UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptemberJune 30, 20172020
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________________from________________________________ to ________________________
________________________________
ENB Financial Corp
(Exact name of registrant as specified in its charter)
Pennsylvania | 000-53297 | 51-0661129 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No) |
31 E. Main St., Ephrata, PA | 17522-0457 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (717) 733-4181
Former name, former address, and former fiscal year, if changed since last report Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
None. | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ Noo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DateData 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||
Non-accelerated filer | ||||
☒ | Smaller reporting company | |||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Act. o¨
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 5, 2017,August 1, 2020,the registrant had2,845,6795,568,601shares of $0.20$0.10 (par) Common Stock outstanding.
ENB FINANCIAL CORP
SeptemberJune 30, 20172020
2
ENB FINANCIAL CORP
Part I - Financial Information
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September 30, | December 31, | September 30, | ||||||||||
2017 | 2016 | 2016 | ||||||||||
$ | $ | $ | ||||||||||
ASSETS | ||||||||||||
Cash and due from banks | 18,426 | 19,852 | 16,055 | |||||||||
Interest-bearing deposits in other banks | 25,814 | 25,780 | 33,812 | |||||||||
Total cash and cash equivalents | 44,240 | 45,632 | 49,867 | |||||||||
Securities available for sale (at fair value) | 320,695 | 308,111 | 298,139 | |||||||||
Loans held for sale | 3,809 | 2,552 | 4,525 | |||||||||
Loans (net of unearned income) | 584,077 | 571,567 | 565,968 | |||||||||
Less: Allowance for loan losses | 8,028 | 7,562 | 7,435 | |||||||||
Net loans | 576,049 | 564,005 | 558,533 | |||||||||
Premises and equipment | 24,402 | 22,568 | 22,776 | |||||||||
Regulatory stock | 6,139 | 5,372 | 5,218 | |||||||||
Bank owned life insurance | 25,161 | 24,687 | 24,489 | |||||||||
Other assets | 9,583 | 11,326 | 7,140 | |||||||||
Total assets | 1,010,078 | 984,253 | 970,687 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Liabilities: | ||||||||||||
Deposits: | ||||||||||||
Noninterest-bearing | 301,978 | 280,543 | 260,873 | |||||||||
Interest-bearing | 536,847 | 536,948 | 531,787 | |||||||||
Total deposits | 838,825 | 817,491 | 792,660 | |||||||||
Short-term borrowings | — | 8,329 | 12,053 | |||||||||
Long-term debt | 68,350 | 61,257 | 63,757 | |||||||||
Other liabilities | 2,036 | 2,237 | 2,264 | |||||||||
Total liabilities | 909,211 | 889,314 | 870,734 | |||||||||
Stockholders' equity: | ||||||||||||
Common stock, par value $0.20; | ||||||||||||
Shares: Authorized 12,000,000 | ||||||||||||
Issued 2,869,557 and Outstanding 2,848,679 | ||||||||||||
(Issued 2,869,557 and Outstanding 2,850,382 as of 12/31/16) | ||||||||||||
(Issued 2,869,557 and Outstanding 2,851,338 as of 9/30/16) | 574 | 574 | 574 | |||||||||
Capital surplus | 4,413 | 4,403 | 4,398 | |||||||||
Retained earnings | 98,815 | 95,475 | 94,353 | |||||||||
Accumulated other comprehensive income (loss) net of tax | (2,232 | ) | (4,885 | ) | 1,221 | |||||||
Less: Treasury stock cost on 20,878 shares (19,175 shares | ||||||||||||
as of 12/31/16 and 18,219 shares as of 9/30/16) | (703 | ) | (628 | ) | (593 | ) | ||||||
Total stockholders' equity | 100,867 | 94,939 | 99,953 | |||||||||
Total liabilities and stockholders' equity | 1,010,078 | 984,253 | 970,687 |
June 30, | December 31, | June 30, | |||||||
2020 | 2019 | 2019 | |||||||
$ | $ | $ | |||||||
ASSETS | |||||||||
Cash and due from banks | 21,320 | 24,304 | 17,210 | ||||||
Interest-bearing deposits in other banks | 39,904 | 16,749 | 34,460 | ||||||
Total cash and cash equivalents | 61,224 | 41,053 | 51,670 | ||||||
Securities available for sale (at fair value) | 334,687 | 308,097 | 290,927 | ||||||
Equity securities (at fair value) | 6,775 | 6,708 | 6,231 | ||||||
Loans held for sale | 2,295 | 2,342 | 3,473 | ||||||
Loans (net of unearned income) | 835,969 | 753,618 | 718,356 | ||||||
Less: Allowance for loan losses | 10,770 | 9,447 | 8,957 | ||||||
Net loans | 825,199 | 744,171 | 709,399 | ||||||
Premises and equipment | 24,918 | 25,033 | 25,339 | ||||||
Regulatory stock | 6,942 | 7,291 | 6,959 | ||||||
Bank owned life insurance | 29,214 | 28,818 | 28,429 | ||||||
Other assets | 8,222 | 8,237 | 9,218 | ||||||
Total assets | 1,299,476 | 1,171,750 | 1,131,645 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Liabilities: | |||||||||
Deposits: | |||||||||
Noninterest-bearing | 466,392 | 363,857 | 345,483 | ||||||
Interest-bearing | 641,522 | 610,231 | 596,123 | ||||||
Total deposits | 1,107,914 | 974,088 | 941,606 | ||||||
Short-term borrowings | — | 200 | — | ||||||
Long-term debt | 65,072 | 77,872 | 74,628 | ||||||
Other liabilities | 4,328 | 2,902 | 2,897 | ||||||
Total liabilities | 1,177,314 | 1,055,062 | 1,019,131 | ||||||
Stockholders' equity: | |||||||||
Common stock, par value $0.10 | |||||||||
Shares: Authorized 24,000,000 | |||||||||
Issued 5,739,114 and Outstanding 5,574,601 as of 6/30/20, | |||||||||
5,640,742 as of 12/31/19, and 5,692,384 as of 6/30/19 | 574 | 574 | 574 | ||||||
Capital surplus | 4,466 | 4,482 | 4,454 | ||||||
Retained earnings | 115,914 | 111,944 | 108,024 | ||||||
Accumulated other comprehensive income | 4,522 | 1,600 | 298 | ||||||
Less: Treasury stock cost on 164,513 shares as of 6/30/20, 98,372 as of 12/31/19, | |||||||||
and 46,730 as of 6/30/19 | (3,314 | ) | (1,912 | ) | (836 | ) | |||
Total stockholders' equity | 122,162 | 116,688 | 112,514 | ||||||
Total liabilities and stockholders' equity | 1,299,476 | 1,171,750 | 1,131,645 |
See Notes to the Unaudited Consolidated Interim Financial Statements
3
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 June 30, | Six Months ended June 30, | |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Interest and dividend income: | ||||||||||||||||||||||||||||
Interest and fees on loans | 6,180 | 5,721 | 17,996 | 16,716 | 8,636 | 8,309 | 17,088 | 16,332 | ||||||||||||||||||||
Interest on securities available for sale | ||||||||||||||||||||||||||||
Taxable | 997 | 581 | 2,818 | 729 | 1,065 | 1,242 | 2,286 | 2,517 | ||||||||||||||||||||
Tax-exempt | 1,051 | 966 | 3,281 | 2,788 | 644 | 608 | 1,210 | 1,255 | ||||||||||||||||||||
Interest on deposits at other banks | 111 | 38 | 257 | 94 | 21 | 119 | 81 | 166 | ||||||||||||||||||||
Dividend income | 105 | 87 | 287 | 246 | 102 | 184 | 290 | 354 | ||||||||||||||||||||
Total interest and dividend income | 8,444 | 7,393 | 24,639 | 20,573 | 10,468 | 10,462 | 20,955 | 20,624 | ||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||
Interest on deposits | 489 | 509 | 1,438 | 1,568 | 543 | 913 | 1,352 | 1,737 | ||||||||||||||||||||
Interest on borrowings | 265 | 242 | 749 | 751 | 456 | 391 | 918 | 746 | ||||||||||||||||||||
Total interest expense | 754 | 751 | 2,187 | 2,319 | 999 | 1,304 | 2,270 | 2,483 | ||||||||||||||||||||
Net interest income | 7,690 | 6,642 | 22,452 | 18,254 | 9,469 | 9,158 | 18,685 | 18,141 | ||||||||||||||||||||
Provision for loan losses | 240 | 200 | 450 | 200 | 975 | 30 | 1,325 | 210 | ||||||||||||||||||||
Net interest income after provision for loan losses | 7,450 | 6,442 | 22,002 | 18,054 | 8,494 | 9,128 | 17,360 | 17,931 | ||||||||||||||||||||
Other income: | ||||||||||||||||||||||||||||
Trust and investment services income | 427 | 344 | 1,335 | 1,104 | 416 | 505 | 1,038 | 1,042 | ||||||||||||||||||||
Service fees | 648 | 589 | 1,894 | 1,644 | 635 | 693 | 1,314 | 1,323 | ||||||||||||||||||||
Commissions | 583 | 552 | 1,714 | 1,611 | 649 | 756 | 1,335 | 1,411 | ||||||||||||||||||||
Gains on securities transactions, net | 170 | 464 | 417 | 2,130 | ||||||||||||||||||||||||
Gains on the sale of debt securities, net | 367 | 106 | 649 | 187 | ||||||||||||||||||||||||
Gains (losses) on equity securities, net | 5 | 27 | (225 | ) | 44 | |||||||||||||||||||||||
Gains on sale of mortgages | 510 | 557 | 1,302 | 1,109 | 1,690 | 415 | 2,231 | 764 | ||||||||||||||||||||
Earnings on bank-owned life insurance | 170 | 210 | 514 | 604 | 205 | 179 | 411 | 357 | ||||||||||||||||||||
Other income | 114 | 112 | 370 | 364 | 101 | 81 | 82 | 178 | ||||||||||||||||||||
Total other income | 2,622 | 2,828 | 7,546 | 8,566 | 4,068 | 2,762 | 6,835 | 5,306 | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||
Salaries and employee benefits | 4,840 | 4,219 | 14,370 | 12,230 | 4,966 | 5,105 | 10,662 | 10,293 | ||||||||||||||||||||
Occupancy | 624 | 555 | 1,828 | 1,584 | 616 | 590 | 1,207 | 1,220 | ||||||||||||||||||||
Equipment | 299 | 276 | 878 | 811 | 316 | 287 | 606 | 574 | ||||||||||||||||||||
Advertising & marketing | 143 | 120 | 539 | 422 | 218 | 166 | 492 | 416 | ||||||||||||||||||||
Computer software & data processing | 575 | 471 | 1,654 | 1,345 | 768 | 609 | 1,474 | 1,266 | ||||||||||||||||||||
Shares tax | 215 | 227 | 644 | 680 | 239 | 232 | 479 | 465 | ||||||||||||||||||||
Professional services | 377 | 380 | 1,260 | 1,207 | 507 | 556 | 1,130 | 1,031 | ||||||||||||||||||||
Other expense | 574 | 500 | 1,707 | 1,663 | 614 | 672 | 1,304 | 1,234 | ||||||||||||||||||||
Total operating expenses | 7,647 | 6,748 | 22,880 | 19,942 | 8,244 | 8,217 | 17,354 | 16,499 | ||||||||||||||||||||
Income before income taxes | 2,425 | 2,522 | 6,668 | 6,678 | 4,318 | 3,673 | 6,841 | 6,738 | ||||||||||||||||||||
Provision for federal income taxes | 391 | 445 | 935 | 1,045 | 719 | 584 | 1,077 | 1,046 | ||||||||||||||||||||
Net income | 2,034 | 2,077 | 5,733 | 5,633 | 3,599 | 3,089 | 5,764 | 5,692 | ||||||||||||||||||||
Earnings per share of common stock | 0.71 | 0.73 | 2.01 | 1.98 | 0.64 | 0.54 | 1.03 | 1.00 | ||||||||||||||||||||
Cash dividends paid per share | 0.28 | 0.27 | 0.84 | 0.81 | 0.160 | 0.155 | 0.320 | 0.305 | ||||||||||||||||||||
Weighted average shares outstanding | 2,848,504 | 2,851,939 | 2,849,849 | 2,851,184 | 5,581,961 | 5,692,506 | 5,604,609 | 5,693,418 |
See Notes to the Unaudited Consolidated Interim Financial Statements
4
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months ended September 30, | Nine Months ended September 30, | Three Months ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Net income | 2,034 | 2,077 | 5,733 | 5,633 | 3,599 | 3,089 | 5,764 | 5,692 | ||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||
Securities available for sale not other-than-temporarily impaired: | ||||||||||||||||||||||||||||
Unrealized gains (losses) arising during the period | (406 | ) | (650 | ) | 4,437 | 4,362 | ||||||||||||||||||||||
Unrealized gains arising during the period | 4,695 | 4,520 | 4,346 | 7,751 | ||||||||||||||||||||||||
Income tax effect | 138 | 221 | (1,509 | ) | (1,483 | ) | (986 | ) | (949 | ) | (911 | ) | (1,627 | ) | ||||||||||||||
(268 | ) | (429 | ) | 2,928 | 2,879 | 3,709 | 3,571 | 3,435 | 6,124 | |||||||||||||||||||
Gains recognized in earnings | (170 | ) | (464 | ) | (417 | ) | (2,130 | ) | (367 | ) | (106 | ) | (649 | ) | (187 | ) | ||||||||||||
Income tax effect | 58 | 158 | 142 | 724 | 77 | 22 | 136 | 39 | ||||||||||||||||||||
(112 | ) | (306 | ) | (275 | ) | (1,406 | ) | (290 | ) | (84 | ) | (513 | ) | (148 | ) | |||||||||||||
Other comprehensive income (loss), net of tax | (380 | ) | (735 | ) | 2,653 | 1,473 | ||||||||||||||||||||||
Other comprehensive income, net of tax | 3,419 | 3,487 | 2,922 | 5,976 | ||||||||||||||||||||||||
Comprehensive Income | 1,654 | 1,342 | 8,386 | 7,106 | 7,018 | 6,576 | 8,686 | 11,668 |
See Notes to the Unaudited Consolidated Interim Financial Statements
5
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accumulated | ||||||||||||||||||
Other | Total | |||||||||||||||||
Common | Capital | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||
Stock | Surplus | Earnings | Income (Loss) | Stock | Equity | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Balances, December 31, 2018 | 574 | 4,435 | 104,067 | (5,678 | ) | (596 | ) | 102,802 | ||||||||||
Net income | — | — | 2,603 | — | — | 2,603 | ||||||||||||
Other comprehensive income net of tax | — | — | — | 2,489 | — | 2,489 | ||||||||||||
Treasury stock purchased - 18,800 shares | — | — | — | — | (330 | ) | (330 | ) | ||||||||||
Treasury stock issued - 8,188 shares | — | 3 | — | — | 143 | 146 | ||||||||||||
Cash dividends paid, $0.15 per share | — | — | (852 | ) | — | — | (852 | ) | ||||||||||
Balances, March 31, 2019 | 574 | 4,438 | 105,818 | (3,189 | ) | (783 | ) | 106,858 | ||||||||||
Net income | — | — | 3,089 | — | — | 3,089 | ||||||||||||
Other comprehensive income net of tax | — | — | — | 3,487 | — | 3,487 | ||||||||||||
Treasury stock purchased - 29,366 shares | — | — | — | — | (204 | ) | (204 | ) | ||||||||||
Treasury stock issued - 16,686 shares | — | 16 | — | — | 151 | 167 | ||||||||||||
Cash dividends paid, $0.155 per share | — | — | (883 | ) | — | — | (883 | ) | ||||||||||
Balances, June 30, 2019 | 574 | 4,454 | 108,024 | 298 | (836 | ) | 112,514 | |||||||||||
Balances, December 31, 2019 | 574 | 4,482 | 111,944 | 1,600 | (1,912 | ) | 116,688 | |||||||||||
Net income | — | — | 2,165 | — | — | 2,165 | ||||||||||||
Other comprehensive loss net of tax | — | — | — | (497 | ) | — | (497 | ) | ||||||||||
Treasury stock purchased - 49,911 shares | — | — | — | — | (1,098 | ) | (1,098 | ) | ||||||||||
Treasury stock issued - 7,670 shares | — | (6 | ) | — | — | 156 | 150 | |||||||||||
Cash dividends paid, $0.16 per share | — | — | (902 | ) | — | — | (902 | ) | ||||||||||
Balances, March 31, 2020 | 574 | 4,476 | 113,207 | 1,103 | (2,854 | ) | 116,506 | |||||||||||
Net income | — | — | 3,599 | — | — | 3,599 | ||||||||||||
Other comprehensive income net of tax | — | — | — | 3,419 | — | 3,419 | ||||||||||||
Treasury stock purchased - 32,966 shares | — | — | — | — | (627 | ) | (627 | ) | ||||||||||
Treasury stock issued - 9,066 shares | — | (10 | ) | — | — | 167 | 157 | |||||||||||
Cash dividends paid, $0.16 per share | — | — | (892 | ) | — | — | (892 | ) | ||||||||||
Balances, June 30, 2020 | 574 | 4,466 | 115,914 | 4,522 | (3,314 | ) | 122,162 |
See Notes to the Unaudited Consolidated Interim Financial Statements
6
See Notes to the Unaudited Consolidated Interim Financial Statements
7
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.
ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the thirdsecond quarter of 2017,2020, is reporting on the results of operations and financial condition of ENB Financial Corp.
Operating results for the three and ninesix months ended SeptemberJune 30, 2017,2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.2020. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
8
2. Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and fair value of securities held at SeptemberJune 30, 2017, 2020,
and December 31, 2016,2019, are as follows:
Gross | Gross | Gross | |||||||||||||||||||||||||||
(DOLLARS IN THOUSANDS) | Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Fair | ||||||||||||||||||||||
Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||
$ | $ | $ | $ | $ | |||||||||||||||||||||||||
September 30, 2017 | |||||||||||||||||||||||||||||
June 30, 2020 | |||||||||||||||||||||||||||||
U.S. government agencies | 29,107 | 3 | (463 | ) | 28,647 | 8,217 | 163 | (1 | ) | 8,379 | |||||||||||||||||||
U.S. agency mortgage-backed securities | 54,181 | 36 | (634 | ) | 53,583 | 71,241 | 1,379 | (67 | ) | 72,553 | |||||||||||||||||||
U.S. agency collateralized mortgage obligations | 54,503 | 117 | (582 | ) | 54,038 | 45,854 | 857 | (149 | ) | 46,562 | |||||||||||||||||||
Asset-backed securities | 33,340 | — | (1,389 | ) | 31,951 | ||||||||||||||||||||||||
Corporate bonds | 57,384 | 64 | (312 | ) | 57,136 | 62,426 | 1,209 | (204 | ) | 63,431 | |||||||||||||||||||
Obligations of states and political subdivisions | 123,344 | 505 | (2,176 | ) | 121,673 | 107,885 | 4,103 | (177 | ) | 111,811 | |||||||||||||||||||
Total debt securities | 318,519 | 725 | (4,167 | ) | 315,077 | ||||||||||||||||||||||||
Marketable equity securities | 5,557 | 61 | — | 5,618 | |||||||||||||||||||||||||
Total securities available for sale | 324,076 | 786 | (4,167 | ) | 320,695 | 328,963 | 7,711 | (1,987 | ) | 334,687 | |||||||||||||||||||
December 31, 2016 | |||||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||
U.S. government agencies | 33,124 | — | (863 | ) | 32,261 | 32,621 | 31 | (28 | ) | 32,624 | |||||||||||||||||||
U.S. agency mortgage-backed securities | 56,826 | 22 | (979 | ) | 55,869 | 48,859 | 215 | (448 | ) | 48,626 | |||||||||||||||||||
U.S. agency collateralized mortgage obligations | 38,737 | 41 | (842 | ) | 37,936 | 60,124 | 323 | (194 | ) | 60,253 | |||||||||||||||||||
Asset-backed securities | 23,646 | 7 | (391 | ) | 23,262 | ||||||||||||||||||||||||
Corporate bonds | 52,928 | 8 | (845 | ) | 52,091 | 54,604 | 316 | (40 | ) | 54,880 | |||||||||||||||||||
Obligations of states and political subdivisions | 128,428 | 346 | (4,344 | ) | 124,430 | 86,216 | 2,245 | (9 | ) | 88,452 | |||||||||||||||||||
Total debt securities | 310,043 | 417 | (7,873 | ) | 302,587 | ||||||||||||||||||||||||
Marketable equity securities | 5,469 | 55 | — | 5,524 | |||||||||||||||||||||||||
Total securities available for sale | 315,512 | 472 | (7,873 | ) | 308,111 | 306,070 | 3,137 | (1,110 | ) | 308,097 |
7
ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
The amortized cost and fair value of debt securities available for sale at SeptemberJune 30, 2017,2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.
CONTRACTUAL MATURITY OF DEBT SECURITIES | ||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||
Amortized | Amortized | |||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||
$ | $ | $ | ||||||||||||
Due in one year or less | 17,425 | 17,322 | 38,520 | 38,932 | ||||||||||
Due after one year through five years | 127,834 | 126,947 | 111,575 | 113,440 | ||||||||||
Due after five years through ten years | 54,502 | 53,703 | 49,932 | 50,325 | ||||||||||
Due after ten years | 118,758 | 117,105 | 128,936 | 131,990 | ||||||||||
Total debt securities | 318,519 | 315,077 | 328,963 | 334,687 |
Securities available for sale with a par value of $63,286,000$90,333,000 and $63,726,000$66,712,000 at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $65,495,000$95,814,000 at SeptemberJune 30, 2017,2020, and $65,770,000$68,732,000 at December 31, 2016.2019.
9
Proceeds from active sales of securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Proceeds from sales | 20,319 | 38,592 | 60,404 | 142,095 | ||||||||||||
Gross realized gains | 243 | 468 | 631 | 2,186 | ||||||||||||
Gross realized losses | 73 | 4 | 214 | 56 |
PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE | ||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
$ | $ | $ | $ | |||||||||
Proceeds from sales | 16,409 | 18,401 | 43,818 | 28,648 | ||||||||
Gross realized gains | 369 | 122 | 666 | 218 | ||||||||
Gross realized losses | (2 | ) | (16 | ) | (17 | ) | (31 | ) |
Management evaluates all of the Corporation’s securities for other than temporaryother-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first ninesix months of 20172020 or 2016.2019.
Information pertaining to securities with gross unrealized losses at SeptemberJune 30, 2017,2020, and December 31, 2016,2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
8
ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
TEMPORARY IMPAIRMENTS OF SECURITIES | TEMPORARY IMPAIRMENTS OF SECURITIES | ||||||||||||||||||||||||||||||||||||||||||
(DOLLARS IN THOUSANDS) | (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, 2017 | |||||||||||||||||||||||||||||||||||||||||||
As of June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||
U.S. government agencies | 10,925 | (111 | ) | 15,718 | (352 | ) | 26,643 | (463 | ) | 1,195 | (1 | ) | — | — | 1,195 | (1 | ) | ||||||||||||||||||||||||||
U.S. agency mortgage-backed securities | 29,092 | (267 | ) | 15,140 | (367 | ) | 44,232 | (634 | ) | 5,790 | (15 | ) | 4,130 | (52 | ) | 9,920 | (67 | ) | |||||||||||||||||||||||||
U.S. agency collateralized mortgage obligations | 23,804 | (277 | ) | 11,438 | (305 | ) | 35,242 | (582 | ) | 17,034 | (149 | ) | — | — | 17,034 | (149 | ) | ||||||||||||||||||||||||||
Asset-backed securities | 18,904 | (672 | ) | 13,047 | (717 | ) | 31,951 | (1,389 | ) | ||||||||||||||||||||||||||||||||||
Corporate bonds | 17,539 | (69 | ) | 18,513 | (243 | ) | 36,052 | (312 | ) | 11,548 | (73 | ) | 2,903 | (131 | ) | 14,451 | (204 | ) | |||||||||||||||||||||||||
Obligations of states & political subdivisions | 35,033 | (595 | ) | 50,271 | (1,581 | ) | 85,304 | (2,176 | ) | 10,873 | (177 | ) | — | — | 10,873 | (177 | ) | ||||||||||||||||||||||||||
Total debt securities | 116,393 | (1,319 | ) | 111,080 | (2,848 | ) | 227,473 | (4,167 | ) | ||||||||||||||||||||||||||||||||||
Marketable equity securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | 116,393 | (1,319 | ) | 111,080 | (2,848 | ) | 227,473 | (4,167 | ) | 65,344 | (1,087 | ) | 20,080 | (900 | ) | 85,424 | (1,987 | ) | |||||||||||||||||||||||||
As of December 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
U.S. government agencies | 32,261 | (863 | ) | — | — | 32,261 | (863 | ) | 1,222 | (3 | ) | 15,971 | (25 | ) | 17,193 | (28 | ) | ||||||||||||||||||||||||||
U.S. agency mortgage-backed securities | 47,418 | (856 | ) | 3,989 | (123 | ) | 51,407 | (979 | ) | 5,040 | (32 | ) | 24,027 | (416 | ) | 29,067 | (448 | ) | |||||||||||||||||||||||||
U.S. agency collateralized mortgage obligations | 33,206 | (842 | ) | — | — | 33,206 | (842 | ) | 17,457 | (50 | ) | 17,512 | (144 | ) | 34,969 | (194 | ) | ||||||||||||||||||||||||||
Asset-backed securities | 10,278 | (169 | ) | 9,126 | (222 | ) | 19,404 | (391 | ) | ||||||||||||||||||||||||||||||||||
Corporate bonds | 45,335 | (830 | ) | 2,002 | (15 | ) | 47,337 | (845 | ) | 2,562 | (4 | ) | 13,041 | (36 | ) | 15,603 | (40 | ) | |||||||||||||||||||||||||
Obligations of states & political subdivisions | 101,229 | (4,063 | ) | 8,041 | (281 | ) | 109,270 | (4,344 | ) | 2,642 | (9 | ) | — | — | 2,642 | (9 | ) | ||||||||||||||||||||||||||
Total debt securities | 259,449 | (7,454 | ) | 14,032 | (419 | ) | 273,481 | (7,873 | ) | ||||||||||||||||||||||||||||||||||
Marketable equity securities | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Total temporarily impaired securities | 259,449 | (7,454 | ) | 14,032 | (419 | ) | 273,481 | (7,873 | ) | 39,201 | (267 | ) | 79,677 | (843 | ) | 118,878 | (1,110 | ) |
In the debt security portfolio there were 16248 positions that were carrying unrealized losses as of SeptemberJune 30, 2017.2020. There were no instruments considered to be other-than-temporarily impaired at SeptemberJune 30, 2017.2020.
The Corporation evaluates both equity and fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income.
As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impact the value of the bonds by causing accelerated amortization. If a security was purchased at a high premium, or dollar price above par, the remaining premium has to be amortized on a straight line basis to the known call date. Calls can occur in a majority of the securities the Corporation purchases but they are dependent on the structure of the instrument, and can also be dependent on certain conditions.
On March 15, 2016, management was made aware of a regulatory call provision on a CoBank bond held by the Corporation. CoBank is a sub-U.S. agency and cooperative of the Farm Credit Association (FCA), a U.S. government sponsored enterprise (GSE). The bond is classified as a corporate bond for disclosure purposes. The regulatory call was not anticipated and the high coupon bond was purchased at a high premium. The call required accelerated amortization to the April 15, 2016 call date, resulting in an additional $479,000 of amortization through September 30, 2016. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018.
910
On April 26, 2016, management became aware of an AgriBank bond call. AgriBank is another cooperative of3. Equity Securities
The following table summarizes the FCA. The Corporation owned $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a bookamortized cost, gross unrealized gains and losses, and fair value of $6.6 millionequity securities held at June 30, 2020 and December 31, 2019.
Gross | Gross | |||||||||||
(DOLLARS IN THOUSANDS) | Amortized | Unrealized | Unrealized | Fair | ||||||||
Cost | Gains | Losses | Value | |||||||||
$ | $ | $ | $ | |||||||||
June 30, 2020 | ||||||||||||
CRA-qualified mutual funds | 6,148 | — | — | 6,148 | ||||||||
Bank stocks | 829 | — | (202 | ) | 627 | |||||||
Total equity securities | 6,977 | — | (202 | ) | 6,775 | |||||||
Gross | Gross | |||||||||||
(DOLLARS IN THOUSANDS) | Amortized | Unrealized | Unrealized | Fair | ||||||||
Cost | Gains | Losses | Value | |||||||||
$ | $ | $ | $ | |||||||||
December 31, 2019 | ||||||||||||
CRA-qualified mutual funds | 6,071 | — | — | 6,071 | ||||||||
Bank stocks | 614 | 26 | (3 | ) | 637 | |||||||
Total equity securities | 6,685 | 26 | (3 | ) | 6,708 |
The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and six months ended June 30, 2020 and 2019, and the portion of unrealized gains and losses for the period that relates to equity investments held as of June 30, 2016. AgriBank went public with this call, stating they intended to call the bonds on July 15, 2016. As a result of this par call notice, management accelerated the amortization of the remaining premium on the AgriBank bond, beginning in April2020 and running until the call date of July 15, 2016. As of September 30, 2016, $1,202,000 of accelerated amortization was recorded on this bond. After July 15, 2016, the Corporation no longer held any sub-U.S. Agency debt of FCA or any other U.S. GSE.2019.
NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS | ||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||
$ | $ | $ | $ | |||||||||
Net gains (losses) recognized in equity securities during the period | 5 | 27 | (225 | ) | 44 | |||||||
Less: Net gains realized on the sale of equity securities during the period | — | — | — | — | ||||||||
Unrealized gains (losses) recognized in equity securities held at reporting date | 5 | 27 | (225 | ) | 44 |
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, the Corporation is listed on a complaint filed in the U.S District Court for the Southern District of New York against CoBank by over 30 previous holders of CoBank bonds. The complaint has gone through initial mediation phases and the discovery stage which concluded on September 29, 2017. The parties are presently engaged in expert discovery, with the matter proceeding toward trial. Management anticipates going through a similar process with AgriBank, however that litigation is taking the form of a class action lawsuit with a plaintiff representing the class. The Corporation, as a member of the class, initially waited for the court to issue a ruling on AgriBank’s motion to dismiss. The District Court Judge issued an opinion in mid-September 2017, denying AgriBank’s motion to dismiss. The District Court recently entered a discovery schedule that establishes mid-May 2018 as the deadline to complete fact discovery, and mid-August 2018 as the deadline for expert discovery. In both litigation efforts management is contesting the process that was undertaken to exercise these regulatory calls. Management cannot make any prediction or draw any conclusion as to the outcome of any negotiations and/or litigation in connection with these matters.
1011
3.
4. Loans and Allowance for Loan Losses
The following table presents the Corporation’s loan portfolio by category of loans as of SeptemberJune 30, 2017,2020, and December 31, 2016:2019:
LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
LOAN PORTFOLIO | ||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||
September 30, | December 31, | June 30, | December 31, | |||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||
$ | $ | $ | $ | |||||||||||
Commercial real estate | ||||||||||||||
Commercial mortgages | 90,468 | 86,434 | 125,925 | 120,212 | ||||||||||
Agriculture mortgages | 150,269 | 163,753 | 175,108 | 175,367 | ||||||||||
Construction | 18,762 | 24,880 | 20,285 | 16,209 | ||||||||||
Total commercial real estate | 259,499 | 275,067 | 321,318 | 311,788 | ||||||||||
Consumer real estate (a) | ||||||||||||||
1-4 family residential mortgages | 168,984 | 150,253 | 261,772 | 258,676 | ||||||||||
Home equity loans | 11,457 | 10,391 | 10,688 | 9,770 | ||||||||||
Home equity lines of credit | 57,991 | 53,127 | 69,507 | 70,809 | ||||||||||
Total consumer real estate | 238,432 | 213,771 | 341,967 | 339,255 | ||||||||||
Commercial and industrial | ||||||||||||||
Commercial and industrial | 41,724 | 42,471 | 129,459 | 58,019 | ||||||||||
Tax-free loans | 19,632 | 13,091 | 16,607 | 16,388 | ||||||||||
Agriculture loans | 18,487 | 21,630 | 21,581 | 20,804 | ||||||||||
Total commercial and industrial | 79,843 | 77,192 | 167,647 | 95,211 | ||||||||||
Consumer | 5,166 | 4,537 | 5,061 | 5,416 | ||||||||||
Gross loans prior to deferred fees | 582,940 | 570,567 | 835,993 | 751,670 | ||||||||||
Less: | ||||||||||||||
Deferred loan costs, net | 1,137 | 1,000 | (24 | ) | 1,948 | |||||||||
Allowance for loan losses | (8,028 | ) | (7,562 | ) | (10,770 | ) | (9,447 | ) | ||||||
Total net loans | 576,049 | 564,005 | 825,199 | 744,171 |
(a) | Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled |
The largest movement within the Corporation’s loan portfolio since December 31, 2019 was the sharp growth in the commercial and industrial loan sector, which experienced a $71.4 million, or 123.1% increase. This was a direct result of the Small Business Administration’s new Paycheck Protection Program (PPP) established as part of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020, and by June 30, 2020 had approved over 950 applications that resulted in $76.1 million in PPP loan balances. The majority of these loans have been written with a two-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2020 with further declines during 2021.
12
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 SeptemberJune 30, 20172020 and December 31, 2016.2019. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.
The Corporation's internally assigned grades for commercial credits are as follows:
· | Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. |
· | Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem, if not corrected. |
· | Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. |
11
ENB FINANCIAL CORPNotes 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)
June 30, 2020 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | ||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||
Grade: | |||||||||||||||||||||
Pass | 123,203 | 159,455 | 20,285 | 119,227 | 16,607 | 19,192 | 457,969 | ||||||||||||||
Special Mention | 813 | 3,242 | — | 5,062 | — | 832 | 9,949 | ||||||||||||||
Substandard | 1,909 | 12,411 | — | 5,139 | — | 1,557 | 21,016 | ||||||||||||||
Doubtful | — | — | — | 31 | — | — | 31 | ||||||||||||||
Loss | — | — | — | — | — | — | — | ||||||||||||||
Total | 125,925 | 175,108 | 20,285 | 129,459 | 16,607 | 21,581 | 488,965 |
September 30, 2017 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Grade: | ||||||||||||||||||||||||||||
Pass | 84,614 | 139,458 | 17,762 | 37,900 | 19,422 | 17,490 | 316,646 | |||||||||||||||||||||
Special Mention | 373 | 5,095 | — | 795 | 210 | 229 | 6,702 | |||||||||||||||||||||
Substandard | 5,481 | 5,716 | 1,000 | 3,029 | — | 768 | 15,994 | |||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | |||||||||||||||||||||
Loss | — | — | — | — | — | — | — | |||||||||||||||||||||
Total | 90,468 | 150,269 | 18,762 | 41,724 | 19,632 | 18,487 | 339,342 | |||||||||||||||||||||
December 31, 2016 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | Commercial Mortgages | Agriculture Mortgages | Construction | Commercial and Industrial | Tax-free Loans | Agriculture Loans | Total | ||||||||||||||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
Grade: | |||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 78,367 | 155,820 | 23,880 | 36,887 | 13,091 | 20,245 | 328,290 | 117,875 | 158,896 | 16,209 | 52,028 | 16,388 | 18,530 | 379,926 | |||||||||||||||||||||||||||||||||||
Special Mention | 4,860 | 5,360 | — | 1,955 | — | 653 | 12,828 | 827 | 4,546 | — | 618 | — | 939 | 6,930 | |||||||||||||||||||||||||||||||||||
Substandard | 3,207 | 2,573 | 1,000 | 3,629 | — | 732 | 11,141 | 1,510 | 11,925 | — | 5,293 | — | 1,335 | 20,063 | |||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | — | — | — | — | — | — | — | 80 | — | — | 80 | |||||||||||||||||||||||||||||||||||
Loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Total | 86,434 | 163,753 | 24,880 | 42,471 | 13,091 | 21,630 | 352,259 | 120,212 | 175,367 | 16,209 | 58,019 | 16,388 | 20,804 | 406,999 |
1213
Substandard loans increased by $953,000, or 4.8%, while special mention loans have increased by $3.0 million, or 43.6%, from December 31, 2019 to June 30, 2020. Substandard loans increased from $20.1 million to $21.0 million from December 31, 2019, to June 30, 2020 while special mention loans increased from $6.9 million to $9.9 million during this same period. The loan areas that experienced material changes in special mention and substandard loans were commercial and industrial, agricultural mortgages, and commercial mortgages. Under commercial and industrial loans, $4.4 million of pass-rated loans were transferred to special mention with $3.9 million of this amount consisting of loans to a commercial leasing company. Under agricultural mortgages, the changes in both substandard and special mention were caused by a number of unrelated borrowers experiencing grading changes or paying off. During the second quarter of 2020, a livestock operating farm with $1.3 million of balances was transferred into substandard from pass. Partially offsetting this, the Corporation received a $825,000 loan payoff on another real estate secured agricultural mortgage. There was also $745,000 of loans transferred into substandard from special mention in the first quarter of 2020. In addition to these loans, two other dairy farm loans primarily accounted for the remaining variance in substandard agricultural mortgages from December 31, 2019 to June 30, 2020. One dairy farmer with $1,130,000 of loans came off of substandard in the second quarter of 2020, while another dairy farmer with three loans totaling $778,000 was placed into substandard.
Two agricultural mortgages were primarily responsible for the $1.3 million reduction in special mention agricultural mortgages between December 31, 2019 and June 30, 2020. One was the $745,000 farm loan that was transferred from special mention to substandard in the first quarter of 2020. The other was a dairy farmer that sold out and paid off $730,000 of special mention agricultural mortgage loans in the second quarter of 2020. Lastly, under commercial mortgages, one residential investment property borrower with $443,000 of loans was placed on substandard in the first quarter of 2020. Note the sharp growth in commercial and industrial pass loans was a result of the introduction of the new PPP loans, which started in April 2020.
For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
CONSUMER CREDIT EXPOSURE
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
(DOLLARS IN THOUSANDS)
September 30, 2017 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||
June 30, 2020 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||
Payment performance: | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Performing | 168,863 | 11,457 | 57,991 | 5,160 | 243,471 | 260,990 | 10,596 | 69,497 | 5,053 | 346,136 | |||||||||||||||||||||||||
Non-performing | 121 | — | — | 6 | 127 | 782 | 92 | 10 | 8 | 892 | |||||||||||||||||||||||||
Total | 168,984 | 11,457 | 57,991 | 5,166 | 243,598 | 261,772 | 10,688 | 69,507 | 5,061 | 347,028 | |||||||||||||||||||||||||
December 31, 2016 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||
December 31, 2019 | 1-4 Family Residential Mortgages | Home Equity Loans | Home Equity Lines of Credit | Consumer | Total | ||||||||||||||||||||||||||||||
Payment performance: | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
Performing | 149,873 | 10,388 | 53,127 | 4,536 | 217,924 | 257,374 | 9,678 | 70,799 | 5,412 | 343,263 | |||||||||||||||||||||||||
Non-performing | 380 | 3 | — | 1 | 384 | 1,302 | 92 | 10 | 4 | 1,408 | |||||||||||||||||||||||||
Total | 150,253 | 10,391 | 53,127 | 4,537 | 218,308 | 258,676 | 9,770 | 70,809 | 5,416 | 344,671 |
1314
The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
AGING OF LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)
Loans | ||||||||||||||||||||||||||||
Greater | Receivable > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | |||||||||||||||||||||||
September 30, 2017 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Commercial mortgages | 248 | 110 | 418 | 776 | 89,692 | 90,468 | — | |||||||||||||||||||||
Agriculture mortgages | — | — | — | — | 150,269 | 150,269 | — | |||||||||||||||||||||
Construction | — | — | — | — | 18,762 | 18,762 | — | |||||||||||||||||||||
Consumer real estate | ||||||||||||||||||||||||||||
1-4 family residential mortgages | 1,310 | 124 | 121 | 1,555 | 167,429 | 168,984 | 57 | |||||||||||||||||||||
Home equity loans | 9 | — | — | 9 | 11,448 | 11,457 | — | |||||||||||||||||||||
Home equity lines of credit | — | 30 | — | 30 | 57,961 | 57,991 | — | |||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||
Commercial and industrial | — | — | 266 | 266 | 41,458 | 41,724 | 191 | |||||||||||||||||||||
Tax-free loans | — | — | — | — | 19,632 | 19,632 | — | |||||||||||||||||||||
Agriculture loans | — | — | — | — | 18,487 | 18,487 | — | |||||||||||||||||||||
Consumer | 9 | 8 | 6 | 23 | 5,143 | 5,166 | 6 | |||||||||||||||||||||
Total | 1,576 | 272 | 811 | 2,659 | 580,281 | 582,940 | 254 |
Loans | |||||||||||||||||||||
Greater | Receivable > | ||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | ||||||||||||||||
June 30, 2020 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | ||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||
Commercial real estate | |||||||||||||||||||||
Commercial mortgages | — | — | 221 | 221 | 125,704 | 125,925 | — | ||||||||||||||
Agriculture mortgages | 305 | — | — | 305 | 174,803 | 175,108 | — | ||||||||||||||
Construction | 1,038 | — | — | 1,038 | 19,247 | 20,285 | — | ||||||||||||||
Consumer real estate | |||||||||||||||||||||
1-4 family residential mortgages | 307 | — | 782 | 1,089 | 260,683 | 261,772 | 291 | ||||||||||||||
Home equity loans | 2 | — | 92 | 94 | 10,594 | 10,688 | — | ||||||||||||||
Home equity lines of credit | 9 | — | 10 | 19 | 69,488 | 69,507 | 10 | ||||||||||||||
Commercial and industrial | |||||||||||||||||||||
Commercial and industrial | 23 | — | 521 | 544 | 128,915 | 129,459 | — | ||||||||||||||
Tax-free loans | — | — | — | — | 16,607 | 16,607 | — | ||||||||||||||
Agriculture loans | 47 | — | — | 47 | 21,534 | 21,581 | — | ||||||||||||||
Consumer | 6 | 8 | 8 | 22 | 5,039 | 5,061 | 8 | ||||||||||||||
Total | 1,737 | 8 | 1,634 | 3,379 | 832,614 | 835,993 | 309 |
AGING OF LOANS RECEIVABLE
Loans | ||||||||||||||||||||||||||||
Greater | Receivable > | |||||||||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | |||||||||||||||||||||||
December 31, 2016 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | |||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Commercial mortgages | — | 419 | 417 | 836 | 85,598 | 86,434 | — | |||||||||||||||||||||
Agriculture mortgages | 165 | — | — | 165 | 163,588 | 163,753 | — | |||||||||||||||||||||
Construction | — | — | — | — | 24,880 | 24,880 | — | |||||||||||||||||||||
Consumer real estate | ||||||||||||||||||||||||||||
1-4 family residential mortgages | 565 | 662 | 380 | 1,607 | 148,646 | 150,253 | 380 | |||||||||||||||||||||
Home equity loans | 178 | — | 3 | 181 | 10,210 | 10,391 | 3 | |||||||||||||||||||||
Home equity lines of credit | — | — | — | — | 53,127 | 53,127 | — | |||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||
Commercial and industrial | 266 | — | 75 | 341 | 42,130 | 42,471 | — | |||||||||||||||||||||
Tax-free loans | — | — | — | — | 13,091 | 13,091 | — | |||||||||||||||||||||
Agriculture loans | — | — | — | — | 21,630 | 21,630 | — | |||||||||||||||||||||
Consumer | 16 | 4 | 1 | 21 | 4,516 | 4,537 | 1 | |||||||||||||||||||||
Total | 1,190 | 1,085 | 876 | 3,151 | 567,416 | 570,567 | 384 |
(DOLLARS IN THOUSANDS)
Loans | |||||||||||||||||||||
Greater | Receivable > | ||||||||||||||||||||
30-59 Days | 60-89 Days | than 90 | Total Past | Total Loans | 90 Days and | ||||||||||||||||
December 31, 2019 | Past Due | Past Due | Days | Due | Current | Receivable | Accruing | ||||||||||||||
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||
Commercial real estate | |||||||||||||||||||||
Commercial mortgages | — | — | 228 | 228 | 119,984 | 120,212 | — | ||||||||||||||
Agriculture mortgages | 962 | — | 1,070 | 2,032 | 173,335 | 175,367 | — | ||||||||||||||
Construction | — | — | — | — | 16,209 | 16,209 | — | ||||||||||||||
Consumer real estate | |||||||||||||||||||||
1-4 family residential mortgages | 2,254 | 161 | 1,302 | 3,717 | 254,959 | 258,676 | 807 | ||||||||||||||
Home equity loans | 52 | — | 92 | 144 | 9,626 | 9,770 | — | ||||||||||||||
Home equity lines of credit | 43 | — | 10 | 53 | 70,756 | 70,809 | 10 | ||||||||||||||
Commercial and industrial | |||||||||||||||||||||
Commercial and industrial | 68 | — | 538 | 606 | 57,413 | 58,019 | — | ||||||||||||||
Tax-free loans | — | — | — | — | 16,388 | 16,388 | — | ||||||||||||||
Agriculture loans | 2 | — | — | 2 | 20,802 | 20,804 | — | ||||||||||||||
Consumer | 14 | 12 | 4 | 30 | 5,386 | 5,416 | 4 | ||||||||||||||
Total | 3,395 | 173 | 3,244 | 6,812 | 744,858 | 751,670 | 821 |
1415
The following table presents nonaccrual loans by classes of the loan portfolio as of SeptemberJune 30, 20172020 and December 31, 2016:2019:
NONACCRUAL LOANS BY LOAN CLASS | ||||||||
(DOLLARS IN THOUSANDS) | ||||||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
$ | $ | |||||||
Commercial real estate | ||||||||
Commercial mortgages | 528 | 646 | ||||||
Agriculture mortgages | — | — | ||||||
Construction | — | — | ||||||
Consumer real estate | ||||||||
1-4 family residential mortgages | 64 | — | ||||||
Home equity loans | — | — | ||||||
Home equity lines of credit | — | — | ||||||
Commercial and industrial | ||||||||
Commercial and industrial | 75 | 75 | ||||||
Tax-free loans | — | — | ||||||
Agriculture loans | — | — | ||||||
Consumer | 20 | — | ||||||
Total | 687 | 721 |
NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
June 30, | December 31, | |||||
2020 | 2019 | |||||
$ | $ | |||||
Commercial real estate | ||||||
Commercial mortgages | 221 | 228 | ||||
Agriculture mortgages | — | 1,070 | ||||
Construction | — | — | ||||
Consumer real estate | ||||||
1-4 family residential mortgages | 491 | 495 | ||||
Home equity loans | 92 | 92 | ||||
Home equity lines of credit | — | — | ||||
Commercial and industrial | ||||||
Commercial and industrial | 521 | 538 | ||||
Tax-free loans | — | — | ||||
Agriculture loans | — | — | ||||
Consumer | — | — | ||||
Total | 1,325 | 2,423 |
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016,2019, is as follows:
IMPAIRED LOANS
(DOLLARS IN THOUSANDS)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Average recorded balance of impaired loans | 2,152 | 1,830 | 2,394 | 1,894 | ||||||||||||
Interest income recognized on impaired loans | 17 | 14 | 49 | 42 |
Three Months Ended June 30, | Six months ended June 30, | |||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
$ | $ | $ | $ | |||||||||
Average recorded balance of impaired loans | 3,178 | 3,412 | 3,557 | 3,057 | ||||||||
Interest income recognized on impaired loans | 18 | 11 | 43 | 22 |
DuringThere were no loan modifications made during the ninefirst six months ended September 30, 2017 there was one loan modification made causing a loan toof 2020 that would be considered a troubled debt restructuring (TDR). Deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A TDR ismodification of the payment terms to a loan where management has grantedcustomer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.
In the first quarter of 2019, a loan modification was made on a $718,000 agricultural mortgage which moved the timing of the annual principal payment and changed interest payments from monthly to annually. The loan classified asfarmer had suffered a TDR during the nine months ended September 30, 2017, was an agricultural loan with a principal balance at September 30, 2017, of $263,000.fire loss in late 2018 impacting one year’s harvest. The concession granted to the borrower was an interest-only period initially running for three months to March 31, 2017. However, in April 2017, that deferral period was extended for an additional three months, causing management to classify the loan as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest paymentspayment due date was reset to November 15, 2019, when it was paid. No other loans were modified during 2019.
Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance of these three TDR loans was $1,941,000 as of July 2017. There were noJune 30, 2020. One of these TDR loans classifiedwith a balance of $439,000 is also on nonaccrual and is included under 1-4 family residential mortgages shown in the nonaccrual table above. For both of these TDR loans the borrowers have a history of being delinquent. Management will continue to report these loans as a TDR during the nine months ended September 30, 2016.
loans until they have been paid off or charged off.
1516
The following tables summarize information in regards toregarding impaired loans by loan portfolio class as of SeptemberJune 30, 2017,2020, and for the six months ended June 30, 2020, and as of December 31, 2016, and September 30, 2016:2019:
IMPAIRED LOAN ANALYSIS | |||||||||||||||
(DOLLARS IN THOUSANDS) | |||||||||||||||
June 30, 2020 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||
$ | $ | $ | $ | $ | |||||||||||
With no related allowance recorded: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 712 | 759 | — | 720 | — | ||||||||||
Agriculture mortgages | 824 | 853 | — | 1,528 | 43 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 1,536 | 1,612 | — | 2,248 | 43 | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | — | — | — | — | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | — | — | — | — | — | ||||||||||
Total with no related allowance | 1,536 | 1,612 | — | 2,248 | 43 | ||||||||||
With an allowance recorded: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 92 | 100 | 28 | 92 | — | ||||||||||
Agriculture mortgages | 677 | 677 | 5 | 685 | — | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 769 | 777 | 33 | 777 | — | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | 521 | 543 | 31 | 532 | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | 521 | 543 | 31 | 532 | — | ||||||||||
Total with a related allowance | 1,290 | 1,320 | 64 | 1,309 | — | ||||||||||
Total by loan class: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 804 | 859 | 28 | 812 | — | ||||||||||
Agriculture mortgages | 1,501 | 1,530 | 5 | 2,213 | 43 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 2,305 | 2,389 | 33 | 3,025 | 43 | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | 521 | 543 | 31 | 532 | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | 521 | 543 | 31 | 532 | — | ||||||||||
Total | 2,826 | 2,932 | 64 | 3,557 | 43 |
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
September 30, 2017 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 195 | 292 | — | 281 | 4 | |||||||||||||||
Agriculture mortgages | 1,193 | 1,193 | — | 1,220 | 40 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,388 | 1,485 | — | 1,501 | 44 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 75 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 263 | 263 | — | 400 | 5 | |||||||||||||||
Total commercial and industrial | 338 | 338 | — | 475 | 5 | |||||||||||||||
Total with no related allowance | 1,726 | 1,823 | — | 1,976 | 49 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 418 | 418 | 98 | 418 | — | |||||||||||||||
Agriculture mortgages | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 418 | 418 | 98 | 418 | — | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | — | — | — | — | — | |||||||||||||||
Total with a related allowance | 418 | 418 | 98 | 418 | — | |||||||||||||||
Total by loan class: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 613 | 710 | 98 | 699 | 4 | |||||||||||||||
Agriculture mortgages | 1,193 | 1,193 | — | 1,220 | 40 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,806 | 1,903 | 98 | 1,919 | 44 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 75 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | 263 | 263 | — | 400 | 5 | |||||||||||||||
Total commercial and industrial | 338 | 338 | — | 475 | 5 | |||||||||||||||
Total | 2,144 | 2,241 | 98 | 2,394 | 49 |
1617
IMPAIRED LOAN ANALYSIS | |||||||||||||||
(DOLLARS IN THOUSANDS) | |||||||||||||||
December 31, 2019 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||
$ | $ | $ | $ | $ | |||||||||||
With no related allowance recorded: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 724 | 765 | — | 859 | — | ||||||||||
Agriculture mortgages | 1,912 | 1,928 | — | 1,903 | 43 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 2,636 | 2,693 | — | 2,762 | 43 | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | — | — | — | — | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | — | — | — | — | — | ||||||||||
Total with no related allowance | 2,636 | 2,693 | — | 2,762 | 43 | ||||||||||
With an allowance recorded: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 92 | 100 | 49 | 93 | — | ||||||||||
Agriculture mortgages | 718 | 718 | 60 | 760 | — | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 810 | 818 | 109 | 853 | — | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | 538 | 549 | 80 | 261 | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | 538 | 549 | 80 | 261 | — | ||||||||||
Total with a related allowance | 1,348 | 1,367 | 189 | 1,114 | — | ||||||||||
Total by loan class: | |||||||||||||||
Commercial real estate | |||||||||||||||
Commercial mortgages | 816 | 865 | 49 | 952 | — | ||||||||||
Agriculture mortgages | 2,630 | 2,646 | 60 | 2,663 | 43 | ||||||||||
Construction | — | — | — | — | — | ||||||||||
Total commercial real estate | 3,446 | 3,511 | 109 | 3,615 | 43 | ||||||||||
Commercial and industrial | |||||||||||||||
Commercial and industrial | 538 | 549 | 80 | 261 | — | ||||||||||
Tax-free loans | — | — | — | — | — | ||||||||||
Agriculture loans | — | — | — | — | — | ||||||||||
Total commercial and industrial | 538 | 549 | 80 | 261 | — | ||||||||||
Total | 3,984 | 4,060 | 189 | 3,876 | 43 |
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
December 31, 2016 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 646 | 743 | — | 768 | 2 | |||||||||||||||
Agriculture mortgages | 1,248 | 1,248 | — | 1,285 | 55 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,894 | 1,991 | — | 2,053 | 57 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 76 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | 75 | 75 | — | 76 | — | |||||||||||||||
Total with no related allowance | 1,969 | 2,066 | — | 2,129 | 57 | |||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | — | — | — | — | — | |||||||||||||||
Agriculture mortgages | — | — | — | — | — | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | — | — | — | — | — | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | — | — | — | — | — | |||||||||||||||
Total with a related allowance | — | — | — | — | — | |||||||||||||||
Total by loan class: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 646 | 743 | — | 768 | 2 | |||||||||||||||
Agriculture mortgages | 1,248 | 1,248 | — | 1,285 | 55 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,894 | 1,991 | — | 2,053 | 57 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 76 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | 75 | 75 | — | 76 | — | |||||||||||||||
Total | 1,969 | 2,066 | — | 2,129 | 57 |
1718
IMPAIRED LOAN ANALYSIS | ||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||
September 30, 2016 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||
Commercial mortgages | 730 | 827 | — | 561 | — | |||||||||||||||
Agriculture mortgages | 1,267 | 1,267 | — | 1,295 | 42 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,997 | 2,094 | — | 1,856 | 42 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 38 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | 75 | 75 | — | 38 | — | |||||||||||||||
�� | ||||||||||||||||||||
Total with no related allowance | 2,072 | 2,169 | — | 1,894 | 42 | |||||||||||||||
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 | 730 | 827 | — | 561 | — | |||||||||||||||
Agriculture mortgages | 1,267 | 1,267 | — | 1,295 | 42 | |||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Total commercial real estate | 1,997 | 2,094 | — | 1,856 | 42 | |||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Commercial and industrial | 75 | 75 | — | 38 | — | |||||||||||||||
Tax-free loans | — | — | — | — | — | |||||||||||||||
Agriculture loans | — | — | — | — | — | |||||||||||||||
Total commercial and industrial | 75 | 75 | — | 38 | — | |||||||||||||||
Total | 2,072 | 2,169 | — | 1,894 | 42 |
18
ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
The following table details activity in the allowance for loan losses by portfolio segment for the ninethree and six months ended SeptemberJune 30, 2017:2020:
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance - December 31, 2016 | 3,795 | 1,652 | 1,552 | 82 | 481 | 7,562 | ||||||||||||||||||
Charge-offs | — | — | (7 | ) | (4 | ) | — | (11 | ) | |||||||||||||||
Recoveries | — | 20 | 9 | 2 | — | 31 | ||||||||||||||||||
Provision | (275 | ) | 163 | 95 | 3 | 104 | 90 | |||||||||||||||||
Balance - March 31, 2017 | 3,520 | 1,835 | 1,649 | 83 | 585 | 7,672 | ||||||||||||||||||
Charge-offs | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||
Recoveries | — | — | 10 | 3 | — | 13 | ||||||||||||||||||
Provision | 208 | 83 | (42 | ) | 36 | (165 | ) | 120 | ||||||||||||||||
Ending Balance - June 30, 2017 | 3,728 | 1,918 | 1,617 | 119 | 420 | 7,802 | ||||||||||||||||||
Charge-offs | — | — | (7 | ) | (9 | ) | — | (16 | ) | |||||||||||||||
Recoveries | — | — | 2 | — | — | 2 | ||||||||||||||||||
Provision | 31 | (16 | ) | 201 | (18 | ) | 42 | 240 | ||||||||||||||||
Ending Balance - September 30, 2017 | 3,759 | 1,902 | 1,813 | 92 | 462 | 8,028 |
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Allowance for credit losses: | ||||||||||||||||||
Beginning balance - December 31, 2019 | 4,319 | 2,855 | 1,784 | 41 | 448 | 9,447 | ||||||||||||
Charge-offs | — | — | — | (6 | ) | — | (6 | ) | ||||||||||
Recoveries | 11 | — | 1 | — | — | 12 | ||||||||||||
Provision | 252 | 296 | 171 | 21 | (390 | ) | 350 | |||||||||||
Balance - March 31, 2020 | 4,582 | 3,151 | 1,956 | 56 | 58 | 9,803 | ||||||||||||
Charge-offs | — | — | — | (10 | ) | — | (10 | ) | ||||||||||
Recoveries | — | — | 1 | 1 | — | 2 | ||||||||||||
Provision | 356 | 146 | 175 | 5 | 293 | 975 | ||||||||||||
Ending Balance - June 30, 2020 | 4,938 | 3,297 | 2,132 | 52 | 351 | 10,770 |
During the six months ended June 30, 2020, management charged off $16,000 in loans while recovering $14,000 and added $1,325,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 3.3% as of June 30, 2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.
During the ninesix months ended SeptemberJune 30, 2017,2020, net provision expenses wereexpense was recorded for all sectors. The higher provision was primarily caused by increasing the consumer real estate, commercialqualitative factors across all industry lines to various degrees as a result of the impact and industrial,effect from COVID-19 and consumer loan segments, withthe declining economic conditions. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2020, so the provision expense was primarily related to this change in economic conditions and potential for credit provision recorded in the commercial real estate loan category.declines moving forward. The decrease in thetotal amount of allowance for loan losses allocated to commercial real estate was primarily due to a material drop in commercial real estatesubstandard loans overat the first nine monthsend of 2017. As of December 31, 2016, 50.2% of the Corporation’s allowance for loan losses was allocated to commercial real estate loans, which consisted of 48.2% of all loans. As of September 30, 2017, 46.8 % of the allowance was allocated to commercial real estate loans which consisted of 44.5% of total loans.
Delinquency rates among the Corporation’s loan pools remain very low. Additionally, there have been no charge-offs for three of our loan pools over the past three years. However, classified loans experienced a large increase in the first nine months of 2017. The Corporation’s classified loans were relatively low and stable throughout 2016 but in the first quarter of 2017 increased by $7.4 million, from $14.2 million to $21.6 million. Two large loan relationships, one consisting of business loans and mortgages, and the other agriculture mortgages were classified as substandard in the first quarter. In the second quarter of 2017, classified loans increased another $4.0 million,2020 was slightly higher resulting in slightly more provision expense.
As of June 30, 2020, the Corporation’s total delinquencies were 0.41%, a decline from 0.91% at December 31, 2019. The Corporation’s total delinquencies continue to $25.6 million. This increasecompare favorably to the national uniform bank performance group, which was primarily caused by four loan customers being classifiedat 1.05% as substandard, two being commercial and two agricultural-related. However, in the third quarter of 2017, classified loans decreased by $4.6 million, bringing the outstanding balance to $21.0 million. Currently, the agricultural lending sector remains under stress due to weak milk and egg prices impacting farmers. December 31, 2019.
Outside of the commercial loan relationships noted above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the health ofpotential credit risks across the Corporation’s commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Commercial borrowers that have exposure to agriculture are subject to more financial stress in the current environment. Qualitative factors regarding trends invarious loan types. In addition, the loan portfolio as well as national and local economic conditions were increasedis sectored out into nine different categories to evaluate these qualitative factors. A total score of the qualitative factors for severaleach loan poolssector is calculated to utilize in the third quarterallowance for loan loss calculation. The agricultural dairy sector carries the highest level of 2017. The increases in classified loans along with higher qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused management to record provision expense of $450,000 through September 30, 2017 despite the continuation of very low levels of delinquencies and charge-offs.a sharp decline in milk prices.
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The following table details activity in the allowance for loan losses by portfolio segment for the ninesix months ended SeptemberJune 30, 2016:2019:
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Beginning balance - December 31, 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 | ||||||||||||||||||
Charge-offs | — | — | — | (2 | ) | — | (2 | ) | ||||||||||||||||
Recoveries | — | — | 159 | — | — | 159 | ||||||||||||||||||
Provision | 255 | 105 | (271 | ) | 6 | (45 | ) | 50 | ||||||||||||||||
Ending Balance - June 30, 2016 | 3,783 | 1,473 | 1,261 | 71 | 659 | 7,247 | ||||||||||||||||||
Charge-offs | — | — | (19 | ) | (10 | ) | — | (29 | ) | |||||||||||||||
Recoveries | — | 1 | 9 | 7 | — | 17 | ||||||||||||||||||
Provision | 95 | 95 | 101 | 20 | (111 | ) | 200 | |||||||||||||||||
Ending Balance - September 30, 2016 | 3,878 | 1,569 | 1,352 | 88 | 548 | 7,435 |
Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | |||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Allowance for credit losses: | ||||||||||||||||||
Beginning balance - December 31, 2018 | 4,296 | 2,408 | 1,428 | 102 | 432 | 8,666 | ||||||||||||
Charge-offs | — | — | — | (17 | ) | — | (17 | ) | ||||||||||
Recoveries | 44 | — | 13 | — | — | 57 | ||||||||||||
Provision | 148 | (140 | ) | 128 | 16 | 28 | 180 | |||||||||||
Balance - March 31, 2019 | 4,488 | 2,268 | 1,569 | 101 | 460 | 8,886 | ||||||||||||
Charge-offs | — | — | — | (6 | ) | — | (6 | ) | ||||||||||
Recoveries | 43 | — | 1 | 3 | — | 47 | ||||||||||||
Provision | (114 | ) | 122 | (204 | ) | (22 | ) | 248 | 30 | |||||||||
Balance - June 30, 2019 | 4,417 | 2,390 | 1,366 | 76 | 708 | 8,957 |
During the six months ended June 30, 2019, management charged off $23,000 in loans while recovering $104,000 and added $210,000 to the provision. The unallocated portion of the allowance increased from 5.3% as of December 31, 2018, and 5.5% as of March 31, 2019, to 8.6% as of June 30, 2019.
During the ninesix months ended SeptemberJune 30, 2016, a credit2019, net provision expense was recorded for the commercial real estate segment, while net credit provisions were recorded in the consumer real estate, commercial and industrial, segment with provision expense recorded in all other loan categories. For the entire portfolio, $200,000 of additional provision expenseand consumer segments. This was neededdue to continued very low historical loss experience for these three segments. In the first nine monthshalf of 2016. Delinquency rates among most2019, management adjusted the qualitative factors across the loan pools remained very low withportfolio to better reflect the total amount of delinquent loans lower on September 30, 2016 than on December 31, 2015, even withforward risk in each loan segment. This resulted in a slightly larger loan balances. The Corporation received $157,000 more recoveries than charge-offsallowance for the nine months ended September 30, 2016. These favorable results acted to offset higher levels of classifiedcommercial real estate loans and non-accruals resultingslightly lower allowances for consumer real estate, commercial and industrial, and consumer, while the unallocated portion of the allowance increased. The Corporation’s commercial real estate allocation for credit losses was reduced by $114,000 in $200,000the second quarter of additional provision being sufficient2019, influenced by a reduction in real estate secured agricultural delinquencies that declined materially since March 31, 2019. The allowance for credit losses on consumer real estate grew in the second quarter of 2019 relative to cover the sharper growth in this segment offset partially by lower delinquencies than March 31, 2019 but unchanged from the loan portfolio. Changesprior June 30, 2019. The Commercial and industrial allocation for credit losses was reduced by $204,000 in qualitative factors were minimal during the thirdsecond quarter and the provision expense recorded was mostly to account for significant loan growth during the year-to-date period.of 2019 as delinquencies declined significantly.
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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 SeptemberJune 30, 20172020 and December 31, 2016:2019:
ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE
(DOLLARS IN THOUSANDS)
As of September 30, 2017: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 98 | — | — | — | — | 98 | ||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 3,661 | 1,902 | 1,813 | 92 | 462 | 7,930 | ||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Ending balance | 259,499 | 238,432 | 79,843 | 5,166 | 582,940 | |||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 1,806 | — | 338 | — | 2,144 | |||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 257,693 | 238,432 | 79,505 | 5,166 | 580,796 | |||||||||||||||||||
As of December 31, 2016: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | — | — | — | — | — | — | ||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 3,795 | 1,652 | 1,552 | 82 | 481 | 7,562 | ||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||
Ending balance | 275,067 | 213,771 | 77,192 | 4,537 | 570,567 | |||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||||||||
for impairment | 1,894 | — | 75 | — | 1,969 | |||||||||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||||||||
for impairment | 273,173 | 213,771 | 77,117 | 4,537 | 568,598 |
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As of June 30, 2020: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Allowance for credit losses: | ||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||
for impairment | 33 | — | 31 | — | — | 64 | ||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||
for impairment | 4,905 | 3,297 | 2,101 | 52 | 351 | 10,706 | ||||||||||||
Loans receivable: | ||||||||||||||||||
Ending balance | 321,318 | 341,967 | 167,647 | 5,061 | 835,993 | |||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||
for impairment | 2,305 | — | 521 | — | 2,826 | |||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||
for impairment | 319,013 | 341,967 | 167,126 | 5,061 | 833,167 |
4.
As of December 31, 2019: | Commercial Real Estate | Consumer Real Estate | Commercial and Industrial | Consumer | Unallocated | Total | ||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||
Allowance for credit losses: | ||||||||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||
for impairment | 109 | — | 80 | — | — | 189 | ||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||
for impairment | 4,210 | 2,855 | 1,704 | 41 | 448 | 9,258 | ||||||||||||
Loans receivable: | ||||||||||||||||||
Ending balance | 311,788 | 339,255 | 95,211 | 5,416 | 751,670 | |||||||||||||
Ending balance: individually evaluated | ||||||||||||||||||
for impairment | 3,446 | — | 538 | — | 3,984 | |||||||||||||
Ending balance: collectively evaluated | ||||||||||||||||||
for impairment | 308,342 | 339,255 | 94,673 | 5,416 | 747,686 |
5. Fair Value Presentation
U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:
Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
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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 presentprovide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the consolidated balance sheets at their fair valueConsolidated Balance Sheets as of SeptemberJune 30, 2017,2020, and December 31, 2016,2019, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||
June 30, 2020 | ||||||||||||
Level I | Level II | Level III | Total | |||||||||
$ | $ | $ | $ | |||||||||
U.S. government agencies | — | 8,379 | — | 8,379 | ||||||||
U.S. agency mortgage-backed securities | — | 72,553 | — | 72,553 | ||||||||
U.S. agency collateralized mortgage obligations | — | 46,562 | — | 46,562 | ||||||||
Asset-backed securities | — | 31,951 | — | 31,951 | ||||||||
Corporate bonds | — | 63,431 | — | 63,431 | ||||||||
Obligations of states & political subdivisions | — | 111,811 | — | 111,811 | ||||||||
Equity securities | 6,775 | — | — | 6,775 | ||||||||
Total securities | 6,775 | 334,687 | — | 341,462 |
Fair Value Measurements:
ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
$ | $ | $ | $ | |||||||||||||
U.S. government agencies | — | 28,647 | — | 28,647 | ||||||||||||
U.S. agency mortgage-backed securities | — | 53,583 | — | 53,583 | ||||||||||||
U.S. agency collateralized mortgage obligations | — | 54,038 | — | 54,038 | ||||||||||||
Corporate bonds | — | 57,136 | — | 57,136 | ||||||||||||
Obligations of states & political subdivisions | — | 121,673 | — | 121,673 | ||||||||||||
Marketable equity securities | 5,618 | — | — | 5,618 | ||||||||||||
Total securities | 5,618 | 315,077 | — | 320,695 |
On SeptemberJune 30, 2017,2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of SeptemberJune 30, 2017,2020, the CRA fund investments had a $5,250,000$6,148,000 book and fair market value and the bank stock portfolio had a book value of $307,000,$829,000, and fair market value of $368,000.
22
ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
Fair Value Measurements:
ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
December 31, 2016 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
$ | $ | $ | $ | |||||||||||||
U.S. government agencies | — | 32,261 | — | 32,261 | ||||||||||||
U.S. agency mortgage-backed securities | — | 55,869 | — | 55,869 | ||||||||||||
U.S. agency collateralized mortgage obligations | — | 37,936 | — | 37,936 | ||||||||||||
Corporate bonds | — | 52,091 | — | 52,091 | ||||||||||||
Obligations of states & political subdivisions | — | 124,430 | — | 124,430 | ||||||||||||
Marketable equity securities | 5,524 | — | — | 5,524 | ||||||||||||
Total securities | 5,524 | 302,587 | — | 308,111 |
On December 31, 2016, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. As of December 31, 2016, the Corporation’s CRA fund investments had a book and fair market value of $5,250,000 and the bank stock portfolio had a book value of $219,000 and a market value of $274,000 utilizing level I pricing.$627,000.
Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. There were
22
ASSETS MEASURED ON A RECURRING BASIS | ||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||
December 31, 2019 | ||||||||||||
Level I | Level II | Level III | Total | |||||||||
$ | $ | $ | $ | |||||||||
U.S. government agencies | — | 32,624 | — | 32,624 | ||||||||
U.S. agency mortgage-backed securities | — | 48,626 | — | 48,626 | ||||||||
U.S. agency collateralized mortgage obligations | — | 60,253 | — | 60,253 | ||||||||
Asset-backed securities | — | 23,262 | — | 23,262 | ||||||||
Corporate bonds | — | 54,880 | — | 54,880 | ||||||||
Obligations of states & political subdivisions | — | 88,452 | — | 88,452 | ||||||||
Equity securities | 6,708 | — | — | 6,708 | ||||||||
Total securities | 6,708 | 308,097 | — | 314,805 |
On December 31, 2019, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities astraded 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, 2017 or December 31, 2016.2019, the CRA fund investments had a $6,071,000 book and market value and the bank stocks had a book value of $614,000 and a market value of $637,000.
The following tables presentprovide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of SeptemberJune 30, 20172020 and December 31, 2016,2019, by level within the fair value hierarchy:
23
ASSETS MEASURED ON A NONRECURRING BASIS
(Dollars in Thousands)
September 30, 2017 | ||||||||||||||||
Level I $ | Level II $ | Level III $ | Total $ | |||||||||||||
Assets: | ||||||||||||||||
Impaired Loans | — | — | 2,046 | 2,046 | ||||||||||||
Total | — | — | 2,046 | 2,046 |
June 30, 2020 | ||||||||||||
Level I | Level II | Level III | Total | |||||||||
$ | $ | $ | $ | |||||||||
Assets: | ||||||||||||
Impaired Loans | $ | — | $ | — | $ | 2,762 | $ | 2,762 | ||||
Total | $ | — | $ | — | $ | 2,762 | $ | 2,762 |
December 31, 2019 | ||||||||||||||||||||||||||||
December 31, 2016 | Level I | Level II | Level III | Total | ||||||||||||||||||||||||
Level I $ | Level II $ | Level III $ | Total $ | $ | $ | $ | $ | |||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||
Impaired Loans | — | — | 1,969 | 1,969 | $ | — | $ | — | $ | 3,795 | $ | 3,795 | ||||||||||||||||
Total | — | — | 1,969 | 1,969 | $ | — | $ | — | $ | 3,795 | $ | 3,795 |
The Corporation had a total of $2,144,000$2,826,000 of impaired loans as of SeptemberJune 30, 2017,2020, with $98,000$64,000 of specific allocation against these loans and $1,969,000$3,984,000 of impaired loans as of December 31, 2016,2019, with no$189,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral. The Corporation had no OREO (Other Real Estate Owned) assets as of December 31, 2016 and September 30, 2017.
23
ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:
24
QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS | |||||
(DOLLARS IN THOUSANDS) | |||||
Fair Value | Valuation | Unobservable | Range | ||
Estimate | Techniques | Input | (Weighted Avg) | ||
Impaired loans | | Appraisal of | Appraisal | -20% (-20%) | |
collateral (1) | adjustments (2) | ||||
Liquidation | -10% (-10%) | ||||
expenses (2) | |||||
December 31, | |||||
Fair Value | Valuation | Unobservable | Range | ||
Estimate | Techniques | Input | (Weighted Avg) | ||
Impaired loans | Appraisal of | Appraisal | -20% (-20%) | ||
collateral (1) | adjustments (2) | ||||
Liquidation | -10% (-10%) | ||||
expenses (2) |
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
2425
Interim Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimatetable provides the fair value ofcarrying amount for each class of financial instrument:
Cashassets 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.
Mortgage Servicing Assets
The fair value of mortgage servicing assets is based on the present value of estimated future cash flows and estimates the price at which a portfolio would prospectively be sold.
Accrued Interest Receivable
The carrying amount of accrued interest receivable is a reasonable estimate of fair value.
Bank Owned Life Insurance
Fair value is equal to the cash surrender value of the life insurance policies.
Deposits
The fair value of non-interest bearing demand deposit accounts and interest bearing demand, savings, and money market deposit accounts is based on the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated by discounting back the expected cash flows of the time deposit using market interest rates from the Corporation’s greater market area currently offered for similar time deposits with similar remaining maturities.
Borrowings
The carrying amount of short-term borrowing is a reasonable estimate of fair value. The fair value of long-term borrowing is estimated by comparing the rate currently offered for the same type of borrowing instrument with a matching remaining term.
Accrued Interest Payable
The carrying amount of accrued interest payable is a reasonable estimate of fair value.
Firm Commitments to Extend Credit, Lines of Credit, and Open Letters of Credit
These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit,liabilities and the fair value determined by discountingfor certain financial instruments that are not required to be measured or reported at fair value on the remaining contractual fee over the termConsolidated Balance Sheets as 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.June 30, 2020 and December 31, 2019:
FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE
(DOLLARS IN THOUSANDS)
June 30, 2020 | |||||||||||||||
Quoted Prices in | |||||||||||||||
Active Markets | Significant Other | Significant | |||||||||||||
for Identical | Observable | Unobservable | |||||||||||||
Carrying | Assets | Inputs | Inputs | ||||||||||||
Amount | Fair Value | (Level 1) | (Level II) | (Level III) | |||||||||||
$ | $ | $ | $ | $ | |||||||||||
Financial Assets: | |||||||||||||||
Cash and cash equivalents | 61,224 | 61,224 | 61,224 | — | — | ||||||||||
Regulatory stock | 6,942 | 6,942 | 6,942 | — | — | ||||||||||
Loans held for sale | 2,295 | 2,295 | 2,295 | — | — | ||||||||||
Loans, net of allowance | 825,199 | 833,431 | — | — | 833,431 | ||||||||||
Mortgage servicing assets | 863 | 898 | — | — | 898 | ||||||||||
Accrued interest receivable | 4,164 | 4,164 | 4,164 | — | — | ||||||||||
Bank owned life insurance | 29,214 | 29,214 | 29,214 | — | — | ||||||||||
Financial Liabilities: | |||||||||||||||
Demand deposits | 466,392 | 466,392 | 466,392 | — | — | ||||||||||
Interest-bearing demand deposits | 41,083 | 41,083 | 41,083 | — | — | ||||||||||
NOW accounts | 104,594 | 104,594 | 104,594 | — | — | ||||||||||
Money market deposit accounts | 123,212 | 123,212 | 123,212 | — | — | ||||||||||
Savings accounts | 246,763 | 246,763 | 246,763 | — | — | ||||||||||
Time deposits | 125,870 | 128,724 | — | — | 128,724 | ||||||||||
Total deposits | 1,107,914 | 1,110,768 | 982,044 | — | 128,724 | ||||||||||
Long-term debt | 65,072 | 61,612 | — | — | 61,612 | ||||||||||
Accrued interest payable | 410 | 410 | 410 | — | — |
2526
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Corporation's financial instruments at September 30, 2017 and December 31, 2016, are summarized as follows:
FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE OF FINANCIAL INSTRUMENTS
(DOLLARS IN THOUSANDS)
September 30, 2017 | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Assets | Inputs | Inputs | |||||||||||||||||
Amount | Fair Value | (Level 1) | (Level II) | (Level III) | ||||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | 44,240 | 44,240 | 44,240 | — | — | |||||||||||||||
Securities available for sale | 320,695 | 320,695 | 5,618 | 315,077 | — | |||||||||||||||
Regulatory stock | 6,139 | 6,139 | 6,139 | — | — | |||||||||||||||
Loans held for sale | 3,809 | 3,809 | 3,809 | — | — | |||||||||||||||
Loans, net of allowance | 576,049 | 573,681 | — | — | 573,681 | |||||||||||||||
Mortgage servicing assets | 592 | 678 | — | — | 678 | |||||||||||||||
Accrued interest receivable | 3,391 | 3,391 | 3,391 | — | — | |||||||||||||||
Bank owned life insurance | 25,161 | 25,161 | 25,161 | — | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Demand deposits | 301,978 | 301,978 | 301,978 | — | — | |||||||||||||||
Interest-bearing demand deposits | 19,279 | 19,279 | 19,279 | — | — | |||||||||||||||
NOW accounts | 78,061 | 78,061 | 78,061 | — | — | |||||||||||||||
Money market deposit accounts | 99,235 | 99,235 | 99,235 | — | — | |||||||||||||||
Savings accounts | 188,015 | 188,015 | 188,015 | — | — | |||||||||||||||
Time deposits | 152,257 | 153,163 | — | — | 153,163 | |||||||||||||||
Total deposits | 838,825 | 839,731 | 686,568 | — | 153,163 | |||||||||||||||
Long-term debt | 68,350 | 68,429 | — | — | 68,429 | |||||||||||||||
Accrued interest payable | 391 | 391 | 391 | — | — |
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ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
FAIR VALUE OF FINANCIAL INSTRUMENTS
(DOLLARS IN THOUSANDS)
December 31, 2016 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||
Amount | Fair Value | (Level 1) | (Level II) | (Level III) | Amount | Fair Value | (Level 1) | (Level II) | (Level III) | ||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Financial Assets: | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 45,632 | 45,632 | 45,632 | — | — | 41,053 | 41,053 | 41,053 | — | — | |||||||||||||||||||||||||
Securities available for sale | 308,111 | 308,111 | 5,524 | 302,587 | — | ||||||||||||||||||||||||||||||
Regulatory stock | 5,372 | 5,372 | 5,372 | — | — | 7,291 | 7,291 | 7,291 | — | — | |||||||||||||||||||||||||
Loans held for sale | 2,552 | 2,552 | 2,552 | — | — | 2,342 | 2,342 | 2,342 | — | — | |||||||||||||||||||||||||
Loans, net of allowance | 564,005 | 563,418 | — | — | 563,418 | 744,171 | 759,011 | — | — | 759,011 | |||||||||||||||||||||||||
Mortgage servicing assets | 410 | 531 | — | — | 531 | 892 | 1,049 | — | — | 1,049 | |||||||||||||||||||||||||
Accrued interest receivable | 3,750 | 3,750 | 3,750 | — | — | 3,768 | 3,768 | 3,768 | — | — | |||||||||||||||||||||||||
Bank owned life insurance | 24,687 | 24,687 | 24,687 | — | — | 28,818 | 28,818 | 28,818 | — | — | |||||||||||||||||||||||||
Financial Liabilities: | |||||||||||||||||||||||||||||||||||
Demand deposits | 280,543 | 280,543 | 280,543 | — | — | 363,857 | 363,857 | 363,857 | — | — | |||||||||||||||||||||||||
Interest-bearing demand deposits | 20,108 | 20,108 | 20,108 | — | — | 25,171 | 25,171 | 25,171 | — | — | |||||||||||||||||||||||||
NOW accounts | 85,540 | 85,540 | 85,540 | — | — | 96,941 | 96,941 | 96,941 | — | — | |||||||||||||||||||||||||
Money market deposit accounts | 93,943 | 93,943 | 93,943 | — | — | 141,649 | 141,649 | 141,649 | — | — | |||||||||||||||||||||||||
Savings accounts | 175,753 | 175,753 | 175,753 | — | — | 211,285 | 211,285 | 211,285 | — | — | |||||||||||||||||||||||||
Time deposits | 161,604 | 163,464 | — | — | 163,464 | 135,185 | 136,781 | — | — | 136,781 | |||||||||||||||||||||||||
Total deposits | 817,491 | 819,351 | 655,887 | — | 163,464 | 974,088 | 975,684 | 838,903 | — | 136,781 | |||||||||||||||||||||||||
Short-term borrowings | 8,329 | 8,329 | 8,329 | — | — | 200 | 200 | 200 | — | — | |||||||||||||||||||||||||
Long-term debt | 61,257 | 61,372 | — | — | 61,372 | 77,872 | 76,825 | — | — | 76,825 | |||||||||||||||||||||||||
Accrued interest payable | 384 | 384 | 384 | — | — | 521 | 521 | 521 | — | — |
6. Commitments and Contingent Liabilities
In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of SeptemberJune 30, 2017,2020, firm loan commitments were $40.5$64.0 million, unused lines of credit were $209.3$305.4 million, and open letters of credit were $11.1$8.8 million. The total of these commitments was $260.9$378.2 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.
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7. Accumulated Other Comprehensive Income (Loss)
The activity in accumulated other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 is as follows:
ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)
(DOLLARS IN THOUSANDS)
Unrealized | ||||
Gains (Losses) | ||||
on Securities | ||||
Available-for-Sale | ||||
$ | ||||
Balance at December 31, 2019 | 1,600 | |||
Other comprehensive loss before reclassifications | (274 | ) | ||
Amount reclassified from accumulated other comprehensive income | (223 | ) | ||
Period change | (497 | ) | ||
1,103 | ||||
Other comprehensive income before reclassifications | ||||
Amount reclassified from accumulated other comprehensive income | ( | ) | ||
Period change | ||||
Balance at | 4,522 | |||
Balance at December 31, 2018 | ( | ) | ||
Other comprehensive income before reclassifications | ||||
Amount reclassified from accumulated other comprehensive income | ( | ) | ||
Period change | ||||
Balance at | March 31, 2019 | ( | ||
) | ||||
Other comprehensive income before reclassifications | ||||
Amount reclassified from accumulated other comprehensive income | ( | ) | ||
Period change | ||||
Balance at June 30, | ||||
(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of 34%21%.
(2) Amounts in parentheses indicate debits.
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DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)
(DOLLARS IN THOUSANDS)
DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1) | 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 Three Months | For the Three Months | |||||||||||||
Ended September 30, | Ended June 30, | |||||||||||||
2017 | 2016 | Affected Line Item in the | 2020 | 2019 | Affected Line Item in the | |||||||||
$ | $ | Consolidated Statements of Income | $ | Consolidated Statements of Income | ||||||||||
Securities available-for-sale: | ||||||||||||||
Net securities gains reclassified into earnings | 170 | 464 | Gains on securities transactions, net | |||||||||||
Net securities gains, | 367 | 106 | Gains on the sale of | |||||||||||
reclassified into earnings | debt securities, net | |||||||||||||
Related income tax expense | (58 | ) | (158 | ) | Provision for federal income taxes | (77) | (22) | Provision for federal income taxes | ||||||
Net effect on accumulated other comprehensive | ||||||||||||||
income for the period | 112 | 306 | ||||||||||||
income (loss) for the period | 290 | 84 |
(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 Six Months | |||||||||||||
Ended September 30, | Ended June 30, | |||||||||||||
2017 | 2016 | Affected Line Item in the | 2020 | 2019 | Affected Line Item in the | |||||||||
$ | $ | Consolidated Statements of Income | $ | Consolidated Statements of Income | ||||||||||
Securities available-for-sale: | ||||||||||||||
Net securities gains reclassified into earnings | 417 | 2,130 | Gains on securities transactions, net | |||||||||||
Net securities gains, | 649 | 187 | Gains on the sale of | |||||||||||
reclassified into earnings | debt securities, net | |||||||||||||
Related income tax expense | (142 | ) | (724 | ) | Provision for federal income taxes | (136) | (39) | Provision for federal income taxes | ||||||
Net effect on accumulated other comprehensive | ||||||||||||||
income for the period | 275 | 1,406 | ||||||||||||
income (loss) for the period | 513 | 148 |
(1) Amounts in parentheses indicate debits.
8. Recently Issued Accounting StandardsLeases
In May 2014,A lease is defined as a contract, or part of a contract, that conveys the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is thatright to control the use of identified property, plant or equipment for a company will recognize revenue to depict the transferperiod of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitledtime in exchange for those goods or services. In addition, this Update specifiesconsideration. On January 1, 2019, the Corporation adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 primarily affected the accounting treatment for certain costs to obtain or fulfill a contractoperating lease agreements in which the Corporation is the lessee.
All of these leases in which the Corporation is the lessee are comprised of real estate property for branches and office space with a customer and expands disclosure requirements for revenue recognition. Subsequently, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.terms extending through 2026. 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. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Corporation’s financial instrumentsleases are classified as operating leases, and therefore, were previously not withinrecognized on the scopeCorporation’s Consolidated Balance Sheets. With the adoption of Topic 606. However, we do expect that842, operating lease agreements are required to be recognized on the standard will result in new disclosure requirements, which are currently being evaluated.Consolidated Balance Sheets as a right-of use (“ROU”) asset and a corresponding lease liability.
The following table represents the Consolidated Balance Sheet classification of the Corporation’s ROU assets and lease liabilities.
29
Lease Consolidated Balance Sheets Classification | |||||||
(Dollars in Thousands) | Classification | June 30, 2020 | December 31, 2019 | ||||
Lease Right-of-Use Assets | |||||||
Operating lease right-of use assets | Other Assets | $ | 819 | 908 | |||
Lease Liabilities | |||||||
Operating lease liabilties | Other Liabilities | $ | 828 | 916 |
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 consolidationThe calculated amount 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)ROU assets 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 changelease liabilities in the fair valuetable above are impacted by the length 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. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 monthsand the discount rate used to determine the present value of the minimum lease payments. The Corporation’s lease agreements often include one or less and (b) there is not anmore options to renew at the Corporation’s discretion. If at lease inception, the Corporation considers the exercising of a renewal option to purchase the underlying asset that the lessee isbe reasonably certain, to exercise. For short-term leases, lessees may elect to recognizethe Corporation will include the extended term in the calculation of the ROU asset and lease payments overliability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease termwhenever this rate is readily determinable. As the rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a straight-line basis.collateralized basis, over a similar term. For public business entities,operating leases existing prior to January 1, 2019, the amendments in this Update are effectiverate 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 permittedremaining lease term as of January 1, 2019 was used.
June 30, 2020 | December 31, 2019 | |||||||
Weighted-average remaining lease term | ||||||||
Operating leases | 4.8 years | 5.3 years | ||||||
Weighted-average discount rate | ||||||||
Operating leases | 3.10% | 3.09% |
The following table represents lease costs and other lease information. As the beginningCorporation elected, for all classes of an interim or annual reporting period. The Corporation is currently assessingunderlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the Corporation’s balance sheet is estimated to result in less than a one percent increase in assetsvariable lease cost primarily represents variable payments such as common area maintenance and liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.utilities.
In March 2016, the FASB issued ASU 2016-06,Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuersFuture minimum payments for operating leases with initial or remaining terms of one year 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 paymentmore as 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 otherthan 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.June 30, 2020 were as follows:
Lease Payment Schedule | |||
(Dollars in Thousands) | Operating Leases | ||
Twelve Months Ended: | |||
June 30, 2021 | $ | 202 | |
June 30, 2022 | 197 | ||
June 30, 2023 | 150 | ||
June 30, 2024 | 155 | ||
June 30, 2025 | 155 | ||
Thereafter | 35 | ||
Total Future Minimum Lease Payments | 894 | ||
Amounts Representing Interests | (66 | ) | |
Present Value of Net Future Minimum Lease Payments | $ | 828 |
30
In March 2016,9. Change in Capital Structure
On April 17, 2019 ENB Financial Corp announced 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 scopeBoard of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an outputDirectors declared a two-for-one stock split of the entity’s ordinary activities) in exchangeCorporation’s issued and outstanding common stock pursuant to which one (1) additional share of common stock was issued for consideration. The amendments in this Update do not change the core principleeach share of common stock held by shareholders of record as of the guidance in Topic 606; they simply clarifyclose of business on May 31, 2019. The additional shares were issued on June 28, 2019. The stock split was effected pursuant to articles of amendment to the implementation guidance on principal versus agent considerations. The amendments in this Update are intendedarticles of incorporation to improvereduce the operability and understandabilitypar value of the implementation guidance on principal versus agent considerations. The amendments in this Update affectcommon stock from $0.20 to $0.10 and increase the guidance in ASU 2014-09,Revenueauthorized shares of common stock proportionately from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have12,000,000 to 24,000,000. Per share data reflected on the Corporation’s financial positionconsolidated statements of income are restated as if the stock split had occurred at the beginning of the earliest period presented.
10. Risks and Uncertainties
COVID-19 Update
The following table provides information with respect to our commercial loans by type at June 30, 2020.
At Risk
(Dollars in Thousands) | # | $ | $ | % | |||||||||
Number | Total | Principal | of Total | ||||||||||
of | Loan | Balance | Loan | ||||||||||
Loan Type | Loans | Exposure | of Loans | Balance | |||||||||
Lessors of Nonresidential Buildings | 151 | 62,901 | 57,085 | 6.83% | |||||||||
Lessors of Residential Buildings | 225 | 44,104 | 39,395 | 4.71% | |||||||||
Specialized Freight | 30 | 16,049 | 11,733 | 1.40% | |||||||||
Residential Remodelers | 99 | 10,256 | 4,158 | 0.50% | |||||||||
New Single Family Housing Construction | 58 | 8,965 | 4,189 | 0.50% | |||||||||
Passenger Car Leasing | 136 | 8,808 | 8,789 | 1.05% | |||||||||
Hotels | 12 | 7,843 | 3,138 | 0.38% | |||||||||
Religious Organizations | 58 | 7,365 | 6,269 | 0.75% | |||||||||
Car Washes | 11 | 6,959 | 5,286 | 0.63% | |||||||||
Concrete & Structural Contrators | 27 | 6,875 | 4,767 | 0.57% | |||||||||
Other | 71 | 14,945 | 8,597 | 1.03% | |||||||||
Totals | 878 | 195,070 | 153,406 | 18.35% |
The Corporation has a diversified commercial loan portfolio that is consistent with the diversified economies of Lancaster, Lebanon and Berks Counties in Pennsylvania, the Corporation’s market area. The above chart is focused on loan types that are commonly known to be at risk or resultsnegatively impacted by the COVID-19 pandemic and its effects. The Corporation’s largest exposure to at risk loan types are loans on leased commercial property and loans on residential investment properties. The Corporation has a relatively low exposure to the hospitality industry, including restaurants. Single loan type exposures falling under the other category do not exceed 0.5% of operations.total loans and include loan types such as site preparation contractors, fuel dealers, and recreational centers. The above levels of exposure to these at risk loan types have not had significant movements from 2019 to 2020. Management does not expect any significant movements in these exposures going forward.
Paycheck Protection Program (PPP)
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, providing over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was authorized to originate PPP loans.
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In terms of qualifying for a PPP loan, an eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10 million. The PPP loans have the following terms: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is eligible to be reduced by the amount of loan forgiveness available under the PPP, provided the employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses such as utilities.
In 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 withininitial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the scopeend 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)April. Congress then passed an additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degreeallocation 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 requirementsfunds for the amendments inPPP loans, allowing a second round of applications to begin. As of June 30, 2020, the Corporation had approved and originated 951 PPP loans totaling $79,710,000 with a current balance of $76,068,000. Management’s focus has been to serve the customers and market area that the Corporation serves. Subsequent to June 30, 2020, but prior to the filing of this Update arereport, the same as the effective dateCorporation has approved and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14,Revenue from Contractsoriginated 990 PPP loans totaling $80,821,000 with Customers (Topic 606):Deferrala current balance of the Effective Date, defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.$77,180,000.
In May 2016,accordance with the FASB issued ASU 2016-12,Revenue from ContractsSBA terms and conditions on these PPP loans, the Corporation expects to receive approximately $3.25 million in fees associated with Customers (Topic 606), which among other things clarifies the objectiveprocessing of these loans. Management received the first $3.15 million in fees in June associated with processing the first $76 million of PPP loans submitted, however all fee income is being deferred over the expected life of each PPP loan. Management will receive the remainder of the collectability criterionfee income as much smaller final batches of PPP loans are processed. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the vast majority of the Corporation’s PPP loans will carry a two year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. It is expected that the vast majority of these PPP borrowers will provide the necessary support in Topic 606,order to have their principal balances forgiven in a period of time significantly shorter than the two-year life of the loan.
COVID-19 Loan Forbearance Programs
As of June 30, 2020, over 300 of the Corporation’s customers had requested payment deferrals or payments of interest only on loans totaling $61.7 million, or 7.4% of the total loan portfolio. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.
Of the $61.7 million of loan balances with payments being deferred, $49.5 million, or 77.0% were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $11.9 million of residential mortgage deferrals and $200,000 of consumer loan deferrals. The vast majority all of the COVID-19 loan payment deferrals were for a 90-day period.
As of June 30, 2020, the Corporation’s delinquent, non-performing, and impaired loans were not yet materially impacted by the rapidly declining economic conditions brought on by COVID-19. However, due to the magnitude of this economic interruption, management does anticipate that these levels will rise in the third quarter of 2020, and will likely show further deterioration in the remainder of 2020 and into 2021. The significance of a credit deterioration with depend on the length of time business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management has already significantly increased the Corporation’s provision for loan losses in the second quarter of 2020, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09,Revenue from Contracts with Customers (Topic 606),qualitative factors have been increased based on predicted prolonged economic weakness, 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 for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact onmore and more borrowers.
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ENB FINANCIAL CORP
Notes to the Corporation’s financial statementsUnaudited Consolidated Interim Financial Statements
11. Recently Issued Accounting Standards
In June 2016, the FASB issued ASU 2016-13,Financial Instruments-CreditInstruments - Credit Losses: Measurement of Credit Losses on Financial Instruments(“ASU 2016-13”), which changes the impairment model for most financial assets. This ASUUpdate is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASUUpdate is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
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ENB FINANCIAL CORPNotes to the Unaudited Consolidated Interim Financial Statements
In August 2016,2018, the FASB issued ASU 2016-15,2018-13, StatementFair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of Cash Flows (Topic 230): Classificationand reasons for transfers between Level I and Level II of Certain Cash Receiptsthe fair value hierarchy; the policy for timing of transfers between levels; and Cash Payments, which addresses eight specific cash flow issues with the objectivevaluation processes for Level III fair value measurements. The Update requires disclosure of reducing diversitychanges in practice. Among these include recognizing cash paymentsunrealized gains and losses for debt prepayment or debt extinguishment as cash outflowsthe period included in other comprehensive income (loss) for financing activities; cash proceeds received fromrecurring Level III fair value measurements held at the settlementend of insurance claims should be classifiedthe reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the basisCorporation’s financial statements.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the related insurance coverage;affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and cash proceeds received frominterim periods within those fiscal years. For all other public business entities, the settlement of bank-owned life insurance policies shouldeffective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investingissued in mid-November. Topic 815, Derivatives and operating activities. The Hedging amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017,2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018,2019, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts2020. For entities that have adopted the amendments in an interim period, any adjustments should be reflectedUpdate 2017-12, the effective date is as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt allfirst annual period beginning after the issuance of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the Update. Topic 825, Financial Instruments amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.
In October 2016, the FASB issued ASU 2016-16,Income Taxes (Topic 740), which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, including2019, and interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In October 2016,May 2019, the FASB issued ASU 2016-18,2019-05, Statement of Cash Flows (Topic 230)Financial Instruments – Credit Losses, Topic 326, which requiresallows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a statementcumulative-effect adjustment to opening retained earnings as of cash flows explains the change duringdate an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the periodeffective dates and transition requirements are the same as those in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public businessASU 2016-13. For entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments arethat have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2018, and2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2019. Early adoption2022, and interim periods within those fiscal years. The final ASU is permitted, including adoptionexpected to be issued in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in thismid-November. This Update should be applied usingis not expected to have a retrospective transition method to each period presented. The Corporation is currently evaluating thesignificant impact the adoption of the standard will have on the Corporation’s statement of cash flows.financial statements.
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In March 2017,July 2019, the FASB issued ASU 2017-08, Receivables2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Nonrefundable FeesCredit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and Other Costs (Subtopic 310-20).extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The amendmentseffective dates in this Update shortenare the amortization periodsame as those applicable for ASU 2019-10. The Corporation qualifies as a smaller reporting company and does not expect to early adopt these ASUs.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortizedtax transactions, and make minor improvements to the earliest call date.codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction. The amendments do not requireUpdate also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, changeaccounting for securities held at a discount;tax law changes and year-to-date losses in interim periods, and determining how to apply the discount continuesincome tax guidance to be amortized to maturity.franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019,2021, and interim periods within fiscal years beginning after December 15, 2020.2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.
In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Corporation’s financial statements.
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted includingbefore an entity’s adoption in an interim period. If an entity early adoptsof ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim period, any adjustments should be reflected asperiods within those years. Other amendments are effective upon issuance of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.ASU. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.
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In September 2017,January 2020, the FASB issued ASU 2017-13,2020-4, Revenue RecognitionReference Rate Reform (Topic 605)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, Revenue from Contracts with Customers (Topic 606), Leases (Topic 840),to provide temporary optional expedients and Leases (Topic 842):Amendments to SEC Paragraphs Pursuantexceptions to the Staff AnnouncementU.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the July 20, 2017 EITF Meetingmodification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and Rescission of Prior SEC Staff Announcementscan make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and Observer Comments.The SEC Observer said that the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606,Revenue from Contracts with Customers, and ASC 842,Leases. The Update also supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon adoption of ASC 606 or ASC 842. This Update is not expected tothe ASU will have a significantmaterial impact on the Corporation’s financial statements.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 20162019 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 |
· | Health of the housing market |
· | Real estate valuations and its impact on the loan portfolio |
· | Interest rate and monetary policies of the Federal Reserve Board |
· | Volatility of the securities markets including the valuation of securities |
· | Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government |
· | Political changes and their impact on new laws and regulations |
· | Competitive forces |
· | Impact of mergers and acquisition activity in the local market and the effects thereof |
· | Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses |
· | Changes in customer behavior impacting deposit levels and loan demand |
· | Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters |
· | Ineffective business strategy due to current or future market and competitive conditions |
· | Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk |
· | Operation, legal, and reputation risk |
· | Results of the regulatory examination and supervision process |
· | The impact of new laws and regulations |
· | Possible |
· |
· | Local disruptions due to flooding, severe weather, or other natural disasters |
· | The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful |
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K.
Results of Operations
Overview
The first six months of 2020 were impacted by a number of unprecedented items caused by the onset of the COVID-19 pandemic. The spread of COVID-19 quickly became global and impacted the global economy. This impact was felt rather quickly due to China’s large role in the world economy, second in GDP but first in terms of supply chain impact for basic goods. The immediate impact and forward risk posed by the pandemic caused the Federal Reserve to take the unusual step of reducing the Federal Funds rate by 50 basis points to 1.25% on March 3, 2020, at a special Fed meeting ahead of the regularly scheduled March 18, 2020 meeting. On March 11, 2020, the World Health Organization (WHO) recognized COVID-19 as a pandemic. The quick further expansion of the pandemic then caused the Federal Reserve to take an unprecedented step of a second special meeting on Sunday afternoon of March 15, 2020, to further reduce the Federal Funds rate 100 basis points to 0.25%. This move took the Federal Funds rate to the same historic low of 0.25% that occurred due to the Financial Crisis of 2008. On March 15, 2020, the Fed also reduced the Discount Window rate by 150 basis points, which took this rate down to 0.25%. This move importantly gave all banks easy access to very low cost funds. On March 16, 2020, the Fed also announced action to inject more liquidity into the financial system by purchasing up to $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities. All major stock exchanges experienced dramatic sell-offs. The DOW which had peaked at 29,568 in February, closed on Friday, March 20, 2020 at 19,174, down 10,394 points, or 35%. NASDAQ was down 30%, while the S&P 500 was down 32%. Even with a significant equity market recovery since the initial impact of COVID-19, economic conditions remain uncertain. With the closing of non-essential businesses throughout various part of the country and a continued impact to consumer spending, it is anticipated that the financial impact will be long-term. The U.S. Government passed a massive Coronavirus Relief Bill that included direct small business aid for employers with fewer than 500 employees; direct deposit stimulus payments to American households; enhanced unemployment compensation benefits; and direct aid to hospitals and health care providers. Additional federal and local government support has helped to sustain businesses and individuals in the short-term, but once these programs have ended, the financial impact will be felt more fully.
The economic impact of COVID-19 had an impact on the Corporation’s financial results for the first six months of 2020 but is currently expected to have much more measurable results into the future. The Corporation recorded net income of $2,034,000$3,599,000 and $5,764,000 for the third quarter of 2017, a 2.1% decrease from the $2,077,000 earned in the third quarter of 2016, while for the nine-month period ended September 30, 2017, the Corporation recorded $5,733,000 of net income, a 1.8% increase over the same period in 2016. The Corporation experienced strong levels of growth in net interest income (NII) for both the three and nine monthsix-month periods ended SeptemberJune 30, 2017, which were largely offset by decreases2020, a 16.5% and 1.3% increase from the $3,089,000 and $5,692,000 earned during the same periods in other income and increases in interest expense. For the third quarter of 2017, the increase in operating expenses and reduction in other income outweighed the increase in NII. For the nine-month period, the Corporation’s NII improvement was more significant relative to the decrease in other income and increase in operating expenses, resulting in higher net income. Earnings2019. The earnings per share (EPS), basic and diluted, were $0.71 and $2.01$0.64 for the three and nine months ended SeptemberJune 30, 2017,2020, and $1.03 for the six months ended June 30, 2020, compared to $0.73$0.54 and $1.98$1.00 for the same periods in 2016.2019, a 18.5% and 3.0% increase, respectively. The increase in the Corporation’s 2020 earnings was caused primarily by an increase in mortgage gains and net interest income, partially offset by a significantly higher provision for loan losses. The larger percentage increases in EPS over the percentage increase in net income are the result of a reduction in average shares outstanding.
The Corporation’s NII has grown each successive quarter since the third quarter of 2016 due to three Federal Reserve interest rate increases and $1,681,000 of non-recurring amortization on U.S. sub-agency bonds recorded in the first nine months of 2016. The Corporation’s NII increased by $1,048,000,$311,000, or 15.8%3.4%, and $4,198,000,$544,000, or 23.0%3.0%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. The increase in NII primarily resulted from an increase in interest and fees on securities and dividend incomeloans of $519,000,$327,000, or 31.8%3.9%, and $2,623,000,$756,000, or 69.7%4.6%, for the three and nine-monthsix months ended June 30, 2020, compared to the same periods ended September 30, 2017.in the prior year. The portion of the increase that was caused by non-recurring amortization was $170,000 for the three-month period and $1,681,000 for the nine-month period ended September 30, 2017. The Corporation’s NII also benefited from a $459,000, or 8.0%, and $1,280,000, or 7.7% increase in interest and fees on loans was partially offset by decreases of $141,000, or 7.6%, and $276,000, or 7.3%, on interest earned on securities for the three and nine-month periodssix months ended SeptemberJune 30, 2017, compared to 2016.2020. The Corporation’s interest expense was relatively flaton deposits and borrowings decreased by $305,000, or 23.4%, and $213,000, or 8.6%, for the three monthsand six-month periods ended SeptemberJune 30, 2017, but declined by $132,000, or 5.7%, for2020, compared to the nine-month period ended September 30, 2017.same periods in 2019.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation recorded $240,000 of provision expense in the third quarter of 2017, compared to $200,000 for the third quarter of 2016, and provision expense of $450,000$975,000 for the nine months ended September 30, 2017,second quarter of 2020, and $1,325,000 for the year-to-date period, compared to $200,000$30,000 and $210,000 for the same periodthree and six-month periods in 2016, representing a $250,000 decrease in income in 2017 compared to 2016. The2019. This represents an increase in provisionquarterly expense of $945,000 and an increase in year-to-date expense of $1,115,000. Provision expense was largely drivenimpacted by higher levels of classified loans,economic factors caused by COVID-19, which required more provision expense in 2017, as well ascould have a specific allocation of $98,000 for an impaired loan in the third quarter of 2017.longer-term impact on asset quality. The gains from the sale of debt securities were $170,000$367,000 for the three months ended June 30, 2020, and $417,000$649,000 for the six months ended June 30, 2020, compared to gains of $106,000 and $187,000 for the three and ninesix months ended SeptemberJune 30, 2017, compared to $464,000 and $2,130,000 for the same periods in 2016, representing decreases of $294,000, or 63.4%, and $1,713,000, or 80.4%, respectively.2019. Market interest rates were lower in 2016,2020, making it more conducive to achieving gains from the sale of securities. For the six months ended June 30, 2020, there were unrealized losses of $225,000 on the Corporation’s portfolio of equity securities that consists of stocks held in other banks. This loss flows through the income statement and was the result of the devaluation of bank stocks given the economic current environment during the period that began with the COVID-19 pandemic. For the six months ended June 30, 2019, there was an unrealized gain of $44,000 on this portfolio, resulting in a negative impact to income of $269,000 for the first six months of 2020 compared to the prior year. The gain on the sale of mortgages decreasedincreased by $47,000,$1,275,000, or 8.4%307.2%, and increased by $193,000,$1,467,000, or 17.4%192.0%, for the three and nine-monthsix-month periods ended SeptemberJune 30, 2017,2020, compared to the prior year’s periods. Both mortgage production and margins realized onThe volume of mortgages sold mortgages werewas significantly higher during the first six months of 2020 compared to the same period in the first nine months of 2017 comparedprior year due to 2016.the very low interest rate environment, which caused a surge in refinancing activity. Total operating expenses increased $899,000,by $27,000, or 13.3%0.3%, and $2,938,000,$855,000, or 14.7%5.2%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. The larger increase in operating expenses for the six month period was driven by higher salary costs in the first quarter related payment of a 2019 performance bonus as well as increases in profession services and other expenses.
The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the ninethree months ended SeptemberJune 30, 2017,2020, compared to the same period in the prior year, due primarily to higher earnings. The ROAbut decreased for the nine months ended September 30, 2017, compared to the prior yearyear-to-date period due to a faster asset growth rate that outpaced the increase inmuch larger balance sheet and only slightly higher earnings. However, ROE increased for the nine-month period as equity did not increase at a rapid pace allowing the growth in earnings to positively impact ROE.
Key Ratios | Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Return on Average Assets | 0.80% | 0.87% | 0.77% | 0.81% | 1.14 | % | 1.11 | % | 0.95 | % | 1.04 | % | ||||||||||||||||||||
Return on Average Equity | 8.06% | 8.31% | 7.86% | 7.71% | 12.31 | % | 11.48 | % | 9.86 | % | 10.87 | % |
35
ENB FINANCIAL CORPManagement’s Discussion and Analysis
The results of the Corporation’s operations are best explained by addressing, in further detail, the five major sections of the income statement, which are as follows:
· | Net interest income |
· | Provision for loan losses |
· | Other income |
· | Operating expenses |
· | Provision for income taxes |
The following discussion analyzes each of these five components.
Net Interest Income
Net interest income (NII)NII represents the largest portion of the Corporation’s operating income. In the first ninesix months of 2017,2020, NII generated 74.8%73.2% of the Corporation’s gross revenue stream, which consists of net interest income and non-interest income, compared to 68.1%77.4% in the first ninesix months of 2016. The higher NII as a percentage of gross revenue was primarily caused by a combination of the last three Federal Reserve interest rate increases as well as non-recurring accelerated amortization expense in 2016.2019. The overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income. Without the impact of the accelerated amortization on the U.S. Sub-Agency bonds, the Corporation’s NII would have accounted for 69.9% of the gross revenue stream for the first nine months of 2016.
The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE 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 $582,000$197,000 and $1,793,000$370,000 for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to $524,000$190,000 and $1,570,000$392,000 for the same periods in 2016.2019.
38
NET INTEREST INCOME | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 , | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Total interest income | 8,444 | 7,393 | 24,639 | 20,573 | ||||||||||||
Total interest expense | 754 | 751 | 2,187 | 2,319 | ||||||||||||
Net interest income | 7,690 | 6,642 | 22,452 | 18,254 | ||||||||||||
Tax equivalent adjustment | 582 | 524 | 1,793 | 1,570 | ||||||||||||
Net interest income (fully taxable equivalent) | 8,272 | 7,166 | 24,245 | 19,824 |
ENB FINANCIAL CORP
Management’s Discussion and Analysis
NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
$ | $ | $ | $ | |||||||||||||
Total interest income | 10,468 | 10,462 | 20,955 | 20,624 | ||||||||||||
Total interest expense | 999 | 1,304 | 2,270 | 2,483 | ||||||||||||
Net interest income | 9,469 | 9,158 | 18,685 | 18,141 | ||||||||||||
Tax equivalent adjustment | 197 | 190 | 370 | 392 | ||||||||||||
Net interest income (fully taxable equivalent) | 9,666 | 9,348 | 19,055 | 18,533 |
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:
· | The rates earned on interest earning assets and paid on interest bearing liabilities |
· | The average balance of interest earning assets and interest bearing liabilities |
The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. Until December 16, 2015,For the first half of 2019 the Federal funds rate had not changed since December 16, 2008. On December 16, 2015,remained at 2.50%, however, in the second half of 2019 the Federal funds rate was increasedReserve decreased rates three times, by 25 basis points to 0.50%, from 0.25%each, beginning in July of 2019. By December 31, 2019, the Fed funds rate stood at 1.75%. On December 14, 2016,March 3, 2020, the Federal Reserve dropped the Fed funds rate was increased 25by 50 basis points to 0.75%. On1.25%, and on March 15, 2017 and on June 14, 2017,2020, the Federal fundsFed dropped the rate was again increased 25by 100 basis points so theto 0.25%. These rate since June 14, 2017, has been 1.25%. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longestdrops were in U.S. history. The impact has been a lower net interest marginresponse to the Corporation and generally across the financial industry. COVID-19 global pandemic.
The increase in December of 2015 and 2016, as well as the increases in March and June of 2017 resulted in higher short-term U.S. Treasury rates, but the long-term rates initially decreased, resulting in a flattening of the yield curve. Long-term rates like the ten-year U.S. Treasury were 192 basis points under the 4.25% Prime rate as of September 30, 2017. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continueexpectations for the remainder of 2017.the year are that there will be no further rate drops or increases. Management anticipates a reduction in interest income in the next 0.25%remaining quarters of 2020 as a result of the significant Federal Reserve rate increase could occurdecreases. All of the Corporation’s Prime-based floating rate loans reset lower in March, while floating rate securities reset when the fourth quarterquarterly reset dates were reached. Asset yields are much lower going into the second half of 2017. It remains2020 and interest income will become harder to be seen whether midgrow without significant growth in earning assets.
The shape of the U.S. Treasury curve also directly impacts the Corporation’s net interest income. The U.S. Treasury curve was flat coming into 2020, and after the rapid decline in short and long-term U.S. Treasury rates will also increase todriven by the same degree thatCOVID-19 environment and the Federal Reserve will move the overnight Federal funds rate. If they do not,rate drops, the yield curve would further flatten makingremained flat, but rates also reached historic lows. This is detrimental to banks as funding sources are typically shorter terms than the assets invested in and asset yields are much lower than they were even a year ago. A sharper yield curve is beneficial to financial institutions as a larger spread can be made on the asset versus the liability utilized. For the first two months of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged around 21 basis points. For the month of March, this spread averaged 42 basis points but the Treasury rates were at much lower levels. For the second quarter of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged 49 basis points. These spreads are very low from a historical perspective.
The combination of lower rates, and a generally flat yield curve out to longer rates, makes it hardermore difficult for the Corporation to generate higher net interest income. The Corporation’s net interest margin declined slightly in the first quarter of 2020 and declined more significantly in the second quarter of 2020. It is likely the net interest margin will continue to decline through the remainder of 2020. Any increase asset yield.in net interest income will need to come from growth of interest earning assets.
36
ENB FINANCIAL CORPManagement’s Discussion and Analysis
The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate increased fromwas 5.50% as of June 30, 2019, 4.75% as of December 31, 2019, and 3.25% to 3.50% on December 16, 2015, from 3.50% to 3.75% on December 14, 2016, from 3.75% to 4.00% onas of June 30, 2020, after the 150 basis points of Federal Reserve rate drops in March 15, 2017, and from 4.00% to 4.25% on June 14, 2017.of 2020. The Corporation’s Prime-based loans, including home equity lines of credit and some variable rate commercial loans, reprice a day after the Federal Reserve rate movement.
39
ENB FINANCIAL CORP
Management’s Discussion and Analysis
As a result of the Federal Reserve rate increases,significant growth of the loan portfolio and savings on the interest expense side, the Corporation’s NII on a tax equivalent basis has been increasing. Despite a lower net interest margin, the Corporation still achieved a slightly higher NII in the second quarter of 2020 and for the first half of 2020 compared to the same periods in the prior year. The net interest margin began to increasedecreasing on a quarterly basis in 2017the latter part of 2019 after the Federal Reserve dropped rates by 75 basis points. This margin decreased slightly in the first quarter of 2020 and more significantly in the second quarter of 2020 with the Corporation’s margin increasing to 3.46% for the year-to-date period ended September 30, 2017, compared to 3.04% for the nine months ended September 30, 2016.drastic rate drops in March. The Corporation’s NII on a tax-equivalent basis increased for the first ninethree months of 2017 increased substantiallyended June 30, 2020, by $318,000, or 3.4%, over the same period in 2016, by $4,421,000,2019. For the six months ended June 30, 2020, NII increased $522,000, or 22.3%2.8%, with the margin increasingcompared to 3.46%. However, there was non-recurring security amortization of $1,681,000 recorded in the first ninesix months of 2016, which had a negative impact on NII and margin. Without this impact, NII would have increased by $2,740,000, or 12.7%, in 2017 compared to 2016.2019. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given further Federal Reserve rate increases. Actual results over the past nine quarterstwo years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any additional Federal Reserve rate increasesimprovements in 2017 would further improve both margin and NII althoughwill be driven primarily by loan growth since asset yields will continue to a limited degree because the rate change would likely only affect the last half of December. However, a fourth quarter Federal Reserve rate increase would have a positive impact on 2018 NII and margin.decline.
The extended extremelyCorporation has maintained a low Federalaverage cost of funds over the past few years but funding costs had increased slightly throughout the first part of 2019 before the Fed rate has enabled management to reducedrops. Deposit rates had been increasing slightly and the cost of funds on overnight borrowings and allowed lower interestwas up due to a higher rate environment. However, with the recent steep drops in market rates, paid on deposits, reducing the Corporation’s interest expense. It was only after the third 25-basis point Fed rate increase in March of 2017 thatfunding costs are once again declining and the Corporation raised someis achieving savings on both the deposit rates minimally. While theand borrowings side. With a very low Prime rate reduced the yield on the Corporation’s loans for many years, the rate increases through September of 2017 did act to boost interest income and help improve the Corporation’s margin. With a higher Prime rate and elevated Treasury rates, higher asset yields should be possibleprojected throughout the remainder of 2017. Due2020, the Corporation’s asset yields will see a decrease, but helping to offset this decline will be a stabilization of costs on the increasing numberinterest expense side. The recent sharp Federal Reserve rate decreases have already reduced the Corporation’s NII and net interest margin (NIM), primarily because of the variable rate loans inportion of the Corporation’s loan portfolio, the 25 basis point increase inwhich resets every time the Prime rate atchanges. Variable rate loans have averaged between 17% and 20% of the end of 2015, 2016, and in March and June of 2017, did cause NII to increase progressively. The full impact of all of these increases was experienced in the third quarter of 2017. Any additional Federal Reserve rate increase in the fourth quarter of 2017 would increase NII but the full impact would not be seen untilloan portfolio for the first quarterhalf of 2018.2020.
Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With higherlower Treasury rates in the first ninesix months of 20172020 compared to the same period in 2016,2019, security reinvestment has generally been occurring at lower yield levels. Because of the lower market interest rates and very flat yield curve, it is difficult to achieve substantially higher yields in the securities portfolio but there have been some pockets of opportunities to reposition the portfolio by selling securities at gains and reinvesting in slightly higher yields and amortization has slowed resulting in higher yields. yielding instruments to benefit the Corporation’s earnings going forward.
The Corporation’s loan portfolio yield has begun to increasedecreased from the prior years’ period as the variable rate portion of the loan portfolio is repricing higherrepriced lower with each Federal Reserve rate movement.movement and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation’s commercial Prime-based loans arewere priced at the Prime rate, currently atwhich was 4.75% to start 2020, and then 4.25%. as of March 4, 2020, and 3.25% as of March 16, 2020 through June 30, 2020. The pricing for the most typical five-year fixed rate commercial loans is currently very similar toslightly higher than the Prime rate. Previously, any increases inWith the significant March Federal Reserve rate reductions, adding variable rate loans acted to bring down overall loan yield. Now with the rates being very similar it is much more beneficial to the Corporationportfolio means they will be priced at very low rates to growstart but can reprice lower if the variable rate loans in a period of risingFederal Reserve lowers rates any further and would reprice higher if the Federal Reserve would increase rates. An elementThere are elements of the Corporation’s Prime-based commercial loans is priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be driven largelyinfluenced by local competition.
Mid-term and long-term interest rates on average were highermuch lower in 20172020 compared to 2016.2019. The average rate of the 10-year U.S. Treasury was 2.32%1.02% in the first ninesix months of 20172020 compared to 1.74%2.49% in the first ninesix months of 2016,2019, and it stood at 2.33%0.66% on SeptemberJune 30, 2017,2020, compared to 1.60% at September2.00% on June 30, 2016.2019. The slope of the yield curve has been compressed throughout most2019 and 2020. As of 2016 and throughMarch 31, 2019, the first nine months of 2017,U.S. Treasury curve was inverted with a difference of 108 basis points between the Fed Funds rate of 1.25% and the 10-year U.S. Treasury as of September 30, 2017, compared to 110rate 50 basis points aslower than the Fed funds rate. As of SeptemberJune 30, 2016.2020, the 10-year U.S. Treasury rate was only 41 basis points higher than the Fed funds rate. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 2.25%1.88% in 2016the first six months of 2020 and 2.62%2.79% in 2017,the first six months of 2019, and as low as 1.37%0.54% in 20162020, and 2.05%2.00% in 2017. Because the yield curve is still relatively flat, management was not able to increase loan rates to improve yield, but security yields have improved as a result of slightly higher investment rates and lower amortization on existing bonds. The non-recurring sub-agency amortization of $1,681,000 for the year-to-date period ended September 30, 2016, negatively affected security yield resulting in artificially low yields during 2016 and higher yields during 2017. With higher long-term rates in 2017 and the likelihood of further Fed rate increases, the Corporation’s asset yield is projected to increase throughout the remainder of 2017 and during 2018.2019.
3740
ENB FINANCIAL CORP
Management’s Discussion and Analysis
While it is becoming increasingly difficult to achieve savings on theThe Corporation’s overall cost of funds remained low and stable through the Corporation has been ablefirst quarter of 2020 and then decreased through the second quarter of 2020 influenced by lower costs on deposits, but offset partially by elevated costs on borrowings with $154,000 of prepayment penalties recorded on FHLB long-term advances. Management expects the cost of funds will decline during the remainder of 2020 as deposits continue to maintain relatively low offering rates on longer-term time deposits. These interest rates are still below the interest rates that existed four or five years ago. Rollover of these longer time depositsreprice to lower rates has caused a decreaseand the new FHLB advances initiated in the first half of 2020 are at lower rates than those that were paid off early. Core deposit interest expense. Generally, it wasrates were reduced six times throughout the longer-termfirst half of 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower rates that helped to achieve interest expense reductions on total deposits, as the savings accountlevels or moving into core deposit products. Management does not anticipate significant deposit rate has not changed, and there were limited rate increases for select interest bearing demand deposit accounts. It is anticipated that interest rates on interest bearing core deposits can be held at the current levels formovements in the remainder of 2017. If the Federal Reserve does act to raiseyear as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest rates during the fourth quarter, deposit interestbearing accounts while making larger rate increases may need to be implemented beginning in 2018. Management selectively repriced somethe pricing of new or reissued time deposit rates higher after the March Federal Reserve rate increase, but the time deposits repricing to lower rates offset any increased interest expense for those that were selectively priced higher.deposits. Borrowing costs, and the wholesale borrowing curves that they are based on, generally follow the direction and slope of the U.S. Treasury curve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation was able to refinance somerefinanced the maturing or paid off borrowings at lower rates in 2016 but lower-priced borrowings matured in 2017 with no ability to refinance at lower rates,2020, so the yieldinterest expense on borrowings increased slightly during 2017 and will likely continue to do sodecline moving into 2018.forward.
Management currently anticipates that the overnight interest rate and Prime rate will remainstay at the current levels until Decemberlevel for the remainder of 2017 with the possibility of one more 0.25% rate increase by year-end.2020. It is likely that mid and long-term U.S. Treasury rates will increase slowlyremain relatively suppressed throughout the fourth quarterremainder of 2017 as the market anticipates an additional Federal Reserve rate movement.year. This would allow management to achieve higher earnings on new higher yielding securitiesvery low and allow for the ability to price new loans at higher market rates. However, it is also possible that even after a Federal Reserve rate increase, theflat yield curve could flatten, makingmakes it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. Additionally, any additional Federal Reserve rate increases would have a greater effect onHowever, the repricing ofrecent decline in rates provides the Corporation’s liabilities asability to hold deposit rates at current levels to help to mitigate the cost of money increases and more marketplace competition returns. Management anticipates that more deposit rate increases will need to be made to remain competitive in the market while maturing borrowings would also likely reprice to higher rates.lower interest income.
The following table provides an analysis of year-to-date changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.
3841
ENB FINANCIAL CORP
Management’s Discussion and Analysis
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
Nine Months Ended September 30, | Nine Months Ended September 30, | Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | 2020 vs. 2019 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
Due To Change In | Due To Change In | Due To Change In | Due To Change In | |||||||||||||||||||||||||||||||||||||||||||||
Net | Net | Net | Net | |||||||||||||||||||||||||||||||||||||||||||||
Average | Interest | Increase | Average | Interest | Increase | Average | Interest | Increase | Average | Interest | Increase | |||||||||||||||||||||||||||||||||||||
Balances | Rates | (Decrease) | Balances | Rates | (Decrease) | Balances | Rates | (Decrease) | Balances | Rates | (Decrease) | |||||||||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest on deposits at other banks | 27 | 136 | 163 | — | 43 | 43 | 59 | (144 | ) | (85 | ) | (54 | ) | (27 | ) | (81 | ) | |||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 44 | 2,059 | 2,103 | (212 | ) | (1,610 | ) | (1,822 | ) | 217 | (477 | ) | (260 | ) | (29 | ) | 280 | 251 | ||||||||||||||||||||||||||||||
Tax-exempt | 766 | (49 | ) | 717 | 466 | 92 | 558 | (3 | ) | (49 | ) | (52 | ) | (315 | ) | 5 | (310 | ) | ||||||||||||||||||||||||||||||
Total securities | 810 | 2,010 | 2,820 | 254 | (1,518 | ) | (1,264 | ) | 214 | (526 | ) | (312 | ) | (344 | ) | 285 | (59 | ) | ||||||||||||||||||||||||||||||
Loans | 938 | 340 | 1,278 | 1,982 | (292 | ) | 1,690 | 1,779 | (1,039 | ) | 740 | 2,270 | 970 | 3,240 | ||||||||||||||||||||||||||||||||||
Regulatory stock | 31 | (3 | ) | 28 | 44 | (100 | ) | (56 | ) | 28 | (62 | ) | (34 | ) | 21 | 22 | 43 | |||||||||||||||||||||||||||||||
Total interest income | 1,806 | 2,483 | 4,289 | 2,280 | (1,867 | ) | 413 | 2,080 | (1,771 | ) | 309 | 1,893 | 1,250 | 3,143 | ||||||||||||||||||||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 19 | 32 | 51 | 32 | (41 | ) | (9 | ) | 51 | (514 | ) | (463 | ) | 54 | 594 | 648 | ||||||||||||||||||||||||||||||||
Savings deposits | 10 | (1 | ) | 9 | 8 | (2 | ) | 6 | 6 | (22 | ) | (16 | ) | 2 | — | 2 | ||||||||||||||||||||||||||||||||
Time deposits | (93 | ) | (97 | ) | (190 | ) | (204 | ) | (123 | ) | (327 | ) | (31 | ) | 125 | 94 | (52 | ) | 148 | 96 | ||||||||||||||||||||||||||||
Total deposits | (64 | ) | (66 | ) | (130 | ) | (164 | ) | (166 | ) | (330 | ) | 26 | (411 | ) | (385 | ) | 4 | 742 | 746 | ||||||||||||||||||||||||||||
Borrowings: | ||||||||||||||||||||||||||||||||||||||||||||||||
Total borrowings | (25 | ) | 23 | (2 | ) | 17 | (261 | ) | (244 | ) | 62 | 110 | 172 | 5 | 116 | 121 | ||||||||||||||||||||||||||||||||
Total interest expense | (89 | ) | (43 | ) | (132 | ) | (147 | ) | (427 | ) | (574 | ) | 88 | (301 | ) | (213 | ) | 9 | 858 | 867 | ||||||||||||||||||||||||||||
NET INTEREST INCOME | 1,895 | 2,526 | 4,421 | 2,427 | (1,440 | ) | 987 | 1,992 | (1,470 | ) | 522 | 1,884 | 392 | 2,276 |
During the first ninesix months of 2017,2020, the Corporation’s NII on an FTE basis increased by $4,421,000, a 22.3% increase$522,000, or 2.8%, over the same period in 2016.2019. Total interest income on an FTE basis for the ninesix months ended SeptemberJune 30, 2017,2020, increased $4,289,000,$309,000, or 19.4%1.5%, from 2016,2019, while interest expense decreased $132,000,$213,000, or 5.7%8.6%, for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. The FTE interest income from the securities portfolio increaseddecreased by $2,820,000,$312,000, or 56.7%7.5%, while loan interest income increased $1,278,000,$740,000, or 7.6%4.5%. During 2017,the first six months of 2020, additional loan volume caused by loan growth added $938,000$1,779,000 to net interest income, andbut the slightly higherlower yields caused a $340,000 increase,$1,039,000 decrease, resulting in a total increase of $1,278,000.$740,000. Higher balances in the securities portfolio caused an increase of $810,000$214,000 in net interest income,NII, while higherlower yields on securities caused a $2,010,000 increase,$526,000 decrease, resulting in a total increasenet decrease of $2,820,000. The Corporation recorded $1,681,000 in non-recurring accelerated amortization on U.S. sub-agency securities during the nine months ended September 30, 2016, which was responsible for the lower yields on securities in 2016.$312,000.
The average balance of interest bearing liabilities increased by 4.5%6.2% during the ninesix months ended SeptemberJune 30, 2017,2020, compared to the prior year driven by the growth in deposit balances. The shift between timelower cost on deposit balances and demand and savings accounts resulted in a more favorable netdecrease in interest income.expense. Lower rates on demand and savings deposits partially offset by higher rates on time deposits caused a $411,000 decrease in interest expense while slightly higher balances of higher costdemand and savings deposits contributed to savingscaused an increase in expense of $64,000 on deposit costs while lower interest rates on all deposit groups caused $66,000 of savings,$26,000 resulting in a total savingsdecrease of $130,000.$385,000.
Out of all the Corporation’s deposit types, interest-bearing demand deposits reprice the most rapidly, as nearly all accounts are immediately affected by rate changes. Time deposit balances decreased resulting in a $93,000$31,000 reduction to expense, and time deposits repricing to lowerhigher interest rates reducedincreased interest expense by an additional $97,000,$125,000, causing a net total reductionincrease of $190,000$94,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.
The average balance of outstanding borrowings increased by 7.6% from the prior year, which resulted in an increase in interest expense of $62,000. Although interest rates were lower in the first half of 2020 compared to the prior year, the Corporation paid off a number of long-term advances with prepayment penalties, which increased interest expense by $110,000. The aggregate of these amounts was an increase in interest expense of $172,000 related to total borrowings.
3942
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The average balance of outstanding borrowings decreased by $3.1 million, or 4.2%, from September 30, 2016, to September 30, 2017. The decrease in total borrowings reduced interest expense by $25,000. The increase in market interest rates increased interest expense by $23,000, as some long-term borrowings at lower rates matured and were replaced with new advances at marginally higher rates. The aggregate of these amounts was a decrease in interest expense of $2,000 related to total borrowings.
The following tables show a more detailed analysis of net interest income on an FTE basis with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net yield on interest earning assets, also referred to as the net interest margin (NIM).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.
4043
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 June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
(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 | 29,497 | 112 | 1.51 | 25,973 | 39 | 0.60 | 31,764 | 21 | 0.26 | 22,292 | 119 | 2.14 | ||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 200,043 | 1,030 | 2.06 | 183,607 | 608 | 1.32 | 229,341 | 1,085 | 1.89 | 211,520 | 1,289 | 2.44 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 124,262 | 1,566 | 5.04 | 113,566 | 1,444 | 5.09 | 97,514 | 802 | 3.29 | 89,831 | 753 | 3.35 | ||||||||||||||||||||||||||||||||||||
Total securities (d) | 324,305 | 2,596 | 3.20 | 297,173 | 2,052 | 2.76 | 326,855 | 1,887 | 2.31 | 301,351 | 2,042 | 2.71 | ||||||||||||||||||||||||||||||||||||
Loans (a) | 583,592 | 6,246 | 4.28 | 560,576 | 5,766 | 4.11 | 827,386 | 8,674 | 4.20 | 721,770 | 8,354 | 4.64 | ||||||||||||||||||||||||||||||||||||
Regulatory stock | 5,723 | 72 | 5.03 | 4,936 | 60 | 4.86 | 7,429 | 83 | 4.47 | 6,859 | 137 | 7.99 | ||||||||||||||||||||||||||||||||||||
Total interest earning assets | 943,117 | 9,026 | 3.83 | 888,658 | 7,917 | 3.56 | 1,193,434 | 10,665 | 3.58 | 1,052,272 | 10,652 | 4.05 | ||||||||||||||||||||||||||||||||||||
Non-interest earning assets (d) | 64,845 | 64,291 | 71,016 | 68,746 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | 1,007,962 | 952,949 | 1,264,450 | 1,121,018 | ||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES & | ||||||||||||||||||||||||||||||||||||||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 199,001 | 93 | 0.19 | 192,147 | 72 | 0.15 | 274,419 | 110 | 0.16 | 260,750 | 449 | 0.69 | ||||||||||||||||||||||||||||||||||||
Savings deposits | 189,863 | 24 | 0.05 | 166,111 | 21 | 0.05 | 238,056 | 12 | 0.02 | 202,415 | 26 | 0.05 | ||||||||||||||||||||||||||||||||||||
Time deposits | 153,710 | 372 | 0.96 | 165,638 | 416 | 1.01 | 128,109 | 421 | 1.32 | 136,721 | 439 | 1.29 | ||||||||||||||||||||||||||||||||||||
Borrowed funds | 69,629 | 265 | 1.51 | 73,411 | 242 | 1.32 | 76,051 | 456 | 2.41 | 75,160 | 390 | 2.08 | ||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 612,203 | 754 | 0.49 | 597,307 | 751 | 0.50 | 716,635 | 999 | 0.56 | 675,046 | 1,304 | 0.77 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 293,124 | 253,527 | 425,773 | 334,287 | ||||||||||||||||||||||||||||||||||||||||||||
Other | 2,570 | 2,683 | 4,429 | 3,777 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 907,897 | 853,517 | 1,146,837 | 1,013,110 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 100,065 | 99,432 | 117,613 | 107,908 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities & stockholders' equity | 1,007,962 | 952,949 | 1,264,450 | 1,121,018 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income (FTE) | 8,272 | 7,166 | 9,666 | 9,348 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest spread (b) | 3.34 | 3.06 | 3.02 | 3.28 | ||||||||||||||||||||||||||||||||||||||||||||
Effect of non-interest | ||||||||||||||||||||||||||||||||||||||||||||||||
bearing deposits | 0.16 | 0.16 | 0.22 | 0.28 | ||||||||||||||||||||||||||||||||||||||||||||
Net yield on interest earning assets (c) | 3.50 | 3.22 | 3.24 | 3.56 |
(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The quarter-to-date average balances include net deferred loan costs of $1,122,000$2,129,000 as of SeptemberJune 30, 2017,2020, and $863,000$1,669,000 as of SeptemberJune 30, 2016.2019. Such fees and costs recognized through income and included in the interest amounts totaled ($112,000)$168,000 in 2017,2020, and ($99,000)129,000) in 2016.2019.
(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.
4144
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, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
(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 | 28,086 | 257 | 1.22 | 22,635 | 94 | 0.55 | 25,312 | 81 | 0.64 | 16,846 | 166 | 1.99 | ||||||||||||||||||||||||||||||||||||
Securities available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 195,093 | 2,904 | 1.98 | 185,399 | 802 | 0.58 | 229,245 | 2,348 | 2.05 | 210,622 | 2,608 | 2.48 | ||||||||||||||||||||||||||||||||||||
Tax-exempt | 127,520 | 4,894 | 5.12 | 107,556 | 4,176 | 5.18 | 92,105 | 1,503 | 3.26 | 92,269 | 1,555 | 3.37 | ||||||||||||||||||||||||||||||||||||
Total securities (d) | 322,613 | 7,798 | 3.22 | 292,955 | 4,978 | 2.27 | 321,350 | 3,851 | 2.40 | 302,891 | 4,163 | 2.75 | ||||||||||||||||||||||||||||||||||||
Loans (a) | 578,496 | 18,176 | 4.19 | 548,492 | 16,898 | 4.11 | 793,692 | 17,165 | 4.33 | 713,243 | 16,424 | 4.62 | ||||||||||||||||||||||||||||||||||||
Regulatory stock | 5,581 | 201 | 4.80 | 4,724 | 173 | 4.88 | 7,449 | 228 | 6.13 | 6,680 | 263 | 7.86 | ||||||||||||||||||||||||||||||||||||
Total interest earning assets | 934,776 | 26,432 | 3.77 | 868,806 | 22,143 | 3.40 | 1,147,803 | 21,325 | 3.72 | 1,039,660 | 21,016 | 4.05 | ||||||||||||||||||||||||||||||||||||
Non-interest earning assets (d) | 62,695 | 62,200 | 71,700 | 66,595 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | 997,471 | 931,006 | 1,219,503 | 1,106,255 | ||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES & | ||||||||||||||||||||||||||||||||||||||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 200,471 | 256 | 0.17 | 183,852 | 204 | 0.15 | 270,095 | 415 | 0.31 | 254,536 | 878 | 0.70 | ||||||||||||||||||||||||||||||||||||
Savings deposits | 186,339 | 71 | 0.05 | 160,506 | 62 | 0.05 | 226,973 | 35 | 0.03 | 201,972 | 51 | 0.05 | ||||||||||||||||||||||||||||||||||||
Time deposits | 156,860 | 1,111 | 0.95 | 169,478 | 1,302 | 1.03 | 130,907 | 902 | 1.39 | 135,999 | 808 | 1.20 | ||||||||||||||||||||||||||||||||||||
Borrowed funds | 71,973 | 749 | 1.39 | 75,090 | 751 | 1.34 | 79,085 | 918 | 2.33 | 73,487 | 746 | 2.02 | ||||||||||||||||||||||||||||||||||||
Total interest bearing liabilities | 615,643 | 2,187 | 0.47 | 588,926 | 2,319 | 0.53 | 707,060 | 2,270 | 0.65 | 665,994 | 2,483 | 0.75 | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Demand deposits | 281,620 | 241,786 | 390,775 | 331,319 | ||||||||||||||||||||||||||||||||||||||||||||
Other | 2,671 | 2,700 | 4,163 | 3,352 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 899,934 | 833,412 | 1,101,998 | 1,000,665 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 97,537 | 97,594 | 117,505 | 105,590 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities & stockholders' equity | 997,471 | 931,006 | 1,219,503 | 1,106,255 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income (FTE) | 24,245 | 19,824 | 19,055 | 18,533 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest spread (b) | 3.30 | 2.87 | 3.07 | 3.30 | ||||||||||||||||||||||||||||||||||||||||||||
Effect of non-interest | ||||||||||||||||||||||||||||||||||||||||||||||||
bearing deposits | 0.16 | 0.17 | 0.25 | 0.27 | ||||||||||||||||||||||||||||||||||||||||||||
Net yield on interest earning assets (c) | 3.46 | 3.04 | 3.32 | 3.57 |
(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 $1,066,000$2,057,000 as of SeptemberJune 30, 2017,2020, and $796,000$1,639,000 as of SeptemberJune 30, 2016.2019. Such fees and costs recognized through income and included in the interest amounts totaled ($335,000)$49,000 in 2017,2020, and ($275,000)248,000) in 2016.2019.
(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.
4245
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s interest income increased at a faster pace primarily due to non-recurring security amortizationincreased interest income on loans, but the increase in income was the first nine monthsresult of 2016,loan growth, not an increase in asset yield, resulting in a higherlower NIM of 3.50%3.24% for the thirdsecond quarter of 2017,2020, compared to 3.22%3.56% for the thirdsecond quarter of 20162019, and 3.46%3.32% for the nine months ended September 30, 2017,year-to-date period in 2020, compared to 3.04% for the same period3.57% in 2016.2019. The yield earned on assets increaseddecreased by 2733 basis points forduring the quarter and 37 basis points for the year-to-date periodsix months ended June 30, 2020, while the rate paid on liabilities dropped onedecreased by 10 basis point for the quarter and six basis points for the year-to-date period when comparing both years. This resulted in a 22 basis point decrease in interest spread, and the effect of non-interest bearing deposits decreased by three basis points during the six months ended June 30, 2020, compared to the prior year, resulting in the decrease in NIM of 25 basis points. Management does anticipateanticipates further improvementsdeclines in NIM during the remainder of 2017 with2020 as the possibilityFederal Reserve has decreased rates by 150 basis points in March of another rate increase2020, putting pressure on the Corporation’s asset yields, which was first fully felt in the fourth quarter.second half of 2020. Loan yields were at historically low levels during 2016decreased in the first six months of 2020 compared to the prior year primarily as a result of the 75 basis points of Prime decline experienced in the second half of 2019 and the first nine months150 basis points of 2017 due to the extended low-rate environment as well as extremely competitive pricing for the loan opportunitiesPrime decline in the market. It is anticipated that these yields will remain relatively unchanged during the remainderfirst quarter of 2017 with increases occurring during 2018 as the economy improves and loan demand increases, reducing pricing pressures and intense competition for loans. The increase in the Prime rate has helped to increase loan yields on variable rate consumer and commercial loans.2020. Growth in the loan portfolio coupled with better yields on variable rate loans caused loan interest incomewill help to increase.offset a declining asset yield moving through 2020. The Corporation’s loan yield increased 17decreased 29 basis points in the third quarterfirst six months of 20172020 compared to the third quarterfirst six months of 2016 and 8 basis points when comparing the year-to-date periods in both years.2019. Loan interest income increased $480,000,$741,000, or 8.3%, and $1,278,000, or 7.6%4.5%, for this time period as a result of the three and nine months ended September 30, 2017, compared to the same periodsgrowth in 2016.balances.
Loan pricing was challenging in 2016, and continues to be in 2017the first half of 2020 as a result of intensethe very low rate environment and competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate or below. The current Prime rate was 5.50% as of 4.25%June 30, 2019, and was moderately higher than the typical business or commercial five-year fixed rates being extended at that time. The Prime rate decreased by 1.50% in March of 2020 to 3.25%, which is generallynow just below the typical rate of a five-year fixed-rate loan. The commercial or business fixed rates do increase with longer fixed terms or lower than most fixed-rate business and commercialcredit quality. In terms of the variable rate pricing, nearly all variable rate loans which typically range between 4.00% and 6.00%, depending on term and credit risk.offered are Prime-based. Management is able to price loan customers with higher levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, currently 5.00%.which amounted to 4.00% at June 30, 2020, still a relatively low rate. However, there are relatively fewonly a small minority of these higher ratethe loans in the commercial and agricultural portfolios are at these higher rates due to the strong credit quality of the Corporation’s borrowers.borrowers and market competition. Competition in the immediate market area ishas been pricing select shorter-term fixed-rate commercial and agricultural lending rates below 4.00%3.50% for the strongest loan credits. This current market environment has largely prevented the Corporation from gaining yield on fixed rate commercial and agricultural loans. The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, please refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Earnings andTax equivalent yields on the Corporation’s securities increaseddecreased by 4435 basis points for the threesix months ended SeptemberJune 30, 2017, and 95 basis points for the nine months ended September 30, 2017,2020, compared to the same periodsperiod in 2016.2019. The Corporation’s securities portfolio consists of nearly allapproximately 79% fixed income debt instruments.instruments and 21% variable rate product as of June 30, 2020. The Corporation’s taxable securities experienced a 7443 basis-point increasedecrease in yield for the threesix months ended SeptemberJune 30, 2017, and a 140 basis-point increase in yield for the nine months ended September 30, 2017,2020, compared to the same periodsperiod in 2016. This was largely due to accelerated amortization that caused significantly lower interest income for the first nine months of 2016. Additionally, some security2019. Security reinvestment in the first ninesix months of 20172020 has been occurring at higherlower rates and regular amortization has been lower due to the slightly higher interest rate environment. These variables have caused taxable security yieldssignificant decline in U.S. Treasury rates. In addition, the Corporation’s U.S. agency mortgage-backed securities and collateralized mortgage obligations experience faster principal prepayments as market rates decrease, causing the amortization of premium to increase, significantly. effectively decreasing the yield.
The yield on tax-exempt securities decreased minimally by five basis points and six11 basis points for the three and ninesix months ended SeptemberJune 30, 2020. For the Corporation, these bonds consist entirely of tax-free municipal bonds. While the tax-exempt yields on municipal bonds declined with the tax rate change at the end of 2017, comparedyields became more attractive again during the latter part of 2019 and the first half of 2020. After selling out of many of these instruments to shorten the same periodsduration of the Corporation’s portfolio and provide a better interest rate risk profile, management began investing in 2016.more of these bonds in the first and second quarters of 2020 as yields stood out and provided better returns than other sectors of the portfolio.
Prior to 2017,The Corporation’s average deposits increased $94.9 million, or 10.3%, with all types of interest-bearing deposits increasing $35.5 million, or 6.0%, while non-interest bearing demand deposits increased $59.5 million, or 17.9%. In the current rate environment, with short-term rates extremely low and with small rate differences for longer-term deposits, the consumer generally elected to stay short and maintain funds in accessible deposit instruments. During the first nine months of 2017, with higher short-term rates but still low longer-term rates, the customer still prefers keeping balances in both non-interest and interest bearing checking products and savings accounts. In addition to the consumer staying liquid with their available funds, there has been a general trend of funds flowing from time deposit accounts into both non-interest checking, NOW and savings accounts. The average balance of the Corporation’s interest bearing liabilities increased during the three and nine months ended September 30, 2017. The average balance of time deposits declined during these same periodsthe first six months of 2020 compared to 2016,2019, but the other areas of NOW, MMDA, and savings grew sufficiently enough to compensate for the decline in time deposits, causing total interest bearing funds to increase. However,Time deposit balances had been growing throughout 2018 and 2019 due to the odd-month CD promotions available at those times, but with morethe recent sharp decline in rates, management expects these time deposit balances to decrease throughout the remainder of the interest bearing funds2020 as a result of customers electing to allow maturing time deposit balances to roll off and hold them in the forma liquid account until there is some sign of NOW, MMDA, and savings accounts the average interest rate paid on these instruments is significantly less than what is paid on time deposits, resulting in less interest expense.increases.
4346
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Interest expense on deposits declineddecreased by $20,000,$385,000, or 3.9%, and $130,000, or 8.3%22.2%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periodsperiod in 2016.2019. Demand and savings deposits reprice in their entirety whenever the offering rates are changed. This allows management to reducechanged, so with each successive rate drop in the first half of 2020, these deposits repriced lower. Interest rates on interest costs rapidly; however, it becomes difficult to continue to gain cost savings once offering rates decline to these historically low levels.checking and money market accounts were decreased four times in March of 2020 and two times in the second quarter of 2020. For the third quarter of 2017 and the ninesix months ended SeptemberJune 30, 2017,2020, the average balances of interest bearing demand deposits increased by $6.9$15.6 million, or 3.6%, and $16.6 million, or 9.0%6.1%, over the same periodsperiod in 2016,2019, while the average balance of savings accounts increased by $23.8$25.0 million, or 14.3%, and $25.8 million, or 16.1%, respectively. This increase in balances of lower cost accounts has helped to reduce the Corporation’s overall interest expense in 2017 compared to 2016.12.4%.
Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During the ninesix months ended SeptemberJune 30, 2017,2020, time deposit balances decreased compared to balances at SeptemberJune 30, 2016.2019. The decrease can be attributed to the lowestlow rates paid historically on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be minimal.minimal, as well as more competitive time deposit rates being offered by other financial institutions in the local market area. 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.position and maintain a lower cost of funds. The Corporation was able to reducedid offer two odd-month CD specials during 2018 and 2019 that did impact interest expense paid on time deposits. For this reason, the Corporation’s interest expense on time deposits increased by $44,000,$94,000, or 10.6%11.6%, for the third quarterfirst six months of 2017,2020, compared to the same period in 2016, and by $191,000, or 14.7%, for2019 despite the nine months ended September 30, 2017, compareddecrease in average balance. This growth in interest expense was due to the same periodhigher promotional rates that were offered beginning in the prior year. Average balancesfourth quarter of time deposits decreased by $11.9 million, or 7.2%, and $12.6 million, or 7.4%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016.2018. The average annualized interest rate paid on time deposits decreasedincreased by five19 basis points for the three-month period and eight basis points for the nine-monthsix-month period when comparing both years. Management anticipates the interest expense on time deposits and annualized rate paid will begin to decline throughout the remainder of 2020 as these higher-priced time deposits mature and reprice at much lower levels or convert to non-maturity deposits.
The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of $2,709,000 and $9,714,000$4,638,000 were utilized in the three and ninesix months ended SeptemberJune 30, 2017, respectively,2020, while average short-term advances of $10,052,000 and $11,131,000$2,506,000 were utilized in the three and ninesix months ended SeptemberJune 30, 2016.2019. 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 decreasedincreased by $3,782,000,$5,598,000, or 5.2%, and $3,117,000, or 4.2%7.6%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periodsperiod in 2016.2019. Interest expense on borrowed funds was $23,000,increased $172,000, or 9.5% higher, and $2,000, or 0.3% lower,23.1%, for the three and nine-month periodssix-month period when comparing 20172020 to 2016.2019, driven higher by $154,000 of FHLB interest prepayment penalties on the early payoff of several advances.
For the threesix months ended SeptemberJune 30, 2017,2020, the net interest spread increased 28decreased by 23 basis points to 3.34%3.07%, from 3.06%compared to 3.30% for the threesix months ended SeptemberJune 30, 2016. For the nine months ended September 30, 2017, the net interest spread increased 43 basis points to 3.30%, from 2.87% for the same period in 2016.2019. The effect of non-interest bearing funds stayed the samedecreased to 25 basis points from 27 basis points for the three-month period and dropped by one basis point for the nine-month period compared to the same periods in the prior year.six months ended June 30, 2019. 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,higher, the benefit of non-interest bearing deposits is reducedincreases because there is lessmore difference between non-interest bearing funds and interest bearing liabilities. For example, if an interest checking account with $10,000 earns 1%, the benefit for $10,000 of non-interest bearing deposits is equivalent to $100; but if the interest-checking rate is reducedincreased to 0.20%1.50%, then the benefit of the non-interest bearing funds is only $20.$150. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the lowerhigher cost of funds affects the benefit to non-interest bearing deposits.
The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk.
Provision for Loan Losses
The allowance for loan losses (ALLL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ALLL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a provision expense of $240,000$975,000 for the three months ended SeptemberJune 30, 2017,2020, and $450,000$1,325,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to a provision expense of $200,000$30,000 and $210,000 for the three and six months ended SeptemberJune 30, 2016, and $200,000 for the nine months ended September 30, 2016.2019, respectively. The analysis of the ALLL takes into consideration, among other things, the following factors:
4447
ENB FINANCIAL CORP
Management’s Discussion and Analysis
· | levels and trends in delinquencies, nonaccruals, charge-offs and recoveries, |
· | trends within the loan portfolio, |
· | 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, and |
· | changes in the value of underlying collateral. |
During the ninesix months ended SeptemberJune 30, 2017,2020, the Corporation recorded provision expense of $450,000$1,325,000 primarily due to higher balances of classified loansa decline in economic and a specific allocation of $98,000business conditions related to COVID-19, which caused an impaired loan. Duringincrease in the first nine months of 2016,qualitative factors regarding outside market conditions. This increase in qualitative factors caused a higher required provision as credit losses may be incurred as businesses deal with the Corporation recorded $200,000 of provision expense. Management closely tracks delinquent, non-performing,challenges presented by COVID-19 and classified loans as a percentage of capital and of the loan portfolio.change in business practice.
As of SeptemberJune 30, 2017,2020, total delinquencies represented 0.46%0.41% of total loans, compared to 0.45%0.44% as of SeptemberJune 30, 2016.2019. These ratios are extremelyvery low compared to local and national peer groups. 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 devaluationlevel of residential and commercial real estate, had stressed these ratios in past periods and the additionclassified loans has increased from June 30, 2019 to June 30, 2020, from 14.8% of a commercial loan relationship in the first quarterregulatory capital to 19.7% of 2017 had caused an increase in these levels. However, a classified loan relationship that paid off helped to reduce the total classified balances during the third quarter of 2017.regulatory capital. The delinquency and classified loan information is utilized in the quarterly 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 also have a significant impact on the provision. Management had recoveries that exceededminimal charge-offs by $16,000and recoveries in the first ninesix months of 2017.2020.
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, 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. Secondly,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 also 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.
In the first ninesix months of 2017,2020, qualitative factors were adjusted based on current information regarding delinquency, economic conditions, and other factors. ChangesIncreases in qualitative factors were unchanged for twomade across all loan pools while theyrelated to national and local economic trends and conditions. This factor was increased for four pools and declined for three. Adjustments to the qualitative factors were minor in nature with most changes being only fiveby 5 or ten10 basis points of adjustment,based on the lowest amount of adjustment that management will make. The four pools with factor increases were agricultural dairy, credit lines, personal loans, and residential real estate. These increases were due to changesloan pool. Other factors changed minimally in the trending of those pools including balances, delinquencies, concentrations of credit, and the personnel that handle those loans. Out of these four pools, the two containing the largest balances are agricultural dairy and residential real estate. The dairy industry continues to be impacted by lower milk prices, which lowers the profit margin for these farmers and has impacted delinquencies. Residential real estate balances have grown significantly, especially adjustable rate mortgages, resulting in a higher concentration of residential mortgages.2020.
45
ENB FINANCIAL CORPManagement’s Discussion and Analysis
Management also monitors the allowance as a percentage of total loans. The percentage of the allowance to total loans has increased since SeptemberJune 30, 2016 and December 31, 2016,2019, and remains comparable withhigher than the Bank’s national peer group.group from the Uniform Bank Performance Reports. As of SeptemberJune 30, 2017,2020, the allowance as a percentage of total loans was 1.37%1.29%, up from 1.32%1.25% at June 30, 2019, and December 31, 2016, and 1.31% at September 30, 2016.2019. Management continues to evaluate the allowance for loan lossesALLL 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 lossesALLL 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.
48
Other Income
Other income for the thirdsecond quarter of 20172020 was $2,622,000, a decrease$4,068,000, an increase of $206,000,$1,306,000, or 7.3%47.3%, compared to the $2,828,000$2,762,000 earned during the thirdsecond quarter of 2016.2019. For the year-to-date period ended SeptemberJune 30, 2017,2020, other income totaled $7,546,000, a decrease$6,835,000, an increase of $1,020,000,$1,529,000, or 11.9%28.8%, compared to the same period in 2016.2019. The following tables detail the categories that comprise other income. As illustrated in the tables below the primary contributor to the increase was the gains on the sales of mortgages.
OTHER INCOME | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||
2017 | 2016 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
Trust and investment services | 427 | 344 | 83 | 24.1 | ||||||||||||
Service charges on deposit accounts | 320 | 285 | 35 | 12.3 | ||||||||||||
Other service charges and fees | 328 | 304 | 24 | 7.9 | ||||||||||||
Commissions | 583 | 552 | 31 | 5.6 | ||||||||||||
Gains on securities transactions, net | 170 | 464 | (294 | ) | (63.4 | ) | ||||||||||
Gains on sale of mortgages | 510 | 557 | (47 | ) | (8.4 | ) | ||||||||||
Earnings on bank owned life insurance | 170 | 210 | (40 | ) | (19.0 | ) | ||||||||||
Other miscellaneous income | 114 | 112 | 2 | 1.8 | ||||||||||||
Total other income | 2,622 | 2,828 | (206 | ) | (7.3 | ) | ||||||||||
OTHER INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended June 30, | Increase (Decrease) | |||||||||||||||
2020 | 2019 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
Trust and investment services | 416 | 505 | (89 | ) | (17.6 | ) | ||||||||||
Service charges on deposit accounts | 205 | 355 | (150 | ) | (42.3 | ) | ||||||||||
Other service charges and fees | 430 | 338 | 92 | 27.2 | ||||||||||||
Commissions | 649 | 756 | (107 | ) | (14.2 | ) | ||||||||||
Gains on securities transactions, net | 367 | 106 | 261 | 246.2 | ||||||||||||
Gains on equity securities, net | 5 | 27 | (22 | ) | (81.5 | ) | ||||||||||
Gains on sale of mortgages | 1,690 | 415 | 1,275 | 307.2 | ||||||||||||
Earnings on bank owned life insurance | 205 | 179 | 26 | 14.5 | ||||||||||||
Other miscellaneous income | 101 | 81 | 20 | 24.7 | ||||||||||||
Total other income | 4,068 | 2,762 | 1,306 | 47.3 |
OTHER INCOME | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||
2017 | 2016 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
Trust and investment services | 1,335 | 1,104 | 231 | 20.9 | ||||||||||||
Service charges on deposit accounts | 908 | 820 | 88 | 10.7 | ||||||||||||
Other service charges and fees | 986 | 824 | 162 | 19.7 | ||||||||||||
Commissions | 1,714 | 1,611 | 103 | 6.4 | ||||||||||||
Gains on securities transactions, net | 417 | 2,130 | (1,713 | ) | (80.4 | ) | ||||||||||
Gains on sale of mortgages | 1,302 | 1,109 | 193 | 17.4 | ||||||||||||
Earnings on bank owned life insurance | 514 | 604 | (90 | ) | (14.9 | ) | ||||||||||
Other miscellaneous income | 370 | 364 | 6 | 1.6 | ||||||||||||
Total other income | 7,546 | 8,566 | (1,020 | ) | (11.9 | ) |
OTHER INCOME
(DOLLARS IN THOUSANDS)
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
2020 | 2019 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
Trust and investment services | 1,038 | 1,042 | (4) | (0.4) | ||||||||||||
Service charges on deposit accounts | 520 | 677 | (157 | ) | (23.2 | ) | ||||||||||
Other service charges and fees | 794 | 646 | 148 | 22.9 | ||||||||||||
Commissions | 1,335 | 1,411 | (76 | ) | (5.4 | ) | ||||||||||
Gains on securities transactions, net | 649 | 187 | 462 | 247.1 | ||||||||||||
Gains (losses) on equity securities, net | (225 | ) | 44 | (269 | ) | (611.4 | ) | |||||||||
Gains on sale of mortgages | 2,231 | 764 | 1,467 | 192.0 | ||||||||||||
Earnings on bank owned life insurance | 411 | 357 | 54 | 15.1 | ||||||||||||
Other miscellaneous income | 82 | 178 | (96 | ) | (53.9 | ) | ||||||||||
Total other income | 6,835 | 5,306 | 1,529 | 28.8 |
Trust and investment services income increased $83,000,decreased $89,000, or 24.1%17.6%, and $231,000,$4,000, or 20.9%0.4%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods last year. This revenue consists of income from traditional trust services and income from alternative investment services provided through a third party. In the thirdsecond quarter of 2017,2020, traditional trust income increaseddecreased by $42,000,$10,000, or 17.5%3.3%, while income from alternative investments increaseddecreased by $41,000,$79,000, or 39.7%35.5%, compared to the thirdsecond quarter of 2016.2019. For the ninesix months ended SeptemberJune 30, 2017,2020, traditional trust services income increased by $158,000,$6,000, or 21.2%1.0%, while income from alternative investment services increaseddecreased by $73,000,$10,000, or 20.4%2.5%, compared to the same period in 2016. Trust2019. The decline in income was upfrom the investment services area for both time periods as a result ofcan be attributed to less new business, higher fees,which was impacted, by COVID-19 and higherthe branch lobby closures during the second quarter. Management would expect activity to increase again going into the remainder of 2020. The trust valuations. Several new trust accounts were openedand investment services area continues to be an area of strategic focus for the Corporation. Management believes there continues to be great need for retirement, estate, small business succession planning, and personal investment services in the fourth quarterCorporation’s service area. Management also sees these services as being a necessary part of 2016 adding revenue beginning in 2017. A new trust fee schedule was implemented in Marcha comprehensive line of 2016, which resulted in more first quarter and year-to-date income in 2017. Trust income was also elevated due to increases in unscheduled executor fee income over both periods of 2016. Lastly, equity markets were up since December 31, 2016, and have continued to increase throughout 2017, which has increased trust valuations andfinancial solutions across the fees generated from their fair market values.
organization.
4649
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Service charges on deposit accounts increaseddecreased by $35,000,$150,000, or 12.3%42.3%, and $88,000,$157,000, or 10.7%23.2%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016. Overdraft service charges are the largest component of this category and comprised approximately 80% of the total deposit service charges for the three and nine months ended September 30, 2017. Total2019. The decrease is primarily due to a decrease in overdraft fees increasedthat were lower by $29,000,$128,000, or 12.8%44.7%, and $77,000,$119,000, or 11.8%22.0%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, respectively, compared to the same periods in 2016. Management attributes higher overdraft2019. This decline can be primarily attributed to the current economic environment, which has necessitated changes in customer behaviors. Various other fee income primarilycategories increased or decreased to lesser degrees making up the growth in deposit accounts and new customers. No changes to Bank fees or policies have occurred. Mostremainder of the other service charge areas showed minimal increases or decreases fromvariance compared to the prior year.
Other service charges and fees increased by $24,000,$92,000, or 7.9%27.2%, and $162,000,$148,000, or 19.7%22.9%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. The quarterly and year-to-date increase is primarily due to an increase in loan administration fees that were higher by $40,000,$119,000, or 37.7%206.5%, and $116,000, or 88.8%, for the three-month periodthree and six months ended SeptemberJune 30, 2017,2020, respectively, compared to the same periods in 2019. This was a result of increased secondary market mortgage activity due to the very low interest rate environment. Additionally, loan modification fees were higher by $60,000, or 558.8%, and $133,000,$74,000, or 47.8%406.7%, for the nine-month periodthree and six months ended SeptemberJune 30, 2017,2020, compared to the same periods in the prior year. A significant increase in mortgage volume is being generated through the mortgage expansion and was the primary reason forPartially offsetting these increased fees. Account analysisincreases, fees increasedon an off-balance sheet cash management product decreased by $6,000,$72,000, or 53.9%70.3%, and $23,000,$48,000, or 86.3%25.7%, for the quarterthree and year-to-date periodssix months ended SeptemberJune 30, 2017,2020, compared to the same periods in the previous year primarily as a result of increased focus on cash management customers and assessing proper fees for the services provided. Partially offsetting these increases, fees for 30-year mortgage originations decreased by $23,000, or 30.5%, and $11,000, or 6.0%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. 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.2019. Various other fee income categories increased or decreased to lesser degrees making up the remainder of the variance compared to the prior year.
Commissions increaseddecreased by $31,000,$107,000, or 5.6%14.2%, and $103,000,$76,000, or 6.4%5.4%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. This was primarily caused by debit card interchange income, which increaseddecreased by $23,000,$64,000, or 4.8%9.7%, and $90,000,$71,000, or 6.4%5.7%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. The interchange income is a direct result of the volume of debit card transactions processed and this income increasesdecreased during the second quarter of 2020 as customer accounts increase or as customers utilize their debit cards to a higher degree. Additionally, insurance commissions from Banker’s Settlement Services increasedspending changed with lower levels of purchases impacted by $7,000, or 30.0%, and $14,000, or 22.6%, for the three and nine months ended September 30, 2017, compared to the same periods in the prior year. The vast majority of the insurance commissions were from residential mortgage transactions.COVID-19.
For the three and six months ended SeptemberJune 30, 2017, $170,0002020, $372,000 and $424,000 of gains on securities transactions were recorded, respectively, compared to $464,000gains of $133,000 and $231,000, respectively, for the same periodperiods in 2016, a $294,000, or 63.4% decrease. For the nine months ended September 30, 2017, $417,000 of gains on securities transactions were recorded compared to $2,130,000 for the nine months ended September 30, 2016, a $1,713,000, or 80.4% decrease.2019. 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. The gains or losses recorded by the Corporation depend heavily on market pricing and the volume of security sales. Generally, the lower U.S. Treasury yields 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 ninesix months of 20162020 provided greaterbetter opportunities to take significant gains out of the portfolio than during the first ninesix months of 2017. Management also executed more gains in the first nine months of 2016 to offset the non-recurring Sub-U.S. Agency amortization of $1,681,000. Market timing was favorable as the bond market was stronger and loan growth was also strong so management did not have to reinvest a significant amount of the proceeds from the sale of securities.2019.
47
ENB FINANCIAL CORPManagement’s Discussion and Analysis
Gains on the sale of mortgages were $510,000$1,690,000 for the three-month period ended SeptemberJune 30, 2017,2020, compared to $557,000$415,000 for the same period in 2016,2019, a $47,000,$1,275,000, or 8.4% decrease. Gains on307.2% increase. For the sale of mortgages for the nine monthssix-month period ended SeptemberJune 30, 2017, increased by $193,000, or 17.4%,2020, mortgage gains amounted to $2,231,000, compared to $764,000 for the same period in 2016. Secondary mortgage financing2019, a $1,467,000, or 192.0% increase. Mortgage activity drives the gains on the sale of mortgages, and the activitywas significantly higher in the first nine monthshalf of 2017 was at increased levels due2020 compared to the greater marketing effortsprior year as a result of the Corporation’shistorically low interest rates and a surge in mortgage area, a slightly improved local economy, as well as attractive mortgage rates.refinancing activity. Management currently anticipates that gains should continue at these higher levels throughout the remainder of 2017, with2020 may continue at a higher level compared to the continued increased focusprior year, but a lower level compared to grow the Corporation’s mortgage origination activity, continued low mortgage rates,first half of 2020, due to the favorable rate environment and expanded adjustable rate mortgage offerings. Most ofreasonable margins received on the Corporation’s recent held for investment mortgage growth has come in the form of 5/1 and 7/1 year adjustable rate mortgages.mortgages that are being sold.
For the three months ended SeptemberJune 30, 2017,2020, earnings on bank-owned life insurance (BOLI) decreasedincreased by $40,000,$26,000, or 19.0%14.5%, and for the ninesix months ended SeptemberJune 30, 2017,2020, earnings on BOLI decreasedincreased by $90,000,$54,000, or 14.9%15.1%, compared to the same periods in 2016. The decrease was primarily due to declining performance on the grandfathered directors’ life insurance policies, which were initiated prior to 1995 in connection with a previous Directors Deferred Compensation Plan. These director-related policies are not generating as much income due to the age of the directors and structure of the policies. The lower levels of return on these policies will likely continue throughout the remainder of 2017 and into 2018.2019. The amount of BOLI income is generally dependent upon the actual 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.
The miscellaneous income category increased by $20,000, or 24.7%, for the three months ended June 30, 2020, and decreased by $96,000, or 53.9%, for the six months ended June 30, 2020, compared to the same periods in 2019. The quarterly increase can be attributed to an increase of $28,000 in net mortgage servicing income while the year-to-date decrease can be attributed to a decline in this income of $108,000. Amortization on mortgage servicing assets was very high in the first quarter of 2020 and then came down significantly in the second quarter resulting in these variances.
50
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Operating Expenses
Operating expenses for the thirdsecond quarter of 20172020 were $7,647,000, an$8,244,000, a modest increase of $899,000,$27,000, or 13.3%0.3%, compared to the $6,748,000$8,217,000 for the thirdsecond quarter of 2016.2019. For the year-to-date period ended SeptemberJune 30, 2017,2020, operating expenses totaled $22,880,000,$17,354,000, an increase of $2,938,000,$855,000, or 14.7%5.2%, compared to the same period in 2016.2019. The following tables provide details of the Corporation’s operating expenses for the three and nine-monthsix-month periods ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.
48
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended June 30, | ||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | Increase (Decrease) | ||||||||||||||||||||||||||||
$ | $ | $ | % | $ | $ | $ | % | |||||||||||||||||||||||||
Salaries and employee benefits | 4,840 | 4,219 | 621 | 14.7 | 4,966 | 5,105 | (139 | ) | (2.7 | ) | ||||||||||||||||||||||
Occupancy expenses | 624 | 555 | 69 | 12.4 | 616 | 590 | 26 | 4.4 | ||||||||||||||||||||||||
Equipment expenses | 299 | 276 | 23 | 8.3 | 316 | 287 | 29 | 10.1 | ||||||||||||||||||||||||
Advertising & marketing expenses | 143 | 120 | 23 | 19.2 | 218 | 166 | 52 | 31.3 | ||||||||||||||||||||||||
Computer software & data processing expenses | 575 | 471 | 104 | 22.1 | 768 | 609 | 159 | 26.1 | ||||||||||||||||||||||||
Bank shares tax | 215 | 227 | (12 | ) | (5.3 | ) | 239 | 232 | 7 | 3.0 | ||||||||||||||||||||||
Professional services | 377 | 380 | (3 | ) | (0.8 | ) | 507 | 556 | (49 | ) | (8.8 | ) | ||||||||||||||||||||
Other operating expenses | 574 | 500 | 74 | 14.8 | 614 | 672 | (58 | ) | (8.6 | ) | ||||||||||||||||||||||
Total Operating Expenses | 7,647 | 6,748 | 899 | 13.3 | 8,244 | 8,217 | 27 | 0.3 | ||||||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||
(DOLLARS IN THOUSANDS) | ||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||
2017 | 2016 | |||||||||||||||
$ | $ | $ | % | |||||||||||||
Salaries and employee benefits | 14,370 | 12,230 | 2,140 | 17.5 | ||||||||||||
Occupancy expenses | 1,828 | 1,584 | 244 | 15.4 | ||||||||||||
Equipment expenses | 878 | 811 | 67 | 8.3 | ||||||||||||
Advertising & marketing expenses | 539 | 422 | 117 | 27.7 | ||||||||||||
Computer software & data processing expenses | 1,654 | 1,345 | 309 | 23.0 | ||||||||||||
Bank shares tax | 644 | 680 | (36 | ) | (5.3 | ) | ||||||||||
Professional services | 1,260 | 1,207 | 53 | 4.4 | ||||||||||||
Other operating expenses | 1,707 | 1,663 | 44 | 2.6 | ||||||||||||
Total Operating Expenses | 22,880 | 19,942 | 2,938 | 14.7 |
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
Six Months Ended June 30, | ||||||||||||||||
2020 | 2019 | Increase (Decrease) | ||||||||||||||
$ | $ | $ | % | |||||||||||||
Salaries and employee benefits | 10,662 | 10,293 | 369 | 3.6 | ||||||||||||
Occupancy expenses | 1,207 | 1,220 | (13 | ) | (1.1 | ) | ||||||||||
Equipment expenses | 606 | 574 | 32 | 5.6 | ||||||||||||
Advertising & marketing expenses | 492 | 416 | 76 | 18.3 | ||||||||||||
Computer software & data processing expenses | 1,474 | 1,266 | 208 | 16.4 | ||||||||||||
Bank shares tax | 479 | 465 | 14 | 3.0 | ||||||||||||
Professional services | 1,130 | 1,031 | 99 | 9.6 | ||||||||||||
Other operating expenses | 1,304 | 1,234 | 70 | 5.7 | ||||||||||||
Total Operating Expenses | 17,354 | 16,499 | 855 | 5.2 |
Salaries and employee benefits are the largest category of operating expenses. In general, they comprise 63%approximately 61% of the Corporation’s total operating expenses. For the three months ended SeptemberJune 30, 2017,2020, salaries and benefits increased $621,000,decreased $139,000, or 14.7%2.7%, from the same period in 2016.2019. For the ninesix months ended SeptemberJune 30, 2017,2020, salaries and benefits increased $2,140,000,$369,000, or 17.5%3.6%, compared to the ninesix months ended SeptemberJune 30, 2016.2019. Salaries increaseddecreased by $459,000,$301,000, or 14.3%8.1%, and employee benefits increased by $162,000,$161,000, or 15.9%11.7%, for the three months ended SeptemberJune 30, 2017,2020, compared to the same period in 2016.2019. For the ninesix months ended SeptemberJune 30, 2017,2020, salary expense increased by $1,528,000,$96,000, or 16.9%1.3%, while employee benefits increased by $611,000,$273,000, or 19.3%9.6%, compared to the ninesix months ended SeptemberJune 30, 2016.2019. Salary and benefit expenses have grown significantlycosts were lower for the quarter due to higher deferred costs on loan originations, which are recorded as a contra salary expense. However, for the year-to-date period, salary costs were higher primarily due to a performance bonus paid out in the first quarter of 2020. Employee benefits expense was at a higher level for the quarter and year-to-date periods in 2020 due to higher health insurance costs, which increased by $146,000, or 21.8%, and $311,000, or 22.7%, for the three new branch locations addedand six months ended June 30, 2020, compared to the same periods in 2016, but also as a result of additional operational positions to support the growth of the Corporation.2019.
51
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 $69,000,$26,000, or 12.4%4.4%, and $244,000,decreased by $13,000, or 15.4%1.1%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in the prior year. Building repair and maintenance costs increased by $18,000,$44,000, or 41.8%173.2%, and $85,000,$47,000, or 84.7%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Utilities costs increased by $10,000, or 5.9%, and $68,000, or 15.1%79.4%, when comparing the three and ninesix months ended SeptemberJune 30, 2017,2020, to the same periods in the prior year. Lease expense increasedFor the year-to-date period, depreciation costs decreased by $22,000,$21,000, or 61.5%5.9%, and $59,000,snow removal costs decreased by $55,000, or 63.6%79.2%. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.
Equipment expenses increased $29,000, or 10.1%, and $32,000, or 5.6%, for the three and nine-month periods in 2017 compared to 2016. Cleaning services increased by $10,000, or 35.0%, and $28,000, or 35.8%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in the prior year. Occupancy expenses were higher for both the quarterEquipment repair and year-to-date periods as a result of projects at existing locations and the expense associated with the three new branch locations and leased office space added during the last half of 2016.
49
ENB FINANCIAL CORPManagement’s Discussion and Analysis
Equipment expensesmaintenance costs increased by $23,000,$25,000, or 8.3%190.4%, and $67,000,$33,000, or 8.3%126.7%, forwhen comparing the three and ninesix months ended SeptemberJune 30, 2017, compared2020, to the same periods in 2016. Equipment service contract expenses increased by $16,000, or 24.7%, and $38,000, or 22.2%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Equipment repair and maintenance costs did not change for the quarterly period in both years, but increased by $15,000, or 48.5%, for the nine months ended September 30, 2017, compared to the same period in the prior year. Other miscellaneous equipment expensesVarious other occupancy expense categories increased by $4,000, or 23.5%, and $27,000, or 74.0%, for the three and nine months ended September 30, 2017, compared to 2016. Partially offsetting these increases, depreciation on furniture and equipment decreased by $3,000, or 1.6%, and $14,000, or 2.6% forsmaller amounts making up the three and nine-month periods in 2017 compared to 2016. In general, furniture and equipment expenses are increasing as a resultremainder of the expanded branchquarter and office network.year-to-date variance.
Advertising and marketing expenses increased by $23,000,$52,000, or 19.2%31.3%, and $76,000, or 18.3%, for the three and six months ended SeptemberJune 30, 2017,2020, compared to the same periodperiods in 2016, and increased by $117,000, or 27.7%, for the nine months ended September 30, 2017, compared to the same period in 2016.2019. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses remained the sameincreased by $70,000, or 58.3%, for the quarter ended September 30, 2017, compared to the third quarter of 2016, but for the nine months ended September 30, 2017, these expensesquarter-to-date period, and increased by $84,000,$88,000, or 31.7%31.9%, compared tofor the year-to-date period in 2016. Public relations expenses increased by $23,000, or 72.1%, for the three months ended SeptemberJune 30, 2017, and $34,000, or 21.7%, for the nine months ended September 30, 2017,2020, compared to the same periods in 2016.the prior year. Public relations expenses decreased by $19,000, or 42.0%, and $12,000, or 8.7%, for the three and six months ended June 30, 2020, compared to the same periods in 2019. 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 $104,000,$159,000, or 22.1%26.1%, for the thirdsecond quarter of 2017,2020 compared to 2019, and $309,000,$208,000, or 23.0%16.4%, for the ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016.2019. Software-related expenses were up $78,000,by $118,000, or 30.3%, and $242,000, or 33.4%35.9%, for the three and nine months ended SeptemberJune 30, 2017,2020, and by $141,000, or 19.7%, for the six months ended June 30, 2020, compared to the same periods in the prior year,year. The increases were 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. Software expenses are likely to continue to increase in 2020, but the actual increase will be dependent on how quickly new software platforms are identified, analyzed, approved and placed into service. Data processing fees were up $27,000,$42,000, or 12.3%14.8%, and $68,000,$66,000, or 10.9%12.1%, for the three and ninesix months ended SeptemberJune 30, 2017,2020, compared to the same periods in 2016. These fees are likely to continue to increase throughout the remainder of 2017 as new software platforms are installed and the cost of annual maintenance contracts increases and data processing fees increase with the increase in customer transactions.2019.
The Pennsylvania Bank Shares Taxshares tax expense decreased $12,000, or 5.3%, and $36,000, or 5.3%,was $239,000 for the three and nine months ended September 30, 2017,second quarter of 2020, an increase of $7,000, or 3.0%, from the second quarter of 2019. For the year-to-date period, shares tax increased by $14,000, or 3.0%, compared to the same periods in 2016. Threeprior year. 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, and the actual tax rate.obligations. The shares tax calculation in 2014 changed to usinguses a year-endperiod-end balance of shareholders’ equity less tax-exempt U.S. obligations multiplied byand a tax rate of 0.89%0.95%. In 2016, as partThe increase in 2020 can be primarily attributed to the Corporation’s growing value of the State of Pennsylvania Budget discussions, the Governor proposed a Bank Shares Tax rate increase to 1.25%. Later proposals were 0.99%, and the 0.95% tax rate that was approved. As a result of these budget discussions, in the beginning of 2016 management was accruing for a higher level of PA Bank Shares Tax, which caused the expense for both the three and nine-month periods ended September 30, 2016 to be elevated. Once it was known the Pennsylvania Bank Shares Tax rate was approved at 0.95% for the 2016 PA Bank Shares Tax year, the amount of expense was reduced in the second half of 2016 and throughout 2017.shareholders’ equity.
Other operating expensesProfessional services expense decreased by $49,000, or 8.8%, and increased by $74,000,$99,000, or 14.8%, and by $44,000, or 2.6%9.6%, for the three and nine monthssix-month periods ended SeptemberJune 30, 2017 respectively,2020, compared to the same periods in 2016. Loan-related expenses increased2019. These services include accounting and auditing fees, legal fees, and fees for other third-party services. Trust department processing fees were lower by $95,000 for the quarter and by $100,000 for the year-to-date periods when comparing 2017 to 2016. The primary reason for this increase was the implementation of a third party origination loan program which generates revenue from loans referred by another financial institution, with a commission paid to that institution which runs through this other operating expense category. Additionally, fraud-related charge-offs increased by $14,000,$48,000, or 63.4%, and $45,000, or 50.7%56.3%, for the three and nine-month periodsmonths ended SeptemberJune 30, 2017,2020, compared to the same periodsperiod in the prior year.year accounting for the quarterly decrease. Other outside service fees increased by $130,000, or 30.9%, for the six months ended June 30, 2020, compared to the same period in 2019 making up the year-to-date variance. Several other professional services expenses increased or decreased slightly making up the remainder of the variance.
5052
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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 ninesix months ended SeptemberJune 30, 2017,2020, the Corporation recorded Federal income tax expense of $391,000 and $935,000,$1,077,000, compared to tax expense of $445,000 and $1,045,000$1,046,000 for the three and ninesix months ended SeptemberJune 30, 2016.2019. The effective tax rate for the Corporation was 16.1%15.7% for the threesix months ended SeptemberJune 30, 2017, and 14.0% for the nine months ended September 30, 2017,2020, compared to 17.6% and 15.6%15.5% for the same periods in 2016. 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. The lower effective tax rate for the year-to-date period in 2017 was primarily caused by an increase in the Corporation’s tax-free municipal bond portfolio.
2019. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on 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’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. The higher effective tax rate for the year-to-date period in 2020 was primarily caused by the higher income before taxes.
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 $215,000$479,000 in the third quarterfirst six months of 2017 and $644,000 for the nine months ended September 30, 2017,2020 compared to $227,000 and $680,000 for the same periods$465,000 in 2016.2019. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income, under operating expenses.
5153
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Financial Condition
Investment Securities Available for Sale
The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of SeptemberJune 30, 2017,2020, the Corporation had $320.7$341.5 million of securities available for sale, which accounted for 31.7%26.3% of assets, compared to 31.3%26.9% as of December 31, 2016,2019, and 30.7%26.3% as of SeptemberJune 30, 2016.2019. Based on ending balances, the securities portfolio increased 7.6%14.9% from SeptemberJune 30, 2016,2019, and 4.1%8.5% from December 31, 2016.2019.
The securities portfolio was showing a net unrealized lossgain of $3,381,000$5,724,000 as of SeptemberJune 30, 2017,2020, compared to an unrealized lossgain of $7,401,000$2,027,000 as of December 31, 2016,2019, and an unrealized gain of $1,850,000$377,000 as of SeptemberJune 30, 2016.2019. 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. The 10-year U.S. Treasury yield was 1.60%2.00% as of SeptemberJune 30, 2016, 2.45%2019, 1.92% as of December 31, 2016,2019, and 2.33%0.66% as of SeptemberJune 30, 2017.2020. The lower Treasury rates since December 31, 2016 have caused an improvementincrease in market valuation, which has resulted in the smallerhigher unrealized lossgains recorded at SeptemberJune 30, 20172020 compared to the significant unrealized losseslower levels of gains at December 31, 2016.2019 and June 30, 2019.
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 SeptemberJune 30, 2017,2020, December 31, 2016,2019, and SeptemberJune 30, 2016.2019.
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, 2017 | ||||||||||||||||||||||||
June 30, 2020 | ||||||||||||||||||||||||
U.S. government agencies | 29,107 | (460 | ) | 28,647 | 8,217 | 162 | 8,379 | |||||||||||||||||
U.S. agency mortgage-backed securities | 54,181 | (598 | ) | 53,583 | 71,241 | 1,312 | 72,553 | |||||||||||||||||
U.S. agency collateralized mortgage obligations | 54,503 | (465 | ) | 54,038 | 45,854 | 708 | 46,562 | |||||||||||||||||
Asset-backed securities | 33,340 | (1,389 | ) | 31,951 | ||||||||||||||||||||
Corporate bonds | 62,426 | 1,005 | 63,431 | |||||||||||||||||||||
Obligations of states and political subdivisions | 107,885 | 3,926 | 111,811 | |||||||||||||||||||||
Total debt securities, available for sale | 328,963 | 5,724 | 334,687 | |||||||||||||||||||||
Equity securities | 6,977 | (202 | ) | 6,775 | ||||||||||||||||||||
Total securities | 335,940 | 5,522 | 341,462 | |||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
U.S. government agencies | 32,621 | 3 | 32,624 | |||||||||||||||||||||
U.S. agency mortgage-backed securities | 48,859 | (233 | ) | 48,626 | ||||||||||||||||||||
U.S. agency collateralized mortgage obligations | 60,124 | 129 | 60,253 | |||||||||||||||||||||
Asset-backed securities | 23,646 | (384 | ) | 23,262 | ||||||||||||||||||||
Corporate bonds | 57,384 | (248 | ) | 57,136 | 54,604 | 276 | 54,880 | |||||||||||||||||
Obligations of states and political subdivisions | 123,344 | (1,671 | ) | 121,673 | 86,216 | 2,236 | 88,452 | |||||||||||||||||
Total debt securities | 318,519 | (3,442 | ) | 315,077 | 306,070 | 2,027 | 308,097 | |||||||||||||||||
Marketable equity securities | 5,557 | 61 | 5,618 | |||||||||||||||||||||
Total securities available for sale | 324,076 | (3,381 | ) | 320,695 | ||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
U.S. government agencies | 33,124 | (863 | ) | 32,261 | ||||||||||||||||||||
U.S. agency mortgage-backed securities | 56,826 | (957 | ) | 55,869 | ||||||||||||||||||||
U.S. agency collateralized mortgage obligations | 38,737 | (801 | ) | 37,936 | ||||||||||||||||||||
Corporate bonds | 52,928 | (837 | ) | 52,091 | ||||||||||||||||||||
Obligations of states and political subdivisions | 128,428 | (3,998 | ) | 124,430 | ||||||||||||||||||||
Total debt securities | 310,043 | (7,456 | ) | 302,587 | ||||||||||||||||||||
Marketable equity securities | 5,469 | 55 | 5,524 | |||||||||||||||||||||
Total securities available for sale | 315,512 | (7,401 | ) | 308,111 | ||||||||||||||||||||
Equity securities | 6,685 | 23 | 6,708 | |||||||||||||||||||||
Total securities | 312,755 | 2,050 | 314,805 |
5254
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Net | ||||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains (Losses) | Value | ||||||||||
$ | $ | $ | ||||||||||
September 30, 2016 | ||||||||||||
U.S. government agencies | 33,088 | (11 | ) | 33,077 | ||||||||
U.S. agency mortgage-backed securities | 50,160 | 31 | 50,191 | |||||||||
U.S. agency collateralized mortgage obligations | 34,940 | 98 | 35,038 | |||||||||
Corporate bonds | 53,751 | 158 | 53,909 | |||||||||
Obligations of states and political subdivisions | 118,515 | 1,452 | 119,967 | |||||||||
Total debt securities | 290,454 | 1,728 | 292,182 | |||||||||
Marketable equity securities | 5,835 | 122 | 5,957 | |||||||||
Total securities available for sale | 296,289 | 1,850 | 298,139 |
Net | ||||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains (Losses) | Value | ||||||||||
$ | $ | $ | ||||||||||
June 30, 2019 | ||||||||||||
U.S. government agencies | 31,186 | (155 | ) | 31,031 | ||||||||
U.S. agency mortgage-backed securities | 46,899 | (807 | ) | 46,092 | ||||||||
U.S. agency collateralized mortgage obligations | 54,906 | 2 | 54,908 | |||||||||
Asset-backed securities | 13,926 | (67 | ) | 13,859 | ||||||||
Corporate bonds | 52,680 | (182 | ) | 52,498 | ||||||||
Obligations of states and political subdivisions | 90,953 | 1,586 | 92,539 | |||||||||
Total debt securities | 290,550 | 377 | 290,927 | |||||||||
Equity securities | 6,242 | (11 | ) | 6,231 | ||||||||
Total securities available for sale | 296,792 | 366 | 297,158 |
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. It is likelyDuring the second half of 2019, the Federal Reserve will actdecreased short-term rates three times for a total of 75 basis points, and during the first quarter of 2020, the Federal Reserve decreased short-term rates two times for a total of 150 basis points. Market conditions in the first half of 2020 were very unpredictable and fast changing due to increasethe start of and continuing impact of COVID-19 and the declaration of a global pandemic on March 11, 2020. The Fed’s reduction of interest rates one more timewas in response to this pandemic and caused short-term and long-term Treasury rates to decline at a rapid pace to reach all-time lows. This pandemic continued to have far-reaching impacts on local, national, and global economies and supply chains and negatively affected market pricing resulting in lower unrealized gains on the securities portfolio despite lower Treasury rates at March 31, 2020, compared to December 31, 2019. However, unrealized gains on the securities portfolio increased during 2017. During 2016, there was increased foreign market turmoil with several major European countries experiencing negative yields for mid and longer term notes. This resulted in foreign investors seekingthe second quarter ending at $5,522,000 as of June 30, 2020. The 10-year U.S. Treasury debt asreached a safe haven and drove U.S. Treasury yields to new record lows early in the third quarterlow of 2016. Treasury rates increased significantly during the third and fourth quarters of 2016. The Treasury rates ran up0.54% on March 9, 2020, compared to a 20172020 high of 1.88% to start the year. The COVID-19 pandemic continues to have significant impacts on rates and the economy and management believes this will continue throughout 2020 resulting in March and then slowly retreated until hitting lows in early September. Since then Treasurythese very low rates have slowly increased and are likely to increase throughoutfor the fourth quarter in anticipationremainder of a December Federal Reserve rate increase. The trend of the U.S. leading economic indicators is more supportive of a Federal Reserve rate increase than they were earlier in the year. Beyond interest rate movements, there are also a number of other factors that influence bond pricing including regulatory changes, financial performance of issuers, changes to credit rating of insurers of bonds, changes in market perception of certain classes of securities, and many more. Management monitors the changes in interest rates and other market influences to assist in management of the securities portfolio.
Any material increase in market interest rates would have a negative impact on the market value of the Corporation’s fixed income debt securities. As of June 30, 2020, approximately 78% of the Corporation’s debt securities were fixed rate securities with the other 22% variable rate. The variable rate instruments generally experience very little impact will vary according to valuation based on a change in rates because they trade on a spread over overnight rates such as LIBOR. However, with the length and structure of each sector. The Federal Reserve increaseddrastically reducing the FedFederal funds rate by 25 basis points1.50% in DecemberMarch to 0.25% it caused the market to view floating rate bonds differently, as the new effective yields on those securities would be significantly reduced upon the next rate reset; whereas fixed rate securities without call options could maintain their effective yield in a new bond market with sharply lower yields. Therefore, the valuation of 2015, December of 2016,the fixed rate securities held up better when the securities portfolio was valued for March of 2017,31, 2020 and June 30, 2020. Generally the longer the bond and the longer the call protection, the better the bond did in terms of 2017, with the likelihood of an additional increase in December of 2017. While management is planning for mid-term and long-term interest rates to increase throughout the remainder of 2017, it is possible they would not increase to the same magnitude that short-term rates will increase resulting in an even flatter yield curve.valuation. 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 lossesgains could growimprove even further if market rates do increaseremain stagnant or decrease during the remainder of the year, either in anticipation of a Federal Reserve rate move, or after the next rate move.year.
After four consecutive quartersThe effective duration of declines ending on September 30, 2016, the Corporation’s effective durationportfolio continues to be at historic lows but increased in the final two quarters of 2016 and first quarter of 2017 due primarily to a higher level of municipal bonds in the securities portfolio. However, due to selective sales of longer duration securities, the duration did declineslightly in the second and third quartersquarter of 2017.2020, to 2.4, from 2.2 as of December 31, 2019. Effective duration is a measurement of the length 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 low as 2.82.3 as of SeptemberJune 30, 2016. Since then it has increased to 3.3 as of September 30, 2017.2019. Duration is expected to remain stable or declineincrease slightly throughout the remainder of 2017. It will be more difficult2020. The Corporation was able to reduce effective duration materially since management has increased the percentageby purchasing more variable rate securities throughout 2018 and 2019. Additionally, with declining rates, pass-through structures of municipal holdingsMBS and CMO instruments typically shorten in the portfolio. While the percentage of longer duration municipal bonds has grown, the types of new municipal bond instruments being purchased generally have better rates-up performance than those municipal bonds being sold. Therefore, the same duration can be maintained despite a higher element of municipal securities. Management also continues to utilize a large cash position outside of the portfolio, as well as lower duration corporate bonds to offset the duration of the longer municipal bonds.principal payments increase.
5355
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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. Because market interest rates were generally rising since September 30, 2016,declining rapidly in the first six months of 2020, there was some opportunity to realize gains from the sales of securities. As a result, gains from the sales of debt securities did decline significantly.were up for the six months ended June 30, 2020, compared to the prior year’s period.
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-incomefixed and variable rate bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book and fair market value of $5.3$6.1 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 $307,000$829,000 and fair market value of $368,000$627,000 as of SeptemberJune 30, 2017.2020. The fair value of the bank stocks was significantly impacted by the COVID-19 pandemic and the drastic devaluation of bank stocks during this time. The equity holdings make up 1.8%2.0% of the Corporation’s securities available for sale.
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.
56
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
Period Ending | ||||||||||||||||||||||||
June 30, 2020 | December 31, 2019 | June 30, 2019 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
U.S. government agencies | 8,379 | 2.5 | 32,624 | 10.5 | 31,031 | 10.4 | ||||||||||||||||||
U.S. agency mortgage-backed securities | 72,553 | 21.2 | 48,626 | 15.4 | 46,092 | 15.5 | ||||||||||||||||||
U.S. agency collateralized mortgage obligations | 46,562 | 13.6 | 60,253 | 19.1 | 54,908 | 18.5 | ||||||||||||||||||
Asset-backed securities | 31,951 | 9.4 | 23,262 | 7.4 | 13,859 | 4.7 | ||||||||||||||||||
Corporate debt securities | 63,431 | 18.6 | 54,880 | 17.4 | 52,498 | 17.7 | ||||||||||||||||||
Obligations of states and political subdivisions | 111,811 | 32.7 | 88,452 | 28.1 | 92,539 | 31.1 | ||||||||||||||||||
Total debt securities, available for sale | 334,687 | 98.0 | 308,097 | 97.9 | 290,927 | 97.9 | ||||||||||||||||||
Marketable equity securities (a) | 6,775 | 2.0 | 6,708 | 2.1 | 6,231 | 2.1 | ||||||||||||||||||
Total securities | 341,462 | 100.0 | 314,805 | 100.0 | 297,158 | 100.0 |
Period Ending | ||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
U.S. government agencies | 28,647 | 8.9 | 32,261 | 10.5 | 33,077 | 11.1 | ||||||||||||||||||
U.S. agency mortgage-backed securities | 53,583 | 16.7 | 55,869 | 18.1 | 50,191 | 16.8 | ||||||||||||||||||
U.S. agency collateralized mortgage obligations | 54,038 | 16.9 | 37,936 | 12.3 | 35,038 | 11.8 | ||||||||||||||||||
Corporate debt securities | 57,136 | 17.8 | 52,091 | 16.9 | 53,909 | 18.1 | ||||||||||||||||||
Obligations of states and political subdivisions | 121,673 | 37.9 | 124,430 | 40.4 | 119,967 | 40.2 | ||||||||||||||||||
Equity securities | 5,618 | 1.8 | 5,524 | 1.8 | 5,957 | 2.0 | ||||||||||||||||||
Total securities | 320,695 | 100.0 | 308,111 | 100.0 | 298,139 | 100.0 |
The largest movements within the securities portfolio were shaped by market factors, such as:
54
ENB FINANCIAL CORPManagement’s Discussion and Analysis
· | 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 |
· | credit risk of each instrument and risk-based capital considerations |
· | Federal income tax considerations with regard to obligations of tax-free states and political subdivisions. |
Since September of 2016, the most significant change occurring within the Corporation’s securities portfolio was an increase in U.S. agency collateralized mortgage obligations (CMOs), and a decrease in U.S. government agency securities.
The Corporation’s U.S. government agency sector decreased by $4.4$22.7 million, or 13.4%73.0%, since SeptemberJune 30, 2016,2019, with the weighting decreased from 11.1%10.4% of the portfolio to 8.9%2.5%. In the past, management’s goal was to maintain agency securities at approximately 15%10% of the securities portfolio. In the current rate environment, management is comfortable maintaining agencies atbelow this level. With the drastic decline in market rates throughout the first half of 2020, many U.S. agency securities were called and a levelnumber of approximately 10% ofothers were sold during the portfolio. Thissix months ended June 30, 2020. In the past, this sector is alsowas important in maintaining adequate risk weightings of the portfolio and to ensure sufficient U.S. government securities for pledging purposes, but management has been utilizing both mortgage-backed securities (MBS) and importantlycollateralized mortgage obligations (CMOs) to ladder outdo the same. Management has increased the allocations of these two sectors as a schedule of agency and corporate maturities over the next 5 yearsgroup since June 30, 2019, MBS to avoid any concentration of maturities.a greater degree. Next to U.S. Treasuries, U.S. agencies are viewed as the safest instrumentssecurities and are considered by management as a foundational portioncomponent of the portfolio.
The Corporation’s U.S. agency MBS and CMO sectors have increased in total since SeptemberJune 30, 2016, and the weightings have changed2019, with significantly more CMOs and only slightly more MBS as of September 30, 2017, compared to September 30, 2016. The Corporation’s CMO portfolio has increased by $19.0increasing $26.5 million, or 54.2%57.4%, while MBS balances have only increased by $3.4and CMOs decreasing $8.3 million, or 6.8%, when comparing September 30, 2017, to balances at September 30, 2016.15.2%. 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 base cash flow.flow of approximately $2.0 - $3.0 million per month. 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,material, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities.
57
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Asset-backed securities increased by $18.1 million, or 130.5%, from June 30, 2019 to June 30, 2020. These securities are floating rate student loan pools which are instruments that will perform well in a rates-up environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flow.
As of SeptemberJune 30, 2017,2020, the fair value of the Corporation’s corporate bonds increased by $3.2$10.9 million, or 6.0%20.8%, from balances at SeptemberJune 30, 2016.2019. 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 and taxable 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. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. However, due to the decrease in the Federal tax rate as enacted by the Tax Cuts and Jobs Act, municipal yields do not outperform the other segments of the securities portfolio to the same degree as years prior to 2018. Municipal securities were purchased throughout the first half of 2020 due to market conditions that led to favorable yields on some instruments. The Corporation also began purchasing some taxable municipal securities that added to the value of this sector. Due to these purchases, the fair market value of municipal holdings has increased by $1.7$19.3 million, or 1.4%20.8%, from SeptemberJune 30, 20162019 to SeptemberJune 30, 2017.2020. Municipal bonds represented 37.9%32.7% of the securities portfolio as of SeptemberJune 30, 2017,2020, compared to 40.2%31.1% as of SeptemberJune 30, 2016.2019. The Corporation’s investment policy limits municipal holdings to 125% of Tier 2 capital. As of SeptemberJune 30, 2017,2020, municipal holdings amounted to 109%89% of Tier 2 capital.
55
ENB FINANCIAL CORPManagement’s Discussion and AnalysisThe Corporation’s investment policy requires that municipal bonds not carrying any insurance coverage have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of June 30, 2020, no municipal bonds carried a credit rating under these levels.
Management utilizes several municipal surveillance reports and engages an independent non-brokerage service 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.
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 all securities that have fallen below initial policy guidelines. As of SeptemberJune 30, 2017,2020, no securities have fallen below investment grade.
As of SeptemberJune 30, 2017, nineteen2020, 8 of the thirty-three35 corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 99.1%98.6% of book value.value, with the vast majority of these unrealized losses on variable rate corporate bonds where valuation was impacted by the sudden March 2020 overnight rate decreases. 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 SeptemberJune 30, 2017,2020, all but threetwo of the corporate bonds had at least one A3 or A- rating by one of the two predominate credit rating services, Moody’s and S&P. The three unrelatedThese two corporate bonds withwere from the same issuer and had a total book value of $6.7$3.0 million, and did not have an A3 or A- rating as of SeptemberJune 30, 2017.2020. These bonds were all 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 with Board approval. In addition, there are twelvefourteen corporate bond instruments that have split ratings with the highest rating within the Corporation’s initial purchase policy guidelines and the lower rating outside of management guidelines, but all are still investment grade. The twelvefourteen bonds have a book value of $20.0$22.5 million with a $57,000$341,000 unrealized lossgain as of SeptemberJune 30, 2017.2020. 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.
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, 2017, no municipal bonds carried a credit rating under these levels.58
As a result of the fallout of the financial crisis, the major rating services have tightened their credit underwriting standardsENB FINANCIAL CORP
Management’s Discussion and are quicker to downgrade municipalities when financial conditions deteriorate. Additionally, the prolonged 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 an independent non-brokerage service 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.Analysis
The entire securities portfolio is reviewed monthly for credit risk and evaluated quarterly for possible impairment. The 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 ongoing nationwide concerns of pension obligations impacting municipalities, management iscontinues to closely monitoringmonitor all corporate and municipal securities.
Loans
Net loans outstanding increased by 3.1%16.3%, to $576.0$825.2 million at SeptemberJune 30, 2017,2020, from $558.5$709.4 million at SeptemberJune 30, 2016.2019. Net loans increased by 2.1%10.9%, an annualized rate of 2.8%21.8%, from $564.0$744.2 million at December 31, 2016.2019. The following table shows the composition of the loan portfolio as of SeptemberJune 30, 2017,2020, December 31, 2016,2019, and SeptemberJune 30, 2016.
56
LOANS BY MAJOR CATEGORY
(DOLLARS IN THOUSANDS)
June 30, | December 31, | June 30, | ||||||||||||||||||||||
2020 | 2019 | 2019 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Commercial mortgages | 125,925 | 15.1 | 120,212 | 16.0 | 104,418 | 14.6 | ||||||||||||||||||
Agriculture mortgages | 175,108 | 20.9 | 175,367 | 23.3 | 168,726 | 23.5 | ||||||||||||||||||
Construction | 20,285 | 2.4 | 16,209 | 2.2 | 18,151 | 2.5 | ||||||||||||||||||
Total commercial real estate | 321,318 | 38.4 | 311,788 | 41.5 | 291,295 | 40.6 | ||||||||||||||||||
Consumer real estate (a) | ||||||||||||||||||||||||
1-4 family residential mortgages | 261,772 | 31.3 | 258,676 | 34.4 | 241,134 | 33.6 | ||||||||||||||||||
Home equity loans | 10,688 | 1.3 | 9,770 | 1.3 | 10,536 | 1.5 | ||||||||||||||||||
Home equity lines of credit | 69,507 | 8.3 | 70,809 | 9.4 | 66,535 | 9.3 | ||||||||||||||||||
Total consumer real estate | 341,967 | 40.9 | 339,255 | 45.1 | 318,205 | 44.4 | ||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||
Commercial and industrial | 129,459 | 15.5 | 58,019 | 7.7 | 61,298 | 8.6 | ||||||||||||||||||
Tax-free loans | 16,607 | 2.0 | 16,388 | 2.2 | 16,815 | 2.3 | ||||||||||||||||||
Agriculture loans | 21,581 | 2.6 | 20,804 | 2.8 | 20,641 | 2.9 | ||||||||||||||||||
Total commercial and industrial | 167,647 | 20.1 | 95,211 | 12.7 | 98,754 | 13.8 | ||||||||||||||||||
Consumer | 5,061 | 0.6 | 5,416 | 0.7 | 8,397 | 1.2 | ||||||||||||||||||
Total loans | 835,993 | 100.0 | 751,670 | 100.0 | 716,651 | 100.0 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Deferred loan fees (costs), net | 24 | (1,948 | ) | (1,705 | ) | |||||||||||||||||||
Allowance for loan losses | 10,770 | 9,447 | 8,957 | |||||||||||||||||||||
Total net loans | 825,199 | 744,171 | 709,399 |
September 30, | December 31, | September 30, | ||||||||||||||||||||||
2017 | 2016 | 2016 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Commercial mortgages | 90,468 | 15.5 | 86,434 | 15.2 | 87,676 | 15.5 | ||||||||||||||||||
Agriculture mortgages | 150,269 | 25.8 | 163,753 | 28.7 | 167,531 | 29.7 | ||||||||||||||||||
Construction | 18,762 | 3.2 | 24,880 | 4.4 | 28,796 | 5.1 | ||||||||||||||||||
Total commercial real estate | 259,499 | 44.5 | 275,067 | 48.3 | 284,003 | 50.3 | ||||||||||||||||||
Consumer real estate (a) | ||||||||||||||||||||||||
1-4 family residential mortgages | 168,984 | 29.0 | 150,253 | 26.3 | 143,066 | 25.3 | ||||||||||||||||||
Home equity loans | 11,457 | 2.0 | 10,391 | 1.8 | 10,537 | 1.9 | ||||||||||||||||||
Home equity lines of credit | 57,991 | 9.9 | 53,127 | 9.3 | 50,251 | 8.9 | ||||||||||||||||||
Total consumer real estate | 238,432 | 40.9 | 213,771 | 37.4 | 203,854 | 36.1 | ||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||
Commercial and industrial | 41,724 | 7.1 | 42,471 | 7.4 | 41,705 | 7.4 | ||||||||||||||||||
Tax-free loans | 19,632 | 3.4 | 13,091 | 2.3 | 11,485 | 2.0 | ||||||||||||||||||
Agriculture loans | 18,487 | 3.2 | 21,630 | 3.8 | 19,363 | 3.4 | ||||||||||||||||||
Total commercial and industrial | 79,843 | 13.7 | 77,192 | 13.5 | 72,553 | 12.8 | ||||||||||||||||||
Consumer | 5,166 | 0.9 | 4,537 | 0.8 | 4,663 | 0.8 | ||||||||||||||||||
Total loans | 582,940 | 100.0 | 570,567 | 100.0 | 565,073 | 100.0 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||
Deferred loan fees (costs), net | (1,137 | ) | (1,000 | ) | (895 | ) | ||||||||||||||||||
Allowance for loan losses | 8,028 | 7,562 | 7,435 | |||||||||||||||||||||
Total net loans | 576,049 | 564,005 | 558,533 |
(a) Residential real estate loans do not include mortgage loans serviced for others which totaled $187,258,000
There was moderatesignificant growth in the loan portfolio since SeptemberJune 30, 2016,2019, and December 31, 2016. A decline2019, respectively. Most major loan categories showed an increase in agricultural mortgagesbalances from both time periods. Loan growth was significant in 2019 and construction lending securedcontinued with growth in the first six months of 2020 driven primarily by commercialthe funding of Payroll Protection Program (PPP) loans to local businesses.
59
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The consumer residential real estate between December 31, 2016 and Septembercategory represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from $318.2 million on June 30, 2017 offset2019, to $342.0 million on June 30, 2020, a large portion of the growth occurring in other areas of the portfolio, resulting in somewhat slower growth. Commercial7.5% increase. This category includes closed-end fixed rate or adjustable-rate residential real estate loans saw a decline in balances with increases in consumer real estate loanssecured by 1-4 family residential properties, including first and commercialjunior liens, and industrial loans more than offsetting this decrease.floating rate home equity loans. The biggest decline in the commercial real estate sector has been in agricultural mortgages, which declined due to a reorganization of the Bank’s agricultural lending team, increased competitive pressures, including new market entrants, and headwinds in the agricultural marketplace impacting dairy farmers and poultry producers. In the consumer real estate sector, 1-4 family residential mortgages increasedaccount for the vast majority of residential real estate loans with fixed and floating home equity loans making up the remainder. Historically, the entire consumer residential real estate component of the loan portfolio has averaged close to 40% of total loans. As of June 30, 2019, this percentage was 44.4%, and as of June 30, 2020, it decreased to 40.9%. Management expects the consumer residential real estate category to increase at a similar pace throughout the remainder of 2020 due to a continued effort to increase mortgage volume, aided by lower interest rates, which should continue to motivate home buyers and those refinancing. Although economic conditions for consumers have deteriorated with the expansionCOVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continues to remain relatively strong as consumers refinance existing debt to lower rates. Market conditions have been changing rapidly throughout the first six months of 2020 and the rest of the year is unpredictable, but management would expect mortgage volume to continue at fairly high levels.
The first lien 1-4 family mortgages increased by $20.6 million, or 8.6%, from June 30, 2019, to June 30, 2020. These first lien 1-4 family loans made up 76% of the residential real estate total as of June 30, 2019, and 77% as of June 30, 2020. The vast majority of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans, with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. In the second quarter of 2020, mortgage production increased 86% over the previous quarter, and was up 93% over the second quarter of 2019. This brought year-to-date mortgage originations to $98.5 million, a 59% increase over the same period last year. Purchase money origination constituted 45% of the Corporation’s mortgage divisionoriginations for the six months ended June 30, 2020, with construction-only and successful efforts to expandconstruction-permanent loans making up 40% of that mix. With continued heavier than normal refinance activity, the product line and increasepercentage of mortgage originations going in the sales force to capture a greater shareCorporation’s held-for-investment mortgage portfolio declined with more customers opting for held-for-sale fixed rate products. Through June 30, 2020, 41% of all mortgage originations were held in the mortgage portfolio, 65% of which were adjustable rate mortgages. As of June 30, 2020, ARM balances were $131.9 million, representing 50% of the local mortgage market. Home1-4 family residential loan portfolio of the Corporation. The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period.
As of June 30, 2020, the remainder of the residential real estate loans consisted of $10.7 million of fixed rate junior lien home equity loans, and $69.5 million of variable rate home equity lines of credit have grown in response(HELOCs). This compares to the low interest$10.5 million of fixed rate environment encouraging customersjunior lien home equity loans, and $66.5 million of HELOCs as of June 30, 2019. Therefore, combined, these two types of home equity loans increased from $77.0 million to utilize$80.2 million, an increase of 4.2%. The majority of borrowers had been choosing variable rate consumer borrowingsHELOC loans throughout 2019 particularly after the Federal Reserve lowered rates three times in conjunction with an attractive six-month introductorythe second half of the year. With the further rate of 1.99%, which the Corporation has offered for all of 2016 and duringdeclines in the first nine monthsquarter of 2017.2020, management expects HELOC activity to increase with customers choosing variable rate product over fixed rate product until rates begin to increase again.
In terms of all loans secured byCommercial real estate the totalmakes up of all categories of real estate loans comprises 85.4%38.3% of total loans as of SeptemberJune 30, 2017. At $259.5 million,2020, compared to 40.6% of total loans as of June 30, 2019. Within the commercial real estate is the largest category of the loan portfolio, consisting of 44.5% of total loans. This category includessegment there has been an increase in agricultural mortgages and commercial mortgages agricultureover the past year, with construction based mortgages and construction loans. Commercial real estate loans decreasedremaining stable. Agricultural mortgages increased $6.4 million, or 3.8%, from $284.0$168.7 million as of SeptemberJune 30, 2016,2019, to $259.5$175.1 million as of SeptemberJune 30, 2017, a $24.5 million, or 8.6% decrease.
2020. The decline in commercial real estate loans has primarily been in those secured by farmland as well as a decline in construction loans partially offset by a small increase in commercial mortgages. Agricultural mortgages decreased $17.2 million, or 10.3% from $167.5 million as of September 30, 2016, to $150.3 million as of September 30, 2017. The decline in agricultural mortgages was caused by an increase in the pipeline of agricultural projects throughout 2019. These loans are now closing as some farmers are moving ahead with projects that may have been on hold for a combinationperiod of new agriculturaltime. Dairy lending competitionremains constrained with milk prices at three-year lows and it does not appear pricing will improve materially in Lancaster County and weakerthe immediate future. There have been overcapacity issues with some consolidation of the area’s larger milk and egg pricing for farmers. Lowproducers. Several dairy egg, and poultry pricesfarmers have left the industry or are constraining local farmers from expanding operations presently.in the process of doing so. Approximately 45% of the Corporation’s agricultural purpose loans support dairy operations while another 25% are either broiler or egg producers. The pipeline for new agricultural mortgages slowed in the second half of 2016 and did not pick up over the winter months leading into the spring of 2017. Management believes the present level of agricultural mortgages will remain flat untilsteadily increase aided by the Corporation’s heavy focus on the agricultural community and a full staff ready to meet agriculture lending needs, but challenged by the declining economic conditions improve for farmers in the local market area and pricing pressures from additional market entrants subside.area.
57
ENB FINANCIAL CORPManagement’s Discussion and Analysis
Commercial mortgages were the most stable sector within the commercial real estate area with a small percentage increaseincreased $21.5 million, or 20.6%, from the prior year period.balances at June 30, 2019. Commercial mortgages as a percentage of the total loan portfolio increased by $2.8 million, or 3.2%, from Septemberto 15.0% as of June 30, 20162020, compared to September14.6% at June 30, 2017, with new2019. New loan production in this segment is currently outpacing normal principal payments, and paydownspay downs, and payoffs. The commercial real estate market environment is showing slow growth in the Corporation’s market area but more competition is vying for this business. Management would expectexpects commercial real estate loans to remain stable as a percentage of the Corporation’s loans as we move throughfor the last quarterremainder of 2017.2020.
60
The Corporation experienced declines inCorporation’s commercial construction as a number of construction projects completed and were converted into permanent financing. The Corporation did not originate any new large construction contractsloan balances increased by $2.1 million, or 11.8%, from June 30, 2019 to replace those that rolled off.June 30, 2020. Management was experiencing some demand for smaller residential builds like construction on existing lots but no new large scale projects. Commercial construction loans decreased by $10.0 million, or 34.8%, from September 30, 2016 to September 30, 2017.
Consumer real estate loans make up 40.9%were 2.5% of the total loan portfolio with balances of $238.4 million as of SeptemberJune 30, 2017, a marked increase from 36.1% of the portfolio2019, compared to 2.4% as of SeptemberJune 30, 2017. These loans include 1-4 family residential mortgages, home equity term loans, and home equity lines of credit. Personal residential mortgages account for 70.9% of total residential real estate loans and 29.0% of total loans, up from 70.2% and 25.3% respectively, as of September 30, 2016. 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. During 2016 and through the first nine months of 2017, the Corporation experienced significant increases in both portfolio and secondary market production. The volume of residential mortgage production since September 30, 2016, led to an 18.1% increase in 1-4 family residential mortgage balances along with a significant shift from fixed rate loans to interim adjustable rate mortgages (ARMs), climbing from 26% of the residential loan portfolio as of September 30, 2016, to 36% at September 30, 2017. This shift in production has decreased the Bank’s interest rate risk profile and this trend is expected to continue throughout the remainder of 2017. Total personal residential mortgage balances increased by $25.9 million, or 18.1%, from September 30, 2016 to September 30, 2017, and $18.7 million, or 12.5%, from December 31, 2016 to September 30, 2017.2020.
The Corporation generally only holds 10 to 20-year fixed rate mortgages, or mortgages with an initial fixed rate period of 10 years or less (adjustable rate mortgages), and will sell any mortgage originated over a 20-year fixed rate term. The majority of the fixed rate mortgages are sold with servicing retained. In the first nine months of 2017, purchase money origination constituted 66% of the Corporation’s mortgage originations with construction-only and construction-permanent loans making up 34% of that. The growth of the Corporation’s held-for-investment portfolio continued to be concentrated in its ARM products; ARM balances were $18.0 million, or 42.2% higher compared to December 31, 2016, while the fixed rate balances dropped by $5.7 million, or 7.5%, during the same time period for net growth of $12.3 million in the residential portfolio. Similar in nature to 2016 trends, 68% of all ARMs booked were 7/1 ARMs, 28% were 5/1 ARMs, and 4% were 3/1 ARMs. 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 continued to grow rapidly as a percentage of the portfolio, amounting to over 46% of the total personal mortgages held by the Corporation as of September 30, 2017. As of September 30, 2017, the Corporation had $60.5 million of ARMs held in the portfolio. Management expects internal mortgage loan production to continue to develop throughout the remainder of 2017 as the Corporation focuses on strategically growing thisother area of the portfolio.
Second mortgagescommercial lending is non-real estate secured commercial lending, referred to as commercial and home equity loans, fixed or variable rate, make up the remainder of the Corporation’s residential real estate loans. The purposes of these loans can vary but for this analysis the loan typeindustrial lending. Commercial and form of lien and collateral govern the placement of these loans under home equity 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. The growth of the Corporation’s home equity lines of credit accelerated during 2016 and in the first nine months of 2017 as a result of an attractive HomeLine product with a low introductory rate of 1.99% for 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. Home equity lines of credit increased from $50.3 million on September 30, 2016, to $58.0 million on September 30, 2017, a $7.7 million, or 15.3% increase.
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
The Corporation continues to offer the low 1.99% six-month introductory rate on the HomeLine product and expects similar growth to occur throughout the remainder of 2017. This trend is likely to slow down if the Prime rate continues to increase over time. 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. Since September 30, 2016, the fixed rate home equity loans have increased by $0.9 million, or 8.7%, and are expected to increase slightly throughout the remainder of 2017 given the likelihood of one more Federal Reserve rate increase. Management anticipates moderate growth in the residential real estate area throughout the remainder of 2017 as longer term rates have remained lower than anticipated and management continues to add resources in an effort to further expand the mortgage department, which remains an area of strategic focus for the Corporation.
Commercialindustrial loans not secured by real estate areaccounted for 20.1% of total loans as of June 30, 2020, compared to 13.8% as of June 30, 2019. The significant increase in this loan category is due solely to the PPP loans which amounted to $76.0 million as of June 30, 2020. Outside of this loan growth, commercial and industrial loans would have decreased from June 30, 2019 to June 30, 2020. In scope, the commercial and industrial loan sector, at 20.1% of total loans, is significantly smaller than the Corporation’s commercial real estate sector at 38.3% of total loans. This is consistent with management’s credit preference for obtaining real estate collateral when making commercial loans. The balance of total commercial and industrial loans increased from $98.8 million at June 30, 2019, to $167.6 million at June 30, 2020, a 69.6% increase. This category of loans generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. The balance at June 30, 2020, also includes the PPP loans, which will likely decline rapidly beginning in the fourth quarter of 2020 as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. Management anticipates that these loans will experience a significant decline in the remainder of 2020 and into 2021.
The Corporation provides credit to many small and medium-sized businesses. Much of this credit is in the form of Prime-based lines of credit to local businesses where the line may not be secured by real estate, portfolio. These commercial and industrial loans, referred to as C&I loans, are generally extendedbut is based on the health of the commercial borrower. They include both fixed rateborrower with other security interests on accounts receivable, inventory, equipment, or through personal guarantees. Commercial and industrial loans, and Prime-based variable rate loans.including PPP loans, increased to $129.5 million at June 30, 2020, a $68.2 million, or 111.3% increase, from the $61.3 million at June 30, 2019. The variable ratetax-free loans are generally in the form of a business line of credit. The Corporation’s security position as to these loans can be further strengtheneddeclined 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$0.2 million, or 1.2%, from balances at June 30, 2019, and the commercial entity. Management can also obtain additional collateral by securing the inventory of the business. The portfolio of all types of C&Iand industrial agricultural loans showed an increase of $7.3 million, or 10.0%, from September 30, 2016 to September 30, 2017. As of September 30, 2017, this category of commercial loans was made up of $41.7 million of C&I loans (outside of tax-free and agricultural loans), $19.6 million of tax-free loans, and $18.5 million of agriculture loans. In the case of the Corporation, all of the $19.6 million of tax-free loans are to local municipalities. C&I loans remained unchanged since September 30, 2016, tax-free loans increased by $8.1 million, or 70.9%, and agriculture loans decreased by $0.9 million, or 4.5%, compared to balances at September 30, 2016. The increase in tax-free loans occurred as a result of scheduled draws on tax-free loans to several municipalities originated in 2016.4.6%.
The consumer loan portfolio increaseddecreased to $5.2$5.1 million at SeptemberJune 30, 2017,2020, from $4.7$8.4 million at SeptemberJune 30, 2016.2019. Consumer loans made up 0.9%0.6% of total loans on SeptemberJune 30, 2017,2020, and 0.8%1.2% on June 30, 2019. The decrease in consumer loans since June 30, 2019, was primarily due to a large-balance consumer purpose loan made to a high net worth customer that was paid off in the third quarter of loans on September 30, 2016.2019. 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.that are generally unsecured. Slightly higher demand for unsecured credit is just slightly outpacingbeing outpaced by principal payments on existing loans resulting in the small increasedecrease in balances. Management anticipates that the Corporation’s level of consumer loans will likely remain stable as a percentage of the portfolio, as the need for additional unsecured credit 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 |
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
September 30, | December 31, | September 30, | ||||||||||
2017 | 2016 | 2016 | ||||||||||
$ | $ | $ | ||||||||||
Nonaccrual loans | 687 | 721 | 805 | |||||||||
Loans past due 90 days or more and still accruing | 254 | 384 | 666 | |||||||||
Troubled debt restructurings | 263 | — | — | |||||||||
Total non-performing loans | 1,204 | 1,105 | 1,471 | |||||||||
Other real estate owned | — | — | — | |||||||||
Total non-performing assets | 1,204 | 1,105 | 1,471 | |||||||||
Non-performing assets to net loans | 0.21% | 0.20% | 0.26% |
June 30, | December 31, | June 30, | ||||||||||
2020 | 2019 | 2019 | ||||||||||
$ | $ | $ | ||||||||||
Nonaccrual loans | 886 | 1,984 | 1,809 | |||||||||
Loans past due 90 days or more and still accruing | 309 | 821 | 242 | |||||||||
Troubled debt restructurings | 1,941 | 1,157 | — | |||||||||
Total non-performing loans | 3,136 | 3,962 | 2,051 | |||||||||
Other real estate owned | — | — | — | |||||||||
Total non-performing assets | 3,136 | 3,962 | 2,051 | |||||||||
Non-performing assets to net loans | 0.38 | % | 0.53 | % | 0.29 | % |
The total balance of non-performing assets decreasedincreased by $267,000,$1.1 million, or 18.2%52.9%, from SeptemberJune 30, 20162019 to SeptemberJune 30, 2017, and increased2020, but declined by $99,000,$0.8 million, or 9.0%20.8%, from balances at December 31, 2016 to September 30, 2017.2019. The decreaseincrease from the prior year was primarily due to lowerhigher levels of non-accrual loans and loans past due 90 days or more partially offset by the addition of one agriculture loan restructured in the second quarter of 2017 that is now considered a troubled debt restructuring (TDR)restructurings (TDRs). The loan is considered a TDR because the borrower was granted a six-month interest-only period on this loan. The decrease in non-accrualNon-accrual loans was due to pay downs received on a business mortgage causing a reduction in outstanding balance on this loan. Additionally,decreased by $923,000, or 51.0%, since June 30, 2019, and loans past due 90 days or more and still accruing decreasedwere up slightly from the prior year period, but down by $412,000 primarily due$512,000, or 62.4% since December 31, 2019. There were two non-performing TDR loans and one performing TDR loan as of June 30, 2020. The first, an agriculture mortgage of $677,000 had cash flow difficulties and a modification in payment terms was made to loans that were previously past due being brought current dueallow annual interest and principal payments. The second TDR loan was a $439,000 1–4 family real estate secured loan with a payment modification made in the form of granting a nine-month interest-only payment. This second TDR loan was both non-accrual and TDR. For this above non-performing chart, the $439,000 real estate loan is listed under TDR loans. An additional $824,000 loan to payments received. a farmer was classified as TDR as of December 31, 2019.
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 position of the borrower and improve the likelihood of full collection by the lender.
Management continues to monitor delinquency trends and the level of non-performing loans closely. At this time, management believes that the potential for material losses related to non-performing loans is increasing with the level of classified loans increasing from the lower levelsdelinquencies slightly higher than those experienced in 2016.2019.
There was no other real estate owned (OREO) as of SeptemberJune 30, 2017,2020, December 31, 2016,2019, or SeptemberJune 30, 2016.2019.
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 |
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Allowance for Loan Losses table below shows the activity in the allowance for loan losses for the nine-monthsix-month periods ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016.2019. 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 CORPManagement’s Discussion and Analysis
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
Nine Months Ended | Six Months Ended | |||||||||||||||
September 30, | June 30 | |||||||||||||||
2017 | 2016 | �� | 2020 | 2019 | ||||||||||||
$ | $ | $ | $ | |||||||||||||
Balance at January 1, | 7,562 | 7,078 | 9,447 | 8,666 | ||||||||||||
Loans charged off: | ||||||||||||||||
Real estate | — | — | — | — | ||||||||||||
Commercial and industrial | 14 | 23 | — | — | ||||||||||||
Consumer | 16 | 24 | 16 | 23 | ||||||||||||
Total charged off | 30 | 47 | 16 | 23 | ||||||||||||
Recoveries of loans previously charged off: | ||||||||||||||||
Real estate | (20 | ) | (10 | ) | (11 | ) | (87 | ) | ||||||||
Commercial and industrial | (21 | ) | (185 | ) | (2 | ) | (14 | ) | ||||||||
Consumer | (5 | ) | (9 | ) | (1 | ) | (3 | ) | ||||||||
Total recovered | (46 | ) | (204 | ) | (14 | ) | (104 | ) | ||||||||
Net loans recovered | (16 | ) | (157 | ) | ||||||||||||
Net loans charged off (recovered) | 2 | (81 | ) | |||||||||||||
Provision charged to operating expense | 450 | 200 | 1,325 | 210 | ||||||||||||
Balance at September 30, | 8,028 | 7,435 | ||||||||||||||
Balance at June 30, | 10,770 | 8,957 | ||||||||||||||
Net recoveries as a % of average total loans outstanding | (0.00% | ) | (0.03% | ) | ||||||||||||
Net charge-offs as a % of average total loans outstanding | 0.00 | % | (0.01 | %) | ||||||||||||
Allowance at end of period as a % of total loans | 1.37% | 1.31% | 1.29 | % | 1.25 | % |
Charge-offs for the ninesix months ended SeptemberJune 30, 2017,2020, were $30,000,$16,000, compared to $47,000$23,000 for the same period in 2016.2019. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first ninesix months of 20172020 and 2016,2019, the Corporation charged off several smaller amounts related to consumer loans. Recoveries were lower in the first six months of 2020 as the Corporation recovered a larger amount related to a real estate borrower in 2019 with only small loans classified as commercial and industrial loans as well as several small consumer loans were charged off. Recoveries exceeded charge-offsamounts recovered in the ninefirst six months ended September 30, 2017, as well as 2016. In 2017, several recoveries on commercial and industrial loans as well as consumer loans were received and in the nine months ended September 30, 2016, a large commercial and industrial recovery was received as well as small real estate and consumer recoveries resulting in the net recovery position for the year-to-date periods.of 2020.
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 level of classified loans was $25.1 million on SeptemberJune 30, 2017, was up $7.12020, compared to $17.8 million or 51.1%, from the balance as of Septemberon June 30, 2016. The Corporation’s total classified loans based on outstanding balances were $21.0 million as of September 30, 2017, $14.2 million as of December 31, 2016, and $13.9 million as of September 30, 2016.2019. Total classified loans did not materially increase untilincreased during 2019 and through the first quartersix months of 2017 when a large business relationship with over $5 million2020 primarily related to the downgrade of loan balances was classified as substandard. In addition, a $2 millionseveral unrelated agricultural relationship was also placed on substandard in March 2017. These two reclassifications were responsible for a $7 million increase in classified loans from December 31, 2016 to March 31, 2017. In April of 2017, the Corporation received a $1.7 million payoff on the $2 million substandard agricultural relationship. Classified loans grew further in the second quarter as two agricultural relationships with balances of $3.3 million were classified as substandard, along with two business customers with $2 million of loan balances. During the third quarter of 2017, payoffs were received on two classified loan relationships resulting in a decline in classified loans between June 30, 2017, and September 30, 2017.
customers. Having more loans in a classified status could result in a larger allowance as higher amounts of 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. There was $98,000$64,000 of specifically allocated allowance against the classified loans as of SeptemberJune 30, 2017, and no2020, $189,000 of specific allocation as of December 31, 2016, or September2019, and $105,000 of specific allocation as of June 30, 2016. Classified loans could require larger provision amounts due to a higher potential risk of loss, so2019. Typically, as the classified loan balances fluctuate, the associated specific allowance applied to them fluctuates, resulting in a lower or higher required allowance.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
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 nine months of 2017 and 2016, there were more recoveries than charge-offs resulting in a net recovery position. Management continually monitors delinquencies, classified loans, and non-performing loans closely in regard to how they may impact charge-offs in the future. Management does anticipate charging off one commercial loan inThe actual charge-offs have been running at low levels, and management expects this to continue through the fourth quarterremainder of 2017 that was on non-accrual status as of September 30, 2017. Management anticipates that charge-off to be approximately $275,000. The particular business has not been operating since 2016 and the property is expected to go to sheriff sale in the first quarter of 2018. Management is not aware of any other significant charge-offs that could occur in the fourth quarter of 2017.2020. 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.
The allowance as a percentage of total loans was 1.37%1.29% as of SeptemberJune 30, 2017, 1.32%2020, and 1.25% as of December 31, 2016,2019, and 1.31% as of SeptemberJune 30, 2016.2019. Management anticipates that the allowance percentage will remain fairly stableincrease during the remainder of 2017,2020, as the allowance balance is increased with additional provision expense to account forand the total loan growth throughoutbalance decreases with the year.payoff of PPP loans. It is typical for the allowance for loan losses to contain a small amount of excess reserves. Management desiresOver the long term, management targets and excess reserve at approximately 5% knowing that the amount of excess reserve in the allowance for loan losses be maintained between 5% and 10%.can fluctuate. The excess reserve stood at 5.8%3.3% as of SeptemberJune 30, 2017.2020. Management would anticipate that this unallocated portion of the allowance could increase throughout the remainder of 2020.
Premises and Equipment
Premises and equipment, net of accumulated depreciation, increaseddecreased by $1.6$0.4 million, or 7.0%1.6%, to $24.4$24.9 million as of SeptemberJune 30, 2017,2020, from $22.8$25.3 million as of SeptemberJune 30, 2016.2019. As of SeptemberJune 30, 2017, $1,285,0002020, $178,000 was classified as construction in process compared to $156,000$104,000 as of SeptemberJune 30, 2016.2019. Fixed assets increaseddeclined as a result of the Corporation’s eleventh full-service branch office openeddepreciation outpacing new purchases in Morgantown, PA and the limited-service location opened in Georgetown, PA, both in the third quarter of 2016. Additionally, fixed assets increased due to assets deployed at a temporary location opened in Strasburg, PA, and the land purchased to build the permanent location also in Strasburg, PA, both in the first quarter of 2017. Premises and equipment, specifically construction in process, will continue to grow during 2017 as construction proceeds on the Corporation’s new Strasburg, PA branch office.2020.
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 $6.1$6.9 million of regulatory stock holdings as of SeptemberJune 30, 2017,2020, consisted of $5.9$6.7 million of FHLB of Pittsburgh stock, $151,000 of FRB stock, and $37,000 of Atlantic Community Bancshares, Inc. stock, the Bank Holding Company of ACBB. 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 dependent upon the relative size of outstanding FHLB borrowings and mortgage activity. Excess stock is typically repurchased from the Corporation at par if the borrowings decline to a predetermined level. The Corporation’s FHLB stock position was $5.9$6.7 million on SeptemberJune 30, 2017, $5.22020, $7.1 million on December 31, 2016,2019, and $5.0$6.8 million on SeptemberJune 30, 2016,2019, with no excess capital stock position. Any future stock repurchases would be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.
The 2020 second quarter dividend declaration made on FHLB of Pittsburgh has paid a quarterly dividend since the resumption of their dividend in the first quarter of 2012. In the first two quarters of 2016, FHLB dividend yield was 5.00% annualized on activity stock and 3.00% annualized on membership stock. The stock declarations made by FHLB of Pittsburgh in the third and fourth quarters of 2016 and the first, second, and third quarters of 2017, iswas at a 5.00%6.25% annualized yield on activity stock and 2.00%3.00% annualized yield on membership stock. 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. 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.
62
ENB FINANCIAL CORPManagement’s Discussion and Analysis
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.
Deposits
The Corporation’s total ending deposits at June 30, 2020, increased by $21.3$133.8 million, or 2.6%13.7%, and $46.2by $166.3 million, or 5.8%17.7%, from December 31, 2016,2019, and SeptemberJune 30, 2016,2019, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks for safe places to investdeposit money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since SeptemberJune 30, 2016,2019, with the changes being a $41.1$120.9 million, or 15.8%35.0% increase in non-interest bearing demand deposit accounts, a $2.5$19.1 million, or 11.6% decrease86.9% increase in interest bearing demand accounts,balances, a $13.7$12.0 million, or 14.9% decrease13.0% increase in NOW balances, a $13.1$15.6 million, or 15.3% increase11.2% decrease in money market account balances, a $21.1$40.9 million, or 12.6%19.8% increase in savings account balances, and a $9.8$11.0 million, or 6.2%8.0% decrease in time deposit balances.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The significant growth across most categories of core deposit accounts is a direct result of the localPPP loan funding process as many customers applied for PPP loans with the approved funds deposited directly into their ENB deposit accounts. In addition, customer spending patterns have changed throughout the COVID-19 pandemic with government aid helping to financially support individuals and businesses and customers spending less and saving more. With the decrease in rates that occurred during the first half of 2020, customer deposits increased with few options in the market disruption caused by two large mergers, which impacted the three counties the Corporation primarily serves. The Corporation has gained many new customers asto earn a result of being a long-standing safe community bank known for offering understandable financial products and services with lower fees. The prolonged historically low interest rates also continue to aid the Corporation in growing core deposits as a result of very little difference between the core deposit rates and short-term time deposit rates.return. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility. Management believes these deposit account types will continuebalances may decrease through the remainder of 2020 with many variables impacting economic activity and with PPP loans being forgiven and funds being utilized to hold higher balances until short-term interest rates increase further.support ongoing business operations.
The Deposits by Major Classification table, shown below, provides the balances of each category for SeptemberJune 30, 2017,2020, December 31, 2016,2019, and SeptemberJune 30, 2016.2019.
DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)
September 30, | December 31, | September 30, | ||||||||||
2017 | 2016 | 2016 | ||||||||||
$ | $ | $ | ||||||||||
Non-interest bearing demand | 301,978 | 280,543 | 260,873 | |||||||||
Interest bearing demand | 19,279 | 20,108 | 21,799 | |||||||||
NOW accounts | 78,061 | 85,540 | 91,719 | |||||||||
Money market deposit accounts | 99,235 | 93,943 | 86,096 | |||||||||
Savings accounts | 188,015 | 175,753 | 166,904 | |||||||||
Time deposits | 148,513 | 156,381 | 158,300 | |||||||||
Brokered time deposits | 3,744 | 5,223 | 6,969 | |||||||||
Total deposits | 838,825 | 817,491 | 792,660 |
June 30, | December 31, | June 30, | ||||||||||
2020 | 2019 | 2019 | ||||||||||
$ | $ | $ | ||||||||||
Non-interest bearing demand | 466,392 | 363,857 | 345,483 | |||||||||
Interest bearing demand | 41,083 | 25,171 | 21,982 | |||||||||
NOW accounts | 104,593 | 96,941 | 92,578 | |||||||||
Money market deposit accounts | 123,212 | 141,649 | 138,793 | |||||||||
Savings accounts | 246,762 | 211,285 | 205,902 | |||||||||
Time deposits | 125,872 | 135,185 | 136,868 | |||||||||
Total deposits | 1,107,914 | 974,088 | 941,606 |
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 and perceived direction of interest rates |
· | Financial condition and perceived safety of the institution |
· | Possible risks associated with other investment opportunities |
· | Level of fees on deposit products |
63
ENB FINANCIAL CORPManagement’s Discussion and Analysis
The Corporation has been a stable presence in the local market area that has experienced several large bank mergers.mergers over the past several years. Three new convenient locations were added since 2016, significantly expanding the Corporation’s footprint, with a presence in three counties with a total of thirteen branch locations. The Corporation has a history of offering very competitive interest rates and fair and understandable service fees as well as attractive 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. Management believes the Corporation’s deposit base has benefited as a result of a growing desire by customers to seek a longstanding, reliable financial institution as a partner to meet their financial needs.
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 SeptemberJune 30, 2017,2020, time deposit balances excluding brokered deposits, had decreased $7.9$11.0 million, or 5.0%8.0%, from June 30, 2019, and $9.8$9.3 million, or 6.2%6.9%, from December 31, 2016 and September 30, 2016, respectively.2019. 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 the Federal Reserve rate decreases in 2019 and the first quarter of 2020, there is minimal differences between shorter term CD rates and interest bearing non-maturity deposits, influencing 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.
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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 ReformENB FINANCIAL CORP
Management’s Discussion 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.Analysis
Borrowings
Total borrowings were $68.4$65.1 million, $69.6$78.1 million, and $75.8$74.6 million as of SeptemberJune 30, 2017,2020, December 31, 2016,2019, and SeptemberJune 30, 2016,2019, respectively. Of these amounts, $8.3 million, and $12.1$0.2 million reflect short-term funds foras of December 31, 2016, and September 30, 2016, respectively,2019, with no short-term funds outstanding as of SeptemberJune 30, 2017.2020 or 2019. 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 $68.4$65.1 million as of SeptemberJune 30, 2017, $61.32020, $77.9 million as of December 31, 2016,2019, and $63.8$74.6 million as of SeptemberJune 30, 2016.2019. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances at SeptemberJune 30, 2017,2020, December 31, 2016,2019, and SeptemberJune 30, 2016.2019. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. 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 typically at rate savings. More recently, with interestWith the declining rates rising, it is becoming increasingly difficult to fund new borrowingsthroughout the first six months of 2020, management took advantage of the environment and prepaid $30.5 million of FHLB advances for a total penalty amount of $154,000 and initiated a select number of newer advances at rates lower than the maturing borrowings.rates. 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 SeptemberJune 30, 2017,2020, the Corporation was significantly under this policy guideline at 6.8%5.0% of asset size with $68.4$65.1 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 SeptemberJune 30, 2017,2020, the Corporation was significantly under this policy guideline at 67.8%53.3% of capital with $68.4$65.1 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of 20162019 and through the first ninesix months of 2017.2020.
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $349.8$471.7 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.
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, maintains capital ratios well above those minimum levels. 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 I 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.
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, 2017 | Capital Ratios | Capitalized | Capitalized | |||||||||
Total Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 15.4% | 8.0% | 10.0% | |||||||||
Bank | 15.2% | 8.0% | 10.0% | |||||||||
Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.2% | 6.0% | 8.0% | |||||||||
Bank | 14.0% | 6.0% | 8.0% | |||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.2% | 4.5% | 6.5% | |||||||||
Bank | 14.0% | 4.5% | 6.5% | |||||||||
Tier 1 Capital to Average Assets | ||||||||||||
Consolidated | 10.2% | 4.0% | 5.0% | |||||||||
Bank | 10.1% | 4.0% | 5.0% | |||||||||
As of December 31, 2016 | ||||||||||||
Total Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 15.2% | 8.0% | 10.0% | |||||||||
Bank | 15.0% | 8.0% | 10.0% | |||||||||
Tier I Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.1% | 6.0% | 8.0% | |||||||||
Bank | 13.9% | 6.0% | 8.0% | |||||||||
Common Equity Tier I Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.1% | 4.5% | 6.5% | |||||||||
Bank | 13.9% | 4.5% | 6.5% | |||||||||
Tier I Capital to Average Assets | ||||||||||||
Consolidated | 10.2% | 4.0% | 5.0% | |||||||||
Bank | 10.1% | 4.0% | 5.0% | |||||||||
As of September 30, 2016 | ||||||||||||
Total Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 15.3% | 8.0% | 10.0% | |||||||||
Bank | 15.1% | 8.0% | 10.0% | |||||||||
Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.2% | 6.0% | 8.0% | |||||||||
Bank | 14.0% | 6.0% | 8.0% | |||||||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
Consolidated | 14.2% | 4.5% | 6.5% | |||||||||
Bank | 14.0% | 4.5% | 6.5% | |||||||||
Tier 1 Capital to Average Assets | ||||||||||||
Consolidated | 10.4% | 4.0% | 5.0% | |||||||||
Bank | 10.2% | 4.0% | 5.0% |
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Regulatory Requirements | |||||||
Adequately | Well | ||||||
As of June 30, 2020 | Capital Ratios | Capitalized | Capitalized | ||||
Total Capital to Risk-Weighted Assets | |||||||
Consolidated | 13.4% | 8.0% | 10.0% | ||||
Bank | 13.3% | 8.0% | 10.0% | ||||
Tier 1 Capital to Risk-Weighted Assets | |||||||
Consolidated | 12.3% | 6.0% | 8.0% | ||||
Bank | 12.1% | 6.0% | 8.0% | ||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | |||||||
Consolidated | 12.3% | 4.5% | 6.5% | ||||
Bank | 12.1% | 4.5% | 6.5% | ||||
Tier 1 Capital to Average Assets | |||||||
Consolidated | 9.3% | 4.0% | 5.0% | ||||
Bank | 9.2% | 4.0% | 5.0% | ||||
As of December 31, 2019 | |||||||
Total Capital to Risk-Weighted Assets | |||||||
Consolidated | 14.5% | 8.0% | 10.0% | ||||
Bank | 14.4% | 8.0% | 10.0% | ||||
Tier I Capital to Risk-Weighted Assets | |||||||
Consolidated | 13.4% | 6.0% | 8.0% | ||||
Bank | 13.2% | 6.0% | 8.0% | ||||
Common Equity Tier I Capital to Risk-Weighted Assets | |||||||
Consolidated | 13.4% | 4.5% | 6.5% | ||||
Bank | 13.2% | 4.5% | 6.5% | ||||
Tier I Capital to Average Assets | |||||||
Consolidated | 9.9% | 4.0% | 5.0% | ||||
Bank | 9.8% | 4.0% | 5.0% | ||||
As of June 30, 2019 | |||||||
Total Capital to Risk-Weighted Assets | |||||||
Consolidated | 14.7% | 8.0% | 10.0% | ||||
Bank | 14.6% | 8.0% | 10.0% | ||||
Tier 1 Capital to Risk-Weighted Assets | |||||||
Consolidated | 13.6% | 6.0% | 8.0% | ||||
Bank | 13.4% | 6.0% | 8.0% | ||||
Common Equity Tier 1 Capital to Risk-Weighted Assets | |||||||
Consolidated | 13.6% | 4.5% | 6.5% | ||||
Bank | 13.4% | 4.5% | 6.5% | ||||
Tier 1 Capital to Average Assets | |||||||
Consolidated | 10.0% | 4.0% | 5.0% | ||||
Bank | 9.9% | 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 ninesix months ended SeptemberJune 30, 2017,2020, were $0.84, 3.7% higher than$0.32, a 4.9% increase from the $0.81 per share dividend$0.305 paid out in the first ninesix months of 2016.2019. Dividends are paid from current earnings and available retained earnings. The Corporation’s current capital plan calls for management to maintain tier I capital to average assets between 10.0%9.5% and 12.0%. The Corporation’s current tier I capital ratio is 10.2%9.3%. This ratio has fallen below the lower limit in the Corporation’s capital plan primarily as a result of the significant balance sheet growth during the first half of 2020. Management anticipates this ratio will be back within guidelines by the end of 2020 as the balance sheet should decline with the payoff of PPP loans. As a secondary measurement, the capital plan also targets a long-term dividend payout ratio in the range of 35%30% to 40%45%. This ratio will vary according to income, but over the long term, the Corporation’s goal is to maintain and target a payout ratio within this range. For the ninesix months ended SeptemberJune 30, 2017,2020, the payout ratio was 41.8%31.1%. 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.
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 SeptemberJune 30, 2017,2020, the Corporation showed an unrealized loss,gain, net of tax, of $2,232,000,$4,522,000, compared to an unrealized lossgain of $4,885,000$1,600,000 at December 31, 2016,2019, and an unrealized gain of $1,221,000$298,000 as of SeptemberJune 30, 2016.2019. These unrealized gains, and losses, net of tax are excluded from capital when calculating the tier I 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. No impairment was recorded in the ninesix months ended SeptemberJune 30, 2017,2020, or in the same prior year period. 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 I capital to risk-weighted assets of 4.5%. |
· | A minimum ratio of tier I 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 I 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 began 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 I capital. The final rule 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.
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
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 I 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 also 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 was 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.
Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the previous general risk-based capital rule. The new rules also increased the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and made 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 more 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 to 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 SeptemberJune 30, 2017.2020.
OFF-BALANCE SHEET ARRANGEMENTS
(DOLLARS IN THOUSANDS)
$ | ||||
Commitments to extend credit: | ||||
Revolving home equity | ||||
Construction loans | ||||
Real estate loans | ||||
Business loans | ||||
Consumer loans | ||||
Other | ||||
Standby letters of credit | ||||
Total |
6869
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Significant Legislation
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 have already or are likely to affect the Corporation are the following:
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 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.
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.
6970
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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.
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.
7071
ENB FINANCIAL CORPManagement’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 |
· |
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 six-month and one-year gap ratios were within guidelines at SeptemberAs of June 30, 2017, and the three and five-year2020, all maturity gap ratios were higher than corporate policy guidelines, due primarily to higher cash levelsa larger amount of loans and faster loan prepayment speeds resultingsecurities now maturing in more assets maturing withinless than five years, influenced very directly by the stated timeframes.PPP loans that will mature in the next one to two years. The three-yearsix-month gap ratio was 143.1%, and five-year was 142.1%211.1%, compared to an upper policy guidelinesguideline of 155%; the one-year gap ratio was also 211.1%, compared to an upper policy guideline of 140%; the three-year gap ratio was 177.2%, compared to an upper guideline of 125%; and 115%the five-year gap ratio was 147.8%, respectively. Allcompared to an upper policy guideline of the gap ratios are higher than the ratios as of December 31, 2016. Given the fact that we are already in115%. The results show asset sensitivity. In a rising interest rate cycle with the likelihood of higher rates, in both the near and long term forecasts, the elevatedhigher gap ratios would be more beneficial to the Corporation. Management believesHowever, in a declining rate environment, being asset sensitive is unfavorable. Even though the Corporation shows asset sensitivity above policy guidelines for the longer-term gap measurements, it is likely we would be back in a rising rate environment for those longer three and five-year periods and having asset sensitivity would be beneficial in that case. The current asset sensitivity of the Corporation’s balance sheet does negatively impact performance in the current gap ratiosrates-down interest rate scenario as there are appropriate andmore assets repricing to lower rates than liabilities. This asset sensitivity will be beneficial in the next rates-up cycle. Management will continue to monitor all gap ratiosand manage the length of the balance sheet in order to ensure propersustain reasonable asset yields in a declining rate environment while still positioning for future interesta likely rising rate cycles.environment out in the future.
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Gap ratios have been maintaining higherincreasing for the Corporation throughout 2019 and into 2020. The Corporation’s assets are moderately long, but the length of the securities portfolio and the loan portfolio is more than offset by the length of the Corporation’s core deposit liabilities in conjunction with holding high levels of cash and cash equivalentsequivalents. Beyond the non-maturity deposits, management is able to assist in offsettingutilize the length of wholesale funding instruments to offset the declining length of the CD portfolio. Management believes that the Federal Reserve rate decreases will negatively impact net interest income for the remainder of 2020 as assets continue to reprice to lower levels. However, some savings can be achieved through deposits, primarily the CD portfolio, as the maturing CDs reprice to significantly lower levels.
The size and length of the Corporation’s relatively longcore deposit liabilities provide the most extension in terms of lengthening the liabilities on the balance sheet. The length of the core deposits is significantly longer than the Corporation’s longest term time deposits and wholesale borrowings. The mix of the Corporation’s liabilities alone would be sufficient to offset the Corporation’s longer assets and to maintain gap ratios within management’s guidelines.
Management desires to show reductions to the cost of funds and improve the loan-to-deposit ratio and does have a large securities portfolio whichto draw liquidity from in the event deposit growth slows down. Initially in February and March management was selling some securities to fund loan growth that was occurring. However, as deposit growth strengthened in April and May any security sales were related to repositioning the portfolio or taking gains as there was already more than sufficient liquidity available on the balance sheet. With gap ratios that are already sufficiently high, management can put more of the available cash to work earning higher returns than overnight funds earn.
Higher gap ratios are beneficial in providing financial flexibility for the Corporation. Higher gap ratios often are an indication that there are more short-term assets on the balance sheet, providing more available liquidity. The quickest way to elevate gap ratios is to retain higher levels of cash on the balance sheet. Management may desire to have higher gap ratios when factoring in future loan growth or other funding changes to the balance sheet. Since late 2018, management has helpedbeen actively working to increase the gap ratios. The strategy of maintaining higher cash levelsCorporation’s loan-to-deposit ratio. As the loan-to-deposit ratio increases and more loans go on to improvethe Corporation’s balance sheet, the asset mix will generally lengthen and the gap ratios will decline. As of June 30, 2020, the loan-to-deposit ratio was 75.5%, compared to 77.4%, at December 31, 2019, and act76.3% at June 30, 2019. Management anticipates that the loan-to-deposit ratio will remain stable throughout 2020 as an immediate hedge against liquidity risk and interestloan growth should remain moderate but deposits have been growing at a fast 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 had been increasing between the third quarter of 2016 and the first quarter of 2017as well.
Management’s desired gap levels will also change due to the natural extensiondirection of MBSinterest rates. In March 2020, the Federal Reserve cut the overnight interest rate by 150 basis points at two separate special Federal Reserve Board meetings. Cash and CMO securities as interest rates rise,other short term assets were directly impacted by this change in overnight rates. If the Corporation’s liquid assets cannot be deployed into higher yielding longer term assets, then management will reduce the amount of cash and short-term assets to reduce the higher levels of long municipal securities heldexposure to future decreases in the portfolio. However,overnight rate. Management believes the securities duration and price volatility did decline during the second and third quarters of 2017, and are expected toovernight Federal funds rate will not decline further due to selective sales of longer duration securitiesin 2020, but the economic environment is unpredictable and natural aging offuture rate changes will be dependent on the portfolio. Since June 30, 2017 management has been selling longer duration municipal bondsnational and U.S. agencies, while purchasing shorter duration taxable securities including some floating rate instruments to better position the Corporation for higher rates.
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
It is likely that short term rates will increase further during the remainder of 2017, so management’s current position is to maintain high maturity gap percentages in preparation for higher rates, with a goal of reducing the 3 year and 5 year gap ratios once several additional Federal Reserve rate increases occur. Ideally, management would like to have all gap ratios back within guidelines when the approximate midpoint of the rates up cycle is reached. While higher gap ratios help the Corporation when interest rates do rise, the risk in maintaining high gap percentages is that, should interest rates not rise, management will have excess liquidity at lower short term rates. This is referred to as opportunity risk, whereby lower levels of income are being achieved than desired. Carrying high gap ratios in the current environment could also bring on an increased level of repricing risk should interest rates decrease, which could negatively impact the Corporation’s interest income and margin.global economic conditions.
The risk of liabilities repricing at higher interest rates is increasing slightlydecreasing in the present environment as the Corporation has begundoes not foresee the need to increase someraise deposit interest rates minimally.with the recent Federal Reserve rate decreases. A number of the Corporation’s maturing time deposits have already repriced to lower rates due to the rapid rate declines during March of 2020. However, a large portion of the Corporation’s deposits are core deposits with little or 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 slightly higherlower interest rates.rates and will continue to do so throughout 2020. The Corporation’s average cost of funds was 3432 basis points as of SeptemberJune 30, 2017,2020, which is very low from an historic perspective. However, thisThe Corporation’s average cost of funds was 49 basis points as of December 31, 2019, and 53 basis points as of June 30, 2019. This cost of funds will likely begin to increase slightlydecline further throughout the remainder of 2017.2020. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts. The Corporation’s cost of funds was 33 basis points as of December 31, 2016, and 35 basis points as of September 30, 2016. The cost of funds savings slowed during 2017, with the low of 31 basis points reached in March 2017. Since then the cost of funds has increased 3 basis points to 34 basis points. Given a higher level of liabilities repricing now management would expect the cost of funds to increase at a slightly faster pace going forward.
Deposits havehad not been very rate sensitive for a number of years as a result of the limited desirable rates available to the deposit customer. However, should market interest rates rise further in the remainder of 2017 and during 2018, customer behavior patterns would change and deposits would be more rate sensitive with a portion potentially leaving the Corporation.customers. The Corporation hashad experienced a steady growth in both non-interest bearing and interest bearing funds during this last prolonged and historically low interest rate environmentcycle, but in 2018 and this trend continued throughoutthrough 2019, deposit growth had been slower than in prior years. With the Federal Reserve rate declines in the first nine monthsquarter of 2017. This trend can partially be attributed2020, deposit growth has once again been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations. Additionally, with the market disruption that occurredgovernment aid direct deposits and checks sent out in 2016 as a resultApril of recent large local bank mergers that greatly impacted2020, the Corporation’s market area.Corporation has experienced significant deposit growth since June 30, 2020.
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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. This became even more apparent with the COVID-19 pandemic and the volatility in the equity markets caused by this event. Investors have grown weary of the volatility of the equity markets. Negative events, primarily overseas, have caused multiple cycles of sharp equity declines followed by recoveries. With equity markets beginning to improve in 2017, there has been a resurgence of customers pulling funds from deposit accounts to reinvestfluctuations in the equity markets. This trend could causeIn 2019, the equity markets had very strong gains, which did not adversely impact the Corporation’s deposit growthgrowth. In March 2020, with the outbreak of COVID-19, the equity markets recorded their biggest decline in recent history with the market down between 30% and 35% after huge sell-offs. The equity market has fluctuated up and down since then, but this unprecedented decline caused many customers to slow or decline throughoutkeep their funds in banks and certainly contributed to the remainderincrease in the Corporation’s deposits through the first half of 2017.2020.
The Corporation’s net interest margin is improvingdown from levels in the previous quarter, primarily as a result of the Federal Reserve rate increase in March and June of 2017.quarter. 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.increases or decreases. Management expects that the gap ratios will remain within or above the established guidelines throughout the remainder of 2017.2020.
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.
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 than the static gap analysis offers.
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
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 |
· | 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 SeptemberJune 30, 2017,2020, the Corporation was within guidelines for all of the above measurements exceptwith the securitiesexception of the investment portfolio liquidity as a percent of total assets which was 3.47% as of June 30, 2020, compared to a policy range of 4% - 8%. This was primarily due to a much higher balance sheet at June 30, 2020. Investment liquidity is strong in the current low-rate environment and having higher levels of liquidity is not necessarily a good thing because it then gets reinvested at lower rates. When the PPP loans begin to decline and deposit balances come down, the investment portfolio liquidity will once again be a higher percentage of the portfolio and as a percentage of total assets. The policy calls for the Corporation to maintain securities portfolio cash flows maturing in one year or less between 15% and 25% of the total portfolio and between 4% and 8% of total assets and as of September 30, 2017, these cash flows represented 5.7% of the portfolio, and 1.8% of total assets, under the lower guidelines. When factoring in available overnight cash, the Corporation’s securities portfolio liquidity represented 13.5% of the portfolio, slightly under the policy guideline of 15% - 25%, and 4.3% of total assets, also below the policy guideline of 6% - 10%.balance sheet.
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 carried an average of approximately $40 million of cash and cash equivalents on a daily basis throughout the first nine months of 2017, with an ending balance of $44.2 million on September 30, 2017, and expects this will continue in the near future. AllThe Corporation’s 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.
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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 400300 basis points, or decrease 25, 50, or 10075 basis points. Rates-downCurrently, the flat-rate scenario seems more likely for the remainder of 2020, with the Federal funds rate at 0.25% as of June 30, 2020, compared to 2.50% as of June 30, 2019. The rates-down scenarios are unlikelymuch less likely now with the Federal Reserve rate cuts that already occurred in 2019 and 2020. For that reason, management believes it appropriate to model rates down 25, 50, and 75 basis points to most adequately cover all the reasonably possible declining rate scenarios that the Corporation could face, while continuing to model rates up scenarios of 100, 200, and 300 basis points. While management had previously turned its focus to rates-down scenarios, with each Federal Reserve rate reduction, the ability to further reduce interest rates diminishes and the exposure to higher interest rates increases. The overnight Federal funds rate and the current U.S. Treasury rates are presently at low historical levels. Because of this point sohistorical perspective, if management would take a neutral position in terms of the direction of forward interest rates, there is clearly more focusedlong term risk of rates going up than down. So while in the near term it is likely we may see no Federal Reserve rate increases or decreases, management remains guarded about the impact of higher interest rates and continues to prepare for rate increases on the rates-up scenarios. a larger scale than decreases.
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 |
· | Consumer reaction to interest rate changes |
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ENB FINANCIAL CORPManagement’s Discussion and Analysis
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 SeptemberJune 30, 2017.2020. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis 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.
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. In addition to the annual validation review, management also engages a third party every three years to obtain a complete external review of the model. That review was last completed in the third quarter of 2017.2017 and management is currently in the process of conducting the 2020 review. The purpose was to conduct a comprehensive evaluation of the model input, assumptions, and output and this study concluded that the model is 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.
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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 that if interest rates were 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-raterising rate scenarios, but a decline in net interest income in the down-ratedeclining rate scenarios.
The thirdsecond quarter 20172020 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of SeptemberJune 30, 2017,2020, the Corporation was well within guidelines for the maximum amount of net interest income change in all rate scenarios. All up-rate scenarios show a positive impact to net interest income although significant improvements are not reflected until rates increase 200, 300, or 400 basis points.income. 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 the past several years and the higherrecent purchases of variable rate securities and the 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. Loans that are Prime-based 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 300200 or 400300 basis points where variable loan rates will still increase by the same amount as the Prime rate. The increases in net interest income inWith the up-rate scenarios are very similarFederal Reserve acting to the increases reflected at December 31, 2016. It is unlikely thatdecrease interest rates will go down, but in the event that they would go lower,by 225 basis points over five meetings held since June 30, 2019, the Corporation would havehas had more exposure to all maturing fixed-rate loans and securities, which would repricesecurities. These assets have been maturing and repricing to lower market rates, 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. However, even in the highly unlikely down-rate scenarios, the Corporation’s exposure to declining net interest income is still within policy guidelines.
Management’s primary focus remains on the most likely scenario of higher interest rates. For the rates-up 100 basis point scenario, net interest income increases by 2.7%3.2% compared to the rates unchanged scenario. In the remaining rates-up scenarios, the net interest income increases slightly more substantially reflecting the sizable amount of the Corporation’s interest-earning assets that reprice immediately by the full amount of the Fed increase versus the limited amount of deposit increases that management would approve on the Corporation’s interest-bearing deposits. The higher interest rates go, the greater the likelihood that the proportionality of the Corporation’s deposit rate changes decreases as a percentage of the Federal Reserve’s action. For the rates-up 200 300, and 400300 basis point scenarios, net interest income increases by 7.6%, 13.6%,7.9% and 19.6%13.9%, respectively, compared to the rates unchanged scenario. Management’s maximum permitted net interest income declines by policy are -5%, -10%, and -15%, and -20% for the rates uprates-up 100, 200, 300, and 400300 basis point scenarios, respectively.
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ENB FINANCIAL CORPManagement’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 Corporation’s borrowings do price up faster than deposits, generally equivalent to the U.S. Treasury market. However, borrowings only make up approximately 5.5% of the total funding provided by deposits and borrowings. 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 allows management the ability to benefit from higher rates by controlling the amount of the increase on large amounts of liabilities that are repricing.could reprice.
As of June 30, 2020, results in the down-25 basis point scenario show a net interest income increase of 0.9% compared to the rates unchanged scenario and compared to a policy guideline of -1.25%. In the rates-down scenarios of -50 and -75 basis points, net interest income decreases by 0.5% and 2.2%, respectively, compared to policy guidelines of -2.5% and -3.75%. Management does not expect the Corporation’s exposure to interest rate changes to increase or change significantly during the remainder of 2017.2020.
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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 in value that would occur on market sensitive instruments given an interest rate increase or decrease in the same seven scenarios mentioned above. As of SeptemberJune 30, 2017,2020, the Corporation was within guidelines for all rateup-rate scenarios and out of policy guidelines for the down-rate scenarios. The trend over the past year has been lessening risk in the up-rate scenarios with increasing cash balances and core deposit balances with the current quarter showingCorporation shows a slightly smallervery favorable benefit in all up-rate scenarios than the quarter ended June 30, 2017. The strong GAP ratios played a large role in improving the Corporation’sto net portfolio value profile.in the rising rate scenario, due primarily to the very low market rates and the elevated amount of core deposits on the Corporation’s balance sheet as of June 30, 2020. 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 for these interest-bearing deposits. This improves the modeling of the Corporation’s fair value risk to higher interest rates as the liability amounts decrease causing a higher net portfolio value of the Corporation’s balance sheet. However, as interest rates decrease, the discount rate used to value the Corporation’s interest bearing accounts decreases, causing a higher net present value for these interest-bearing deposits.
The results as of SeptemberJune 30, 2017,2020, indicate that the Corporation’s net portfolio value would experience valuation gains of 8.3%21.7%, 8.4%, 7.5%35.1%, and 5.2%,42.0% in the rates-up 100, 200, 300, and 400300 basis point scenarios. Management’s maximum permitted declines in net portfolio value by policy are -5% for rates-up 100 basis points, graduating up to -20%-15% for rates-up 400300 basis points. A valuation loss would indicate 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. While the down-rate scenarios that are modeled are unlikely, theThe analysis does show a valuation loss in the down 25, 50, and down 10075 basis point scenarios of -4.2%, -15.5%, and -27.9%, respectively, compared to policy guidelines of -3.75%, -7.5%, and -11.25%. The Corporation’s expected valuation loss was outside of guidelines for all down-rate scenarios. TheWith the significant declines in the overnight and Prime rate since 2019, the exposure to valuation changes could change going forward if the behavior of the Corporation’s deposits changes due to higherlower interest rates. Based on five past decay rate studies onWith the rapid increase in the Corporation’s core deposits, management would expect a possible decline throughout the remainder of 2020 which would help to limit the exposure to fair value loss in the down-rate scenarios. Management also does not expectanticipate any further Federal Reserve rate reductions as another 0.25% move down would cause the Federal funds rate range to be -0.25% to 0.00%. The Federal Reserve has signaled that their preferred course of action would be to use other tools available to support the economy before resorting to 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 offurther rate cycles.reduction.
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 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 SeptemberJune 30, 2017,2020, 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 SeptemberJune 30, 2017,2020, 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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ENB FINANCIAL CORP
SeptemberJune 30, 20172020
Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position or results of operations 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.
The COVID-19 Pandemic Has Adversely Impacted Our Business And Financial Results, And The Ultimate Impact Will Depend On Future Developments, Which Are Highly Uncertain And Cannot Be Predicted, Including The Scope And Duration Of The Pandemic And Actions Taken By Governmental Authorities In Response To The Pandemic.
The COVID-19 pandemic has negatively impacted the global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed or are required to operate at diminished capacities, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
We continue to closely monitor the COVID-19 pandemic and related risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and indirect effects on the global, national and local economy and our business and results of operation are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.
The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. ManagementExcept for the risk factor above, management has not identified any new risk factors since the December 31, 20162019 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 SeptemberJune 30, 2017.2020.
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Issuer Purchase of Equity Securites | ||||||||||||||||
Total Number of | Maximum Number | |||||||||||||||
Total Number | Average | Shares Purchased | of Shares that May | |||||||||||||
of Shares | Price Paid | as Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | Per Share | Announced Plans * | Under the Plan * | ||||||||||||
July 2017 | — | — | — | 108,865 | ||||||||||||
August 2017 | 8,500 | $ | 34.14 | 8,500 | 100,365 | |||||||||||
September 2017 | — | — | — | 100,365 | ||||||||||||
Total | 8,500 |
Issuer Purchase of Equity Securites | ||||||||||||||||
Total Number of | Maximum Number | |||||||||||||||
Total Number | Average | Shares Purchased | of Shares that May | |||||||||||||
of Shares | Price Paid | as Part of Publicly | Yet be Purchased | |||||||||||||
Period | Purchased | Per Share | Announced Plans * | Under the Plan * | ||||||||||||
April 2020 | 6,400 | 18.65 | 6,400 | 66,423 | ||||||||||||
May 2020 | 21,566 | 19.17 | 21,566 | 44,857 | ||||||||||||
June 2020 | 5,000 | 18.80 | 5,000 | 39,857 | ||||||||||||
Total | 32,966 |
* On June 17, 2015,February 20, 2019, the Board of Directors of ENB Financial Corp announced the approval ofCorporation approved a plan to purchase,repurchase, in the open market and privately negotiatedrenegotiated transactions, up to 140,000100,000 shares of its outstanding common stock. Shares repurchased are being held as treasury shares to be utilized in connection withThis plan replaced the Corporation’s three stock purchase plans.2015 plan. The first purchase of common stock under this plan occurred on July 31, 2015.May 13, 2019. By SeptemberJune 30, 2017,2020, a total of 39,635160,143 shares were repurchased at a total cost of $1,330,000,$3,291,000 for an average cost per share of $33.56. Management may choose$20.55. The total number of shares authorized to repurchase additional shares in 2017be repurchased under this plan.the plan was increased to 200,000 pursuant to the 2-for-1 stock split, which became effective on June 28, 2019.
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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Exhibit |
Description |
3(i) |
|
3 (ii) |
|
10.1 |
|
10.2 |
|
10.3 |
|
| Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)). |
| |
31.2 | Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)). |
| |
32.1 | Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)). |
| |
32.2 | Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)). |
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ENB FINANCIAL CORP
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: | By: | |
Chairman of the Board | ||
Chief Executive Officer and President | ||
Principal Executive Officer | ||
Dated: | By: | |
Scott E. Lied, CPA | ||
Treasurer | ||
Principal Financial Officer |
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