10-Q 1 form10q-125919_enb.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended     September 30, 2012

OR

 

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

 

For the transition period from ___________________________ to ___________________________

 

 

ENB Financial Corp

(Exact name of registrant as specified in its charter)

 

Pennsylvania   000-53297   51-0661129
(State or Other Jurisdiction of Incorporation)   (Commission File Number)   (IRS Employer Identification No)
         
         
31 E. Main St., Ephrata, PA   17522-0457    
(Address of principal executive offices)   (Zip Code)    

 

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

 

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

 

 

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

Yes ý     No o

 

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

Yes ý     No o

 

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

 

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

 

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

Yes o     No ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 2, 2012, the registrant had 2,855,235 shares of $0.20 (par) Common Stock outstanding.

 

 
 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2012

 

Part I – FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
  Consolidated Balance Sheets at September 30, 2012 and 2011 and December 31, 2011 (Unaudited) 3
       
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited) 4
       
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (Unaudited) 5
       
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (Unaudited) 6
       
  Notes to the Unaudited Consolidated Interim Financial Statements   7-28
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   29-60
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk   61-65
       
  Item 4.  Controls and Procedures   66
       
       
       

Part II – OTHER INFORMATION

67
       
  Item 1. Legal Proceedings 67
       
  Item 1A.  Risk Factors 67
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 67
       
  Item 3. Defaults Upon Senior Securities 67
       
  Item 4. Mine Safety Disclosures 67
       
  Item 5. Other Information 67
       
  Item 6. Exhibits 68
       
       
SIGNATURE PAGE 69
       

EXHIBIT INDEX

70

 

2
 

PART I.     FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

ENB Financial Corp

Consolidated Balance Sheets (Unaudited)

 

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)  September 30,   December 31,   September 30, 
   2012   2011   2011 
   $   $   $ 
ASSETS               
Cash and due from banks   10,198    12,511    10,541 
Interest-bearing deposits in other banks   24,754    19,375    24,479 
                
  Total cash and cash equivalents   34,952    31,886    35,020 
                
Securities available for sale (at fair value)   304,481    284,011    284,644 
                
Loans held for sale   897    1,926    210 
                
Loans (net of unearned income)   401,644    412,638    408,450 
                
  Less: Allowance for loan losses   7,644    8,480    8,253 
                
  Net loans   394,000    404,158    400,197 
                
Premises and equipment   21,112    21,366    20,912 
                
Regulatory stock   4,033    4,148    4,102 
                
Bank owned life insurance   19,015    16,552    16,393 
                
Other assets   6,349    7,099    7,351 
                
      Total assets   784,839    771,146    768,829 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
                
Liabilities:               
 Deposits:               
   Noninterest-bearing   149,839    149,510    139,426 
   Interest-bearing   470,095    456,168    463,995 
                
   Total deposits   619,934    605,678    603,421 
                
 Long-term debt   70,500    73,000    80,500 
 Accounts payable for security purchases not yet settled   2,097    6,964     
 Other liabilities   3,394    3,033    3,170 
                
      Total liabilities   695,925    688,675    687,091 
                
Stockholders' equity:               
 Common stock, par value $0.20;               
Shares:  Authorized 12,000,000               
 Issued 2,869,557 and Outstanding 2,857,475               
 (Issued 2,869,557 and Outstanding 2,858,831 as of 12-31-11)               
 (Issued 2,869,557 and Outstanding 2,859,035 as of 9-30-11)   574    574    574 
 Capital surplus   4,315    4,304    4,317 
 Retained earnings   77,611    73,632    72,450 
 Accumulated other comprehensive income, net of tax   6,711    4,221    4,655 
 Less: Treasury stock shares at cost 12,082 (10,726 shares               
  as of 12-31-11 and 10,522 shares as of 9-30-11)   (297)   (260)   (258)
                
      Total stockholders' equity   88,914    82,471    81,738 
                
      Total liabilities and stockholders' equity   784,839    771,146    768,829 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

3
 

ENB Financial Corp

 Consolidated Statements of Income (Unaudited)

Periods Ended September 30, 2012 and 2011

 

   Three Months   Nine Months 
   2012   2011   2012   2011 
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)  $   $   $   $ 
Interest and dividend income:                    
                     
   Interest and fees on loans   5,011    5,386    15,272    16,271 
   Interest on securities available for sale                    
        Taxable   977    1,603    3,336    4,710 
        Tax-exempt   924    867    2,711    2,565 
   Interest on deposits at other banks   24    11    60    29 
   Dividend income   31    28    86    94 
                     
      Total interest and dividend income   6,967    7,895    21,465    23,669 
                     
Interest expense:                    
   Interest on deposits   1,061    1,270    3,271    4,005 
   Interest on long-term debt   499    785    1,655    2,338 
                     
      Total interest expense   1,560    2,055    4,926    6,343 
                     
       Net interest income   5,407    5,840    16,539    17,326 
                     
   Provision (credit) for loan losses   (250)   450    (850)   1,350 
                     
       Net interest income after provision (credit) for loan losses   5,657    5,390    17,389    15,976 
                     
Other income:                    
   Trust and investment services income   248    253    816    847 
   Service fees   393    435    1,259    1,320 
   Commissions   490    469    1,454    1,376 
   Gains on securities transactions, net   342    269    1,003    1,346 
    Impairment losses on securities:                    
         Impairment losses on investment securities       (92)   (55)   (171)
         Non-credit related (gains) losses on securities not expected                    
           to be sold in other comprehensive income before tax       11    (31)   (129)
   Net impairment losses on investment securities       (81)   (86)   (300)
   Gains on sale of mortgages   52    28    183    108 
   Losses on sale of loans               (263)
   Earnings on bank owned life insurance   164    148    762    441 
   Other income   69    88    265    264 
                     
      Total other income   1,758    1,609    5,656    5,139 
                     
Operating expenses:                    
   Salaries and employee benefits   3,020    2,904    9,326    8,566 
   Occupancy   420    410    1,261    1,217 
   Equipment   221    206    657    604 
   Advertising & marketing   65    74    285    239 
   Computer software & data processing   418    397    1,216    1,174 
   Bank shares tax   202    208    618    625 
   Professional services   262    287    850    974 
   FDIC insurance   90    88    270    433 
   Other expense   373    401    1,282    1,133 
                     
      Total operating expenses   5,071    4,975    15,765    14,965 
                     
       Income before income taxes   2,344    2,024    7,280    6,150 
                     
Provision for federal income taxes   384    293    1,160    870 
                     
Net income   1,960    1,731    6,120    5,280 
                     
Earnings per share of common stock   0.69    0.61    2.14    1.85 
                     
Cash dividends paid per share   0.25    0.24    0.75    0.72 
                     
Weighted average shares outstanding   2,854,723    2,858,809    2,855,555    2,857,626 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

4
 

ENB Financial Corp

Consolidated Statements of Comprehensive Income  (Unaudited)

Periods Ended September 30, 2012 and 2011

 

   Three Months   Nine Months 
   2012   2011   2012   2011 
(DOLLARS IN THOUSANDS)  $   $   $   $ 
                 
Net income   1,960    1,731    6,120    5,280 
                     
Other comprehensive (income) loss, net of tax:                    
Net change in unrealized (gains) losses:                    
                     
Other-than-temporarily impaired securities available for sale:                    
                     
  Gains (losses) arising during the quarter       (92)   (55)   (171)
  Income tax effect       31    18    58 
        (61)   (37)   (113)
                     
  Losses recognized in earnings       81    86    300 
  Income tax effect       (27)   (29)   (103)
        54    57    197 
Unrealized holding gains (losses) on other-than-temporarily impaired                    
 securities available for sale, net of tax       (7)   20    84 
                     
Securities available for sale not other-than-temporarily impaired:                    
                     
  Gains arising during the period   2,568    3,021    4,745    7,602 
  Income tax effect   (873)   (1,027)   (1,613)   (2,585)
    1,695    1,994    3,132    5,017 
                     
  Gains recognized in earnings   (342)   (269)   (1,003)   (1,346)
  Income tax effect   116    91    341    458 
    (226)   (178)   (662)   (888)
Unrealized holding (losses) gains on securities available for sale not                    
 other-than-temporarily impaired, net of tax   1,469    1,816    2,470    4,129 
                     
Other comprehensive income   1,469    1,809    2,490    4,213 
                     
Comprehensive Income   3,429    3,540    8,610    9,493 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

5
 

ENB Financial Corp

Consolidated Statements of Cash Flows (Unaudited)

 

(DOLLARS IN THOUSANDS)  Nine Months Ended September 30, 
   2012   2011 
   $   $ 
Cash flows from operating activities:          
Net income   6,120    5,280 
Adjustments to reconcile net income to net cash          
provided by operating activities:          
Net amortization of securities premiums and discounts and loan fees   2,649    1,353 
Increase in interest receivable   (205)   (35)
Decrease in interest payable   (175)   (158)
Provision (credit) for loan losses   (850)   1,350 
Gains on securities transactions, net   (1,003)   (1,346)
Impairment losses on securities   86    300 
Losses on the sale of student loans       263 
Gains on sale of mortgages   (183)   (108)
Loans originated for sale   (10,212)   (7,277)
Proceeds from sales of loans   11,424    7,946 
Earnings on bank-owned life insurance   (762)   (441)
Gains on sale of other real estate owned   (15)    
Depreciation of premises and equipment and amortization of software   1,001    999 
Deferred income tax   598    (212)
Decrease in prepaid federal deposit insurance   236    395 
Decrease in accounts payable for securities purchased not yet settled   (4,867)    
Other assets and other liabilities, net   (485)   (400)
Net cash provided by operating activities   3,357    7,909 
           
Cash flows from investing activities:          
Securities available for sale:          
  Proceeds from maturities, calls, and repayments   70,460    41,795 
  Proceeds from sales   29,624    58,530 
  Purchases   (118,512)   (119,762)
Purchase of other real estate owned   (112)    
Proceeds from sale of other real estate owned   132      
Purchase of regulatory bank stock   (230)    
Redemptions of regulatory bank stock   345    578 
Purchase of bank-owned life insurance   (2,527)   (61)
Proceeds from bank-owned life insurance   826     
Proceeds from sale of student loans       7,981 
Net decrease (increase) in loans   10,729    (1,682)
Purchases of premises and equipment   (582)   (1,226)
Purchase of computer software   (33)   (107)
Net cash used for investing activities   (9,880)   (13,954)
           
Cash flows from financing activities:          
Net increase in demand, NOW, and savings accounts   13,104    15,606 
Net increase (decrease) in time deposits   1,152    (7,779)
Proceeds from long-term debt   15,000    10,500 
Repayments of long-term debt   (17,500)   (4,500)
Dividends paid   (2,141)   (2,056)
Treasury stock sold   317    334 
Treasury stock purchased   (343)   (266)
Net cash provided by financing activities   9,589    11,839 
Increase in cash and cash equivalents   3,066    5,794 
Cash and cash equivalents at beginning of period   31,886    29,226 
Cash and cash equivalents at end of period   34,952    35,020 
           
Supplemental disclosures of cash flow information:          
Interest paid   5,100    6,501 
Income taxes paid   745    1,065 
           
Supplemental disclosure of non-cash investing and financing activities:          
Securities purchased not yet settled   2,097     
Net transfer of other real estate owned held for sale from loans   278     
Fair value adjustments for securities available for sale   3,773    6,383 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

6
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

1.       Basis of Presentation

 

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

 

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the third quarter of 2012, is reporting on the results of operations and financial condition of ENB Financial Corp.

 

Operating results for the three and nine months ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. 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, 2011.

 

 

2.       Securities Available for Sale

 

The amortized cost and fair value of securities held at September 30, 2012, and December 31, 2011, are as follows:

 

       Gross   Gross     
(DOLLARS IN THOUSANDS)  Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
   $   $   $   $ 
September 30, 2012                    
U.S. government agencies   36,741    1,935    (60)   38,616 
U.S. agency mortgage-backed securities   54,425    1,234    (11)   55,648 
U.S. agency collateralized mortgage obligations   47,503    285    (368)   47,420 
Private collateralized mortgage obligations   6,352    62    (479)   5,935 
Corporate bonds   47,606    1,382    (36)   48,952 
Obligations of states and political subdivisions   96,686    6,428    (160)   102,954 
Total debt securities   289,313    11,326    (1,114)   299,525 
Marketable equity securities   5,000        (44)   4,956 
Total securities available for sale   294,313    11,326    (1,158)   304,481 
                     
December 31, 2011                    
U.S. government agencies   44,669    1,959    (14)   46,614 
U.S. agency mortgage-backed securities   54,264    874    (9)   55,129 
U.S. agency collateralized mortgage obligations   55,908    462    (321)   56,049 
Private collateralized mortgage obligations   8,251    25    (1,051)   7,225 
Corporate bonds   25,579    230    (511)   25,298 
Obligations of states and political subdivisions   84,945    4,852    (52)   89,745 
Total debt securities   273,616    8,402    (1,958)   280,060 
Marketable equity securities   4,000        (49)   3,951 
Total securities available for sale   277,616    8,402    (2,007)   284,011 

7
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

The amortized cost and fair value of debt securities available for sale at September 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

 

CONTRACTUAL MATURITY OF DEBT SECURITIES        
(DOLLARS IN THOUSANDS)        
         
   Amortized     
   Cost   Fair Value 
   $   $ 
Due in one year or less   36,641    36,979 
Due after one year through five years   104,948    107,512 
Due after five years through ten years   74,391    76,672 
Due after ten years   73,333    78,362 
Total debt securities   289,313    299,525 

 

Securities available for sale with a par value of $83,331,000 and $73,049,000 at September 30, 2012, and December 31, 2011, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $89,138,000 at September 30, 2012, and $77,874,000 at December 31, 2011.

 

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, 
   2012   2011   2012   2011 
   $   $   $   $ 
Proceeds from sales   6,720    12,542    29,624    58,530 
Gross realized gains   351    315    1,080    1,567 
Gross realized losses   9    46    77    221 

 

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE    
(DOLLARS IN THOUSANDS)                
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2012   2011   2012   2011 
   $   $   $   $ 
Gross realized gains   351    315    1,080    1,567 
                     
Gross realized losses   9    46    77    221 
Impairment on securities       81    86    300 
Total gross realized losses   9    127    163    521 
                     
Net gains on securities   342    188    917    1,046 

 

The bottom portion of the above table shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. Unlike the sale of a security, impairment is a write-down of the book value of the security which produces a loss and does not provide any proceeds. The net gain or loss from security transactions is also reflected on the Corporation’s Consolidated Statements of Income and Consolidated Statements of Cash Flows.

8
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

Management evaluates all of the Corporation’s securities for other than temporary impairment (OTTI) on a periodic basis. As of September 30, 2012, no impairment was needed on any of the Corporation’s securities; however, three private collateralized mortgage obligations (PCMOs) were being held that had experienced prior impairment. Analysis of these three securities as of September 30, 2012, based on the projected future cash flows, including prepayment speeds, delinquencies, foreclosures, and the severity of losses, did not indicate a need to take additional impairment. While there was no security impairment recorded in the second or third quarters of 2012, in the first quarter of 2012, $86,000 of impairment was recorded on two PCMO securities considered to be other than temporarily impaired. Impairment was taken on four PCMO securities in the third quarter of 2011 that amounted to $81,000 and year-to-date impairment on these securities as of September 30, 2011, was $300,000. One of the four PCMOs that experienced impairment in 2011 was sold in May 2012, leaving only three PCMOs that had experienced impairment. Information pertaining to securities with gross unrealized losses at September 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES                   
(DOLLARS IN THOUSANDS)              
   Less than 12 months   More than 12 months   Total 
       Gross       Gross       Gross 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   $   $   $   $   $   $ 
As of September 30, 2012                              
U.S. government agencies   3,975    (60)           3,975    (60)
U.S. agency mortgage-backed securities   5,638    (11)           5,638    (11)
U.S. agency collateralized mortgage obligations   27,612    (270)   5,719    (98)   33,331    (368)
Private collateralized mortgage obligations           4,844    (479)   4,844    (479)
Corporate bonds   1,971    (28)   992    (8)   2,963    (36)
Obligations of states & political subdivisions   9,817    (131)   2,005    (29)   11,822    (160)
                               
Total debt securities   49,013    (500)   13,560    (614)   62,573    (1,114)
                               
Marketable equity securities           956    (44)   956    (44)
                               
Total temporarily impaired securities   49,013    (500)   14,516    (658)   63,529    (1,158)
                               
As of December 31, 2011                              
U.S. government agencies   5,995    (14)           5,995    (14)
U.S. agency mortgage-backed securities   4,998    (9)           4,998    (9)
U.S. agency collateralized mortgage obligations   23,631    (321)           23,631    (321)
Private collateralized mortgage obligations           4,919    (1,051)   4,919    (1,051)
Corporate bonds   12,392    (497)   491    (14)   12,883    (511)
Obligations of states & political subdivisions   2,767    (17)   2,977    (35)   5,744    (52)
                               
Total debt securities   49,783    (858)   8,387    (1,100)   58,170    (1,958)
                               
Marketable equity securities           951    (49)   951    (49)
                               
Total temporarily impaired securities   49,783    (858)   9,338    (1,149)   59,121    (2,007)

 

In the debt security portfolio, there are 47 positions that were considered temporarily impaired at September 30, 2012. Based on analysis conducted as of September 30, 2012, no securities indicated impairment, and therefore, no securities were considered other-than-temporarily impaired.

9
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

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. The Corporation adopted a provision of U.S. generally accepted accounting principles which provides 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. The adoption of this provision was only applicable to four of the Corporation’s PCMOs since these were the only instruments management deemed to be other-than-temporarily impaired and have experienced some impairment.

 

A cumulative total of $1,143,000 of impairment has been recorded on the three impaired PCMO securities currently held, plus the PCMO that was sold in May 2012. Impairment of $340,000 was first recorded in 2009 on two of these securities. Additional impairment was recorded in 2010 for a total of $393,000 on the same two PCMO securities. During 2011, there was an additional $324,000 of impairment recorded on the three PCMO securities, currently identified as other than temporarily impaired, plus the impaired PCMO that was sold in May 2012. In the first quarter of 2012, an additional $86,000 of impairment was recorded on two of the PCMO securities. There was no impairment recorded in the second or third quarters of 2012.

 

The impairment on the PCMOs is a result of a deterioration of expected cash flows on these securities due to higher projected credit losses than the amount of credit protection carried by these securities. Specifically, the foreclosure and severity rates have been running at levels where expected principal losses are in excess of the remaining credit protection on these instruments. The projected principal losses are based on prepayment speeds that are equal to or slower than the actual last twelve-month prepayment speeds the particular securities have experienced. Every quarter, management evaluates third-party reporting that shows projected principal losses based on various prepayment speed and severity rate scenarios. Based on the assumption that all loans over 60 days delinquent will default and at a severity rate equal to or above that previously experienced, and based on historical and expected prepayment speeds, management determined that it was appropriate to take additional impairment on two PCMOs in the first quarter of 2012, with no impairment necessary in the second or third quarters.

 

The following tables reflect the amortized cost, market value, and unrealized loss as of September 30, 2012 and 2011, on the PCMO securities held which had impairment taken in each respective year. The values shown are after the Corporation recorded year-to-date impairment charges of $86,000 through September 30, 2012, and $300,000 through September 30, 2011. The $86,000 and $300,000 are deemed to be credit losses and are the amounts that management expects the principal losses will be by the time these securities mature. The remaining $308,000 and $1,031,000 of unrealized losses are deemed to be market value losses that are considered temporary.

 

SECURITY IMPAIRMENT CHARGES                
(DOLLARS IN THOUSANDS)                
                 
   As of September 30, 2012 
   Amortized  Market  Unrealized  Impairment
   Cost  Value  Loss  Charge
   $  $  $  $
                 
Private collateralized mortgage obligations   3,605    3,297    (308)   (86)

 

   As of September 30, 2011 
   Amortized  Market  Unrealized  Impairment
   Cost  Value  Loss  Charge
   $  $  $  $
                     
Private collateralized mortgage obligations   7,427    6,396    (1,031)   (300)

 

10
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held:

 

CREDIT LOSSES RECOGNIZED IN EARNINGS ON DEBT SECURITIES            
(DOLLARS IN THOUSANDS)                
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
   $   $   $   $ 
                 
Beginning balance   977    951    1,057    732 
                     
Credit losses on debt securities for which other-than-                    
  temporary impairment has not been previously recognized               105 
                     
Additional credit losses on debt securities for which other-                    
  than-temporary impairment was previously recognized       81    86    195 
                     
Sale of debt securities with previously recognized impairment            (166)    
                     
Ending balance   977    1,032    977    1,032 

 

Recent market conditions throughout the financial sector have made the evaluation regarding the possible impairment of PCMOs difficult to fully determine given the volatility of their pricing, based not only on interest rate changes, but on collateral uncertainty as well. The Corporation’s mortgage-backed securities (MBS) and collateralized mortgage obligations (CMO) holdings are backed by the U.S. government, and therefore, experience significantly less volatility and uncertainty than the PCMO securities. The Corporation has not experienced any impairment on U.S. government MBS or CMO securities and does not expect impairment in the future on these instruments. The Corporation’s PCMO holdings make up a minority of the total MBS, CMO, and PCMO securities held. As of September 30, 2012, on an amortized cost basis, PCMOs accounted for 5.9% of the Corporation’s total MBS, CMO, and PCMO holdings, compared to 7.0% as of December 31, 2011. As of September 30, 2012, four PCMOs were held with one of the four rated AAA by either Moody’s or S&P. The remaining three securities were rated below investment grade. Impairment charges, as detailed above, were taken on two of these securities in the first quarter of 2012, with no impairment taken in the second or third quarters of 2012.

 

Management conducts impairment analysis on a quarterly basis and currently plans to continue to hold these securities as cash flow analysis performed under severe stress testing does not indicate a need to take further impairment on the bonds that are considered impaired. The unrealized loss position of all of the Corporation’s PCMOs has improved since December 31, 2011. The PCMO net unrealized losses stood at $1.0 million as of December 31, 2011, and improved to a $417,000 net unrealized loss as of September 30, 2012. One of the four PCMOs is carrying an unrealized gain. Management has concluded that, as of September 30, 2012, the unrealized losses outlined in the above table represent temporary declines. Management currently does not intend to sell these securities as a result of unrealized holding losses carried and impairment taken, and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. While management does not intend to sell these securities related to their impairment, it is standard practice to sell off smaller MBS, CMO, and PCMO instruments once normal principal payments have reduced the size of the security to less than $1 million. This is done to reduce the administrative costs and improve the efficiency of the entire portfolio. One previously impaired PCMO instrument was sold in the second quarter of 2012 with proceeds of $1,051,000 at a minimal loss of $8,000. Management will continue to monitor the remaining PCMO instruments.

 

11
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

3.        Loans and Allowance for Loan Losses

 

The following tables present the Corporation’s loan portfolio by category of loans as of September 30, 2012, and December 31, 2011.

 

LOAN PORTFOLIO         
          
   September 30,   December 31, 
   2012   2011 
   $   $ 
Commercial real estate          
Commercial mortgages   86,941    95,347 
Agriculture mortgages   76,675    73,287 
Construction   17,525    18,957 
Total commercial real estate   181,141    187,591 
           
Consumer real estate (a)          
1-4 family residential mortgages   130,762    133,959 
Home equity loans   13,525    14,687 
Home equity lines of credit   15,907    15,004 
Total consumer real estate   160,194    163,650 
           
Commercial and industrial          
Commercial and industrial   25,612    25,913 
Tax-free loans   17,774    19,072 
Agriculture loans   13,058    12,884 
Total commercial and industrial   56,444    57,869 
           
Consumer   3,798    3,590 
           
Gross loans prior to deferred fees   401,577    412,700 
Less:          
Deferred loan fees (costs), net   (67)   62 
Allowance for loan losses   7,644    8,480 
Total net loans   394,000    404,158 
           

 

(a) Real estate loans serviced for Fannie Mae, which are not included in the Consolidated Balance Sheets, totaled $7,345,000 and $8,904,000 as of September 30, 2012, and December 31, 2011, respectively.    

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2012, and December 31, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled or at all. 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.

 

12
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

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

 

COMMERCIAL CREDIT EXPOSURE
CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE
(DOLLARS IN THOUSANDS)
                             
September 30, 2012  Commercial
Mortgages
   Agriculture
Mortgages
   Construction   Commercial
and
Industrial
   Tax-free
Loans
   Agriculture
Loans
   Total 
   $   $   $   $   $   $   $ 
Grade:                                   
Pass   77,946    73,400    13,054    23,198    17,534    12,161    217,293 
Special Mention   619    419        338        88    1,464 
Substandard   8,376    2,856    4,471    2,076    240    809    18,828 
Doubtful                            
Loss                            
                                    
   Total   86,941    76,675    17,525    25,612    17,774    13,058    237,585 
                                    

 

December 31, 2011  Commercial
Mortgages
   Agriculture
Mortgages
   Construction   Commercial
and
Industrial
   Tax-free
Loans
   Agriculture
Loans
   Total 
   $   $   $   $   $   $   $ 
Grade:                                   
Pass   76,532    67,235    13,869    21,561    19,072    11,943    210,212 
Special Mention   3,872    773    132    1,173        65    6,015 
Substandard   14,943    5,279    4,956    3,179        876    29,233 
Doubtful                            
Loss                            
                                    
   Total   95,347    73,287    18,957    25,913    19,072    12,884    245,460 

13
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and non-accrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of September 30, 2012, and December 31, 2011:

 

CONSUMER CREDIT EXPOSURE
CREDIT RISK PROFILE BY PAYMENT PERFORMANCE
(DOLLARS IN THOUSANDS)
September 30, 2012  1-4 Family
Residential
Mortgages
   Home Equity
Loans
   Home Equity
Lines of
Credit
   Consumer   Total 
Payment performance:  $   $   $   $   $ 
                          
Performing   130,451    13,384    15,907    3,794    163,536 
Non-performing   311    141        4    456 
                          
  Total   130,762    13,525    15,907    3,798    163,992 
                          

 

December 31, 2011  1-4 Family
Residential
Mortgages
   Home Equity
Loans
   Home Equity
Lines of
Credit
   Consumer   Total 
Payment performance:  $   $   $   $   $ 
                     
Performing   133,643    14,541    15,004    3,590    166,778 
Non-performing   316    146            462 
                          
  Total   133,959    14,687    15,004    3,590    167,240 

 

 

14
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 2012, and December 31, 2011:

 

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, 2012  Past Due   Past Due   Days   Due   Current   Receivable   Accruing 
   $   $   $   $   $   $   $ 
Commercial real estate                                   
  Commercial mortgages   128    225        353    86,588    86,941     
  Agriculture mortgages                   76,675    76,675     
  Construction                   17,525    17,525     
Consumer real estate                                   
  1-4 family residential mortgages   640    21    172    833    129,929    130,762    172 
  Home equity loans   132            132    13,393    13,525     
  Home equity lines of credit   17            17    15,890    15,907     
Commercial and industrial                                   
  Commercial and industrial   32            32    25,580    25,612     
  Tax-free loans                   17,774    17,774     
  Agriculture loans                   13,058    13,058     
Consumer   5        2    7    3,791    3,798     
      Total   954    246    174    1,374    400,203    401,577    172 

 

                           Loans 
           Greater               Receivable > 
   30-59 Days   60-89 Days   than 90   Total Past       Total Loans   90 Days and 
December 31, 2011  Past Due   Past Due   Days   Due   Current   Receivable   Accruing 
   $   $   $   $   $   $   $ 
Commercial real estate                                   
  Commercial mortgages   390            390    94,957    95,347     
  Agriculture mortgages                   73,287    73,287     
  Construction   132            132    18,825    18,957     
Consumer real estate                                   
  1-4 family residential mortgages   1,684    140    107    1,931    132,028    133,959    107 
  Home equity loans   79    101        180    14,507    14,687     
  Home equity lines of credit       15        15    14,989    15,004     
Commercial and industrial                                   
  Commercial and industrial   49        101    150    25,763    25,913     
  Tax-free loans                   19,072    19,072     
  Agriculture loans                   12,884    12,884     
Consumer   18    5        23    3,567    3,590     
      Total   2,352    261    208    2,821    409,879    412,700    107 

 

15
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2012, and December 31, 2011:

 

NONACCRUAL LOANS BY LOAN CLASS    
(DOLLARS IN THOUSANDS)    
   September 30,   December 31, 
   2012   2011 
   $   $ 
         
Commercial real estate          
 Commercial mortgages   963    1,265 
 Agriculture mortgages        
 Construction        
Consumer real estate          
 1-4 family residential mortgages   184    209 
 Home equity loans   141    146 
 Home equity lines of credit        
Commercial and industrial          
 Commercial and industrial   54    242 
 Tax-free loans        
 Agriculture loans        
Consumer   4     
            Total   1,346    1,862 

 

As of September 30, 2012, and December 31, 2011, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and nine months ended September 30, 2012, and September 30, 2011, is as follows:

 

IMPAIRED LOANS                
(DOLLARS IN THOUSANDS)                
   Three months ended September 30,   Nine months ended September 30, 
   2012   2011   2012   2011 
   $   $   $   $ 
Impaired loans:                    
Average recorded balance of impaired loans   3,074    3,645    3,286    4,075 
Interest income recognized on impaired loans   50    29    106    92 

 

Interest income on impaired loans would have increased by approximately $4,000 and $65,000 for the three and nine months ended September 30, 2012, and $35,000 and $114,000 for the three and nine months ended September 30, 2011, had these loans performed in accordance with their original terms.

16
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information in regards to impaired loans by loan portfolio class as of September 30, 2012, and December 31, 2011:

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2012  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
   $   $   $   $   $ 
                     
With no related allowance recorded:                         
Commercial real estate                         
   Commercial mortgages   304    304        416     
   Agriculture mortgages   1,640    1,640        1,646    83 
   Construction                    
Total commercial real estate   1,944    1,944        2,062    83 
                          
Commercial and industrial                         
   Commercial and industrial   54    95        155    20 
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial   54    95        155    20 
                          
Total with no related allowance   1,998    2,039        2,217    103 
                          
With an allowance recorded:                         
Commercial real estate                         
   Commercial mortgages   983    1,080    162    1,069    3 
   Agriculture mortgages                    
   Construction                    
Total commercial real estate   983    1,080    162    1,069    3 
                          
Commercial and industrial                         
   Commercial and industrial                    
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial                    
                          
Total with a related allowance   983    1,080    162    1,069    3 
                          
Total by loan class:                         
Commercial real estate                         
   Commercial mortgages   1,287    1,384    162    1,485    3 
   Agriculture mortgages   1,640    1,640        1,646    83 
   Construction                    
Total commercial real estate   2,927    3,024    162    3,131    86 
                          
Commercial and industrial                         
   Commercial and industrial   54    95        155    20 
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial   54    95        155    20 
                          
Total   2,981    3,119    162    3,286    106 

 

17
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2011  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
   $   $   $   $   $ 
                     
With no related allowance recorded:                         
Commercial real estate                         
   Commercial mortgages   473    473        641     
   Agriculture mortgages   1,658    1,658        1,667    119 
   Construction       67        44     
Total commercial real estate   2,131    2,198        2,352    119 
                          
Commercial and industrial                         
   Commercial and industrial   137    137        226     
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial   137    137        226     
                          
Total with no related allowance   2,268    2,335        2,578    119 
                          
With an allowance recorded:                         
Commercial real estate                         
   Commercial mortgages   1,147    1,244    140    1,245     
   Agriculture mortgages                    
   Construction                    
Total commercial real estate   1,147    1,244    140    1,245     
                          
Commercial and industrial                         
   Commercial and industrial   105    105    61    71     
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial   105    105    61    71     
                          
Total with a related allowance   1,252    1,349    201    1,316     
                          
Total by loan class:                         
Commercial real estate                         
   Commercial mortgages   1,620    1,717    140    1,886     
   Agriculture mortgages   1,658    1,658        1,667    119 
   Construction       67        44     
Total commercial real estate   3,278    3,442    140    3,597    119 
                          
Commercial and industrial                         
   Commercial and industrial   242    242    61    297     
   Tax-free loans                    
   Agriculture loans                    
Total commercial and industrial   242    242    61    297     
                          
Total   3,520    3,684    201    3,894    119 

 

18
Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

 

The following tables detail activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2012, and September 30, 2011:

 

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, 2011   3,441    1,424    2,825    61    729    8,480 
                               
   Charge-offs           42    5        47 
   Recoveries           20    5        25 
   Provision   (371)   (103)   214    (6)   16    (250)(1)
                               
Balance - March 31, 2012   3,070    1,321    3,017    55    745    8,208 
                               
   Charge-offs           5    2        7 
   Recoveries           23    3        26 
   Provision   41    96    (434)   4    (57)   (350)(1)
                               
Balance - June 30, 2012   3,111    1,417    2,601    60    688    7,877 
                               
   Charge-offs               2        2 
   Recoveries   15        3    1        19 
   Provision   296    (14)   (457)   (5)   (70)   (250)(1)
                               
Ending Balance - September 30, 2012   3,422    1,403    2,147    54    618    7,644 

(1)The Corporation recognized a $250,000 credit provision in the first quarter of 2012, a $350,000 credit provision in the second quarter of 2012, and a $250,000 credit provision in the third quarter of 2012, as a result of lower levels of non-performing and  delinquent loans, minimum charge-offs, and a decline in loan balances.

 

<
   Commercial
Real Estate
   Consumer
Real Estate
   Commercial
and Industrial
   Consumer   Unallocated   Total 
   $   $   $   $   $   $ 
Allowance for credit losses:                              
Beginning balance - December 31, 2010   2,605    1,254    2,816    75    382    7,132 
                               
   Charge-offs   97    13    30    9        149 
   Recoveries       2    145    3        150 
   Provision   527    39    (165)       49    450