prime-based loans were priced at the Prime rate, which was 4.75% to start 2020, and then 4.25% as of March 4, 2020, and 3.25% as of March 16, 2020 through June 30, 2020. The pricing for the most typical five-year fixed rate commercial loans is currently slightly higher than the Prime rate. With the significant March Federal Reserve rate reductions, adding variable rate loans to the portfolio means they will be priced at very low rates to start but can reprice lower if the Federal Reserve lowers rates any further and would reprice higher if the Federal Reserve would increase rates. There are elements of the Corporation’s Prime-based commercial loans priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be influenced by local competition.

 

Mid-term and long-term interest rates on average were much lower in 2020 compared to 2019. The average rate of the 10-year U.S. Treasury was 1.02% in the first six months of 2020 compared to 2.49% in the first six months of 2019, and it stood at 0.66% on June 30, 2020, compared to 2.00% on June 30, 2019. The slope of the yield curve has been compressed throughout 2019 and 2020. As of March 31, 2019, the U.S. Treasury curve was inverted with the 10-year U.S. Treasury rate 50 basis points lower than the Fed funds rate. As of June 30, 2020, the 10-year U.S. Treasury rate was only 41 basis points higher than the Fed funds rate. 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 1.88% in the first six months of 2020 and 2.79% in the first six months of 2019, and as low as 0.54% in 2020, and 2.00% in 2019.

40 

Index 

 

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The Corporation’s cost of funds remained low and stable through the first quarter of 2020 and then decreased through the second quarter of 2020 influenced by lower costs on deposits, but offset partially by elevated costs on borrowings with $154,000 of prepayment penalties recorded on FHLB long-term advances. Management expects the cost of funds will decline during the remainder of 2020 as deposits continue to reprice to lower rates and the new FHLB advances initiated in the first half of 2020 are at lower rates than those that were paid off early. Core deposit interest rates were reduced six times throughout the first half of 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. Management does not anticipate significant deposit rate movements in the remainder of the year as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest bearing accounts while making larger rate increases in the pricing of new or reissued time deposits. 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 refinanced the maturing or paid off borrowings at lower rates in 2020, so the interest expense on borrowings will decline moving forward.

 

Management currently anticipates that the overnight interest rate and Prime rate will stay at the current level for the remainder of 2020. It is likely that mid and long-term U.S. Treasury rates will remain relatively suppressed throughout the remainder of the year. This very low and flat yield curve makes it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. However, the recent decline in rates provides the ability to hold deposit rates at current levels to help to mitigate the lower interest income.

 

The following table provides an analysis of year-to-date changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.

 

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Index 

 

ENB FINANCIAL CORP
Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

   Six Months Ended June 30,  Six Months Ended June 30,
   2020 vs. 2019  2019 vs. 2018
   Increase (Decrease)  Increase (Decrease)
   Due To Change In  Due To Change In
         Net        Net
   Average  Interest  Increase  Average  Interest  Increase
   Balances  Rates  (Decrease)  Balances  Rates  (Decrease)
   $  $  $  $  $  $
INTEREST INCOME                              
                               
Interest on deposits at other banks   59    (144)   (85)   (54)   (27)   (81)
                               
Securities available for sale:                              
Taxable   217    (477)   (260)   (29)   280    251 
Tax-exempt   (3)   (49)   (52)   (315)   5    (310)
Total securities   214    (526)   (312)   (344)   285    (59)
                               
Loans   1,779    (1,039)   740    2,270    970    3,240 
Regulatory stock   28    (62)   (34)   21    22    43 
                               
Total interest income   2,080    (1,771)   309    1,893    1,250    3,143 
                               
INTEREST EXPENSE                              
                               
Deposits:                              
Demand deposits   51    (514)   (463)   54    594    648 
Savings deposits   6    (22)   (16)   2        2 
Time deposits   (31)   125    94    (52)   148    96 
Total deposits   26    (411)   (385)   4    742    746 
                               
Borrowings:                              
Total borrowings   62    110    172    5    116    121 
                               
Total interest expense   88    (301)   (213)   9    858    867 
                               
NET INTEREST INCOME   1,992    (1,470)   522    1,884    392    2,276 

 

 

During the first six months of 2020, the Corporation’s NII on an FTE basis increased by $522,000, or 2.8%, over the same period in 2019. Total interest income on an FTE basis for the six months ended June 30, 2020, increased $309,000, or 1.5%, from 2019, while interest expense decreased $213,000, or 8.6%, for the six months ended June 30, 2020, compared to the same period in 2019. The FTE interest income from the securities portfolio decreased by $312,000, or 7.5%, while loan interest income increased $740,000, or 4.5%. During the first six months of 2020, additional loan volume caused by loan growth added $1,779,000 to net interest income, but the lower yields caused a $1,039,000 decrease, resulting in a total increase of $740,000. Higher balances in the securities portfolio caused an increase of $214,000 in NII, while lower yields on securities caused a $526,000 decrease, resulting in a net decrease of $312,000.

 

The average balance of interest bearing liabilities increased by 6.2% during the six months ended June 30, 2020, compared to the prior year driven by growth in deposit balances. The lower cost on deposit accounts resulted in a decrease in interest expense. Lower rates on demand and savings deposits partially offset by higher rates on time deposits caused a $411,000 decrease in interest expense while slightly higher balances of demand and savings deposits caused an increase in expense of $26,000 resulting in a total decrease of $385,000.

 

Out of all the Corporation’s deposit types, interest-bearing demand deposits reprice the most rapidly, as nearly all accounts are immediately affected by rate changes. Time deposit balances decreased resulting in a $31,000 reduction to expense, and time deposits repricing to higher interest rates increased interest expense by $125,000, causing a net total increase of $94,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

 

The average balance of outstanding borrowings increased by 7.6% from the prior year, which resulted in an increase in interest expense of $62,000. Although interest rates were lower in the first half of 2020 compared to the prior year, the Corporation paid off a number of long-term advances with prepayment penalties, which increased interest expense by $110,000. The aggregate of these amounts was an increase in interest expense of $172,000 related to total borrowings.

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Index 

 

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The following tables show a more detailed analysis of net interest income on an FTE basis with all the major elements of the Corporation’s 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 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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Index 

 

ENB FINANCIAL CORP
Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 

   For the Three Months Ended June 30,
   2020  2019
         (c)        (c)
   Average     Annualized  Average     Annualized
   Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate
   $  $  %  $  $