Company Quick10K Filing
Quick10K
ENB Financial
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-17 Other Events, Exhibits
8-K 2019-07-17 Earnings, Exhibits
8-K 2019-06-03 Amend Bylaw, Exhibits
8-K 2019-05-15 Officers, Exhibits
8-K 2019-05-07 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-04-17 Other Events, Exhibits
8-K 2019-04-12 Earnings, Exhibits
8-K 2019-04-01 Officers, Other Events, Exhibits
8-K 2019-02-20 Other Events, Exhibits
8-K 2019-01-31 Officers
8-K 2019-01-16 Other Events, Exhibits
8-K 2019-01-15 Earnings, Exhibits
8-K 2018-10-18 Officers, Exhibits
8-K 2018-10-17 Other Events, Exhibits
8-K 2018-10-15 Earnings, Exhibits
8-K 2018-07-19 Earnings, Exhibits
8-K 2018-07-18 Other Events, Exhibits
8-K 2018-05-08 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-04-18 Other Events, Exhibits
8-K 2018-04-16 Earnings, Exhibits
8-K 2018-02-02 Other Events
8-K 2018-01-18 Earnings, Exhibits
8-K 2018-01-17 Other Events, Exhibits
LAUR Laureate Education 3,680
BID Sotheby's 1,840
CAL Caleres 1,090
IPOA Social Capital Hedosophia 712
PKE Park Electrochemical 330
CHNR China Natural Resources 45
PNAT Pura Naturals 0
PGUS Progreen 0
RGFR Rangeford Resources 0
THMG Thunder Mountain Gold 0
ENBP 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities - Nothing To Report
Item 4. Mine Safety Disclosures - Not Applicable
Item 5. Other Information - Nothing To Report
Item 6. Exhibits:
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

ENB Financial Earnings 2019-03-31

ENBP 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q-21982_enbf.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2019

OR

 

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

 

For the transition period from _______________________ to _______________________

 

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

Pennsylvania 000-53297 51-0661129
(State or Other Jurisdiction of Incorporation) (Commission File Number) (IRS Employer Identification No)

 

 

31 E. Main St., Ephrata, PA       17522-0457        
(Address of principal executive offices) (Zip Code)  

 

 

Registrant’s telephone number, including area code           (717) 733-4181          

 

Former name, former address, and former fiscal year, if changed since last report           Not Applicable          

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes x          No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer o Accelerated filer o
  Non-accelerated filer o Smaller reporting company x
      Emerging growth company o

 

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

 

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

Yes o          No x

 

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

1 

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 1, 2019, the registrant had 5,694,452 shares of $0.10 (par) Common Stock outstanding.

 

 

 

 

2 

 

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2019

 

Part I – FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
  Consolidated Balance Sheets at March 31, 2019 and 2018, and December 31, 2018 4
       
  Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 5
       
  Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 6
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019, and 2018 (Unaudited) 7
       
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 8
       
  Notes to the Unaudited Consolidated Interim Financial Statements 9-31
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32-64
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 65-70
       
  Item 4.   Controls and Procedures 71
       
       
       
Part II – OTHER INFORMATION 72
       
  Item 1. Legal Proceedings 72
       
  Item 1A. Risk Factors 72
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 72
       
  Item 3. Defaults Upon Senior Securities 72
       
  Item 4. Mine Safety Disclosures 72
       
  Item 5. Other Information 72
       
  Item 6. Exhibits 73
       
SIGNATURE PAGE 74

 

 

 

Index 

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

   March 31,  December 31,  March 31,
   2019  2018  2018
   $  $  $
ASSETS               
Cash and due from banks   17,957    26,675    12,733 
Interest-bearing deposits in other banks   22,468    14,690    24,986 
                
   Total cash and cash equivalents   40,425    41,365    37,719 
                
Securities available for sale (at fair value)   291,186    294,065    311,128 
Equity securities (at fair value)   6,081    5,934    5,775 
                
Loans held for sale   2,688    1,429    2,640 
                
Loans (net of unearned income)   710,135    694,073    609,515 
                
   Less: Allowance for loan losses   8,886    8,666    8,083 
                
   Net loans   701,249    685,407    601,432 
                
Premises and equipment   25,409    25,551    25,835 
Regulatory stock   6,705    6,348    6,194 
Bank owned life insurance   28,273    28,085    27,525 
Other assets   10,182    9,658    12,061 
                
       Total assets   1,112,198    1,097,842    1,030,309 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
                
Liabilities:               
  Deposits:               
    Noninterest-bearing   329,007    369,081    305,832 
    Interest-bearing   600,794    550,653    550,367 
                
    Total deposits   929,801    919,734    856,199 
                
  Short-term borrowings       7,870    5,622 
  Long-term debt   72,478    65,386    68,511 
  Other liabilities   3,061    2,050    2,443 
                
       Total liabilities   1,005,340    995,040    932,775 
                
Stockholders' equity:               
  Common stock, par value $0.10 as of 3/31/19; $0.20 as of 12/31/18 and 3/31/18               
Shares:  Authorized 24,000,000 as of 3/31/19; 12,000,000 as of 12/31/18 and 3/31/18               
             Issued 5,739,114 and Outstanding  5,694,452 as of  3/31/19               
             Issued 2,869,557 and Outstanding  2,852,532 as of 12/31/18               
             Issued 2,869,557 and Outstanding  2,853,479 as of  3/31/18   574    574    574 
  Capital surplus   4,438    4,435    4,419 
  Retained earnings   105,818    104,067    99,623 
  Accumulated other comprehensive loss net of tax   (3,189)   (5,678)   (6,541)
  Less: Treasury stock cost on 44,662 shares as of 3/31/19               
  17,025 shares as of 12/31/18 and 16,078 shares as of 3/31/18   (783)   (596)   (541)
                
       Total stockholders' equity   106,858    102,802    97,534 
                
       Total liabilities and stockholders' equity   1,112,198    1,097,842    1,030,309 

 

See Notes to the Unaudited Consolidated Interim Financial Statements                        

4 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

           

   Three Months ended March 31, 
   2019   2018 
   $   $ 
Interest and dividend income:          
Interest and fees on loans   8,023    6,398 
Interest on securities available for sale          
Taxable   1,275    1,100 
Tax-exempt   647    760 
Interest on deposits at other banks   47    112 
Dividend income   170    154 
           
Total interest and dividend income   10,162    8,524 
           
Interest expense:          
Interest on deposits   824    479 
Interest on borrowings   355    295 
           
Total interest expense   1,179    774 
           
Net interest income   8,983    7,750 
           
Provision for loan losses   180    190 
           
Net interest income after provision for loan losses   8,803    7,560 
           
Other income:          
Trust and investment services income   537    554 
Service fees   630    661 
Commissions   655    584 
Gains on the sale of debt securities, net   81    34 
Gains on equity securities, net   17    31 
Gains on sale of mortgages   349    235 
Earnings on bank-owned life insurance   178    1,099 
Other income   97    182 
           
Total other income   2,544    3,380 
           
Operating expenses:          
Salaries and employee benefits   5,188    4,960 
Occupancy   630    663 
Equipment   287    288 
Advertising & marketing   250    232 
Computer software & data processing   658    545 
Shares tax   233    215 
Professional services   475    433 
Other expense   561    548 
           
Total operating expenses   8,282    7,884 
           
Income before income taxes   3,065    3,056 
           
Provision for federal income taxes   462    235 
           
Net income   2,603    2,821 
           
Earnings per share of common stock   0.91    0.99 
           
Weighted average shares outstanding   2,847,170    2,850,146 
           
Adjusted earnings per share of common stock   0.46    0.49 
           
Adjusted weighted average shares outstanding   5,694,340    5,700,292 

 

See Notes to the Unaudited Consolidated Interim Financial Statements      

 

5 

Index 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

   Three Months ended March 31, 
   2019   2018 
   $   $ 
         
Net income   2,603    2,821 
           
Other comprehensive income (loss), net of tax:          
Securities available for sale not other-than-temporarily impaired:          
           
   Unrealized gains (losses) arising during the period   3,231    (3,399)
   Income tax effect   (678)   714 
    2,553    (2,685)
           
   Gains recognized in earnings   (81)   (34)
   Income tax effect   17    7 
    (64)   (27)
           
Other comprehensive income (loss), net of tax   2,489    (2,712)
           
Comprehensive Income   5,092    109 
           

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

6 

Index 

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, 2017   574    4,415    98,629    (3,195)   (664)   99,759 
                               
Net income           2,821            2,821 
                               
Other comprehensive loss net of tax               (2,712)       (2,712)
                              
Change in accounting principal for                              
    adoption of ASU 2017-08           (1,663)           (1,663)
                               
Reclassification of certain income tax                              
    effects from accumluated other                              
    comprehensive loss           634    (634)        
                               
Treasury stock issued - 3,656 shares       4            123    127 
                               
Cash dividends paid, $0.28 per share           (798)           (798)
                               
Balances, March 31, 2018   574    4,419    99,623    (6,541)   (541)   97,534 
                               
                               
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 

 

See Notes to the Unaudited Consolidated Interim Financial Statements  

7 

Index 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)  Three Months Ended March 31, 
   2019   2018 
   $   $ 
Cash flows from operating activities:          
Net income   2,603    2,821 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Net amortization of securities premiums and discounts and loan fees   827    1,057 
Amortization of operating leases right-of-use assets   43     
Decrease (increase) in interest receivable   (85)   180 
Increase (decrease) in interest payable   58    22 
Provision for loan losses   180    190 
Gains on sale of debt securities, net   (81)   (34)
Gain on equity securities, net   (17)   (31)
Gains on sale of mortgages   (349)   (235)
Loans originated for sale   (9,026)   (6,980)
Proceeds from sales of loans   8,116    7,467 
Earnings on bank-owned life insurance   (178)   (1,099)
Depreciation of premises and equipment and amortization of software   391    406 
Deferred income tax   (94)   (229)
Other assets and other liabilities, net   (95)   339 
Net cash provided by operating activities   2,293    3,874 
           
Cash flows from investing activities:          
Securities available for sale:          
   Proceeds from maturities, calls, and repayments   2,997    4,897 
   Proceeds from sales   10,246    8,986 
   Purchases   (7,970)   (17,100)
Purchase of regulatory bank stock   (550)   (1,088)
Redemptions of regulatory bank stock   193    688 
Purchase of bank-owned life insurance   (10)   24 
Net increase in loans   (16,142)   (12,423)
Purchases of premises and equipment, net   (221)   (510)
Purchase of computer software   (29)   (36)
Net cash used for investing activities   (11,486)   (16,562)
           
Cash flows from financing activities:          
Net increase (decrease) in demand, NOW, and savings accounts   6,928    (7,872)
Net increase (decrease) in time deposits   3,139    (2,406)
Net (decrease) increase in short-term borrowings   (7,870)   5,622 
Proceeds from long-term debt   11,562    7,661 
Repayments of long-term debt   (4,470)   (5,000)
Dividends paid   (852)   (798)
Proceeds from sale of treasury stock   146    127 
Treasury stock purchased   (330)    
Net cash provided by (used in) financing activities   8,253    (2,666)
Decrease in cash and cash equivalents   (940)   (15,354)
Cash and cash equivalents at beginning of period   41,365    53,073 
Cash and cash equivalents at end of period   40,425    37,719 
           
Supplemental disclosures of cash flow information:          
    Interest paid   1,121    752 
    Income taxes paid        
           
Supplemental disclosure of non-cash investing and financing activities:          
Fair value adjustments for securities available for sale   (3,150)   5,097 
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

8 

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 first quarter of 2019, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. 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, 2018.

 

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.

 

Leases

 

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02, among other things, requires lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 became effective for the Corporation on January 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provided an additional transition method that allowed entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provided for certain policy elections and changed lessor accounting for sales and similar taxes and certain lessor costs. Upon adoption of ASU 2016-02, ASU 2018-11 and ASU 2018-20 on January 1, 2019, the Corporation recognized right-of-use assets and related lease liabilities of $1,075,000.

 

9 

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 March 31, 2019, and December 31, 2018, are as follows:        

 

       Gross   Gross     
(DOLLARS IN THOUSANDS)  Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   $   $   $   $ 
March 31, 2019                
U.S. government agencies   33,026    8    (613)   32,421 
U.S. agency mortgage-backed securities   44,431    22    (1,354)   43,099 
U.S. agency collateralized mortgage obligations   53,859    74    (1,016)   52,917 
Asset-backed securities   11,400    3    (84)   11,319 
Corporate bonds   60,973    16    (839)   60,150 
Obligations of states and political subdivisions   91,534    373    (627)   91,280 
Total securities available for sale   295,223    496    (4,533)   291,186 
                     
December 31, 2018                    
U.S. government agencies   31,025    5    (910)   30,120 
U.S. agency mortgage-backed securities   46,363    2    (1,726)   44,639 
U.S. agency collateralized mortgage obligations   55,182    74    (1,166)   54,090 
Asset-backed securities   11,440        (41)   11,399 
Corporate bonds   61,085        (1,893)   59,192 
Obligations of states and political subdivisions   96,157    69    (1,601)   94,625 
Total securities available for sale   301,252    150    (7,337)   294,065 

 

 

The amortized cost and fair value of debt securities available for sale at March 31, 2019, 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   18,692    18,410 
Due after one year through five years   138,034    135,433 
Due after five years through ten years   30,822    30,301 
Due after ten years   107,675    107,042 
Total debt securities   295,223    291,186 

 

 

Securities available for sale with a par value of $59,419,000 and $58,668,000 at March 31, 2019, and December 31, 2018, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $59,989,000 at March 31, 2019, and $58,914,000 at December 31, 2018.

 

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.

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

     

   Three Months Ended March 31, 
   2019   2018 
   $   $ 
Proceeds from sales   10,246    8,986 
Gross realized gains   96    52 
Gross realized losses   15    18 

  

 

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first three months of 2019 or 2018.

 

Information pertaining to securities with gross unrealized losses at March 31, 2019, and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)  

   Less than 12 months   More than 12 months   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   $   $   $   $   $   $ 
As of March 31, 2019                              
U.S. government agencies           28,410    (613)   28,410    (613)
U.S. agency mortgage-backed securities           40,646    (1,354)   40,646    (1,354)
U.S. agency collateralized mortgage obligations   5,337    (35)   42,449    (981)   47,786    (1,016)
Asset-backed securities   9,376    (84)           9,376    (84)
Corporate bonds   16,533    (135)   39,592    (704)   56,125    (839)
Obligations of states & political subdivisions   554    (1)   45,755    (626)   46,309    (627)
                               
Total temporarily impaired securities   31,800    (255)   196,852    (4,278)   228,652    (4,533)
                               
                               
As of December 31, 2018                              
U.S. government agencies           28,116    (910)   28,116    (910)
U.S. agency mortgage-backed securities           42,041    (1,726)   42,041    (1,726)
U.S. agency collateralized mortgage obligations   8,055    (85)   40,735    (1,081)   48,790    (1,166)
Asset-backed securities   5,563    (41)           5,563    (41)
Corporate bonds   20,228    (455)   38,964    (1,438)   59,192    (1,893)
Obligations of states & political subdivisions   12,367    (104)   68,982    (1,497)   81,349    (1,601)
                               
Total temporarily impaired securities   46,213    (685)   218,838    (6,652)   265,051    (7,337)

 

 

In the debt security portfolio there were 139 positions that were carrying unrealized losses as of March 31, 2019. There were no instruments considered to be other-than-temporarily impaired at March 31, 2019.

 

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.

 

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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 March 31, 2019 and December 31, 2018.

 

       Gross   Gross     
(DOLLARS IN THOUSANDS)  Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   $   $   $   $ 
March 31, 2019                    
CRA-qualified mutual funds   5,447            5,447 
Bank stocks   679    5    (50)   634 
Total equity securities   6,126    5    (50)   6,081 
                     

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
December 31, 2018                    
CRA-qualified mutual funds   5,410            5,410 
Bank stocks   591        (67)   524 
Total equity securities   6,001        (67)   5,934 

 

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the year-to-date period ended March 31, 2019 and 2018, and the portion of unrealized gains and losses for the period that relates to equity investments held as of March 31, 2019 and 2018.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)    

   Three Months Ended   Three Months Ended 
   March 31, 2019   March 31, 2018 
   $   $ 
         
Net gains recognized in equity securities during the period   17    31 
           
Less:  Net gains (losses) realized on the sale of equity securities during the period        
           
Unrealized gains recognized in equity securities held at reporting date   17    31 

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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 March 31, 2019, and December 31, 2018:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)    

   March 31,  December 31,
   2019  2018
   $  $
Commercial real estate          
Commercial mortgages   104,041    101,419 
Agriculture mortgages   166,950    165,926 
Construction   18,302    18,092 
Total commercial real estate   289,293    285,437 
           
Consumer real estate (a)          
1-4 family residential mortgages   231,538    219,037 
Home equity loans   10,011    10,271 
Home equity lines of credit   64,408    64,413 
Total consumer real estate   305,957    293,721 
           
Commercial and industrial          
Commercial and industrial   60,893    61,043 
Tax-free loans   22,031    22,567 
Agriculture loans   21,627    20,512 
Total commercial and industrial   104,551    104,122 
           
Consumer   8,713    9,197 
           
Gross loans prior to deferred fees   708,514    692,477 
Less:          
Deferred loan costs, net   1,621    1,596 
Allowance for loan losses   (8,886)   (8,666)
Total net loans   701,249    685,407 

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $131,584,000 and $126,916,000 as of March 31, 2019, and December 31, 2018, respectively.  

 

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of March 31, 2019 and December 31, 2018. 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.

 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

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

 

 

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

March 31, 2019  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   101,241    154,120    17,782    54,986    21,833    19,688    369,650 
Special Mention   590    4,393    520    4,807    198    1,325    11,833 
Substandard   2,210    8,437        1,100        614    12,361 
Doubtful                            
Loss                            
                                    
    Total   104,041    166,950    18,302    60,893    22,031    21,627    393,844 
                                    

 

December 31, 2018  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   99,013    154,132    17,567    59,348    22,367    19,487    371,914 
Special Mention   176    3,478    525    518    200    453    5,350 
Substandard   2,230    8,316        1,177        572    12,295 
Doubtful                            
Loss                            
                                    
    Total   101,419    165,926    18,092    61,043    22,567    20,512    389,559 

 

The largest movement in credit risk profile from December 31, 2018 to March 31, 2019 was a $3.9 million commercial and industrial (C&I) relationship that was downgraded from pass to special mention. This larger relationship, which provides a wide complement of leased equipment, accounted for the vast majority of the $4.3 million increase in commercial and industrial special mention loans since year-end, and well over half of the increase in special mention loans for all commercial loan categories. Agricultural loans not secured by real estate experienced an $872,000 increase in special mention loans from year-end. This was primarily the result of a downgrading of one farmer with $920,000 of C&I balance, who has a mix of operations. This same borrower had $500,000 in an agricultural mortgage that was also downgraded to special mention in the first quarter of 2019 that contributed to the $915,000 increase in special mention agricultural mortgages. The remainder of the increase in special mention agricultural mortgage loans was over several relationships. Lastly, the commercial mortgage special mention increase of $414,000 was caused by one commercial borrower with a $407,000 balance as of March 31, 2019.

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of March 31, 2019 and December 31, 2018:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)          

 

March 31, 2019  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   231,281    10,011    64,408    8,708    314,408 
Non-performing   257            5    262 
                          
   Total   231,538    10,011    64,408    8,713    314,670 
                          

 

December 31, 2018  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   218,641    10,271    64,413    9,196    302,521 
Non-performing   396            1    397 
                          
   Total   219,037    10,271    64,413    9,197    302,918 

 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of March 31, 2019 and December 31, 2018:

 

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)  

                      
                     Loans
         Greater           Receivable >
   30-59 Days  60-89 Days  than 90  Total Past     Total Loans  90 Days and
March 31, 2019  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages           1,003    1,003    103,038    104,041     
   Agriculture mortgages   254    784    816    1,854    165,096    166,950     
   Construction                   18,302    18,302     
Consumer real estate                                   
   1-4 family residential mortgages   649    263    257    1,169    230,369    231,538    257 
   Home equity loans   95            95    9,916    10,011     
   Home equity lines of credit   40            40    64,368    64,408     
Commercial and industrial                                   
   Commercial and industrial       5        5    60,888    60,893     
   Tax-free loans                   22,031    22,031     
   Agriculture loans   76            76    21,551    21,627     
Consumer   11    3    5    19    8,694    8,713    5 
       Total   1,125    1,055    2,081    4,261    704,253    708,514    262 
                                    

 

                      
                     Loans
         Greater           Receivable >
   30-59 Days  60-89 Days  than 90  Total Past     Total Loans  90 Days and
December 31, 2018  Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
   Commercial mortgages           237    237    101,182    101,419     
   Agriculture mortgages   326        816    1,142    164,784    165,926     
   Construction                   18,092    18,092     
Consumer real estate                                   
   1-4 family residential mortgages   455    201    396    1,052    217,985    219,037    396 
   Home equity loans   62    35        97    10,174    10,271     
   Home equity lines of credit   95            95    64,318    64,413     
Commercial and industrial                                   
   Commercial and industrial   24            24    61,019    61,043     
   Tax-free loans                   22,567    22,567     
   Agriculture loans   118            118    20,394    20,512     
Consumer   10    15    1    26    9,171    9,197    1 
       Total   1,090    251    1,450    2,791    689,686    692,477    397 

 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2019 and December 31, 2018:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

   March 31,  December 31,
   2019  2018
   $  $
       
Commercial real estate          
  Commercial mortgages   1,003    1,017 
  Agriculture mortgages   816    816 
  Construction        
Consumer real estate          
  1-4 family residential mortgages        
  Home equity loans        
  Home equity lines of credit        
Commercial and industrial          
  Commercial and industrial        
  Tax-free loans        
  Agriculture loans        
Consumer        
             Total   1,819    1,833 

 

As of March 31, 2019 and December 31, 2018, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended March 31, 2019 and March 31, 2018, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

   Three months ended March 31,
   2019  2018
   $  $
       
Average recorded balance of impaired loans   2,697    1,836 
Interest income recognized on impaired loans   11    20 

 

There were no loan modifications made during the three months ended March 31, 2019 or 2018 causing a loan to be considered a troubled debt restructuring (TDR). A TDR is a loan where management has granted a concession to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

 

17 

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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 March 31, 2019, and December 31, 2018:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

March 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   744    774        747     
    Agriculture mortgages   1,683    1,683        1,688    11 
    Construction                    
Total commercial real estate   2,427    2,457        2,435    11 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with no related allowance   2,427    2,457        2,435    11 
                          
With an allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   260    276    113    262     
    Agriculture mortgages                    
    Construction                    
Total commercial real estate   260    276    113    262     
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with a related allowance   260    276    113    262     
                          
Total by loan class:                         
Commercial real estate                         
    Commercial mortgages   1,004    1,050    113    1,009     
    Agriculture mortgages   1,683    1,683        1,688    11 
    Construction                    
Total commercial real estate   2,687    2,733    113    2,697    11 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total   2,687    2,733    113    2,697    11 

 

18 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)    

 

December 31, 2018

 

   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   $  $  $  $  $
                
With no related allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   370    901        396     
    Agriculture mortgages   1,692    1,692        1,063    45 
    Construction                    
Total commercial real estate   2,062    2,593        1,459    45 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans                    
Total commercial and industrial                    
                          
Total with no related allowance   2,062    2,593        1,459    45 
                          
With an allowance recorded:                         
Commercial real estate                         
    Commercial mortgages   647    694    132    484     
    Agriculture mortgages                    
    Construction                    
Total commercial real estate   647    694    132    484     
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans               124    6 
Total commercial and industrial               124    6 
                          
Total with a related allowance   647    694    132    608    6 
                          
Total by loan class:                         
Commercial real estate                         
    Commercial mortgages   1,017    1,595    132    880     
    Agriculture mortgages   1,692    1,692        1,063    45 
    Construction                    
Total commercial real estate   2,709    3,287    132    1,943    45 
                          
Commercial and industrial                         
    Commercial and industrial                    
    Tax-free loans                    
    Agriculture loans               124    6 
Total commercial and industrial               124    6 
                          
Total   2,709    3,287    132    2,067    51 

 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

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

 

 

During the three months ended March 31, 2019, management charged off $17,000 in loans while recovering $57,000 and added $180,000 to the provision. The growth in the loan portfolio was primarily responsible for the $180,000 of additional provision.

 

During the three months ended March 31, 2019, provision expenses were primarily recorded for the commercial real estate and commercial and industrial segments, while a credit provision was recorded in the consumer real estate segment due to very low historical loss experience. In the past two quarters, management has adjusted the qualitative factors across the loan portfolio to better reflect the forward risk in each loan segment. This has resulted in more provision expense being allocated to commercial real estate loans and less to residential real estate loans. While the Corporation has been experiencing more residential real estate growth than commercial real estate growth, when the performance of these respective borrowers declines, the potential for loan losses is more pronounced with commercial real estate loans. The impact of negative economic events is more volatile with commercial real estate loans. Supporting this conclusion, the Corporation’s level of delinquencies has remained higher with commercial real estate loans than residential real estate loans. The Corporation’s commercial real estate and commercial and industrial loan provision allocations are also influenced by the levels of classified loans. For both of these categories the level of classified loans increased significantly since December 31, 2018, with commercial real estate increasing 31.7% and commercial and industrial increasing over four fold, but on a much smaller loan segment. This is what caused the Corporation to allocate $148,000 of provision expense to commercial real estate and $128,000 to commercial and industrial, while reducing consumer real estate by $140,000. The smallest out of all the loan segments is the unsecured consumer loan segment, where the $16,000 provision allocation was nearly a match to the $17,000 of consumer charge-offs that occurred in the first quarter of 2019.

 

Delinquency rates among the Corporation’s loan pools remain low and made up 0.59% of total loans as of March 31, 2019, compared to 0.46% of total loans as of December 31, 2018. Charge-offs for the three months ended March 31, 2019, were very low at $17,000.

 

The agricultural lending sector has generally been under stress over the past several years due to lower commodity prices. The Corporation’s agricultural portfolio is highly affected by volatility in the protein sector; particularly dairy and broiler prices. These are the two commodity price indicators that have the most immediate impact to the majority of the Corporation’s agricultural borrowers. In 2019, egg prices improved with better pricing on average than 2018. Broiler prices are considered to be stable but on the weaker side of their recent range. Slaughter levels have increased slightly year over year, but with weaker meat demand, poultry integrators are taking active measures to control production. Milk prices remain historically low and have not broken out of a historical low three-year range. The average milk price for the first quarter of 2019 slightly exceeded the average for the first quarter of 2018, but income over feed costs remain low. The local dairy industry continues to undergo consolidation as it deals with overcapacity.

 

These agricultural challenges did not adversely impact the Corporation’s agricultural loans until the end of 2018 when total agricultural mortgage delinquencies rose to $1.1 million, from zero at the end of 2017. As of March 31, 2019, total agricultural mortgage delinquencies rose to $1.9 million. While agricultural mortgage delinquencies have risen significantly since the end of 2018, they still represent only 1.1% of all agricultural mortgages. Agricultural mortgages over 90 days delinquent remained unchanged at $816,000 from December 31, 2018 to March 31, 2019. The agricultural mortgages over 90 days delinquent are made up of two loans to one dairy farmer, with the largest loan of $766,000 backed by a 90% FSA guarantee. Both of the loans were placed on non-accrual at the end of the fourth quarter of 2018. The borrower has been trying to sell the property since mid-2018. The Bank will proceed on foreclosure if the customer is not successful in selling the farm by mid-year. Management does not anticipate any charge-off on this loan due to the sufficiency of collateral and the FSA guarantee. Outside of this relationship, it was the 60-89 days past due delinquencies that were primarily responsible for the increase in total agricultural mortgage delinquencies. Management will continue to closely monitor the level of agricultural mortgage delinquencies for trends like declining borrower performance.

 

20 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

Outside of the agricultural economy, the health of the Corporation’s commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Total delinquencies for commercial mortgages as of March 31, 2019, were less than 0.4%, while total commercial and industrial delinquencies declined from December 31, 2018 to March 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. The majority of the qualitative factors had little change during the first quarter of 2019. Minor adjustments to the qualitative factors covering changes in lending policies and procedures, trends in the nature and volume of the loan portfolio, and levels of and trends in delinquency, non-accruals, and charge-offs were made throughout the first quarter as these levels increased or decreased. The other qualitative factors remained consistent since December 31, 2018, requiring no adjustments to the allowance.

 

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

   Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Beginning balance - December 31, 2017   3,863    2,052    1,829    98    398    8,240 
                               
    Charge-offs   (224)       (110)   (18)       (352)
    Recoveries           4    1        5 
    Provision   408    137    (422)   (9)   76    190 
                               
Balance - March 31, 2018   4,047    2,189    1,301    72    474    8,083 

 

 

During the three months ended March 31, 2018, provision expenses were recorded for the commercial real estate and consumer real estate segments with credit provisions recorded for the commercial and industrial and consumer loan segments. The increase in the allowance for commercial real estate loans was primarily a result of higher levels of charge-offs in the first three months of 2018. The increase in the amount of the allowance for loan losses allocated to the consumer real estate segment was primarily a result of growth in the residential real estate portfolio during the three months ended March 31, 2018.

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of March 31, 2019 and December 31, 2018:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of March 31, 2019:  Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Ending balance: individually evaluated                              
  for impairment   113                    113 
Ending balance: collectively evaluated                              
  for impairment   4,375    2,268    1,569    102    459    8,773 
                               
Loans receivable:                              
Ending balance   289,293    305,957    104,551    8,713         708,514 
Ending balance: individually evaluated                              
  for impairment   2,687                     2,687 
Ending balance: collectively evaluated                              
  for impairment   286,606    305,957    104,551    8,713         705,827 

 

As of December 31, 2018:  Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Ending balance: individually evaluated                              
  for impairment   132                    132 
Ending balance: collectively evaluated                              
  for impairment   4,164    2,408    1,428    103    431    8,534 
                               
Loans receivable:                              
Ending balance   285,437    293,721    104,122    9,197         692,477 
Ending balance: individually evaluated                              
  for impairment   2,709                     2,709 
Ending balance: collectively evaluated                              
  for impairment   282,728    293,721    104,122    9,197         689,768 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

5. Fair Value Presentation

 

U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:

 

  Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
     
  Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
     
  Level III: Assets and liabilities that have little to no observable pricing as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following tables provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of March 31, 2019, and December 31, 2018, 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)        

 

   March 31, 2019
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       32,421        32,421 
U.S. agency mortgage-backed securities       43,099        43,099 
U.S. agency collateralized mortgage obligations       52,917        52,917 
Asset-backed securities       11,319        11,319 
Corporate bonds       60,150        60,150 
Obligations of states & political subdivisions       91,280        91,280 
Equity securities   6,081            6,081 
                     
Total securities   6,081    291,186        297,267 

 

 

On March 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 March 31, 2019, the CRA fund investments had a $5,447,000 book and fair market value and the bank stock portfolio had a book value of $679,000, and fair market value of $634,000.

 

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.

23 

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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, 2018
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. government agencies       30,120        30,120 
U.S. agency mortgage-backed securities       44,639        44,639 
U.S. agency collateralized mortgage obligations       54,090        54,090 
Asset-backed securities       11,399        11,399 
Corporate bonds       59,192        59,192 
Obligations of states & political subdivisions       94,625        94,625 
Equity securities   5,934            5,934 
                     
Total securities   5,934    294,065        299,999 

 

 

On December 31, 2018, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2018, the CRA fund investments had a $5,410,000 book and market value and the bank stocks had a book value of $591,000 and a market value of $524,000.

 

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 March 31, 2019 and December 31, 2018, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 

                 
   March 31, 2019 
   Level I   Level II   Level III   Total 
   $   $   $   $ 
Assets:                    
Impaired Loans  $   $   $2,574   $2,574 
Total  $   $   $2,574   $2,574 
                     

 

   December 31, 2018 
   Level I   Level II   Level III   Total 
   $   $   $   $ 
Assets:                
Impaired Loans  $   $   $2,577   $2,577 
Total  $   $   $2,577   $2,577 

 

 

The Corporation had a total of $2,687,000 of impaired loans as of March 31, 2019, with $113,000 of specific allocation against these loans and $2,709,000 of impaired loans as of December 31, 2018, with $132,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

 

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)    

 

  March 31, 2019  
  Fair Value Valuation Unobservable Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans 2,574 Appraisal of Appraisal -20% (-20%)  
    collateral (1) adjustments (2)    
      Liquidation -10% (-10%)  
      expenses (2)    
           

 

  December 31, 2018  
   Fair Value  Valuation Unobservable  Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans 2,577 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 March 31, 2019 and December 31, 2018:

 

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

(DOLLARS IN THOUSANDS)

 

   March 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   40,425    40,425    40,425         
Regulatory stock   6,705    6,705    6,705         
Loans held for sale   2,688    2,688    2,688         
Loans, net of allowance   701,249    704,595            704,595 
Mortgage servicing assets   845    891            891 
Accrued interest receivable   3,839    3,839    3,839         
Bank owned life insurance   28,273    28,273    28,273         
                          
Financial Liabilities:                         
Demand deposits   329,007    329,007    329,007         
Interest-bearing demand deposits   21,165    21,165    21,165         
NOW accounts   89,800    89,800    89,800         
Money market deposit accounts   150,388    150,388    150,388         
Savings accounts   203,084    203,084    203,084         
Time deposits   136,357    135,852            135,852 
     Total deposits   929,801    929,296    793,444        135,852 
                          
Long-term debt   72,478    72,080            72,080 
Accrued interest payable   455    455    455         

 

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, 2018
         Quoted Prices in      
         Active Markets  Significant Other  Significant
         for Identical  Observable  Unobservable
   Carrying     Assets  Inputs  Inputs
   Amount  Fair Value  (Level 1)  (Level II)  (Level III)
   $  $  $  $  $
Financial Assets:                         
Cash and cash equivalents   41,365    41,365    41,365         
Regulatory stock   6,348    6,348    6,348         
Loans held for sale   1,429    1,429    1,429         
Loans, net of allowance   685,407    687,844            687,844 
Mortgage servicing assets   905    997            997 
Accrued interest receivable   3,754    3,754    3,754         
Bank owned life insurance   28,085    28,085    28,085         
                          
Financial Liabilities:                         
Demand deposits   369,081    369,081    369,081         
Interest-bearing demand deposits   20,104    20,104    20,104         
NOW accounts   89,072    89,072    89,072         
Money market deposit accounts   108,594    108,594    108,594         
Savings accounts   199,665    199,665    199,665         
Time deposits   133,218    132,351            132,351 
     Total deposits   919,734    918,867    786,516        132,351 
                          
Short-term borrowings   7,870    7,870    7,870         
Long-term debt   65,386    65,286            65,286 
Accrued interest payable   397    397    397         

 

 

6.       Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of March 31, 2019, firm loan commitments were $43.9 million, unused lines of credit were $236.7 million, and open letters of credit were $9.2 million. The total of these commitments was $289.8 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

 

27 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

7. Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the three months ended March 31, 2019 and 2018 is as follows:

 

ACCUMULATED OTHER COMPREHENSIVE LOSS (1) (2)

(DOLLARS IN THOUSANDS)  

 

   Unrealized
   Gains (Losses)
   on Securities
   Available-for-Sale
   $
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)
      
      
      
Balance at December 31, 2017   (3,195)
  Other comprehensive loss before reclassifications   (2,685)
  Amount reclassified from accumulated other comprehensive loss   (27)
  Reclassification of certain income tax effects from accumulated other comprehensive loss   (634)
Period change   (3,346)
      
Balance at March 31, 2018   (6,541)

 

(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.  

 

 

 

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

(DOLLARS IN THOUSANDS)  

 

   Amount Reclassified from   
   Accumulated Other Comprehensive   
   Income (Loss)  
   For the Three Months   
   Ended March 31,   
   2019    2018  Affected Line Item in the
   $    $  Consolidated Statements of Income
Securities available-for-sale:             
  Net securities gains,   81    34   Gains on the sale of
           reclassified into earnings                   debt securities, net
     Related income tax expense   (17)   (7)  Provision for federal income taxes
  Net effect on accumulated other comprehensive             
     income for the period   64    27    

 

28 

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ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

 

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 Sheets classification of the Corporation’s ROU assets and lease liabilities.

 

 

Lease Consolidated Balance Sheets Classification      
(Dollars in Thousands)  Classification  March 31, 2019
 Lease Right-of-Use Assets        
         
    Operating lease right-of use assets  Other Assets  $1,032 
         
 Lease Liabilities        
    Operating lease liabilties  Other Liabilities  $1,035 

 

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.

 

      March 31, 2019
Weighted-average remaining lease term         
    Operating leases     6.0 years
 Weighted-average discount rate         
    Operating leases     3.09

 

 

The Corporation elected not to separate lease and non-lease components and instead to account for them as a single lease component.

 

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2019 were as follows:

 

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Notes to the Unaudited Consolidated Interim Financial Statements

 

Lease Payment Schedule

(Dollars in Thousands)  Operating Leases
Twelve Months Ended:     
    March 31, 2020  $198 
    March 31, 2021   199 
    March 31, 2022   203 
    March 31, 2023   155 
    March 31, 2024   154 
Thereafter   229 
Total Future Minimum Lease Payments   1,138 
Amounts Representing Interests   (103)
Present Value of Net Future Minimum Lease Payments  $1,035 

 

 

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 will be 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 are expected to be issued on June 28, 2019. The stock split will be 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.

 

The stock split occurred after the March 31, 2019 reporting period, but prior to the May 15, 2019 report filing date. Securities and Exchange Commission guidance requires that such events be reported retroactively on the consolidated balance sheet as if the transaction occurred on the balance sheet date. Under the guidance, the number of issued and outstanding shares as of the current reporting period of March 31, 2019, were revised to give effect to the stock split, but the number of issued and outstanding shares as of the previous comparative periods were not. The par value and treasury shares of the Corporation’s common stock are reflected in the same manner, with the current reporting period reflecting the new par value and the previous comparative periods reflecting the old par value. The treasury share data and cash dividend data on the Corporation’s consolidated statements of changes in stockholders’ equity are also reflected in this manner with only the current period changes reflected as if the stock split has already occurred. 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.

 

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Notes to the Unaudited Consolidated Interim Financial Statements

 

 

 

10. 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. 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 March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

In 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. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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Management’s Discussion and Analysis

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

 

The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2018 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

 

Forward-Looking Statements

 

The U.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are generally identified when terms such as: “believe,” “estimate,” “anticipate,” “expect,” “project,” “forecast,” and other similar wordings are used. The readers of this report should take into consideration that these forward-looking statements represent management’s expectations as to future forecasts of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance, or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative of actual results.

 

Readers should note that many factors affect this forward-looking information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These factors include, but are not limited to, the following:

 

·National and local economic conditions
·Effects of slow economic conditions or prolonged economic weakness, specifically the effect on loan customers to repay loans
·Health of the housing market
·Real estate valuations and its impact on the loan portfolio
·Interest rate and monetary policies of the Federal Reserve Board
·Volatility of the securities markets including the valuation of securities
·Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government
·Political changes and their impact on new laws and regulations
·Competitive forces
·Impact of mergers and acquisition activity in the local market and the effects thereof
·Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses
·Changes in customer behavior impacting deposit levels and loan demand
·Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters
·Ineffective business strategy due to current or future market and competitive conditions
·Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk
·Operation, legal, and reputation risk
·Results of the regulatory examination and supervision process
·The impact of new laws and regulations, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations issued thereunder
·Possible impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules
·Disruptions due to flooding, severe weather, or other natural disasters
·The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

 

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Management’s Discussion and Analysis

Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K.

 

Results of Operations

 

Overview

The Corporation recorded net income of $2,603,000 for the three-month period ended March 31, 2019, a 7.7% decrease, from the $2,821,000 earned during the same period in 2018. The basic and diluted earnings per share, after adjusting for the two-for-one stock split declared on April 17, 2019, were $0.46 for the three months ended March 31, 2019, compared to $0.49 for the same period in 2018. The decrease in the Corporation’s 2019 earnings was caused primarily by insurance proceeds from a bank owned life insurance (BOLI) policy that was received in the first quarter of 2018. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on select officers. Due to the death of a participant during the first quarter of 2018, the Corporation recorded additional BOLI income of $913,000. This net death benefit caused an increase in the Corporation’s 2018 earnings.

 

The Corporation’s NII increased by $1,233,000, or 15.9%, for the three months ended March 31, 2019, compared to the same period in 2018. The increase in NII primarily resulted from an increase in interest and fees on loans of $1,625,000, or 25.4%, for the three months ended March 31, 2019. The increase in NII was partially offset by an increase in interest expense. The Corporation’s interest expense on deposits and borrowings increased by $405,000, or 52.3%, for the three months ended March 31, 2019.

 

The Corporation recorded $10,000 less provision expense in the first quarter of 2019 compared to the same quarter of 2018, with $180,000 of provision compared to $190,000 of provision for the first quarter of 2018. The gains from debt and equity securities were $98,000 for the three months ended March 31, 2019, compared to gains of $65,000 for the same period in 2018. Market interest rates were lower in 2019, making it more conducive to achieving gains from the sale of securities. The gain on the sale of mortgages increased by $114,000, or 48.5%, for the three-month period ended March 31, 2019, compared to the prior year’s period. The volume of mortgages sold during the first quarter of 2019 was higher than 2018 primarily causing the increase in gain income. Total operating expenses increased $398,000, or 5.0%, for the three months ended March 31, 2019, compared to the same period in 2018.

 

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE decreased for the three months ended March 31, 2019, compared to the same period in the prior year due primarily to lower earnings as a result of the non-recurring BOLI income recorded in the first quarter of 2018.

 

Key Ratios  Three Months Ended
   March 31,
   2019  2018
       
Return on Average Assets   0.97%    1.12% 
Return on Average Equity   10.22%    11.72% 

 

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

·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 three months of 2019, NII generated 77.9% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 69.6% in the first three months of 2018. 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 $202,000 for the three months ended March 31, 2019, compared to $230,000 for the same period in 2018.

 

NET INTEREST INCOME              
(DOLLARS IN THOUSANDS)              
    Three Months Ended    
    March 31,    
    2019     2018    
    $     $    
Total interest income     10,162       8,524    
Total interest expense     1,179       774    
                   
Net interest income     8,983       7,750    
Tax equivalent adjustment     202       230    
                   
Net interest income (fully taxable equivalent)     9,185       7,980    

 

NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:

 

·The rates earned on interest earning assets and paid on interest bearing liabilities
·The average balance of interest earning assets and interest bearing liabilities

 

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. Until December 16, 2015, the Federal funds rate had not changed since December 16, 2008, a period of seven years. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. On December 14, 2016, one year later, the Federal funds rate was increased 25 basis points to 0.75%. During 2017, the Federal funds rate was increased three times so that the rate was 1.50% as of December 31, 2017. In 2018, the Federal Reserve increased the Federal funds rate four times so that the rate was 2.50% as of December 31, 2018. There were no rate changes made in the first quarter of 2019. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longest in U.S. history. The impact has been a lower net interest margin to the Corporation and generally across the financial services industry. The Federal Reserve rate increases resulted in higher short-term U.S. Treasury rates, but long-term rates decreased, resulting in a flattening of the yield curve. Long-term rates like the 10-year U.S. Treasury were 309 basis points under the 5.50% Prime rate as of March 31, 2019. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continue throughout 2019. Management anticipates there could be no further Federal Reserve rate increases in 2019. It remains to be seen whether mid and long-term U.S. Treasury rates increase or if the yield curve will remain flat. A flat yield curve makes it more difficult for the Corporation to increase asset yield.

 

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Management’s Discussion and Analysis

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate was 5.50% as of March 31, 2019, following the nine Federal Reserve rate moves that began in December 2015. 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.

 

As a result of the Federal Reserve rate increases and the significant growth of the loan portfolio, the Corporation’s NII on a tax equivalent basis has been increasing significantly. The Corporation’s margin decreased in the beginning of 2018 primarily as a result of lower tax-equivalent yields on the Corporation’s municipal securities, which were negatively impacted by the lower corporate tax rate. Subsequent to the tax rate change, the Corporation’s net interest margin began increasing again. The net interest margin for the first quarter of 2019 increased to 3.59%. The Corporation’s NII on a tax-equivalent basis increased for the three months ended March 31, 2019, by $1,206,000, or 15.1%, over the same period in 2018. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given further Federal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any additional Federal Reserve rate increases in 2019 would further improve both margin and NII, although to a slightly lesser degree because the cost on deposits and borrowings will likely begin to increase more rapidly. However, without any additional Federal Reserve rate increase, improvements in NII will be driven primarily by loan growth and repricing of loans to higher rates.

 

The extended extremely low Federal funds rate had enabled management to reduce the average cost of funds over a period of years. However, in 2018, this trend reversed with slight increases in both deposit and borrowings interest expense as the cost to replace maturing borrowings increased and rates paid on deposits increased slightly. The cost of funds increased even further in the first quarter of 2019 due to a change in classification of a cash management product and as a result of higher rates paid on time deposits and long-term borrowings. While the low Prime rate reduced the average yield on the Corporation’s loans for many years, the rate increases in 2018, did act to enhance interest income. With a higher Prime rate and elevated Treasury rates, higher asset yields are expected throughout the remainder of 2019. The increasing number of Federal Reserve rate moves assists the Corporation in growing NII and net interest margin (NIM) because of the variable rate portion of the loan portfolio which resets every time the Prime rate changes. The magnitude of increase in NII and net interest margin may slow down during the remainder of 2019 as some deposit rates were increased in the fourth quarter of 2018.

 

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 quarter of 2019 compared to the same period in 2018, less security reinvestment has been occurring as cash flows from the securities portfolio are generally being reallocated into loan portfolio growth. Because of the flat yield curve, it is difficult to achieve substantially higher yields in the investment portfolio.

 

The Corporation’s loan portfolio yield has begun to increase as the variable rate portion of the loan portfolio repriced higher with each Federal Reserve rate movement. The vast majority of the Corporation’s commercial Prime-based loans are priced at the Prime rate, currently at 5.50%. The pricing for the most typical five-year fixed rate commercial loans is currently very similar to the Prime rate. Previous to 2018, any increases in variable rate loans acted to bring down overall loan yield. Now with the Prime rate being very similar or higher than fixed commercial rates, it is immediately beneficial to the Corporation’s asset yield to increase variable rate loans. Since the Prime rate generally moves in tandem with the overnight Federal Funds Rate, the key benefit of adding variable rate loans in the present interest rate environment is the immediate repricing to a higher rate should the Federal Reserve continue with rate increases. There are also 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 lower in 2019 compared to 2018. The average rate of the 10-year U.S. Treasury was 2.65% in the first three months of 2019 compared to 2.76% in the first three months of 2018, and it stood at 2.41% on March 31, 2019, compared to 2.74% on March 31, 2018. The slope of the yield curve has been compressed throughout 2018 and through the first three months of 2019, with a difference of 9 basis points between the Fed funds rate of 2.50% and the 10-year U.S. Treasury as of March 31, 2019, compared to 99 basis points as of March 31, 2018. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 2.79% in the first quarter 2019 and 2.94% in the first quarter of 2018, and as low as 2.39% in 2019, and 2.44% in 2018.

 

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Management’s Discussion and Analysis

While the Corporation’s overall cost of funds remains low, there were increases in 2018 and through the first quarter of 2019 due to higher interest expense on both deposits and borrowings. Core deposit interest rates are still very low and have not been increased significantly, although time deposit rates have increased for two odd-month CD specials that were initiated in the fourth quarter of 2018. The Corporation increased interest rates marginally on the Corporation’s interest bearing core accounts. Further rate increases are not as likely given the expectations for no further Federal Reserve rate increases throughout 2019. 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 majority of borrowings at higher rates in 2018 and 2019 as lower-priced borrowings matured with no ability to refinance at lower rates, so the yield on borrowings increased during 2018 and during the first quarter of 2019.

 

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels throughout the remainder of 2019. It is likely that mid and long-term U.S. Treasury rates will remain relatively suppressed throughout the remainder of the year. This 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 anticipation of remaining at current rate levels provides some ability to hold deposit rates at current levels to control the increase in interest expense.

 

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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Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

   Three Months Ended March 31
   2019 vs. 2018
   Increase (Decrease)
   Due To Change In
         Net
   Average  Interest  Increase
   Balances  Rates  (Decrease)
   $  $  $
INTEREST INCOME               
                
Interest on deposits at other banks   (51)   (15)   (66)
                
Securities available for sale:               
Taxable   (6)   192    186 
Tax-exempt   (157)   11    (146)
Total securities   (163)   203    40 
                
Loans   1,102    530    1,632 
Regulatory stock   9    (5)   4 
                
Total interest income   897    713    1,610 
                
INTEREST EXPENSE               
                
Deposits:               
Demand deposits   20    307    327 
Savings deposits   1        1 
Time deposits   (33)   50    17 
Total deposits   (12)   357    345 
                
Borrowings:               
Total borrowings   (3)   63    60 
                
Total interest expense   (15)   420    405 
                
NET INTEREST INCOME   912    293    1,205 

 

 

During the first three months of 2019, the Corporation’s NII on an FTE basis increased by $1,205,000, or 15.1%, over the same period in 2018. Total interest income on an FTE basis for the three months ended March 31, 2019, increased $1,610,000, or 18.4%, from 2018, while interest expense increased $405,000, or 52.3%, for the three months ended March 31, 2019, compared to the same period in 2018. The FTE interest income from the securities portfolio increased by $40,000, or 1.9%, while loan interest income increased $1,632,000, or 25.3%. During the first quarter of 2019, additional loan volume caused by loan growth added $1,102,000 to net interest income, and the higher yields caused a $530,000 increase, resulting in a total increase of $1,632,000. Lower balances in the securities portfolio caused a decrease of $163,000 in NII, while higher yields on securities caused a $203,000 increase, resulting in a total increase of $40,000. The Corporation sold a number of municipal bonds throughout 2018 due to the reduction in the Federal Corporate tax rate as well as a desire to sell some longer securities and replace with shorter ones.

 

The average balance of interest bearing liabilities increased by 5.0% during the three months ended March 31, 2019, compared to the prior year driven by growth in deposit balances. The higher cost on deposit accounts resulted in an increase in interest expense although the shift between time deposit balances and demand and savings accounts partially offset this increase. Higher interest rates on all deposit groups except savings deposits caused a $357,000 increase in interest expense while lower balances of higher cost deposits contributed to savings of $12,000 on deposit costs resulting in a total increase of $345,000.

 

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 $33,000 reduction to expense, and time deposits repricing to higher interest rates increased interest expense by $50,000, causing a net total increase of $17,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

 

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Management’s Discussion and Analysis

The average balance of outstanding borrowings did not change materially from the prior year and resulted in a reduction in interest expense of $3,000. The higher market interest rates increased interest expense on the Corporation’s borrowings by $63,000, as long-term borrowings at lower interest rates matured and were replaced with new advances at higher rates. The aggregate of these amounts was an increase in interest expense of $60,000 related to total borrowings.

 

The following table shows 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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Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)                  

 

   For the Three Months Ended March 31,
   2019  2018
         (c)        (c)
   Average     Annualized  Average     Annualized
   Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate
   $  $  %  $