UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period endedSeptember 30, 2015          March 31, 2016          

OR

 

oTRANSITION 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)

 

Pennsylvania000-5329751-0661129
(State or Other Jurisdiction of Incorporation)(Commission File Number)(IRS Employer Identification No)
   
   
31 E. Main St., Ephrata, PA17522-0457 
(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 reportNot 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.

Yesx           Noo

 

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

Yesx           Noo

 

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

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

 

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

Yeso           Nox

 

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 ofNovember 7, 2015,May 4, 2016,the registrant had2,851,8122,851,394 shares of $0.20 (par) Common Stock outstanding.

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2015

March 31, 2016

 

Part I – FINANCIAL INFORMATION

 
   
Item 1.Financial Statements 
   
Consolidated Balance Sheets at September 30,March 31, 2016 and 2015 and 2014 and December 31, 20142015 (Unaudited)3
   
Consolidated Statements of Income for the Three and Nine Months Ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)4
   
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)5
   
Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2016 and 2015 and 2014 (Unaudited)6
   
Notes to the Unaudited Consolidated Interim Financial Statements7-33
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations34-7034-64
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk71-7565-70
   
Item 4.Controls and Procedures7671
   
   
   
Part II – OTHER INFORMATION7772
   
Item 1.Legal Proceedings7772
   
Item 1A.Risk Factors7772
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds7772
   
Item 3.Defaults Upon Senior Securities7772
   
Item 4.Mine Safety Disclosures7772
   
Item 5.Other Information7772
   
Item 6.Exhibits7873
   
   
SIGNATURE PAGE7974
   
EXHIBIT INDEX8075

 

Index

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

 September 30,  December 31, September 30,  March 31,  December 31, March 31, 
 2015  2014 2014  2016  2015 2015 
 $  $ $  $  $ $ 
ASSETS                        
Cash and due from banks  15,668   16,727   13,003   11,989   15,426   13,423 
Interest-bearing deposits in other banks  24,139   26,685   31,076   28,689   28,801   26,933 
                        
Total cash and cash equivalents  39,807   43,412   44,079   40,678   44,227   40,356 
                        
Securities available for sale (at fair value)  278,470   295,822   301,297   287,270   289,423   292,808 
                        
Loans held for sale  1,020   506   257   804   1,126   648 
                        
Loans (net of unearned income)  495,039   471,168   457,873   544,784   520,283   482,626 
                        
Less: Allowance for loan losses  7,106   7,141   6,968   7,040   7,078   7,140 
                        
Net loans  487,933   464,027   450,905   537,744   513,205   475,486 
                        
Premises and equipment  21,953   22,447   22,693   21,466   21,696   22,305 
Regulatory stock  4,296   3,227   4,184   4,675   4,314   3,595 
Bank owned life insurance  23,659   20,603   20,406   24,082   23,869   20,765 
Other assets  7,128   7,164   6,970   8,102   7,741   6,752 
                        
Total assets  864,266   857,208   850,791   924,821   905,601   862,715 
                        
LIABILITIES AND STOCKHOLDERS' EQUITY                        
                        
Liabilities:                        
Deposits:                        
Noninterest-bearing  208,678   210,444   188,391   243,647   236,214   205,830 
Interest-bearing  484,011   489,207   498,953   506,084   503,848   489,777 
                        
Total deposits  692,689   699,651   687,344   749,731   740,062   695,607 
                        
Short-term borrowings  9,951      7,260   11,467   8,736   4,930 
Long-term debt  64,594   62,300   62,300   64,883   59,594   65,548 
Other liabilities  2,269   2,490   2,465   1,866   2,107   2,024 
                        
Total liabilities  769,503   764,441   759,369   827,947   810,499   768,109 
                        
Stockholders' equity:                        
Common stock, par value $0.20;                        
Shares: Authorized 12,000,000                        
Issued 2,869,557 and Outstanding 2,854,312            
(Issued 2,869,557 and Outstanding 2,856,836 as of 12/31/14)            
(Issued 2,869,557 and Outstanding 2,857,415 as of 9/30/14)  574   574   574 
Issued 2,869,557 and Outstanding 2,851,394            
(Issued 2,869,557 and Outstanding 2,849,524 as of 12/31/15)            
(Issued 2,869,557 and Outstanding 2,856,413 as of 3/31/15)  574   574   574 
Capital surplus  4,392   4,375   4,368   4,395   4,395   4,383 
Retained earnings  89,804   87,200   86,169   92,172   91,029   87,895 
Accumulated other comprehensive income, net of tax  475   1,002   666 
Less: Treasury stock cost on 15,245 shares (12,721 shares            
as of 12/31/14 and 12,142 shares as of 9/30/14)  (482)  (384)  (355)
Accumulated other comprehensive income (loss) net of tax  318   (252)  2,161 
Less: Treasury stock cost on 18,163 shares (20,033 shares            
as of 12-31-15 and 13,144 shares as of 3-31-15)  (585)  (644)  (407)
                        
Total stockholders' equity  94,763   92,767   91,422   96,874   95,102   94,606 
                        
Total liabilities and stockholders' equity  864,266   857,208   850,791   924,821   905,601   862,715 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

 Three Months ended September 30,  Nine Months ended September 30,  Three Months ended March 31, 
 2015  2014  2015  2014  2016 2015 
 $  $  $  $  $  $ 
Interest and dividend income:                        
Interest and fees on loans  5,060   4,848   15,035   14,444   5,439   4,949 
Interest on securities available for sale                        
Taxable  761   944   2,566   3,166   473   1,000 
Tax-exempt  843   827   2,413   2,547   867   766 
Interest on deposits at other banks  18   17   51   44   26   14 
Dividend income  79   60   286   192   81   143 
                        
Total interest and dividend income  6,761   6,696   20,351   20,393   6,886   6,872 
                        
Interest expense:                        
Interest on deposits  614   777   1,898   2,343   546   674 
Interest on borrowings  314   378   995   1,246   265   340 
                        
Total interest expense  928   1,155   2,893   3,589   811   1,014 
                        
Net interest income  5,833   5,541   17,458   16,804   6,075   5,858 
                        
Provision (credit) for loan losses  (150)     150   (300)  (50)  200 
                        
Net interest income after provision (credit) for loan losses  5,983   5,541   17,308   17,104   6,125   5,658 
                        
Other income:                        
Trust and investment services income  250   309   921   959   387   355 
Service fees  533   507   1,419   1,321   478   401 
Commissions  520   507   1,488   1,467   515   465 
Gains on securities transactions, net  529   624   1,690   1,891   728   561 
Impairment losses on securities:                
Impairment gains on investment securities           15 
Non-credit related losses on securities not expected                
to be sold in other comprehensive income before tax           (37)
Net impairment losses on investment securities           (22)
Gains on sale of mortgages  226   120   615   250   155   153 
Earnings on bank-owned life insurance  196   163   530   477   194   160 
Other income  88   45   274   280   194   106 
                        
Total other income  2,342   2,275   6,937   6,623   2,651   2,201 
                        
Operating expenses:                        
Salaries and employee benefits  3,679   3,517   11,055   10,428   3,971   3,702 
Occupancy  508   476   1,586   1,451   514   554 
Equipment  283   287   849   815   263   268 
Advertising & marketing  96   95   412   350   135   155 
Computer software & data processing  407   393   1,165   1,188   420   374 
Shares tax  195   170   586   536   227   195 
Professional services  322   311   1,077   991   377   318 
Other expense  600   518   1,697   1,595   575   584 
                        
Total operating expenses  6,090   5,767   18,427   17,354   6,482   6,150 
                        
Income before income taxes  2,235   2,049   5,818   6,373   2,294   1,709 
                        
Provision for federal income taxes  382   337   903   1,083   382   243 
                        
Net income  1,853   1,712   4,915   5,290   1,912   1,466 
                        
Earnings per share of common stock  0.65   0.60   1.72   1.85   0.67   0.51 
                        
Cash dividends paid per share  0.27   0.27   0.81   0.80   0.27   0.27 
                        
Weighted average shares outstanding  2,851,893   2,857,225   2,853,823   2,855,417   2,849,954   2,857,282 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

  Three Months ended September 30,  Nine Months ended September 30, 
  2015  2014  2015  2014 
  $  $  $  $ 
             
Net income  1,853   1,712   4,915   5,290 
                 
Other comprehensive income (loss), net of tax:                
Net change in unrealized gains:                
                 
Other-than-temporarily impaired securities available for sale:                
                 
Gains arising during the period           15 
   Income tax effect           (5)
            10 
                 
   Losses recognized in earnings           22 
   Income tax effect           (7)
            15 
Unrealized holding gains on other-than-temporarily impaired                
  securities available for sale, net of tax           25 
                 
Securities available for sale not other-than-temporarily impaired:                
                 
   Unrealized gains arising during the period  1,978   1,919   892   8,833 
   Income tax effect  (673)  (652)  (303)  (3,004)
   1,305   1,267   589   5,829 
                 
   Gains recognized in earnings  (529)  (624)  (1,690)  (1,891)
   Income tax effect  180   212   574   643 
   (349)  (412)  (1,116)  (1,248)
Unrealized holding gains (losses) on securities available for sale not                
  other-than-temporarily impaired, net of tax  956   855   (527)  4,581 
                 
Other comprehensive income (loss), net of tax  956   855   (527)  4,606 
                 
Comprehensive Income  2,809   2,567   4,388   9,896 
  Three Months ended March 31, 
  2016  2015 
  $  $ 
       
Net income  1,912   1,466 
         
Other comprehensive income, net of tax:        
Securities available for sale not other-than-temporarily impaired:        
         
   Unrealized gains arising during the period  1,591   2,317 
   Income tax effect  (541)  (788)
   1,050   1,529 
         
   Gains recognized in earnings  (728)  (561)
   Income tax effect  248   191 
   (480)  (370)
         
Other comprehensive income, net of tax  570   1,159 
         
Comprehensive Income  2,482   2,625 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS     
(DOLLARS IN THOUSANDS) Nine Months Ended September 30,  Three Months Ended March 31, 
 2015  2014  2016  2015 
 $  $  $  $ 
Cash flows from operating activities:                
Net income  4,915   5,290   1,912   1,466 
Adjustments to reconcile net income to net cash                
provided by operating activities:                
Net amortization of securities premiums and discounts and loan fees  4,429   3,726   1,758   1,327 
Decrease in interest receivable  196   208   105   336 
Decrease in interest payable  (90)  (100)  (13)  (47)
Provision (credit) for loan losses  150   (300)  (50)  200 
Gains on securities transactions, net  (1,690)  (1,891)  (728)  (561)
Impairment losses on securities     22 
Gains on sale of mortgages  (615)  (250)  (155)  (153)
Loans originated for sale  (19,927)  (8,867)  (5,120)  (5,139)
Proceeds from sales of loans  20,028   8,919   5,597   5,150 
Earnings on bank-owned life insurance  (530)  (477)  (194)  (160)
Loss on sale of other real estate owned  30   23      21 
Depreciation of premises and equipment and amortization of software  1,160   1,086   404   378 
Deferred income tax  285   480   238   25 
Other assets and other liabilities, net  (276)  (663)  (1,076)  (885)
Net cash provided by operating activities  8,065   7,206   2,678   1,958 
                
Cash flows from investing activities:                
Securities available for sale:                
Proceeds from maturities, calls, and repayments  37,005   24,173   19,915   16,564 
Proceeds from sales  123,335   99,348   48,099   40,235 
Purchases  (146,374)  (119,273)  (65,953)  (52,754)
Proceeds from sale of other real estate owned  176   48      77 
Purchase of regulatory bank stock  (1,288)  (890)  (670)  (491)
Redemptions of regulatory bank stock  219   366   309   123 
Purchase of bank-owned life insurance  (2,526)  (18)  (19)  (2)
Net increase in loans  (24,346)  (19,755)  (24,564)  (11,837)
Purchases of premises and equipment  (588)  (691)
Purchases of premises and equipment, net  (129)  (215)
Purchase of computer software  (174)  (140)  (194)  (62)
Net cash used for investing activities  (14,561)  (16,832)  (23,206)  (8,362)
                
Cash flows from financing activities:                
Net increase in demand, NOW, and savings accounts  7,346   33,356 
Net increase (decrease) in demand, NOW, and savings accounts  20,881   (1,187)
Net decrease in time deposits  (14,308)  (2,638)  (11,212)  (2,857)
Net increase in short-term borrowings  9,951   3,360   2,731   4,930 
Proceeds from long-term debt  12,794   13,800   10,289   6,248 
Repayments of long-term debt  (10,500)  (16,500)  (5,000)  (3,000)
Dividends paid  (2,311)  (2,286)  (769)  (771)
Treasury stock sold  392   374   124   130 
Treasury stock purchased  (473)  (338)  (65)  (145)
Net cash provided by financing activities  2,891   29,128   16,979   3,348 
Increase (decrease) in cash and cash equivalents  (3,605)  19,502 
Decrease in cash and cash equivalents  (3,549)  (3,056)
Cash and cash equivalents at beginning of period  43,412   24,577   44,227   43,412 
Cash and cash equivalents at end of period  39,807   44,079   40,678   40,356 
                
Supplemental disclosures of cash flow information:                
Interest paid  2,982   3,689   823   1,061 
Income taxes paid  640   300   625   250 
                
Supplemental disclosure of non-cash investing and financing activities:                
Net transfer of other real estate owned from loans  137   56      137 
Fair value adjustments for securities available for sale  (800)  6,979   863   1,756 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.Basis of Presentation

 

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.

 

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the thirdfirst quarter of 2015,2016, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and nine months ended September 30, 2015,March 31, 2016, are not necessarily indicative of the results that may be expected for the year ended December 31, 2015.2016. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.

 

 

2.Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, and fair value of securities held at September 30, 2015,March 31, 2016, and December 31, 2014,2015, are as follows:

 

   Gross Gross     Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value Cost Gains Losses Value
 $ $ $ $ $ $ $ $
September 30, 2015                
March 31, 2016        
U.S. government agencies  25,420   57   (45)  25,432   21,673   26   (11)  21,688 
U.S. agency mortgage-backed securities  38,392   48   (248)  38,192   50,494   91   (233)  50,352 
U.S. agency collateralized mortgage obligations  47,810   375   (309)  47,876   44,227   292   (442)  44,077 
Corporate bonds  60,542   104   (267)  60,379   62,025   84   (294)  61,815 
Obligations of states and political subdivisions  100,046   1,800   (805)  101,041   102,615   1,459   (476)  103,598 
Total debt securities  272,210   2,384   (1,674)  272,920   281,034   1,952   (1,456)  281,530 
Marketable equity securities  5,540   20   (10)  5,550   5,755   13   (28)  5,740 
Total securities available for sale  277,750   2,404   (1,684)  278,470   286,789   1,965   (1,484)  287,270 
                                
December 31, 2014                
December 31, 2015                
U.S. government agencies  46,577   110   (528)  46,159   29,829   3   (141)  29,691 
U.S. agency mortgage-backed securities  37,946   138   (134)  37,950   42,288   39   (347)  41,980 
U.S. agency collateralized mortgage obligations  48,690   55   (679)  48,066   48,140   125   (934)  47,331 
Corporate bonds  65,274   145   (311)  65,108   63,825   29   (549)  63,305 
Obligations of states and political subdivisions  90,628   2,961   (258)  93,331   100,208   1,780   (405)  101,583 
Total debt securities  289,115   3,409   (1,910)  290,614   284,290   1,976   (2,376)  283,890 
Marketable equity securities  5,189   19      5,208   5,515   23   (5)  5,533 
Total securities available for sale  294,304   3,428   (1,910)  295,822   289,805   1,999   (2,381)  289,423 

 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The amortized cost and fair value of debt securities available for sale at September 30, 2015,March 31, 2016, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

 

CONTRACTUAL MATURITY OF DEBT SECURITIES

(DOLLARS IN THOUSANDS)      

 Amortized   Amortized  
 Cost Fair Value Cost Fair Value
 $ $ $ $
Due in one year or less  19,693   19,683   24,146   24,043 
Due after one year through five years  102,007   101,831   107,792   107,535 
Due after five years through ten years  58,519   58,855   51,160   51,409 
Due after ten years  91,991   92,551   97,936   98,543 
Total debt securities  272,210   272,920   281,034   281,530 

 

Securities available for sale with a par value of $67,960,000$54,499,000 and $75,013,000$60,295,000 at September 30, 2015,March 31, 2016, and December 31, 2014,2015, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $72,939,000$58,252,000 at September 30, 2015,March 31, 2016, and $78,269,000$65,137,000 at December 31, 2014.2015.

 

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

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

     

 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2015 2014 2015 2014 2016 2015
 $ $ $ $ $ $
Proceeds from sales  46,797   29,834   123,335   99,304   48,099   40,235 
Gross realized gains  531   825   1,784   2,576   730   607 
Gross realized losses  2   201   94   685   2   46 

 

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

  Three Months Ended September 30, Nine Months Ended September 30,
  2015 2014 2015 2014
  $ $ $ $
Gross realized gains  531   825   1,784   2,576 
                 
Gross realized losses  2   201   94   685 
Impairment on securities           22 
Total gross realized losses  2   201   94   707 
                 
Net gains on securities  529   624   1,690   1,869 

The bottom portion of the above table shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. The net gain or loss from security transactions is also reflected on the Corporation’s Consolidated Statements of Income and Consolidated Statements of Cash Flows.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. Prior to June 30, 2014, the Corporation had a small number of private collateralized mortgage obligations (PCMOs) of which all but one had impairment recorded at some point in the past. During the second quarter of 2014, the three PCMOs remaining in the Corporation’s securities portfolio were sold. No other securities in the portfolio had other-than-temporary impairment recorded in 2014the first quarter of 2016 or 2015.

 

Information pertaining to securities with gross unrealized losses at September 30, 2015,March 31, 2016, and December 31, 2014,2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)    

 Less than 12 months More than 12 months Total Less than 12 months More than 12 months Total
   Gross   Gross   Gross   Gross   Gross   Gross
 Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses Value Losses Value Losses Value Losses
 $ $ $ $ $ $ $ $ $ $ $ $
As of September 30, 2015                        
As of March 31, 2016                        
U.S. government agencies  996   (4)  3,974   (41)  4,970   (45)  4,994   (6)  1,994   (5)  6,988   (11)
U.S. agency mortgage-backed securities  17,917   (156)  2,481   (92)  20,398   (248)  31,293   (144)  2,986   (89)  34,279   (233)
U.S. agency collateralized mortgage obligations  15,768   (197)  6,080   (112)  21,848   (309)  15,510   (426)  2,041   (16)  17,551   (442)
Corporate bonds  32,648   (249)  5,173   (18)  37,821   (267)  25,978   (198)  9,601   (96)  35,579   (294)
Obligations of states & political subdivisions  36,148   (600)  8,291   (205)  44,439   (805)  22,415   (204)  15,641   (272)  38,056   (476)
                                                
Total debt securities  103,477   (1,206)  25,999   (468)  129,476   (1,674)  100,190   (978)  32,263   (478)  132,453   (1,456)
                                                
Marketable equity securities  172   (10)        172   (10)  364   (28)        364   (28)
                                                
Total temporarily impaired securities  103,649   (1,216)  25,999   (468)  129,648   (1,684)  100,554   (1,006)  32,263   (478)  132,817   (1,484)
                                                
As of December 31, 2014                        
As of December 31, 2015                        
U.S. government agencies  9,676   (30)  19,689   (498)  29,365   (528)  24,968   (106)  1,965   (35)  26,933   (141)
U.S. agency mortgage-backed securities  7,412   (18)  5,412   (116)  12,824   (134)  24,613   (235)  4,827   (112)  29,440   (347)
U.S. agency collateralized mortgage obligations  25,314   (403)  11,222   (276)  36,536   (679)  26,563   (827)  4,652   (107)  31,215   (934)
Corporate bonds  33,413   (227)  9,855   (84)  43,268   (311)  50,530   (532)  2,002   (17)  52,532   (549)
Obligations of states & political subdivisions  2,710   (29)  16,720   (229)  19,430   (258)  21,913   (252)  7,435   (153)  29,348   (405)
                                                
Total debt securities  148,587   (1,952)  20,881   (424)  169,468   (2,376)
                        
Marketable equity securities  142   (5)        142   (5)
                        
Total temporarily impaired securities  78,525   (707)  62,898   (1,203)  141,423   (1,910)  148,729   (1,957)  20,881   (424)  169,610   (2,381)

 

In the debt security portfolio, there were 112are 103 positions that were carrying unrealized losses as of September 30, 2015. In the equity security portfolio there were four positions that were carrying unrealized losses as of September 30, 2015.March 31, 2016. There were no instruments considered to be other-than-temporarily impaired at September 30, 2015.March 31, 2016.

 

The Corporation evaluates both equity and fixed maturity positions for OTTIother-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. Management follows a practice of evaluating for impairment any security identified as carrying unrealized losses of greater than 10%. As of September 30, 2015, no securities, debt or equity, were carrying unrealized losses of greater than 10%. Management will also evaluate for impairment securities with unrealized losses of greater than 5%, but under 10%, that have been carrying unrealized losses for an extended period of time. Management would also conduct impairment analysis on any debt security that began passing through actual credit losses, or based on projected future cash flows, was expected to do so in the future. There are no securities held as of September 30, 2015, that management believes would incur future credit losses.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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. This accounting treatment was only applicable to two

As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impact the value of the Corporation’s PCMOsbonds by causing accelerated amortization. If a security was purchased at a high premium, or dollar price above par, the remaining premium has to be amortized on a straight line basis to the known call date. Calls can occur in a majority of the securities the Corporation purchases but they are dependent on the structure of the instrument, and can also be dependent on certain conditions. The Corporation experienced a clean-up call on a Ginnie Mae U.S. agency mortgage backed security in the firstfourth quarter of 2014, but both2015, which required $385,000 of thoseremaining premium to be amortized. Subsequent to this event, all other high coupon and/or high premium U.S. agency mortgage backed securities and collateralized mortgage obligations were reviewed to determine if there was any other current material exposure to clean-up call provisions. No other securities were sold in the second quarter of 2014, resulting in no further impairment charges.identified with impending clean-up calls.

 

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

 

CREDIT LOSSES RECOGNIZED IN EARNINGS ON DEBT SECURITIES

(DOLLARS IN THOUSANDS)  

  Three Months Ended September 30, Nine Months Ended September 30,
  2015 2014 2015 2014
  $ $ $ $
         
Beginning balance           1,148 
                 
Credit losses on debt securities for which other-than-                
  temporary impairment has not been previously recognized            
                 
Additional credit losses on debt securities for which other-                
   than-temporary impairment was previously recognized           22 
                 
Sale of debt securities with previously recognized impairment           (1,170)
                 
Ending balance            

With the sale of the remaining PCMO portfolio during the second quarter of 2014, there are no remaining impairment balances in subsequent periods.

109 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

3.Loans and Allowance for Loan Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2015,March 31, 2016, and December 31, 2014:2015:

 

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)  

 September 30, December 31, March 31, December 31,
 2015 2014 2016 2015
 $ $ $ $
Commercial real estate                
Commercial mortgages  90,740   95,914   88,997   87,613 
Agriculture mortgages  152,015   140,322   165,211   158,321 
Construction  8,963   7,387   21,354   14,966 
Total commercial real estate  251,718   243,623   275,562   260,900 
                
Consumer real estate (a)                
1-4 family residential mortgages  127,716   123,395   136,307   133,538 
Home equity loans  11,857   12,563   10,423   10,288 
Home equity lines of credit  34,476   27,308   40,571   37,374 
Total consumer real estate  174,049   163,266   187,301   181,200 
                
Commercial and industrial                
Commercial and industrial  35,848   31,998   40,431   36,189 
Tax-free loans  12,613   11,806   18,929   19,083 
Agriculture loans  16,705   16,496   18,087   18,305 
Total commercial and industrial  65,166   60,300   77,447   73,577 
                
Consumer  3,498   3,517   3,725   3,892 
                
Gross loans prior to deferred fees  494,431   470,706   544,035   519,569 
Less:                
Deferred loan costs, net  (608)  (462)  (749)  (714)
Allowance for loan losses  7,106   7,141   7,040   7,078 
Total net loans  487,933   464,027   537,744   513,205 

 

(a)Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets,totaled $32,537,000$41,282,000 and $16,670,000$38,024,000 as of September 30, 2015,March 31, 2016, and December 31, 2014,2015, respectively.

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2015March 31, 2016 and December 31, 2014.2015. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

10 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation's internally assigned grades for commercial credits are as follows:

 

·Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

 

·Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. 

 

·Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

 

11 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

 

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

 

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

 

September 30, 2015 Commercial
Mortgages
 Agriculture
Mortgages
 Construction Commercial
and
Industrial
 Tax-free
Loans
 Agriculture
Loans
 Total
March 31, 2016 Commercial
Mortgages
 Agriculture
Mortgages
 Construction Commercial
and
Industrial
 Tax-free
Loans
 Agriculture
Loans
 Total
 $ $ $ $ $ $ $ $ $ $ $ $ $ $
Grade:                                                        
Pass  83,212   148,865   7,790   34,928   12,613   16,348   303,756   82,796   161,452   20,239   39,418   18,929   17,604   340,438 
Special Mention  1,031   1,144      48      31   2,254   508   1,154      39      250   1,951 
Substandard  6,497   2,006   1,173   872      326   10,874   5,693   2,605   1,115   974      233   10,620 
Doubtful                                          
Loss                                          
                                                        
Total  90,740   152,015   8,963   35,848   12,613   16,705   316,884   88,997   165,211   21,354   40,431   18,929   18,087   353,009 
                            

 

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

December 31, 2014 Commercial
Mortgages
 Agriculture
Mortgages
 Construction Commercial
and
Industrial
 Tax-free
Loans
 Agriculture
Loans
 Total
  $ $ $ $ $ $ $
Grade:                            
Pass  82,478   135,298   5,350   31,006   11,806   16,255   282,193 
Special Mention  2,649   3,237      29      29   5,944 
Substandard  10,787   1,787   2,037   963      212   15,786 
Doubtful                     
Loss                     
                             
    Total  95,914   140,322   7,387   31,998   11,806   16,496   303,923 

1211 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of September 30, 2015March 31, 2016 and December 31, 2014:2015:

 

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

 

September 30, 2015 1-4 Family
Residential
Mortgages
 Home Equity
Loans
 Home Equity
Lines of
Credit
 Consumer Total
March 31, 2016
 1-4 Family
Residential
Mortgages
 Home Equity
Loans
 Home Equity
Lines of
Credit
 Consumer Total
Payment performance: $ $ $ $ $ $ $ $ $ $
                    
Performing  127,308   11,857   34,476��  3,488   177,129   135,999   10,423   40,548   3,722   190,692 
Non-performing  408         10   418   308      23   3   334 
                                        
Total  127,716   11,857   34,476   3,498   177,547   136,307   10,423   40,571   3,725   191,026 
                                        

 

December 31, 2014 1-4 Family
Residential
Mortgages
 Home Equity
Loans
 Home Equity
Lines of
Credit
 Consumer Total
December 31, 2015
 1-4 Family
Residential
Mortgages
 Home Equity
Loans
 Home Equity
Lines of
Credit
 Consumer Total
Payment performance: $ $ $ $ $ $ $ $ $ $
              ��               
Performing  123,023   12,551   27,308   3,517   166,399   133,220   10,278   37,327   3,889   184,714 
Non-performing  372   12         384   318   10   47   3   378 
                                        
Total  123,395   12,563   27,308   3,517   166,783   133,538   10,288   37,374   3,892   185,092 

 

1312 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 2015March 31, 2016 and December 31, 2014:2015:

 

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

               
              Loans
      Greater       Receivable >
  30-59 Days 60-89 Days than 90 Total Past   Total Loans 90 Days and
September 30, 2015 Past Due Past Due Days Due Current Receivable Accruing
  $ $ $ $ $ $ $
Commercial real estate                            
   Commercial mortgages  272         272   90,468   90,740    
   Agriculture mortgages              152,015   152,015    
   Construction              8,963   8,963    
Consumer real estate                            
   1-4 family residential mortgages  953   167   408   1,528   126,188   127,716   408 
   Home equity loans  27         27   11,830   11,857    
   Home equity lines of credit  47   12      59   34,417   34,476    
Commercial and industrial                            
   Commercial and industrial  15   56      71   35,777   35,848    
   Tax-free loans              12,613   12,613    
   Agriculture loans              16,705   16,705    
Consumer  17   10   10   37   3,461   3,498   10 
       Total  1,331   245   418   1,994   492,437   494,431   418 
                             

 

                           Loans
             Loans     Greater       Receivable >
     Greater       Receivable > 30-59 Days 60-89 Days than 90 Total Past   Total Loans 90 Days and
 30-59 Days 60-89 Days than 90 Total Past   Total Loans 90 Days and
December 31, 2014 Past Due Past Due Days Due Current Receivable Accruing
March 31, 2016 Past Due Past Due Days Due Current Receivable Accruing
 $ $ $ $ $ $ $ $ $ $ $ $ $ $
Commercial real estate                                                        
Commercial mortgages     189   266   455   95,459   95,914      275   594      869   88,128   88,997    
Agriculture mortgages              140,322   140,322                  165,211   165,211    
Construction              7,387   7,387                  21,354   21,354    
Consumer real estate                                                        
1-4 family residential mortgages  665   349   372   1,386   122,009   123,395   372   733      308   1,041   135,266   136,307   308 
Home equity loans  78   14   12   104   12,459   12,563   12   17   56      73   10,350   10,423    
Home equity lines of credit  13         13   27,295   27,308            23   23   40,548   40,571   23 
Commercial and industrial                                                        
Commercial and industrial  21   73      94   31,904   31,998      35         35   40,396   40,431    
Tax-free loans              11,806   11,806                  18,929   18,929    
Agriculture loans              16,496   16,496      15         15   18,072   18,087    
Consumer  23   1      24   3,493   3,517      18   17   3   38   3,687   3,725   3 
Total  800   626   650   2,076   468,630   470,706   384   1,093   667   334   2,094   541,941   544,035   334 

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

1413 

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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 September 30, 2015March 31, 2016 and December 31, 2014:2015:

 

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)  

 

 September 30, December 31, March 31, December 31,
 2015 2014 2016 2015
 $ $ $ $
        
Commercial real estate                
Commercial mortgages  423   894   337   380 
Agriculture mortgages            
Construction            
Consumer real estate                
1-4 family residential mortgages            
Home equity loans            
Home equity lines of credit            
Commercial and industrial                
Commercial and industrial  46   73       
Tax-free loans            
Agriculture loans            
Consumer            
Total  469   967   337   380 

 

As of September 30, 2015March 31, 2016 and December 31, 2014,2015, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and nine months ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, is as follows:

 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)  

 

 Three months ended September 30, Nine months ended September 30, Three months ended March 31,
 2015 2014 2015 2014 2016 2015
 $ $ $ $ $ $
            
Average recorded balance of impaired loans  1,820   2,534   1,997   2,589   1,672   2,111 
Interest income recognized on impaired loans  23   27   68   81   14   24 

 

Interest income on impaired loans would have increased by approximately $3,000 and $17,000$4,000 for the three and nine months ended September 30, 2015,March 31, 2016, compared to $9,000 and $32,000$7,000 for the three and nine months ended September 30, 2014,March 31, 2015, had these loans performed in accordance with their original terms.

 

During the ninethree months ended September 30,March 31, 2016 and 2015, and 2014, there were no loan modifications made that would cause a loan to be considered a troubled debt restructuring (TDR). A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial condition of the borrower and improve the likelihood of full collection by the lender. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

 

1514 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information in regards to impaired loans by loan portfolio class as of September 30, 2015,March 31, 2016, December 31, 2014,2015, and September 30, 2014:March 31, 2015:

 

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

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

September 30, 2015

  Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
  $ $ $ $ $
           
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  423   995      572    
    Agriculture mortgages  1,345   1,345      1,367   65 
    Construction               
Total commercial real estate  1,768   2,340      1,939   65 
                     
Commercial and industrial                    
    Commercial and industrial  46   53      58   3 
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  46   53      58   3 
                     
Total with no related allowance  1,814   2,393      1,997   68 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages               
    Agriculture mortgages               
    Construction               
Total commercial real estate               
                     
Commercial and industrial                    
    Commercial and industrial               
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial               
                     
Total with a related allowance               
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  423   995      572    
    Agriculture mortgages  1,345   1,345      1,367   65 
    Construction               
Total commercial real estate  1,768   2,340      1,939   65 
                     
Commercial and industrial                    
    Commercial and industrial  46   53      58   3 
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  46   53      58   3 
                     
Total  1,814   2,393      1,997   68 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

December 31, 2014  

  Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
  $ $ $ $ $
           
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  745   931      931    
    Agriculture mortgages  1,391   1,391      1,539   104 
    Construction               
Total commercial real estate  2,136   2,322      2,470   104 
                     
Commercial and industrial                    
    Commercial and industrial  73   73      86   6 
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  73   73      86   6 
                     
Total with no related allowance  2,209   2,395      2,556   110 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  149   264   1   68    
    Agriculture mortgages               
    Construction               
Total commercial real estate  149   264   1   68    
                     
Commercial and industrial                    
    Commercial and industrial               
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial               
                     
Total with a related allowance  149   264   1   68    
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  894   1,195   1   999    
    Agriculture mortgages  1,391   1,391      1,539   104 
    Construction               
Total commercial real estate  2,285   2,586   1   2,538   104 
                     
Commercial and industrial                    
    Commercial and industrial  73   73      86   6 
    Tax-free loans               
    Agriculture loans               
Total commercial and industrial  73   73      86   6 
                     
Total  2,358   2,659   1   2,624   110 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

September 30, 2014

 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
IMPAIRED LOAN ANALYSIS          
(DOLLARS IN THOUSANDS)          
March 31, 2015 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Average
Recorded
Investment
 Interest
Income
Recognized
 $ $ $ $ $ $ $ $ $ $
                              
With no related allowance recorded:                                        
Commercial real estate                                        
Commercial mortgages  1,289   1,386      924      585   1,157      665    
Agriculture mortgages  1,556   1,556      1,574   81   1,372   1,372      1,383   23 
Construction                              
Total commercial real estate  2,845   2,942      2,498   81   1,957   2,529      2,048   23 
                                        
Commercial and industrial                                        
Commercial and industrial  76   76      91      60   67      63   1 
Tax-free loans                              
Agriculture loans                              
Total commercial and industrial  76   76      91      60   67      63   1 
                                        
Total with no related allowance  2,921   3,018      2,589   81   2,017   2,596      2,111   24 
                                        
With an allowance recorded:                                        
Commercial real estate                                        
Commercial mortgages                              
Agriculture mortgages                              
Construction                              
Total commercial real estate                              
                                        
Commercial and industrial                                        
Commercial and industrial                              
Tax-free loans                              
Agriculture loans                              
Total commercial and industrial                              
                                        
Total with a related allowance                              
                                        
Total by loan class:                                        
Commercial real estate                                        
Commercial mortgages  1,289   1,386      924      585   1,157      665    
Agriculture mortgages  1,556   1,556      1,574   81   1,372   1,372      1,383   23 
Construction                              
Total commercial real estate  2,845   2,942      2,498   81   1,957   2,529      2,048   23 
                                        
Commercial and industrial                                        
Commercial and industrial  76   76      91      60   67      63   1 
Tax-free loans                              
Agriculture loans                              
Total commercial and industrial  76   76      91      60   67      63   1 
                                        
Total  2,921   3,018      2,589   81   2,017   2,596      2,111   24 

 

1817 

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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 ninethree months ended September 30,March 31, 2016:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

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

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

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

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

 Commercial Real Estate Consumer Real Estate Commercial and Industrial Consumer Unallocated Total            
 $ $ $ $ $ $ Commercial
Real Estate
 Consumer
Real Estate
 Commercial
and Industrial
 Consumer Unallocated Total
Allowance for credit losses:                        
 $ $ $ $ $ $
            
Beginning balance - December 31, 2014  3,834   1,367   1,301   66   573   7,141   3,834   1,367   1,301   66   573   7,141 
                                                
Charge-offs  (272)        (1)     (273)  (272)        (1)     (273)
Recoveries  2      70         72   2      70         72 
Provision  623   (283)  (147)  (11)  18   200   623   (283)  (147)  (11)  18   200 
                                                
Balance - March 31, 2015  4,187   1,084   1,224   54   591   7,140   4,187   1,084   1,224   54   591   7,140 
                        
Charge-offs        (2)  (3)     (5)
Recoveries  1      11   2      14 
Provision  (29)  (20)  157   22   (30)  100 
                        
Ending Balance - June 30, 2015  4,159   1,064   1,390   75   561   7,249 
                        
Charge-offs           (4)     (4)
Recoveries        10   1      11 
Provision  (63)  94   (195)  (26)  40   (150)
                        
Ending Balance - September 30, 2015  4,096   1,158   1,205   46   601   7,106 

 

During the nine months ended September 30,first quarter of 2015, provision expense was recorded for the commercial real estate segment with credit provisions recorded in all other loan categories. There were $272,000 of commercial real estate loan charge-offs during the first quarter of 2015, which increased the historical loss rates and ultimately resulted in a higher required reserve amount for the commercial real estate category as of March 31, 2015. However, sincecategory. The higher commercial loan charge-offs and loan growth during the first quarter charge-offs have been at a minimum, economic conditions continue to improve, andof 2015 overshadowed the qualitative factors impacting commercial real estate have declined,reduction in provisions in the other areas, resulting in a lower allocation. The majority$200,000 of the Corporation’s total allowance is devoted to commercial real estate as this is the largest element of the portfolio and generally carries a higher element of credit risk. With charge-offs and recoveries running at minimal levels for the second and third quarters of 2015, it has been the qualitative factor movements that have been primarily responsible for adjusting the allocations shown above for the four main loan categories.provision expense.

 

Management evaluates nine qualitative factors that impact the allocations for the four major loan groups shown above. The accumulation of all nine qualitative factors results in a total, which is then added to the historical loss ratio to arrive at an adjusted loss percentage. The balances in each loan sector are than multiplied by the adjusted loss percentage to arrive at the allocation or provision shown above. All of the nine qualitative factors that management considers had declined from December 31, 2014 to September 30, 2015. While some factors increased, the majority of the factors declined throughout the year. The only area that experienced an increase in provision for the third quarter of 2015 was consumer real estate. Consumer real estate includes residential real estate loans including mortgages and both fixed and variable rate home equity loans. Management continues to grow the residential mortgage program and has expanded the product offerings. Home equity options have been enhanced with the Homeline home equity line of credit, causing an increase in those loans. All of the loan categories outside of commercial real estate ended September 30, 2015 with a lower allowance than at December 31, 2014, primarily due to lower qualitative factors, but also influenced by the loan growth in these areas.

1918 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014:

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, 2013  3,657   1,346   1,416   102   698   7,219 
                         
    Charge-offs           (15)     (15)
    Recoveries  4   5   43         52 
    Provision  (150)  51   (117)  17   (1)  (200)(1)
                         
Balance - March 31, 2014  3,511   1,402   1,342   104   697   7,056 
                         
    Charge-offs                  
    Recoveries  3      9         12 
    Provision  (106)  44   12   (24)  (26)  (100)(1)
                         
Ending Balance - June 30, 2014  3,408   1,446   1,363   80   671   6,968 
                         
    Charge-offs        (12)  (2)     (14)
    Recoveries        14         14 
    Provision  159   (34)  (74)  3   (54)   
                         
Ending Balance - September 30, 2014  3,567   1,412   1,291   81   617   6,968 

(1)The Corporation recognized a $200,000 credit provision in the first quarter of 2014 and a $100,000 credit provision in the second quarter of 2014 as a result of lower levels of substandard loans, and continued  low levels of total classified loans, impaired loans, non-accrual loans, recoveries in excess of charge-offs, continuing declines in historic loss ratio, and improving qualitative factors.

During the nine months ended September 30, 2014, credit provisions were recorded for the commercial real estate, commercial and industrial, and consumer loan categories while there was a small provision expense required for the consumer real estate loan category. There were no commercial loan charge-offs during the first nine months of 2014, which reduced the historical loss rates and ultimately resulted in a lower required reserve amount for the commercial loan categories. Qualitative factors were shifting throughout the first nine months of 2014, with some increasing and some decreasing, but overall, qualitative factors across the board were declining. Conversely, factors in the allowance calculation related to consumer real estate were increased in the first nine months of 2014 as a result of the mortgage initiative and focus on increasing volume in this area.

20 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of September 30, 2015March 31, 2016 and December 31, 2014:2015:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

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

 

As of September 30, 2015: Commercial
Real Estate
 Consumer
Real Estate
 Commercial
and Industrial
 Consumer Unallocated Total
As of December 31, 2015: Commercial
Real Estate
 Consumer
Real Estate
 Commercial
and Industrial
 Consumer Unallocated Total
 $ $ $ $ $ $ $ $ $ $ $ $
Allowance for credit losses:                                                
Ending balance: individually evaluated                                                
for impairment                                    
Ending balance: collectively evaluated                                                
for impairment  4,096   1,158   1,205   46   601   7,106   3,831   1,403   1,314   62   468   7,078 
                                                
Loans receivable:                                                
Ending balance  251,718   174,049   65,166   3,498       494,431   260,900   181,200   73,577   3,892       519,569 
Ending balance: individually evaluated                                                
for impairment  1,768      46          1,814   1,705                1,705 
Ending balance: collectively evaluated                                                
for impairment  249,950   174,049   65,120   3,498       492,617   259,195   181,200   73,577   3,892       517,864 
                        

As of December 31, 2014: Commercial
Real Estate
 Consumer
Real Estate
 Commercial
and Industrial
 Consumer Unallocated Total
  $ $ $ $ $ $
Allowance for credit losses:                        
Ending balance: individually evaluated                        
  for impairment  1               1 
Ending balance: collectively evaluated                        
  for impairment  3,833   1,367   1,301   66   573   7,140 
                         
Loans receivable:                        
Ending balance  243,623   163,266   60,300   3,517       470,706 
Ending balance: individually evaluated                        
  for impairment  2,285      73          2,358 
Ending balance: collectively evaluated                        
  for impairment  241,338   163,266   60,227   3,517       468,348 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4. Fair Value Presentation

 

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

 

Level I:Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:Assets and liabilities that have little to no observable pricing as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets reported on the consolidated balance sheetsConsolidated Balance Sheets at their fair value as of September 30, 2015,March 31, 2016, and December 31, 2014,2015, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

Fair Value Measurements:

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)  

 March 31, 2016
 September 30, 2015        
 Level I Level II Level III Total Level I Level II Level III Total
 $ $ $ $ $ $ $ $
                
U.S. government agencies     25,432      25,432      21,688      21,688 
U.S. agency mortgage-backed securities     38,192      38,192      50,352      50,352 
U.S. agency collateralized mortgage obligations     47,876      47,876      44,077      44,077 
Corporate bonds     60,379      60,379      61,815      61,815 
Obligations of states & political subdivisions     101,041      101,041      103,598      103,598 
Marketable equity securities  5,550         5,550   5,740         5,740 
                                
Total securities  5,550   272,920      278,470   5,740   281,530      287,270 

 

On September 30, 2015,March 31, 2016, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of September 30, 2015,March 31, 2016, the CRA fund investments had a $5,000,000 book and fair market value and the bank stock portfolio had a book value of $540,000,$755,000, and fair market value of $550,000.$740,000.

 

2220 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Fair Value Measurements:

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)        

 December 31, 2015
 December 31, 2014        
 Level I Level II Level III Total Level I Level II Level III Total
 $ $ $ $ $ $ $ $
                
U.S. government agencies     46,159      46,159      29,691      29,691 
U.S. agency mortgage-backed securities     37,950      37,950      41,980      41,980 
U.S. agency collateralized mortgage obligations     48,066      48,066      47,331      47,331 
Corporate bonds     65,108      65,108      63,305      63,305 
Obligations of states & political subdivisions     93,331      93,331      101,583      101,583 
Marketable equity securities  5,208         5,208   5,533         5,533 
                                
Total securities  5,208   290,614      295,822   5,533   283,890      289,423 

 

On December 31, 2014,2015, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. As of December 31, 2014,2015, the Corporation’s CRA fund investments had a book and fair market value of $5,000,000 and the bank stock portfolio had a book value of $189,000$515,000 and a market value of $208,000$533,000 utilizing level I pricing.

 

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. There were no level III securities as of September 30, 2015March 31, 2016 or December 31, 2014.2015.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of September 30, 2015March 31, 2016 and December 31, 2014,2015, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 September 30, 2015  March 31, 2016 
 Level I
$
 Level II
$
 Level III
$
 Total
$
  Level I
$
 Level II
$
 Level III
$
 Total
$
 
Assets:                                
Impaired Loans        1,814   1,814         1,641   1,641 
OREO            
Total        1,814   1,814         1,641   1,641 

 

 

  December 31, 2014 
  Level I
$
  Level II
$
  Level III
$
  Total
$
 
Assets:                
   Impaired Loans        2,357   2,357 
   OREO        69   69 
Total        2,426   2,426 

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

 

The Corporation had a total of $1,814,000$1,641,000 of impaired loans as of September 30, 2015,March 31, 2016, with no specific allocation against these loans and $2,358,000$1,705,000 of impaired loans as of December 31, 2014,2015, with $1,000 of specifically allocated allowanceno specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

2321 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Other real estate owned (OREO) is measured at fair value, less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management. The Corporation had no OREO properties as of September 30, 2015, and had one residential property that was classified as OREO as of December 31, 2014. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

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, 2016September 30, 2015
 Fair ValueValuationUnobservableRangeRange
 EstimateTechniquesInput(Weighted Avg)
 
      
Impaired loans 1,8141,641Appraisal ofAppraisal-20% (-20%)
  collateral (1)adjustments (2)  
   Liquidation-10% (-10%)
 
   expenses (2)  
      

 

 December 31, 20142015
  Fair Value ValuationUnobservable UnobservableRange Range
 EstimateTechniquesInput(Weighted Avg)
 
      
Impaired loans2,3571,705Appraisal ofAppraisal-20% (-20%)
  collateral (1)adjustments (2)  
   Liquidation -10% (-10%)
 
   expenses (2)  
      
OREO69Appraisal ofAppraisal
collateral (1),(3)adjustments (2)-40% (-40%)
Liquidation
expenses (2)-1% (-1%)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.  

24 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

5. Interim Disclosures about Fair Value of Financial Instruments

5.Interim Disclosures about Fair Value of Financial Instruments

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash and Cash Equivalents

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Securities Available for Sale

Management utilizes quoted market pricing for the fair value of the Corporation's securities that are available for sale, if available. If a quoted market rate is not available, fair value is estimated using quoted market prices for similar securities.

 

Regulatory Stock

Regulatory stock is valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the carrying amount is a reasonable estimate of fair value.

 

Loans Held for Sale

Loans held for sale are individual loans for which the Corporation has a firm sales commitment; therefore, the carrying value is a reasonable estimate of the fair value.

 

Loans

The fair value of fixed and variable rate loans is estimated by discounting back the scheduled future cash flows of the particular loan product, using the market interest rates of comparable loan products in the Corporation’s greater market area, with the same general structure, comparable credit ratings, and for the same remaining maturities.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Accrued Interest Receivable

The carrying amount of accrued interest receivable is a reasonable estimate of fair value.

 

Bank Owned Life Insurance

Fair value is equal to the cash surrender value of the life insurance policies.

 

Deposits

The fair value of non-interest bearing demand deposit accounts and interest bearing demand, savings, and money market deposit accounts is based on the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated by discounting back the expected cash flows of the time deposit using market interest rates from the Corporation’s greater market area currently offered for similar time deposits with similar remaining maturities.

 

Borrowings

The carrying amount of short-term borrowing is a reasonable estimate of fair value. The fair value of a termlong-term borrowing is estimated by comparing the rate currently offered for the same type of borrowing instrument with a matching remaining term.

 

Accrued Interest Payable

The carrying amount of accrued interest payable is a reasonable estimate of fair value.

 

Firm Commitments to Extend Credit, Lines of Credit, and Open Letters of Credit

These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment, using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure purposes. The contractual amounts of unfunded commitments are presented in Note 6.

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of the Corporation's financial instruments at September 30, 2015March 31, 2016 and December 31, 2014,2015, are summarized as follows:

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 September 30, 2015 March 31, 2016
     Quoted Prices in         Quoted Prices in    
     Active Markets Significant Other Significant     Active Markets Significant Other Significant
     for Identical Observable Unobservable     for Identical Observable Unobservable
 Carrying   Assets Inputs Inputs Carrying   Assets Inputs Inputs
 Amount Fair Value (Level 1) (Level II) (Level III) Amount Fair Value (Level 1) (Level II) (Level III)
 $ $ $ $ $ $ $ $ $ $
Financial Assets:                                        
Cash and cash equivalents  39,807   39,807   39,807         40,678   40,678   40,678       
Securities available for sale  278,470   278,470   5,550   272,920      287,270   287,270   5,740   281,530    
Regulatory stock  4,296   4,296   4,296         4,675   4,675   4,675       
Loans held for sale  1,020   1,020   1,020         804   804   804       
Loans, net of allowance  487,933   485,783         485,783   537,744   532,772         532,772 
Accrued interest receivable  3,510   3,510   3,510         3,495   3,495   3,495       
Bank owned life insurance  23,659   23,659   23,659         24,082   24,082   24,082       
                                        
Financial Liabilities:                                        
Demand deposits  208,678   208,678   208,678         243,647   243,647   243,647       
Interest-bearing demand deposits  14,270   14,270   14,270         12,467   12,467   12,467       
NOW accounts  69,439   69,439   69,439         76,865   76,865   76,865       
Money market deposit accounts  71,091   71,091   71,091         87,647   87,647   87,647       
Savings accounts  141,950   141,950   141,950         159,213   159,213   159,213       
Time deposits  187,261   189,248         189,248   169,892   171,185         171,185 
Total deposits  692,689   694,676   505,428      189,248   749,731   751,024   579,839      171,185 
                                        
Short-term borrowings  9,951   9,951   9,951         11,467   11,467   11,467       
Long-term debt  64,594   65,232         65,232   64,883   65,593         65,593 
Accrued interest payable  496   496   496         443   443   443       

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

 

  December 31, 2014
      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  43,412   43,412   43,412       
Securities available for sale  295,822   295,822   5,208   290,614    
Regulatory stock  3,227   3,227   3,227       
Loans held for sale  506   506   506       
Loans, net of allowance  464,027   463,197         463,197 
Accrued interest receivable  3,706   3,706   3,706       
Bank owned life insurance  20,603   20,603   20,603       
                     
Financial Liabilities:                    
Demand deposits  210,444   210,444   210,444       
Interest-bearing demand deposits  14,039   14,039   14,039       
NOW accounts  72,951   72,951   72,951       
Money market deposit accounts  69,442   69,442   69,442       
Savings accounts  131,206   131,206   131,206       
Time deposits  201,569   203,787         203,787 
     Total deposits  699,651   701,869   498,082      203,787 
                     
Long-term debt  62,300   63,058         63,058 
Accrued interest payable  586   586   586       

  December 31, 2015
      Quoted Prices in    
      Active Markets Significant Other Significant
      for Identical Observable Unobservable
  Carrying   Assets Inputs Inputs
  Amount Fair Value (Level 1) (Level II) (Level III)
  $ $ $ $ $
Financial Assets:                    
Cash and cash equivalents  44,227   44,227   44,227       
Securities available for sale  289,423   289,423   5,533   283,890    
Regulatory stock  4,314   4,314   4,314       
Loans held for sale  1,126   1,126   1,126       
Loans, net of allowance  513,205   512,481         512,481 
Accrued interest receivable  3,600   3,600   3,600       
Bank owned life insurance  23,869   23,869   23,869       
                     
Financial Liabilities:                    
Demand deposits  236,214   236,214   236,214       
Interest-bearing demand deposits  14,737   14,737   14,737       
NOW accounts  77,180   77,180   77,180       
Money market deposit accounts  82,507   82,507   82,507       
Savings accounts  148,320   148,320   148,320       
Time deposits  181,104   182,887         182,887 
     Total deposits  740,062   741,845   558,958      182,887 
                     
Short-term borrowings  8,736   8,736   8,736       
Long-term debt  59,594   59,805         59,805 
Accrued interest payable  456   456   456       

 

6.Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of September 30, 2015,March 31, 2016, firm loan commitments were $46.9$54.9 million, unused lines of credit were $154.2$162.1 million, and open letters of credit were $11.3$11.8 million. The total of these commitments was $212.4$228.8 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

7.Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is as follows:

 

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

(DOLLARS IN THOUSANDS)  

 

  Unrealized
  Gains (Losses)
  on Securities
  Available-for-Sale
  $
Balance at December 31, 2015(252)
  Other comprehensive income before reclassifications1,050
  Amount reclassified from accumulated other comprehensive income(480)
Period change570
Balance at March 31, 2016318
Balance at December 31, 2014  1,002 
  Other comprehensive incomeloss before reclassifications  1,529 
  Amount reclassified from accumulated other comprehensive incomeloss  (370)
Period change  1,159 
     
Balance at March 31, 2015  2,161 
  Other comprehensive loss before reclassifications(2,246)
  Amount reclassified from accumulated other comprehensive loss(396)
Period change(2,642)
Balance at June 30, 2015(481)
  Other comprehensive income before reclassifications1,305
  Amount reclassified from accumulated other comprehensive income(349)
Period change956
Balance at September 30, 2015475
Balance at December 31, 2013(3,940)
  Other comprehensive income before reclassifications2,610
  Amount reclassified from accumulated other comprehensive income(437)
Period change2,173
Balance at March 31, 2014(1,767)
  Other comprehensive income before reclassifications1,962
  Amount reclassified from accumulated other comprehensive income(384)
Period change1,578
Balance at June 30, 2014(189)
  Other comprehensive income before reclassifications1,267
  Amount reclassified from accumulated other comprehensive income(412)
Period change855
Balance at September 30, 2014666

 

(1)All amounts are net of tax relatedtax.  Related income tax expense or benefit is calculated using a federalFederal income tax rate of 34%.

(2)Amounts in parentheses indicate debits.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)      

  Amount Reclassified from  
  Accumulated Other Comprehensive  
  Income (Loss)  
  For the Three Months  
  Ended September 30,  
  2015 2014 Affected Line Item in the
  $ $ Statements of Income
Securities available-for-sale:          
  Net securities gains reclassified into earnings  529   624  Gains on securities transactions, net
     Related income tax expense  (180)  (212) Provision for federal income taxes
  Net effect on accumulated other comprehensive          
     income for the period  349   412   

(1) Amounts in parentheses indicate debits.

 

 

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

(DOLLARS IN THOUSANDS)      

 

 Amount Reclassified from Amount Reclassified from 
 Accumulated Other Comprehensive Accumulated Other Comprehensive 
 Income (Loss) Income (Loss) 
 For the Nine Months For the Three Months 
 Ended September 30,  Ended March 31, 
 2015 2014 Affected Line Item in the20162015Affected Line Item in the
 $ $ Statements of Income$Consolidated Statements of Income
Securities available-for-sale:          
Net securities gains reclassified into earnings  1,690   1,891  Gains on securities transactions, net 728561    Gains on securities transactions, net
Related income tax expense  (574)  (643) Provision for federal income taxes(248)(191)    Provision for federal income taxes
Net effect on accumulated other comprehensive            
income for the period  1,116   1,248  480370 
            
Net impairment losses reclassified into earnings     (22) Net impairment losses on investment securities
Related income tax expense     7  Provision for federal income taxes
Net effect on accumulated other comprehensive         
income for the period     (15)  
Total reclassifications for the period  1,116   1,233   
(1) Amounts in parentheses indicate debits.(1) Amounts in parentheses indicate debits.

26 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

  

(1) Amounts in parentheses indicate debits.  

8.Subsequent Event

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

 

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

8. Recently Issued Accounting Standards

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

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

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

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

9.Recently Issued Accounting Standards

 

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

 

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

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

 

In August 2014, the FASB issued ASU 2014-15,Presentation of Financial Statements -Going- Going Concern (Subtopic205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual periodperiods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Corporation’s financial statements.

 

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

 

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

 

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

 

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

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

 

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

 

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

 

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

 

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

 

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Notes to the Unaudited Consolidated Interim Financial Statements

 

In May 2015, the FASB issued ASU 2015-08, Business Combinations - Pushdown Accounting - Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update is not expected to have a significant impact on the Corporation’s financial statements.

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

 

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

 

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

 

In August 2015, the FASB issued ASU 2015-15,Interest – Imputation of Interest (Subtopic 835-30): Presentation And Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This Update adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

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Notes to the Unaudited Consolidated Interim Financial Statements

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

 

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

 

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

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

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

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

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

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

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

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

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

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Management’s Discussion and Analysis

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

 

The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 20142015 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

 

Forward-Looking Statements

 

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

 

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

 

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

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

 

Results of Operations

 

Overview

The Corporation recorded net income of $1,853,000 and $4,915,000$1,912,000 for the three and nine-month periodsthree-month period ended September 30, 2015,March 31, 2016, a 8.2%30.4% increase, and 7.1% decrease respectively, fromover the $1,712,000 and $5,290,000$1,466,000 earned during the same periodsperiod in 2014.2015. The earnings per share, basic and diluted, were $0.65 and $1.72$0.67 for the three and nine months ended September 30, 2015,March 31, 2016, compared to $0.60 and $1.85$0.51 for the same periodsperiod in 2014.2015.

 

The two primary reasons for the increase in earnings for the three-month period ended September 30, 2015, compared to the same period the prior year were an increase in net interest income, and a decrease in the provision for loan losses. Forloss expense, and an increase in other income. Net interest income increased by $217,000, or 3.7%, for the three months ended September 30, 2015, net interest income increased $292,000, or 5.3%,March 31, 2016, compared to the same period in the prior year.2015. The Corporation recorded a credit provision for loan losses of $150,000 in$50,000 for the third quarter of 2015,three months ended March 31, 2016, compared to no credit provision or provision expense recorded in the third quarter of 2014. Operational expenses did increase at a slightly faster pace than the net interest income increase, but the combination of a credit provision and slightly more other income than in the third quarter of 2014 enabled the Corporation to report a 8.2% increase in quarterly earnings.

The primary reasons$200,000 for the decrease in year-to-datethree months ended March 31, 2015, earnings wererepresenting an increase in the provision for loan losses and an increase in operational expenses, partially offset by increases in net interest income and other income. Unlike in the quarterly period, the increases in net interest income and other income for the nine-month period were not enough to cover the increases in operational expenses. In addition, the Corporation recorded $150,000 of expense related to the provision for loan losses for the nine months ended September 30, 2015, compared to a credit provision of $300,000 for the same period in 2014. The result was a 7.1% reduction in net income for the Corporation for the nine-month period ended September 30, 2015.

The increase in provision expense was primarily due to charge-offs recorded in the first quarter of 2015, as well as loan portfolio growth through the nine months ended September 30, 2015. The increase in charge-offs recorded in 2015 resulted in higher historical loss factors, which caused higher required provisions in the first and second quarters. In the third quarter, with reduced qualitative factors, the calculation of the allowance for loan losses resulted in a credit provision for the quarter decreasing the overall expense for the year. However, $150,000 of expense was still recorded for the year-to-date period in 2015, compared to a credit provision of $300,000 in the same period in 2014.$250,000. Low levels of delinquent, non-performing, and classified loans, as well as minimal charge-offsa net recovery position in the first quarter of 2016, resulted in the need to reduce the allowance for loan losses by recording a credit provision in 2014.provision. The allowance as a percentage of total loans was 1.44%1.29% as of September 30, 2015,March 31, 2016, compared to 1.52%1.48% as of September 30, 2014.March 31, 2015. More detail is provided in the Provision for Loan Losses section that follows and the Allowance for Loan Losses section under Financial Condition.

 

Operating expensesOther operating income increased by $323,000,$450,000, or 5.6%, and $1,073,000, or 6.2%20.4%, for the three and nine monthsfirst quarter of 2016 compared to the prior year. This increase was driven by an increase in security gains as well as smaller increases in other categories of other income. Net gains on securities increased by $167,000, or 29.8%, for the three-month period ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in the prior year. Personnel costs increased by $162,000, or 4.6%, and $627,000, or 6.0%, for the three and nine months ended September 30, 2015, compared to 2014, due to new staff positions as well as higher benefit costs associated with new and existing staff. The personnel costs increase was largely the result of additional staffing in the mortgage department, but there was also a new information system position and three position upgrades in the operations, loans, and legal areas. The mortgage area is undergoing an expansion while the added and upgraded positions are largely to cover new requirements of the Dodd-Frank Act.

In the other income area, net gains on securities decreased by $95,000, or 15.2%, and $179,000, or 9.6%, for the three-month and nine-month periods ended September 30, 2015, compared to the same periods in 2014. Net gains on the sale of mortgages increased by $106,000, or 88.3%, and $365,000, or 146.0%, for the three and nine months ended September 30, 2015. More detail is provided under the Other Income and Operating Expense sections under Results of Operations.

 

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

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s net interest income for the three and nine months ended September 30, 2015,March 31, 2016, increased from the same periodsperiod in 2014. For the three months ended September 30, 2015, net2015. Net interest income was $5,833,000,$6,075,000 for the first quarter of 2016, compared to $5,541,000$5,858,000 for the same quarter of 2014,in 2015, a $292,000,$217,000, or 5.3% increase. For the nine months ended September 30, 2015, net interest income was $17,458,000, compared to $16,804,000 for the same period in 2014, a $654,000, or 3.9%3.7% increase. The Corporation’s net interest margin was 3.09% for the thirdfirst quarter of 2015,2016, compared to 3.02%3.13% for the thirdfirst quarter of 2014. The Corporation’s year-to-date net2015. Net interest margin was 3.10% through September 30, 2015, compared to 3.11% fordid increase by twelve basis points on a sequential basis from 2.97% in the same period in 2014.fourth quarter of 2015.

 

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the three-month period ending September 30, 2015,ended March 31, 2016, compared to the prior year’s period with the stronger quarterly net income. However, for the nine months ending September 30, 2015 both ROA and ROE were lower than the same period of 2014,in the prior year due to the decreaseincrease in the Corporation’s income and an increase in asset and capital levels.income.

 

        
Key Ratios Three Months Ended Nine Months Ended Three Months Ended
 September 30, September 30, March 31,
 2015 2014 2015 2014 2016 2015
                    
Return on Average Assets  0.84%  0.80%  0.76%  0.85%  0.84%   0.69% 
Return on Average Equity  7.90%  7.55%  7.05%  8.05%  8.01%   6.38% 
                

 

The results of the Corporation’s operations are best explained by addressing, in further detail, the five major sections of the income statement, which are as follows:

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

·Net interest income
·Provision for loan losses
·Other income
·Operating expenses
·Provision for income taxes

 

The following discussion analyzes each of these five components.

 

Net Interest Income

 

Net interest income (NII) represents the largest portion of the Corporation’s operating income. In the first ninethree months of 2015,2016, NII generated 71.6%69.6% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 71.7%72.7% in the first ninethree months of 2014.2015. The overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income.

 

The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $480,000 and $1,379,000$511,000 for the three and nine months ended September 30, 2015,March 31, 2016, compared to $468,000 and $1,415,000$438,000 for the same periodsperiod in 2014.

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2015.

ENB FINANCIAL CORP

Management’s Discussion and Analysis

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

 

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2015  2014  2015  2014 
  $  $  $  $ 
Total interest income  6,761   6,696   20,351   20,393 
Total interest expense  928   1,155   2,893   3,589 
                 
Net interest income  5,833   5,541   17,458   16,804 
Tax equivalent adjustment  480   468   1,379   1,415 
                 
Net interest income (fully taxable equivalent)  6,313   6,009   18,837   18,219 

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

 

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

 

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

 

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. TheUntil December 16, 2015, the Federal funds rate hashad not changed since December of16, 2008. While the Federal Reserve has not changedOn December 16, 2015, the Federal funds rate since that time, it has been utilizing a number of other granted powerswas increased 25 basis points to help stimulate the economy while managing monetary policy, including maintaining low levels of inflation.0.50%, from 0.25%. This period of nearly seven years with extremely low and unchanged overnight rates iswas the lowest and longest in U.S. history. PriorThe impact has been lower margin to the filing of this document,Corporation and generally across the financial industry. The increase in December resulted in higher short-term U.S. Treasury rates, but the long-term rates have actually decreased since the Federal Reserve Bank choseReserve’s decision to holdincrease rates, resulting in a flattening of the Federal Funds targetyield curve. This low rate at 0.25% on October 28, 2015. However,environment continued during the first quarter of 2016, and it appears it will continue through the second quarter, although there is possiblea possibility that the Federal Reserve will act tocould increase the overnight rates at the meeting to be held on December 16, 2015.again later in 2016.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate has also not movedincreased from its historic low of 3.25% sinceto 3.50% on December 16, 2008.2015. Depending on the loan instrument, the Corporation’s Prime-based loans would reprice either a day after the Federal Reserve rate movement or after a 45-day notification period. Commercial rates generally reprice the next business day while some consumer loans require the 45-day notification period.

 

The fact that the Federal funds rate and the Prime rate havehad remained at these very low levels for nearly seven years hasand only increased by 25 basis points in December of 2015 had made it difficult to grow the NII of the Corporation as the net interest margin has declined. During the first nine monthsquarter of 2015, management2016, the Corporation was able to grow interest-earninginterest earning assets 3.8% overfast enough to offset the decline in margin resulting in higher NII compared to the previous year’s first ninequarter. For the three months of 2014. Net interest incomeended March 31, 2016, NII on a tax equivalent basis increased by $618,000,$290,000, or 3.4%4.6%, but the Corporation’s margin still showed a slight decline from the prior year’s period.3.13% in 2015, to 3.09% in 2016. This is typical in a prolonged low rate environment when additional savings on interest expense are limited, while yields on the Corporation’s longer assets continue to reprice to lower levels. This causes a decline in the Corporation’s margin, but the impact of the decrease in margin can be offset by sufficient increases in interest earning assets, causing an increase in NII. Factoring out $430,000 of accelerated amortization caused by an unexpected regulatory par call on the Corporation’s CoBank sub-U.S. Agency that was recorded during the first quarter of 2016, the Corporation’s NIM would have been 3.29%, a significant increase of 16 basis points over the 3.13% NIM achieved in the first quarter of 2015.

 

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

 

Security yields fluctuate more rapidly than loan yields based primarily on the changes to the U.S. Treasury rates and yield curve. With lower U.S. Treasury rates on average in the first nine monthsquarter of 20152016 compared to 2014,2015, most of the security reinvesting was occurring at lower rates. As the volume of securities sold at gains continued at a higher level, this also resulted in more reinvestment at lower rates. Management did generally direct a large portion of the security sale proceeds into loan growth. Additionally, management repositioned withingrowth particularly in the security portfoliofourth quarter of 2015 and purchased shorter assets, which affected security yield. Meanwhile, the first quarter of 2016 when loan growth was significant. The Corporation’s loan yield has continued to decline slightly as new loans are going on at among the lowest loan rates of this interest rate cycle. Partially offsetting these lower rates in 2015 and previous years.on new loans, the increased rate on Prime-based loans is having a positive impact on yield. Management does price a minority portion of business and consumer loans above the Prime rate on variable rate loans, which helps with loan yield, however, these rates on average are still lower than the typical fixed rate loan. Therefore, any increases in total variable rate loans will generally reduce overall loan portfolio yield. An element of the Corporation’s Prime-based commercial loans is priced above the Prime rate based on the level of credit risk of the borrower. Additionally, certain variable ratevariable-rate consumer loans are priced above Prime. Prime-based pricing continues to be driven largely by local competition.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Mid-term and long-term interest rates generally declined throughouton average were slightly lower in the first quarter of 2016 compared to 2015. The average rate of the 10-year U.S. Treasury was 1.91% in the first quarter of 2016 compared to 1.97% in the first quarter of 2015, then increased throughoutbut it stood at 1.78% on March 31, 2016, compared to 1.94% at March 31, 2015. The slope of the second quarteryield curve was already compressed, but with the Fed rate increase in December of 2015, there was even less slope between the short end and declined again throughout the third quarter of 2015 ending lower than they were at thelong end of 2014. Rates on average were lower than they were during the first nine monthscurve. There was only a difference of 2014. The128 basis points between overnight rates and the 10-year U.S. Treasury yield stood at 2.06% on September 30, 2015,as of March 31, 2016, compared to 2.17% at December169 basis points as of March 31, 2014,2015. With a flatter yield curve and 2.52% at September 30, 2014. Lower U.S. Treasurylower mid and long-term interest rates, during 2015 provided opportunitiesmanagement was not able to sellincrease loan rates to improve yield although the 25 basis point increase in the Prime rate did act to increase the yield on Prime-based variable rate loans. Additionally, with lower rates, security amortization increased and yields on new purchases were low resulting in a lower overall securities at gains.yield. As a result, the Corporation’s asset yield continued to decline.

 

While it is becoming increasingly difficult to achieve savings on the Corporation’s overall cost of funds, management was able to selectively reprice longer-term time deposits and borrowings to lower levels during the nine months ended September 30, 2015, resulting in continued savings. Only time deposit terms three years or longer are repricing at lower rates, providing interest expensestill achieving savings on deposits. Interestselect long-term CDs and repricing FHLB borrowings in the first quarter of 2016. It is not anticipated that interest rates on interest bearing core deposit accounts had notdeposits can be reduced further in 2016 as these rates have already been reduced throughsignificantly over the third quarter of 2015, but management did act to reduce some core deposit rates slightly at the beginningcourse of the fourth quarter based on lower U.S. Treasurypast few years. While CD rate reductions are also limited, there are still small savings to be achieved in CDs repricing down from higher rates in order to achieve additional savings before a possible Federal Reserve rate increase.five years ago. Borrowing costs and the wholesale borrowing curves that they are based on generally follow the direction and slope of the U.S. Treasury curve, howevercurve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation was able to refinance longer-termmost borrowings at lower rates in 2015 and in the first nine monthsquarter of 2015 resulting in decreased interest expense and2016. Management expects this trend to continue throughoutto a lesser degree during the year as one more high-rate advance matures inremainder of 2016 based on the fourth quarter.current rates on the instruments maturing.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Management currently anticipates that the Federal Reserve will likely either increase the overnight interest rate and Prime rate will remain at the last Federal Reserve Board meeting in December of 2015, or sometime duringcurrent levels through the first quarterhalf of 2016.2016 with the possibility of at least one small rate increase in the second half of the year. It is possiblelikely that the mid and long-term Treasury rates could increase throughout the course of the rest of the year in anticipation of aadditional Federal Reserve rate movement.movements. This would allow management to achieve higher earnings on assets givenif the opportunity for higher yielding securities and the ability to price new loans at higher market rates.rates occurred. If the Federal Reserve would act to increase overnight rates, it is also possible that the yield curve could flatten more, making it more difficult for management to increase the yield on earning assets and net interest margin, as generally the Corporation will make loanslend out or reinvest into securitiesat higher interest rates out further out on the yield curve such as five-year instruments.curve. Additionally, with another Federal Reserve rate increase in 2016, management would expect to have to increase deposit rates to remain competitive in the market.

 

Generally, a flatter yield curve is not conducive to increasing net interest margin and net interest income. However, given a December overnight rate increase by the Federal Reserve, the Corporation would now benefithas benefited from a higher levelgradual increase in the amount of variable rate loans than were held in the past. Approximately 29%loans. Over 30% of the Corporation’s loans are variable rate, as of September 30, 2015, which would reprice to a higher rate based on the Prime rate with any Federal Reserve increase. This percentage was approximately 26% as of September 30, 2014. Higher amounts of variable rate loans would help in the event of a flatter yield curve but would likely not be sufficient alone to offset higher funding costs if short-term rates were to increase materially, therefore a lower margin would occur.

 

The Corporation’s margin was 3.09% for the thirdfirst quarter of 2015,2016, a seven basis-point increase from the 3.02% for the third quarter of 2014. For the year-to-date period, the Corporation’s margin was 3.10%, a onefour basis-point decline from the 3.11%3.13% for the nine months ended September 30, 2014.first quarter of 2015. On a sequential basis, margin did improve from the 2.97% for the fourth quarter of 2015. There were two non-recurring accelerated amortization events on unrelated bonds that impacted the fourth quarter 2015 margin as well as the first quarter 2016 margin. Without these events, NIM would have been 3.16% for the fourth quarter of 2015, and 3.29% for the first quarter of 2016.

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

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

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Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

 

As shown on the tablestable that follow,follows, interest income, on an FTE basis for the quarter ended September 30, 2015,March 31, 2016, increased by $77,000,$87,000, or 1.1%1.2%, and interest expense decreased by $227,000,$203,000, or 19.7%20.0%, compared to the same period in 2014. For the nine months ended September 30, 2015, resulting in a $290,000 increase in net interest income on an FTE basis, interest income decreased by $78,000, or 0.4%, and interest expense decreased by $696,000, or 19.4%, compared to the nine months ended September 30, 2014.basis.

 

38 

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The following tables showtable shows a more detailed analysis of net interest income on an FTE basis shown with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, Management emphasizes the net yield on interest earning assets, also referred to as the net interest margin (NIM). The NIM is calculated by dividing net interest income on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently a bank generates NII.

 

39 

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 

 For the Three Months Ended September 30, For the Three Months Ended March 31,
 2015 2014 2016 2015
     (c)     (c)     (c)     (c)
 Average   Annualized Average   Annualized Average   Annualized Average   Annualized
 Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
 $ $ % $ $ % $ $ % $ $ %
ASSETS                                                
Interest earning assets:                                                
Federal funds sold and interest                                                
on deposits at other banks  23,619   18   0.31   22,928   17   0.30   19,127   26   0.55   20,155   14   0.29 
                                                
Securities available for sale:                                                
Taxable  200,276   782   1.56   210,338   963   1.83   192,712   496   1.03   210,254   1,018   1.94 
Tax-exempt  100,121   1,265   5.05   103,396   1,236   4.78   102,371   1,299   5.08   91,029   1,147   5.04 
Total securities (d)  300,397   2,047   2.73   313,734   2,199   2.80   295,083   1,795   2.43   301,283   2,165   2.87 
                                                
Loans (a)  488,188   5,118   4.20   454,254   4,906   4.31   534,226   5,517   4.14   479,177   5,005   4.19 
                                                
Regulatory stock  4,179   58   5.55   4,119   42   4.11   4,644   59   5.08   3,471   126   14.52 
                                                
Total interest earning assets  816,383   7,241   3.55   795,035   7,164   3.60   853,080   7,397   3.47   804,086   7,310   3.65 
                                                
Non-interest earning assets (d)  58,715           56,304           59,950           57,140         
                                                
Total assets  875,098           851,339           913,030           861,226         
                                                
LIABILITIES &                                                
STOCKHOLDERS' EQUITY                                                
Interest bearing liabilities:                                                
Demand deposits  160,499   74   0.18   155,243   71   0.18   176,288   65   0.15   157,754   70   0.18 
Savings deposits  141,585   19   0.05   129,038   17   0.05   153,203   20   0.05   135,264   18   0.05 
Time deposits  192,176   521   1.09   215,950   689   1.27   175,065   461   1.06   198,802   586   1.20 
Borrowed funds  74,216   314   1.69   71,433   378   2.10   78,531   265   1.36   72,556   340   1.90 
Total interest bearing liabilities  568,476   928   0.65   571,664   1,155   0.80   583,087   811   0.56   564,376   1,014   0.73 
                                                
Non-interest bearing liabilities:                                                
                                                
Demand deposits  210,642           186,677           231,048           200,747         
Other  2,902           3,051           2,920           2,858         
                                                
Total liabilities  782,020           761,392           817,055           767,981         
                                                
Stockholders' equity  93,078           89,947           95,975           93,245         
                                                
Total liabilities & stockholders' equity  875,098           851,339           913,030           861,226         
                                                
Net interest income (FTE)      6,313           6,009           6,586           6,296     
                                                
Net interest spread (b)          2.90           2.80           2.91           2.92 
Effect of non-interest                                                
bearing deposits          0.19           0.22           0.18           0.21 
Net yield on interest earning assets (c)          3.09           3.02           3.09           3.13 

 

(a) Includes balances of nonaccrual loans and the recognition of any related interest income.  The quarter-to-date average balances include net deferred loan costs of $544,000$728,000 as of September 30, 2015,March 31, 2016, and $415,000$456,000 as of September 30, 2014.March 31, 2015.  Such fees and costs recognized through income and included in the interest amounts totaled ($58,000)75,000) in 2015,2016, and ($37,000)41,000) in 2014.

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

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

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

40 

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

  For the Nine Months Ended September 30,
  2015 2014
      (c)     (c)
  Average   Annualized Average   Annualized
  Balance Interest Yield/Rate Balance Interest Yield/Rate
  $ $ % $ $ %
ASSETS                        
Interest earning assets:                        
Federal funds sold and interest                        
on deposits at other banks  22,609   51   0.30   19,581   44   0.30 
                         
Securities available for sale:                        
Taxable  203,177   2,623   1.72   204,620   3,231   2.11 
Tax-exempt  95,515   3,619   5.05   102,961   3,807   4.93 
Total securities (d)  298,692   6,242   2.79   307,581   7,038   3.05 
                         
Loans (a)  484,329   15,208   4.19   449,081   14,599   4.34 
                         
Regulatory stock  3,850   229   7.93   3,887   127   4.37 
                         
Total interest earning assets  809,480   21,730   3.58   780,130   21,808   3.73 
                         
Non-interest earning assets (d)  58,123           54,474         
                         
Total assets  867,603           834,604         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  158,233   214   0.18   149,354   199   0.18 
Savings deposits  139,111   55   0.05   126,990   51   0.05 
Time deposits  195,215   1,629   1.12   215,727   2,093   1.30 
Borrowed funds  73,492   995   1.81   71,589   1,246   2.33 
Total interest bearing liabilities  566,051   2,893   0.68   563,660   3,589   0.85 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  205,443           179,934         
Other  2,837           3,198         
                         
Total liabilities  774,331           746,792         
                         
Stockholders' equity  93,272           87,812         
                         
Total liabilities & stockholders' equity  867,603           834,604         
                         
Net interest income (FTE)      18,837           18,219     
                         
Net interest spread (b)          2.90           2.88 
Effect of non-interest                        
     bearing deposits          0.20           0.23 
Net yield on interest earning assets (c)          3.10           3.11 

(a) Includes balances of nonaccrual loans and the recognition of any related interest income.  The year-to-date average balances include net deferred loan costs of $496,000 as of September 30, 2015, and $387,000 as of September 30, 2014.  Such fees and costs recognized through income and included in the interest amounts totaled ($153,000) in 2015, and ($95,000) in 2014.2015.

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

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

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

4140 

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s interest income decreased at a faster pace than interest expense, resulting in a lower NIM of 3.09% for the first quarter of 2016, compared to 3.13% for the first quarter of 2015. The yield earned on assets dropped 18 basis points while the rate paid on liabilities dropped 17 basis points. Because the Corporation’s interest-earning assets are significantly larger than interest-bearing liabilities, there was a greater decline in interest income than interest expense. Management does anticipate improvements in NIM during the remainder of 2016 as asset yields improve. Loan yields were at historically low levels during 20142015 and duringin the nine months ended September 30, 2015,first quarter of 2016 due to the extended low-rate environment as well as extremely competitive pricing for the limited number of quality loan opportunities in the market. The Corporation’s loan yield decreased 11 basis points in the third quarter of 2015 compared to the third quarter of 2014, and decreased 15 basis points for the first nine months of 2015 compared to the same period in 2014. It is anticipated that these yields will improve in the coming monthsslightly throughout 2016 as the economy improves and loan demand increases, reducing pricing pressures and intense competition for loans. The growth in the loan portfolio made up for the decrease in interest income due to lower yields. The Corporation’s loan yield decreased 5 basis points in the first quarter of 2016 compared to the first quarter of 2015. Despite the lower yields, the growth in the loan portfolio resulted in interest income on loans increasing $212,000,$512,000, or 4.3%12.2%, for the thirdfirst quarter of 20152016 compared to the thirdfirst quarter of 2014. For the nine months ended September 30, 2015, the Corporation’s interest income on loans increased $609,000, or 4.2%, compared to the same period in 2014.2015.

 

Loan pricing was a challenge in 2014,2015, and continues to be in 20152016 as a result of intense competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate. The Prime rate is generally below typical fixed-rate business and commercial loans, which generallytypically range between 3.50% and 5.50%, depending on term and credit risk. Management is able to price customers with higher levels of credit risk at Prime plus pricing but these rates still average below the rates of the most typical five-year fixed rate loans. Additionally, with the strong improvement to the credit quality of the Corporation’s loan portfolio there are fewer opportunities to price more credit risk into the loan rates. While Prime-based loans will aid the Corporation when interest rates rise, any further increase in Prime-based loans as a percentage of total loans will currently cause the Corporation’s average loan yield to decrease. The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, please refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Earnings and yields on the Corporation’s securities declined by 744 basis points for the thirdfirst quarter of 20152016 compared to the thirdfirst quarter of 2014. For the year-to-date period ended September 30, 2015, the yield on the securities portfolio declined by 26 basis points compared to the year-to-date period in 2014.2015. The Corporation’s securities portfolio consists of nearly all fixed income debt instruments. The Corporation’s taxable securities experienced a 2791 basis-point decrease in yield for the three months ended September 30, 2015, and a 39 basis-point decrease in yield for the nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014. Most2015. This was largely due to the accelerated amortization event that caused a significant decline in interest income for the first quarter of 2016. Additionally, most security reinvestment in the past few years has been occurring at lower rates and regular amortization has been higher in recent years due to faster prepayment speeds on MBS and CMO securities. Each time U.S. Treasury rates experience athe low interest rate environment. These variables have caused taxable security yields to decline the prepayment speeds pick up and negatively impactsignificantly. Meanwhile, the yield on these securities. Meanwhile, tax-exempt security yieldssecurities increased by 27four basis points and 12 basis points forfrom the three and nine-month periods ended September 30,first quarter of 2015 compared to the same periods in 2014.first quarter of 2016. The yields on these tax-exempt municipal bonds are not as quick to follow changes in the U.S. Treasury rates. They have been relatively stable despite significant movements in the 10-year U.S. Treasury from one year ago. As the 10-year U.S. Treasury rates declined, the spreads available on these securities increased, resulting in similar yields. Management was also selling out of lower yielding municipal bonds in an effort to improve overall municipal bond yield.

 

In the current rate environment with short-term rates extremely low and with small rate differences for longer-term deposits, the consumer is electing to stay short and maintain funds in accessible deposit instruments. As a result, the customer prefers keeping balances in both non-interest and interest bearing checking products and savings accounts. In addition to the consumer staying liquid with their available funds, there has been a general trend of funds flowing from time deposit accounts into both non-interest checking, NOW and savings accounts. The average balance of the Corporation’s interest bearing liabilities decreasedincreased during the three months ended September 30, 2015, and increased minimally during the nine months ended September 30, 2015, compared to the same periods in 2014.March 31, 2016. The average balance of time deposits declined significantly induring this period compared to 2015, more than offsetting the increases inbut the other areas of NOW, MMDA, and savings accounts,grew sufficiently enough to compensate for the decline in time deposits, causing total interest bearing funds to decrease.increase. However, with more of the interest bearing funds in the form of NOW, MMDA, and savings accounts rather than time deposits, the average interest rate paid on all of these instruments is lowerless than previous,what is paid on time deposits, resulting in less interest expense.

 

Interest expense on deposits declined by $163,000$128,000, or 19.0%, for the three months ended September 30, 2015, and $445,000 for the nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015. Demand and savings deposits reprice in entirety whenever the offering rates are changed. This allows management to reduce interest costs rapidly; however, it becomes difficult to continue to gain cost savings once offering rates decline to these historically low levels. The annualized rate on interest bearing demand accounts was 0.15% for the three-month period ended March 31, 2016, compared to 0.18% for the three and nine-month periods ended September 30, 2015, and 2014. The scope of further reductions in dollar amount of interest expense is very limited since rates cannot be reduced much lower.prior year’s first quarter. For the first ninethree months of 2015,2016, the average balances of interest bearing demand deposits increased by $8.9$18.5 million, or 5.9%11.7%, over the same period in 2014,2015, while the average balance of savings accounts increased by $12.1$17.9 million, or 9.5%13.3%. This increase in balances of lower cost accounts has helped to reduce the Corporation’s overall interest expense in 20152016 compared to 2014.2015.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During 2014 and through the first nine monthsquarter of 2015,2016, time deposit balances decreased.decreased compared to balances at March 31, 2015. The decrease can be attributed to the lowest rates paid historically on time deposits, which has caused the differential between time deposit rates and rates on non-maturingnon-maturity deposits to be minimal. As a result, customers have elected to keep more of their funds in non-maturity deposits and less funds in time deposits. Because time deposits are the most expensive deposit product for the Corporation and the largest dollar expense from a funding standpoint, the reduction in time deposits, along with the increases in interest-bearing checking, savings, and non-interest bearing checking, has allowed the Corporation to achieve a lower cost and more balanced deposit funding position. The Corporation was able to reduce interest expense on time deposits by $168,000,$125,000, or 24.4%21.3%, for the thirdfirst quarter of 2015,2016, compared to the same period in 2014, and $464,000,2015. Average balances of time deposits decreased by $23.7 million, or 22.2%11.9%, for the ninethree months ended September 30, 2015,March 31, 2016, compared to the same period in 2014. Average balances decreased by $23.8 million, or 11.0%, and $20.5 million, or 9.5%, for the three and nine months ended September 30, 2015, compared to the same periods in 2014.2015. The average annualized interest rate paid on time deposits decreased by 1814 basis points for the three-month period and the nine-month period when comparing both years.

 

The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of $7,779,000$12,755,000 were utilized in the first ninethree months of 2015, compared to $5,541,0002016, while average short-term advances of $8,910,000 were utilized in the first ninethree months of 2014.2015. Management has used long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source of liquidity. Average total borrowings increased by $2.8$6.0 million, or 3.9%8.2%, in the thirdfirst quarter of 2015,2016 compared to the same quarter in 2014, and increased by $1.9 million, or 2.7%, for the nine months ended September 30, 2015, compared to the same period in 2014.2015. Interest expense on borrowed funds was $64,000,$75,000, or 16.9%22.1% lower, for the three-month period and $251,000, or 20.1% lower, for the nine-month period when comparing 20152016 to 2014,2015, as a result of management refinancing maturing long-term advances to lower rates.

 

The NIM was 3.09% for the thirdfirst quarter of 2015, and 3.10% for the nine months ended September 30, 2015,2016, compared to 3.02% and 3.11% for the same periods in 2014. For the quarter ended September 30, 2015, the net interest spread increased ten basis points to 2.90%, from 2.80%3.13% for the same period in 2014.2015. For the nine-month periodquarter ended September 30, 2015,March 31, 2016, the net interest spread increased twodecreased one basis pointspoint to 2.90%2.91%, from 2.88%2.92% for the same period in 2014.2015. The effect of non-interest bearing funds dropped three basis points for the three and nine-month periodsthree-month period compared to the prior year. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go lower, the benefit of non-interest bearing deposits is reduced because there is less difference between no-costnon-interest bearing funds and interest bearing liabilities. For example, if a savings account with $10,000 earns 1%, the benefit for $10,000 of non-interest bearing deposits is equivalent to $100; but if the savings rate is reduced to 0.20%, then the benefit of the non-interest bearing funds is only $20. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the lower cost of funds affects the benefit to non-interest bearing deposits.

 

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

 

Provision for Loan Losses

 

The allowance for loan losses (ALLL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ALLL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a credit provision of $150,000$50,000 for the three months ended September 30, 2015,March 31, 2016, and a provision expense of $150,000 for the nine months ended September 30, 2015, compared to no credit provision or provision expense$200,000 for the three months ended September 30, 2014, and a credit provision of $300,000 for the nine months ended September 30, 2014.March 31, 2015. The analysis of the ALLL takes into consideration, among other things, the following factors:

 

 ·levels and trends in delinquencies, nonaccruals, charge-offs and recoveries,
·trends within the loan portfolio,

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

·changes in lending policies and procedures,
·experience of lending personnel and management oversight,
·national and local economic trends,
·concentrations of credit,
·external factors such as legal and regulatory requirements,
·changes in the quality of loan review and board oversight,
·changes in the value of underlying collateral.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

A credit provision was recorded in 2014the first quarter of 2016 due to the following factors:

 

·Low levels of delinquent and non-performing loans
·Lower levels of classified loans
·Low net charge-offs/recoveries

 

PriorDuring the first quarter of 2016, due to 2012, the annual provision expense was at increased levels to account for difficult economic conditions that had an impact on the financial health of the Corporation’s borrowers and a direct impact on asset quality. Throughout 2014, after analysis of the factors listed above, the allowance for loan loss calculation resulted in a reduction of the provision because of significant improvements in the loan portfolio related to delinquent, non-performing, and classified loans. In the first half of 2015, increased charge-offs again resulted in the need to increase the Corporation’s provision expense. During the third quarter of 2015, a decline in qualitative factors more than offset a slight increase in substandard loans, resulting in the need to takeCorporation recorded a credit provision of $50,000 and still maintained adequate levels of reserves to adjust the allowance to the required amount. As of September 30, 2015, the Corporation’s net charge-offs were $185,000, compared to net recoveries of $49,000 during the first nine months of 2014. This was largely responsiblecover for the higher provision expense of $150,000 recorded in the first nine months of 2015, compared to a $300,000 credit provision during the first nine months of 2014. The higher charge-offs in the first nine months of 2015 are the result of one $272,000 commercial loan charge-off inanticipated future losses. During the first quarter of 2015, due to increased charge-offs which completely charged off allresulted in higher historical loss factors as well as significant loan portfolio growth, the remaining loan balanceCorporation recorded a provision expense to this borrower. This wasbring the second charge-off relatedallowance to this borrower. The first charge-off was $204,000 and occurred in the fourth quarter of 2014. In addition to charge-offs and recoveries, managementrequisite levels. Management closely tracks delinquent, non-performing, and classified loans as a percentage of capital and of the loan portfolio.

 

As of September 30, 2015,March 31, 2016, total delinquencies represented 0.48%0.45% of total loans, compared to 0.65%0.48% as of September 30, 2014.March 31, 2015. These ratios are extremely low compared to local and national peer groups. As of September 30, 2015, the Corporation’s total delinquencies were approximately a third of the national peer group average of 1.38% of total loans. The vast majority of the Corporation’s loan customers have remained very steadfast in making their loan payments and avoiding delinquency, even during challenging economic conditions. The delinquency ratios speak to the long-term health, conservative nature, and, importantly, the character of the Corporation’s customers and lending practices. Classified loans are primarily determined by loan-to-value and debt-to-income ratios. The prolonged economic downturn, including devaluation of residential and commercial real estate, had stressed these ratios in past years.periods. Valuations have recently shown improvements and the levels of classified loans have declined significantly. Classified loans as a percentage of regulatory capital (Tier 1 Capital plus the Allowance for Loan Losses) stood at 18.0% as of September 30, 2015, compared to 21.8% as of December 31, 2014, and 17.9% as of September 30, 2014. These levels are all significantly, well below levels experienced in years prior to 2013. Classified loans last exceeded 30% of regulatory capital back on September 30, 2012, but have generally migrated lower since then.

The delinquency and classified loan information is utilized in the quarterly allowance for loan loss (ALLL)ALLL calculation, which directly affects the provision expense. A sharp increase or decrease in delinquencies and/or classified loans during the quarter would be cause for management to increase or decrease the provision expense. The level of actual charge-offs relative to the amount of recoveries can have a significant impact on the provision. Management had charge-offsrecoveries that exceeded recoveriescharge-offs in the first quarter of 20152016 which resulted in the need to record a credit provision expense for the year-to-date period.quarter.

 

Generally, management will evaluate and adjust, if necessary, the provision expense each quarter based upon completion of the quarterly ALLL calculation. Future provision amounts will generally depend on the amount of loan growth achieved versus levels of delinquent, non-performing, and classified loans.loans, as well as charge-offs and recoveries.

 

In addition to the above, provision expense is impacted by three major components that are all included in the quarterly calculation of the ALLL. First, specific allocations are made for any loans where management has determined an exposure that needs to be provided for. These specific allocations are reviewed each quarter to determine if adjustments need to be made. It is common for specific allocations to be reduced as additional principal payments are made, so while some specific allocations are being added, others are being reduced. Second, management provides for estimated losses on pools of similar loans based on historical loss experience. Finally, management utilizes qualitative factors every quarter to adjust historical loss experience to take into consideration the current trends in loan volume, delinquencies, charge-offs, changes in lending practices, and the quality of the Corporation’s underwriting, credit analysis, lending staff, and Board oversight.National and local economic trends and conditions are helpful to determine the amount of loan loss allowance the Corporation should be carrying on the various types of loans. Management evaluates and adjusts, if necessary, the qualitative factors on a quarterly basis.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Over the first three quarters of 2015, normal qualitative factor adjustments for expected loan losses were made, however the general trend is lower qualitative factors, which would cause a lower ALLL calculation. More qualitative factors were reduced than increased during the first three quarters of 2015, with the total qualitative factors for all loan segments lower as of September 30, 2015 compared to December 31, 2014.

In the first quarter of 2015, stable employment,2016, qualitative factors were adjusted based on current information regarding delinquency, economic conditions, and experience and depth inother factors. While some factors were increased, generally lower factors existed as of March 31, 2016, compared to the lending area allowed for a reduction of this factor for all pools, while in the third quarter the factor for quality of loan review and Board oversight was reduced due to continued enhancements in oversight. The factor for changes in lending policy and procedures was reduced for all commercial loans including agricultural loans in the third quarter after experiencing no material changes in 2015. The same factor was increased in the first quarter of 2015 for home equity, personal loans, and credit line segments after major changes occurred with the Bank’s home equity product. The qualitative factor forprior year. Downward trends in the naturedelinquencies caused some factors to decline, and volume of the loans was lowered for agricultural dairy loans and consumer loans outside of home equity, as growth rates slowed. The most significant growth rate change has occurred in agricultural dairy loans where the Corporation has gone from a very high growth rate in 2013, to slowing in 2014, tothere were net declines in the first three quarters of 2015, allowing the adjustment to be cut in half since the second quarter of 2014. The most recent adjustments for loan growth rates was the recognition of a faster business loan growth rate in the third quarter with slowing in personal loans and credit lines. In the second quarter of 2015, the factor for growth rate was pushed up for CRE loans as well as the factor for concentration of credit as CRE loans have grown with the improving economy. The qualitative factor for health of the national and local economic conditions was lowered in the first quarter related to all consumer loans, while in the third quarter this same qualitative factor for agricultural loans outside of dairy was increased due to concernsfactors related to the avian flu, which could affect the poultry industry. The factor for delinquency was increased in the third quarter for agricultural loans outside of dairy, while the delinquency factor was reduced for business mortgages. In the second quarter of 2015, lower levels of delinquencies caused reduced factor adjustments for business loans, business mortgages,non-dairy agriculture and consumer credit lines.

The Corporation’s charge-offs and recoveries have a direct impact on the ALLL and the provision forhome equity loan losses. For the nine months ended September 30, 2015, the Corporation’s net charge-offs were $185,000. This compares to net recoveries of $49,000 during the first nine months of 2014. This was largely responsible for the higher provision expense of $150,000 recorded in the first nine months of 2015, compared to a $300,000 credit provision during the first nine months of 2014. The higher charge-offs in the first nine months of 2015 are the result of one commercial loan charge-off in the first quarter of 2015. This was the second charge-off related to this borrower, with the first occurring in the fourth quarter of 2014. No additional charge-offs are expected on this borrower.segments.

 

Management monitors the allowance as a percentage of total loans. The percentage of the allowance to total loans has decreased slightly since September 30, 2014March 31, 2015 and December 31, 2014,2015, but remains comparable with the peer group. As of September 30, 2015,March 31, 2016, the allowance as a percentage of total loans was 1.44%1.29%, down from 1.52%1.36% at December 31, 2014,2015, and 1.52%1.48% at September 30, 2014.March 31, 2015. Management continues to evaluate the allowance for loan losses in relation to the size of the loan portfolio and changes to the segments within the loan portfolio and their associated credit risk. Management believes the allowance for loan losses is adequate to provide for future loan losses based on the current portfolio and the current economic environment. More detail is provided under Allowance for Loan Losses in the Financial Condition section that follows.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Other Income

 

Other income for the thirdfirst quarter of 20152016 was $2,342,000,$2,651,000, an increase of $67,000,$450,000, or 2.9%20.4%, compared to the $2,275,000$2,201,000 earned during the thirdfirst quarter of 2014. For the year-to-date period ended September 30, 2015, other income totaled $6,937,000, an increase of $314,000, or 4.7%, compared to the same period in 2014.2015. The following tables detailtable details the categories that comprise other income.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

OTHER INCOME

(DOLLARS IN THOUSANDS)

  Three Months Ended September 30,  Increase (Decrease) 
  2015  2014       
  $  $  $  % 
             
Trust and investment services  250   309   (59)  (19.1)
Service charges on deposit accounts  277   321   (44)  (13.7)
Other service charges and fees  256   186   70   37.6 
Commissions  520   507   13   2.6 
Gains on securities transactions, net  529   624   (95)  (15.2)
Impairment losses on securities            
Gains on sale of mortgages  226   120   106   88.3 
Earnings on bank owned life insurance  196   163   33   20.2 
Other miscellaneous income  88   45   43   95.6 
                 
Total other income  2,342   2,275   67   2.9 
                 

 

OTHER INCOME

(DOLLARS IN THOUSANDS)  

 

  Nine Months Ended September 30,  Increase (Decrease) 
  2015  2014       
  $  $  $  % 
             
Trust and investment services  921   959   (38)  (4.0)
Service charges on deposit accounts  807   880   (73)  (8.3)
Other service charges and fees  612   441   171   38.8 
Commissions  1,488   1,467   21   1.4 
Gains on securities transactions, net  1,690   1,891   (201)  (10.6)
Gains on sale of mortgages  615   250   365   146.0 
Earnings on bank owned life insurance  530   477   53   11.1 
Other miscellaneous income  274   280   (6)  (2.1)
                 
Total other income  6,937   6,623   314   4.7 

  Three Months Ended March 31,  Increase (Decrease) 
  2016  2015       
  $  $  $  % 
             
Trust and investment services  387   355   32   9.0 
Service charges on deposit accounts  262   257   5   1.9 
Other service charges and fees  216   144   72   50.0 
Commissions  515   465   50   10.8 
Gains on securities transactions, net  728   561   167   29.8 
Gains on sale of mortgages  155   153   2   1.3 
Earnings on bank owned life insurance  194   160   34   21.3 
Other miscellaneous income  194   106   88   83.0 
Total other income  2,651   2,201   450   20.4 

 

Trust and investment services income decreased $59,000,increased $32,000, or 19.1%, and $38,000, or 4.0%9.0%, for the three and nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod last year. This revenue consists of income from traditional trust services and income from alternative investment services provided through a third party. In the thirdfirst quarter of 2015,2016, traditional trust income decreasedincreased by $58,000,$10,000, or 26.6%3.9%, while income from alternative investments decreasedincreased by $1,000,$22,000, or 1.1%20.2%, compared to the third quarter of 2014. For the nine months ended September 30, 2015, traditional trust services income decreased by $50,000, or 7.5%, while income from alternative investment services increased by $12,000, or 4.0%, compared to the same period in 2014. Trust income was down for both periods primarily as a result of a $41,000 charge for a trading loss recorded in the thirdfirst quarter of 2015. Investment services income is dependent on new investment activity derived from the period and was down slightly for the quarter, but up for the nine-month period. The trust and investment services area continues to be an area of strategic focus for the Corporation. Management believes there is a great need for retirement, estate, small business planning, and personal investment services in the Corporation’s service area. Management also sees these services as being a necessary part of a comprehensive line of financial solutions across the organization.

 

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Management’s Discussion and Analysis

Service charges on deposit accounts decreased by $44,000, or 13.7%, for the three months ended September 30, 2015, and $73,000, or 8.3%, for the nine months ended September 30, 2015, compared to the same periods in 2014. Overdraft service charges are the largest component of this category and comprised approximately 80% of the total deposit service charges for the three months ended September 30, 2015, and 81% of the total deposit service charges for the nine months ended September 30, 2015. Total overdraft fees decreased by $46,000, or 17.0%, and $69,000, or 9.6%, for the three and nine months ended September 30, 2015, compared to the same periods in 2014. Management attributes lower overdraft fee income primarily to changes in customer behavior. Customers have been more diligent in preventing overdrafts. No changes to Bank fees or policies have occurred. Most of the other service charge areas showed minimal increases or decreases from the prior year.

Other service charges and fees increased by $70,000,$72,000, or 37.6%, and $171,000, or 38.8%50.0%, for the three and nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015. The quarterly and year-to-date increase is primarily due to an30-year mortgage origination fees increasing by $39,000, to $47,000 for the three-month period ended March 31, 2016, compared to only $8,000 for the same period in the prior year. A significant increase in loanmortgage volume is being generated through the mortgage expansion and was the primary reason for these increased fees. Loan administration fees that were higherincreased by $34,000,$12,000, or 67.3%25.7%, for the three-month period ended September 30, 2015, and $101,000, or 100.3%, for the nine-month period ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2015, also due to increased mortgage production. The other service charges and fees area is expected to continue to grow at a faster pace than other elements of the Corporation’s fees but the percentage increase will decline going forward. The large 50% increase in this area was primarily a function of mortgage activity being strong in the first quarter of 2016, compared to a weak prior year. An increase in feesyear’s period that was early on in the second quarter of 2014 as well as higher mortgage originationdepartment expansion. As volume was responsible for this increase. Mortgage volume for 2015 is running at more than twicenumbers increase, the pace as the first nine months of 2014, a direct result of the additional resources allocated to the Corporation’s mortgage expansion. Fees for 30-year mortgage originations increased by $43,000, or 196.6%, and $65,000, or 190.6%, for the three and nine months ended September 30, 2015, compared to the same periods in 2014. The mortgage origination fees are points on a mortgage. There was an increase in the number of mortgage borrowers electing to take points in the third quarter of 2015 as well as an increase in construction mortgages where it is more typical of borrowers to pay points to further reduce the interest rate. Modification and subordination fees increased by $2,000, or 110.8%, and $20,000, or 352.8%, for the three and nine months ended September 30, 2015, compared to the same periods in 2014. Partially offsetting thesepercentage increases letter of credit fees decreased by $22,000, or 49.0%, and $19,000, or 22.7%, for the three and nine months ended September 30, 2015, compared to the same periods in 2014.will decline. Various other fee income categories increased or decreased slightly.to lesser degrees making up the remainder of the variance compared to the prior year.

Commissions increased by $50,000, or 10.8%, for the three months ended March 31, 2016, compared to the same period in 2015. This was primarily caused by debit card interchange income, which increased by $30,000, or 7.2%. The interchange income is a direct result of the volume of debit card transactions processed and this income increases as customer accounts increase or as customers utilize their debit cards to a higher degree. Additionally, commissions from Bankers Settlement Services were $19,000 for the first quarter of 2016 with no income received during the first quarter of 2015.

 

For the three months ended September 30, 2015, $529,000 of gains on securities transactions excluding impairment were recorded compared to $624,000 for the same period in 2014, a $95,000, or 15.2% decrease. For the nine months ended September 30, 2015, $1,690,000March 31, 2016, $728,000 of gains on securities transactions were recorded compared to $1,891,000$561,000 for the nine months ended September 30, 2014, a $201,000, or 10.6% decrease.same period in 2015. Gains or losses on securities transactions fluctuate based on market opportunities to take gains and reposition the securities portfolio to improve long-term earnings, or as part of management’s asset liability goals to improve liquidity or reduce interest rate risk or fair value risk. Gains or losses on securities are a direct result of thefluctuate significantly based on market pricing available at the time of sale and the volume of security sales. Generally, the lower U.S. Treasury yields are,go, the more management will be motivated to pursue taking gains from the sale of securities. However, these market opportunities are evaluated subject to the Corporation’s other asset liability measurements and goals. The yield curve in the first nine monthsquarter of 20152016 and 20142015 provided opportunities to take significant gains out of the portfolio althoughand the year-to-date gains in 20152016 were slightly lowerhigher than those recorded in the first nine monthsquarter of 2014.

There were no impairment losses for the nine months ended September 30, 2015 while there were impairment losses on securities of $22,000 for the nine months ended September 30, 2014. Impairment losses occur when securities are written down to a lower value based on anticipated credit losses. The impairment losses recorded in 2014 were related to private collateralized mortgage obligations, which were all soldby $167,000, or 29.8%. Management executed more gains in the first halfquarter of 2014. Further information on securities2016 to help offset the non-recurring Sub-U.S. Agency amortization of $430,000. Market timing was favorable as the bond market was stronger and other than temporary impairment is provided inloan growth was strong so management did not have to reinvest a significant amount of the Securities Available for Sale section, under Financial Condition, in this filing.

Gains onproceeds from the sale of mortgages were $226,000 for the three-month period ended September 30, 2015, compared to $120,000 for the same period in 2014, a $106,000, or 88.3% increase. Gains on the sale of mortgages for the nine months ended September 30, 2015, were $615,000, compared to $250,000 for the same period in 2014, a $365,000, or 146.0% increase. Secondary mortgage financing activity drives the gains on the sale of mortgages, and the activity in the first nine months of 2015 was running at a pace nearly double 2014 volume due to additional investments and efforts made in the mortgage area as well as low mortgage rates. The mortgage division of the Bank continues to experience steady growth in terms of both volume and units. Closed units through the end of the third quarter are up 72% over 2014; combined with an 11% increase in average loan amount, total closed dollar volume has increased over 91% from the same period in 2014. The introduction of government loan products (FHA, VA, and USDA) started to have an impact in 2015, with governmental production running seven times more in the first nine months of 2015 compared to the same period in 2014. Lastly, market rates have been more favorable in the first nine months of 2015 with the 10-year U.S. Treasury averaging 2.12%, compared to 2.63% for the same period in 2014. Management anticipates that gains should continue to increase throughout the remainder of 2015 and in 2016 with an increased strategic focus and resources deployed to grow the Corporation’s mortgage origination activity.securities.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

ForEarnings on bank-owned life insurance (BOLI) increased by $34,000, or 21.3%, for the three months ended September 30, 2015, earnings on BOLI increased by $33,000, or 20.2%, and for the nine months ended September 30, 2015, earnings on BOLI increased by $53,000, or 11.1%,March 31, 2016, compared to the same periodsperiod in 2014. Increases and decreasesthe prior year. This was due to an additional investment of $2.5 million made in BOLI in May of 2015, covering new officers hired since the previous BOLI investment. The amount of BOLI income depend on insurance cost components on the Corporation’s BOLI policies,is dependent upon; the actual annual return of the policies, the insurance cost components, and any benefits paid upon death that exceed the policy’s cash surrender value. Increases in cash surrender value are a function of the return of the policy net of all expenses. An additional investment of $2,500,000 was made into BOLI during the second quarter of 2015, resulting in the increased income for both the quarter and year-to-date periods.

 

The miscellaneous income category increased by $43,000,$88,000, or 95.6%83.0%, for the three months ended September 30, 2015, and decreased by $6,000, or 2.1%, for the nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015. The primary reason for the increased quarterly incomeincrease was due to a decrease in OREO losses of $22,000 in the third quarter of 2015 compared to the same quarter in the prior year. Additionally, there was a sales tax refund of $30,000 recorded in the third quarter of 2015 with no sales tax refunds recorded in the third quarter of 2014. The primary reason for the year-to-date decrease was a decreasean increase in income related to the provision for off balance sheet credit losses. Larger reductions to this off balance sheet credit provision occurred in the nine months ended September 30, 2014,2016 than the year-to-date period in 2015. This income decreased by $42,000 for the nine months ended September 30, 2015, compared to the same period in the prior year.

 

 

Operating Expenses

 

Operating expenses for the thirdfirst quarter of 20152016 were $6,090,000,$6,482,000, an increase of $323,000,$332,000, or 5.6%5.4%, compared to the $5,767,000$6,150,000 for the thirdfirst quarter of 2014. For the year-to-date period ended September 30, 2015, operating expenses totaled $18,427,000, an increase of $1,073,000, or 6.2%, compared to the same period in 2014.2015. The following tables providetable provides details of the Corporation’s operating expenses for the three and nine-month periodsthree-month period ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015.

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Management’s Discussion and Analysis

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

  Three Months Ended September 30,  Increase (Decrease) 
  2015  2014       
  $  $  $  % 
Salaries and employee benefits  3,679   3,517   162   4.6 
Occupancy expenses  508   476   32   6.7 
Equipment expenses  283   287   (4)  (1.4)
Advertising & marketing expenses  96   95   1   1.1 
Computer software & data processing expenses  407   393   14   3.6 
Bank shares tax  195   170   25   14.7 
Professional services  322   311   11   3.5 
Other operating expenses  600   518   82   15.8 
     Total Operating Expenses  6,090   5,767   323   5.6 

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

 

  Nine Months Ended September 30,  Increase (Decrease) 
  2015  2014       
  $  $  $  % 
Salaries and employee benefits  11,055   10,428   627   6.0 
Occupancy expenses  1,586   1,451   135   9.3 
Equipment expenses  849   815   34   4.2 
Advertising & marketing expenses  412   350   62   17.7 
Computer software & data processing expenses  1,165   1,188   (23)  (1.9)
Bank shares tax  586   536   50   9.3 
Professional services  1,077   991   86   8.7 
Other operating expenses  1,697   1,595   102   6.4 
     Total Operating Expenses  18,427   17,354   1,073   6.2 

  Three Months Ended March 31,  Increase (Decrease) 
  2016  2015       
  $  $  $  % 
Salaries and employee benefits  3,971   3,702   269   7.3 
Occupancy expenses  514   554   (40)  (7.2)
Equipment expenses  263   268   (5)  (1.9)
Advertising & marketing expenses  135   155   (20)  (12.9)
Computer software & data processing expenses  420   374   46   12.3 
Bank shares tax  227   195   32   16.4 
Professional services  377   318   59   18.6 
Other operating expenses  575   584   (9)  (1.5)
     Total Operating Expenses  6,482   6,150   332   5.4 

 

Salaries and employee benefits are the largest category of operating expenses. In general, they comprise 60%61% of the Corporation’s total operating expenses. For the three months ended September 30, 2015,March 31, 2016, salaries and benefits increased $162,000,$269,000, or 4.6%7.3%, from the same period in 2014. For the nine months ended September 30, 2015, salaries and benefits increased $627,000, or 6.0%, compared to the nine months ended September 30, 2014.2015. Salaries increased by $112,000,$192,000, or 4.2%7.1%, and employee benefits increased by $50,000,$77,000, or 5.7%7.7%, for the three months ended September 30, 2015,March 31, 2016, compared to the same period in 2014. For the nine months ended September 30, 2015, salary expense increased by $451,000, or 5.8%, while employee benefits increased by $176,000, or 6.5%, compared to the nine months ended September 30, 2014.2015. Salary and benefit expenses are growing primarily because of the expansion of the mortgage division and one additional information systems position, along with three position upgrades, affecting three different areas of the Bank. The three position upgrades involved operations, commercial lending and legal.departments as well as other support positions within the bank.

 

Occupancy expenses consist of the following:

·Depreciation of bank buildings
·Real estate taxes and property insurance
·Building lease expense
·Utilities
·Building repair and maintenance

 

Occupancy expenses increased $32,000,decreased $40,000, or 6.7%, and $135,000, or 9.3%7.2%, for the three and nine months ended September 30, 2015, compared to the same periods in the prior year. Cleaning services were $31,000 for the third quarter of 2015 and $100,000 for the nine-month period and are now being included in occupancy costs whereas in years prior to 2015 they were included with professional services. This reclassification is primarily responsible for the quarter and year-to-date increases in this area. Additionally, lease expense increased by $34,000, or 66.9%, for the nine months ended September 30, 2015,March 31, 2016, compared to the same period in the prior year dueyear. Snow removal costs decreased by $20,000, or 36.2% as a result of the mild winter in 2016 compared to the lease of additional office spaceprior year. Utilities costs decreased by $10,000, or 5.9% when comparing both time periods. Cleaning services expense decreased $9,000, or 25.1%, for the three months ended March 31, 2016, compared to the same period in downtown Ephrata that occurred in the second quarter of 2014. Additional space was leased for loan operations, providing more room for commercial lending and the mortgage expansion at the main office location.2015.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Advertising and marketing expenses did not change substantiallydecreased $20,000, or 12.9%, for the three months ended September 30, 2015, but did increase by $62,000, or 17.7%, for the nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses increaseddecreased by $48,000,$46,000, or 20.1%46.2%, and the public relations expenses increased by $14,000,$26,000, or 13.2%46.8%, for the ninethree months ended September 30, 2015,March 31, 2016, compared to the same period in 2014.2015. Marketing expenses support the overall business strategies of the Corporation; therefore, the timing of these expenses is highly dependent upon the execution of those strategies.

 

Computer software and data processing expenses increased by $46,000, or 12.3%, for the first quarter of 2016 compared to the same period in 2015. Software-related expenses were up $49,000, or 27.2%, primarily as a result of increased amortization on existing software as well as purchases of new software platforms to support the strategic initiatives of the Corporation. These fees are likely to continue to increase throughout the remainder of 2016 as new software platforms are installed and the cost of annual maintenance contracts increases.

Bank shares tax expense increased $25,000,$32,000, or 14.7%16.4%, for the three months ended September 30, 2015, and $50,000, or 9.3%, for the nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014. In 2014, the PA Bank Shares Tax rate and formula was changed, resulting in a lower tax amount for the Corporation.2015. Two main factors determine the amount of bank shares tax: the ending value of shareholders’ equity and the ending value of tax-exempt U.S. obligations. Previously, theobligations, calculated on a quarter ending basis. The shares tax calculation formula utilized a rolling six-year average of taxable shares, which was the average shareholders’ equity of the Bank less the average amount of exempt U.S. obligations held. Inin 2014 the shares tax rate was reduced from 1.25% to 0.89%. Additionally, the calculation was changed to using a year-end balance of shareholders’ equity, less tax-exempt U.S. obligations held at year-end. Whilemultiplied by a tax rate of 0.89%. The tax rate was 1.25% in 2013 and prior years, resulting in a lower tax amount. However, it is anticipated that the tax rate and formulawill be changed to 1.00% effective for years beginning in 2016 forward, so management elected to change reduced Bank sharesour tax accrual to the 1.00% tax rate in 2014, normal growththe first quarter of Bank shareholders’ equity and slightly lower exempt U.S. obligations held, caused2016 causing the shares tax to increase in 2015.over the prior year’s first quarter.

 

Professional services expense increased $11,000,$59,000, or 3.5%, and $86,000, or 8.7%18.6%, for the three and nine months ended September 30, 2015,March 31, 2016, compared to the same periodsperiod in 2014.2015. These services include accounting and auditing fees, legal fees, and fees for other third-party services. Trust department processing fees increased by $18,000$25,000 for the three months ended September 30, 2015, and $28,000 for the nine months ended September 30, 2015,March 31 2016, compared to the same periodsperiod in the prior year. LegalOther outside service fees decreased by $10,000 for the quarter and increased by $14,000 for$27,000 in the year-to-date period ended September 30, 2015,first quarter of 2016 compared to the same periods in 2014. The year-to-date increase was due to non-recurring fees associated with Corporate legal matters.first quarter of 2015. Several other professional services expenses increased or decreased slightly making up the remainder of the variance.

 

Other operating expenses increased by $82,000, or 15.8%, and by $102,000, or 6.4%, for the three and nine months ended September 30, 2015 respectively, compared to the same periods in 2014. The third quarter increase was primarily due to a $110,000 increase in the allowance for off balance sheet credit losses, and a $16,000 increase in general insurance, partially offset by a $19,000 decrease in other loan expenses, a $14,000 decline in dues, memberships and contributions, with several other smaller items making up the remaining difference. The year-to-date increase can be attributed to several increases, partially offset by two main decreases. The allowance for off balance sheet credit losses increased by $95,000, FDIC assessments by $54,000, general insurance costs by $36,000, and shareholder expenses by $28,000. Partially offsetting these increases were a $67,000 decline in operating supplies and a $45,000 decline in delinquent loan expenses.

 

Income Taxes

 

The majority of the Corporation’s income is taxed at a corporate rate of 34% for Federal income tax purposes. For the three and nine months ended September 30, 2015,March 31, 2016, the Corporation recorded Federal income tax expense of $382,000, and $903,000, compared to tax expense of $337,000 and $1,083,000$243,000 for the three and nine months ended September 30, 2014.March 31, 2015. The effective tax rate for the Corporation was 17.1%16.7% for the three months ended September 30, 2015, and 15.5% for the nine months ended September 30, 2015,March 31, 2016, compared to 16.4% and 17.0%14.2% for the same periodsperiod in 2014.2015. The Corporation’s effective tax rate has historically been maintained at low levels primarily due to a relatively high level of tax-free municipal bonds held in the securities portfolio. The fluctuation of the effective tax rate will occur as a result of total tax-free revenue as a percentage of total revenue.revenue and as pre-tax income fluctuates.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on tax-exempt loans and securities, and BOLI income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation’s provision for Federal income taxes on the Consolidated Statements of Income by the income before income taxes for the applicable period.

 

The Corporation is also subject to Pennsylvania Corporate Net Income Tax; however, the Corporation’s Holding Company has very limited taxable corporate net income activities. The Corporation’s wholly owned subsidiary, Ephrata National Bank, is subject to Pennsylvania Bank Shares Tax. Like Federal Corporate income tax, the Pennsylvania Bank Shares Tax is a significant expense for the Corporation, amounting to $227,000 in the first quarter of 2016 compared to $195,000 in the thirdsame quarter of 2015 and $586,000 for the nine months ended September 30, 2015, compared to $170,000 and $536,000 for the same periods in 2014.2015. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income, under operating expenses.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Financial Condition

 

Securities Available for Sale

 

The Corporation classifies all of its securities as available for sale and reports the portfolio at fair market value. As of September 30, 2015,March 31, 2016, the Corporation had $278.5$287.3 million of securities available for sale, which accounted for 32.2%31.1% of assets, compared to 34.5%32.0% as of December 31, 2014,2015, and 35.4%33.9% as of September 30, 2014.March 31, 2015. Based on ending balances, the securities portfolio decreased 7.6%1.9% from September 30, 2014,March 31, 2015, and 5.9%0.7% from December 31, 2014.2015.

 

The securities portfolio was showing a netfairly high level of unrealized gains as of March 31, 2015, but with higher Treasury rates later in 2015, the portfolio had an unrealized loss at December 31, 2015, and returned to an unrealized gain of $720,000 as of September 30, 2015, compared to $1,518,000 as of Decemberat March 31, 2014, and $1,009,000 as of September 30, 2014.2016. The valuation of the Corporation’s securities portfolio, predominately debt securities, is impacted by both the U.S. Treasury rates and the perceived forward direction of interest rates. Out of the three period-end dates noted above, the 10-year U.S. Treasury yield was at its highest on September 30, 2014, at 2.52%. The 10-year U.S. Treasury yield decreased to 2.17%1.94% as of March 31, 2015, 2.27% as of December 31, 2014,2015, and declined throughout the first quarter of 2016 to 2.06%1.78% as of September 30, 2015.March 31, 2016. The actual U.S.lower Treasury rates have caused an improvement in market valuation, resulting in an unrealized gain of $481,000 on the securities portfolio as of March 31, 2016, compared to an unrealized loss of $382,000 as of December 31, 2015, and forecasts for future interest rates will continue to impact the valuationunrealized gains of the Corporation’s debt securities.$3.3 million as of March 31, 2015.

 

The table below summarizes the Corporation’s amortized cost, unrealized gain or loss position, and fair value for each sector of the securities available for sale portfolio for the periods ended September 30, 2015,March 31, 2016, December 31, 2014,2015, and September 30, 2014.March 31, 2015.

 

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)  

 

   Net     Net  
 Amortized Unrealized Fair Amortized Unrealized Fair
 Cost Gains (Losses) Value Cost Gains (Losses) Value
 $ $ $ $ $ $
September 30, 2015            
March 31, 2016            
U.S. government agencies  25,420   12   25,432   21,673   15   21,688 
U.S. agency mortgage-backed securities  38,392   (200)  38,192   50,494   (142)  50,352 
U.S. agency collateralized mortgage obligations  47,810   66   47,876   44,227   (150)  44,077 
Corporate bonds  60,542   (163)  60,379   62,025   (210)  61,815 
Obligations of states and political subdivisions  100,046   995   101,041   102,615   983   103,598 
Total debt securities  272,210   710   272,920   281,034   496   281,530 
Marketable equity securities  5,540   10   5,550   5,755   (15)  5,740 
Total securities available for sale  277,750   720   278,470   286,789   481   287,270 
                        
December 31, 2014            
December 31, 2015            
U.S. government agencies  46,577   (418)  46,159   29,829   (138)  29,691 
U.S. agency mortgage-backed securities  37,946   4   37,950   42,288   (308)  41,980 
U.S. agency collateralized mortgage obligations  48,690   (624)  48,066   48,140   (809)  47,331 
Corporate bonds  65,274   (166)  65,108   63,825   (520)  63,305 
Obligations of states and political subdivisions  90,628   2,703   93,331   100,208   1,375   101,583 
Total debt securities  289,115   1,499   290,614   284,290   (400)  283,890 
Marketable equity securities  5,189   19   5,208   5,515   18   5,533 
Total securities available for sale  294,304   1,518   295,822   289,805   (382)  289,423 

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Management’s Discussion and Analysis

         Net  
   Net   Amortized Unrealized Fair
 Amortized Unrealized Fair Cost Gains (Losses) Value
 Cost Gains (Losses) Value $ $ $
 $ $ $
September 30, 2014            
March 31, 2015            
U.S. government agencies  37,702   (872)  36,830   37,721   107   37,828 
U.S. agency mortgage-backed securities  46,485   251   46,736   37,477   107   37,584 
U.S. agency collateralized mortgage obligations  59,309   (586)  58,723   55,667   (48)  55,619 
Corporate bonds  53,053   (65)  52,988   62,847   458   63,305 
Obligations of states and political subdivisions  98,363   2,294   100,657   90,461   2,632   93,093 
Total debt securities  294,912   1,022   295,934   284,173   3,256   287,429 
Marketable equity securities  5,376   (13)  5,363   5,362   17   5,379 
Total securities available for sale  300,288   1,009   301,297   289,535   3,273   292,808 

 

While interest rate changes and the perceived forward direction of interest rates generally have a close relationship to the valuation of the Corporation’s fixed income securities portfolio, there are also a number of other market factors that impact bond prices. While there is still a possibility of aanother Federal Reserve rate increase in the fourth quarter of 2015,2016, at present market interest rates remain compressed and have been range bound, operating in a fairly narrow range over the last twelve months.quarter. While any market rate increase would have a negative impact on the Corporation’s debt securities, the impact will vary according to the length and structure of each sector. ItThe Federal Reserve increased the Fed funds rate by 25 basis points in December of 2015 but it is not known when the Federal Reserve will act to increase the Fed funds rate but mid-termagain. The increase in December did not result in higher mid and long-term Treasury rates, can react at any time to economic newsbut actually resulted in lower rates and market forces.a flatter yield curve. While management is planning for mid-term and long-term interest rates to increase throughout the remainder of 2016, it is possible they would not increase to the same magnitude that short-term rates will increase. Therefore aincrease resulting in an even flatter yield curve could develop.curve. With the 10-year U.S. Treasury yield at 2.06%1.78% as of September 30, 2015,March 31, 2016, any significant increase in this rate would have a negative impact on the Corporation’s obligations of states and political subdivisions, referred to as municipal bonds. The municipal bond sector is the largest of the portfolio and, as a result, management will closely monitor the 10-year U.S. Treasury yield due to its impact on these securities. The other sectors of the portfolio have shorter lives and duration and would be more influenced by the 2-year and 5-year U.S. Treasury rates. It is anticipated that the current unrealized gains will dissipate and unrealized losses will be incurred when market rates do begin to increase, either in anticipation of a Federal Reserve rate move, or after the next Federal rate move.

 

Management has already taken steps to reducehad been reducing portfolio effective duration steadily since the Corporation’s exposure to increases in interest rates and declines inend of 2013, with levels hitting most recent lows on March 31, 2015. Effective duration is a measurement of the market valuationlength of the securities portfolio with a higher level indicating more length and more exposure to an increase in interest rates. The securities portfolio base case effective duration was as high as 4.0 as of September 30, 2013, but declined to 2.9 as of March 31, 2015. Since then it has increased slightly to 3.0 as of March 31, 2016. Duration is expected to remain stable throughout 2016. It will be more difficult to reduce duration materially in 2016 as the portfolio is expected to decline in size due to forecasted loan growth while management has increased the percentage of municipal holdings in the portfolio. These actions have includedWhile the salespercentage of longer duration securities, primarily municipal bonds. While the municipal bond segment of the portfoliobonds has grown, the types of new municipal bond instruments being purchased generally have better rates-up performance than those municipal bonds being sold. ThoseTherefore, the same duration can be maintained despite a higher element of municipal securities. Management also continues to utilize lower duration corporate bonds to offset the duration of the longer municipal bonds.

Management’s actions to maintain reasonable effective duration of the securities portfolio are part of a broader asset liability plan to continually work to mitigate future interest rate risk and fair value risk to the Corporation. Part of that strategy is to retain higher levels of cash and cash equivalents to increase liquidity and provide an immediate hedge against higher interest rates and fair value risk. However, despite taking actions to mitigate the Corporation’s future risk, these risks are inherent to the banking model. Unrealized gains and losses on securities will vary significantly according to market forces. Management’s focus will continue to be on the long-term performance of these securities. While management has and will continue to take gains from the portfolio when opportunities exist, the broader securities strategy remains to buy and hold debt securities until maturity. If and when market interest rates do begin to rise, management expects gains from the sales of securities to decline significantly.

 

The Corporation typically invests excess liquidity into securities, primarily fixed-income bonds. The securities portfolio provides interest and dividend income to supplement the interest income on loans. Additionally, the securities portfolio assists in the management of both liquidity risk and interest rate risk. In order to provide maximum flexibility for management of liquidity and interest rate risk, the securities portfolio is classified as available for sale and reported at fair value. Management adjusts the value of all the Corporation’s securities on a monthly basis to fair market value as determined in accordance with U.S. generally accepted accounting principles. Management has the ability and intent to hold all debt securities until maturity, and does not generally record impairment on bonds that are currently valued below book value. In addition to the fixed-income bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book value of $5.0 million. The CRA fund is a Small Business Association (SBA) variable rate fund with a stable dollar price. The Corporation also has a small portfolio of bank stocks with a book value of $540,000.$755,000. These two equity holdings make up 2.0% of the Corporation’s securities available for sale.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

All securities, bonds, and equity holdings are evaluated for impairment on a quarterly basis. Should any impairment occur, management would write down the security to a fair market value in accordance with U.S. generally accepted accounting principles, with the amount of the write down recorded as a loss on securities.

 

Each quarter, management sets portfolio allocation guidelines and adjusts the security portfolio strategy generally based on the following factors:

 

·ALCO positions as to liquidity, credit risk, interest rate risk, and fair value risk
·Growth of the loan portfolio
·Slope of the U.S. Treasury curve
·Relative performance of the various instruments, including spread to U.S. Treasuries
·Duration and average length of the portfolio
·Volatility of the portfolio
·Direction of interest rates
·Economic factors impacting debt securities

 

The investment policy of the Corporation imposes guidelines to ensure diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk. The composition of the securities portfolio based on fair market value is shown in the following table.

 

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)      

 

 Period Ending Period Ending
 September 30, 2015 December 31, 2014 September 30, 2014 March 31,2016 December 31, 2015 March 31, 2015
 $ % $ % $ % $ % $ % $ %
                        
U.S. government agencies  25,432   9.1   46,159   15.6   36,830   12.2   21,688   7.6   29,691   10.3   37,828   12.9 
U.S. agency mortgage-backed securities  38,192   13.7   37,950   12.8   46,736   15.5   50,352   17.5   41,980   14.5   37,584   12.9 
U.S. agency collateralized mortgage obligations  47,876   17.2   48,066   16.2   58,723   19.5   44,077   15.3   47,331   16.3   55,619   19.0 
Corporate debt securities  60,379   21.7   65,108   22.0   52,988   17.6   61,815   21.5   63,305   21.9   63,305   21.6 
Obligations of states and political subdivisions  101,041   36.3   93,331   31.6   100,657   33.4   103,598   36.1   101,583   35.1   93,093   31.8 
Equity securities  5,550   2.0   5,208   1.8   5,363   1.8   5,740   2.0   5,533   1.9   5,379   1.8 
                                                
Total securities  278,470   100.0   295,822   100.0   301,297   100.0   287,270   100.0   289,423   100.0   292,808   100.0 

 

The largest movements within the securities portfolio were shaped by market factors, such as:

 

·slope of the U.S. Treasury curve and projected forward rates
·interest spread versus U.S. Treasury rates on the various securities
·pricing of the instruments, including supply and demand for the product
·structure of the instruments, including duration and average life
·portfolio weightings versus policy guidelines
·prepayment speeds on mortgage-backed securities and collateralized mortgage obligations
·risk-based capital considerations
·Federal income tax considerations with regard to obligations of states and political subdivisions.

 

Since SeptemberMarch of 2014,2015, the most significant change occurring with the Corporation’s securities portfolio was a large $17.4 million, or 5.9% decline, in the total portfolio since December 31, 2014. This was primarily due to increased loan demand. Management desires to continue to build the loan portfolio and has goals of increasing the loan-to-deposit ratio and reallocating assets by funding loan growth with declines in securities. The largest change within the portfolio was a decrease in U.S. government agency U.S. agency mortgage-backed securities (MBS), and U.S. agency collateralized mortgage obligations (CMO), with a partially offsetting increase in corporate debt securities.U.S. agency mortgage-backed securities (MBS) and obligations of states and political subdivisions. The Corporation took advantage of the low market rate environment and sold a number of U.S. government agency securities to reduce duration, generate gains, and to increase liquidity. In addition, while MBSliquidity and several other agency securities provide a stable ladderwere called in the first quarter of cash flows, the lack of a structure to limit prepayment speeds makes these securities susceptible to lower yields on any rate declines. The volatility of MBS prepayment speeds has caused management to not reinvest in this area.2016. A number of CMO securities were also sold during the thirdfirst quarter of 2016 either because of the substantialhigher than desired prepayment speeds, causing lower effective yields, or due to gains associated with these transactions.obtainable on slower paying instruments.

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Management’s Discussion and Analysis

Corporate securities provide strong yields for short maturity instruments, with no variation in yield performance. Corporate securities are viewed as key to maintaining the 0 to 5-year portion of the portfolio’s maturity ladder, so a steady stream of reinvestment would occur at higher rates given a future rates-up cycle. The more significant components of the securities portfolio along with a more detailed explanation of their changes are discussed below.

The Corporation’s U.S. government agency sector decreased by $11.4$16.1 million, or 30.9%42.7%, since September 30, 2014,March 31, 2015, with the weighting reduced from 12.2%12.9% of the portfolio to 9.1%7.6%. In the past, management’s goal was to maintain agency securities at approximately 15% of the securities portfolio. In the currently very low rate environment, management is comfortable maintaining Agenciesagencies at a level of 10% of the portfolio. Management does plan to reinvest in the Agencyagency sector prior to year-end to hold agencies at approximately 10% of the portfolio. This sector is also important in maintaining adequate risk weightings of the portfolio, to ensure sufficient U.S. government securities for pledging purposes, and importantly to ladder out a schedule of agency and corporate maturities over the next 5 years to avoid any concentration of maturities. Next to U.S. Treasuries, U.S. agencies are viewed as the safest instruments and are considered by management as a foundational portion of the portfolio.

 

The Corporation’s U.S. agency MBS and CMO sectors have decreasednot changed much in total, by $19.4 million, or 18.4%, since September 30, 2014.but the weighting has changed with more MBS and fewer CMOs as of March 31, 2016, compared to March 31, 2015. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions. Unlike the typical U.S. agency paper, corporate bonds, and obligations of states and political subdivisions, which only pay principal at final maturity, the U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. The combined effect of all of these instruments paying monthly principal and interest provides the Corporation with a significant and reasonably stable cash flow. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield. As interest rates decline, prepayment of principal on securities increases, the duration of the security shortens, and the yield declines as more amortization is required on premium bonds. When interest rates increase, the opposite of this occurs. Despite the fluctuations that occur in terms of monthly cash flow as a result of changing prepayment speeds, the monthly cash flow generated by U.S. agency MBS and CMO securities is reasonably stable and as a group is significant, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities. As a result of the volatility of MBS prepayment speeds, management has shifted the MBS/CMO allocation to a heavier weighting of CMOs in this combined sector.

 

As of September 30, 2015,March 31, 2016, the fair value of the Corporation’s corporate bonds increaseddecreased by $7.4$1.5 million, or 13.9%2.4%, from balances at September 30, 2014.March 31, 2015. Like any security, corporate bonds have both positive and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. Management stands to possibly lose the entire principal amount if the entity that issued the corporate paper fails. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held.

 

Obligations of states and political subdivisions, or municipal bonds, are tax-free securities that generally provide the highest yield in the securities portfolio. They also carry the longest duration on average of any instrument in the securities portfolio. In the prolonged period of historically low interest rates, the municipal bond sector has far outperformed all other sectors of the portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds and these instruments experience significant fair market value gains when interest rates are low and market value losses when interest rates are higher. The market value of municipal holdings has not changed significantlyincreased by $10.5 million, or 11.3%, from $100.7 million at September 30, 2014,March 31, 2015 to $101.0 million at September 30, 2015, however the municipal holdings have grown as a percentageMarch 31, 2016. Municipal bonds represented 31.8% of the securities portfolio to 36.3% as of September 30, 2015. It is not anticipated that this percentage will continueMarch 31, 2015, compared to rise.36.1% as of March 31, 2016. The Corporation’s investment policy limits municipal holdings to a maximum of 40% of the securities portfolio.

 

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Management’s Discussion and Analysis

By policy, management is to identify and recommend whether to hold or sell securities with credit ratings that have fallen below minimum policy credit ratings required at the time of purchase, or below investment grade. Management monitors the security ratings on a monthly basis and reviews quarterly with the Board of Directors. Management, with Board approval, determines whether it is in the Corporation’s best interest to continue to hold any security that has fallen below policy guidelines or below investment grade based on the expectation of recovery of market value or improved performance. At this time management has elected, and the Board has approved, holding securities that have fallen below initial policy guidelines or investment grade. Presently, management and the Board continue to hold four corporate bond instruments with Moody’s and S&P ratings below management’s initial purchase policy guidelines but still investment grade. These four bonds have a book value of $6.6 million with a small unrealized holding loss of $14,000 as of March 31, 2016. In addition, seven corporate bond instruments that have split ratings, with one rating within the Corporation’s initial purchase policy guidelines and one rating outside of management guidelines but still investment grade. The seven bonds have a book value of $11.6$8.8 million with a small $63,000$33,000 unrealized carrying loss as of September 30, 2015.March 31, 2016. Management conducts ongoing monitoring of these bonds with the Board approving holding these securities on a quarterly basis. Currently, there are no indications that any of these bonds would discontinue contractual payments.

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Management’s Discussion and Analysis

As of September 30, 2015,March 31, 2016, twenty-one of the thirty-nineforty corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 99.3%99.2% of book value. The Corporation’s investment policy requires that corporate bonds have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase, or an average or composite rating of A-. As of September 30, 2015,March 31, 2016, all but twofour of the corporate bonds had at least one A3 or A- rating by one of the two predominate major credit rating services, Moody’s and S&P. The twofour unrelated corporate bonds, with a total book value of $2.2$6.6 million, did not have an A3 or A- rating as of September 30, 2015.March 31, 2016. These bonds were both rated Moody’s Baa1 and S&P BBB+, which are two levels above the minimum required to be considered investment grade. Management conducts ongoing monitoring of these bonds and has chosen to continue to hold these bonds.bonds with board approval.

 

The Corporation’s investment policy requires that municipal bonds not carrying insurance have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of September 30, 2015,March 31, 2016, no municipal bonds carried a credit rating under these levels.

 

In the current environment, the major rating services have tightened their credit underwriting procedures and are more apt to downgrade municipalities. Additionally, the very weak economy has reduced revenue streams for many municipalities and has called into question the basic premise that municipalities have unlimited power to tax, i.e. the ability to raise taxes to compensate for revenue shortfalls. As a result of this environment, management utilizes several municipal surveillance reports and engages a third party to perform enhanced municipal credit evaluation. Management will typically sell municipal securities if negative trends in financial performance are found and/or ratings have declined to levels deemed unacceptable. As a result of the above monitoring and actions taken to proactively sell weaker municipal credits, the Corporation’s entire municipal bond portfolio consists of investment grade credits.

 

The entire securities portfolio is reviewed monthly for credit risk and evaluated quarterly for possible impairment. With the sale of all remaining PCMO securities in 2014, theThe Corporation’s municipal and corporate bonds present the largest credit risk and highest likelihood for any possible impairment. Due to the ability for corporate credit situations to change rapidly and the continued weak economic conditions impacting municipalities, management is closely monitoring all corporate and municipal securities.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Loans

 

Net loans outstanding increased by 8.2%13.1%, to $487.9$537.7 million at September 30, 2015,March 31, 2016, from $450.9$475.5 million at September 30, 2014.March 31, 2015. Net loans increased by 5.2%4.8%, an annualized rate of 6.9%19.1%, from $464.0$513.2 million at December 31, 2014.2015. The following table shows the composition of the loan portfolio as of September 30, 2015,March 31, 2016, December 31, 2014,2015, and September 30, 2014.March 31, 2015.

 

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)      

 

 September 30, December 31, September 30, March 31, December 31, March 31,
 2015 2014 2014 2016 2015 2015
 $ % $ % $ % $ % $ % $ %
                        
Commercial real estate                                                
Commercial mortgages  90,740   18.3   95,914   20.4   95,173   20.8   88,997   16.4   87,613   16.8   94,783   19.7 
Agriculture mortgages  152,015   30.7   140,322   29.8   133,588   29.2   165,211   30.4   158,321   30.5   150,005   31.1 
Construction  8,963   1.8   7,387   1.6   9,054   2.0   21,354   3.9   14,966   2.9   8,416   1.7 
Total commercial real estate  251,718   50.8   243,623   51.8   237,815   52.0   275,562   50.7   260,900   50.2   253,204   52.5 
                                                
Consumer real estate (a)                                                
1-4 family residential mortgages  127,716   25.8   123,395   26.2   123,203   26.9   136,307   25.0   133,538   25.7   122,048   25.3 
Home equity loans  11,857   2.4   12,563   2.7   9,915   2.2   10,423   1.9   10,288   2.0   12,466   2.6 
Home equity lines of credit  34,476   7.0   27,308   5.8   26,672   5.8   40,571   7.5   37,374   7.2   28,774   6.0 
Total consumer real estate  174,049   35.2   163,266   34.7   159,790   34.9   187,301   34.4   181,200   34.9   163,288   33.9 
                                                
Commercial and industrial                                                
Commercial and industrial  35,848   7.3   31,998   6.8   29,366   6.4   40,431   7.4   36,189   7.0   32,971   6.8 
Tax-free loans  12,613   2.6   11,806   2.5   12,550   2.7   18,929   3.5   19,083   3.7   12,759   2.6 
Agriculture loans  16,705   3.4   16,496   3.5   14,089   3.2   18,087   3.3   18,305   3.5   16,612   3.5 
Total commercial and industrial  65,166   13.3   60,300   12.8   56,005   12.3   77,447   14.2   73,577   14.2   62,342   12.9 
                                                
Consumer  3,498   0.7   3,517   0.7   3,833   0.8   3,725   0.7   3,892   0.7   3,326   0.7 
                                                
Total loans  494,431   100.0   470,706   100.0   457,443   100.0   544,035   100.0   519,569   100.0   482,160   100.0 
Less:                                                
Deferred loan fees (costs), net  (608)      (462)      (430)      (749)      (714)      (466)    
Allowance for loan losses  7,106       7,141       6,968       7,040       7,078       7,140     
Total net loans  487,933       464,027       450,905       537,744       513,205       475,486     

 

(a)Residential real estate loans do not include mortgage loans serviced for others which totaled $32,537,000$41,282,000 as of September 30, 2015, $16,670,000March 31, 2016, $38,024,000 as of December 31, 2014,2015, and $12,523,000$19,845,000 as of September 30, 2014.March 31, 2015.

 

Since September 30, 2014,March 31, 2015, and December 31, 2014,2015, loan growth occurred as a result of increases in agriculture mortgages, commercial construction loans, 1-4 family residential mortgages, home equity lines of credit, and commercial and industrial loans. Agricultural lending has been an area of increased focus for the Corporation. The agricultural sector of the local economy has recovered much quicker than other elements such as construction, manufacturing, and service-related industries. Commercial construction loans have increased as a result of a renewed focus on construction lending and as more businesses move forward with construction projects in the slightly improved economic environment. 1-4 family residential mortgages increased due to the expansion of the Corporation’s mortgage division and successful efforts to expand the product line and increase the sales force to capture a greater share of the local mortgage market. Home equity lines of credit have grown in response to the low interest rate environment encouraging customers to utilize variable rate consumer borrowings in conjunction with several home equity specials that the Corporation has offered during 2014 and 2015. Commercial and industrial loan growth has occurred as a result of more businesses moving forward with loan needs as a result of slightly improved local economic conditions and improved performance compared to prior years.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The composition of the loan portfolio has undergone relatively minor changes in recent years outside of the increases mentioned above. The total of all categories of real estate loans comprises 86%85% of total loans. At $251.7$275.6 million, commercial real estate is the largest category of the loan portfolio, consisting of 50.8%50.7% of total loans. This category includes commercial mortgages, agriculture mortgages, and construction loans. Commercial real estate loans increased from $237.8$253.2 million as of September 30, 2014,March 31, 2015, to $251.7$275.6 million as of September 30, 2015,March 31, 2016, a $13.9$22.4 million, or 5.8%8.8% increase.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The growth in commercial real estate loans has occurred entirely in those secured by farmland.farmland as well as construction loans. Agricultural mortgages increased from $133.6$150.0 million, or 56.2%59.2% of commercial real estate loans as of September 30, 2014,March 31, 2015, to $152.0$165.2 million, or 60.4%60.0% of commercial real estate loans as of September 30, 2015.March 31, 2016. Commercial construction loans increased by $12.9 million, or 153.7%, from March 31, 2015, to March 31, 2016, primarily as a result of a number of agricultural construction projects going on, the majority of these being construction of layer and broiler poultry houses. These loans remain in the construction category until they are completed and moved into permanent financing. Commercial mortgages declined by $4.4$5.8 million, or 4.7%6.1%, from September 30, 2014,March 31, 2015, to September 30, 2015, and commercial construction loans did not change significantly during that time.March 31, 2016.

 

Consumer real estate loans make up 35.2%34.4% of the total loan portfolio with balances of $174.0$187.3 million. These loans include 1-4 family residential mortgages, home equity term loans, and home equity lines of credit. Personal residential mortgages account for 73.4%72.8% of total residential real estate loans and 25.8%25.0% of total loans. Traditional 10 to 20-year personal mortgages originated from and held by the Corporation have consistently been the largest single product of the Corporation’s loan portfolio. The Corporation experienced a slowdown in the number of residential mortgages made and held at the Bank in 2014 and intothrough some of 2015, as the secondary mortgage market rates became extremely competitive and more customers were opting for this alternative. This activity drove gains on mortgages higher forDuring the year, although duringlast half of 2015 and the thirdfirst quarter of 2015,2016, fewer loans were being sold on the secondary market and more mortgage originations were being maintained in the Corporation’s portfolio. This contributed to the growth in portfolio 1-4 family residential mortgages since September 30, 2014,March 31, 2015, and December 31, 2014.2015. Total personal residential mortgage balances increased $4.5$14.3 million, or 3.7%11.7%, from September 30, 2014March 31, 2015 to September 30, 2015,March 31, 2016, and $4.3$2.8 million, or 3.5%2.1%, from December 31, 20142015 to September 30, 2015.March 31, 2016.

 

The Corporation generally only holds 10, 15, and 20-year mortgages, and will sell any mortgage originated over 20 years. While terms of 10, 15, 20, and 30 years are offered to the customer, the most popular term is the 30-year, which are all sold on the secondary market. The majority of the 30-year mortgages are sold with servicing retained. In the first half of 2015, as customers looked to refinance mortgages that were held on the Corporation’s Consolidated Balance Sheet, many were taking advantage of the lower rates offered on the secondary market resulting in the conversion of the Corporation’s residential mortgages into mortgages sold on the secondary market. During the thirdlatter half of 2015 and the first quarter of 2015,2016, more mortgages were being generated and held in the Corporation’s portfolio as opposed to being sold on the secondary market, resulting in higher balances of portfolio 1-4 family residential mortgages. The vast majority of the growth in portfolio mortgages has been in adjustable rate mortgages (ARMs). The most common ARM product is the 5/1 ARM. In this mortgage, the amortization is on a 30-year term like a standard mortgage but the rate is adjustable after five years based on an index. The ARM products have attracted heavy customer interest as the initial rates are lower and many home buyers do not expect to remain in their homes for the long term. The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period. The ARM loans have grown rapidly as a percentage of the portfolio, amounting to over 22% of the total personal mortgages held by the Corporation as of March 31, 2016. Management expects internal mortgage loan production to continue to develop throughout the remainder of 20152016 as the Corporation focuses on strategically growing this area of the portfolio.

 

Second mortgages and home equity loans, fixed or variable rate, make up the remainder of the Corporation’s residential real estate loans. Requests for fixed-rate home equity loans have been very light during this prolonged period of historically low rates, while home equity lines of credit, which float on the Prime rate, have been the preferred home equity financing. Despite low fixed-ratefixed home equity rates the home equity lines of credit offered in the marketplace are lower and have been lower for over five years. Consumers are seeking the lowest interest rate possible to borrow money against their home value, which has resulted in a long trend of more variable rate versus fixed rate financing. The growth of the Corporation’s home equity lines of credit has accelerated during 2015 and into 2016 as a result of an attractive Homeline promotion that featuredproduct with a 1.49%low introductory rate for a six-month period.six months. After that period, the home equity line would revert to Prime or Prime plus a margin depending on the strength of the borrower.

 

In the fourth quarter of 2014 there were a larger number of second lien fixed rate loans made that were secured by a personal residence that caused the fixedFixed rate home equity loans to increase from $9.9 million to $12.6 million.have been steadily decreasing as more customers borrow on variable rate lines of credit. The purposes of these loans can vary but for this analysis the loan type and form of lien and collateral govern the placement of these loans under home equity loans. Since DecemberMarch 31, 2014,2015, the fixed rate home equity loans have resumed their long-term downward trend to $11.9declined by $2.0 million, as of September 30, 2015,or 16.4%, and are expected to decline further.further throughout 2016. The $11.9 million fixed rate balance as of September 30, 2015, is a $2.0 million, or 20.2% increase, over September 30, 2014. However, the growth in home equity lines of credit greatly exceedsmore than offsets the smaller dollar increase ofdecrease in fixed-rate home equity loans. Home equity lines of credit increased from $26.7$28.8 million on September 30, 2014,March 31, 2015, to $34.5$40.6 million on September 30, 2015, a $7.8March 31, 2016, an $11.8 million, or 29.2%40.1% increase. The net of these two trends is a $9.8 million, or 26.8%23.7% increase, in total home equity loan balances.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation continues to offer a low 1.99% six-month introductory rate on the Homeline special during the fourth quarter of 2015product and expects similar growth to occur until the end of the year.throughout 2016. This trend is likely to continue while the Prime rate remains at 3.25%.low. It is expected that when the Federal Reserve acts to increase the overnight rate again, and the Prime rate increases, the reaction will be that floating rate loans will become less attractive to borrowers who will act to protect themselves against further rate increases by converting to a fixed rate loan. Management anticipates moderate growth in the residential real estate area throughout the remainder of 20152016 as this area is an area of strategic focus for the Corporation.

 

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Management’s Discussion and Analysis

Commercial loans not secured by real estate are significantly smaller than the Corporation’s commercial loans secured by real estate portfolio. These commercial and industrial loans, referred to as C & I loans, are generally extended based on the health of the commercial borrower. They include both fixed rate loans and Prime-based variable rate loans. The variable rate loans are generally in the form of a business line of credit. The Corporation’s security position as to these loans can be further strengthened by obtaining the personal guarantees of the owners. This is a preferred approach to commercial accounts as it allows the Corporation to pursue assets of the owner in addition to assets of the commercial entity. Management can also obtain additional collateral by securing the inventory of the business. The portfolio of all types of C&I loans showed an increase of $9.2$15.1 million, or 16.4%24.2%, from September 30, 2014March 31, 2015 to September 30, 2015.March 31, 2016. As of September 30, 2015,March 31, 2016, this category of commercial loans was made up of $35.8$40.4 million of C&I loans (outside of tax-free and agricultural loans), $12.6$18.9 million of tax-free loans, and $16.7$18.1 million of agriculture loans. In the case of the Corporation, all of the $12.6$18.9 million of tax-free loans are to local municipalities. The tax-free loan segment of C&I loans has changed little since September 30, 2014. C&I loans outside of tax-free and agricultural, grewincreased by $6.5$7.5 million, or 22.1%22.6%, since September 30, 2014, while commercialtax-free loans increased by $6.2 million, or 48.4%, and industrial agriculture loans grew $2.6increased by $1.5 million, or 18.6%8.9%, and commercial and industrial tax-free loans remained unchanged. The growth of both of these areas was fueled by business expansion projects.from balances at March 31, 2015.

 

The consumer loan portfolio decreasedincreased to $3.5$3.7 million at September 30, 2015,March 31, 2016, from $3.8$3.3 million at September 30, 2014.March 31, 2015. Consumer loans made up 0.8% of total loans on September 30, 2014, and 0.7% of total loans on September 30,March 31, 2016, and 0.6% of total loans on March 31, 2015. The long-term trend over the past decade has seen homeowners turning to the equity in their homes to finance cars and education rather than traditional consumer loans for those expenditures. Slightly higher demand for unsecured credit is being offset by principal payments on existing loans. Management anticipates that the Corporation’s level of consumer loans will likely be relatively unchanged in the near future, as the need for additional unsecured credit in the current weaker economic conditions is generally offset by those borrowers wishing to reduce debt levels and move away from the higher cost of unsecured financing relative to other forms of real estate secured financing.

 

Non-Performing Assets

 

Non-performing assets include:

 

·Nonaccrual loans
·Loans past due 90 days or more and still accruing
·Troubled debt restructurings
·Other real estate owned

 

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)

  September 30, December 31, September 30,
  2015 2014 2014
  $ $ $
       
Nonaccrual loans  469   967   1,365 
Loans past due 90 days or more and still accruing  418   384   220 
Troubled debt restructurings         
Total non-performing loans  887   1,351   1,585 
             
Other real estate owned     69   24 
             
Total non-performing assets  887   1,420   1,609 
             
Non-performing assets to net loans  0.18%  0.31%  0.36%

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)  

  March 31, December 31, March 31,
  2016 2015 2015
  $ $ $
       
Nonaccrual loans  337   380   645 
Loans past due 90 days or more and still accruing  334   379   407 
Troubled debt restructurings         
Total non-performing loans  671   759   1,052 
             
Other real estate owned        108 
             
Total non-performing assets  671   759   1,160 
             
Non-performing assets to net loans  0.12%   0.15%   0.24% 

The total balance of non-performing assets decreased by $722,000,$489,000, or 44.9%42.2%, from September 30, 2014March 31, 2015 to September 30, 2015,March 31, 2016, and decreased by $533,000,$88,000, or 37.5%11.6%, from December 31, 20142015 to September 30, 2015.March 31, 2016. The decrease from the prior year’s period was primarily due to a decrease in nonaccrual loans which was partially offset by an increase in loans past due 90 days or more and still accruing.other real estate owned. The decrease since December 31, 2014, was due to a decrease in nonaccrual loans due to a charged-off commercial loan relationship in the first quarter of 2015. The Corporation’s non-performing assets to net loans ratio was 0.18% on September 30, 2015 compared to 0.31% on December 31, 2014, and 0.36% as of September 30, 2014. Another very similar ratio is the non-performing loans to total loans where the Corporation remains very low versus the peer group. As of September 30, 2015, the Corporation’sgroup with a 0.12% non-performing loans to total loans ratio was 0.18% while the national peer group’s ratio was nearly five times higher at 0.94%.asset ratio. There were no loans classified as a TDR as of September 30, 2015,March 31, 2016, December 31, 2014,2015, or September 30, 2014.March 31, 2015. Management is monitoring delinquency trends and the level of non-performing loans closely in light of the slightly improved but continued weak economic conditions. At this time, management believes that the potential for material losses related to non-performing loans is low with the level of non-performing and classified loans declining from the higher levels experienced in prior years.

 

Other real estate owned (OREO) is shown at the lower of cost or fair market value, net of anticipated selling costs. As of September 30, 2014 and DecemberMarch 31, 2014,2015, the OREO balance consisted of onetwo residential property, although it was not the same borrower or property at the endproperties with a $108,000 fair market value. One of these periods. The property held at September 30, 2014, with a $24,000 fair market valueproperties was sold duringin the fourthsecond quarter and 2015 and the other was sold in the third quarter of 2014. A new property with a fair market value of $69,000 was2015. No OREO properties were held as of December 31, 2014, but sold in the first quarter of 2015. There were no OREO properties held as of September 30, 2015.

2015 or March 31, 2016.

 

Allowance for Loan Losses

 

The allowance for loan losses is established to cover any losses inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of the allowance for loan losses. This calculation is based upon a systematic methodology for determining the allowance for loan losses in accordance with generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in the loan portfolio. The allowance calculation includes specific provisions for under-performing loans and general allocations to cover anticipated losses on all loan types based on historical losses. The calculation is also influenced by nine qualitative factors that are adjusted on a quarterly basis as needed. Based on the quarterly loan loss calculation, management will adjust the allowance for loan losses through the provision as necessary. Changes to the allowance for loan losses during the year are primarily affected by five main factors:

 

·Historical loan losses
·Qualitative factor adjustments including levels of delinquent and non-performing loans
·Growth trends of the loan portfolio
·Recovery of loans previously charged off
·Provision for loan losses

 

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses. The Allowance for Loan Losses table below shows the activity in the allowance for loan losses for the nine-monththree-month periods ended September 30, 2015March 31, 2016 and September 30, 2014.March 31, 2015. At the bottom of the table, two benchmark percentages are shown. The first is net charge-offs as a percentage of average loans outstanding for the year. The second is the total allowance for loan losses as a percentage of total loans.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

ALLOWANCE FOR LOAN LOSSES

(DOLLARS IN THOUSANDS)  

 

  Nine Months Ended 
  September 30, 
  2015  2014 
  $  $ 
       
Balance at January 1,  7,141   7,219 
Loans charged off:        
Real estate  272    
Commercial and industrial  2   12 
Consumer  8   17 
Total charged off  282   29 
         
Recoveries of loans previously charged off:        
Real estate  3   12 
Commercial and industrial  91   66 
Consumer  3    
Total recovered  97   78 
Net loans (recovered) charged off  185   (49)
         
Provision charged (credited) to operating expense  150   (300)
         
Balance at June 30,  7,106   6,968 
         
Net charge-offs (recoveries) as a % of average total loans outstanding  0.04%  (0.01%)
         
Allowance at end of period as a % of total loans  1.44%  1.52%

  Three Months Ended 
  March 31, 
  2016  2015 
  $  $ 
       
Balance at January 1,  7,078   7,141 
Loans charged off:        
Real estate     272 
Commercial and industrial  4    
Consumer  12   1 
Total charged off  16   273 
         
Recoveries of loans previously charged off:        
Real estate  10   2 
Commercial and industrial  16   70 
Consumer  2    
Total recovered  28   72 
Net loans (recovered) charged off  (12)  201 
         
Provision charged (credited) to operating expense  (50)  200 
         
Balance at March 31,  7,040   7,140 
         
Net charge-offs (recoveries) as a % of average total loans outstanding  0.00%   0.04% 
         
Allowance at end of period as a % of total loans  1.29%   1.48% 

 

Charge-offs for the ninethree months ended September 30, 2015,March 31, 2016, were $282,000,$16,000, compared to $29,000$273,000 for the same period in 2014.2015. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first ninequarter of 2016, only a small commercial and industrial loan as well as several small consumer loans were charged off. In the first three months of 2015, there was one commercial real estate loan that was charged off for $272,000 making up the majority of this balance. In the first nine months of 2014, only $29,000 in charge-offs occurred in the form of a number ofas well as one small consumer loans and one $12,000 commercial and industrial loan. This resulted in the increased level of charge-offs in the nine months ended September 30, 2015, compared to the same period in the prior year.

 

The allowance as a percentage of total loans represents the portion of the total loan portfolio for which an allowance has been provided. Management regularly reviews the overall risk profile of the loan portfolio and the impact that current economic trends have on the Corporation’s loans. The financial industry typically evaluates the quality of loans on a scale with “unclassified” representing healthy loans, “special mention” being the first indication of credit concern, and several successive classified ratings indicating further credit declines of “substandard,” “doubtful,” and, ultimately, “loss.”

 

The Corporation’s total classified loans based on outstanding balances were $16.0$14.0 million as of September 30, 2015, $19.6March 31, 2016, $15.4 million as of December 31, 2014,2015, and $15.1$20.1 million as of September 30, 2014.March 31, 2015. Having more loans in a classified status will result in a higher allowance as higher projected historical losses and qualitative factors are attached to these loans. In addition to this impact, management performs a specific allocation test on these classified loans. As of December 31, 2014, thereThere was ano specifically allocated allowance amount of $1,000 against the classified loans but no specifically allocated allowance was required as of September 30, 2014,March 31, 2016, December 31, 2015, or September 30,March 31, 2015. While the level of classified loans could have a significant bearing on the allowance, currently they are not having a material influence. The classified loans could require larger provision amounts due to a higher potential risk of loss, so as the classified loan balances fluctuate, the associated specific allowance applied to them fluctuates, resulting in a lower or higher required allowance. The Corporation’s level of classified loans is down significantly$6.1 million, or 30.3%, from several years ago with steady declines since 2011the balance as well as a decline from balances at Decemberof March 31, 2014.2015.

 

The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period, after reducing charge-offs by recoveries. The Corporation continues to experience very low net charge-off percentages due to strong credit practices. For the first ninethree months of 2015, net2016, there were more recoveries than charge-offs as a percentage of average total loans outstanding was 0.04%, which is higher than the previous year whenresulting in a net recovery position resulted in a ratio of (0.01%), but is still running at a very low historical level.position. Management continually monitors delinquencies, classified loans, and charge-off activity closely, and is not anticipating significant increases throughout the remainder of 2015.2016. Management practices are in place to reduce the number and severity of losses. In regard to severely delinquent loans, management attempts to improve the Corporation’s collateral or credit position and, in the case of a loan workout, intervene to minimize additional charge-offs.

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Management’s Discussion and Analysis

The allowance as a percentage of total loans was 1.44%1.29% as of September 30, 2015, and 1.52%March 31, 2016, 1.36% as of December 31, 20142015, and September 30, 2014.1.48% as of March 31, 2015. Management anticipates that the rate of decline in the allowance percentage will slow during the remainder of 2015.2016, as the allowance balance is increased with additional provision expense to account for increased loan growth. It is typical for the allowance for loan losses to contain a small amount of excess reserves. Management desires that the amount of excess reserve in the allowance for loan losses be maintained between 5% and 10%. The excess reserve stood at 8.9%10.0% as of September 30, 2014, 8.0% asMarch 31, 2016, therefore management was at the higher side of December 31, 2014, and 8.4% asits preferred range of September 30, 2015.

excess reserve.

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation, decreased by $0.7$0.8 million, or 3.1%3.6%, to $22.0$21.5 million as of September 30, 2015,March 31, 2016, from $22.7$22.3 million as of September 30, 2014 as more depreciation on fixed assets occurred than the amount of new assets placed into service.March 31, 2015. As of September 30, 2015, $142,000March 31, 2016, $189,000 was classified as construction in process compared to $109,000$95,000 as of September 30, 2014.

March 31, 2015. Management is currently working on remodeling plans for the Corporation’s eleventh full service branch office to be opened in Morgantown in the third quarter of 2016. Management anticipates premises and equipment to grow by approximately $1.0 million during the second quarter of 2016 as the project begins and improvements and acquisitions of equipment are made.

 

Regulatory Stock

 

The Corporation owns multiple forms of regulatory stock that is required in order to be a member of the Federal Reserve Bank (FRB) and members of banks such as the Federal Home Loan Bank (FHLB) and Atlantic Community Bankers Bank (ACBB). The Corporation’s $4.3$4.7 million of regulatory stock holdings as of September 30, 2015,March 31, 2016, consisted of $4.1$4.5 million of FHLB of Pittsburgh stock, $151,000 of FRB stock, and $37,000 of ACBB stock. All of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the investment is carried at book value and there is no fair market value adjustment.

 

The Corporation’s investment in FHLB stock is required for membership in the organization. The amount of stock required is highly dependent upon the relative size of outstanding borrowings from FHLB and the mortgages the Corporation sells to FHLB. The Corporation participates in the FHLB Mortgage Partnership Finance (MPF) program, where mortgages originated by the Bank are sold to FHLB, servicing retained, with an element of credit risk also maintained by the Bank. Each time a mortgage is sold to FHLB, the Corporation is required to purchase capital stock in the amount of 4% of the mortgage. This requirement is causing the Corporation’s capital stock requirement to increase more than the amount required when FHLB borrowings are obtained. Excess stock is typically repurchased quarterly by FHLB from the Corporation at par based onif the amount of borrowings and mortgages outstanding.decline to a predetermined level. The Corporation’s FHLB stock position was $4.1$4.5 million on September 30,March 31, 2016, and $3.4 million on March 31, 2015, and $4.0 million as of September 30, 2014, with no excess capital stock position. Since FHLB MPF mortgage volume is on the rise, anyAny future stock repurchases would generally be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.

 

The FHLB of Pittsburgh has paid a quarterly dividend since the resumption of their dividend in the first quarter of 2012. Most recently the dividend yield was 5.00% annualized on activity stock and 3.00% annualized on membership stock for the thirdfirst quarter of 2015.2016. Most of the Corporation’s dividend is based on the activity stock, which is based on the amount of borrowings and mortgage activity with FHLB. In addition to the normal quarterly dividend, the FHLB paid a special dividend in the first quarter of 2015 due to their record earnings and strong financial position as of December 31, 2014. Management continues to monitor the financial condition of the FHLB quarterly to assess its ability to continue to regularly repurchase excess capital stock and pay a dividend.

 

Management believes that the FHLB will continue to be a primary source of wholesale liquidity for both short-term and long-term funding. Management’s strategy in terms of future use of FHLB borrowings is addressed under the Borrowings section of this Management’s Discussion and Analysis.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Deposits

 

The Corporation’s total ending deposits increased by $5.3$9.7 million, or 0.8%1.3%, from September 30, 2014, and decreased by $7.0$54.1 million, or 1.0%7.8%, from December 31, 2014.2015, and March 31, 2015, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. In the past few years, the economic concerns historically low interest rates, and volatility of the equity market led customers back to banks for safe places to invest money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since September 30, 2014,March 31, 2015, with the changes being a $20.3$37.8 million, or 10.8%18.4% increase, in non-interest bearing demand deposit accounts, a $2.6$7.5 million, or 22.5%10.9% increase, in interest bearing demand deposits,NOW balances, a $4.5$17.8 million, or 6.8%25.4% increase, in money market balances, and a $14.0$19.2 million, or 11.0%13.7% increase, in savings account balances. Partially offsetting these increases, NOW accounts decreased by $8.8 million, or 11.3%, and time deposits decreased by $27.3$26.1 million, or 13.3%13.8%, and brokered CDs decreased by $2.7 million, or 27.8%, from September 30, 2014March 31, 2015, to September 30, 2015.March 31, 2016.

 

The increase in non-interest bearing demand accounts and savings account balances is the result of historically low interest rates, which have resulted in little difference between savings rates and other core deposit rates and even short-term time deposit rates. Customers view demand deposits and savings as the safest, most convenient place to maintain funds for maximum flexibility. Management believes these deposit account types will continue to hold higher balances until short-term interest rates increase.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Deposits by Major Classification table, shown below, provides the balances in each deposit category as of each category for September 30, 2015,March 31, 2016, December 31, 2014,2015, and September 30, 2014.March 31, 2015.

 

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

 

 September 30, December 31, September 30,  March 31, December 31, March 31, 
 2015 2014 2014  2016 2015 2015 
 $ $ $  $ $ $ 
                  
Non-interest bearing demand  208,678   210,444   188,391   243,647   236,214   205,830 
Interest bearing demand  14,270   14,039   11,647   12,467   14,737   11,799 
NOW accounts  69,439   72,951   78,285   76,865   77,180   69,319 
Money market deposit accounts  71,091   69,442   66,588   87,647   82,507   69,886 
Savings accounts  141,950   131,206   127,927   159,213   148,320   140,062 
Time deposits  177,606   191,927   204,869   162,929   171,444   189,065 
Brokered time deposits  9,655   9,642   9,637   6,963   9,660   9,646 
Total deposits  692,689   699,651   687,344   749,731   740,062   695,607 

 

The growth and mix of deposits is often driven by several factors including:

 

·Convenience and service provided
·Current rates paid on deposits relative to competitor rates
·Level of fees on deposit products
·Level of and perceived direction of interest rates
·Financial condition and perceived safety of the institution
·Relative performance andPossible risks associated with other investment opportunities
·Level of fees on deposit products

 

The Corporation has been a stable presence in the local area and offers convenient locations as well as competitive service fees and interest rates because of a strong commitment to the customers and the communities that it serves. Management has always priced products and services in a manner that makes them affordable for all customers. This in turn creates a high degree of customer loyalty and a stable deposit base. Additionally, as financial institutions have come under increased scrutiny from both regulators and customers, the Corporation has maintained an outstanding reputation. The Corporation’s deposit base increased as a result of customers seeking a longstanding, reliable institution as a partner to meet their financial needs.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of September 30, 2015,March 31, 2016, time deposit balances, excluding brokered deposits, had decreased $14.3$8.5 million, or 7.5%5.0%, and $27.3$26.1 million, or 13.3%13.8%, from December 31, 20142015 and September 30, 2014,March 31, 2015, respectively. The Corporation has experienced a slow and steady shift in deposit trends over the past five years as customers have moved money from time deposits into core checking and savings accounts. With minimal differences between shorter term CD rates and interest bearing non-maturity deposits, customers are more inclined to accumulate their funds in a liquid account that can be accessed at any time. This has resulted in declining time deposit balances and more significant growth in the core deposit areas. Management anticipates that the recent declines in time deposits will likely continue until interest rates increase and cause more of a separation between longer-term rates and overnight rates.

 

Time deposits have FDIC insurance coverage insuring no loss of principal up to $250,000 per account, based on certain account structures. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the $250,000 FDIC insurance coverage on all deposit accounts was made permanent. This has caused an increase in the percentage of time deposits over $100,000 held by the Corporation. While total time deposits continue to decline in the present environment, the percentage of time deposits over $100,000 compared to total time deposits has increased and is expected to remain at these higher percentages due to the FDIC coverage. Time deposits in their entirety have decreased and are expected to further decline until the Federal Reserve acts to further increase short term interest rates.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Borrowings

 

Total borrowings were $74.5$76.4 million, $62.3$68.3 million, and $69.6$70.5 million as of September 30, 2015,March 31, 2016, December 31, 2014,2015, and September 30, 2014,March 31, 2015, respectively. Of these amounts, $9.9$11.5 million, $8.7 million, and $7.3$4.9 million reflect short term funds at September 30,for March 31, 2016, December 31, 2015, and September 30, 2014,March 31, 2015, respectively. The Corporation had no short-term funds borrowed as of December 31, 2014. Short-term funds are used for immediate liquidity needs and are not typically part of an ongoing liquidity or interest rate risk strategy; therefore, they fluctuate more rapidly. When short term funds are used, they are purchased through correspondent and member bank relationships as overnight borrowings or through the FHLB for terms less than one year.

 

Total long-term borrowings, borrowings initiated for terms longer than one year, were $64.6$64.9 million as of September 30, 2015, and $62.3March 31, 2016, $59.6 million as of December 31, 20142015, and September 30, 2014.$65.5 million as of March 31, 2015. The Corporation uses two main sources for long-term borrowings: FHLB advances and repurchase agreements obtained through brokers. The repurchase agreement portion of the long-term debt was $5.0$10.0 million at September 30,March 31, 2015, and $10.0with no repurchase agreements as of December 31, 2015, or March 31, 2016. FHLB long-term advances were $64.9 million at March 31, 2016, $59.6 million at December 31, 20142015, and at September 30, 2014. FHLB long-term advances were $59.6$55.5 million at September 30, 2015, $52.3 million at DecemberMarch 31, 2014, and $52.3 million at September 30, 2014.2015. Both FHLB advances and repurchase agreements are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more manageable funding source in regard to amount, timing, and rate for interest rate risk and liquidity purposes compared to deposits. Over the course of the past few years, the Corporation has minimally changed the ladder of long-term FHLB borrowings, by replacing maturing advances with new long-term advances at significant rate savings. In the current interest rate environment, management has preferred to seek new long-term borrowings from FHLB rather than through repurchase agreements. Management will continue to analyze and compare the costs and benefits of borrowing versus obtaining funding from deposits.

 

In order to limit the Corporation’s exposure and reliance to a single funding source, the Corporation’s Asset Liability Policy sets a goal of maintaining the amount of borrowings from the FHLB to 15% of asset size. As of September 30, 2015,March 31, 2016, the Corporation was significantly under this policy guideline at 8.0%8.3% of asset size with $69.5$76.4 million of total FHLB borrowings. The Corporation also has a policy that limits total borrowings from all sources to 150% of the Corporation’s capital. As of September 30, 2015,March 31, 2016, the Corporation was significantly under this policy guideline at 78.6%78.8% of capital with $74.5$76.4 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of 20142015 and through the first ninethree months of 2015.2016.

 

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $282.7$316.6 million. The Corporation’s two internal policy limits mentioned above are far more restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Stockholders’ Equity

 

Federal regulatory authorities require banks to meet minimum capital levels. The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, both maintain capital ratios well above those minimum levels and higher than the Bank’s national peer group average. The Bank falls under the FDIC’s Peer Group #3, FDIC insured commercial banks between $300 million and $1 billion of asset size. As of September 30, 2015,March 31, 2016, there were 1,2301,215 commercial banks in this national peer group. As of September 30, 2015, theThe Bank was in the 6658th percentile in tier 1I risk-based capital to risk weighted assets and in the 6758th percentile in total risk-based capital to risk-weighted assets, based on the March 31, 2016 national Uniform Bank Performance Report (UBPR). The Bank’s tier 1I capital to risk-weighted assets stood at 15.3%14.3% compared to 14.5%14.4% for the peer group average. The Bank’s total capital to risk-weighted assets was 16.5%15.5% compared to the peer group average of 15.6%15.5%. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier 1I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for loan losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The following tables reflect the capital ratios for the Corporation and Bank compared to the regulatory capital requirements.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

REGULATORY CAPITAL RATIOS:            

 

    Regulatory Requirements
    Adequately Well
As of September 30, 2015 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets            
Consolidated  16.7%  8.0%  10.0%
Bank  16.5%  8.0%  10.0%
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  15.4%  6.0%  8.0%
Bank  15.3%  6.0%  8.0%
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  15.4%  4.5%  6.5%
Bank  15.3%  4.5%  6.5%
             
Tier 1 Capital to Average Assets            
Consolidated  10.8%  4.0%  5.0%
Bank  10.7%  4.0%  5.0%
             
As of December 31, 2014            
Total Capital to Risk-Weighted Assets            
Consolidated  17.3%  8.0%  10.0%
Bank  17.2%  8.0%  10.0%
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  16.1%  4.0%  6.0%
Bank  15.9%  4.0%  6.0%
             
Tier 1 Capital to Average Assets            
Consolidated  10.7%  4.0%  5.0%
Bank  10.6%  4.0%  5.0%
             
             
As of September 30, 2014            
Total Capital to Risk-Weighted Assets            
Consolidated  17.8%  8.0%  10.0%
Bank  17.6%  8.0%  10.0%
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  16.5%  4.0%  6.0%
Bank  16.4%  4.0%  6.0%
             
Tier 1 Capital to Average Assets            
Consolidated  10.7%  4.0%  5.0%
Bank  10.6%  4.0%  5.0%

The new common equity tier 1 capital to risk-weighted asset measurement (CET1) as a result of the Basel III capital reforms became effective for the Corporation as of January 1, 2015. This measurement has been added to the above table for September 30, 2015. For the Corporation, CET1 is the same as the Tier 1 Capital to Risk-Weighted Assets as currently the Corporation has none of the CET1 adjustments to Tier 1 Capital to Risk-Weighted Assets.

     Regulatory Requirements 
     Adequately  Well 
As of March 31, 2016 Capital Ratios  Capitalized  Capitalized 
Total Capital to Risk-Weighted Assets            
Consolidated  15.6%   8.0%   10.0% 
Bank  15.5%   8.0%   10.0% 
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  14.5%   6.0%   8.0% 
Bank  14.3%   6.0%   8.0% 
             
Common Equity Tier I Capital to Risk-Weighted Assets            
Consolidated  14.5%   4.5%   6.5% 
Bank  14.3%   4.5%   6.5% 
             
Tier I Capital to Average Assets            
Consolidated  10.6%   4.0%   5.0% 
Bank  10.5%   4.0%   5.0% 
             
As of December 31, 2015            
Total Capital to Risk-Weighted Assets            
Consolidated  15.9%   8.0%   10.0% 
Bank  15.8%   8.0%   10.0% 
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  14.8%   6.0%   8.0% 
Bank  14.6%   6.0%   8.0% 
             
Common Equity Tier I Capital to Risk-Weighted Assets            
Consolidated  14.8%   4.5%   6.5% 
Bank  14.6%   4.5%   6.5% 
             
Tier I Capital to Average Assets            
Consolidated  10.8%   4.0%   5.0% 
Bank  10.7%   4.0%   5.0% 
             
             
As of March 31, 2015            
Total Capital to Risk-Weighted Assets            
Consolidated  17.1%   8.0%   10.0% 
Bank  16.8%   8.0%   10.0% 
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  15.8%   4.0%   6.0% 
Bank  15.5%   4.0%   6.0% 
             
Tier I Capital to Average Assets            
Consolidated  10.8%   4.0%   5.0% 
Bank  10.6%   4.0%   5.0% 

 

Dividends play a vital role in the management of capital levels of the Corporation. Management seeks a balance between maintaining a sufficient cushion of excess capital above regulatory limits versus the payment of dividends to the shareholders as a direct return of their investment. Due to a constant stream of stable earnings, the payment of a dividend is needed to maintain capital at acceptable levels in order to provide an adequate return of equity to the shareholders.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s dividends per share for the ninethree months ended September 30, 2015,March 31, 2016, were $0.81, compared to $0.80$0.27, matching the dividends per share for the ninethree months ended September 30, 2014.March 31, 2015. Dividends are paid from current earnings and available retained earnings. The Corporation’s current capital plan calls for management to maintain tier 1I capital to average assets between 10.0% and 12.0%. The Corporation’s current tier 1I capital ratio is 10.8%10.6%. As a secondary measurement, the Corporation’s capital plan calls foralso targets a long term dividend payout ratio in the range of approximately35% to 40%. This ratio will vary according to net income, but over the long term, the Corporation’s goal is to maintain and target a payout ratio of 40%.within this range. For the ninethree months ended September 30, 2015,March 31, 2016, the payout ratio was higher than the Capital plan target at 47.1% but has not had a material impact on the Corporation’s level of capital. The higher dividend payout ratio in the first nine months of 2015 is primarily due to weaker earnings. This ratio should decrease provided earnings increase throughout the remainder of 2015.40.3%. Management’s goal is to maintain all regulatory capital ratios at current levels. Future dividend payout ratios are dependent on the future level of earnings and other factors that impact the level of capital.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The amount of unrealized gain or loss on the securities portfolio is reflected, net of tax, as an adjustment to capital, as required by U.S. generally accepted accounting principles. This is recorded as accumulated other comprehensive income or loss in the capital section of the consolidated balance sheet. An unrealized gain increases capital, while an unrealized loss reduces capital. This requirement takes the position that, if the Corporation liquidated the securities portfolio at the end of each period, the current unrealized gain or loss on the securities portfolio would directly impact the Corporation’s capital. As of September 30, 2015,March 31, 2016, the Corporation showed an unrealized gain, net of tax, of $475,000,$318,000, compared to an unrealized gainloss of $1,002,000$252,000 at December 31, 2014,2015, and an unrealized gain of $666,000$2,161,000 as of September 30, 2014.March 31, 2015. These unrealized gains and losses, net of tax are excluded from capital when calculating the tier 1I capital to average assets numbers above. The amount of unrealized gain or loss on the securities portfolio, shown net of tax, as an adjustment to capital, does not include any actual impairment taken on securities, which is shown as a reduction to income on the Corporation’s Consolidated Statements of Income. The changes in unrealized gains and losses are due to normal changes in market valuations of the Corporation’s securities as a result of interest rate movements.

 

Regulatory Capital Changes

 

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:

 

·A minimum ratio of common equity tier 1I capital to risk-weighted assets of 4.5%.
·A minimum ratio of tier 1I capital to risk-weighted assets of 6%.
·A minimum ratio of total capital to risk-weighted assets of 8%.
·A minimum leverage ratio of 4%.

 

In addition, the final rules established a common equity tier 1I capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will beginbegan on January 1, 2016.

 

Under the initially proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1I capital. The final rules allowrule allows community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election was made by the Corporation with the filing of the first quarter Call Report as of March 31, 2015.

 

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1I capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009, and banking organizations that were mutual holding companies as of May 19, 2010. The Corporation does not have trust preferred securities or cumulative perpetual preferred stock with no plans to add these to the capital structure.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

 

Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. The Corporation does not securitize assets and has no plans to do so.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

 

Management has evaluated the impact of the above rules on levels of the Corporation’s capital. The final rulings were highly favorable in terms of the items that would have a more significant impact to the Corporation and community banks in general. Specifically, the AOCI final ruling, which would have had the greatest negative impact now providesto capital, provided the Corporation with an opt-out provision. The final ruling on the risk weightings of mortgages was favorable and did not have a material negative impact. The rulings as to trust preferred securities, preferred stock, and securitization of assets are not applicable to the Corporation, and presently the revised treatment of MSAs is not material to capital. The remaining changes to risk weightings on several items mentioned above such as past-due loans and certain commercial real estate loans do not have a material impact to capital presently, but could change as these levels change.

 

Off-Balance Sheet Arrangements

 

In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation’s financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as of September 30, 2015.March 31, 2016.

 

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

 

  September 30,March 31,
  20152016
  $
Commitments to extend credit:    
Revolving home equity  40,38250,779 
Construction loans  20,21025,623 
Real estate loans  48,62949,472 
Business loans  86,89785,810 
Consumer loans  1,4831,475 
Other  3,5183,869 
Standby letters of credit  11,30111,791 
     
Total  212,420228,819 

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Jumpstart Our Business Startups ActSignificant Legislation

In April 2012, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes:

·raising the threshold requiring registration under the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank holding companies from 500 to 2,000 holders of record;
·raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;
·raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws;
·permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
·allowing private companies to use "crowdfunding" to raise up to $1 million in any 12-month period, subject to certain conditions; and
·creating a new category of issuer, called an "Emerging Growth Company," for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity IPO and complying with public company reporting obligations for up to five years.

While the JOBS Act does not have any current application to the Corporation, management will continue to monitor the implementation rules for potential effects which might benefit the Corporation.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

 

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant impact on the Corporation’s business operations as its provisions take effect. It is difficult to predict at this time what specific cumulative impact Dodd-Frank and the yet-to-be-written implementing rules and regulations will have on community banks. However, it is expected that, at a minimum, they will increase the Corporation’s operating and compliance costs and could increase interest expense. Among the provisions that are likely to affect the Corporation are the following:

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Holding Company Capital Requirements

Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1tier I capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, are consistent with safety and soundness.

 

Deposit Insurance

Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions, and credit unions to $250,000 per depositor. Additionally, on February 7, 2011, the Board of Directors of the FDIC approved a final rule based on the Dodd-Frank Act that revises the assessment base from one based on domestic deposits to one based on assets. This change, which was effective in April 2011, saved the Corporation a significant amount of FDIC insurance premiums from the significantly higher FDIC insurance premiums placed into effect after the financial crisis.

 

Corporate Governance

Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. The Corporation was exempt from these requirements until January 21, 2013, due to its status as a smaller reporting company. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

 

Consumer Financial Protection Bureau

Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

 

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Interstate Branching

Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.

 

Limits on Interstate Acquisitions and Mergers

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition – the acquisition of a bank outside its home state – unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a financial institution, the Corporation is subject to three primary risks:

 

·Credit risk
·Liquidity risk
·Interest rate risk

 

The Board of Directors has established an Asset Liability Management Committee (ALCO) to measure, monitor, and manage these primary market risks. The Asset Liability Policy has instituted guidelines for all of these primary risks, as well as other financial performance measurements with target ranges. The Asset Liability goals and guidelines are consistent with the Strategic Plan goals related to financial performance.

 

Credit Risk

For discussion on credit risk refer to the sections in Item 2. Management’s Discussion and Analysis, on securities, non-performing assets, and allowance for loan losses.

 

Liquidity Risk

Liquidity refers to having an adequate supply of cash available to meet business needs. Financial institutions must ensure that there is adequate liquidity to meet a variety of funding needs, at a minimal cost. Minimal cost is an important component of liquidity. If a financial institution is required to take significant action to obtain funding, and is forced to utilize an expensive source, it has not properly planned for its liquidity needs. Funding new loans and covering deposit withdrawals are the primary liquidity needs of the Corporation. The Corporation uses a variety of funding sources to meet liquidity needs, such as:

 

·Deposits
·Loan repayments
·Maturities and sales of securities
·Borrowings from correspondent and member banks
·Repurchase agreements
·Brokered deposits
·Current earnings

 

As noted in the discussion on deposits, customers have historically provided the Corporation with a reliable and steadily increasing source of funds liquidity. The Corporation also has in place relationships with other banking institutions for the purpose of buying and selling Federal funds. The lines of credit with these institutions provide immediate sources of additional liquidity. The Corporation currently has unsecured lines of credit totaling $32 million. This does not include amounts available from member banks such as the Federal Reserve Discount Window or the FHLB of Pittsburgh.

 

Management uses a cumulative maturity gap analysis to measure the amount of assets maturing within various periods versus liabilities maturing in those same periods. A gap ratio of 100% represents an equal amount of assets and liabilities maturing in the same stated period. Management monitors six-month, one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. The CorporationAll but one cumulative maturity gap was within internal gapCorporate Policy guidelines for all ratios except the five-year gap as of September 30, 2015.March 31, 2016. The five-year cumulative gap ratio was just slightly higher than the policy range at 119.7%, versus120% as of March 31, 2016, compared to an upper policy guideline of 115%. In a rising rate environment it indicating more assets maturing in the 3-5 year time frame than is helpfultypical. Given the likelihood of higher rates in the future, this higher gap ratio is not of concern, but management will continue to have highermonitor all gap ratios to allowensure proper positioning for asset reinvestment at higher rates.future interest rate cycles. The other gap ratios as of September 30, 2015,March 31, 2016, had increaseddecreased slightly sincecompared to December 31, 2014,2015, with a one-year gap of 101%93% and a three-year gap of 114%112%, compared to 93%103% and 98%120%, respectively, as of December 31, 2014.2015.

 

Management has been maintaining higher levels of cash and cash equivalents to assist in offsetting the Corporation’s relatively long securities portfolio, which has helped to maintain the gap ratios at their current levels. The strategy of maintaining higher cash levels to improve gap ratios and act as an immediate hedge against liquidity risk and interest rate risk is expected to continue until the securities portfolio is materially shorter in duration. The Corporation’s securities portfolio measurements of duration and price volatility have been declining for the last several quarters, but are up slightly from recent lows on March 31, 2015. Management’s goal is to slowly reduce portfolio duration by allowing the securities portfolio to decline as loan growth continues. Simply slowing on new purchases and allowing the existing portfolio to age and mature will reduce duration. Management has also been maintaining a larger component of shorter corporate securities to offset the longer duration of the Corporation’s municipal bonds.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

It is possible that short term rates will increase in the final quarterlatter part of 2015,2016, so management’s current position is to maintain fairly highincrease maturity gap percentages slightly in preparation for higher rates and continue tostill maintain them within guidelines. Higher gap ratios will help the Corporation when rates do rise, and it is important to focus on the one-year and three-yeartake action to increase gap ratios going forward to take advantage of any steady progression of higher rates.in future quarters. The risk in maintaining high gap percentages is that, should interest rates not rise, management will have a higher amount of maturing assets that will reprice at lower rates. This is referred to as repricing risk. Carrying high gap ratios in the current environment brings on an increased level of repricing risk, which negatively impacts the Corporation’s interest income and margin. The risk of liabilities repricing at higher interest rates is very low in the present environment as over half of the Corporation’s deposits are core deposits with no repricing expected to occur in the near future. The remainder of the Corporation’s maturing liabilities made up of time deposits and borrowings are generally repricing to similarequivalent interest rates. Only theThe Corporation’s longest time deposits with four and five-year terms, and very few long-term borrowings are still repricing to lower interest rates. Asrates but some of September 30, 2015, there remains one $5.0 million repurchase agreement that willthe mid-term deposits are beginning to reprice to significantlyhigher levels. To date, there have been more term liabilities repricing to lower interest rates inthan higher rates, which has helped to lower the lastCorporation’s average cost of funds to a new historically low level of 39 basis points as of March 31, 2016. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts. The Corporation’s cost of funds was 41 basis points as of December 31, 2015 and 52 basis points as of March 31, 2015. The cost of funds savings slowed during the first quarter of 2015. Meanwhile, the mid-term time deposits with eighteen months2016 and appears to three-year terms, are already repricing to higher interest rates.be reaching a neutral point. Therefore, higher levels of liabilities repricing generallynow would be expected to have a neutral impact to the Corporation currently based on present pricing. This is projected to change to a negative impact in the near future. As aCorporation. However, as another Federal Reserve rate increase becomes more imminent, all deposit rates will likely need to be increased in order to retain balances and react to competition. This will actwould begin to increase the Corporation’scause increases in interest expense.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Given the limited desirable rates currently available to the deposit customer, management does not perceive significant risk that deposits maturing in the shorter time frames will leave the Corporation. It is likely that, should market interest rates rise duringmaterially in the final quarterremainder of 2015 and throughout 2016, customer behavior patterns would change and deposits would be more rate sensitive with a portion potentially leaving the Corporation. The Corporation has experienced a steady growth in both non-interest bearing and interest bearing funds during this historically low interest rate environment; however, deposit growth has slowed significantly during 2015 compared to prior years.environment.

 

The performance of the equity markets also has a bearing on how much of the current deposits will remain at the Corporation. It is management’s observation that since the financial crisis, an element of the Corporation’s deposit customers has been reluctant to redeploy funds presently at banks back into the equity market. They have been negatively impacted by multiple declines in the equity markets. It remains to be seen whether further equity market improvements will materially change customer behavior.

 

Ideally, management would prefer to maintain slightly higher six-month and one-year gap ratios than the current levels in order to prepare for rates-up, while still maintaining a higher three-year gap ratio to be positioned to reinvest assets after interest rates have increased significantly over a period of time. For example, even if the FOMC were to begin increasingincrease short-term interest rates in the fourth quarter of 2015,late 2016, it would likely be at least until 2017 before interest rates would likely near the highs of the next rate cycle. The Corporation’s significantly high overnight cash position is to counter the relatively light initial cash ladder of the securities portfolio and will allow the Corporation to immediately invest in higher yielding instruments when interest rates rise. The risk of carrying large cash balances and positioning for higher interest rates too early may subject the Corporation to more repricing risk and lower net interest margin. Currently, the Corporation’s net interest margin is at lowerimproving slightly from levels thanin the previous quarter, but not from the prior year’s levels due to lower security yields resulting from higher amortization and lower loan yields resulting from competitive pricing in the current interest rate environment. Management’s future asset liability decisions will be dependent upon improvements in asset yield as well as the expected timing of further short-term rate increases. Management expects that the gap ratios will remain within the established guidelines throughout the remainder of 2015.2016.

 

It is important to stress that the gap ratios are a static measurement of the Corporation’s asset liability position. It is only one of many asset liability analysis tools management utilizes to measure, monitor, and manage both liquidity and interest rate risk. The deficiencies with the gap analysis are that it makes no provision for changes to the balance sheet out into the future and would not factor in changes that management would very likely make to mitigate future interest rate risk.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

In addition to the cumulative maturity gap analysis discussed above, management utilizes a number of liquidity measurements that management believes has advantages over and gives better clarity to the Corporation’s present and projected liquidity that the static gap analysis offers.

 

The Corporation analyzes the following additional liquidity measurements in an effort to monitor and mitigate liquidity risk:

 

·Core Deposit Ratio – Core deposits as a percentage of assets

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

·Funding Concentration Analysis – Alternative funding sources outside of core deposits as a percentage of assets
·Short-term Funds Availability – Readily available short-term funds as a percentage of assets
·Securities Portfolio Liquidity – Cash flows maturing in one year or less as a percentage of assets and securities
·Readily Available Unencumbered Securities and Cash – Unencumbered securities as a percentage of the securities portfolio and as a percentage of total assets
·Borrowing Limits – Internal borrowing limits in terms of both FHLB and total borrowings
·Three, Six, and Twelve-month Projected Sources and Uses of Funds – Projection of future liquidity positions

 

These measurements are designed to prevent undue reliance on outside sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available liquidity sources. As of September 30, 2015,March 31, 2016, the Corporation was within guidelines for all of the above measurements except the securities portfolio liquidity as a percentage of the investment portfolio and as a percentage oftotal assets. The policy calls for the Corporation to maintain securities portfolio cash flows maturing in one year or less between 10% and 20% of the securities portfolio and between 5% and 10% of total assets. As of September 30, 2015,March 31, 2016, these cash flows represented 7.9% of the securities portfolio and 2.5%4.4% of total assets, which isonly slightly under the lower guideline. However, when factoring in available overnight cash, the Corporation’s securities portfolio liquidity represented 16.7% of the securities portfolio and 5.3%7.4% of total assets. It is important for the Corporation to prepare for a rates-up environment and having more liquidity is advantageous as funds can be reinvested in higher yielding assets faster when sufficient liquidity exists. Management has been carrying an average of $25 million to $35 million of cash and cash equivalents on a daily basis throughout the first ninethree months of 2015,2016, and expects this will continue in the near future. All liquidity measurements are tracked and reported quarterly by management to both observe trends and ensure the measurements stay within desired ranges. Management is confident that a sufficient amount of internal and external liquidity exists to provide for significant unanticipated liquidity needs.

 

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

 

·Changes in net interest income
·Changes in net portfolio value

 

Financial modeling is used to forecast net interest income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under seven different interest rate scenarios. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, 300, or 400 basis points, or decrease 50 or 100 basis points. Rates-down scenarios are unlikely at this point so management is more focused on the rates-up scenarios. The results obtained through the use of forecasting models are based on a variety of factors. Both the net interest income and fair value forecasts make use of the maturity and repricing schedules to determine the changes to the balance sheet over the course of time. Additionally, there are many assumptions that factor into the results. These assumptions include, but are not limited to, the following:

 

·Projected forward interest rates
·Slope of the U.S. Treasury curve
·Spreads available on securities over the U.S. Treasury curve
·Prepayment speeds on loans held and mortgage-backed securities
·Anticipated calls on securities with call options
·Deposit and loan balance fluctuations
·Competitive pressures affecting loan and deposit rates
·Economic conditions

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

·Consumer reaction to interest rate changes

 

For the interest rate sensitivity analysis and net portfolio value analysis discussed below, results are based on a static balance sheet reflecting no projected growth from balances as of September 30, 2015.March 31, 2016. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis of this sort to be the most conservative and most accurate means to evaluate fair value and future interest rate risk. The static balance sheet approach is used to reduce the number of variables in calculating the model’s accuracy in predicting future net interest income. It is appropriate to pull out various balance sheet growth scenarios which could be utilized to compensate for a declining margin. By testing the model using a base model assuming no growth, this variable is eliminated and management can focus on predicted net interest income based on the current existing balance sheet. Management does run additional scenarios with expected growth rates through the asset liability model to most accurately predict future financial performance. This is done separately and apart from the static balance sheet approach discussed above to test fair value and future interest rate risk.

 

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Management’s Discussion and Analysis

As a result of the many assumptions, this information should not be relied upon to predict future results. Additionally, both of the analyses discussed below do not consider any action that management could take to minimize or offset the negative effect of changes in interest rates. These tools are used to assist management in identifying possible areas of risk in order to address them before a greater risk is posed. Personnel perform an in-depth annual validation and a quarterly review of the settings and assumptions used in the model to ensure reliability of the forecast results. Additionally, in the third quarter of 2014, an independent third party performed a comprehensive validation on the model input, assumptions, and output and determined that the model was managed appropriately and generating acceptable results. Back testing of the model to actual results is performed quarterly to ensure the validity of the assumptions in the model. The internal and external validations as well as the back testing indicate that the model assumptions are reliable.

 

Changes in Net Interest Income

 

The change in net interest income measures the amount of net interest income fluctuation that would be experienced over one year, assuming interest rates change immediately and remain the same for one year. This is considered to be a short-term view of interest rate risk. The analysis of changes in net interest income due to changes in interest rates is commonly referred to as interest rate sensitivity. The Corporation’s interest rate sensitivity analysis indicates were interest rates to go up immediately the Corporation would realize more net interest income. This is due to the ability of the Corporation to immediately achieve higher interest earnings on interest-earning assets while having the ability to limit the amount of increase in interest-bearing liabilities based on the timing of deposit rate changes. This results in an increase in net interest income in the up-rate scenarios, but a decline in net interest income in the down-rate scenarios.

 

The thirdfirst quarter 20152016 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of September 30, 2015,March 31, 2016, the Corporation was well within guidelines for the maximum amount of net interest income change in all rate scenarios except the down 100 basis-point scenario which is extremely unlikely.scenarios. All interest rate-upup-rate scenarios show a positive impact to net interest income although significant improvements are not reflected until rates increase 300 or 400 basis points. The increase in net interest income in the up-rate scenarios is largely due to the increase in variable rate loans that has occurred during this historically low rate environment and the higher cash balances held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates. Loan rates will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by 300 or 400 basis points where variable loan rates will still increase by the same amount as the Prime rate. The increases in net interest income in the up-rate scenarios are comparable toslightly lower than the increases reflected at December 31, 2014, and2015, but importantly still show improved net interest income. It is unlikely that rates will go down, but in the event that they would go lower, the Corporation would have exposure to all maturing fixed-rate loans and securities, which would reprice lower while most of the Corporation’s interest-bearing deposits could not be repriced any lower. This would result in a decline in net interest income in any down-rate scenario. The down 100 basis-point scenario showsHowever, even in the Corporation slightly outside of guidelines, but this scenariohighly unlikely down-rate scenarios, the Corporation’s exposure to declining net interest income is not likely to happen.still well within policy guidelines.

 

Management’s primary concern in this current rate environment is with the most likely scenario of higher interest rates; therefore, they are reviewed with more scrutiny. For the rates-up 100 basis point scenario, net interest income increased minimally by 1.8%0.8% compared to the rates unchanged scenario. This minimal increase reflects the fact that some loans are priced at floor rates of 4.00% currently and would not be able to immediately reprice by the full amount of the rate movement. However, in the remaining rates-up scenarios, the net interest income increases more substantially reflecting the full repriceabilty of the Corporation’s interest-earning assets. For the rates-up 200, 300, and 400 basis point scenarios, net interest income increased by 4.8%2.4%, 9.5%6.7%, and 14.7%12.0%, respectively, compared to the rates unchanged scenario. Management’s maximum permitted net interest income declines by policy are -5%, -10%, -15%, and -20% for the rates up 100, 200, 300, and 400 basis point scenarios, respectively.

 

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Management’s Discussion and Analysis

The positive impact of significantly higher rates is primarily due to the favorable impact of all of the Corporation’s variable rate loans repricing by the full amount of the Federal rate change, assisted by the Corporation’s relatively high interest earning cash balances and that component of the loans and securities portfolios that reprice in less than one year. This more than offsets the increase in interest expense caused by repricing deposits and borrowings, where they are only repricing by a fraction of the rate change. The more aggressive rates-up scenarios also benefit from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. This in essence allows management the ability to minimizeneutralize the impact of higher rates by controlling the large amount of liabilities that are repricing. Management does not expect the Corporation’s exposure to interest rate changes to increase or change significantly during the remainder of 2015.2016.

 

The assumptions and analysis of interest rate risk are based on historical experience during varied economic cycles. Management believes these assumptions to be appropriate; however, actual results could vary significantly. Management uses this analysis to identify trends in interest rate sensitivity and determine if action is necessary to mitigate asset liability risk.

 

Changes in Net Portfolio Value

 

The change in net portfolio value is considered a tool to measure long-term interest rate risk. The analysis measures the exposure of the balance sheet to valuation changes due to changes in interest rates. The calculation of net portfolio value discounts future cash flows to the present value based on current market rates. The change in net portfolio value estimates the gain or loss that would occur on market sensitive instruments given an interest rate increase or decrease in the same seven scenarios mentioned above. As of September 30, 2015,March 31, 2016, the Corporation was within guidelines for all up-rate scenarios but was slightly outside of guidelines for the rates-down 100 basis point scenario with the rates-up exposures showing slightly moreless volatility than the December 31, 20142015 measurements. The increasedecrease in fair value exposure since December 31, 2014,2015, can be primarily attributed to having fewer long-term liabilities. The value ofgrowth in non-interest bearing deposit accounts hasbalances. These deposits have always been highly favorable in a rising rate environment as these balancesthey are more valuable to the Corporation, representing a decrease in liabilities as interest rates rise.

In The non-interest bearing demand deposit accounts and low-interest bearing checking, NOW, and money market accounts provide more benefit to the Corporation when interest rates are higher and the difference between the overnight funding costs compared to the average interest bearing core deposit rates are greater. As interest rates increase, the discount rate used to value the Corporation’s interest bearing accounts increases, causing a lower net present value. This improves the modeling of the Corporation’s fair value risk as the liability amounts decrease causing net present value or fair value of the Corporation’s balance sheet to increase. The large growth in deposits in the first quarter of 2013, the asset liability model settings were changed for the Corporation’s interest-bearing core deposit accounts to reflect their true value more accurately as rates rise based on assumptions regarding the proportionality of their rates changing in relation to the change in the Prime rate. More recently, management has built more deposit rate sensitivity into the model to reflect that interest rates will be coming off all-time lows and they have been artificially held low for a prolonged period of time. Management believes the interest bearing core deposit types will be more rate sensitive on average than these deposits were in the last rates-up cycle.2016 aided fair value.

 

The results as of September 30, 2015,March 31, 2016, indicate that the Corporation’s net portfolio value would experience a slight valuation gaingains of 1.7%4.2%, 3.0%, and 1.0%, in the rates-up 100, 200, and 300 basis point scenario,scenarios, respectively, and lossesa valuation loss of 1.5%, 6.3%, and 12.7%3.2% in the rates-up 200, 300, and 400 basis point scenarios, respectively.scenario. Management’s maximum permitted declines in net portfolio value by policy are -7.5% for rates-up 100 basis points, graduating up to -30% for rates-up 400 basis points. A valuation loss indicates that the value of the Corporation’s assets is declining at a faster pace than the decrease in the value of the Corporation’s liabilities. The more significant valuation lossesloss represented in the higher rates-up scenarios are indicative of400 basis point scenario indicates the Corporation’s longer-term assets like residential mortgages and municipal securities showingshow significant declines in value as interest rates increase further.significantly. However, the value of the cash held by the Corporation and the non-interest bearing deposits helps to offset this negative exposure to a large degree. It is not anticipated that these exposuresThe exposure to valuation changes willcould change materially duringthroughout the final quarterremainder of 2015. Additionally, based2016 if the behavior of the Corporation’s deposits changes or if the interest rate environment changes to any significant degree. Based on four past decay rate studies on the Corporation’s core deposits, management does not expect a material decline in core deposit accounts, including the non-interest bearing accounts, when short term interest rates do increase. The Corporation’s core deposits have been stable through a number of rate cycles.

 

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Management’s Discussion and Analysis

The weakness with the net portfolio value analysis is that it assumes liquidation of the Corporation rather than as a going concern. For that reason, it is considered a secondary measurement of interest rate risk to “Changes in Net Interest Income” discussed above. However, the net portfolio value analysis is a more important tool to measure the impact of interest rate changes to capital. In the current regulatory climate, the focus is on ensuring adequate asset liability modeling is being done to project the impact of very large interest rate increases to Bank capital or net portfolio value.on capital. The asset liability modeling currently in place measures the impact of such a rate change on the valuation of the Corporation’s loans, securities, deposits, and borrowings, and the resulting impact to capital. Management continues to analyze additional scenario testing to model “worst case” scenarios to adequately plan for the possible severe impact of such events.

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Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures.

 

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Treasurer (Principal Financial Officer), of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015,March 31, 2016, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure controls and procedures as of September 30, 2015,March 31, 2016, are effective to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

(b) Changes in Internal Controls.

 

There have been no changes in the Corporation’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

September 30, 2015March 31, 2016

 

Item 1. Legal Proceedings

 

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation or its subsidiaries taken as a whole. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation. In addition, no material proceedings are pending, are known to be threatened, or contemplated against the Corporation by governmental authorities.

 

Item 1A. Risk Factors

 

The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. Management has not identified any new risk factors since the December 31, 20142015 Form 10-K filing.

 

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

 

Purchases

 

The following table details the Corporation’s purchase of its own common stock during the three months ended September 30, 2015.March 31, 2016.

 

Issuer Purchase of Equity Securites
                  
     Total Number of Maximum Number     Total Number of Maximum Number 
 Total Number Average Shares Purchased of Shares that May Total Number Average Shares Purchased of Shares that May 
 of Shares Price Paid as Part of Publicly Yet be Purchased of Shares Price Paid as Part of Publicly Yet be Purchased 
Period Purchased Per Share Announced Plans * Under the Plan * Purchased Per Share Announced Plans * Under the Plan * 
                 
July 2015  3,700  $31.88   3,700   136,300 
August 2015           136,300 
September 2015           136,300 
January 2016           127,865 
February 2016           127,865 
March 2016  2,000  $32.40   2,000   125,865 
                                
Total  3,700               2,000             

 

*On June 17, 2015, the Board of Directors of ENB Financial Corp announced the approval of a plan to purchase, in open market and privately negotiated transactions, up to 140,000 shares of its outstanding common stock. Shares repurchased are being held as treasury shares to be utilized in connection with the Corporation’s three stock purchase plans previously mentioned.plans. The first purchase of common stock under this plan occurred on July 31, 2015. Under the plan,By March 31, 2016, a total of 3,70014,135 shares were repurchased at a total cost of $118,000$462,000, for an average cost per share of $31.88.$32.68. Management may choose to repurchase additional shares during the remainder of 2015in 2016 under this plan.

 

Item 3. Defaults Upon Senior Securities – Nothing to Report

 

Item 4. Mine Safety Disclosures – Not Applicable

 

Item 5. Other Information – Nothing to Report

 

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Item 6. Exhibits:

 

Exhibits - The following exhibits are filed as part of this filing on Form 10-Q or incorporated by reference hereto:

 

        Page
 3 (i)Articles of Incorporation of the Registrant, as amended*
    
 3 (ii)By-Laws of the Registrant, as amended**
    
 10.1Form of Deferred Income Agreement.***
    
 10.22011 Employee Stock Purchase Plan****
    
 10.3    2010 Non-Employee Directors’ Stock Plan*****
    
 11Statement re: computation of per share earnings  4
  (Included on page 4 herein) 
    
 31.1Section 302 Chief Executive Officer Certification81
    
 31.2Section 302 Principal Financial Officer Certification82
    
 32.1Section 1350 Chief Executive Officer Certification83
    
 32.2Section 1350 Principal Financial Officer Certification84
        Page
3 (i)Articles of Incorporation of the Registrant, as amended*
   
3 (ii)By-Laws of the Registrant, as amended**
   
10.1Form of Deferred Income Agreement.***
   
10.22011 Employee Stock Purchase Plan****
   
10.3  2010 Non-Employee Directors’ Stock Plan*****
   
11Statement re: computation of per share earnings (Included on page 4 herein)4
   
31.1Section 302 Chief Executive Officer Certification76
   
31.2Section 302 Principal Financial Officer Certification77
   
32.1Section 1350 Chief Executive Officer Certification78
   
32.2Section 1350 Principal Financial Officer Certification79

*  Incorporated herein by reference to Exhibit 4.1 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 28, 2012.

** Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.

*** Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2008.

**** Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 29, 2012.

***** Incorporated herein by reference to Exhibit 10 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 4, 2010.

 

 

*Incorporated herein by reference to Exhibit 4.1 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 28, 2012.

**Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.

***Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2008.

****Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 29, 2012.

*****Incorporated herein by reference to Exhibit 10 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 4, 2010.

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SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 ENB Financial Corp
        (Registrant)
   
   
Dated:  NovemberMay 13, 20152016By:   /s//s/  Aaron L. Groff, Jr.
  Aaron L. Groff, Jr.
  Chairman of the Board,
  Chief Executive Officer and President
   
   
Dated:  NovemberMay 13, 20152016By:  /s//s/  Scott E. Lied
  Scott E. Lied, CPA
  Treasurer
  Principal Financial Officer

 

 

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EXHIBIT INDEX

 

 

Exhibit
No.

Description

Page number

on Manually
 Manually Signed

Original

3(i)Articles of Incorporation of the Registrant, as amended. (Incorporated herein by reference to Exhibit 4.1 of the Corporation’s Registration Statement on Form S-8 filed with the SEC on June 28, 2012.) 
3 (ii)By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.) 
10.1Form of Deferred Income Agreement.  (Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August 13, 2008.) 
10.22011 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 29, 2012.) 
10.32010 Non-Employee Directors’ Stock Plan.  (Incorporated herein by reference to Exhibit 10 of the Corporation’s Form S-8 filed with the SEC on June 4, 2010.) 
11Statement re: Computation of Earnings Per Share as found on page 4 of Form 10-Q, which is included herein.Page 4

31.1

Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)).Page 8176

31.2

Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)).Page 8277

32.1

Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)).Page 8378

32.2

Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)).Page 8479

 

 

80