UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
T
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the fiscal year ended
|
December 31,
2009
|
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _________________ to _________________
Commission
File Number 000-53297
ENB
Financial Corp
(Exact
name of registrant as specified in its charter)
|
Pennsylvania
|
51-0661129
|
||
|
State
or other jurisdiction of incorporation or organization
|
(IRS
Employer Identification No.)
|
||
|
31 E. Main St. Ephrata, PA
|
17522
|
||
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (717) 733-4181
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Title of each
class
Common
Stock, Par Value $0.20 Per Share
Indicated
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes T No
¨
Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes T No
¨
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 T No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
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 the 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 ¨
|
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
T
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009, was approximately $42,015,535.
The
number of shares of the registrant’s Common Stock outstanding as of February 15,
2010, was 2,839,000.
DOCUMENTS INCORPORATED BY
REFERENCE
The
Registrant’s Definitive Proxy Statement for its 2010 Annual Meeting of
Shareholders to be held on May 4, 2010, is incorporated into Parts III and IV
hereof.
2
ENB FINANCIAL CORP
Table of
Contents
|
Part
I
|
|||
|
Item
1.
|
4
|
||
|
Item
1A.
|
19
|
||
|
Item
1B.
|
26
|
||
|
Item
2.
|
26
|
||
|
Item
3.
|
28
|
||
|
Item
4.
|
28
|
||
|
Part
II
|
|||
|
Item
5.
|
28 | ||
|
Item
6.
|
31
|
||
|
Item
7.
|
32
|
||
|
Item
7A.
|
64
|
||
|
Item
8.
|
70
|
||
|
Item
9.
|
100
|
||
| Item 9A (T). Controls and Procedures |
100
|
||
|
Item
9B.
|
101
|
||
|
Part
III
|
|||
|
Item
10.
|
102
|
||
|
Item
11.
|
102
|
||
|
Item
12.
|
102
|
||
|
Item
13.
|
102
|
||
|
Item
14.
|
102
|
||
|
Part
IV
|
|||
|
Item
15.
|
103
|
||
|
104
|
|||
|
105
|
|||
ENB
FINANCIAL CORP
Part
I
Forward-Looking
Statements
The U.S.
Private Securities Litigation Reform Act of 1995 provides safe harbor in regard
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 predictions, 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:
|
|
·
|
Economic
conditions
|
|
|
·
|
Monetary
and interest rate policies of the Federal Reserve
Board
|
|
|
·
|
Volatility
of the securities markets
|
|
|
·
|
Effects
of deteriorating market conditions, specifically the effect on loan
customers to repay loans
|
|
|
·
|
Political
changes and their impact on new laws and
regulations
|
|
|
·
|
Competitive
forces
|
|
|
·
|
Changes
in deposit flows, loan demand, or real estate and investment securities
values
|
|
|
·
|
Changes
in accounting principles, policies, or
guidelines
|
|
|
·
|
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
|
|
|
·
|
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.
|
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 ENB Financial Corp 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 ENB Financial Corp periodically
with the Securities and Exchange Commission, including Item 1A. of this Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form
8-K.
|
Item
1.
|
Business
|
General
ENB
Financial Corp (“the Corporation”) is a bank holding company that was formed on
July 1, 2008. The Corporation’s wholly owned subsidiary, Ephrata
National Bank (“the Bank”), is a full service commercial bank organized under
the laws of the United States. Presently, no other subsidiaries exist
under the bank holding company. The Corporation and the Bank are both
headquartered in Ephrata, Lancaster County, Pennsylvania. The Bank
was incorporated in 1881 pursuant to the United States National Bank Act under a
charter granted by the Office of the Comptroller of the Currency
(OCC). The Federal Deposit Insurance Corporation (FDIC) insures
deposit accounts to the maximum extent provided by law. The
Corporation’s retail, operational, and administrative offices are all located in
northern Lancaster County, Pennsylvania, the Corporation’s primary market
area.
The basic
business of the Corporation is to provide a broad range of financial services to
individuals and small-to-medium-sized businesses in Northern Lancaster County
and surrounding market areas. The Corporation utilizes funds gathered
through deposits from the general public to originate loans. The
Corporation offers time, demand, and savings deposits and secured and unsecured
commercial, real estate, and consumer loans. Ancillary
services
ENB
FINANCIAL CORP
that
provide added convenience for our customers include direct deposit and direct
payments of funds through Electronic Funds Transfer, ATMs linked to the Star ™®
network, telephone and internet banking, MasterCard™® debit cards, Visa™® or
MasterCard credit cards, and safe deposit box facilities. The
Corporation also offers a full complement of trust and investment advisory
services through ENB’s Money Management Group.
As of
December 31, 2009, the Corporation employed 217 persons, consisting of 172
full-time and 45 part-time employees. The number of full-time
employees decreased by eight and the number of part-time employees remained the
same from the previous year-end. The decline in total employees was
attributable to the prior year’s organizational realignment and the last of the
employees who accepted a voluntary separation package leaving the
Corporation. A collective bargaining agent does not represent the
employees.
Operating
Segments
The
Corporation’s business is providing financial products and
services. These products and services are provided through the
Corporation’s wholly owned subsidiary, the Bank. The Bank is
presently the only subsidiary of the Corporation, and the Bank only has one
reportable operating segment, community banking, as described in Note A of the
Notes to the Consolidated Financial Statements included in this
Report. The segment reporting information in Note A is incorporated
by reference into this Part I, Item 1.
Business
Operations
Products and Services with
Reputation Risk
The
Corporation offers a diverse range of financial and banking products and
services. In the event one or more customers and/or governmental
agencies becomes dissatisfied with or objects to any product or service offered
by the Corporation, negative publicity with respect to any such product or
service, whether legally justified or not, could have a negative impact on the
Corporation’s reputation. The discontinuance of any product or
service, whether or not any customer or governmental agency has challenged any
such product or service, could have a negative impact on the Corporation’s
reputation.
Market Area and
Competition
The
Corporation’s primary market area is northern Lancaster County, Pennsylvania;
however, the Corporation’s market area also extends into contiguous Berks,
Lebanon, and Chester Counties. The area served by the Corporation is
a mix of rural communities and small to mid-sized towns. The
Corporation’s service area is located just south of the Pennsylvania turnpike
between the greater metropolitan areas of Philadelphia and Harrisburg and the
smaller cities of Reading and Lancaster. Lancaster County ranks high nationally
as a favored place to reside due to its scenic farmland, low cost of living,
diversity of the local economy, and proximity to large cities. As a
result, the area is experiencing strong population growth and
development.
In the
course of attracting and retaining deposits, and originating loans, the
Corporation faces considerable competition. The Corporation competes
with other commercial banks, savings and loan institutions, and credit unions
for traditional banking products, such as deposits and
loans. Additionally, the Corporation competes with consumer finance
companies for loans, mutual funds, and other investment alternatives for
deposits. The Corporation competes for deposits based on the ability
to provide a range of products, low fees, quality service, competitive rates,
and convenient locations and hours. The competition for loan
origination generally relates to interest rates offered, products available,
quality of service, and loan origination fees charged. Several competitors
within the Corporation’s primary market have substantially higher legal lending
limits that enable them to service larger loans.
The
Corporation continues to assess the competition and market area to determine the
best way to meet the financial needs of the communities it
serves. Management strategically addresses these competitive issues
by determining the new products and services to be offered as well as investing
in the expertise of staffing for expansion of the Corporation’s
services.
Concentrations and
Seasonality
The
Corporation does not have any portion of its businesses dependent on a single or
limited number of customers, the loss of which would have a material adverse
effect on its businesses. No substantial portion of loans
or
ENB
FINANCIAL CORP
investments
is concentrated within a single industry or group of related industries,
although a significant amount of loans are secured by real estate located in
northern Lancaster County, Pennsylvania. The business activities of
the Corporation are not seasonal in nature. Financial instruments
with concentrations of credit risk are described in Note Q of the Notes to
Consolidated Financial Statements included in this Report. The
concentration of credit risk information in Note Q is incorporated by reference
into this Part I, Item 1.
Supervision
and Regulation
General
Overview
Bank
holding companies operate in a highly regulated environment and are routinely
examined by federal and state regulatory authorities. The following
discussion concerns various federal and state laws and regulations and the
potential impact of such laws and regulations on the Corporation and the
Bank.
To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory or regulatory provisions themselves. Proposals to change
laws and regulations are frequently introduced in Congress, the state
legislatures, and before the various bank regulatory agencies. The
Corporation cannot determine the likelihood or timing of any such proposals or
legislation, or the impact they may have on the Corporation and the
Bank. A change in law, regulations, or regulatory policy may have a
material effect on the Corporation and the Bank’s business.
The
operations of the Bank are subject to federal and state statutes applicable to
banks chartered under the banking laws of the United States, to members of the
Federal Reserve System, and to banks whose deposits are insured by the
FDIC. Bank operations are subject to regulations of the OCC, the
Board of Governors of the Federal Reserve System, and the FDIC.
Supervision
and Regulation of the Corporation
The Holding Company Act of
1956.
On the
day of the reorganization, the Corporation became subject to the provisions of
the Holding Company Act of 1956, as amended, and to supervision by the Federal
Reserve Board. The following restrictions apply:
|
|
·
|
General Supervision by the
Federal Reserve Board. As a bank holding company, the
Corporation’s activities are limited to the business of banking and
activities closely related or incidental to banking. Bank
holding companies are required to file periodic reports with and are
subject to examination by the Federal Reserve Board. The
Federal Reserve Board has adopted a risk-focused supervision program for
small shell bank holding companies that is tied to the examination results
of the subsidiary bank. The Federal Reserve Board has issued
regulations under the Bank Holding Company Act that require a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks. As a result, the Federal Reserve Board may
require that the Corporation stand ready to provide adequate capital funds
to the Bank during periods of financial stress or
adversity.
|
|
|
·
|
Restrictions on Acquiring
Control of Other Banks and Companies. A bank holding
company may not:
|
|
|
o
|
acquire
direct or indirect control of more than 5% of the outstanding shares of
any class of voting stock, or substantially all of the assets of any bank,
or
|
|
|
o
|
merge
or consolidate with another bank holding company, without prior approval
of the Federal Reserve Board.
|
In
addition, a bank holding company may not:
|
|
o
|
engage
in a non-banking business, or
|
|
|
o
|
acquire
ownership or control of more than 5% of the outstanding shares of any
class of voting stock of any company engaged in a non-banking
business,
|
unless
the Federal Reserve Board determines the business to be so closely related to
banking as to be a
ENB
FINANCIAL CORP
proper
incident to banking. In making this determination, the Federal
Reserve Board considers whether these activities offer benefits to the public
that outweigh any possible adverse effects.
|
|
·
|
Anti-Tie-In
Provisions. A bank holding company and its subsidiaries
may not engage in tie-in arrangements in connection with any extension of
credit or provision of any property or services. These
anti-tie-in provisions state generally that a bank may
not:
|
|
|
o
|
extend
credit,
|
|
|
o
|
lease
or sell property, or
|
|
|
o
|
furnish
any service to a customer
|
on the
condition that the customer provides additional credit or service to a bank or
its affiliates, or on the condition that the customer not obtain other credit or
service from a competitor of the bank.
|
|
·
|
Restrictions on Extensions of
Credit by Banks to their Holding Companies. Subsidiary
banks of a holding company are also subject to restrictions imposed by the
Federal Reserve Act on:
|
|
|
o
|
any
extensions of credit to the bank holding company or any of its
subsidiaries,
|
|
|
o
|
investments
in the stock or other securities of the Corporation,
and
|
|
|
o
|
taking
these stock or securities as collateral for loans to any
borrower.
|
|
|
·
|
Risk-Based Capital
Guidelines. Bank holding companies must comply with the
Federal Reserve Board’s risk-based capital guidelines. The
required minimum ratio of total capital to risk-weighted assets, including
some off-balance sheet activities, such as standby letters of credit, is
8%. At least half of the total capital is required to be Tier I
Capital, consisting principally of common shareholders’ equity, less
certain intangible assets. The remainder, Tier II Capital, may
consist of:
|
|
|
o
|
some
types of preferred stock,
|
|
|
o
|
a
limited amount of subordinated
debt,
|
|
|
o
|
some
hybrid capital instruments,
|
|
|
o
|
other
debt securities, and
|
|
|
o
|
a
limited amount of the general loan loss
allowance.
|
The
risk-based capital guidelines are required to take adequate account of interest
rate risk, concentrations of credit risk, and risks of nontraditional
activities.
|
|
·
|
Capital Leverage Ratio
Requirements. The Federal Reserve Board requires a bank
holding company to maintain a leverage ratio of a minimum level of Tier I
capital, as determined under the risk-based capital guidelines, equal to
3% of average total consolidated assets for those bank holding companies
that have the highest regulatory examination rating and are not
contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to
maintain a ratio of at least 1% to 2% above the stated
minimum. The Bank is subject to similar capital requirements
pursuant to the Federal Deposit Insurance
Act.
|
|
|
·
|
Restrictions on Control
Changes. The Change in Bank Control Act of 1978 requires
persons seeking control of a bank or bank holding company to obtain
approval from the appropriate federal banking agency before completing the
transaction. The law contains a presumption that the power to
vote 10% or more of voting stock confers control of a bank or bank holding
company. The Federal Reserve Board is responsible for reviewing
changes in control of bank holding companies. In doing so, the
Federal Reserve Board reviews the financial position, experience and
integrity of the acquiring person, and the effect the change of control
will have on the financial condition of the Corporation, relevant markets,
and federal deposit insurance
funds.
|
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act (SOX), also known as the “Public Company Accounting Reform
and Investor Protection Act,” was established in 2002 and introduced major
changes to the regulation of financial practice. SOX was established
as a reaction to the outbreak of corporate and accounting scandals, including
Enron and Worldcom. SOX represents a comprehensive revision of laws
affecting corporate governance, accounting obligations, and
ENB
FINANCIAL CORP
corporate
reporting. SOX is applicable to all companies with equity or debt
securities that are either registered, or file reports under the
Securities Exchange Act of 1934. In particular, SOX establishes: (i)
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Principal Executive Officer and Principal Financial Officer
of the reporting company; (iii) standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and its directors and executive officers; and (v) increased civil and criminal
penalties for violations of the securities laws. Many of the
provisions were effective immediately while other provisions become effective
over a period of time and are subject to rulemaking by the SEC.
Congress
determined that the primary responsibility for enacting, implementing, and
enforcing the new rules brought about by SOX would be that of the U.S.
Securities and Exchange Commission (SEC). While some provisions of
SOX became effective upon enactment on July 30, 2002, the other provisions
became effective as the SEC adopted various rules. The SOX
requirements have been deferred a number of times for the Corporation,
previously as a non-accelerated filer, and more recently, as a smaller reporting
company.
To ensure
greater investor confidence in corporate disclosures from public companies, SOX
restricts the services that public accounting firms can provide to publicly
traded companies. The Corporation does not engage the same
professional accounting firm for external and internal auditing.
Section
404 of SOX requires publicly held companies to document and test their internal
controls that impact financial reporting and report on the findings, known as
Section 404a. External auditors also must test and report on the
effectiveness of a company’s internal controls to ensure accurate financial
reporting, which is known as Section 404b. Companies must report any
deficiencies or material weaknesses in their internal controls, as well as their
remediation efforts.
Accelerated
and large accelerated filers have had to comply with Sections 404a and 404b of
SOX in their annual reports since 2004, with their auditors required to report
on the effectiveness of internal controls. An accelerated filer is
defined as having between $75 million and $700 million of publicly traded market
capitalization; large accelerated filers are companies with over $700 million of
publicly traded market capitalization as of the end of their second
quarter. Non-accelerated filers with publicly traded market
capitalization under $75 million were not required to comply with Section 404b
until recently. The Corporation was considered a non-accelerated
filer through 2007, and therefore was only subject to Section
404a. The Corporation currently meets the definition of a smaller
public company as it has a public equity float of approximately $47 million as
of June 30, 2009.
During
2005, as the SEC and Public Company Accounting Oversight Board (PCAOB) jointly
reviewed the 2004 annual reporting and evaluated the impact of SOX on these
accelerated filers, it was apparent that the experience was difficult and
costly, requiring more resources, people, and time than expected. The
SEC was particularly concerned about the cost and other difficulties that
smaller companies would face in preparing to implement Section
404. As a result, the requirement for non-accelerated filers, and
subsequently smaller reporting companies, to comply with Section 404b was
delayed and has since been delayed several times.
During
2007, the SEC issued rulings on several parts of Section 404. The
2007 SEC ruling refined the definitions of material weakness and significant
deficiencies under Section 404a that management would be required to disclose if
determined that such weaknesses or deficiencies existed in the internal controls
over financial reporting. The rule also refined parts of Section 404b
regarding the independent registered public accounting firm requirement of
attesting to the effectiveness of the Corporation’s internal control structure
over financial reporting. It allowed the independent registered
public accounting company to place more reliance on the testing of internal
controls over financial reporting done by management or the Corporation’s
internal auditors. Section 404b was expected to be required for
financial years ending on or after December 15, 2008. The SEC also
expanded the definitions of smaller public companies beyond non-accelerated
filers to include a new definition of smaller reporting
company. The smaller reporting company definition was more
favorable to smaller businesses that qualified under certain
conditions. Those public companies with public floats under $75
million that did not qualify under the smaller reporting company were considered
non-accelerated filers. Both were not subject to Section 404b at the
time. The non-accelerated filers also included publicly traded
companies that previously did have a public float over $75 million but were now
less than $50 million due to market conditions. In 2007, the
Corporation existed in the name of Ephrata National Bank and filed as a
non-accelerated filer.
In
February 2008, the SEC proposed a rule that extended the date for independent
auditor attestation to first be included for years ended on or after December
15, 2009. On July 1, 2008, the Corporation came into existence
as
ENB
FINANCIAL CORP
ENB
Financial Corp, which succeeded Ephrata National Bank. With the new
entity and new SEC registration statement, the Corporation changed the filing
status from non-accelerated filer to smaller reporting company. An
issuer has the ability to determine its filing status on an annual
basis.
On
October 2, 2009, the SEC announced, concurrent with the release of its most
recent cost-benefit study, that the Commission was granting a final deferral of
the effective date of Section 404b for small companies, extending the deadline
to annual reports for fiscal years ending after June 15, 2010. As a
result, management does not believe there will be further extensions to Section
404b and is proceeding based on attestation being performed on the Corporation’s
controls for the year ending December 31, 2010.
Permitted
Activities for Bank Holding Companies
The
Federal Reserve Board permits bank holding companies to engage in activities so
closely related to banking or managing or controlling banks as to be a proper
incident of banking. In 1997, the Federal Reserve Board significantly
expanded its list of permissible non-banking activities to improve the
competitiveness of bank holding companies. The following list
includes activities that a holding company may engage in, subject to change by
the Federal Reserve Board:
|
|
·
|
Making,
acquiring, or servicing loans and other extensions of credit for its own
account or for the account of
others.
|
|
|
·
|
Any
activity used in connection with making, acquiring, brokering, or
servicing loans or other extensions of credit, as determined by the
Federal Reserve Board. The Federal Reserve Board has determined
that the following activities are
permissible:
|
|
|
o
|
real
estate and personal property
appraising;
|
|
|
o
|
arranging
commercial real estate equity
financing;
|
|
|
o
|
check-guaranty
services;
|
|
|
o
|
collection
agency services;
|
|
|
o
|
credit
bureau services;
|
|
|
o
|
asset
management, servicing, and collection
activities;
|
|
|
o
|
acquiring
debt in default, if a holding company divests shares or assets securing
debt in default that are not permissible investments for bank holding
companies within prescribed time periods, and meets various other
conditions; and
|
|
|
o
|
real
estate settlement services.
|
|
|
·
|
Leasing
personal and real property or acting as agent, broker, or advisor in
leasing property, provided that:
|
|
|
o
|
the
lease is a non-operating lease;
|
|
|
o
|
the
initial term of the lease is at least 90
days;
|
|
|
o
|
if
real property is being leased, the transaction will compensate the lessor
for at least the lessor’s full investment in the property and costs, with
various other conditions.
|
|
|
·
|
Operating
non-bank depository institutions, including an industrial bank or savings
association.
|
|
|
·
|
Performing
functions or activities that may be performed by a trust company,
including activities of a fiduciary, agency, or custodial nature, in the
manner authorized by federal or state law, so long as the holding company
is not a bank.
|
|
|
·
|
Acting
as investment or financial advisor to any person,
including:
|
|
|
o
|
serving
as investment advisor to an investment company registered under the
Investment Company Act of 1940;
|
|
|
o
|
furnishing
general economic information and advice, general economic statistical
forecasting services, and industry
studies;
|
|
|
o
|
providing
advice in connection with mergers, acquisitions, divestitures,
investments, joint ventures, capital structuring, financing transactions,
and conducting financial feasibility
studies;
|
ENB
FINANCIAL CORP
|
|
o
|
providing
general information, statistical forecasting, and advice concerning any
transaction in foreign exchange, swaps, and similar transactions,
commodities, options, futures, and similar
instruments;
|
|
|
o
|
providing
educational courses and instructional materials to consumers on individual
financial management matters; and
|
|
|
o
|
providing
tax planning and tax preparation services to any
person.
|
|
|
·
|
Agency transactional
services for customer investments,
including:
|
|
|
o
|
Securities brokerage --
Providing securities brokerage services, whether alone or in combination
with investment advisory services, and incidental activities, including
related securities credit activities compliant with Federal Reserve Board
Regulation T and custodial services, if the securities brokerage services
are restricted to buying and selling securities solely as agent for the
account of customers and do not include securities underwriting or
dealing.
|
|
|
o
|
Riskless-principal
transactions -- Buying and selling all types of securities in the
secondary market on the order of customers as “riskless
principal.”
|
|
|
o
|
Private-placement
services -- Acting as agent for the private placement of securities
in accordance with the requirements of the Securities Act of 1933 and the
rules of the SEC.
|
|
|
o
|
Futures commission
merchant -- Acting as a futures commission merchant for
unaffiliated persons in the execution and clearance of any futures
contract and option on a futures contract traded on an exchange in the
United States or abroad, if the activity is conducted through a separately
incorporated subsidiary of the holding company and the company satisfies
various other conditions.
|
|
|
·
|
Investment
transactions as principal:
|
|
|
o
|
Underwriting
and dealing in government obligations and money market instruments,
including bankers’ acceptances and certificates of deposit, under the same
limitations applicable if the activity were performed by a holding
company’s subsidiary member banks.
|
|
|
·
|
Engaging
as principal in:
|
|
|
o
|
foreign
exchanges; and
|
|
|
o
|
forward
contracts, options, futures, options on futures, swaps, and similar
contracts, with various conditions.
|
|
|
·
|
Buying
and selling bullion, and related
activities.
|
|
|
·
|
Management
consulting and counseling
activities:
|
|
|
o
|
Subject
to various limitations, management consulting on any matter to
unaffiliated depository institutions, or on any financial, economic,
accounting, or audit matter to any other company;
and
|
|
|
o
|
Providing
consulting services to employee benefit, compensation, and insurance
plans, including designing plans, assisting in the implementation of
plans, providing administrative services to plans, and developing employee
communication programs for plans.
|
|
|
·
|
Providing
career counseling services to:
|
|
|
o
|
a
financial organization and individuals currently employed by, or recently
displaced from, a financial
organization;
|
|
|
o
|
individuals
who are seeking employment at a financial organization;
and
|
|
|
o
|
individuals
who are currently employed in or who seek positions in the finance,
accounting, and audit departments of any
company.
|
|
|
·
|
Support
services:
|
|
|
o
|
providing
limited courier services; and
|
ENB
FINANCIAL CORP
|
|
o
|
printing
and selling checks and related items requiring magnetic ink character
recognition.
|
|
|
·
|
Insurance
agency and underwriting:
|
|
|
o
|
Subject
to various limitations, acting as principal, agent, or broker for credit,
life, accident, health, and unemployment insurance that is directly
related to an extension of credit by a holding company or any of its
subsidiaries.
|
|
|
o
|
Engaging
in any insurance agency activity in a place where the Corporation or a
subsidiary of the Corporation has a lending office and that has a
population not exceeding 5,000 or has inadequate insurance agency
facilities, as determined by the Federal Reserve
Board.
|
|
|
o
|
Supervising,
on behalf of insurance underwriters, the activities of retail insurance
agents who sell fidelity insurance and property and casualty insurance on
the real and personal property used in the Corporation’s operations or its
subsidiaries, and group insurance that protects the employees of the
Corporation or its subsidiaries.
|
|
|
o
|
Engaging
in any insurance agency activities if the Corporation has total
consolidated assets of $50 million or less, with the sale of life
insurance and annuities being limited to sales in small towns or as credit
insurance.
|
|
|
·
|
Making
equity and debt investments in corporations or projects designed primarily
to promote community welfare, and providing advisory services to these
programs.
|
|
|
·
|
Subject
to various limitations, providing others with financially oriented data
processing or bookkeeping services.
|
|
|
·
|
Issuing
and selling money orders, travelers' checks, and United States savings
bonds.
|
|
|
·
|
Providing
consumer financial counseling that involves counseling, educational
courses, and distribution of instructional materials to individuals on
consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget management, real
estate tax shelters, tax planning, retirement and estate planning,
insurance, and general investment management, so long as this activity
does not include the sale of specific products or
investments.
|
|
|
·
|
Providing
tax planning and preparation
advice.
|
Permitted
Activities for Financial Holding Companies
The
Gramm-Leach-Bliley Financial Services Modernization Act became law in November
1999 and amends the Holding Company Act of 1956 to create a new category of
holding company - the financial holding company. To be designated as
a financial holding company, a bank holding company must file an application
with the Federal Reserve Board (FRB). The corporation must be and
remain well capitalized and well managed, as determined by FRB regulations and
maintain at least a satisfactory examination rating under the Community
Reinvestment Act. Once a bank holding company becomes a financial
holding company, the holding company or its affiliates may engage in any
activities that are financial in nature or incidental to financial
activities. Furthermore, the Federal Reserve may approve a proposed
activity if it is complementary to financial activities and does not threaten
the safety and soundness of banking. The Act provides an initial list
of activities that constitute activities that are financial in nature,
including:
|
|
·
|
lending
and deposit activities,
|
|
|
·
|
insurance
activities, including underwriting, agency, and
brokerage,
|
|
|
·
|
providing
financial investment advisory
services,
|
|
|
·
|
underwriting
in, and acting as a broker or dealer in,
securities,
|
|
|
·
|
merchant
banking, and
|
|
|
·
|
insurance
company portfolio investment.
|
The
Corporation is currently not a financial holding company.
ENB
FINANCIAL CORP
Supervision
and Regulation of the Bank
Safety and
Soundness
The
primary regulator for the Bank is the OCC. The OCC has the authority
under the Financial Institutions Supervisory Act and the Federal Deposit
Insurance Act to prevent a national bank from engaging in any unsafe or unsound
practice in conducting business or from otherwise conducting activities in
violation of the law.
Federal
and state banking laws and regulations govern, but are not limited to, the
following:
|
|
·
|
Scope
of a bank’s business
|
|
|
·
|
Investments
a bank may make
|
|
|
·
|
Reserves
that must be maintained against certain
deposits
|
|
|
·
|
Loans
a bank makes and collateral it
takes
|
|
|
·
|
Merger
and consolidation activities
|
|
|
·
|
Establishment
of branches
|
The
Corporation is a member of the Federal Reserve System. Therefore, the
policies and regulations of the Federal Reserve Board have a significant impact
on many elements of the Corporation’s operations, including:
|
|
·
|
Loan
and deposit growth
|
|
|
·
|
Rate
of interest earned and paid
|
|
|
·
|
Levels
of liquidity
|
|
|
·
|
Levels
of required capital
|
Management
cannot predict the effect of changes to such policies and regulations upon the
Corporation’s business model and the corresponding impact they may have on
future earnings.
FDIC Insurance
Assessments
The FDIC
imposes a risk-related premium schedule for all insured depository institutions
that results in the assessment of premiums based on the Bank’s capital and
supervisory measures. Under the risk-related premium schedule, the
FDIC assigns, on a semi-annual basis, each depository institution to one of
three capital groups, the best of these being “Well Capitalized.” For
purposes of calculating the insurance assessment, the Bank was considered “Well
Capitalized” as of December 31, 2009. This designation has benefited
the Bank in the past and continues to benefit it in terms of a lower quarterly
FDIC rate. The Bank was utilizing a one-time credit against
calculated quarterly FDIC assessments. This credit was fully utilized
in the second quarter of 2008, upon which the Bank began to pay FDIC insurance
again. The FDIC adjusts the insurance rates when
necessary. The FDIC insurance rate increased by 140% in
2009. This increase is designed to replenish the FDIC fund due to
2008 bank failures and to provide for additional FDIC insurance coverage on
deposit accounts. The insurance coverage increases include a FDIC
insurance increase from $100,000 to $250,000, and unlimited insurance coverage
on non-interest bearing deposits and interest bearing deposit balances with
rates less than or equal to 0.50%. The total FDIC assessments paid by
the Bank in 2009 were $966,000.
In
addition to FDIC insurance costs, the Bank is subject to assessments to pay the
interest on Financing Corporation Bonds. Congress created the
Financing Corporation to issue bonds to finance the resolution of failed thrift
institutions. These assessment rates are set
quarterly. The total Financing Corporation assessments paid by the
Bank in 2009 were $56,000.
FDIC Insurance Premium
Increase
On
February 27, 2009, the FDIC announced that it was increasing federal deposit
insurance premiums, beginning in the second quarter of 2009, for well-managed,
well-capitalized banks to a range between 12 and 16 cents per $100 of insured
deposits on an annual basis. As a result, the Bank’s total regular
insurance premiums for 2009, which were paid from earnings, increased by
approximately $792,000, or 344.3%.
The FDIC
also voted to impose a special assessment of 5 basis points on all FDIC-insured
banks to be collected on September 30, 2009. This special assessment
totaled $326,000. In the third quarter of 2009, the FDIC announced
that they would be requesting that banks prepay three years worth of assessments
at the end of 2009 to help
ENB
FINANCIAL CORP
replenish
the severely depleted Deposit Insurance Fund (DIF). The Corporation
paid $2.3 million in prepaid FDIC insurance on December 30, 2009. The
entire amount was recorded as a prepaid expense (asset). As of
December 31, 2009, and each quarter thereafter, the Corporation will record an
expense (charge to earnings) for its regular quarterly assessment for the
quarter with an offsetting credit to the prepaid assessment until the asset is
exhausted. Once the asset is exhausted, the Corporation will record
an accrued expense payable each quarter for the assessment payment, which would
be paid in arrears to the FDIC at the end of the following
quarter. If the prepaid assessment is not exhausted by December 30,
2014, any remaining amount will be returned to the Corporation.
Community Reinvestment
Act
Under the
Community Reinvestment Act (CRA), as amended, the OCC is required to assess all
financial institutions that it regulates to determine whether these institutions
are meeting the credit needs of the community that they serve. The
Act focuses specifically on low and moderate income
neighborhoods. The OCC takes an institution’s CRA record into account
in its evaluation of any application made by any of such institutions for, among
other things:
|
·
|
Approval
of a new branch or other deposit
facility
|
|
·
|
Closing
of a branch or other deposit
facility
|
|
·
|
An
office relocation or a merger
|
|
·
|
Any
acquisition of bank shares
|
The CRA,
as amended, also requires that the OCC make publicly available the evaluation of
a bank’s record of meeting the credit needs of its entire community, including
low and moderate income neighborhoods. This evaluation includes a
descriptive rating of either outstanding, satisfactory, needs to improve, or
substantial noncompliance, along with a statement describing the basis for the
rating. These ratings are publicly disclosed. The Bank
received an outstanding rating on the most recent CRA Performance Evaluation
completed on April 13, 2009.
Capital
Adequacy
Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
institutions are classified in one of five defined categories as illustrated
below:
|
Capital Category
|
Total Risk-Based Ratio
|
Tier 1 Risk-Based Ratio
|
Tier 1 Leverage Ratio
|
|
Well
Capitalized
|
>
10.0
|
>
6.0
|
>
5.0
|
|
Adequately
Capitalized
|
>
8.0
|
>
4.0
|
>
4.0*
|
|
Undercapitalized
|
<
8.0
|
<
4.0
|
<
4.0*
|
|
Significantly
Undercapitalized
|
<
6.0
|
<
3.0
|
<
3.0
|
|
Critically
Undercapitalized
|
<
2.0
|
*3.0 for
those banks having the highest available regulatory rating.
The
Bank’s capital ratios exceed the regulatory requirements to be considered Well
Capitalized for Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1
Leverage Capital. The Capital Ratio table and consolidated financial
statement Note N – Regulatory Matters and Restrictions, are incorporated by
reference herein, from Item 8, and made a part hereof. Note N
discloses capital ratios for both the Bank and the Corporation, shown as
Consolidated.
During
2009, capital adequacy became a primary focus of regulators in light of the
challenging financial conditions of the past two years which have caused a
larger number of bank failures, higher loan losses, and lower earnings levels of
financial institutions. In 2008, there were 25 bank failures, while
in 2009, the number climbed to 140. As of March 1, 2010, 22 banks had
failed in 2010. As a result, regulators were discussing and also
acting to require banks with weaker capital levels to maintain levels higher
than the regulatory minimums. The most commonly discussed new
possible capital levels for well capitalized institutions have been 8% rather
than 5% for Tier 1 Leverage, 10% rather than 6% for Tier 1 Risk-Based, and 12%
rather than 10% for Total Risk-Based Capital. These discussed levels,
and the associated higher levels for the related lower rated categories, have
not been approved as of the time of this filing. However, management
is aware of regulatory practices that are requiring that these levels of capital
be attained. Management expects higher regulatory capital levels to
be enacted in 2010 but is not able to predict what those levels will
be.
ENB
FINANCIAL CORP
Prompt Corrective
Action
In the
event an institution’s capital deteriorates to the Undercapitalized category or
below, FDICIA prescribes an increasing amount of regulatory intervention,
including:
|
|
·
|
Implementation
of a capital restoration plan and a guarantee of the plan by a parent
institution
|
|
|
·
|
Placement
of a hold on increases in assets, number of branches, or lines of
business
|
If
capital reaches the significantly or critically undercapitalized level, further
material restrictions can be imposed, including restrictions on interest payable
on accounts, dismissal of management, and (in critically undercapitalized
situations) appointment of a receiver. For well-capitalized
institutions, FDICIA provides authority for regulatory intervention where they
deem the institution to be engaging in unsafe or unsound practices, or if the
institution receives a less than satisfactory examination report rating for
asset quality, management, earnings, liquidity, or sensitivity to market
risk.
Regulation
O
Regulation
O, also known as Loans to Insiders, governs the permissible lending
relationships between a bank and its executive officers, directors, and
principal shareholders and their related interests. The primary
restriction of Regulation O is that loan terms and conditions, including
interest rates and collateral coverage, can be no more favorable to the insider
than loans made in comparable transactions to non-covered
parties. Additionally, the loan may not involve more than normal
risk. The regulation requires quarterly reporting to regulators of
the total amount of credit extended to insiders.
Under
Regulation O, a bank is not required to obtain approval from the bank’s Board of
Directors prior to making a loan to an executive officer, as long as a first
lien on the executive officer’s residence secures the loan. Further
amendments allow bank insiders to take advantage of preferential loan terms that
are available to substantially all employees. Regulation O does
permit an insider to participate in a plan that provides more favorable credit
terms than the bank provides to non-employee customers provided that the
plan:
|
|
·
|
Is
widely available to employees
|
|
|
·
|
Does
not give preference to any insider over other
employees
|
The Bank
has a policy in place that offers general employees more favorable loan terms
than those offered to non-employee customers. The Bank’s policy on
loans to insiders allows insiders to participate in the same favorable rate and
terms offered to all other employees; however, any loan to an insider must
receive the approval of the Bank’s Board of Directors.
Legislation and Regulatory
Changes
From time
to time, legislation is enacted that has the effect of increasing the cost of
doing business, limiting or expanding permissible activities, or affecting the
competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies, and other
financial institutions are frequently made in Congress, and before various
regulatory agencies. No prediction can be made as to the likelihood
of any major changes or the impact such changes might have on the Corporation’s
operations. See Item 1A. Risk Factors for more
information.
In the
following section, certain significant enacted or proposed legislation is
discussed that either has impacted, or is likely to impact the
Corporation. Certain legislation was enacted several years ago that
had phase-in periods or requirements that only began impacting the Corporation
in 2008. Other significant legislation, like the USA Patriot Act, was
enacted several years ago and continues to be a focus of regulatory
agencies. The sub-prime crisis which became apparent in 2007, and the
broader credit crisis that followed in 2008, resulted in a number of very
historical legislative changes that occurred in late 2008, and continue to the
time of this report. This legislation, along with other legislation
currently under consideration by Congress or various regulatory or professional
agencies, is also discussed below.
New Legislation and
Regulations
Regulation
E – Electronic Fund Transfer Act
ENB
FINANCIAL CORP
On
November 17, 2009, the Federal Reserve Board announced a final rule requiring
consumer consent for overdraft fees on ATM and one-time debit card
transactions. The rule requires affirmative consumer consent,
referred to as opt-in, for charging overdraft fees on these types of
transactions. Issued on November 12, 2009, as an amendment to
Regulation E, which implements the Electronic Fund Transfer Act, the final rule
has a July 1, 2010, mandatory compliance date. The new rule’s
prohibitions and requirements are extensive including:
|
|
·
|
Obtaining
valid consent
|
|
|
·
|
Description
of the issuer’s overdraft policies and the fees
imposed
|
|
|
·
|
Confirmation
of opt-in
|
|
|
·
|
Notification
of customer rights
|
Check,
ACH payments, and recurring debit card transactions that create overdrafts, such
as regular bill payments on a VISA-branded debit card, are not subject to the
new rule. As a result, an issuer may charge overdraft fees for these
transactions without an opt-in.
Under the
new regulation, an issuer is prohibited from providing different account terms,
conditions, and features to customers who do not opt in. Also, an
issuer is prohibited from conditioning the payment of overdrafts falling outside
the rule on a customer’s consent to payment of fees on ATM and one-time debit
card overdrafts. This means that to comply with the new rule, an
issuer cannot simply decline payment of all debit card overdrafts of a customer
who does not opt in and instead must install a system that can read the codes
used by merchants to distinguish between recurring and non-recurring
transactions. The FRB established July 1, 2010, as the mandatory
implementation date in large part due to the practical difficulties of
installing such a system.
On
accounts opened before July 1, 2010, issuers may continue to charge overdraft
fees for paying ATM or one-time debit transactions without a customer’s opt-in
until August 15, 2010. Issuers are permitted to obtain opt-ins at any
time before July 1, 2010, as long as the opt-in satisfies all requirements of
the new rule. Opt-ins must be honored as soon as they are
received.
Management
has evaluated and continues to evaluate the impact of this
legislation. Presently, management anticipates a 30% to 50% reduction
in overdraft fees after these regulatory changes take place in July
2010.
Regulation
Z – Truth in Lending Act
The Truth
in Lending Act was initially enacted to require financial institutions to
provide standardized information or disclosures for consumers to use and
consider when determining the cost of credit. This regulation has seen more
changes than any other during the last eighteen months of legislative activity.
The Home Ownership and Equity Protection Act, the Mortgage Disclosure
Improvement Act of 2008, the Higher Education Opportunity Act, and the Credit
Card Accountability and Responsibility Act of 2009 have all amended this
regulation for the purpose of providing consumer protection. Some of
the protections realized by the amendments are:
|
|
·
|
The
identification of Higher-Priced Mortgage Loans (HPML) and the
establishment of the Average Prime Offer Rate to be used as an index with
defined margins to identify these
loans
|
|
|
·
|
Mandated
disclosure formats, disclosure delivery schedules, and permissible loan
closing schedules based on the delivery of required disclosure
documents
|
|
|
·
|
Disclosure
of loan payment processing and account crediting
procedures
|
|
|
·
|
Open
End Line of Credit periodic statements are to be issued at least 21 days
before payment due date
|
The
Fair and Accurate Credit Transactions (FACT) Act
The FACT
Act was passed by Congress in November 2003, and signed into law by the
President on December 4, 2003. The FACT Act amended the Fair Credit
Reporting Act (FCRA), which was originally passed in 1978. The FCRA
has been revised and amended several times since it first became law, the FACT
Act being the most recent amendment. The purpose of the FACT Act is
to require consumer agencies, creditors, and others to implement procedures
that:
|
|
·
|
Assist
in remedying identity theft
|
|
|
·
|
Improve
consumer credit report dispute
resolution
|
|
|
·
|
Improve
the accuracy of consumer credit
records
|
ENB
FINANCIAL CORP
|
|
·
|
Improve
the access to, and use of credit
reports
|
The final
rule for Section 214 of the FACT Act was published in the Federal Register on
October 30, 2007, and became effective on January 1, 2008. This
section, entitled the “Affiliate Marketing Rule,” mandates that consumers be
given an opportunity to “opt out” before a company uses information provided by
an affiliate company to market its products and services to the
consumer. The final rule prohibits the use of information obtained
from the consumer’s transactions or account relationship with an affiliate, the
consumer’s application, credit reports, or other third party sources if the
consumer is not given notice, reasonable opportunity, and a simple method to opt
out of any prospective solicitations.
Section
114, “Identity Theft Red Flags,” and Section 315, “Address Discrepancy,” final
rules were published in the Federal Register on November 9, 2007, and became
effective on January 1, 2008. The “Identity Theft Red Flags” rules require
financial institutions to develop and implement an Identity Theft Prevention
Program to protect new and existing accounts from the risk of identity theft.
Policies and procedures must be enacted to detect, prevent, and mitigate
identity theft and enable financial institutions to:
|
|
·
|
Identify
relevant patterns, practices, and specific forms of activity that are red
flags signaling possible identity theft and incorporate those red flags
into their program;
|
|
|
·
|
Detect
red flags that have been incorporated into their
program;
|
|
|
·
|
Respond
appropriately to any red flags that are detected to prevent and mitigate
identity theft; and
|
|
|
·
|
Ensure
their program is updated periodically to reflect changes in risks from
identity theft.
|
The
“Address Discrepancy” final rules, Section 315, require financial institutions
to develop policies and procedures to assess the validity of a request for a
change of address by a credit or debit card holder that is followed closely by a
request for an additional or replacement card. These rules also
require users of consumer reports to develop policies and procedures to be used
when a notice of address discrepancy is received from a consumer reporting
agency.
The final
rule for Section 312 of the FACT Act was published in the Federal Register on
July 1, 2009, and becomes effective on July 1, 2010. This section,
entitled the “Procedures to Enhance the Accuracy and Integrity of Information
Furnished to Consumer Reporting Agencies,” mandates that financial institutions
establish and implement reasonable written policies and procedures to insure the
accuracy and integrity of the information they furnish to consumer reporting
agencies about their clients’ credit activities.
USA Patriot Act
On March
9, 2006, the President signed the USA Patriot Improvement and Reauthorization
Act of 2005 into law. This enactment extended the requirements of the
original act signed into law in October 2001. The rules, developed by the
Secretary of the Treasury, require that the Bank have procedures in place
to:
|
|
·
|
Verify
the identity of persons applying to open an
account
|
|
|
·
|
Ensure
adequate maintenance of the records used to verify a person’s identity,
and
|
|
|
·
|
Determine
whether a person is on any U.S. governmental agency list of known or
suspected terrorists, or a terrorist
organization.
|
The
regulators continue to stress the importance of the Bank Secrecy
Act. The OCC is enhancing the risk assessment requirements for
banks. These include requiring banks to report risk assessments on
bank products, customers, and geographies.
The
Corporation has implemented the required internal controls and continues to
enhance the policies, procedures, and monitoring programs to ensure proper
compliance. The Corporation has purchased software to automate the
monitoring activities that are required for money laundering and suspicious
activity.
Government
Sponsored Entities Takeover – September 7, 2008
On
September 7, 2008, the U.S. Treasury Department took the unprecedented action of
placing the government sponsored entities (GSE) of Fannie Mae and Freddie Mac
under conservatorship. Fannie Mae and Freddie Mac are government
mortgage finance companies that were established with governmental backing to
assist the public with affordable home ownership. Fannie Mae was
created in the 1930’s under President Franklin D. Roosevelt’s
“New
ENB
FINANCIAL CORP
Deal”
plan to revive the economy. Freddie Mac was started in
1970. The companies were designed primarily to lower the cost of home
ownership by buying mortgages from lenders, freeing up cash at banks to make
more loans. They make money by financing mortgage-asset purchases
with low-cost debt and on guarantees of home-loan securities they create out of
loans from lenders.
When
housing prices declined significantly in 2008 and recessionary conditions began,
the health of these government sponsored entities deteriorated and both were
incurring unprecedented losses. The financial condition of the two
GSEs had declined to the point that their survival and the backing of their
mortgage-backed debt was called into question. As a result, the U.S.
government stepped in and effectively became the owner of these entities by
taking a priority position in the preferred stock of these
entities. Due to the huge amount of GSE debt held by institutions and
governments all over the world, the U.S. Treasury Department believed taking
over the entities was the most appropriate course of action to ensure the
backing of this debt and provide support for the credit markets in
general. As a result of the government’s action, Fannie Mae and
Freddie Mac mortgage-backed instruments were able to hold on to an AAA rating by
the major rating services. While government action backed the
creditors, the preferred equity holders were left in a very weak
position. As a result, the Corporation initially took impairment and
then sold its remaining preferred Fannie Mae stock position in the fourth
quarter of 2008.
It is
likely the U.S. Treasury Department will continue to hold both Fannie Mae and
Freddie Mac under conservatorship until a new regulatory solution is
found. As recent as January 2010, Chairman of the House Financial
Services Committee, Barney Frank, said his committee would push to replace
Fannie Mae and Freddie Mac with a different model for U.S. mortgage
financing. Treasury Secretary Timothy Geithner said that he
does not believe Congress will be able to pass legislation restructuring these
two companies until 2011. Barney Frank has also commented that Fannie
and Freddie bond holders should not assume that government will pay the full
value of these investments as Congress retools the companies. While
Fannie Mae and Freddie Mac debt is not guaranteed by the U.S. government, as
GSEs, they do have the implicit backing of the government, as demonstrated by
government actions to date. The economic ramifications of the U.S.
government not fully backing Fannie Mae and Freddie Mac debt would be severe and
felt worldwide as many foreign countries have purchased this
debt. Based on book value, the Corporation owned $36.6 million of
mortgage-backed securities and $27.2 million of collateralized mortgage
obligations of Fannie Mae and Freddie Mac as of December 31,
2009. The Corporation also owned $4 million of Freddie Mac debt
instruments as of December 31, 2009. It is anticipated that the
Corporation’s Fannie Mae and Freddie Mac security holdings will decline
throughout 2010 as management has been directing the majority of newer
investments into Ginnie Mae securities backed by the full faith and credit of
the U.S. Government.
FDIC
Insurance Reform
On
October 3, 2008, the President signed the Emergency Economic Stabilization Act
(EESA) of 2008. This legislation temporarily raised the federal
deposit insurance coverage limit per depositor from $100,000 to $250,000 through
2009. In the second quarter of 2009, the Senate voted in favor of the
Deposit Insurance Bill S. 896, which extends the FDIC’s borrowing authority with
the U.S. Treasury from $30 billion to $100 billion, with emergency funding up to
$500 billion. The legislation also extended the temporary deposit
insurance coverage increase to $250,000 through the end of
2013. Additionally, the FDIC announced the details of its Temporary
Liquidity Guarantee Program (TLGP) on October 14, 2008. The purpose
of this program is to strengthen confidence and encourage liquidity in the
nation’s banking system. This program is composed of two
components:
|
|
·
|
The
Debt Guarantee Program (DGP) under which the FDIC will guarantee certain
newly issued senior unsecured debt issued on or after October 14, 2008,
and before June 30, 2009, by participating financial
institutions. Financial institutions not desiring to
participate in this program had to elect to opt out of this
component. The Corporation does not issue senior unsecured debt
and therefore opted out of this
program.
|
|
|
·
|
The
Transaction Account Guarantee (TAG) program is the program under which the
FDIC will provide full deposit insurance coverage for all of a bank’s
non-interest bearing deposit transaction accounts regardless of the dollar
amount. Negotiable Order of Withdrawal (NOW) accounts with
interest rates less than or equal to 0.5% and Interest on Lawyer Trust
Accounts (IOLTA) are also covered by this extended
coverage. This guarantee is temporary, expiring on June 30,
2010. The TAG program requires a bank to disclose to its
customers if it is or is not participating in the program. A
participating bank is also required to give a second disclosure to
customers who have an agreement that sweeps money from a non-interest
bearing transaction account to an interest bearing account or
non-transaction account. This disclosure must inform the
customer that a transfer to an interest bearing account could decrease the
customer’s FDIC
|
ENB
FINANCIAL CORP
deposit
insurance coverage. The Corporation’s cost of the premium for the TAG
program is very small compared to FDIC insurance coverage. Total TAG
costs for 2009 were less than $10,000.
Capital
Purchase Program of the Emergency Economic Stabilization Act of 2008
(EESA)
When the
EESA of 2008 was passed on October 3, 2008, with $700 billion of funding, the
initial focus of the Act was to provide rapid relief to the banking and finance
industry by purchasing troubled assets, primarily mortgage-related
debt. The Troubled Asset Relief Program (TARP) was developed to
purchase sub-prime debt and other impaired mortgage-backed
instruments. Due to the rapidly declining health of large banks,
brokerage houses, and insurance companies, the initial focus of the government
purchasing troubled mortgage-backed instruments was quickly changed to direct
capital injections into the largest banks, and later regional and larger
community banks. While “TARP” was the standard phrase for banks
receiving U.S. Treasury funding, the Capital Purchase Program (CPP) was actually
the program established for the U.S. Treasury to invest in the nation’s banks by
taking a senior cumulative preferred stock position.
Under the
CPP, the U.S. Treasury would hold the preferred stock for five years, receiving
a 5% dividend during this period. The U.S. Treasury has the option to
redeem the preferred stock after three years, in which case the government
ownership would be transferred to other preferred equity holders or the
preferred shares would be eliminated. After five years, the dividend
rate on the preferred stock increases to 9%. In an effort to provide
confidence to the banking system, the government required the nation’s largest
banks to participate in the CPP. Beyond the largest banks, other
regional and community banks could apply to receive capital under the
CPP. Financial institutions had to evaluate their need for additional
capital, and the attractiveness of the initial dividend rate, and requirements
attached to the program. Besides adding additional preferred stock to
the equity structure, the cost of the capital, and the element of government
ownership, there are other restrictions in the plan involving increases to
dividends and restrictions on stock repurchases that management did not believe
were aligned with the Corporation’s strategic plan. The Corporation
is considered “Well Capitalized” under regulatory standards and compares
favorably to the peer group in total and regulatory capital, and as such,
management elected not to participate in the CPP.
American
Recovery and Reinvestment Act of 2009
On
February 18, 2009, President Barack Obama signed into law the American Recovery
and Reinvestment Act of 2009. The historical $789 billion economic
recovery package is intended to stem the decline in the U.S.
economy. About 35% of the plan is dedicated to tax cuts for
businesses and individuals, including payroll tax credits, first-time home buyer
credits, and tax breaks on new car loan interest and sales tax. The
remainder of the package is spending-related, including construction of highways
and bridges, water and waste water treatment facilities, and high speed internet
services. Spending plans also include health and human services
initiatives such as expanded unemployment benefits, food stamps, and subsidies
for health insurance. Due to the magnitude of this wide sweeping
legislation, the package will undoubtedly impact nearly all segments of the
economy and will in turn impact the financial industry. Up to the
filing of this report, this legislation has not had a material impact on the
Corporation’s financial condition and results of operations.
Comprehensive
Financial Reform
On
November 10, 2009, Senate Banking committee Chairman Christopher Dodd (D-CT) was
joined by fellow committee members to unveil a tough, bold bill to reform the
way that the financial system is regulated. The Chairman referenced a
long list of the weaknesses of the current financial system and reiterated the
need for Congress to restore responsibility and accountability in the financial
system in order to give Americans confidence that there is a system in place
that works and protects them. Some of the most important items of the
plan call for the following:
|
|
·
|
Stopping
abusive practices by creating an independent Consumer Financial Protection
Agency.
|
|
|
·
|
Ending
the “too big to fail” practices.
|
|
|
·
|
Replacing
the myriad of government agencies that failed to prevent the current
financial crisis with a single accountable federal banking
regulator.
|
|
|
·
|
Single
regulator proposal calls for a separate division for community banks that
have never posed the same risks as larger financial
institutions.
|
|
|
·
|
Eliminating
regulatory gaps that allowed risky practices such as over-the-counter
derivatives, hedge funds, asset-backed securities, and payday lending, to
largely fly under the radar of regulatory
scrutiny.
|
ENB
FINANCIAL CORP
|
|
·
|
Demand
transparency from credit rating agencies and hold them accountable for the
quality of their ratings.
|
|
|
·
|
To
restore confidence in our markets and encourage investment, requiring
companies that sell products such as mortgage-backed securities to keep
“skin in the game” to protect against selling highly risky securities to
investors.
|
This
legislation stands to have a material impact on the Corporation. The
extent of regulatory change that comes about from the proposed legislation
cannot be determined at this time; however, due to the severity of the current
financial crisis and the size, scope, and comprehensive nature of this proposed
legislation, it is very likely that additional regulatory burdens will be placed
upon the Corporation.
On
December 2, 2009, the House Financial Services Committee approved similar
financial reform legislation that also addressed the “too big to fail” issue and
help prevent the failure of large institutions from becoming a system-wide
crisis, with the taxpayer left to cover the costs. The Financial
Stability Improvement Act (H.R. 3996) is intended to modernize America’s
financial rules. Importantly, this legislation passed without the
“Cramdown” provision that would have allowed bankruptcy judges to reduce, or
“cram down,” mortgage principal and modify loan terms. The
legislation required the proposed Consumer Financial Protection Agency to
establish a special unit dedicated to ensuring that community banks are not
disproportionately affected by its regulations, and called for the change in
FDIC deposit-insurance assessment base to assets minus tangible capital, rather
than domestic deposits, which would allow lower premiums for 98 percent of the
nation’s community banks, the Corporation included. Once signed into
law, this comprehensive set of reforms will work in tandem to address the myriad
of causes that led to the financial crisis. This legislation goes to
the Senate, which will work to advance its own regulatory reform
bill.
Ongoing
Legislation
As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Corporation’s business is particularly susceptible to changes
in federal and state legislation and regulations. Over the course of
time, various federal and state proposals for legislation could result in
additional regulatory and legal requirements for the
Corporation. Management cannot predict if any such legislation will
be adopted, or if adopted, how it would affect the business of the
Corporation. Past history has demonstrated that new legislation or
changes to existing legislation usually results in a heavier compliance burden
and generally increases the cost of doing business.
Statistical
Data
The
statistical disclosures required by this item are incorporated by reference
herein, from Item 6 on page 31 and the Income Statements on page 73 as found in
this Form 10-K filing.
Available
Information
A copy of
the Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
and Current Reports on Form 8-K, as required to be filed with the Securities and
Exchange Commission pursuant to Securities Exchange Act Rule 13a-1, may be
obtained, without charge, from our website: www.enbfc.com or by
request via e-mail to pwenger@epnb.com. This
information may also be obtained via written request to Mr. Paul W. Wenger,
Secretary, Shareholder Relations, at ENB Financial Corp, 31 East Main Street,
P.O. Box 457, Ephrata, PA, 17522.
The
Corporation’s reports, proxy statements, and other information are available for
inspection and copying at the SEC Public Reference Room at 100 F Street, N.E.,
Washington, DC, 20549 at prescribed rates. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Corporation is an electronic filer
with the Commission. The Commission maintains a website that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission. The address
of the Commission’s website is http://www.sec.gov.
|
Item
1A.
|
Risk
Factors
|
An
investment in the Corporation’s common stock is subject to risks inherent to the
banking industry and the equity markets. The material risks and
uncertainties that management believes affect the Corporation are described
below. Before making an investment decision, you should carefully consider the
risks and uncertainties described below
ENB
FINANCIAL CORP
together
with all of the other information included or incorporated by reference in this
report. The risks and uncertainties described below are not the only
ones facing the Corporation. Additional risks and uncertainties that
management is not aware of or is not focused on, or currently deems immaterial,
may also impair the Corporation’s business operations. This report is
qualified in its entirety by these risk factors.
If any of
the following risks actually occur, the Corporation’s financial condition and
results of operations could be materially and adversely affected. If
this were to happen, the value of the Corporation’s common stock could decline
significantly, and you could lose all or part of your investment.
Risks
Related To The Corporation’s Business:
The
Corporation Is Subject To Interest Rate Risk
The
Corporation’s earnings and cash flows are largely dependent upon its net
interest income. Net interest income is the difference between
interest income earned on interest earning assets, such as loans and securities,
and interest expense paid on interest bearing liabilities, such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors
that are beyond the Corporation’s control, including general economic conditions
and policies of various governmental and regulatory agencies, particularly, the
Board of Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the
Corporation receives on loans and securities, but also the amount of interest it
pays on deposits and borrowings. Changes in interest rates could also
affect:
|
·
|
The
Corporation’s ability to originate loans and obtain
deposits
|
|
·
|
The
fair value of the Corporation’s financial assets and
liabilities
|
|
·
|
The
average duration of the Corporation’s assets and
liabilities
|
|
·
|
The
future liquidity of the Corporation
|
If the
interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, the
Corporation’s net interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings.
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
Corporation’s results of operations, any substantial, unexpected, prolonged
change in market interest rates could have a material adverse effect on the
Corporation’s financial condition and results of operations.
The
Corporation Is Subject To Lending Risk
There are
inherent risks associated with the Corporation’s lending
activities. These risks include, among other things, the impact of
changes in interest rates and changes in the economic conditions in the markets
where the Corporation operates, as well as those across the Commonwealth of
Pennsylvania and the United States. Increases in interest rates
and/or weakening economic conditions could adversely impact the ability of
borrowers to repay outstanding loans or the value of the collateral securing
these loans. The Corporation is also subject to various laws and
regulations that affect its lending activities. Failure to comply
with applicable laws and regulations could subject the Corporation to regulatory
enforcement action that could result in the assessment of significant civil
money penalties against the Corporation.
As of
December 31, 2009, 41.0% of the Corporation’s loan portfolio consisted of
commercial, industrial, and construction loans secured by real
estate. Another 17.9% of the Corporation’s loan portfolio consisted
of commercial loans not secured by real estate. These types of loans
are generally viewed as having more risk of default than residential real estate
loans or consumer loans. These types of loans are also typically
larger than residential real estate loans and consumer loans. Because
the Corporation’s loan portfolio contains a significant number of commercial and
industrial, construction, and commercial real estate loans with relatively large
balances, the deterioration of one or a few of these loans could cause a
significant increase in non-performing loans. An increase in
non-performing loans could result in a net loss of earnings from these loans, an
increase in the provision for possible loan losses, and an increase in loan
charge-offs, all of which could have a material adverse effect on the
Corporation’s financial condition and results of operations.
ENB
FINANCIAL CORP
If
We Conclude That The Decline In Value Of Any Of Our Investment Securities Is
Other Than Temporary, We Are Required To Write Down The Value Of That Security
Through A Charge To Earnings.
We review
our investment securities portfolio at each quarter-end reporting period to
determine whether the fair value is below the current carrying
value. When the fair value of any of our investment securities has
declined below its carrying value, we are required to assess whether the decline
is other than temporary. If we conclude that the decline is other
than temporary, we are required to write down the value of that security through
a charge to earnings. Changes in the expected cash flows of these
securities and/or prolonged price declines have resulted and may result in our
concluding in future periods that there is additional impairment of these
securities that is other than temporary, which would require a charge to
earnings to write down these securities to their fair value. Due to
the complexity of the calculations and assumptions used in determining whether
an asset is impaired, the impairment disclosed may not accurately reflect the
actual impairment in the future.
The
Corporation’s Allowance For Possible Loan Losses May Be
Insufficient
The
Corporation maintains an allowance for possible loan losses, which is a reserve
established through a provision for loan losses, charged to
expense. The allowance represents management’s best estimate of
expected losses inherent in the existing portfolio of loans. The
allowance, in the judgment of management, is necessary to reserve for estimated
loan losses and risks inherent in the loan portfolio. The level of
the allowance reflects management’s continuing evaluation of industry
concentrations, specific credit risks, loan loss experience, current loan
portfolio quality, present economic, political, and regulatory conditions, and
unidentified losses inherent in the current loan
portfolio. Determining the appropriate level of the allowance for
possible loan losses understandably involves a high degree of subjectivity and
requires the Corporation to make significant estimates of current credit risks
and future trends, all of which may undergo material changes. Changes
in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans, and other factors, both
within and outside of the Corporation’s control, may require an increase in the
allowance for possible loan losses. In addition, bank regulatory
agencies periodically review the Corporation’s allowance for loan losses and may
require an increase in the provision for possible loan losses or the recognition
of further loan charge-offs, based on judgments different than those of
management. In addition, if charge-offs in future periods exceed the
allowance for possible loan losses, the Corporation will need additional
provisions to increase the allowance for possible loan losses. Any
increases in the allowance for possible loan losses will result in a decrease in
net income, and may have a material adverse effect on the Corporation’s
financial condition and results of operations.
The
Corporation Is Subject To Environmental Liability Risk Associated With Lending
Activities
A
significant portion of the Corporation’s loan portfolio is secured by real
property. During the ordinary course of business, the Corporation may
foreclose on and take title to properties securing certain loans. In
doing so, there is a risk that hazardous or toxic substances could be found on
these properties. If hazardous or toxic substances are found, the
Corporation may be liable for remediation costs, as well as for personal injury
and property damage. Environmental laws may require the Corporation
to incur substantial expenses and may materially reduce the affected property’s
value or limit the Corporation’s ability to use or sell the affected
property. In addition, future laws or more stringent interpretations
or enforcement policies with respect to existing laws, may increase the
Corporation’s exposure to environmental liability. Although the
Corporation has policies and procedures to perform an environmental review
before initiating any foreclosure action on real property, these reviews may not
be sufficient to detect all potential environmental hazards. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on the Corporation’s
financial condition and results of operations.
The
Corporation’s Profitability Depends Significantly On Economic Conditions In The
Commonwealth Of Pennsylvania
The
Corporation’s success depends primarily on the general economic conditions of
the Commonwealth of Pennsylvania, and more specifically, the local markets in
which the Corporation operates. Unlike larger national or other
regional banks that are more geographically diversified, the Corporation
provides banking and financial services to customers primarily located in
Lancaster County, as well as Berks, Chester, and Lebanon
Counties. The local economic conditions in these areas have a
significant impact on the demand for the Corporation’s products and services as
well as the ability of the Corporation’s customers to repay loans, the value of
the collateral securing loans, and the stability of the Corporation’s deposit
funding sources. A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic
ENB
FINANCIAL CORP
occurrences,
unemployment, changes in securities markets, or other factors could impact these
local economic conditions and, in turn, have a material adverse effect on the
Corporation’s financial condition and results of operations.
The
Corporation Operates In A Highly Competitive Industry And Market
Area
The
Corporation faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. Such competitors primarily include national,
regional, and community banks within the various markets in which the
Corporation operates. Additionally, various out-of-state banks have
begun to enter or have announced plans to enter the market areas in which the
Corporation currently operates. The Corporation also faces
competition from many other types of financial institutions, including, without
limitation, online banks, savings and loans, credit unions, finance companies,
brokerage firms, insurance companies, and other financial
intermediaries. The financial services industry could become even
more competitive as a result of legislative, regulatory and technological
changes, and continued consolidation. Banks, securities firms, and
insurance companies can merge under the umbrella of a financial holding company,
which can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting), and merchant
banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by
banks, such as automatic transfer and automatic payment systems. Many
of the Corporation’s competitors have fewer regulatory constraints and may have
lower cost structures. Additionally, due to their size, many
competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for
those products and services than the Corporation can offer.
The
Corporation’s ability to compete successfully depends on a number of factors,
including, among other things:
|
|
·
|
The
ability to develop, maintain, and build upon long-term customer
relationships based on quality service, high ethical standards, and safe,
sound management practices.
|
|
|
·
|
The
ability to expand the Corporation’s market
position.
|
|
|
·
|
The
scope, relevance, and pricing of products and services offered to meet
customer needs and demands.
|
|
|
·
|
The
rate at which the Corporation introduces new products and services
relative to its competitors.
|
|
|
·
|
Customer
satisfaction with the Corporation’s level of
service.
|
|
|
·
|
Industry
and general economic trends.
|
Failure
to perform in any of these areas could significantly weaken the Corporation’s
competitive position, which could adversely affect the Corporation’s growth and
profitability and have a material adverse effect on the Corporation’s financial
condition and results of operations.
The
Corporation Is Subject To Extensive Government Regulation And
Supervision
The
Corporation is
subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds, and the banking system as a
whole, not shareholders. These regulations affect the Corporation’s
lending practices, capital structure, investment practices, dividend policy, and
growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations, and policies for possible
changes. Changes to statutes, regulations, or regulatory policies,
including changes in interpretation or implementation of statutes, regulations,
or policies, could affect the Corporation in substantial and unpredictable
ways. Such changes could subject the Corporation to additional costs,
limit the types of financial services and products the Corporation may offer,
and/or increase the ability of non-banks to offer competing financial services
and products, among other things. Failure to comply with laws,
regulations, or policies could result in sanctions by regulatory agencies, civil
money penalties, and/or reputation damage, which could have a material adverse
effect on the Corporation’s business, financial condition, and results of
operations. While the Corporation has policies and procedures
designed to prevent any such violations, there can be no assurance that such
violations will not occur.
The
Corporation’s Controls And Procedures May Fail Or Be Circumvented
Management
regularly reviews and updates the Corporation’s internal controls, disclosure
controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of
ENB
FINANCIAL CORP
the
system are met. Any failure or circumvention of the Corporation’s
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on the
Corporation’s business, results of operations, and financial
condition.
New
Lines Of Business Or New Products And Services May Subject The Corporation To
Additional Risks
From time
to time, the Corporation may implement new lines of business or offer new
products and services within existing lines of business. There are
substantial risks and uncertainties associated with these efforts, particularly
in instances where the markets are not fully developed. In developing
and marketing new lines of business and/or new products and services, the
Corporation may invest significant time and resources. Initial
timetables for the introduction and development of new lines of business and/or
new products or services may not be achieved and price and profitability targets
may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives, and shifting market preferences, may also
impact the successful implementation of a new line of business or a new product
or service. Furthermore, any new line of business and/or new product
or service could have a significant impact on the effectiveness of the
Corporation’s system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of
business or new products or services could have a material adverse effect on the
Corporation’s business, results of operations, and financial
condition.
The
Corporation’s Ability To Pay Dividends Depends On Earnings And Is Subject To
Regulatory Limits
The
Corporation’s ability to pay dividends is also subject to its profitability,
financial condition, capital expenditures, and other cash flow
requirements. Dividend payments are subject to legal and regulatory
limitations, generally based on net profits and retained earnings, imposed by
the various banking regulatory agencies. There is no assurance that
the Corporation will have sufficient earnings to be able to pay dividends or
generate adequate cash flow to pay dividends in the future. The
Corporation’s failure to pay dividends on its common stock could have a material
adverse effect on the market price of its common stock.
Future
Acquisitions May Disrupt The Corporation’s Business And Dilute Stockholder
Value
The
Corporation may use its common stock to acquire other companies or make
investments in Corporations and other complementary businesses. The
Corporation may issue additional shares of common stock to pay for future
acquisitions, which would dilute the ownership interest of current shareholders
of the Corporation. Future business acquisitions could be material to
the Corporation, and the degree of success achieved in acquiring and integrating
these businesses into the Corporation could have a material effect on the value
of the Corporation’s common stock. In addition, any acquisition could
require the Corporation to use substantial cash or other liquid assets or to
incur debt. In those events, the Corporation could become more susceptible to
economic downturns and competitive pressures.
The
Corporation May Not Be Able To Attract And Retain Skilled People
The
Corporation’s success highly depends on its ability to attract and retain key
people. Competition for the best people in most activities engaged in
by the Corporation can be intense and the Corporation may not be able to hire
people or to retain them. The unexpected loss of services of one or
more of the Corporation’s key personnel could have a material adverse impact on
the Corporation’s business because of their skills, knowledge of the
Corporation’s market, years of industry experience, and the difficulty of
promptly finding qualified replacement personnel. The Corporation
does not currently have employment agreements or non-competition agreements with
any of its senior officers.
The
Corporation’s Information Systems May Experience An Interruption Or Breach In
Security
The
Corporation relies heavily on communications and information systems to conduct
its business. Any failure, interruption, or breach in security of
these systems could result in failures or disruptions in the Corporation’s
customer relationship management, general ledger, deposit, loan, and other
systems. While the Corporation has policies and procedures designed
to prevent or limit the effect of the failure, interruption, or security breach
of its information systems, there can be no assurance that any such failures,
interruptions, or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions, or security breaches of the Corporation’s information systems
could damage the Corporation’s reputation, result in a loss of customer
business, subject the Corporation to additional regulatory scrutiny, or expose
the Corporation to
ENB
FINANCIAL CORP
civil
litigation and possible financial liability, any of which could have a material
adverse effect on the Corporation’s financial condition and results of
operations.
The
Corporation Continually Encounters Technological Change
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. The Corporation’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands, as well as to create
additional efficiencies in the Corporation’s operations. Many of the
Corporation’s competitors have substantially greater resources to invest in
technological improvements. The Corporation may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on the Corporation’s business, financial condition, and results of
operations.
The
Corporation Is Subject To Claims And Litigation Pertaining To Fiduciary
Responsibility
From time
to time, customers make claims and take legal action pertaining to the
Corporation’s performance of its fiduciary responsibilities. Whether
customer claims and legal action related to the Corporation’s performance of its
fiduciary responsibilities are founded or unfounded, if such claims and legal
actions are not resolved in a manner favorable to the Corporation, they may
result in significant financial liability and/or adversely affect the market
perception of the Corporation and its products and services as well as impact
customer demand for those products and services. Any financial
liability or reputation damage could have a material adverse effect on the
Corporation’s business, financial condition, and results of
operations.
Financial
Services Companies Depend On The Accuracy And Completeness Of Information About
Customers And Counterparties
In
deciding whether to extend credit or enter into other transactions, the
Corporation may rely on information furnished by, or on behalf of, customers and
counterparties, including financial statements, credit reports, and other
financial information. The Corporation may also rely on
representations of those customers, counterparties, or other third parties, such
as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, credit reports, or other financial information could have a material
adverse impact on the Corporation’s business and, in turn, the Corporation’s
financial condition and results of operations.
Consumers
May Decide Not To Use Banks To Complete Their Financial
Transactions
Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For
example, consumers can now maintain funds that would have historically been held
as bank deposits in brokerage accounts or mutual funds. Consumers can
also complete transactions such as paying bills and/or transferring funds
directly without the assistance of banks. The process of eliminating
banks as intermediaries, known as “disintermediation,” could result in the loss
of fee income, as well as the loss of customer deposits and the related income
generated from those deposits. The loss of these revenue streams and
the lower cost deposits as a source of funds could have a material adverse
effect on the Corporation’s financial condition and results of
operations.
Other
Events:
Natural
Disasters, Acts Of War Or Terrorism, and Other External Events Could
Significantly Impact The Corporation’s Business
Severe
weather, natural disasters, acts of war or terrorism, and other adverse external
events could have a significant impact on the Corporation’s ability to conduct
business. Such events could affect the stability of the Corporation’s
deposit base; impair the ability of borrowers to repay outstanding loans, impair
the value of collateral securing loans, cause significant property damage,
result in loss of revenue, and/or cause the Corporation to incur additional
expenses. Severe weather or natural disasters, acts of war or
terrorism, or other adverse external events, may occur in the
future. Although management has established disaster recovery
policies and procedures, the occurrence of
ENB
FINANCIAL CORP
any such
event could have a material adverse effect on the Corporation’s business,
financial condition, and results of operations.
Risks
Associated With The Corporation’s Common Stock:
The
Corporation’s Stock Price Can Be Volatile
Stock
price volatility may make it more difficult for shareholders to resell their
shares of common stock when they desire and at prices they find
attractive. The Corporation’s stock price can fluctuate significantly
in response to a variety of factors including, among other things:
|
•
|
Actual
or anticipated variations in quarterly results of
operations.
|
|
•
|
Recommendations
by securities analysts.
|
|
•
|
Operating
and stock price performance of other companies that investors deem
comparable to the Corporation.
|
|
•
|
News
reports relating to trends, concerns, and other issues in the financial
services industry.
|
|
•
|
Perceptions
in the marketplace regarding the Corporation and/or its
competitors.
|
|
•
|
New
technology used, or services offered, by
competitors.
|
|
•
|
Significant
acquisitions or business combinations, strategic partnerships, joint
ventures, or capital commitments by, or involving, the Corporation or its
competitors.
|
|
•
|
Changes
in government regulations.
|
|
•
|
Geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
|
General
market fluctuations, industry factors, and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes, or credit loss trends, could also cause the Corporation’s stock price
to decrease regardless of operating results.
The
Trading Volume In The Corporation’s Common Stock Is Less Than That Of Other
Larger Financial Services Companies
The
Corporation’s common stock is listed for trading on the Over the Counter
Bulletin Board (OTCBB) exchange. The trading volume in its common
stock is a fraction of that of other larger financial services
companies. A public trading market having the desired characteristics
of depth, liquidity, and orderliness depends on the presence in the marketplace
of willing buyers and sellers of the Corporation’s common stock at any given
time. This presence depends on the individual decisions of investors
and general economic and market conditions over which the Corporation has no
control. Given the lower trading volume of the Corporation’s common stock,
significant sales of the Corporation’s common stock, or the expectation of these
sales, could cause the Corporation’s stock price to fall.
An
Investment In The Corporation’s Common Stock Is Not An Insured
Deposit
The
Corporation’s common stock is not a bank deposit and, therefore, is not insured
against loss by the FDIC, any other deposit insurance fund, or by any other
public or private entity. Investment in the Corporation’s common stock is
inherently risky for the reasons described in this “Risk Factors” section and
elsewhere in this report and is subject to the same market forces that affect
the price of common stock in any company. As a result, an investor in
the Corporation’s common stock may lose some or all of their
investment.
The
Corporation’s Articles Of Association and Bylaws, As Well As Certain Banking
Laws May Have An Anti-Takeover Effect
Provisions
of the Corporation’s articles of incorporation and bylaws, federal banking laws,
including regulatory approval requirements, and the Corporation’s stock purchase
rights plan, could make it more difficult for a third party to acquire the
Corporation, even if doing so would be perceived to be beneficial to the
Corporation’s shareholders. The combination of these provisions
effectively inhibits a non-negotiated merger or other business combination that
could adversely affect the market price of the Corporation’s common
stock.
ENB
FINANCIAL CORP
|
Item
1B.
|
Unresolved
Staff Comments
|
None
|
Item 2.
|
Properties
|
ENB
Financial Corp’s headquarters and main office of Ephrata National Bank are
located at 31 East Main Street, Ephrata, Pennsylvania.
Listed
below are the office locations of properties owned by the
Corporation. No mortgages, liens, or encumbrances exist on any of the
Corporation’s owned properties. The Corporation does not currently
lease any locations.
ENB
FINANCIAL CORP
|
Property Location
|
Owned
|
|
|
Corporate
Headquarters/Main Office
|
Owned
|
|
|
31
East Main Street
|
||
|
Ephrata,
Pennsylvania
|
||
|
ENB's
Money Management Group
|
Owned
|
|
|
47
East Main Street
|
||
|
Ephrata,
Pennsylvania
|
||
|
Technology
Center
|
Owned
|
|
|
31
East Franklin Street
|
||
|
Ephrata,
Pennsylvania
|
||
|
Main
Street Drive-In
|
Owned
|
|
|
42
East Main Street
|
||
|
Ephrata,
Pennsylvania
|
||
|
Cloister
Office
|
Owned
|
|
|
809
Martin Avenue
|
||
|
Ephrata,
Pennsylvania
|
||
|
Hinkletown
Office
|
Owned
|
|
|
935
North Railroad Avenue
|
||
|
New
Holland, Pennsylvania
|
||
|
Denver
Office
|
Owned
|
|
|
1
Main Street
|
||
|
Denver,
Pennsylvania
|
||
|
Akron
Office
|
Owned
|
|
|
351
South 7th Street
|
||
|
Akron,
Pennsylvania
|
||
|
Lititz
Office
|
Owned
|
|
|
3190
Lititz Pike
|
||
|
Lititz,
Pennsylvania
|
||
|
Blue
Ball Office
|
Owned
|
|
|
110
Marble Avenue
|
||
|
East
Earl, Pennsylvania
|
||
|
Manheim
Office
|
Owned
|
|
|
1
North Penryn Road
|
||
|
Manheim,
Pennsylvania
|
In
addition to the above properties, the Corporation owns two other properties
located in the Corporation’s Ephrata Main Street campus. These
properties were acquired in 2002, when a group of properties adjacent and
surrounding the Corporation’s Main Office was purchased. These two
properties are being held for future use or possible sale; the other properties
purchased in 2002 have been remodeled as office or operational space and are
reflected in the offices shown above.
ENB
FINANCIAL CORP
|
Item
3.
|
Legal
Proceedings
|
The
nature of the Corporation’s business generates a certain amount of litigation
involving matters arising in the ordinary course of business; however, in the
opinion of management, there are no proceedings pending to which the Corporation
is a party to, or which would be material in relation to the Corporation’s
undivided profits or financial condition. There are no proceedings
pending other than ordinary routine litigation incident to the business of the
Corporation. In addition, no material proceedings are pending, known
to be threatened, or contemplated against the Corporation by governmental
authorities.
|
Item
4.
|
(Removed
and Reserved)
|
Part
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Shareholder Matters,
and Issuer Purchases of Equity
Securities
|
The
Corporation has only one class of stock authorized, issued, and outstanding,
which consists of common stock with a par value of $0.20 per
share. As of December 31, 2009, there were 12,000,000 shares of
common stock authorized with 2,869,557 shares issued, and 2,839,000 shares
outstanding to approximately 1,635 shareholders. The Corporation’s
common stock is traded on a limited basis on the OTCBB under the symbol
“ENBP.” Prices presented in the table below reflect high and low
prices of actual transactions known to management. Prices and
dividends per share are adjusted for stock splits. Market quotations
reflect inter-dealer prices, without retail mark up, mark down, or commission
and may not reflect actual transactions.
|
2009
|
2008
|
|||||||||||||||||||||||
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|||||||||||||||||||
|
First
quarter
|
$ | 25.99 | $ | 22.00 | $ | 0.31 | $ | 26.85 | $ | 25.00 | $ | 0.31 | ||||||||||||
|
Second
quarter
|
25.50 | 24.00 | 0.31 | 26.70 | 23.50 | 0.31 | ||||||||||||||||||
|
Third
quarter
|
24.95 | 22.00 | 0.31 | 26.00 | 22.76 | 0.31 | ||||||||||||||||||
|
Fourth
quarter
|
23.50 | 19.50 | 0.24 | 26.50 | 24.85 | 0.31 | ||||||||||||||||||
Source
- SNL Financial LC
Dividends
Since
1973, the Corporation has paid quarterly cash dividends on approximately March
15, June 15, September 15, and December 15 of each year. Prior to
1973, dividends were paid semi-annually. The Corporation currently
expects to continue the practice of paying quarterly cash dividends to its
shareholders for the foreseeable future. However, future dividends
are dependent upon future earnings. Certain laws restrict the amount
of dividends that may be paid to shareholders in any given year. In
addition, under Pennsylvania corporate law, the Corporation may not pay a
dividend if, after issuing the dividend (1) the Corporation would be unable to
pay its debts as they become due, or (2) the Corporation’s total assets would be
less than its total liabilities plus the amount needed to satisfy any
preferential rights of shareholders. In addition, as declared by the
board of directors, Ephrata National Bank’s dividend restrictions apply
indirectly to ENB Financial Corp because cash available for dividend
distributions will initially come from dividends Ephrata National Bank pays to
ENB Financial Corp. See Note N to the consolidated financial statements in this
Form 10-K filing, for information that discusses and quantifies this regulatory
restriction.
ENB
Financial Corp offers its shareholders the convenience of a Dividend
Reinvestment Plan and the direct deposit of cash dividends. The
Dividend Reinvestment Plan gives shareholders registered with the Corporation
the opportunity to have their quarterly dividends invested automatically in
additional shares of the Corporation’s common stock. Shareholders who
prefer a cash dividend may have their quarterly dividends deposited directly
into a checking or savings account at their financial
institution. For additional information on either program, contact
the Stock Registrar and Dividend Paying Agent.
ENB
FINANCIAL CORP
Purchases
The
following table details the Corporation’s purchase of its own common stock
during the fourth quarter of 2009.
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 *
|
||||||||||||
|
October
2009
|
- | - | - | 89,600 | ||||||||||||
|
November
2009
|
- | - | - | 89,600 | ||||||||||||
|
December
2009
|
2,500 | $ | 19.95 | 2,500 | 87,100 | |||||||||||
|
Total
|
2,500 | |||||||||||||||
*On
August 13, 2008, the Board of Directors of ENB Financial Corp announced the
approval of a plan to purchase, in open market and privately negotiated
transactions, up to 140,000 shares of outstanding common
stock. Shares repurchased are being held as treasury shares to be
utilized in connection with the Corporation’s Dividend Reinvestment Plan and
Employee Stock Purchase Plan. The first purchase of common stock
under this plan occurred on August 27, 2008. By December 31, 2009, a
total of 52,900 shares were repurchased at a total cost of $1,340,000, for an
average cost per share of $25.33. Management may choose to repurchase
additional shares in 2010.
Recent Sales of Unregistered
Securities and Equity Compensation Plan
The
Corporation does not have an equity compensation plan and has not sold any
unregistered securities.
Shareholder Performance
Graph
Set forth
below is a line graph comparing the yearly change in the cumulative total
shareholder return on ENB Financial Corp’s common stock against the cumulative
total return of the Russell 2000 Index and the Mid-Atlantic Custom Peer Group
Index for the period of six fiscal years commencing January 1, 2004, and ending
December 31, 2009. The graph shows that the cumulative investment
return to shareholders, based on the assumption that a $100 investment was made
on December 31, 2004, in each of the following: the Corporation’s common stock,
the Russell 2000 Index, and the Mid-Atlantic Custom Peer Group Index, and that
all dividends were reinvested in those securities over the past six years, the
cumulative total return on such investment would be $67.80, $102.58, and $70.20,
respectively. The shareholder return shown on the graph below is not
necessarily indicative of future performance.
ENB
FINANCIAL CORP
|
Period Ending
|
||||||||||||||||||||||||
|
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
ENB
Financial Corp.
|
100.00 | 101.90 | 88.75 | 78.89 | 78.74 | 67.80 | ||||||||||||||||||
|
Russell
2000
|
100.00 | 104.55 | 123.76 | 121.82 | 80.66 | 102.58 | ||||||||||||||||||
|
Mid-Atlantic
Custom Peer Group*
|
100.00 | 100.01 | 102.06 | 95.05 | 75.16 | 70.20 | ||||||||||||||||||
*Mid-Atlantic
Custom Peer Group consists of Mid-Atlantic commercial banks with assets less
than $1B.
ENB
FINANCIAL CORP
Item
6 - Selected Financial Data
(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
The
selected financial data set forth below should be read in conjunction with the
Corporation's financial statements and their accompanying notes presented
elsewhere herein.
|
Year Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
INCOME
STATEMENT DATA
|
||||||||||||||||||||
|
Interest
income
|
33,803 | 34,725 | 33,784 | 31,567 | 28,087 | |||||||||||||||
|
Interest
expense
|
12,818 | 14,598 | 14,692 | 12,904 | 9,401 | |||||||||||||||
|
Net
interest income
|
20,985 | 20,127 | 19,092 | 18,663 | 18,686 | |||||||||||||||
|
Provision
for loan losses
|
2,920 | 669 | 1,446 | 1,276 | 390 | |||||||||||||||
|
Other
income
|
6,440 | 4,907 | 4,801 | 3,402 | 4,127 | |||||||||||||||
|
Other
expenses
|
20,069 | 20,468 | 16,831 | 15,300 | 13,828 | |||||||||||||||
|
Income
before income taxes
|
4,436 | 3,897 | 5,616 | 5,489 | 8,595 | |||||||||||||||
|
Provision
for Federal income taxes
|
136 | (117 | ) | 553 | 718 | 1,610 | ||||||||||||||
|
Net
benefit
|
4,300 | 4,014 | 5,063 | 4,771 | 6,985 | |||||||||||||||
|
PER
SHARE DATA
|
||||||||||||||||||||
|
Net
income (basic and diluted)
|
1.52 | 1.40 | 1.77 | 1.67 | 2.39 | |||||||||||||||
|
Cash
dividends paid
|
1.17 | 1.24 | 1.21 | 1.17 | 1.12 | |||||||||||||||
|
Book
value at year-end
|
24.51 | 23.92 | 24.05 | 23.14 | 22.28 | |||||||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||
|
Total
assets
|
725,952 | 688,423 | 633,762 | 606,670 | 577,578 | |||||||||||||||
|
Total
loans
|
427,852 | 411,954 | 384,999 | 365,977 | 328,766 | |||||||||||||||
|
Securities
|
236,335 | 214,421 | 192,960 | 191,577 | 206,305 | |||||||||||||||
|
Deposits
|
569,943 | 511,112 | 478,726 | 469,259 | 448,786 | |||||||||||||||
|
Total
borrowings
|
82,500 | 103,800 | 82,100 | 67,200 | 60,900 | |||||||||||||||
|
Stockholders'
equity
|
69,576 | 68,045 | 68,822 | 65,957 | 64,062 | |||||||||||||||
|
SELECTED
RATIOS
|
||||||||||||||||||||
|
Return
on average assets
|
0.60 | % | 0.60 | % | 0.82 | % | 0.81 | % | 1.27 | % | ||||||||||
|
Return
on average stockholders' equity
|
6.28 | % | 5.89 | % | 7.63 | % | 7.45 | % | 10.71 | % | ||||||||||
|
Average
equity to average assets ratio
|
9.60 | % | 10.20 | % | 10.72 | % | 10.85 | % | 11.84 | % | ||||||||||
|
Dividend
payout ratio
|
76.97 | % | 88.57 | % | 68.36 | % | 70.06 | % | 46.86 | % | ||||||||||
|
Efficiency
ratio
|
69.01 | % | 75.09 | % | 65.42 | % | 61.92 | % | 56.42 | % | ||||||||||
|
Net
interest margin
|
3.43 | % | 3.51 | % | 3.62 | % | 3.68 | % | 3.92 | % | ||||||||||
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
|
Item
7.
|
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 annual
report. The financial condition and results of operations presented
are not indicative of future performance.
Results
of Operations
Overview
The
Corporation recorded net income of $4,300,000 for the year ended December 31,
2009, a 7.1% increase over the $4,014,000 earned during the same period in
2008. The 2008 net income was 20.7% lower than the 2007 net income of
$5,063,000. Earnings per share, basic and diluted, were $1.52 for
2009, compared to $1.40 in 2008, and $1.77 in 2007.
Two large
items negatively affected the Corporation’s 2009 net income:
|
|
·
|
The
Corporation recorded a provision for loan loss expense of $2,920,000 for
the year ended December 31, 2009, a $2,251,000 increase over the $669,000
recorded for the same period in 2008. The higher provision was
a result of an increase in charged-off loans and an increase in the number
of classified loans. Because of the higher provision, the
allowance as a percentage of loans increased from 1.02% as of December 31,
2008, to 1.38% as of December 31,
2009.
|
|
|
·
|
The Corporation’s
FDIC insurance costs totaled $1,022,000 for the year ended December
31, 2009, a $792,000 increase over the $230,000 recorded for the same
period in 2008. In addition to its regular assessment increase,
the FDIC issued a special one-time assessment to replenish reserves
depleted by bank failures in the last two years. The special
one-time assessment amounted to
$326,000.
|
Despite
significant economic weakness and an extremely low interest rate environment,
the Corporation’s net interest income increased at a rate of 4.3%, or $858,000,
for the year ended December 31, 2009, compared to 5.4%, or a $1,035,000 increase
from 2007 to 2008. Other income, excluding the gain or loss on
securities, increased 15.7%, or $852,000 for 2009, compared to
2008. Operational costs for 2009 compared to 2008 decreased at a pace
of 1.9%, or $399,000, primarily due to a $1,222,000 charge associated with the
2008 voluntary separation package.
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 2009 ROA did not change from
2008. While net income was higher, the average assets of the
Corporation grew at nearly the same rate causing no change in
ROA. The Corporation’s ROE increased from 2008 due to the 7.1%
increase in net income, while growth in average equity or capital was only
0.5%. This resulted in more return from the equity
utilized.
|
Key
Ratios
|
Twelve
Months Ended
|
|||||||
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Return
on Average Assets
|
0.60 | % | 0.60 | % | ||||
|
Return
on Average Equity
|
6.28 | % | 5.89 | % | ||||
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
|
|
|
·
|
Income
taxes
|
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
The
following discussion analyzes each of these five components.
Net
Interest Income
Net
interest income (NII) represents the largest portion of the Corporation’s
operating income. In 2009, NII generated 76.5% of the Corporation’s
gross revenue stream, compared to 80.4% in 2008, and 79.9% in
2007. Since NII comprises a significant portion of the operating
income, the direction and rate of increase or decrease will often indicate the
overall performance of the Corporation.
The
following table shows a summary analysis of NII 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 a FTE basis. The FTE NII
shown in both tables below will exceed the NII reported on the statements of
income. The amount of FTE adjustment totaled $1,746,000 for 2009,
$1,649,000 for 2008, and $1,776,000 for 2007.
The
amount of the tax adjustment varies depending on the amount of income earned on
tax-free assets. The Corporation has been in an alternative minimum
tax (AMT) position for the past several years. As a result, tax-free
loans and securities do not offer the full tax advantage they do when the
Corporation is not subject to AMT. During 2008 and into the first
quarter of 2009, management was actively reducing the tax-free municipal bond
portfolio in an effort to reduce the Corporation’s AMT position, which acted to
reduce the tax-equivalent adjustments. However, because of
legislation that followed the credit crisis in the fall of 2008, beginning in
2009, financial institutions were permitted to purchase 2009 and 2010 newly
issued tax-free municipal bonds, which are AMT-exempt for the life of the
bond. As a result, management has resumed the purchase of AMT-exempt
municipal bonds, increasing the size of the tax-free municipal bond portfolio,
and again increasing the tax equivalent adjustment. This is why the
tax equivalent adjustment increased for the year ended December 31, 2009,
compared to 2008.
Net
Interest Income
(DOLLARS
IN THOUSANDS)
|
Year ending
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Total
interest income
|
33,803 | 34,725 | 33,784 | |||||||||
|
Total
interest expense
|
12,818 | 14,598 | 14,692 | |||||||||
|
Net
interest income
|
20,985 | 20,127 | 19,092 | |||||||||
|
Tax
equivalent adjustment
|
1,746 | 1,649 | 1,776 | |||||||||
|
Net
interest income
|
||||||||||||
|
(fully
taxable equivalent)
|
22,731 | 21,776 | 20,868 | |||||||||
NII is
the difference between interest income earned on assets and interest expense
incurred on liabilities. Accordingly, two factors affect
NII:
|
|
·
|
The
rates charged 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, and the shape of the U.S. Treasury curve,
all affect NII.
The
Federal funds rate, which is the overnight rate that financial institutions
charge other financial institutions to buy or sell overnight funds, has declined
from 5.25% in August 2007, to 0.25% by December 31, 2008. The Federal
funds rate declined 100 basis points in the second half of 2007, with another
400 basis points of reductions in 2008, and remained at these low levels through
December 31, 2009. The rate reductions have generally had offsetting
positive and negative impacts to the Corporation’s NII.
The Prime
rate typically moves in tandem with the Federal funds rate. The
decrease in the Federal funds rate has reduced the cost of funds on overnight
borrowings and allowed lower interest rates paid on deposits, reducing the
Corporation’s interest expense. The decrease in the Prime rate
reduced the yield on the Corporation’s prime-based
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
loans. Therefore,
these same rate movements had a direct negative impact on the interest income
for the Corporation. The Corporation’s fixed rate loans do not
reprice as rates change; however, with the steep decline in interest rates, more
customers have refinanced into lower fixed rate loans or moved into Prime-based
loans. Management has instituted floors on certain loan instruments
and revised pricing standards to help slow the reduction of loan yield during
this historically low-rate period.
During
2008, short-term interest rates decreased dramatically, and the U.S. Treasury
curve resumed a more normal, positively-sloped yield
curve. Initially, in early 2008, mid-term and long-term rates did not
decline, creating a more advantageous environment for obtaining a sufficient
margin on loans and securities above cost of funds. In the fourth
quarter of 2008, short-term rates again decreased. This time,
mid-term and long-term U.S. Treasury rates declined, but not to the extent that
short-term rates did, creating more slope for the yield curve. This
more favorably sloped positive yield curve remained throughout
2009. Since deposits and borrowings generally price off short-term
rates, the significant rate drops on the short end of the rate curve permitted
management to continue to reduce the overall cost of funds during
2009. Over this period, management continued to reprice time deposits
and borrowings to lower levels. Rates on interest bearing core
deposit accounts were also steadily reduced during 2009. While the
reductions were more pronounced from October 2008 to March 2009, management made
several additional rate reductions over the remaining nine months of
2009. Meanwhile, management continued to invest in securities and
originate loans at longer terms, where the U.S. Treasury curve and market rates
remained higher.
Management
currently anticipates that interest rates will remain at these historically low
rates well into 2010 because of the current economic and credit
situation. This will likely result in the U.S. Treasury curve
retaining a significant positive slope for 2010, based on the economic data
currently available. This allows management to continue to price the
vast majority of liabilities off lower short-term rates, while pricing loans and
investing in longer securities, which are based off the 5-year and 10-year
Treasury rates that are significantly above short-term rates.
The
following table provides an analysis of year-to-year 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.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
RATE/VOLUME
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE
EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
|
2009 vs. 2008
|
2008 vs. 2007
|
|||||||||||||||||||||||
|
Increase
(Decrease)
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
Due To Change In
|
Due To Change In
|
|||||||||||||||||||||||
|
Net
|
Net
|
|||||||||||||||||||||||
|
Average
|
Interest
|
Increase
|
Average
|
Interest
|
Increase
|
|||||||||||||||||||
|
Balances
|
Rates
|
(Decrease)
|
Balances
|
Rates
|
(Decrease)
|
|||||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
|||||||||||||||||||
|
INTEREST
INCOME
|
||||||||||||||||||||||||
|
Federal
funds sold
|
3 | (29 | ) | (26 | ) | (116 | ) | (86 | ) | (202 | ) | |||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||
|
Taxable
|
554 | (563 | ) | (9 | ) | 1,988 | 510 | 2,498 | ||||||||||||||||
|
Tax-exempt
|
197 | 63 | 260 | (523 | ) | 39 | (484 | ) | ||||||||||||||||
|
Total
securities
|
751 | (500 | ) | 251 | 1,465 | 549 | 2,014 | |||||||||||||||||
|
Loans
|
1,693 | (2,587 | ) | (894 | ) | 948 | (1,865 | ) | (917 | ) | ||||||||||||||
|
Regulatory
stock
|
6 | (162 | ) | (156 | ) | 30 | (111 | ) | (81 | ) | ||||||||||||||
|
Total
interest income
|
2,453 | (3,278 | ) | (825 | ) | 2,327 | (1,513 | ) | 814 | |||||||||||||||
|
INTEREST
EXPENSE
|
||||||||||||||||||||||||
|
Deposits:
|
||||||||||||||||||||||||
|
Demand
deposits
|
(31 | ) | (584 | ) | (615 | ) | 63 | (565 | ) | (502 | ) | |||||||||||||
|
Savings
deposits
|
32 | (167 | ) | (135 | ) | 16 | (92 | ) | (76 | ) | ||||||||||||||
|
Time
deposits
|
1,338 | (2,103 | ) | (765 | ) | 626 | (658 | ) | (32 | ) | ||||||||||||||
|
Total
deposits
|
1,339 | (2,854 | ) | (1,515 | ) | 705 | (1,315 | ) | (610 | ) | ||||||||||||||
|
Borrowings:
|
||||||||||||||||||||||||
|
Federal
funds purchased
|
(9 | ) | (47 | ) | (56 | ) | 70 | (58 | ) | 12 | ||||||||||||||
|
Other
borrowings
|
(191 | ) | (18 | ) | (209 | ) | 647 | (143 | ) | 504 | ||||||||||||||
|
Total
borrowings
|
(200 | ) | (65 | ) | (265 | ) | 717 | (201 | ) | 516 | ||||||||||||||
|
Total
interest expense
|
1,139 | (2,919 | ) | (1,780 | ) | 1,422 | (1,516 | ) | (94 | ) | ||||||||||||||
|
NET
INTEREST INCOME
|
1,314 | (359 | ) | 955 | 905 | 3 | 908 | |||||||||||||||||
In 2009,
the Corporation’s NII on a FTE basis increased by $955,000 compared to 2008, a
4.4% increase. Total interest income on a FTE basis for 2009
decreased $825,000, or 2.3%, from 2008, while interest expense decreased by
$1,780,000, or 12.2%, from 2008 to 2009. The FTE interest income from
the securities portfolio increased $251,000, or 2.1%, while loan interest income
declined $894,000, or 3.7%. The remaining smaller other earning asset
categories also reflected declines in interest income. During most of
2009, loan demand was low and the Corporation used available liquidity generated
by deposits and additional borrowings to invest in
securities. Although the growth in the securities portfolio added
$751,000 to net interest income, the lower yields on taxable securities caused a
$500,000 reduction, resulting in a net increase of $251,000.
Loan
demand did increase marginally in the last quarter of the year, contributing to
growth in loan balances, which added $1,693,000 to net interest
income. However, decreases in loan yield more than offset the
additional income from loan growth, reducing net interest income by
$2,587,000. With the Federal funds rate dropping to 0.25% in December
of 2008, it was less advantageous to sell Federal funds; therefore, management
managed liquidity to maintain minimal Federal funds sold on average throughout
2009. Because of the sharp rate drops that occurred in 2008, the
income generated on Federal funds sold was $29,000 lower in 2009, due solely to
the lower rates available. Overall, the Corporation’s interest income
on Federal funds sold declined by $26,000.
Interest
bearing liabilities grew steadily throughout 2009; however, with significantly
lower interest rates, total interest expense declined despite the increase in
balances. Lower rates on all deposit groups caused $2,854,000 of
savings, while higher balances increased interest expense by $1,339,000,
resulting in net savings of $1,515,000. Out of all the Corporation’s
deposit types, demand deposits reprice the most rapidly, as nearly all accounts
are immediately affected by rate changes. The Corporation reduced
demand deposit interest expense by $584,000 due to lower
rates. Time
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
deposit
balances increased adding $1,338,000 to expense, but time deposits repricing to
lower interest rates reduced interest expense by $2,103,000, causing a net
reduction of $765,000 in time deposit interest expense. Historically,
the Corporation has seen increases in time deposits when the equity markets
decline, as investors attempt to protect principal. This occurred in
both 2008 and 2009. Even with the historically low rate environment,
the Corporation was successful in increasing nearly all deposit types by
providing competitive rates. As 2009 progressed, and interest rates
declined, the Corporation was able to reduce the cost of funds
significantly. These rate reductions more than compensated for the
increase in deposit balances.
The
Corporation was able to rely more on the liquidity generated by deposits during
the year and slightly less on borrowed funds. The Federal funds
purchased declined, decreasing interest expense $9,000 related to decreased
balances, while reducing expense $47,000 due to lower rates, for a net decrease
to expense of $56,000. Long-term borrowing balances decreased
interest expense $191,000, and lower rates reduced expense $18,000, for a net
decrease of $209,000.
The
following table shows a more detailed analysis of net interest income on a FTE
basis shown with all the major elements of the Corporation’s balance sheet,
which consists of interest earning and non-interest earning assets and interest
bearing and non-interest bearing liabilities. Additionally, the
analysis provides the net interest spread and the net yield on interest earning
assets. The net interest spread is the difference between the yield
on interest earning assets and the rate paid on interest bearing
liabilities. The net interest spread has the deficiency of not giving
credit for the non-interest bearing funds and capital used to fund a portion of
the total interest earning assets. For this reason, management
emphasizes the net yield on interest earning assets, also referred to as the net
interest margin (NIM). The NIM is calculated by dividing net interest
income on a FTE basis into total average interest earning assets. NIM
is generally the benchmark used by analysts to measure how efficiently a bank
generates NII. For example, a financial institution with a NIM of
3.75% would be able to use fewer assets and still achieve the same level of NII
as a financial institution with a NIM of 3.50%.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
COMPARATIVE
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(TAXABLE
EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
|
December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
|
Yield/
|
Average
|
Yield/
|
Average
|
Yield/
|
|||||||||||||||||||||||||||||||
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
||||||||||||||||||||||||||||
|
$
|
$
|
%
|
$
|
$
|
%
|
$
|
$
|
%
|
||||||||||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||||||||||||||||||
|
Interest
earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal
funds sold and interest
|
||||||||||||||||||||||||||||||||||||
|
on
deposits at other banks
|
1,426 | 6 | 0.40 | 1,310 | 32 | 2.49 | 4,502 | 234 | 5.20 | |||||||||||||||||||||||||||
|
Securities
available for sale:
|
||||||||||||||||||||||||||||||||||||
|
Taxable
|
179,140 | 8,502 | 4.75 | 167,845 | 8,511 | 5.07 | 128,031 | 6,013 | 4.69 | |||||||||||||||||||||||||||
|
Tax-exempt
|
57,466 | 3,715 | 6.46 | 54,403 | 3,455 | 6.35 | 62,643 | 3,939 | 6.29 | |||||||||||||||||||||||||||
|
Total
securities (d)
|
236,606 | 12,217 | 5.16 | 222,248 | 11,966 | 5.38 | 190,674 | 9,952 | 5.22 | |||||||||||||||||||||||||||
|
Loans
(a)
|
419,689 | 23,315 | 5.56 | 391,112 | 24,209 | 6.19 | 376,539 | 25,126 | 6.67 | |||||||||||||||||||||||||||
|
Regulatory
stock
|
4,916 | 11 | 0.21 | 4,737 | 167 | 3.52 | 4,177 | 248 | 5.94 | |||||||||||||||||||||||||||
|
Total
interest earning assets
|
662,637 | 35,549 | 5.37 | 619,407 | 36,374 | 5.88 | 575,892 | 35,560 | 6.18 | |||||||||||||||||||||||||||
|
Non-interest
earning assets (d)
|
50,451 | 48,773 | 43,494 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
713,088 | 668,180 | 619,386 | |||||||||||||||||||||||||||||||||
|
LIABILITIES
&
|
||||||||||||||||||||||||||||||||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
96,975 | 616 | 0.64 | 99,614 | 1,231 | 1.24 | 95,961 | 1,733 | 1.81 | |||||||||||||||||||||||||||
|
Savings
deposits
|
80,649 | 165 | 0.20 | 72,049 | 300 | 0.42 | 68,956 | 376 | 0.55 | |||||||||||||||||||||||||||
|
Time
deposits
|
256,062 | 8,174 | 3.19 | 219,769 | 8,939 | 4.07 | 204,947 | 8,971 | 4.38 | |||||||||||||||||||||||||||
|
Borrowed
funds
|
92,518 | 3,863 | 4.18 | 97,497 | 4,128 | 4.23 | 79,902 | 3,612 | 4.52 | |||||||||||||||||||||||||||
|
Total
interest bearing liabilities
|
526,204 | 12,818 | 2.44 | 488,929 | 14,598 | 2.99 | 449,766 | 14,692 | 3.27 | |||||||||||||||||||||||||||
|
Non-interest
bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
112,706 | 106,029 | 98,228 | |||||||||||||||||||||||||||||||||
|
Other
|
5,690 | 5,092 | 5,007 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
644,600 | 600,050 | 553,001 | |||||||||||||||||||||||||||||||||
|
Stockholders'
equity
|
68,488 | 68,130 | 66,385 | |||||||||||||||||||||||||||||||||
|
Total
liabilities & stockholders' equity
|
713,088 | 668,180 | 619,386 | |||||||||||||||||||||||||||||||||
|
Net
interest income (FTE)
|
22,731 | 21,776 | 20,868 | |||||||||||||||||||||||||||||||||
|
Net
interest spread (b)
|
2.93 | 2.89 | 2.91 | |||||||||||||||||||||||||||||||||
|
Effect
of non-interest
|
||||||||||||||||||||||||||||||||||||
|
bearing
funds
|
0.50 | 0.62 | 0.71 | |||||||||||||||||||||||||||||||||
|
Net
yield on interest earning assets (c)
|
3.43 | 3.51 | 3.62 | |||||||||||||||||||||||||||||||||
(a)
Includes balances of non-accrual loans and the recognition of any related
interest income. Average balances also include net deferred loan fees
of ($433,000) in 2009, ($308,000) in 2008, and ($348,000) in
2007. Such fees recognized through income and included in the
interest amounts totaled $59,000 in 2009, $48,000 in 2008, and $80,000 in
2007.
(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.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
The
Corporation’s interest expense increased at a slightly faster pace than interest
income, resulting in a lower NIM of 3.43% for 2009, compared to 3.51% for
2008. The yield earned on assets dropped 51 basis points while the
rate paid on liabilities dropped 55 basis points. While the
difference in yield earned and rate paid is not significant alone, it becomes
more of a factor given the amount of assets that repriced compared to the amount
of liabilities that repriced. Management anticipates NIM improvement
in 2010 as the rate curve remains in a steep positive slope allowing further
cost savings to occur on liabilities, while loans have essentially reached the
bottom of the pricing cycle. Prime rate decreases that have a
negative impact to loan yield should be over now that the target Federal funds
rate is between 0.00% and 0.25%. While the amount of the
Corporation’s Prime-based loans continues to increase, management is also
flooring more Prime-based loans above 3.25% in an effort to slow the loss of
loan yield. Management is also taking action to increase Prime-based
loan rates when the customer’s credit standing has
diminished. Management’s efforts to price Prime-based loans higher
were mainly offset by more Prime-based loan demand. Customers are
seeking more Prime-based loans because even with Prime floors instituted at
4.00%, these variable rate loans are viewed as more desirable than fixed loan
rates of 6.00% and higher. Some business and commercial borrowers are
paying down these fixed rate loans, and refinancing with a Prime-based variable
rate loan. 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.
Yields on
the Corporation’s securities declined 22 basis points for the year 2009,
compared to 2008. This compares to a 16 basis point increase in
securities yield that occurred from 2007 to 2008. Some of the
securities purchased four and five years ago, when interest rates were last at
40-year historical lows, matured and were reinvested at higher rates during
2008, prior to the significant fourth quarter 2008 rate
decreases. This enabled management to increase yields slightly in
2008. During 2009, most of the cash flow received from the securities
portfolio was reinvested at lower yields. The portfolio yield has not
declined to the extent that market rates have declined, due to the length of the
Corporation’s portfolio, some market changes, and certain portfolio
strategies. Due to the turmoil in the credit markets, there were
opportunities to purchase instruments that carried larger than normal
spreads. This was especially true with regard to corporate
bonds. The resumption of purchasing tax-exempt municipal bonds that
qualify as alternative minimum tax exempt also helped to keep the decline in
security yield to a minimum. Management anticipates that further, but
slower, declines in asset yield will likely occur in 2010 as new loan volume and
refinancing to Prime-based variable loans will likely
continue. Security yield will also likely decline, despite a
favorable slope to the yield curve, as U.S. Treasury rates are still at very low
historical levels with most reinvestment occurring at lower yields.
The rate
paid on deposits and borrowings decreased for the year ended December 31, 2009,
over the same period in 2008. Management follows a disciplined
pricing strategy on core deposit products that are not rate sensitive, meaning
that the balances do not fluctuate significantly when interest rates
change. The pricing strategy helped to manage the cost of funds by
reducing interest expense on demand deposits by 60 basis points, on savings
deposits by 22 basis points, and on time deposits by 88 basis points in
2009. Management captured rate savings on time deposits as large
portions of the time deposit portfolio repriced downward as interest rates
declined. This opportunity resulted from several converging market
conditions, including uncertainty in the stock market, local bank consolidation,
and economic turmoil. Typically, the Corporation sees increases in
time deposits during periods when consumers are not confident in the stock
market and economic conditions deteriorate. During these periods,
there is a “flight to safety” to federally insured
deposits. Management believes the competitive advantage related to
merger activity has subsided. The newest trend is customers being
less rate sensitive due to greater concern about the health of the financial
institution. In this regard, the Corporation has benefited due to
stronger capital and better earnings performance than several local
competitors.
The
average rate of borrowed funds decreased slightly from 2008 to 2009, as several
long-term borrowings matured and management was able to refinance into new
long-term borrowings at lower interest rates. Throughout most of
2009, the fixed borrowing rates were lower than the average rate paid on the
Corporation’s existing borrowings. The Corporation may have
opportunities to decrease borrowing costs in 2010, as additional fixed rate
borrowings mature or reprice. Additionally, the average rate on
borrowings will decline should borrowings increase and additional loans are
obtained at lower rates.
Provision
for Loan Losses
The
allowance for loan losses 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 allowance for loan
losses is adequate to cover any losses inherent in the loan
portfolio. The Corporation added $2,920,000 to the allowance for
2009, compared to $669,000 for 2008. The
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Corporation
gives special attention to the level of delinquent loans. The
analysis of the loan loss allowance takes into consideration, among other
things, the following factors:
|
|
·
|
Historical
loan loss experience by loan type
|
|
|
·
|
Concentrations
of credit risk
|
|
|
·
|
Credit
migration analysis
|
|
|
·
|
Volume
of delinquent and non-performing
loans
|
|
|
·
|
Loan
portfolio characteristics
|
|
|
·
|
Current
economic conditions
|
The
significant increase in the provision for the year ended December 31, 2009, was
due to the following factors:
|
|
·
|
Recessionary
economic conditions
|
|
|
·
|
Moderate
increase in delinquency rates during
2009
|
|
|
·
|
Trends
in non-performing loans
|
|
|
·
|
Increased
charge-offs
|
The first three factors
are all related to the difficult economic conditions, which have prevailed in
2008 and 2009. The cumulative impact of prolonged recessionary
conditions has had an impact on the Corporation’s borrowers, primarily
commercial and business borrowers, making it necessary to increase the allowance
as a percentage of loans to provide for higher anticipated
losses. The Corporation also had to increase the provision to
directly offset $1,260,000 of 2009 charge-offs. The need to increase
the allowance as a percentage of loans from 1.02% to 1.38% by the end of 2009
required over $1,650,000 of provision. The 2009 charge-offs were
significantly higher due to large fourth quarter 2009 charge-offs, which
consisted of one large commercial loan and a number of smaller unrelated
commercial loans. The amounts charged off were the amounts determined
to be uncollectible on these loans. In total, $1,048,000 was charged
off in the fourth quarter of 2009. The Corporation experienced a
lower amount of charged-off loans in 2008, when a total of $241,000 was charged
off. The weak economic conditions that first affected the
Corporation’s business borrowers in 2008, continued throughout 2009, adversely
affecting certain industries like residential building and trucking
operations. The cumulative effect of a prolonged economic slowdown
was experienced by a larger segment of the Corporation’s commercial customers in
2009, resulting in more charge-offs. It is anticipated that the
Corporation will continue to make larger provision allocations in 2010 in an
effort to both offset any net charge-offs and still increase the allowance as a
percentage of total loans.
Management
also continues to provide for estimated losses on pools of similar loans based
on historical loss experience. Management utilizes qualitative
factors every quarter designed to adjust historical loss experience to take into
consideration the current trends in loan volume, delinquencies, changes in
lending practices, and the quality of the bank’s underwriting, credit analysis,
lending staff, and board oversight. Additionally, national and local
economic trends and conditions are considered to help determine the impact on
the amount of loan loss allowance the bank should be carrying on the various
types of loans. In 2009, the Corporation adjusted its qualitative
factors, and particularly the factors related to external items such as
competition, legal, and regulatory risks. Most of these qualitative
factors were adjusted by five basis points to account for the increased
regulatory and economic pressures present in the outstanding loan
portfolio. The periodic adjustment of qualitative factors allows the
Corporation’s historical loss experience to be continually brought current to
more accurately reflect estimated credit losses.
Management
continues to evaluate the allowance for loan losses in relation to the growth of
the loan portfolio and its associated credit risk, and believes the provision
and the allowance for loan losses are adequate to provide for future loan
losses. For further discussion of the calculation, see the “Allowance
for Loan Losses” section.
Other
Income
Other
income for 2009 was $6,440,000, an increase of $1,533,000, or 31.2%, compared to
the $4,907,000 earned in 2008. The following table details the
categories that comprise other income.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
OTHER
INCOME
(DOLLARS
IN THOUSANDS)
|
2009 vs. 2008
|
2008 vs. 2007
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
Increase (Decrease)
|
2008
|
2007
|
Increase (Decrease)
|
|||||||||||||||||||||||||||
|
$
|
$
|
$
|
%
|
$
|
$
|
$
|
%
|
|||||||||||||||||||||||||
|
Trust
and investment services
|
1,075 | 971 | 104 | 10.7 | 971 | 952 | 19 | 2.0 | ||||||||||||||||||||||||
|
Service
charges on deposit accounts
|
2,047 | 1,454 | 593 | 40.8 | 1,454 | 1,231 | 223 | 18.1 | ||||||||||||||||||||||||
|
Other
fees
|
559 | 607 | (48 | ) | (7.9 | ) | 607 | 461 | 146 | 31.7 | ||||||||||||||||||||||
|
Commissions
|
1,409 | 1,328 | 81 | 6.1 | 1,328 | 1,124 | 204 | 18.1 | ||||||||||||||||||||||||
|
Net
realized gains (losses) on sales
|
||||||||||||||||||||||||||||||||
|
of
securities available for sale
|
175 | (506 | ) | 681 | (134.6 | ) | (506 | ) | 157 | (663 | ) | (422.3 | ) | |||||||||||||||||||
|
Gains
on sale of mortgages
|
229 | 123 | 106 | 86.2 | 123 | 118 | 5 | 4.2 | ||||||||||||||||||||||||
|
Earnings
on bank-owned life insurance
|
646 | 632 | 14 | 2.2 | 632 | 469 | 163 | 34.8 | ||||||||||||||||||||||||
|
Other
miscellaneous income
|
300 | 298 | 2 | 0.7 | 298 | 289 | 9 | 3.1 | ||||||||||||||||||||||||
|
Total
other income
|
6,440 | 4,907 | 1,533 | 31.2 | 4,907 | 4,801 | 106 | 2.2 | ||||||||||||||||||||||||
There was
a significant variance for gain or loss on security transactions for the year
ended December 31, 2009, compared to the same period in 2008. For the
year ended December 31, 2009, $175,000 of gains on securities transactions was
recorded compared to a loss of $506,000 for 2008. Gains or losses on
securities transactions fluctuate based on market conditions
including:
|
|
·
|
opportunities
to reposition the securities portfolio to improve long-term
earnings,
|
|
|
·
|
appreciation
or deterioration of a securities value due to changes in interest rates,
credit risk, or market dynamics such as spread and liquidity,
or
|
|
|
·
|
management’s
asset liability goals to improve liquidity or reduce interest rate or fair
value risk.
|
The gains
or losses recorded depend entirely on the active trades based on the
above. Losses can be in the form of active sales of securities, or
impairment of securities, which involves writing the security down to a lower
value based on anticipated credit losses. In the third quarter of
2008, losses and other-than-temporary impairment charges of $1,216,000 were
recorded on U.S. Agency preferred stock. A portion of these losses
was offset by gains on securities sold during 2008, which reduced the net losses
for the year. During 2009, the Corporation realized a $526,000 loss
on the sale of a CIT Group, Inc. corporate bond and recorded impairment charges
of $369,000 on three private collateralized mortgage obligation (PCMO)
securities for which a full recovery of principal is not
expected. Throughout 2009, management also sold securities at gains
of $1,070,000, which more than offset these losses, resulting in the net gain of
$175,000 for the year. The difference of recording net realized gains
of $175,000 in 2009, compared to net realized losses of $506,000 in 2008,
represents a year-over-year increase of $681,000.
Trust and
investment services revenue consists of income from traditional trust services
and income from alternative investment services provided through a third
party. In 2009, traditional trust services income increased $135,000,
or 19.0%, over 2008 levels. Alternative investment services income
decreased $31,000, or 11.9%, from 2008 levels. The amount of customer
investment activity drives the investment services income; therefore, the
economic slowdown throughout the year has diminished customer interest in
investing in the equity market. The trust and investment services
area continues to be an area of strategic focus for the
Corporation. Management believes there is a great need for
retirement, estate, and small business planning in the Corporation’s service
area. Management also sees these services as being a necessary part
of a comprehensive line of financial solutions across the
organization.
Service
charges on deposit accounts for the year ended December 31, 2009, increased by
$593,000, or 40.8%, compared to 2008. Overdraft service charges for
2009, which comprise over 90% of the total deposit service charges increased
substantially to $1,895,000 in 2009, from $1,287,000 in 2008, a 47.2%
increase. The Corporation instituted new operational procedures for
posting transactions and assessing overdraft charges in the fourth quarter of
2008, which caused this increase. Management expects that overdraft
income for 2010 will show a notable decrease from 2009 levels because of
regulatory changes to occur in mid-2010. Based on management’s
estimates, it is possible that overdraft income will be reduced by 30% to as
much as 50% after the regulatory changes take place on July 1,
2010. Management is evaluating a number of procedural recommendations
that show varying degrees of overdraft income reductions based on projections of
customer behavior patterns.
Other
fees decreased for the year ended December 31, 2009, by $48,000, or 7.9%,
compared to the previous year. Loan-related fees decreased $12,000,
while the remaining fee income categories decreased by
$36,000. Letter of
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
credit
fees declined $18,000, or 13.8%, as construction projects
slowed. Combined mortgage rate amendments, modifications, document
preparation fees, and mortgage origination fees decreased by $25,000, or 12.1%,
from 2008 to 2009, as the number of rate amendments and modifications slowed
significantly from 2008, while new home mortgage volume and refinancing activity
increased. The Corporation assesses fees to business customers when
they amend the original terms of their mortgage agreement, to change the length
of the loan, the rate, or both. These amendments allow customers to
obtain favorable terms without rewriting the loan. These loan
amendments do not involve delinquent loans. The rate amendments and
modifications on business loans were much more prevalent in 2008 when customers
were first attracted to refinancing from fixed to variable
rates. Offsetting the decreases in loan fees, the Corporation
instituted a review fee that was responsible for a $26,000 increase in
fees. The largest decrease in other fees was a $20,000 reduction in
fees on ATM/Debit cards issued. The Corporation made a pricing change
in 2009 when it discontinued charging $10 for every consumer card
issued.
The
largest component of commission income is from the Corporation’s Debit
MasterCard®. The amount of customer usage of the card at point of
sale transactions determines the level of commission income
received. The debit card income of $1,169,000 in 2009 is an increase
of $82,000, or 7.5%, over 2008. Customers have become more
comfortable with the use of debit cards, and they are now widely accepted by
merchants, thereby increasing the number of transactions
processed. Another large component of commission income is from
MasterCard and Visa® commission, which provided income of $157,000 for 2009, a
decrease of $8,000, or 4.8%, from 2008. MasterCard and Visa
commission is the amount the Corporation earns on transactions processed through
the MasterCard and Visa systems for business customers.
Although
economic conditions have slowed the sale of homes and new construction
throughout 2009, the amount of refinancing activity has increased significantly
because of the low rate environment. This has increased the amount of
mortgages originated for sale to the secondary market. Secondary
mortgage financing activity drives the gains on the sale of mortgages, which
showed an increase of $106,000, or 86.2%, for 2009, compared to
2008. Management anticipates that gains on the sale of mortgages may
decline in 2010, as mortgage rates have now been lower for an extended period of
time.
The
earnings on BOLI increased $14,000, or 2.2%, for 2009, compared to
2008. The increase in BOLI income was a result of increases in the
cash surrender value. Death benefits paid that exceed the policies
cash surrender value are recorded in miscellaneous income. No death
benefits were recorded in 2009 or 2008. Management does not
anticipate any significant changes in BOLI income for 2010.
The
miscellaneous income category increased $2,000, or 0.7%, for 2009, over
2008. This category had a number of increases offset by one
decrease. Net servicing fees on mortgage servicing rights increased
$43,000, customer check orders increased $19,000, and sales tax refund income
increased $14,000. Offsetting these increases was a $74,000 reduction
of income related to adjusting the provision for off-balance sheet credit
losses.
Operating
Expenses
The
following table provides details of the Corporation’s operating expenses for the
last three years along with the percentage increase or decrease for 2009 and
2008 compared to the previous year.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
OPERATING
EXPENSES
(DOLLARS
IN THOUSANDS)
|
2009 vs. 2008
|
2008 vs. 2007
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
Increase (Decrease)
|
2008
|
2007
|
Increase (Decrease)
|
|||||||||||||||||||||||||||
|
$
|
$
|
$
|
%
|
$
|
$
|
$
|
%
|
|||||||||||||||||||||||||
|
Salaries
and employee benefits
|
10,867 | 11,892 | (1,025 | ) | (8.6 | ) | 11,892 | 9,693 | 2,199 | 22.7 | ||||||||||||||||||||||
|
Occupancy
expenses
|
1,440 | 1,242 | 198 | 15.9 | 1,242 | 1,146 | 96 | 8.4 | ||||||||||||||||||||||||
|
Equipment
expenses
|
820 | 957 | (137 | ) | (14.3 | ) | 957 | 899 | 58 | 6.5 | ||||||||||||||||||||||
|
Advertising
& marketing expenses
|
387 | 411 | (24 | ) | (5.8 | ) | 411 | 415 | (4 | ) | (1.0 | ) | ||||||||||||||||||||
|
Computer
software & data
|
||||||||||||||||||||||||||||||||
|
processing
expenses
|
1,531 | 1,508 | 23 | 1.5 | 1,508 | 1,383 | 125 | 9.0 | ||||||||||||||||||||||||
|
Shares
tax
|
743 | 721 | 22 | 3.1 | 721 | 449 | 272 | 60.6 | ||||||||||||||||||||||||
|
Professional
services
|
1,595 | 1,643 | (48 | ) | (2.9 | ) | 1,643 | 968 | 675 | 69.7 | ||||||||||||||||||||||
|
Federal
deposit insurance
|
1,022 | 230 | 792 | 344.3 | 230 | 54 | 176 | 325.9 | ||||||||||||||||||||||||
|
Other
operating expenses
|
1,664 | 1,864 | (200 | ) | (10.7 | ) | 1,864 | 1,824 | 40 | 2.2 | ||||||||||||||||||||||
|
Total
operating expenses
|
20,069 | 20,468 | (399 | ) | (1.9 | ) | 20,468 | 16,831 | 3,637 | 21.6 | ||||||||||||||||||||||
Salaries
and employee benefits are the largest category of other expenses. In
general, they comprise close to 55% of the Corporation’s total operating
expenses. For the year 2009, salaries and benefits decreased
$1,025,000, or 8.6%; however, the decrease was primarily caused by a $1,222,000
separation package offered to a specific group of employees as part of workforce
realignment in 2008. The $1,222,000 charge consisted of $866,000 for
severance pay and $356,000 for medical insurance coverage
continuation. Excluding the one-time separation package, the salaries
and benefits for 2009 increased $197,000, or 1.8%, over
2008. Insurance costs decreased at a rate of 13.8% from 2008 to 2009,
primarily because of decreased participation in the health insurance plan
because of the workforce realignment and a decrease in life insurance premiums
due to a change in insurance carrier. Pension expense was $531,000 in
2009, compared to $527,000 in 2008, a minimal increase. Eligible
employees receive pension contributions based upon compensation subject to
certain caps; therefore, this increase is generally consistent with the increase
in salary expense.
Occupancy
expenses consist of the following:
|
|
·
|
Depreciation
of bank buildings
|
|
|
·
|
Real
estate taxes and property insurance
|
|
|
·
|
Utilities
|
|
|
·
|
Building
repair and maintenance
|
Occupancy
expenses have increased by $198,000, or 15.9%, for 2009, compared to
2008. The increase was spread across multiple occupancy
categories. Building depreciation increased $29,000, or 5.7%, over
2008 levels, mostly due to the addition of a new branch in
2008. Utility expenses increased by $113,000, or 29.5%, over 2008,
due to higher energy costs affecting electric and oil prices. The
cost of electricity alone was $49,000, or 23.0%, higher in 2009, compared to
2008. The Corporation’s main electricity provider increased rates
approximately 40% in 2009. Building repair and maintenance costs
continue to rise in tandem with more facilities, higher costs related to
materials and supplies, and costs associated with the aging of
facilities.
Equipment
expenses decreased $137,000, or 14.3%, for the year ended December 31, 2009,
compared to 2008. This is partially because depreciation on furniture
and equipment decreased $93,000, or 15.7%, for the year ended December 31,
2009. Equipment assets have short lives, generally five to seven
years. The Corporation placed a significant amount of furniture and
equipment assets into service between five and ten years ago that are now fully
depreciated. Specifically, all the furniture and equipment placed
into service at the Lititz Branch Office became fully depreciated in January
2009. Additionally, expenses related to equipment service contracts
decreased $39,000, or 16.6%, for the year ended December 31, 2009, compared to
2008. Some of the Corporation’s larger investment technology
contracts have decreased because of purchases of new equipment with lower levels
of maintenance contracts.
Advertising
and marketing expenses for the year decreased $24,000, or 5.8%, from 2008
levels. The expenses of this category support the overall business
strategies of the Corporation; therefore, the timing of these expenses is
dependent upon those strategies.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
The
computer software and data processing expenses are comprised of STAR® network
processing fees, software amortization, software purchases, and software
maintenance agreements. The STAR network fees are the fees paid to
process all ATM and debit card transactions. STAR network fees were
$827,000 in 2009, and $794,000 in 2008, a $33,000, or 4.2%,
increase. This increase parallels the increased number of electronic
transactions executed by customers. Management expects that this cost
will rise as ATM and debit card point of sale transactions
increase. Software-related expenses decreased slightly from $681,000
in 2008, to $678,000 in 2009. Management does expect software
expenses to rise more materially in 2010 due to several software-based
initiatives.
Shares
tax expense rose $22,000, or 3.1%, for 2009 over 2008. This is
primarily a result of an increase in the number of shares outstanding that
requires the Corporation to pay more tax related to those
shares. Management does not anticipate a substantial increase in this
expense in 2010.
Professional
services expenses decreased $48,000, or 2.9%, from 2008
levels. Professional services include accounting and auditing fees,
legal fees, loan review fees, and other third-party services. In
2008, management engaged the consulting arm of the Corporation’s core-processing
vendor to conduct an organizational efficiency and income generation
initiative. The fees associated with that contract amounted to
$481,000 in 2008, and $275,000 in 2009. Additionally, legal fees
decreased by $55,000, or 61.7%, from 2008 to 2009. Stockholder
expenses were inflated in 2008 due to the formation of the bank holding company,
resulting in a decrease in expense of $33,000, or 25.6%, from 2008 to
2009. Offsetting these decreases was an increase in student loan
servicing expense of $195,000, or 251.9%, due to higher costs to service the
loans.
The
expenses associated with the Federal Deposit Insurance Corporation (FDIC)
insurance increased by $792,000, or 344.3%, for the year ended December 31,
2009, over 2008. The FDIC expenses for 2009 included the
significantly higher charges for the FDIC insurance fund, which included a 140%
rate increase that became effective in the fourth quarter of 2008, and expenses
for a special one-time assessment of five (5) basis points, which was due as of
June 30, 2009. For more information, refer to the section titled
“FDIC Insurance Premium Increase” found on page 12 of this Form 10-K
filing.
Other
operating expenses include the remainder of the Corporation’s operating
expenses. Some of the larger items included in this category
are:
|
|
·
|
Postage
|
|
|
·
|
Regulatory
and tax assessments
|
|
|
·
|
Director
fees and expense
|
|
|
·
|
Travel
expense
|
|
|
·
|
General
supplies
|
|
|
·
|
Charitable
contributions
|
|
|
·
|
Delinquent
loan expenses
|
Other
operating expenses decreased $200,000, or 10.7%, from 2008 to
2009. The largest decreases occurred in travel expense, down $85,000,
miscellaneous loan expenses, down $44,000, and director fees, down
$52,000. Travel expenses were higher in 2008 mostly due to the
out-of-pocket and travel expenses associated with the Corporation’s business
consulting engagement. Loan-related expenses were higher in 2008
primarily as a result of fees waived for a home equity loan
special. Director fees decreased due to the completion of deferred
compensation payments for past directors.
Management
uses the efficiency ratio as one metric to evaluate operating
expenses. The efficiency ratio measures the efficiency of the
Corporation in producing one dollar of revenue. For example, an
efficiency ratio of 60% means it costs sixty cents to generate one dollar of
revenue. A lower ratio represents better operational
efficiency. The formula for calculating the efficiency ratio is total
operating expenses, excluding foreclosed property and OREO expenses, divided by
net interest income on a FTE basis, prior to the provision for loan losses, plus
other income, excluding gain or loss on the sale of securities. For
2009, the Corporation’s efficiency ratio was 69.0%, an improvement from the
75.1% for 2008. Management has a long-term goal of reducing the
efficiency ratio to less than 65%.
Income
Taxes
The
majority of the Corporation’s income is taxed at a corporate rate of 34% for
Federal income tax purposes. The Corporation is also subject to
Pennsylvania Corporate Net Income Tax; however, no taxable activity is conducted
at the corporate level. The Corporation’s wholly owned subsidiary,
Ephrata National Bank, is not subject to state income
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
tax, but
does pay Pennsylvania Bank Shares Tax. The Bank Shares Tax expense
appears on the Corporation’s Consolidated Statements of Income under operating
expenses.
Certain
items of income are not subject to Federal income tax, such as tax-exempt
interest income on loans and securities, and increases in the cash surrender
value of life insurance; 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 income tax by the
pre-tax income for the applicable period.
For the
year ended December 31, 2009, the Corporation recorded a tax provision of
$136,000, compared to a tax benefit of $117,000 for 2008. The
Corporation’s high level of tax-free assets and associated tax-free income,
along with applicable tax credits, exceeded the Corporation’s taxable income in
2008 causing a tax benefit. In 2009, the Corporation’s level of
tax-free income remained consistent with 2008, but the taxable income was
higher, resulting in tax expense for the year. The effective tax rate
for the Corporation was 3.1% for 2009, compared to (3.0%) for 2008.
Due to
lower earnings and a large percentage of tax-free income compared to total
income, the Corporation became subject to the alternative minimum tax (AMT) in
2006. The Corporation has remained in an AMT position
since. The AMT affects the amount of Federal income tax due and paid,
but it does not affect the book tax provision. Being in an AMT
position does affect future book tax expense as management alters strategies
designed to bring the Corporation out of an AMT position, such as reducing
tax-free income. AMT tax paid can be utilized in the future as
credits against regular income tax, should the regular corporate tax calculation
once again exceed the AMT calculation. The AMT credits have an
unlimited carry forward. Management does anticipate that the
Corporation will be able to utilize these AMT credits in 2010 and future years
when higher earnings levels are achieved.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Financial
Condition
Cash
and Cash Equivalents
Cash and
cash equivalents consist of the cash on hand in the Corporation’s vaults,
operational transaction accounts with the Federal Reserve Bank (FRB), and
deposits in other banks. The FRB requires a specified amount of cash
available either in vault cash or in a FRB account. Known as cash
reserves, these funds provide for the daily clearing house activity of the
Corporation and fluctuate based on the volume of each day’s
transactions. As of December 31, 2009, the Corporation had $16.7
million in cash and cash equivalents, compared to $19.4 million as of December
31, 2008. The cash and cash equivalents represent only one element of
liquidity. For further discussion on liquidity management refer to
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.
Sources
and Uses of Funds
The
following table shows an overview of the Corporation’s primary sources and uses
of funds. This table utilizes average balances to explain the change
in the sources and uses of funding. Management uses this analysis
tool to evaluate changes in each balance sheet category. Trends
identified from past performance assist management with decisions concerning
future growth.
Some
conclusions drawn from the following table are as follows:
|
|
·
|
Balance
sheet growth was slightly slower in 2009 compared to
2008.
|
|
|
·
|
Loans
grew slightly faster than the asset growth rate allowing security growth
to be slightly slower.
|
|
|
·
|
Short-term
investments were maintained at low levels to take advantage of
higher-yielding assets.
|
|
|
·
|
Deposit
growth was stronger in 2009, compared to 2008, due to greater
“flight-to-safety” concern.
|
|
|
·
|
Time
and savings deposits grew rapidly in
2009.
|
|
|
·
|
Non-interest
bearing deposits grew moderately in
2009.
|
|
|
·
|
Interest-bearing
demand deposits declined slightly in
2009.
|
|
|
·
|
Borrowings
decreased moderately in 2009 as less reliance was placed on wholesale
funding.
|
SOURCES
AND USES OF FUNDS
(DOLLARS
IN THOUSANDS)
|
2009 vs. 2008
|
2008 vs. 2007
|
|||||||||||||||||||||||||||||||
|
2009
|
2008
|
Increase
(Decrease)
|
2008
|
2007
|
Increase
(Decrease)
|
|||||||||||||||||||||||||||
|
Average
Balances
|
$
|
$
|
$
|
%
|
$
|
$
|
$
|
%
|
||||||||||||||||||||||||
|
Short-term
investments
|
1,426 | 1,310 | 116 | 8.9 | 1,310 | 4,502 | (3,192 | ) | (70.9 | ) | ||||||||||||||||||||||
|
Securities
available for sale
|
236,606 | 222,248 | 14,358 | 6.5 | 222,248 | 190,674 | 31,574 | 16.6 | ||||||||||||||||||||||||
|
Regulatory
stock
|
4,916 | 4,737 | 179 | 3.8 | 4,737 | 4,177 | 560 | 13.4 | ||||||||||||||||||||||||
|
Loans
|
419,689 | 391,112 | 28,577 | 7.3 | 391,112 | 376,539 | 14,573 | 3.9 | ||||||||||||||||||||||||
|
Total
Uses
|
662,637 | 619,407 | 43,230 | 7.0 | 619,407 | 575,892 | 43,515 | 7.6 | ||||||||||||||||||||||||
|
Interest
bearing demand deposits
|
96,975 | 99,614 | (2,639 | ) | (2.6 | ) | 99,614 | 95,961 | 3,653 | 3.8 | ||||||||||||||||||||||
|
Savings
deposits
|
80,649 | 72,049 | 8,600 | 11.9 | 72,049 | 68,956 | 3,093 | 4.5 | ||||||||||||||||||||||||
|
Time
deposits
|
256,062 | 219,769 | 36,293 | 16.5 | 219,769 | 204,947 | 14,822 | 7.2 | ||||||||||||||||||||||||
|
Borrowings
|
92,518 | 97,497 | (4,979 | ) | (5.1 | ) | 97,497 | 79,902 | 17,595 | 22.0 | ||||||||||||||||||||||
|
Non-interest
bearing funds
|
112,706 | 106,029 | 6,677 | 6.3 | 106,029 | 98,228 | 7,801 | 7.9 | ||||||||||||||||||||||||
|
Total
Sources
|
638,910 | 594,958 | 43,952 | 7.4 | 594,958 | 547,994 | 46,964 | 8.6 | ||||||||||||||||||||||||
Securities
Available For Sale
The
Corporation classifies all of its securities as available for sale and reports
the portfolio at fair market value. As of December 31, 2009, the
Corporation had $236.3 million of securities available for sale, which accounted
for 32.6% of assets, compared to 31.1% as of December 31, 2008. This
indicates that the securities portfolio on an ending-balance basis grew at a
faster pace than total assets. Based on ending balances, the
securities portfolio increased 10.2% from December 31, 2008, to December 31,
2009.
Each
quarter management sets portfolio allocation guidelines and adjusts security
portfolio strategy generally based upon the following factors:
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
|
|
·
|
Performance
of the various instruments
|
|
|
·
|
Direction
of interest rates
|
|
|
·
|
Slope
of the yield curve
|
|
|
·
|
ALCO
positions as to liquidity, interest rate risk, and net portfolio
value
|
|
|
·
|
Changes
in credit risk of the various
instruments
|
|
|
·
|
State
of the economy and projected economic
trends
|
The
investment policy of the Corporation imposes guidelines to ensure
diversification within the portfolio. The diversity specifications provide
opportunities to maximize yield and minimize credit risk. The composition of the
securities portfolio based on fair market value is shown in the following
table.
SECURITIES
PORTFOLIO
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||||||||
|
U.S.
treasuries & government agencies
|
47,571 | 20.2 | 47,064 | 22.0 | 47,599 | 24.7 | ||||||||||||||||||
|
Mortgage-backed
securities
|
42,390 | 17.9 | 46,093 | 21.5 | 33,097 | 17.1 | ||||||||||||||||||
|
Collateralized
mortgage obligations
|
53,982 | 22.8 | 36,049 | 16.8 | 36,833 | 19.1 | ||||||||||||||||||
|
Private
collateralized mortgage obligations
|
12,748 | 5.4 | 18,294 | 8.5 | - | - | ||||||||||||||||||
|
Corporate
debt securities
|
13,369 | 5.7 | 11,637 | 5.4 | 11,507 | 6.0 | ||||||||||||||||||
|
Obligations
of states and political subdivisions
|
63,369 | 26.8 | 52,521 | 24.5 | 60,422 | 31.3 | ||||||||||||||||||
|
Equity
securities
|
2,906 | 1.2 | 2,763 | 1.3 | 3,502 | 1.8 | ||||||||||||||||||
|
Total
securities
|
236,335 | 100.0 | 214,421 | 100.0 | 192,960 | 100.0 | ||||||||||||||||||
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. Refer to Item 7A Quantitative and Qualitative Disclosures
about Market Risk for further discussion of risk strategies. To
provide maximum flexibility for management of liquidity and interest rate risks,
the securities portfolio is classified as available for sale and reported at
fair value. Management adjusts the value of the portfolio 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 the bonds that are currently valued below book
value. Equity securities generally pose a greater risk to loss of
principal since there is no specified maturity date on which the Corporation
will recover the entire principal. Recovery of the principal investment is
dependent on the fair value of the security at the time of sale.
As of
December 31, 2009, the Corporation held seven PCMO securities with a book value
of $16.6 million, a reduction of $3.9 million, or 19.0%, from the balance as of
December 31, 2008. Three of these securities, with a book value of
$6.6 million, carried an AAA credit rating by at least one of the major credit
rating services. The four remaining PCMOs, with a book value of $10.0
million, had credit ratings below investment grade, which is BBB- for S&P
and Baa3 for Moodys. Management currently has no plans to sell these
securities as management believes the current market values are not true
indications of the value of the bonds based on cash flow analysis performed
under severe stress testing. Management’s December 31, 2009, cash
flow analysis on all of the Corporation’s PCMOs did indicate a need to take
impairment on three of the four PCMOs with below investment grade credit
ratings. The cash flow analysis, conducted at slower prepayment
speeds than what the securities have actually been paying, reveals that there is
an expectation that two of the bonds will suffer a 1% loss of principal, while
the third shows a 7.4% loss of principal. Total impairment
taken on these three bonds was $369,000, with the first two bonds reflecting
small impairment amounts of $29,000 and $11,000, while the third security had
impairment charges of $329,000.
Current
analysis by management does not show the need to take additional impairment, but
it is possible that foreclosure rates and the severity of losses on the
foreclosures could increase, resulting in more credit losses to the
Corporation. Management will continue to update cash flow analysis
quarterly that incorporates the most current default rates and prepayment speeds
on these instruments. It is possible that further impairment would be
necessary if default rates rose to levels that have not yet been experienced, or
if the severity of losses on foreclosures increased, or if prepayment speeds
slowed to speeds not previously experienced. Prepayment speeds on all
of the Corporation’s PCMOs have been
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
relatively
fast, which is assisting in the cash flow analysis. Faster prepayment
speeds make it more likely that the Corporation’s principal is returned before
additional credit losses are incurred.
Based on
fair market value on December 31, 2009, approximately 98.8% of the Corporation’s
securities were invested in debt securities with final maturities, while 1.2% of
the portfolio was invested in equity securities. The equity
percentage changed very little from December 31, 2008, with the reduction in
unrealized holding losses of $143,000 responsible for the
change. Management did sell $1 million of a CRA equity fund at a
$60,000 loss to reinvest the proceeds into a $1 million CRA-approved SBA fund
with a stable dollar price, and reduce the Corporation’s exposure to fair value
fluctuations. The $60,000 loss is included in the net $175,000 of
security gains and losses for all of 2009. The only equity security
in the Corporation’s portfolio is the CRA fund investment. The CRA fund is
structured as a mutual fund where dollars are invested in CRA-qualifying
mortgage pools. The current guideline used by management for the
amount to be invested in CRA-approved investments is approximately 0.5% of
assets. The CRA fund is rated AAA by both Moodys and
S&P.
Throughout
the year, the Corporation was able to utilize the positively sloped treasury
curve to add higher yielding tax-exempt securities to the portfolio which helped
offset reductions in taxable security yields. Overall, the tax
equivalent yield on all of the Corporation’s securities declined from 5.38% for
2008, to 5.16% for 2009. Growth in the securities portfolio occurred
in part to offset the slower loan growth being experienced by the
Corporation. The majority of growth occurred in mortgage-backed
securities (MBS), collateralized mortgage obligations (CMO), and obligations of
states and political subdivisions. They match the overall objectives
of the securities strategy of providing:
|
|
·
|
a
stable and reliable cash flow for
liquidity
|
|
|
·
|
solid
investments that generally carry AAA credit
ratings
|
|
|
·
|
strong
income compared to other debt
securities
|
Investments
in a substantial amount of MBS and CMOs assists management in maintaining a
stable five-year ladder of cash flows, which is important in providing stable
liquidity and interest rate risk positions. Unlike U.S. agency paper,
corporate bonds, and obligations of states and political subdivisions, which
only pay principal at final maturity, the MBS, CMO, and PCMO securities pay
monthly principal and interest. The combined effect of all of these
instruments paying monthly principal and interest provides the Corporation with
a significant and stable cash flow. While cash flows coming off of
MBS, CMOs, and PCMOs do slow down and speed up as interest rates increase or
decrease, the overall effect on the portfolio is minimal. The
significance of these monthly cash flows relative to other security calls or
maturities does act to soften or smooth out the Corporation’s total monthly cash
flow from securities.
Obligations
of states and political subdivisions, often referred to as municipal bonds, are
tax-free securities that generally provide the highest yield in the securities
portfolio. Since 2008, the municipal bond ratings have been adversely
affected by downgrades on nearly all of the insurance companies backing
municipal bond issues. Previous to the sharp decline in the health of
the insurance companies, nearly 95% of the Corporation’s municipal bonds carried
AAA credit ratings with the added insurance protection. Now, with the
health of most of the insurers greatly diminished, the final rating of most
municipal bonds has fallen to AA or A. As of December 31, 2009, only
30% of the Corporation’s municipal bonds carried an AAA rating. The
Corporation’s investment policy requires that municipal bonds not carrying
insurance have a minimum credit rating of A at the time of
purchase. As of December 31, 2009, nineteen municipal bonds, with a
book value of $7.7 million, carried credit ratings under A. In the
current environment, the major rating services have tightened their credit
underwriting procedures and are more apt to downgrade
municipalities. Additionally, the very weak economy has reduced
revenue streams for many municipalities and has called into question the basic
premise that municipalities have unlimited power to tax, i.e. the ability to
raise taxes to compensate for revenue shortfalls. All scheduled
interest payments on these securities have been paid timely on these securities
and management believes all future contractual payments will be
made. Despite the lower credit ratings on the nineteen municipal
securities, management intends to hold these securities to maturity, with full
recovery of principal expected.
As of
December 31, 2009, the Corporation held corporate bonds with a total book value
of $12.9 million and fair market value of $13.4 million. Management
continues to hold corporate securities at approximately 5% to 6% of the
portfolio. 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 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 minimal credit ratings that
must be met in order for management to purchase a corporate bond. In
July 2009, one of the Corporation’s corporate holdings, CIT Group, Inc., became
public about experiencing severe financial problems. The Corporation
held two $1,000,000 CIT Group. Inc. corporate bonds as of June 30,
2009. One of the bonds matured on July 15, 2009, with full value
being received. However, news of a possible CIT Group, Inc.
bankruptcy with
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
lack of
any potential government intervention surfaced on July 13, 2009, and continued
to create negative pressure on the value of the Corporation’s remaining
$1,000,000 book value of CIT Group, Inc. to the point that in just two days the
price had fallen to less than half of its value. As a result of the
rapidly declining value of this bond, management made the decision on July 16,
2009, to sell the remaining CIT Group, Inc. bond at a $526,000 loss rather than
continue to hold the bond with the uncertainty of losing additional
principal.
As of
December 31, 2009, all of the corporate securities held by the Corporation were
showing unrealized holding gains. And all of these corporate bonds
had at least an A credit rating by one of the major credit rating
services. Currently, there are no indications that any of these bonds
would discontinue contractual payments.
The
entire securities portfolio is reviewed monthly for credit risk and evaluated
quarterly for possible impairment. In terms of credit risk and
impairment, management views the Corporation’s CRA fund investment differently
because it has no maturity date. Bond investments could have larger
unrealized losses but significantly less probability of impairment due to having
a fixed maturity date. As of December 31, 2009, the CRA fund was
showing unrealized losses of $94,000, a 4.7% price decline. The prices on this
fund tend to lag behind decreases in U.S. Treasury
rates. Management believes that the price declines are
primarily rate driven, and temporary as opposed to
permanent. Corporate bonds and private collateralized mortgage
obligations have the most potential credit risk out of the Corporation’s debt
instruments. Due to the rapidly changing credit environment and weak
economic conditions, management is closely monitoring all corporate bonds and
all private label securities. For further information on impairment
see Note B. For further details regarding credit risk see Note
Q.
The
following table shows the weighted-average life and yield on the Corporation’s
securities by maturity intervals as of December 31, 2009, based on amortized
cost. All of the Corporation’s securities are classified as available
for sale and are reported at fair value; however, for purposes of this schedule
they are shown at amortized cost.
SECURITIES
PORTFOLIO MATURITY ANALYSIS
(DOLLARS
IN THOUSANDS)
|
Within
|
1 - 5 |
5 -
10
|
Over 10 | |||||||||||||||||||||||||||||||||||||
|
1 Year
|
Years
|
Years
|
Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
%
|
%
|
%
|
%
|
%
|
||||||||||||||||||||||||||||||||||||
|
$
|
Yield
|
$ |
Yield
|
$
|
Yield
|
$
|
Yield
|
$
|
Yield
|
|||||||||||||||||||||||||||||||
|
U.S.
treasuries & government agencies
|
- | - | 6,721 | 4.16 | 40,297 | 4.45 | - | - | 47,018 | 4.41 | ||||||||||||||||||||||||||||||
|
Mortgage-backed
securities
|
9,469 | 4.40 | 18,910 | 4.59 | 9,043 | 4.60 | 3,970 | 4.51 | 41,392 | 4.54 | ||||||||||||||||||||||||||||||
|
Collateralized
mortgage obligations
|
10,320 | 4.40 | 39,185 | 4.04 | - | - | 3,779 | 5.29 | 53,284 | 4.20 | ||||||||||||||||||||||||||||||
|
Private
collaterized mortgage obligations
|
- | - | - | - | 7,017 | 5.75 | 9,551 | 6.22 | 16,568 | 6.02 | ||||||||||||||||||||||||||||||
|
Corporate
bonds
|
4,466 | 5.11 | 7,967 | 5.16 | 500 | 5.30 | - | - | 12,933 | 5.15 | ||||||||||||||||||||||||||||||
|
Obligations
of states and political
|
||||||||||||||||||||||||||||||||||||||||
|
subdivisions
|
1,215 | 7.87 | 7,183 | 6.80 | 17,343 | 6.49 | 36,790 | 6.57 | 62,531 | 6.60 | ||||||||||||||||||||||||||||||
|
Other
equity securities
|
- | - | - | - | - | - | 3,000 | 4.85 | 3,000 | 4.85 | ||||||||||||||||||||||||||||||
|
Total
securities
|
25,470 | 4.69 | 79,966 | 4.54 | 74,200 | 5.07 | 57,090 | 6.19 | 236,726 | 5.12 | ||||||||||||||||||||||||||||||
Securities
are assigned to categories based on stated contractual maturity except for MBS,
CMOs, and PCMOs, which are based on anticipated payment periods.
The yield
on the securities portfolio, including equity securities, was 5.12% as of
December 31, 2009, compared to 5.33% as of December 31,
2008. As of December 31, 2009, the effective duration of the
Corporation’s fixed income security portfolio was 2.8 for the base case or rates
unchanged scenario. This compares to an effective duration of 2.0 as
of December 31, 2008. Effective duration is the estimated duration or
length of a security or portfolio, which is implied by the price
volatility. Effective duration is calculated by converting price
volatility to a standard measurement representing length. While it is
a standard measurement representing length, it is not expressed in
years. It is a measurement of price sensitivity, with lower durations
representing better positions. An effective duration of 3.0 would be
the same as a three-year U.S. treasury. Management receives effective
duration and price volatility information quarterly on an individual security
basis. Management’s target base case, or rates unchanged, effective
duration is 2.5. With the likelihood that interest rates may increase
by the end of 2010 or early 2011, management’s strategy is to reduce the
securities portfolio’s effective duration to 2.5 or less by June 30, 2010, to
assist in reducing the Corporation’s overall rates-up exposure.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Effective
duration is only one measurement of the length of the securities
portfolio. Management receives and monitors a number of other
measurements. In general, a shorter portfolio will adjust more
quickly in a rising interest rate environment, whereas a longer portfolio will
tend to generate more return over the long-term and will outperform a shorter
portfolio when interest rates decline. Because the Corporation’s
securities portfolio is longer than the average peer bank, it will generally
outperform the average peer bank given static rates or a decline in interest
rates, and will generally underperform given higher interest
rates. Additionally, with fixed rate instruments, the longer the term
of the security, generally the more fair value risk there is when interest rates
rise. The converse is true when interest rates
decline. Management utilizes other elements of the Corporation’s
balance sheet to reduce exposure to higher interest rates including additional
prime-based loans and extending liabilities through time deposits and
borrowings. While the securities portfolio’s effective duration
exceeds management’s target guidelines as of December 31, 2009, the
Corporation’s interest rate sensitivity analysis and fair value analysis are
within guidelines. See the Market Risk section for further discussion
on the Corporation’s management of asset liability risks including interest rate
risk and fair value risk.
Throughout
2009 and as of December 31, 2009, all of the Corporation’s securities were held
at the bank level. With the formation of the holding company on July
1, 2008, the Corporation is able to hold securities at the parent or holding
company level. Tax strategies, market conditions, and other strategic
decisions have factored into management’s decision not to transfer securities to
the holding company, or purchase equity securities at the holding company
level. Management and the Board will continue to evaluate changing
market conditions and any opportunities in terms of transferring or purchasing
securities at the holding company level.
Loans
Net loans
outstanding increased $14.2 million, or 3.5%, from $407.7 million at December
31, 2008, to $421.9 million at December 31, 2009. The following table
shows the composition of the loan portfolio as of December 31 for
each of the past five years.
LOANS BY
MAJOR CATEGORY
(DOLLARS
IN THOUSANDS)
| December 31, | ||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||||||||||||||||||||
|
Real
estate
|
||||||||||||||||||||||||||||||||||||||||
| Residential (a) | 163,625 | 38.2 | 163,076 | 39.6 | 150,996 | 39.2 | 148,828 | 40.6 | 135,381 | 41.1 | ||||||||||||||||||||||||||||||
| Commercial | 152,108 | 35.5 | 152,942 | 37.1 | 131,297 | 34.1 | 124,414 | 34.0 | 110,770 | 33.7 | ||||||||||||||||||||||||||||||
| Construction | 23,382 | 5.5 | 13,540 | 3.3 | 16,960 | 4.4 | 10,751 | 2.9 | 5,662 | 1.7 | ||||||||||||||||||||||||||||||
|
Commercial
|
76,526 | 17.9 | 71,765 | 17.4 | 75,172 | 19.5 | 70,300 | 19.2 | 64,333 | 19.5 | ||||||||||||||||||||||||||||||
|
Consumer
|
12,506 | 2.9 | 10,887 | 2.6 | 10,896 | 2.8 | 12,091 | 3.3 | 13,253 | 4.0 | ||||||||||||||||||||||||||||||
| 428,147 | 100.0 | 412,210 | 100.0 | 385,321 | 100.0 | 366,384 | 100.0 | 329,399 | 100.0 | |||||||||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
| Deferred loan fees, net | 295 | 256 | 322 | 407 | 633 | |||||||||||||||||||||||||||||||||||
| Allowance for loan losses | 5,912 | 4,203 | 3,682 | 3,244 | 2,795 | |||||||||||||||||||||||||||||||||||
|
Total
net loans
|
421,940 | 407,751 | 381,317 | 362,733 | 325,971 | |||||||||||||||||||||||||||||||||||
|
(a)
|
Residential
real estate loans do not include mortgage loans sold to Fannie Mae and
serviced by ENB. These loans totaled $11,754,000 as of December
31, 2009, $11,058,000 as of December 31, 2008, $9,975,000 as of December
31, 2007, $9,358,000 as of December 31, 2006, and $5,412,000 as of
December 31, 2005.
|
The
composition of the loan portfolio has undergone minor changes in recent
years. The total of all categories of real estate loans comprises
nearly 80% of total net loans. Residential real estate is the largest
category of the loan portfolio, consisting of approximately 38% of total
loans. The residential real estate category remained relatively
unchanged from the end of 2008 to the end of 2009. This category
includes closed-end fixed rate residential real estate loans secured by 1-4
family residential properties, including first and junior liens, and floating
rate home equity loans. As of December 31, 2009, the residential real
estate category included $131.2 million of 1-4 family residential loans secured
by first liens, $21.7 million secured by junior liens, namely fixed rate home
equity loans, and $10.4 million of revolving home equity lines of
credit. This compares to $128.5 million of 1-4 family residential
loans secured by first liens, $27.9 million secured by junior liens, and $6.5
million of revolving home equity lines of credit as of December 31,
2008.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
The first
lien 1-4 family mortgages grew from $128.5 million on December 31, 2008, to
$131.2 million as of December 31, 2009, a 2.1% increase. These first
lien 1-4 family loans made up 80% of the total residential real estate total as
of December 31, 2009, and 78% as of December 31, 2008. 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 owner and non-owner-occupied
mortgages. The weaker economic conditions and continued weak housing
market adversely affected the non-owner occupied 1-4 family residential
mortgages, resulting in a decline in those mortgages. Meanwhile,
single family primary residence mortgages grew more than 15%, as more primary
residential mortgage customers sought to retain their mortgage at Ephrata
National Bank versus having it sold in the secondary market, or sold to the
secondary market with servicing remaining at Ephrata National
Bank. The net effect was a minimal increase in 1-4 family residential
loans secured by first liens.
Given
recent negative national events with regard to the mortgage industry and large
commercial banks, more consumers prefer that their mortgage be held by a local
financial institution. Even though the mortgage business in general
has slowed, the Corporation has seen new business from other financial
institutions where borrowers are refinancing adjustable rate instruments into
traditional fixed rate mortgages. Management believes that there may
be a slowdown in mortgage originations in 2010 as the housing market continues
to be weak and the amount of mortgages likely to be refinanced
declines. The Corporation generally only holds 10, 15, and 20-year
mortgages, and will sell any mortgage over 20 years. In the past, the
majority of the new mortgage requests have been for 30-year mortgages; however,
in 2009 with the decline in housing valuations and customers refinancing to
reduce monthly borrowing costs and total borrowings, more 10, 15, and 20-year
mortgage requests were made. As a result, the Corporation’s personal
residential mortgage portfolio experienced a more significant
increase.
As of
December 31, 2009, the remainder of the residential real estate loans consisted
of $21.3 million of fixed rate junior lien home equity loans, and $10.4 million
of variable rate home equity lines of credit (HELOC). This compares
to $27.9 million of fixed rate junior lien home equity loans, and $6.5 million
of HELOCs as of December 31, 2008. Therefore, combined, these two
types of home equity loans decreased from $34.4 million to $31.7 million, a
decline of 8.5%. The sharp increase in new HELOCs was not sufficient
to offset the more moderate decline in the larger fixed rate junior lien home
equity portfolio. With the decline in the Prime rate to 3.25%, which
had already occurred at the end of 2008, and fixed home equity rates between 6%
and 8%, customers shifted any new home equity borrowings to the HELOCs and
either paid off or continued to pay down their fixed rate home equity
loans. Even with Prime-based floors established at 4.00% for all new
HELOCs, there was still generally at least a 200 basis point differential
between the HELOC rate and fixed rate home equity loans, which continued to
motivate the customer to seek a new HELOC and pay off their fixed rate home
equity loan. In the current environment, most borrowers were looking
to consolidate and reduce their total debt position. Management
believes the trends experienced in 2009 will continue until the Prime rate
begins to increase.
Commercial
real estate loans declined slightly since December 31, 2008, while commercial
loans not secured by real estate grew $4.8 million, or 6.6%, during the year
from December 31, 2008, to December 31, 2009. Collectively, these two
categories of commercial loans grew at a slow 1.7% rate for the year, due to
slower local economic activity. While commercial loan activity has
declined nationally, the Corporation’s market area is very diverse and generally
has a healthy economic climate. However, commercial loans have grown
at a much slower pace than in past years. As of December 31, 2009,
commercial real estate loans accounted for 66.5% of total commercial loans, not
including construction loans. This compares to 68.1% as of December
31, 2008. Commercial loans not secured by real estate account for the
remainder. This generally includes unsecured lines of credit, truck,
equipment, and receivable and inventory loans. Management anticipates
that commercial loans not secured by real estate will continue to experience
slow to moderate growth in 2010, while commercial real estate loans may remain
stagnant. Declines in the value of commercial real estate, similar to
the declines in residential housing, have impacted the growth of these
loans. Any decline in the valuation of commercial real estate reduces
the commercial borrower’s ability to borrow against this real
estate. This, coupled with weaker economic conditions that have
diminished the business outlook for many of the Corporation’s commercial
customers, has resulted in less demand for this type of loan. 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,
but is based on the health of the borrower with other security interests on
accounts receivable, inventory, equipment, or through personal
guarantees. Businesses are also using more of their available credit
from both unsecured and real estate secured lines of credit as economic
conditions impacted their sales and cash flows.
A
significant portion of the Corporation’s recent commercial loan growth has been
generated in Prime-based variable loans. The Prime rate experienced
dramatic reductions in the fall of 2008, declining from 5.00% at the end of
September 2008, to 3.25% by mid-December 2008, where it has remained
since. As a result, the Prime rate has been well below standard
commercial fixed rates. This advantage caused an increase in
commercial loans not secured by real estate as commercial customers sought the
most advantageous funding for their business. Businesses also see the
advantage of converting their fixed rate loans to variable rate loans at these
historically low interest rates to reduce their
costs. This
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
occurs
generally with the commercial loans secured by real estate as borrowers look to
convert their fixed rate commercial mortgage to a commercial line of credit
secured by real estate. Therefore, the Corporation is seeing some shifting of
fixed to variable products within the business and commercial segment of the
loan portfolio. When the Prime rate moves substantially off of the
current lows, it is likely that businesses will refinance from variable rate
loans to fixed rate loans to avoid higher variable rates.
Real
estate construction is a fairly small element of the Corporation’s total loan
portfolio, accounting for 5.5% of total loans as of December 31, 2009, and 3.3%
of total loans as of December 31, 2008. The real estate construction
portfolio did grow materially in 2009, increasing nearly $10 million as a number
of construction projects moved ahead after being held up in
2008. Only a small amount of this increase was due to residential
housing construction. The majority of the increase was due to
construction projects on a number of farms and small
businesses. While it is likely this area will experience growth in
2010, especially if economic conditions improve, management does not expect the
same level of activity as was experienced in 2009.
As a
result of the subprime and real estate crisis, which began to severely impact
the economy in 2008, and the resulting credit and financial crisis that
continued throughout 2009, declines in the valuation of real estate became a
point of concern. During late 2008 and early 2009, the area of
commercial real estate (CRE) began to receive significant attention in terms of
increased risk for banks following the significant declines that had occurred in
residential real estate valuations. Regulators were warning banks of
concentrations in CRE loans and the increased risk that they could potentially
bring to the financial institution. These commercial borrowers are
viewed as having more risk due to the specific types of commercial loans that
fall into this category and their reliance on the value of the real estate that
is used as collateral.
The
Corporation’s CRE profile has not changed materially from December 31, 2008, to
December 31, 2009, and the Corporation remains well below the CRE guidelines of
100% of total risk-based capital for construction and development loans, and
300% of risk-based capital for total CRE loans. There are nine
categories of CRE loans by definition. The Corporation does not have
any real estate investment trust (REIT) loans, which are the ninth category. The
following chart details the Corporation’s CRE loans as of December 31,
2009.
CRE
SUMMARY BY CATEGORY
(DOLLARS
IN THOUSANDS)
|
2009
|
||||||||||
|
Risk-
|
||||||||||
|
Loan
|
Based
|
|||||||||
|
CRE
|
Amount
|
Capital
|
||||||||
|
Type
|
CRE Description
|
$ | % | |||||||
| 0.01 |
Land
Development Loans
|
6,850 | 9.0 | % | ||||||
| 0.02 |
1-4
Family Residential Construction Loans
|
1,949 | 2.5 | % | ||||||
| 0.03 |
Commercial
Construction Loans
|
10,639 | 14.1 | % | ||||||
| 0.04 |
Other
Land Loans
|
2,785 | 3.7 | % | ||||||
| 0.05 |
Multi-Family
Property
|
11,545 | 15.3 | % | ||||||
| 0.06 |
Nonfarm,
Nonresidential Property
|
25,413 | 33.6 | % | ||||||
| 0.07 |
Nonfarm,
Nonresidential Property-Temp
|
1,256 | 1.7 | % | ||||||
| 0.08 |
Unsecured
Loans to Developers
|
1,300 | 1.7 | % | ||||||
| 61,737 | 81.6 | % | ||||||||
|
Corporation’s
Risk-Based Capital
|
75,679 | |||||||||
Management
does not believe the Corporation’s CRE profile will change significantly during
2010. Management is closely monitoring all CRE loan types to be able
to determine any negative trends that may occur. Management does
internally monitor the delinquencies and risk ratings of these loans on a
monthly basis and has established internal policy guidelines to restrict the
amount of each of the above eight types of CRE loans as a percentage of
capital. As of December 31, 2009, the Corporation was within internal
guidelines for all of the above CRE loan types.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Consumer
loans also represent a small portion of the Corporation’s loan portfolio,
accounting for 2.9% of total loans as of December 31, 2009, and 2.6% as of
December 31, 2008. This area did grow by $1.6 million, or 14.9%, from
December 31, 2008, to December 31, 2009, as consumers ran out of available real
estate secured credit and sought either additional unsecured credit or other
non-real estate secured credit like vehicle loans, for any new financing
needs. This broke a long and consistent trend of consumer loans
declining as a percentage of total loans. In years leading up to 2009,
homeowners have turned to equity in their homes to finance cars and education
rather than traditional consumer loans for those
expenditures. Additionally, many specialized lenders have emerged for
consumer needs that compete with financial institutions. However, in
the current economic environment with reduced housing values, many borrowers no
longer have available equity in their home from which to borrow. This
has reduced the demand for fixed home equity loans and increased the need for
unsecured credit. Additionally, due to current liquidity conditions,
specialized lenders began pulling back on the availability of credit and more
favorable credit terms. The underwriting standards of major financing
and credit card companies began to strengthen after years of lower credit
standards. This led consumers to seek unsecured credit away from
national finance companies and back to their bank of
choice. Management has seen the need for additional unsecured credit
increase. Management anticipates that the need for unsecured credit
may continue during this current credit crisis and economic downturn, as many
consumers need to access all available credit. Management would
expect that when economic and credit conditions improve, including housing
valuations, the Corporation’s borrowers will return to the past trend of relying
more heavily on home equity loans versus unsecured or non-real estate secured
loans.
Management
does not anticipate that the loan portfolio composition will change materially
in 2010.
The
following tables show the maturities for the loan portfolio by time frame for
the major categories, and also the loans, which are floating or fixed, maturing
after one year.
LOAN
MATURITIES
(DOLLARS
IN THOUSANDS)
|
Due
After
|
||||||||||||||||
|
One
Year
|
||||||||||||||||
|
Due
in One
|
Through
|
Due
After
|
||||||||||||||
|
Year
or Less
|
Five
Years
|
Five
Years
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Real
estate
|
||||||||||||||||
|
Residential
|
9,020 | 10,812 | 143,793 | 163,625 | ||||||||||||
|
Commercial
|
16,574 | 11,800 | 123,734 | 152,108 | ||||||||||||
|
Construction
|
9,787 | 735 | 12,860 | 23,382 | ||||||||||||
|
Commercial
|
27,308 | 18,509 | 30,709 | 76,526 | ||||||||||||
|
Consumer
|
2,397 | 9,922 | 187 | 12,506 | ||||||||||||
|
Total
amount due
|
65,086 | 51,778 | 311,283 | 428,147 | ||||||||||||
FIXED AND
FLOATING LOANS DUE AFTER ONE YEAR
(DOLLARS
IN THOUSANDS)
|
Floating
or
|
||||||||
|
Fixed
Rates
|
Adjustable Rates
|
|||||||
|
$
|
$
|
|||||||
|
Real
estate
|
||||||||
|
Residential
|
140,126 | 14,479 | ||||||
|
Commercial
|
11,854 | 123,680 | ||||||
|
Construction
|
2,076 | 11,519 | ||||||
|
Commercial
|
43,625 | 5,593 | ||||||
|
Consumer
|
10,102 | 7 | ||||||
|
Total
amount due
|
207,783 | 155,278 | ||||||
The
majority of the Corporation’s fixed rate loans have a maturity date longer than
five years. The primary reason for the longevity of the portfolio is
the high percentage of real estate loans, which typically have maturities of 10,
15, or 20
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
years. Fixed
rate commercial mortgages have maturities that range from 3 years to 25
years. The most popular commercial mortgage term is a 20-year
amortization with a 5-year reset period. In this case, the loan
matures in twenty years but after five years either the loan rate resets to the
Prime rate plus 0.75%, or a fixed rate for another reset period. The
original maturity date does not change. Customers will generally opt
for another fixed reset period within the original term.
Out of
all the loans due after one year, 57.2% are fixed rate loans as of December 31,
2009. This is very consistent with the prior year end when 57.6% of
the loans due after one year were fixed rate. These loans will not
reprice to a higher or lower interest rate unless they mature or are refinanced
by the borrower. Floating or adjustable rate loans reflect different
types of repricing. Approximately 55% of the $155.3 million of
floating or adjustable loans due after one year are true floating
loans. These loans are tied to the Prime rate and will reprice when
the Prime rate changes. The vast majority of these Prime-based loans
did not have floors in place as of December 31, 2009. While elements
of the Corporation’s business and commercial Prime-based loans have been priced
at levels above the Prime rate due to credit standing, an actual Prime floor on
new loans was not instituted until the beginning of 2010. Prime
floors of 4.00% were instituted on the Corporation’s home equity loans at the
end of 2008. The other 45% of the Corporation’s floating or
adjustable loans due after one year are adjustable in nature and will reprice at
a predetermined time in the amortization of the loan. These loans are
mostly real estate commercial loans.
As of
December 31, 2008, 47% of the $150.1 million of floating or adjustable loans due
after one year were true floating rate loans, with the other 53% being
adjustable in nature. The increase in the true floating rate loan
percentage from 47% as of December 31, 2008, to 55% as of December 31, 2009, was
a function of more borrowers converting fixed rate loans to variable rate loans,
or not negotiating to fix their rate when the opportunity
arose. Because of the historically low Prime rate there have been
instances where the Corporation’s commercial borrowers have not acted to reset
their fixed rate after the end of their fixed rate period, resulting in the loan
converting to a variable rate loan with the rate of prime plus 0.75% until the
end of the amortization period. This trend is expected to continue as
long as Prime-based rates are significantly below fixed commercial loan
rates.
For more
details regarding how the length of the loan portfolio and its repricing affects
interest rate risk, please see Item 7A. Quantitative and Qualitative Disclosure
about Market Risk.
Non-Performing
Assets
Non-performing
assets include:
|
|
·
|
Non-accrual
loans
|
|
|
·
|
Loans
past due 90 days or more and still
accruing
|
|
|
·
|
Troubled
debt restructurings
|
|
|
·
|
Other
real estate owned
|
NON-PERFORMING
ASSETS
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Non-accrual
loans
|
6,076 | 2,889 | 425 | 548 | 544 | |||||||||||||||
|
Loans
past due 90 days or more and still accruing
|
742 | 531 | 498 | 342 | 53 | |||||||||||||||
|
Troubled
debt restructurings
|
1,540 | - | - | - | - | |||||||||||||||
|
Total
non-performing loans
|
8,358 | 3,420 | 923 | 890 | 597 | |||||||||||||||
|
Other
real estate owned
|
520 | 520 | 675 | 698 | - | |||||||||||||||
|
Total
non-performing assets
|
8,878 | 3,940 | 1,598 | 1,588 | 597 | |||||||||||||||
|
Non-performing
assets to net loans
|
2.10 | % | 0.97 | % | 0.42 | % | 0.44 | % | 0.18 | % | ||||||||||
Non-performing
assets increased $4.9 million from December 31, 2008, to December 31,
2009. This increase was a result of a number of factors, all related
to declining economic conditions, which have affected businesses and consumers
alike. During 2009, management saw the cumulative effect of the
second year of severe recessionary conditions. The impact to the
Corporation’s borrowers accelerated throughout 2009 as business and consumers
most
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
impacted
by the economic conditions exhausted available secondary sources of
liquidity. Several businesses that were able to make it through 2008
were not able to sustain operations throughout 2009 with the second or third
year of losses.
The
Corporation’s total non-accrual loans increased $3.2 million from December 31,
2008, to December 31, 2009. This increase was a result of the
addition of a number of new non-accrual loans, charge-offs of several
non-accrual loans that existed at the end of 2008, and resolution of an
additional loan.
As of
December 31, 2009, there were nine loans totaling $4.2 million on non-accrual
that were not on non-accrual as of December 31, 2008. These nine
loans consisted of four loans to two borrowers in the trucking industry totaling
$3.1 million, two loans totaling $520,000 to a borrower in the
advertising/production industry, $420,000 to a real estate developer, and two
loans totaling $206,000 to a food trade borrower. Management has seen
weakness in the trucking industry as a result of the weaker
economy. Residential builders and developers have also been
significantly affected by the slowdown and devaluation in
housing. These industries, along with the dairy industry in
agriculture, seem to be the most affected by the prolonged economic weakness;
however the number of the Corporation’s borrowers that are severely delinquent
or non-performing in these industries remains very small. The
Corporation’s diverse customer base, with many small businesses and industry
types represented, has helped to avoid large concentrations in these
industries. See Note Q for further discussion on concentrations of
credit risk. The severe economic conditions naturally will impact
nearly all industries to some extent; however, the impact can vary
greatly. Some businesses simply are not as successful in negotiating
more difficult times, or may be impacted by non-economic matters like succession
planning and poor business practice. Based on present conditions,
management does not anticipate any significant new trends or the emergence of
more severe trends beyond those already discussed.
The
increase caused by nine loans being added to non-accrual in 2009 was partially
offset by approximately $900,000 of charge-offs and $215,000 of principal
payments received on non-accrual loans during 2009. Eight smaller
business non-accrual loans totaling $174,000 on December 31, 2008, were charged
off during 2009. In addition, the Corporation took a partial charge
off of $606,000 on a larger commercial borrower that had three non-accrual loans
as of December 31, 2008. This reduced the total non-accrual loans to
this commercial borrower; however the three loans still remained on non-accrual
as of December 31, 2009. One non-accrual loan to a builder was
resolved during 2009 resulting in a $95,000 reduction in non-accrual balances,
which is included in the $215,000 of principal payments above.
Loans
past due 90 days or more and still accruing increased by $211,000 from December
31, 2008, to December 31, 2009, primarily as a result of the addition of one
home equity loan totaling $463,000 in the third quarter of 2009. The
Corporation received payments on other loans past due 90 days or more and still
accruing that existed as of December 31, 2008, with several being paid
off. Outside of the $463,000 home equity loan, the other loans past
due 90 days or more and still accruing as of December 31, 2009, consisted of a
$248,000 residential mortgage, a $21,000 small business loan, and three consumer
loans totaling $10,000.
The
Corporation’s troubled debt restructurings increased by $1,540,000 from December
31, 2008, to December 31, 2009, due to the addition of three agricultural loans
classified as troubled debt restructurings during 2009. All of these
loans involved farmers, including two loans to dairy farmers totaling $1.2
million. The dairy industry appears to be the one agricultural area
that is under intense pricing pressure, which is constraining revenues while
costs continue to rise. The other troubled debt restructuring involved a farm
loan where the principal farmer died and the family is now selling the
farm. In all cases, the loans were classified as troubled debt
restructurings because principal payments were deferred for a certain period of
time, with the borrower still making interest payments. In the later
case, it is anticipated that sufficient assets will be liquidated by the family
to pay off the loan in 2010. The two troubled debt restructurings
involving dairy farmers were primarily the result of herd health issues that
reduced revenue, leaving the farmer with the inability to service the debt at
the current levels. In both of these cases, management believes the reduction in
revenue is temporary, and management is working with the borrower to resume a
plan of normal principal payments.
As of
December 31, 2009, other real estate owned (OREO) is shown at a recorded fair
market value, net of anticipated selling costs, of $520,000. The
balance consists of one manufacturing property that has been in OREO since
December 2006. This property has been under an agreement of sale
since late 2007, initially to one party, and then to a second party in
2008. In the second quarter of 2008, a new agreement of sale was
signed for the recorded value of the property. Subsequently, this
agreement has been extended several times as a result of delays in addressing
all environmental concerns of the property. To complete the sale of
the property, the Corporation must meet all conditions of the agreement, which
include satisfying all federal and state environmental
requirements. The agreement allows for a due-diligence period to
ensure all contingencies of the agreement have been met, prior to moving to
settlement. Subsequent to December 31, 2009, and through the filing
date of this report, the Corporation and the interested party have
continued
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
the
process of addressing the conditions of the agreement. Management
anticipates that resolution of all contingencies would occur prior to the end of
2010.
Management
is monitoring total delinquency trends closely in light of the current weak
economic conditions. Total delinquencies include loans 30 to 59 days
past due, loans 60-89 days past due, loans 90 days or more past due
and still accruing, and non-accrual loans. Total delinquencies
remained very stable during the first half of 2009, going from 1.33% as of
December 31, 2008, to 1.23% as of March 31, 2009, to 1.25% as of June 30,
2009. After June 30, 2009, delinquencies began to rise moderately to
1.53% as of September 30, 2009, and 1.83% as of December 31,
2009. Management does believe that this trend of higher delinquencies
is beginning to moderate, as delinquency levels in early 2010 have decreased
slightly. However, with a prolonged period of economic weakness, it
is possible that more businesses and consumers will be impacted and could fall
behind on their payments. Within the categories of delinquencies,
management has seen little change in the percentages, other than the non-accrual
category which increased from 0.70% of total loans as of December 31, 2008, to
1.42% of total loans as of December 31, 2009. The 60 to 89 days past
due percentage has actually seen a decline from 0.12% as of December 31, 2008,
to 0.03% as of December 31, 2009, while the 90 days or more category has
increased slightly from 0.13% as of December 31, 2008, to 0.18% as of December
31, 2009. All of the Corporation’s delinquency percentages are
significantly below the Corporation’s national peer group. At this
time, with economic conditions weak and uncertain, management believes that the
potential for significant losses related to non-performing loans has moderated,
but is still increasing.
Subsequent
to December 31, 2009, but prior to the filing of this report, management took
possession of the property securing a home equity loan that was classified as
past due 90 days or more and still accruing, and classified it as
OREO. As such, the $463,000 loan was removed from the loans past due
90 days or more category and was reclassified as a Bank asset under
OREO. The total amount of non-performing assets did not materially
change as a result of this transaction. In February 2010, management
set up the property as OREO at fair market value less anticipated selling costs,
which resulted in a $35,000 charge-off and a $428,000 OREO asset
valuation. The fair value was determined after obtaining appraisals
and broker pricing opinions and determining at what price the Corporation would
list the property, and then discounting this amount down to an expected sales
price. The expected sales price is further reduced by projected
selling costs before arriving at the basis for which the OREO property is
established.
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 U.S. generally
accepted accounting principles. The calculation includes estimates
and is based upon losses inherent in the loan portfolio. The
calculation, and detailed analysis supporting it, emphasizes delinquent and
non-performing loans. The allowance calculation includes specific
provisions for non-performing loans and general allocations to cover anticipated
losses on all loan types based on historical losses. 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 three
events:
|
|
·
|
Charge
off of loans considered not
recoverable
|
|
|
·
|
Recovery
of loans previously charged off
|
|
|
·
|
Provision
for loan losses
|
Strong
credit and collateral policies have been instrumental in producing a favorable
history of loan losses. In recent months, the Corporation has
experienced an increase in the number of charged-off loans and a greater number
of classified loans for which a loss is possible. For these reasons,
the Corporation has experienced higher than normal levels of both the allowance
for loan losses and the provision for loan losses. The Allowance for
Loan Losses table below shows the activity in the allowance for loan losses for
each of the past five years. 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.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
ALLOWANCE
FOR LOAN LOSSES
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Balance
at January 1,
|
4,203 | 3,682 | 3,244 | 2,795 | 2,764 | |||||||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Real
estate
|
- | - | - | 419 | - | |||||||||||||||
|
Commercial
and industrial
|
1,126 | 150 | 925 | 372 | 79 | |||||||||||||||
|
Consumer
|
134 | 91 | 153 | 111 | 171 | |||||||||||||||
|
Total
charge-offs
|
1,260 | 241 | 1,078 | 902 | 250 | |||||||||||||||
|
Recoveries
of loans previously charged off:
|
||||||||||||||||||||
|
Real
estate
|
- | - | - | - | - | |||||||||||||||
|
Commercial
and industrial
|
31 | 69 | 19 | 11 | 13 | |||||||||||||||
|
Consumer
|
18 | 24 | 51 | 64 | 47 | |||||||||||||||
|
Total
recoveries
|
49 | 93 | 70 | 75 | 60 | |||||||||||||||
|
Net
loans charged off
|
1,211 | 148 | 1,008 | 827 | 190 | |||||||||||||||
|
Provision
charged to operating expense
|
2,920 | 669 | 1,446 | 1,276 | 390 | |||||||||||||||
|
Allowance
reclassified to other liabilities
|
||||||||||||||||||||
|
for
off-balance sheet commitments
|
- | - | - | - | (169 | ) | ||||||||||||||
|
Balance
at December 31,
|
5,912 | 4,203 | 3,682 | 3,244 | 2,795 | |||||||||||||||
|
Net
charge-offs as a %
|
||||||||||||||||||||
|
of
average total loans outstanding
|
0.29 | 0.04 | 0.27 | 0.24 | 0.06 | |||||||||||||||
|
Allowance
at year end as a % of total loans
|
1.38 | 1.02 | 0.96 | 0.89 | 0.85 | |||||||||||||||
Charge-offs
for the year ended December 31, 2009, were $1,260,000, compared to $241,000 for
the same period in 2008. The charge-offs in 2008 represent a more
typical level of consumer and small business loan charge-offs that would result
from management charging off unsecured debt over 90 days delinquent with little
likelihood of recovery. The significantly higher charge-offs in 2009
resulted from partial charge-offs totaling $786,000 on two commercial loans in
the fourth quarter of 2009.
During
2009 the Corporation provided $2,920,000 to the allowance for loan losses,
compared to $669,000 during 2008. The provision is used to increase
the allowance for loan losses to a level considered adequate to provide for
losses inherent in the loan portfolio. With the level of delinquent
and special mention loans increasing throughout 2009, management’s quarterly
calculation of the allowance for loan losses was showing the need to add more
into the provision to bring the allowance to higher levels. While the
Corporation’s classified loans (substandard and doubtful rated loans) did not
increase throughout 2009, the level of special mention loans did increase
significantly. Special mention is the first rating that indicates the
loan is receiving special attention. Further declines in the loan’s
performance would result in a substandard rating. If conditions
deteriorated further, with full repayment no longer expected, the loan would be
rated doubtful. The sharp increase in loans with a special mention
rating occurred in the business loan and business mortgage areas of the
portfolio, indicating that more businesses were facing a decline in their
financial performance. The sharp increase in special mention loans
did have a direct impact to the quarterly allowance for loan loss calculation
and was responsible for an additional $1,350,000 of provision to the allowance
in 2009 to sufficiently provide for possible loan losses inherent in these
loans. Therefore, approximately two-thirds of the increase in the
provision was caused by the need to increase the allowance to the calculated
levels, with the remainder necessary to offset the higher charge-offs, which
primarily occurred in the fourth quarter of 2009. Management
anticipates that the percentage of delinquencies and the total amount of
classified loans will remain high, but stabilize during
2010. However, it is likely that management will continue to increase
the allowance as a percentage of loans in an effort to ensure a sufficient
allowance is maintained. Even though the economy is showing signs of
improvement, weak economic conditions will likely continue throughout
2010.
The
allowance as a percentage of total loans represents the portion of the total
loan portfolio for which an allowance has been provided. For the
five-year period from 2005 through 2009, the Corporation maintained an allowance
as a percentage of loans in a narrow range between 0.85% and
1.38%. In 2009 alone, the percentage increased from 1.02% at the
beginning of the year, to 1.38% as of December 31, 2009. The
composition of the Corporation’s loan portfolio has
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
not
changed materially from 2008 to 2009; however, management views the overall risk
profile of the portfolio to be higher in 2009 as a result of more loans being
classified as substandard and special mention. These classifications
require larger provision amounts due to a higher potential risk of
loss. Management will continue to increase the allowance as a
percentage of total loans as long as the quarterly calculation of the allowance
for loan losses demonstrates the need to allocate additional amounts based on
estimated credit losses inherent in the current portfolio, utilizing historical
and projected credit losses and levels of qualitative and quantitative risks
that are appropriate based on the current credit environment.
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. The Corporation has historically experienced very
low net charge-off percentages due to conservative credit
practices. The 0.29% shown for 2009 is similar to charge-off rates
experienced in 2006 and 2007.
The
following table provides the allocation of the Corporation’s allowance for loan
losses by major loan classifications. The percentage of loans
indicates the percentage of the loan portfolio represented by the indicated loan
type. The reserve associated with commercial and industrial loans
increased substantially from December 31, 2008, to December 31, 2009, coinciding
with the increase in commercial and industrial loans as a percentage of the
total loan portfolio and the increased risk in the commercial loan
portfolio. Commercial and industrial loans consist of loans to
businesses that are not secured by real estate. On December 31, 2009,
66.0% of the allowance was allocated to commercial and industrial
loans. The increase in the allowance to these loans occurred
primarily as a result of current economic conditions in the Corporation’s market
area that have impacted certain segments of the commercial
customers. Since commercial loans are usually larger in dollar
amount, the potential for loss from these loans is greater.
This
allocation may change as the mix of delinquent and substandard classified loans
within the portfolio changes. In total, the allowance for loan losses
is maintained at a level considered by management to be adequate to provide for
losses that can be reasonably anticipated.
ALLOCATION
OF RESERVE
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
%
of
|
%
of
|
%
of
|
%
of
|
%
of
|
||||||||||||||||||||||||||||||||||||
|
$
|
Loans
|
$
|
Loans
|
$
|
Loans
|
$
|
Loans
|
$
|
Loans
|
|||||||||||||||||||||||||||||||
|
Real
estate
|
1,917 | 79.2 | 2,293 | 80.0 | 1,558 | 77.7 | 1,654 | 77.5 | 1,327 | 76.5 | ||||||||||||||||||||||||||||||
|
Commercial
and industial
|
3,902 | 17.9 | 1,727 | 17.4 | 1,768 | 19.5 | 1,291 | 19.2 | 968 | 19.5 | ||||||||||||||||||||||||||||||
|
Consumer
|
83 | 2.9 | 155 | 2.6 | 166 | 2.8 | 299 | 3.3 | 236 | 4.0 | ||||||||||||||||||||||||||||||
|
Unallocated
|
10 | - | 28 | - | 190 | - | - | - | 264 | - | ||||||||||||||||||||||||||||||
|
Total
allowance for loan losses
|
5,912 | 100.0 | 4,203 | 100.0 | 3,682 | 100.0 | 3,244 | 100.0 | 2,795 | 100.0 | ||||||||||||||||||||||||||||||
Premises
and Equipment
Premises
and equipment, net of accumulated depreciation, increased by $945,000, or 4.7%,
to $20,858,000 on December 31, 2009, from $19,913,000 as of December 31,
2008. In 2008, $1,983,000 of new investments were made in premises
and equipment while the Corporation recorded $1,038,000 of accumulated
depreciation on existing assets. During 2009, the Denver branch
office was renovated and $1.4 million was in construction in process related to
this project as of December 31, 2009. The project was completed in
February 2010, with all assets being placed in service as of that date. For
further information on fixed assets please see Note D to the Consolidated
Financial Statements, and for construction commitments see the off-balance sheet
arrangements section.
Bank-Owned
Life Insurance (BOLI)
The
Corporation owned life insurance with a total recorded cash surrender value
(CSV) of $15,248,000 on December 31, 2009, compared to $14,512,000 on December
31, 2008. The Corporation holds two distinct BOLI
programs. The first, with a CSV of $3,848,000, was the result of
insurance policies taken out on directors of the Corporation electing to
participate in a directors’ deferred compensation plan. The program
was designed to use the insurance policies to fund future annuity payments as
part of a directors’ deferred compensation plan that permitted deferral of Board
pay from 1979 through 1999. The plan was closed to entry in 1999 when
directors were no longer provided with the option of deferring their Board
pay. The Corporation pays the required premiums for the policies and
is the owner and beneficiary of the policies. The life insurance
policies in the plan generally have annual premiums; however, the premium
payments
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
are not
required after the first five years. The Corporation continues to
make the premium payments, which cover the cost of the insurance and generally
adds to the cash surrender value of the policy.
The
second BOLI plan was taken out on a select group of the Corporation’s officers,
with the additional income generated used to offset rising benefit
costs. In May 2006, the first $5 million BOLI investment was made on
these officers. In 2007, a second $5 million BOLI investment was made
that covered officers who were not included in the initial BOLI investment and
included additional investments on some officers already
covered. During 2009, the CSV for this plan increased from
$10,939,000 as of December 31, 2008, to $11,400,000 as of December 31, 2009, a
4.2% increase. The increase resulted solely from the returns on the
insurance policy investment. The Corporation purchased whole life
policies for this BOLI plan and is the owner and beneficiary of the
policies. Management is looking at the possibility of purchasing
additional BOLI in the future to cover any officers hired since the last
investment in 2007.
Deposits
The
Corporation’s total ending deposits increased $58.8 million, or 11.5%, from
$511.1 million on December 31, 2008, to $569.9 million on December 31,
2009. Customer deposits are the Corporation’s primary source of
funding for loans and investments. In 2009, economic concerns, the
credit crisis, and poor performance of the stock market and other types of
investments led customers back to banks as safe places to invest money, in spite
of low interest rates. Despite significant growth of new deposits,
the actual mix of deposit categories has remained relatively
stable.
The
Deposits by Major Classification table, shown below, provides the average
balances and rates paid on each deposit category for each of the past three
years. The average 2009 balance carried on all deposits was $546.4
million, compared to $497.5 million for 2008. This represents an
increase of 9.8% on average deposit balances. The increase in average
deposit balances from 2007 to 2008 was 6.3%. Average balances provide
a more accurate picture of growth in deposits because deposit balances can vary
throughout the year. In addition, the interest paid is based on
average deposit balances carried during the year calculated on a daily
basis.
DEPOSITS
BY MAJOR CLASSIFICATION
(DOLLARS
IN THOUSANDS)
Average
balances and average rates paid on deposits by major category are summarized as
follows:
|
December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||||||||
|
Non-interest
bearing demand deposits
|
112,706 | - | 106,029 | - | 98,228 | - | ||||||||||||||||||
|
NOW
accounts
|
53,111 | 0.58 | 60,098 | 1.23 | 54,960 | 1.62 | ||||||||||||||||||
|
Money
market deposit accounts
|
43,864 | 0.70 | 39,516 | 1.25 | 41,001 | 2.06 | ||||||||||||||||||
|
Savings
deposits
|
80,649 | 0.20 | 72,049 | 0.42 | 68,956 | 0.55 | ||||||||||||||||||
|
Time
deposits
|
256,062 | 3.19 | 219,769 | 4.07 | 204,947 | 4.38 | ||||||||||||||||||
|
Total
deposits
|
546,392 | 497,461 | 468,092 | |||||||||||||||||||||
The
growth and mix of deposits is often driven by several factors
including:
|
|
·
|
Convenience
and service provided
|
|
|
·
|
Fees
|
|
|
·
|
Permanence
of the institution
|
|
|
·
|
Possible
risks associated with other investment
opportunities
|
|
|
·
|
Current
rates paid on deposits compared to competitor
rates
|
The
Corporation has been a stable presence in the local area and offers convenient
locations, low service fees, and competitive 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, which has provided stability to the
deposit base. In 2009, management began to see a new trend develop
that resulted in deposit inflows due to financial concerns regarding the health
of other competing financial institutions, as opposed to merger-related
activity. The Corporation continues to generally benefit from the
customers’ desire to conduct business with a smaller financial institution
versus a larger institution. Larger financial institutions have been
in the forefront in terms of negative publicity related to the governmental
actions commonly referred to as the “bailout”of the banking
industry. The Corporation chose not to take governmental
funds
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
issued as
part of the Troubled Asset Relief Program (TARP). This was a
beneficial decision in that some customers viewed the recipients of TARP funds
to be in weaker financial condition. While this was not always the
case, the public’s perception determines where they will direct their
funds. In addition to these trends, the Corporation’s deposits
benefited from the eighth full service branch location opened in September
2008.
The
average balance of the Corporation’s core deposits, including non-interest
bearing demand deposits, NOW accounts, MMDA accounts, and savings accounts, grew
$12.6 million, or 4.6%, since December 31, 2008. Out of these core
deposit categories, all experienced growth except the NOW
accounts. Several converging factors are assisting in the increase in
core deposits. Interest rates are at historic lows, which results in
less motivation for customers to shop interest rates because the differential
between high and low rates is compressed. Customers are trying to
build more liquid funds to meet cash flow needs in a slowing economy, as a
matter of prudence. The safety of FDIC-insured funds and immediate,
or nearly immediate, funds in the current environment appear to be more of a
concern to customers than interest rates. Additionally, the concern
over the stability of some larger financial institutions has led customers
seeking security to community banks with high levels of capital and
long-standing reputations.
Time
deposits are typically a more rate-sensitive product making them a less reliable
source of funding. Time deposits fluctuate as consumers search for
the best rates in the market, with less allegiance to any particular financial
institution. Due to current adequate funding levels from all sources, the
Corporation’s recent time deposit strategy has been to offer rates that meet or
slightly exceed the average rates offered by the local competing
banks. Time deposit growth was aided in 2009 by the very volatile and
weak stock market. This condition continues to prevail at the time of
the writing of this report. Time deposits are a safe investment with
FDIC coverage insuring no loss of principal below certain
levels. Prior to October 3, 2008, FDIC coverage was $100,000 on
non-IRA time deposits, and $250,000 on IRA time deposits. Effective
October 3, 2008, the FDIC insurance increased to $250,000 for all deposit
accounts with the signing of the Emergency Economic Stabilization Act of
2008. The higher FDIC insurance limits benefited the Corporation due
to its strong level of capital and consistent earnings. In this
environment, the Corporation experienced time deposit growth due to weak
earnings and/or capital levels of competing national, regional, and local
community banks. Often as customers placed more and more time
deposits in financial institutions, due to the declining stock market, they did
not want to exceed the FDIC insurance limits and therefore the Corporation
gained many new time deposit customers. The culmination of all of
these conditions contributed to the $36.3 million, or 16.5%, increase in the
average balance of time deposits between December 31, 2008, and December 31,
2009.
The
majority of the time deposit growth achieved in 2009 was in terms less than 18
months, which have lower rates than longer term time deposits, indicating that
customers are not looking for long-term investments with the best return, but
shorter safe investments. Management expects that, when equity
investments begin to rebound in performance, there will be a reduction in the
Corporation’s time deposit balances.
As of
December 31, 2009, time deposits over $100,000 made up 27.9% of the total time
deposits. This compares to 24.3% on December 31,
2008. Since time deposits over $100,000 are made up of relatively few
customers with large dollar accounts, management monitors these accounts closely
due to the potential for these deposits to rapidly increase or
decrease. Management believes the growth in time deposits over
$100,000 was due primarily to an increase in the FDIC insurance levels and to a
lesser degree the weak equity markets. The following table provides
the total amount of time deposits of $100,000 or more for the past three years
by maturity distribution.
MATURITY
OF TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Three
months or less
|
14,010 | 14,545 | 5,281 | |||||||||
|
Over
three months through six months
|
11,135 | 2,998 | 3,756 | |||||||||
|
Over
six months through twelve months
|
17,954 | 17,905 | 13,337 | |||||||||
|
Over
twelve months
|
29,908 | 20,583 | 16,759 | |||||||||
|
Total
|
73,007 | 56,031 | 39,133 | |||||||||
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
In order
to meet future funding obligations, it is necessary to review the timing of
maturity for large depositors like the time deposits of $100,000 or
more. The Corporation monitors all large depositors to ensure that
there is a steady flow of maturities. As of December 31, 2009, the
Corporation had a typical laddering of large time deposits. For more
information on liquidity management, please see Item 7A. Quantitative and
Qualitative Disclosures about Market Risk. Additionally, for more
information on the maturity of time deposits, see Note F to the Consolidated
Financial Statements.
Borrowings
Total
borrowings were $82.5 million and $103.8 million as of December 31, 2009, and
2008, respectively. The Corporation was purchasing no short-term
funds as of December 31, 2009, and $11.8 million of short-term funds at the end
of 2008. 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.
Long-term
borrowings decreased $9.5 million, or 10.3%, from $92.0 million on December 31,
2008, to $82.5 million on December 31, 2009. The Corporation uses two
main sources for long-term borrowings: Federal Home Loan Bank (FHLB)
advances and repurchase agreements through brokers or correspondent
banks. Both of these types of borrowings are used as a secondary
source of funding and to mitigate interest rate risk. Management will
continue to analyze and compare the costs and benefits of borrowing versus
obtaining funding from deposits.
Total
FHLB borrowings were $52.5 million as of December 31, 2009, compared to $67.0
million as of December 31, 2008. The FHLB borrowings decrease related
to the maturity of several FHLB loans in 2009 that were not replaced with
additional borrowings. Several loans that did mature were replaced with new
loans, reducing the rates paid on the borrowings. The borrowings with
FHLB are primarily fixed-rate loans. The Corporation occasionally
uses convertible select loans that give advantageous pricing compared to
fixed-rate loans; however, they generally have additional risk due to a call
feature being included on the loan. Management compares the length of
the first call of these borrowings to the normal length of time
deposits. Often, a convertible select borrowing from FHLB can provide
a longer period of rate protection than the term of some of the Corporation’s
typical time deposit promotions. The call feature may be based on a
time requirement or a specific rate requirement. As of December 31,
2009, the Corporation held $20.0 million of convertible select loans, the same
level as December 31, 2008.
As of
December 31, 2009, the Corporation held $30.0 million of repurchase agreements,
the same amount as December 31, 2008. The repurchase agreements all
have some call feature, much like FHLB convertible select loans. All
of the callable repurchase agreements had an initial period where no call could
occur. However, $20 million of callable repurchase agreements are now
into their call period where calls could occur on a quarterly
basis. It is unlikely that any of the callable repurchase agreements
will be called in the near future, as their rates are well above market rates
for the same term. Two of the repurchase agreements existing prior to
2008, totaling $10 million are in a back-end fixed rate with a quarterly call,
whereas the two other repurchase agreements are at a floating rate that resets
quarterly with a call provision. The interest rates on callable
repurchase agreements are more favorable than non-callable long-term fixed
rates; therefore, these instruments assist the Corporation in increasing net
interest margin. In all cases, the rate advantage of callable
borrowing structures is weighed against any additional interest rate risk
exposure taken compared to non-callable borrowing
structures. Management views repurchase agreement transactions as a
diversification of funding outside of the FHLB, because principally the same
funding structures can be obtained from FHLB. Management monitors the
amount of convertible select loans that could be called in any one year to
ensure that the Corporation does not have a concentrated amount of call
risk.
To limit
the Corporation’s exposure and reliance on 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 the Corporation’s total assets. As
of December 31, 2009, the Corporation was within this policy guideline at 7.2%
of asset size with $52.5 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 December 31, 2009, total
borrowings from all sources amounted to 118.6% of the Corporation’s capital,
well under the policy guideline. The Corporation has maintained FHLB
borrowings and total borrowings within these guidelines throughout the
year.
The
Corporation continues to be well under the FHLB maximum borrowing capacity
(MBC), which is currently $207.9 million. The Corporation’s two
internal policy limits are far more restrictive than the FHLB MBC, which is
calculated and set quarterly by FHLB. Due to recent circumstances in
the financial and mortgage sectors, FHLB has been under regulatory and operating
performance pressures and has taken steps to preserve capital. As a
result, FHLB has suspended the dividend paid on stock owned by banks that have
FHLB borrowings. Additionally, FHLB will no longer repurchase excess
stock if a bank reduces its borrowings. For this reason, management
is committed to maintaining current borrowing levels, but not placing more
reliance on FHLB for additional borrowings.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Stockholders’
Equity
Federal
regulatory authorities require banks to meet minimum capital
levels. The Corporation maintains capital ratios well above those
minimum levels and higher than the peer group average. The
risk-weighted capital ratios are calculated by dividing capital by risk-weighted
assets. Regulatory guidelines determine risk-weighted assets by
assigning assets to one of four risk-weighted categories. The
calculation of Tier I Capital to Risk-Weighted Assets includes a reduction to
capital for the allowance for loan losses, thereby making this ratio lower than
the Total Capital to Risk-Weighted Assets ratio. See Notes I and N to
the Consolidated Financial Statements for additional information on capital
transactions.
The
following table reflects the Corporation’s capital ratios compared to the
regulatory capital requirements.
|
Regulatory
Capital Ratios
|
Capital Ratios
|
Regulatory Requirements
|
||||||||||||||||||
|
As
of
|
As
of
|
As
of
|
||||||||||||||||||
|
Dec.
31,
|
Dec.
31,
|
Dec.
31,
|
Adequately
|
Well
|
||||||||||||||||
|
2009
|
2008
|
2007
|
Capitalized
|
Capitalized
|
||||||||||||||||
|
Total
Capital to Risk-Weighted Assets
|
16.0 | % | 16.2 | % | 16.6 | % | 8.0 | % | 10.0 | % | ||||||||||
|
Tier
I Capital to Risk-Weighted Assets
|
14.8 | % | 15.2 | % | 15.8 | % | 4.0 | % | 6.0 | % | ||||||||||
|
Tier
I Capital to Average Assets
|
9.7 | % | 10.1 | % | 10.9 | % | 4.0 | % | 5.0 | % | ||||||||||
The high
level of capital maintained by the Corporation provides a greater degree of
financial security and acts as a non-interest bearing source of
funds. Conversely, a high level of capital, also referred to as
equity, makes it more difficult for the Corporation to improve return on average
equity, which is a benchmark of shareholder return. The Corporation’s
capital is affected by earnings, the payment of dividends, changes in
accumulated comprehensive income or loss, and equity transactions.
Total
dividends paid to shareholders during 2009, were $3,316,000, or $1.17 per share,
compared to $3,549,000, or $1.24 per share paid to shareholders during
2008. The Corporation uses current earnings and available retained
earnings to pay dividends. The Corporation’s current capital plan
calls for management to maintain Tier I Capital to Average Assets between 9.0%
and 12.0%. Management also desires a dividend payout ratio between
40% and 50%. This ratio will vary according to income, but over the
long term, management’s goal is to average a payout ratio in this
range. For 2009, the dividend payout ratio was
77.1%. Management anticipates that the payout ratio for 2010 will be
within the target range of 40% to 50% of the Corporation’s net
income.
The
amount of unrealized gain or loss on the Corporation’s 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
Corporation’s balance sheet. An unrealized gain increases the
Corporation’s capital while an unrealized loss reduces the Corporation’s
capital. This requirement takes the position that if the Corporation
liquidated at the end of each period, the current unrealized gain or loss of the
securities portfolio would directly impact the Corporation’s
capital. As of December 31, 2009, the Corporation showed unrealized
losses, net of tax, of $258,000, compared to unrealized losses of $963,000 as of
December 31, 2008. The changes in unrealized losses are due to normal
changes in market valuations of the Corporation’s securities as a result of
interest rate movements.
At the
close of the period ended June 30, 2008, 130,443 shares of treasury stock held
as a result of previous stock purchase plans, less shares utilized for the
Employee Stock Purchase Plan and Dividend Reinvestment Plan, were
retired. The retirement of these treasury shares was required as part
of the formation of ENB Financial Corp. Treasury shares act as a
reduction to capital; therefore, the retirement of treasury shares into common
stock and capital surplus had no impact to the Corporation’s
capital. Since December 31, 2008, 20,500 shares of treasury stock
have been repurchased, and 15,305 reissued, with 30,557 treasury shares existing
on December 31, 2009.
Contractual
Cash Obligations
The
Corporation has a number of contractual obligations that arise from the normal
course of business. The following table summarizes the contractual
cash obligations of the Corporation as of December 31, 2009, and shows the
future periods in which settlement of the obligations is
expected. The contractual obligation numbers below do not include
accrued interest. Refer to the Notes to the Consolidated Financial Statements
referenced in the table for additional details regarding these
obligations.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
CONTRACTUAL
OBLIGATIONS
(DOLLARS
IN THOUSANDS)
|
Less
than
|
1-3 | 4-5 |
More
than
|
|||||||||||||||||
|
1
year
|
years
|
years
|
5
years
|
Total
|
||||||||||||||||
|
$
|
$ | $ |
$
|
$
|
||||||||||||||||
|
Time
deposits (Note F)
|
147,872 | 80,861 | 32,928 | - | 261,661 | |||||||||||||||
|
Borrowings
(Notes G and H)
|
15,000 | 37,000 | 18,000 | 12,500 | 82,500 | |||||||||||||||
|
Total
contractual obligations
|
162,872 | 117,861 | 50,928 | 12,500 | 344,161 | |||||||||||||||
The
Corporation has a number of contractual obligations that arise from the normal
course of business. A construction contract was signed in May 2009
for $1.5 million to renovate the Denver branch. As of December 31,
2009, $1,241,000 was paid on this contract, and as of the report date, the
remainder of the contract price has been paid.
Management
signed a contract in March 2008 with the Corporation’s core processing vendor to
conduct a comprehensive business process improvement (BPI)
engagement. The majority of the engagement occurred over the
six-month period beginning in July 2008. Initial benefits were
realized in the fourth quarter of 2008, with an acceleration of benefits
occurring in 2009, and to occur in subsequent years. The financial
goal of the BPI is to obtain $1.4 million to $2.2 million of annual pre-tax
benefit through operational cost savings and revenue
enhancements. The strategic goal of the BPI engagement is to be a
more efficient organization, with better customer service, at increased levels
of profitability. The fees for the entire BPI engagement were
$756,000 plus travel-related expenses; billed through April 2009 at a rate of
$68,700 per month. As of December 31, 2009, all expenses related to
the BPI engagement have been paid.
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
liquidity section to follow, 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 December 31,
2009. For further details regarding off-balance sheet arrangements,
refer to Note P to the Consolidated Financial Statements.
|
OFF-BALANCE
SHEET ARRANGEMENTS
(DOLLARS IN THOUSANDS)
|
||||
|
December 31,
|
||||
|
2009
|
||||
|
$
|
||||
|
Commitments
to extend credit:
|
||||
|
Revolving
home equity loans
|
16,262 | |||
|
Construction
loans
|
16,354 | |||
|
Real
estate loans
|
2,355 | |||
|
Business
loans
|
63,952 | |||
|
Consumer
loans
|
2,725 | |||
|
Other
|
5,063 | |||
|
Standby
letters of credit
|
8,790 | |||
|
Total
|
115,501 | |||
Recently
Issued Accounting Standards
Refer to
Note A to the Consolidated Financial Statements for discussion on recently
issued accounting standards.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
Critical
Accounting Policies
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect many of the reported amounts and
disclosures. Actual results could differ from these
estimates.
Allowance
for Loan Losses
A
material estimate that is particularly susceptible to significant change is the
determination of the allowance for loan losses. Management believes
that the allowance for loan losses is adequate and reasonable. The
Corporation’s methodology for determining the allowance for loan losses is
described in an earlier section of Management’s Discussion and
Analysis. Given the very subjective nature of identifying and valuing
loan losses, it is likely that well-informed individuals could make materially
different assumptions and, therefore, calculate a materially different allowance
amount. Management uses available information to recognize losses on
loans; however, changes in economic conditions may necessitate
revisions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation’s
allowance for loan losses. Such agencies may require the Corporation
to recognize adjustments to the allowance based on their judgments of
information available to them at the time of their examination.
Other
than Temporary Impairment Of Securities
Securities
are evaluated periodically to determine whether a decline in their value is
other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than
temporary. The term “other than temporary” is not intended to
indicate that the decline is permanent. It indicates that the
prospect of a near-term recovery of value is not necessarily favorable or that
there is a lack of evidence to support fair values equal to, or greater than,
the carrying value of the security. Once a decline in value is
determined to be other than temporary, the value of the security is reduced and
a corresponding charge to earnings is recognized.
Deferred
Tax Assets
The
Corporation uses an estimate of future earnings to support the position that the
benefit of deferred tax assets will be realized. If future income
should prove non-existent or less than the amount of the deferred tax assets
within the tax years to which they may be applied, the asset may not be realized
and the Corporation’s net income will be reduced. Deferred tax assets
are described further in Note M to the Consolidated Financial
Statements.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
As a
financial institution, the Corporation is subject to four primary market
risks:
|
·
|
Credit
risk
|
|
·
|
Liquidity
risk
|
|
·
|
Interest
rate risk
|
|
·
|
Fair
value risk
|
The Board
of Directors has established an Asset Liability Management Committee (ALCO) to
measure, monitor, and manage these four 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.
For
discussion on credit risk, refer to the sections on non-performing assets,
allowance for loan losses, Note C, and Note P to the Consolidated Financial
Statements.
Liquidity
Liquidity
refers to having an adequate supply of cash available to meet business
needs. Financial institutions must ensure that there is adequate
liquidity to meet a variety of funding needs, at a minimal
cost. Minimal cost is an important component of
liquidity. If a financial institution is required to take significant
action to obtain funding, and is forced to utilize an expensive source, it has
not properly planned for its liquidity needs. Funding new loans and
covering deposit withdrawals are the primary liquidity needs of the
Corporation. The Corporation uses a variety of funding sources to
meet liquidity needs, such as:
|
·
|
Deposits
|
|
·
|
Loan
repayments
|
|
·
|
Maturities
and sales of securities
|
|
·
|
Borrowings
from correspondent and member banks
|
|
·
|
Repurchase
agreements
|
|
·
|
Brokered
deposits
|
|
·
|
Current
earnings
|
One of
the measurements used in liquidity planning is the Maturity Gap Analysis. The
Maturity Gap Analysis below measures the amount of assets maturing within
various time frames versus liabilities maturing in those same
periods. These time frames are referred to as gaps and are reported
on a cumulative basis. For instance, the one-year gap shows all
assets maturing one year or less from a specific date versus the total
liabilities maturing in the same time period. The gap is then
expressed as a percentage of assets over liabilities. Mismatches between assets
and liabilities maturing are identified and assist management in determining
potential liquidity issues. A cumulative maturity gap of 100% indicates that the
same amount of assets and liabilities are maturing within the specified
period. While this would be ideal, loans usually have longer lives
than deposits, resulting in a ratio less than 100%.
The table
below shows the six-month, one-year, three-year, and five-year cumulative gaps
as of December 31, 2009, along with the cumulative maturity gap guidelines
monitored by management. For the purposes of this analysis, core
deposits without a specific maturity date are spread across all time periods
based on historical behavior.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
MATURITY
GAP ANALYSIS
(DOLLARS
IN THOUSANDS)
|
More
than
|
More
than
|
More
than
|
||||||||||||||||||
|
Less
than
|
6
months
|
1
year
|
3
years
|
More
than
|
||||||||||||||||
|
Maturity
Gap
|
6
months
|
to
1 year
|
to
3 years
|
to
5 years
|
5
years
|
|||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
|
Assets
maturing
|
52,845 | 43,653 | 152,270 | 102,055 | 262,141 | |||||||||||||||
|
Liabilities
maturing
|
107,924 | 80,158 | 166,202 | 100,698 | 165,835 | |||||||||||||||
|
Maturity
gap
|
(55,079 | ) | (36,505 | ) | (13,932 | ) | 1,357 | 96,306 | ||||||||||||
|
Cumulative
maturity gap
|
(55,079 | ) | (91,584 | ) | (105,516 | ) | (104,159 | ) | (7,853 | ) | ||||||||||
|
Maturity
gap %
|
49.0 | % | 54.5 | % | 91.6 | % | 101.3 | % | 158.1 | % | ||||||||||
|
Cumulative
maturity gap %
|
49.0 | % | 51.3 | % | 70.2 | % | 77.1 | % | 98.7 | % | ||||||||||
|
Cumulative
maturity gap % guideline
|
45%
to 155
|
% |
60%
to 140
|
% |
75%
to 125
|
% |
85%
to 115
|
% | ||||||||||||
As of
December 31, 2009, all except the less than six month maturity gap are outside
of Corporate Policy guidelines. The majority of the maturity gaps are
below the minimum policy target due to the current interest rate
environment. This indicates that the ratio of assets to liabilities
maturing in those time frames is under normal operating levels. This
is the combined result of both management’s actions and customer reaction to the
present environment. With interest rates at historically low levels
for an extended period of time, management did not want large amounts of assets
repricing to lower yields. As a result, management pushed out
maturities on a portion of the securities portfolio to diminish repricing
risk. The current gap ratios are also impacted by customer behavior,
as over 50% of the time deposits are in terms of one-year or
less. Customers are most comfortable with one-year time deposits and
do not generally like to extend to longer terms if it is likely that interest
rates will rise. In the current environment, with interest rates at
50-year lows, management actually prefers maintaining lighter gap ratios than
normal, as this strategy is in the best interest of the
Corporation.
Given the
likelihood that interest rates may increase by late 2010 or early 2011,
management’s current position is to increase the cumulative maturity gap
percentage for the three gap ratios below guidelines for each successive quarter
in 2010, with the goal of having all gap ratios back within normal guidelines by
June 30, 2010. The risk in this situation is that, should interest
rates rise rapidly, maturing liabilities will either reprice at higher rates or
leave the Corporation, thereby reducing funding. At this point in
time, the risk of liabilities repricing at higher interest rates is
low. Given the alternative investment options available, management
also does not perceive significant risk that deposits maturing in the shorter
time frames will leave the Corporation. It is likely that, should
interest rates rise in late 2010 and throughout 2011, customer behavior patterns
will change and deposits will be more rate sensitive with a greater portion
potentially leaving the Corporation. These maturity gaps are closely
monitored along with additional liquidity measurements discussed
below. Management will work to bring these ratios back within policy
guidelines over the first six months of 2010 in order to prepare for the
possibility of rising rates.
In
addition to the cumulative maturity gap analysis discussed above, management
utilizes a number of other important liquidity measurements that management
believes have advantages over, and gives better clarity to, the Corporation’s
present and projected liquidity.
The
following liquidity measurements are evaluated 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 the securities
portfolio
|
|
|
·
|
Borrowing
Limits – Internal borrowing limits in terms of both FHLB and total
borrowings.
|
|
|
·
|
Three
and Six-month Projected Sources and Uses of
Funds
|
These
measurements are designed to prevent undue reliance on outside sources of
funding and 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.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
As of
December 31, 2009, the Corporation was within guidelines for all of the above
measurements. These measurements are tracked and reported quarterly
by management to both observe trends and ensure the measurements stay within
desired ranges. Management is confident that a sufficient
amount of internal and external liquidity exists to provide for significant
unanticipated liquidity needs.
Interest
Rate Risk and Fair Value Risk
Identifying
the interest rate risk of the Corporation’s interest earning assets and interest
bearing liabilities is essential to managing net interest margin and net
interest income. In addition to the impact on earnings, management is
also concerned about how much the value of the Corporation’s assets might rise
or fall given an increasing or decreasing interest rate
environment. Net portfolio value (NPV) analysis measures the change
in the Corporation’s capital fair value, given interest rate fluctuations, while
interest rate sensitivity analysis (IRSA) measures the impact of a change in
interest rates on the net interest income and net interest
margin. Therefore, the two primary approaches to measuring the impact
of interest rate changes on the Corporation’s earnings and fair value are
referred to as:
|
·
|
Changes
in net portfolio value
|
|
·
|
Changes
in net interest income
|
The
Corporation’s asset liability model is able to perform dynamic forecasting based
on a wide range of assumptions provided. The model is flexible and
can be used for many types of financial projections. The Corporation
uses financial modeling to forecast balance sheet growth and
earnings. The results obtained through the use of forecasting models
are based on a variety of factors. Both earnings and balance sheet
forecasts make use of maturity and repricing schedules to determine the changes
to the Corporation’s 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:
|
·
|
Projected
interest rates
|
|
·
|
Timing
of interest rate changes
|
|
·
|
Prepayment
speeds on loans held and mortgage-backed
securities
|
|
·
|
Anticipated
calls on securities with call
options
|
|
·
|
Deposit
and loan balance fluctuations
|
|
·
|
Economic
conditions
|
|
·
|
Consumer
reaction to interest rate changes
|
As a
result of the many assumptions, this information should not be relied upon to
predict future results. Additionally, both of the analyses shown
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.
Change
in Net Portfolio Value
The
change in net portfolio value gives a long-term view of the exposure to changes
in interest rates. The NPV is calculated by discounting the future
cash flows to the present value based on current market rates. The
NPV is the mathematical equivalent of the present value of assets minus the
present value of liabilities.
The table
below indicates the changes in the Corporation’s NPV as of December 31,
2009. As part of the Asset Liability Policy, the Board of Directors
has established risk measurement guidelines to protect the Corporation against
decreases in the net portfolio value and net interest income in the event of
interest rate changes described above. All scenarios for both 2009 and 2008 show
the Corporation within ALCO guidelines.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
CHANGES
IN NET PORTFOLIO VALUE
|
2009
|
2008
|
Policy
|
||||||||||
|
Percentage
|
Percentage
|
Guidelines
|
||||||||||
|
Change
|
Change
|
%
|
||||||||||
|
300
basis point rise
|
0.4 | 13.7 | (37.5 | ) | ||||||||
|
200
basis point rise
|
1.2 | 12.8 | (25.0 | ) | ||||||||
|
100
basis point rise
|
1.2 | 7.8 | (12.5 | ) | ||||||||
|
Base
rate scenario
|
- | - | - | |||||||||
|
100
basis point decline
|
8.7 | 0.4 | (12.5 | ) | ||||||||
|
200
basis point decline
|
18.6 | (0.9 | ) | (25.0 | ) | |||||||
|
300
basis point decline
|
31.9 | (0.5 | ) | (37.5 | ) | |||||||
This
table shows the effect of an immediate interest rate shock on the net portfolio
value of the Corporaton's assets and liabilities. Base rate is the Prime
rate.
The
results as of December 31, 2009, indicate improvements to NPV for all changes in
rates. The percentage change for all scenarios is within policy
guidelines. The valuation benefit given rates down 200 and 300 basis
points is very unlikely to occur given that interest rates are already at
historical lows and the Federal Reserve’s target overnight interest rate is
already down to 0.00% to 0.25%. For lower interest rates to occur,
the Prime rate would have to move independent of the overnight Federal funds
rate, which has not occurred in recent history. Although there is
little volatility as rates rise, it does indicate that the Corporation gains
NPV, which is the result of the value of assets declining at a slower rate than
the decrease in the value of deposits. Stated in another manner, an
increase in interest rates would devalue the Corporation’s assets; however, this
would be overshadowed by the value of the Corporation’s liabilities declining at
a faster pace. Generally, the average life of the Corporation’s
assets, primarily investment securities, was longer at the end of 2009 than
2008. This explains why, for 2009, there is less of a NPV benefit as
rates rise and more of a benefit should rates decline.
Changes
in Net Interest Income
The
changes in net interest income reflect how much the Corporation’s net interest
income would be expected to increase or decrease given a change in market
interest rates. The changes in net interest income shown are measured
over a one-year time horizon and assume an immediate rate change on the rate
sensitive assets and liabilities. This is considered the more
important measure of interest rate sensitivity due to the immediate effect that
rate changes may have on the overall performance of the
Corporation. The following table takes into consideration when
financial instruments would most likely reprice and the duration of the pricing
change. It is important to emphasize that the information shown in
the table is an estimate based on hypothetical changes in market interest
rates.
CHANGES
IN NET INTEREST INCOME
|
2009
|
2008
|
Policy
|
||||||||||
|
Percentage
|
Percentage
|
Guidelines
|
||||||||||
|
Change
|
Change
|
%
|
||||||||||
|
300
basis point rise
|
0.6 | 1.6 | (15.0 | ) | ||||||||
|
200
basis point rise
|
(0.7 | ) | (0.1 | ) | (10.0 | ) | ||||||
|
100
basis point rise
|
(1.6 | ) | (1.0 | ) | (5.0 | ) | ||||||
|
Base
rate scenario
|
- | - | - | |||||||||
|
100
basis point decline
|
(0.1 | ) | (1.1 | ) | (5.0 | ) | ||||||
|
200
basis point decline
|
(2.2 | ) | (8.4 | ) | (10.0 | ) | ||||||
|
300
basis point decline
|
(5.7 | ) | (16.1 | ) | (15.0 | ) | ||||||
This
table shows the effect of an immediate interest rate shock, over a one-year
period on the Corporaton's net interest income. Base rate is the
Prime rate.
ENB
FINANCIAL CORP
Management’s
Discussion and Analysis
The above
analysis shows a slightly negative impact to the Corporation’s net interest
income when rates rise 100 and 200 basis points, as well as in all rates down
scenarios. In the unique current rate environment, the amount of the
Corporation’s assets repricing higher will be fairly slow due to the low
six-month to one-year gap ratio with lower levels of assets repricing than
liabilities. On the liability side, if rates increase, it is typical
for management to react slowly in increasing deposit rates. Even when
deposit rates are increased, they are typically increased at a fraction of the
increase in the Prime rate. In the current environment, if interest
rates rise, it is expected that deposit rates will move upward, but more slowly
than in past rates-up cycles. It is unlikely that rates will go down,
but in the event that they would go lower, the Corporation would have exposure
in the Prime-based lending segment because those assets would earn less
return. The scenarios above show all rate scenarios at relatively
neutral positions. This indicates that even if rates move up or down
there would be relatively little change in net interest income. This
analysis focuses on immediate rate movements, referred to as rate shocks, and
measured over the course of one year. The Corporation’s model also
has the ability to measure changes to net interest income given interest rate
changes that occur more slowly over time. This type of modeling is
referred to as interest rate ramps, where a set change in rates occurs over a
period of time. If rates were to move upward slowly over the course
of the next year, the results are very close to the results using a rate
shock.
The above
analysis also shows that the Corporation’s net interest income would decrease if
rates decline. This results from several types of deposit products’
current offering rates being at or near the floor for pricing. For
instance, savings accounts were being paid 0.15% as of December 31,
2009. Management is only able to reduce the rate to zero; therefore,
any reduction in the savings rate only benefits earnings in the case of a
15-basis point rate decline. Since most loan rates would be able to
reprice lower under all three declining rate scenarios and the deposit rate
decreases are limited, the Corporation would have less earnings under a
declining rate scenario. It is likely that management would control
the reduction in loan rates to prevent an actual reduction in net interest
income in a downward rate environment.
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.
This Page
Intentionally Left Blank
ENB
FINANCIAL CORP
|
Item
8.
|
Consolidated
Financial Statements and Supplementary
Data
|
The
following audited consolidated financial statements are set forth in this Annual
Report of Form 10-K on the following pages:
|
Index to Consolidated Financial Statements and
Supplementary Data
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
71
|
|
|
Consolidated
Balance Sheets
|
72
|
|
|
Consolidated
Statements of Income
|
73
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
74
|
|
|
Consolidated
Statements of Cash Flows
|
75
|
|
|
Notes
to Consolidated Financial Statements
|
76
|
|
ENB
FINANCIAL CORP
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
ENB
Financial Corp
We have
audited the accompanying consolidated balance sheets of ENB Financial Corp (the
“Corporation) and subsidiary as of December 31, 2009 and 2008, and the related
statements of income, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2009. These
financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ENB Financial Corp as of December
31, 2009 and 2008, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles.
We were
not engaged to examine management’s assessment of the effectiveness of ENB
Financial Corp’s internal control over financial reporting as of December 31,
2009 and 2008, which is included in Item 9A(T) of Form 10-K and, accordingly, we
do not express an opinion thereon.
/s/S.R.
Snodgrass, A.C.
Wexford,
PA
March 24,
2010
ENB
FINANCIAL CORP
CONSOLIDATED
BALANCE SHEETS
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
12,396 | 19,286 | ||||||
|
Interest
bearing deposits in other banks
|
51 | 106 | ||||||
|
Federal
funds sold
|
4,300 | - | ||||||
|
Total
cash and cash equivalents
|
16,747 | 19,392 | ||||||
|
Securities
available for sale (at fair value)
|
236,335 | 214,421 | ||||||
|
Loans
held for sale
|
179 | 245 | ||||||
|
Loans
|
427,852 | 411,954 | ||||||
|
Less: Allowance
for loan losses
|
5,912 | 4,203 | ||||||
|
Net
loans
|
421,940 | 407,751 | ||||||
|
Premises
and equipment
|
20,858 | 19,913 | ||||||
|
Regulatory
stock
|
4,916 | 4,915 | ||||||
|
Bank-owned
life insurance
|
15,248 | 14,512 | ||||||
|
Other
assets
|
9,729 | 7,274 | ||||||
|
Total
assets
|
725,952 | 688,423 | ||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Non-interest
bearing
|
121,665 | 114,262 | ||||||
|
Interest
bearing
|
448,278 | 396,850 | ||||||
|
Total
deposits
|
569,943 | 511,112 | ||||||
|
Short-term
borrowings
|
- | 11,800 | ||||||
|
Long-term
debt
|
82,500 | 92,000 | ||||||
|
Other
liabilities
|
3,933 | 5,466 | ||||||
|
Total
liabilities
|
656,376 | 620,378 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock, par value $0.20
|
||||||||
|
Shares:
Authorized 12,000,000
|
||||||||
|
Issued
2,869,557 and Outstanding 2,839,000
|
||||||||
|
(Issued
2,869,557 and Outstanding 2,844,195 as of 12-31-08)
|
574 | 574 | ||||||
|
Capital
surplus
|
4,415 | 4,457 | ||||||
|
Undivided
profits
|
65,613 | 64,629 | ||||||
|
Accumulated
other comprehensive loss, net of tax
|
(258 | ) | (963 | ) | ||||
|
Less:
Treasury stock shares at cost 30,557 (25,362 shares as of
12-31-08)
|
(768 | ) | (652 | ) | ||||
|
Total
stockholders' equity
|
69,576 | 68,045 | ||||||
|
Total
liabilities and stockholders' equity
|
725,952 | 688,423 | ||||||
See notes
to consolidated financial statements
ENB
FINANCIAL CORP
CONSOLIDATED
STATEMENTS OF INCOME
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Interest
and dividend income:
|
||||||||||||
|
Interest
and fees on loans
|
22,763 | 23,675 | 24,648 | |||||||||
|
Interest
on securities available for sale:
|
||||||||||||
|
Taxable
|
8,375 | 8,346 | 5,825 | |||||||||
|
Tax-exempt
|
2,522 | 2,361 | 2,700 | |||||||||
|
Interest
on Federal funds sold
|
6 | 28 | 221 | |||||||||
|
Interest
on deposits at other banks
|
- | 5 | 13 | |||||||||
|
Dividend
income
|
137 | 310 | 377 | |||||||||
|
Total
interest and dividend income
|
33,803 | 34,725 | 33,784 | |||||||||
|
Interest
expense:
|
||||||||||||
|
Interest
on deposits
|
8,955 | 10,470 | 11,080 | |||||||||
|
Interest
on short-term borrowings
|
17 | 73 | 60 | |||||||||
|
Interest
on long-term debt
|
3,846 | 4,055 | 3,552 | |||||||||
|
Total
interest expense
|
12,818 | 14,598 | 14,692 | |||||||||
|
Net
interest income
|
20,985 | 20,127 | 19,092 | |||||||||
|
Provision
for loan losses
|
2,920 | 669 | 1,446 | |||||||||
|
Net
interest income after provision for loan losses
|
18,065 | 19,458 | 17,646 | |||||||||
|
Other
income:
|
||||||||||||
|
Trust
and investment services income
|
1,075 | 971 | 952 | |||||||||
|
Service
fees
|
2,606 | 2,061 | 1,692 | |||||||||
|
Commissions
|
1,409 | 1,328 | 1,124 | |||||||||
|
Gains
on securities transactions, net
|
544 | 254 | 157 | |||||||||
|
Impairment
losses on securities:
|
||||||||||||
|
Impairment
losses on investment securities
|
(2,056 | ) | (760 | ) | - | |||||||
|
Non-credit
related losses on securities not expected
|
||||||||||||
|
to
be sold in other comprehensive income before tax
|
1,687 | - | - | |||||||||
|
Net
impairment losses on investment securities
|
(369 | ) | (760 | ) | - | |||||||
|
Gains
on sale of mortgages
|
229 | 123 | 118 | |||||||||
|
Earnings
on bank owned life insurance
|
646 | 632 | 469 | |||||||||
|
Other
|
300 | 298 | 289 | |||||||||
|
Total
other income
|
6,440 | 4,907 | 4,801 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Salaries
and employee benefits
|
10,867 | 11,892 | 9,693 | |||||||||
|
Occupancy
|
1,440 | 1,242 | 1,146 | |||||||||
|
Equipment
|
820 | 957 | 899 | |||||||||
|
Advertising
& marketing
|
387 | 411 | 415 | |||||||||
|
Computer
software & data processing
|
1,531 | 1,508 | 1,383 | |||||||||
|
Shares
tax
|
743 | 721 | 449 | |||||||||
|
Professional
services
|
1,595 | 1,643 | 968 | |||||||||
|
Federal
deposit insurance
|
1,022 | 230 | 54 | |||||||||
|
Other
|
1,664 | 1,864 | 1,824 | |||||||||
|
Total
operating expenses
|
20,069 | 20,468 | 16,831 | |||||||||
|
Income
before income taxes (benefit)
|
4,436 | 3,897 | 5,616 | |||||||||
|
Provision/(benefit)
for Federal income taxes
|
136 | (117 | ) | 553 | ||||||||
|
Net
income
|
4,300 | 4,014 | 5,063 | |||||||||
|
Earnings
per share of common stock
|
1.52 | 1.40 | 1.77 | |||||||||
|
Cash
dividends paid per share
|
1.17 | 1.24 | 1.21 | |||||||||
|
Weighted-average
number of shares outstanding
|
2,835,721 | 2,860,856 | 2,854,400 | |||||||||
See notes
to consolidated financial statements
ENB
FINANCIAL CORP
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
Total
|
||||||||||||||||||||||||
|
Common
|
Capital
|
Undivided
|
Comprehensive
|
Treasury
|
Stockholders'
|
|||||||||||||||||||
|
Stock
|
Surplus
|
Profits
|
Income (Loss)
|
Stock
|
Equity
|
|||||||||||||||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
|||||||||||||||||||
|
Balances,
December 31, 2006
|
600 | 4,510 | 66,548 | (1,081 | ) | (4,620 | ) | 65,957 | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 5,063 | - | - | 5,063 | ||||||||||||||||||
|
Unrealized
holding gains on securities
|
||||||||||||||||||||||||
|
available
for sale arising during
|
||||||||||||||||||||||||
|
the
year, net of tax $517
|
- | - | - | 1,004 | - | 1,004 | ||||||||||||||||||
|
Reclassification
adjustment for gains
|
||||||||||||||||||||||||
|
included
in net income, net of tax ($53)
|
- | - | - | (104 | ) | - | (104 | ) | ||||||||||||||||
|
Total
comprehensive income
|
5,963 | |||||||||||||||||||||||
|
Treasury
stock issued - 11,789 shares
|
- | (8 | ) | - | - | 363 | 355 | |||||||||||||||||
|
Cash
dividends paid, $1.21 per share
|
- | - | (3,453 | ) | - | - | (3,453 | ) | ||||||||||||||||
|
Balances,
December 31, 2007
|
600 | 4,502 | 68,158 | (181 | ) | (4,257 | ) | 68,822 | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 4,014 | - | - | 4,014 | ||||||||||||||||||
|
Unrealized
holding losses on securities
|
||||||||||||||||||||||||
|
available
for sale arising during
|
||||||||||||||||||||||||
|
the
year, net of tax ($575)
|
- | - | - | (1,116 | ) | - | (1,116 | ) | ||||||||||||||||
|
Reclassification
adjustment for losses
|
||||||||||||||||||||||||
|
included
in net income, net of tax $172
|
- | - | - | 334 | - | 334 | ||||||||||||||||||
|
Total
comprehensive income
|
3,232 | |||||||||||||||||||||||
|
Net
treasury stock retired - 130,443 shares
|
(26 | ) | - | (3,994 | ) | - | 4,020 | - | ||||||||||||||||
|
Treasury
stock purchased - 32,400 shares
|
(833 | ) | (833 | ) | ||||||||||||||||||||
|
Treasury
stock issued - 7,038 shares
|
- | (45 | ) | - | - | 418 | 373 | |||||||||||||||||
|
Cash
dividends paid, $1.24 per share
|
- | - | (3,549 | ) | - | - | (3,549 | ) | ||||||||||||||||
|
Balances,
December 31, 2008
|
574 | 4,457 | 64,629 | (963 | ) | (652 | ) | 68,045 | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 4,300 | - | - | 4,300 | ||||||||||||||||||
|
Unrealized
holding gains on securities
|
||||||||||||||||||||||||
|
available
for sale arising during
|
||||||||||||||||||||||||
|
the
year, net of tax $423
|
- | - | - | 820 | - | 820 | ||||||||||||||||||
|
Reclassification
adjustment for gains
|
||||||||||||||||||||||||
|
included
in net income, net of tax ($60)
|
- | - | - | (115 | ) | - | (115 | ) | ||||||||||||||||
|
Total
comprehensive income
|
5,005 | |||||||||||||||||||||||
|
Treasury
stock purchased - 20,500 shares
|
- | - | - | - | (507 | ) | (507 | ) | ||||||||||||||||
|
Treasury
stock issued - 15,305 shares
|
- | (42 | ) | - | - | 391 | 349 | |||||||||||||||||
|
Cash
dividends paid, $1.17 per share
|
- | - | (3,316 | ) | - | - | (3,316 | ) | ||||||||||||||||
|
Balances,
December 31, 2009
|
574 | 4,415 | 65,613 | (258 | ) | (768 | ) | 69,576 | ||||||||||||||||
See notes
to consolidated financial statements
ENB
FINANCIAL CORP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(DOLLARS
IN THOUSANDS)
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
4,300 | 4,014 | 5,063 | |||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
Net
amortization of securities and loan fees
|
699 | 332 | 491 | |||||||||
|
(Increase)
decrease in interest receivable
|
(335 | ) | 28 | 167 | ||||||||
|
Increase
(decrease) in interest payable
|
(210 | ) | 36 | 102 | ||||||||
|
Provision
for loan losses
|
2,920 | 669 | 1,446 | |||||||||
|
(Gains)
losses on securities transactions
|
(175 | ) | 506 | (157 | ) | |||||||
|
Gains
on sale of mortgages
|
(229 | ) | (123 | ) | (118 | ) | ||||||
|
Loans
originated for sale
|
(3,106 | ) | (2,100 | ) | (1,387 | ) | ||||||
|
Proceeds
from sales of loans
|
3,401 | 2,343 | 1,664 | |||||||||
|
Earnings
on bank-owned life insurance
|
(646 | ) | (632 | ) | (469 | ) | ||||||
|
Depreciation
of premises and equipment and amortization of software
|
1,265 | 1,261 | 1,137 | |||||||||
|
Deferred
income tax
|
(963 | ) | (933 | ) | (457 | ) | ||||||
|
Increase
in federal deposit insurance
|
(2,317 | ) | - | - | ||||||||
|
Other
assets and other liabilities, net
|
(497 | ) | 1,529 | (279 | ) | |||||||
|
Net
cash provided by operating activities
|
4,107 | 6,930 | 7,203 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Securities
available for sale:
|
||||||||||||
|
Proceeds
from maturities, calls, and repayments
|
59,423 | 50,623 | 27,778 | |||||||||
|
Proceeds
from sales
|
56,412 | 52,970 | 10,279 | |||||||||
|
Purchases
|
(137,265 | ) | (127,127 | ) | (38,490 | ) | ||||||
|
Proceeds
from sale of other real estate owned
|
- | 150 | - | |||||||||
|
Purchase
of regulatory bank stock
|
(1 | ) | (815 | ) | (664 | ) | ||||||
|
Redemptions
of regulatory bank stock
|
- | 11 | 670 | |||||||||
|
Purchase
of bank-owned life insurance
|
(90 | ) | (9 | ) | (5,111 | ) | ||||||
|
Net
increase in loans
|
(17,050 | ) | (27,053 | ) | (20,044 | ) | ||||||
|
Purchases
of premises and equipment
|
(1,983 | ) | (3,206 | ) | (1,971 | ) | ||||||
|
Purchase
of computer software
|
(255 | ) | (456 | ) | (89 | ) | ||||||
|
Net
cash used in investing activities
|
(40,809 | ) | (54,912 | ) | (27,642 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
increase in demand, NOW, and savings accounts
|
28,119 | 4,161 | 15,886 | |||||||||
|
Net
increase (decrease) in time deposits
|
30,712 | 28,225 | (6,419 | ) | ||||||||
|
Net
increase (decrease) in short-term borrowings
|
(11,800 | ) | 11,700 | (1,100 | ) | |||||||
|
Proceeds
from long-term debt
|
13,000 | 20,000 | 34,000 | |||||||||
|
Repayments
of long-term debt
|
(22,500 | ) | (10,000 | ) | (18,000 | ) | ||||||
|
Dividends
paid
|
(3,316 | ) | (3,549 | ) | (3,453 | ) | ||||||
|
Treasury
stock sold
|
349 | 373 | 355 | |||||||||
|
Treasury
stock purchased
|
(507 | ) | (833 | ) | - | |||||||
|
Net
cash provided by financing activities
|
34,057 | 50,077 | 21,269 | |||||||||
|
Increase/(decrease)
in cash and cash equivalents
|
(2,645 | ) | 2,095 | 830 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
19,392 | 17,297 | 16,467 | |||||||||
|
Cash
and cash equivalents at end of period
|
16,747 | 19,392 | 17,297 | |||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Interest
paid
|
13,028 | 14,562 | 14,590 | |||||||||
|
Income
taxes paid
|
460 | 1,050 | 950 | |||||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||||
|
Net
transfer of other real estate owned held for sale from
loans
|
- | - | 93 | |||||||||
See notes
to consolidated financial statements
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations:
ENB
Financial Corp, through its wholly owned subsidiary, Ephrata National Bank,
provides financial services to Northern Lancaster County and surrounding
communities. ENB Financial Corp, a bank holding company, was formed
on July 1, 2008, to become the parent company of Ephrata National Bank, which
existed as a stand-alone national bank since its formation in
1881. The Corporation’s wholly owned subsidiary, Ephrata National
Bank, offers a full array of banking services including loan and deposit
products for both personal and commercial customers, as well as trust and
investment services, through nine office locations.
Basis
of Presentation:
The
consolidated financial statements of ENB Financial Corp and its subsidiary,
Ephrata National Bank, (collectively “the Corporation”) conform to U.S.
generally accepted accounting principles (GAAP). The preparation of these
statements requires that management make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Material estimates of the Corporation, including the
allowance for loan losses, the fair market value of securities available for
sale, the valuation of foreclosed real estate, other than temporary investment
impairments, intangible assets, and deferred tax assets or liabilities, are
evaluated regularly by management. Actual results could differ from
the reported estimates given different conditions or assumptions.
The
accounting and reporting policies followed by the Corporation conform with U.S.
GAAP and to general practices within the banking industry. All intercompany
transactions have been eliminated in consolidation. The following is a summary
of the more significant policies.
Cash
and Cash Equivalents:
For
purposes of reporting cash flows, cash and cash equivalents are identified as
cash and due from banks, and includes cash on hand, collection items, amounts
due from banks, and interest bearing deposits with other banks with maturities
of less than 90 days.
Securities
Available for Sale:
The
Corporation classifies its entire portfolio of debt and equity securities as
available for sale securities, which the Corporation reports at fair
value. Any unrealized valuation gains or losses in the portfolio are
reported as a separate component of Stockholders' Equity, net of deferred income
taxes. The constant yield method is used for the amortization of
premiums and the accretion of discounts for all of the Corporation’s securities
with the exception of collateralized mortgage obligations (CMO) and index
amortizing notes (IANs). The constant yield method maintains a stable
yield on the instrument through its maturity. For CMOs and IANs, a
two-step/proration method is used for amortization and accretion. The
first step is a proration based on the current pay down. This
component ensures that the book price stays level with par. The
second step amortizes or accretes the remaining premium or discount to the
calculated final amortization or accretion date based on the current three-month
constant prepayment rates. Net gains or losses realized on sales or
calls of securities are reported as gains or losses on security transactions
during the year of sale, using the specific identification method.
Other
Than Temporary Impairment (OTTI)
Management
monitors all of the Corporation’s securities for OTTI on a monthly basis and
determines whether any impairment should be recorded. A number of
factors are considered in determining whether a security is impaired, including,
but not limited to, the following:
|
|
·
|
period
of time the security has had unrealized
losses,
|
|
|
·
|
percentage
of unrealized losses,
|
|
|
·
|
type
of security,
|
|
|
·
|
the
intent to sell the security or whether it is more likely than not that the
Corporation would be required to sell the security before its anticipated
recovery in market value
|
|
|
·
|
amount
of projected credit losses based on current cash flow analysis, default,
and severity rates, and
|
|
|
·
|
market
dynamics impacting the market and liquidity of the
security.
|
Management
will more closely evaluate those securities that have unrealized losses of 10%
or more and have had unrealized losses for more than twelve
months. If management determines that the declines in value of the
security
ENB
Financial Corp
Notes to
Consolidated Financial Statements
are not
temporary, or if management does not have the ability to hold the security until
maturity, which is the case with equity securities, then management will record
impairment on the security. For equity securities, typically the
amount of impairment is the difference between the security’s book value and
current fair market value determined by obtaining independent market
pricing. For all securities evaluated for impairment, debt and
equity, management will determine what portion of the unrealized valuation loss
is attributed to projected or known loss of principal, and what portion is
attributed to market pricing not reflective of the true value of the security,
based on current cash flow analysis. Management will generally record
impairment equivalent to the projected or known loss of principal, known as the
credit loss. The other portion of the fair market value loss is
attributed to market factors and it is management’s opinion that these fair
value losses are temporary and not permanent. All impairment is
recorded as a loss on securities and is included in gains and losses on
securities transactions under the Corporation’s Statements of
Income.
Loans
and Allowance for Loan Losses:
The
Corporation reports loans receivable at the outstanding principal balances,
reduced by any charge-offs and net of any deferred loan origination fees or
costs. Net loan origination fees and costs are deferred and
recognized as an adjustment of yield over the contractual life of the
loan.
In
general, fixed-rate residential mortgage loans originated by the Corporation,
and held for sale, are carried in the aggregate at the lower of cost or
market. Such mortgage loans are sold to Fannie Mae and serviced by
the Corporation. The Corporation also originates loans for immediate
sale to Wells Fargo but does not service these mortgages.
Interest
accrues daily on outstanding loan balances. Generally, the accrual of
interest discontinues when the ability to collect the loan becomes doubtful or
when a loan becomes more than 90 days past due as to principal and interest.
Management may elect to continue the accrual of interest based on the
expectation of future payments and/or the sufficiency of the underlying
collateral.
The
allowance for loan losses is maintained at a level considered by management to
be adequate to provide for probable losses that can be reasonably
anticipated. The monthly provision for loan losses is an expense
which increases the allowance, while charge-offs, net of recoveries, decrease
the allowance. The Corporation makes periodic credit reviews of the
loan portfolio and considers current economic conditions, historical loan loss
experience, and other factors in determining the adequacy of the reserve
balance. Loans determined to be uncollectible are charged to the
allowance during the period in which such determination is made.
A loan is
impaired when it is probable that a creditor will be unable to collect all
principal and interest payments due according to the contractual terms of the
loan agreement.
The
Corporation individually evaluates commercial and commercial real estate loans
for impairment and does not aggregate loans by major risk
classifications. The definition of “impaired loans” is not the same
as the definition of “non-accrual loans,” although the two categories
overlap. The Corporation may choose to place a loan on non-accrual
status due to payment delinquency or uncertain collectability while not
classifying the loan as impaired, provided the loan is not a commercial or
commercial real estate classification. Factors considered by
management in determining impairment include payment status and collateral
value. The amount of impairment for these types of loans is
determined by the difference between the present value of the expected cash
flows related to the loan using the original interest rate and its recorded
value or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based
on the fair value of the collateral.
Mortgage
loans secured by one-to-four family properties and all consumer loans are
considered to be large groups of smaller-balance homogenous loans and are
measured for impairment collectively. Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally
are not classified as impaired. Management determines the
significance of payment delays on a case-by-case basis, taking into
consideration all circumstances concerning the loan, the creditworthiness and
payment history of the borrower, the length of the payment delay, and the amount
of shortfall in relation to the principal and interest owed.
Other
Real Estate Owned (OREO):
OREO
represents properties acquired through customer loan defaults. These properties
are recorded at the lower of fair value less projected disposal costs at
acquisition date, or the loan balance. Fair value is determined by
current
ENB
Financial Corp
Notes to
Consolidated Financial Statements
appraisals.
Costs associated with holding OREO are charged to operational expense. OREO is a
component of other assets on the Corporation’s Consolidated Balance
Sheets.
Mortgage
Servicing Rights (MSRs):
The
Corporation has agreements for the express purpose of selling residential
mortgage loans in the secondary market, referred to as mortgage servicing
rights. The Corporation maintains all servicing rights for the loans
sold through Fannie Mae. Originated MSRs are recorded by allocating
total costs incurred between the loans and servicing rights based on their
relative fair values. MSRs are amortized in proportion to the
estimated servicing income over the estimated life of the servicing
portfolio. Impairment is evaluated based on the fair value of the
right, portfolio interest rates, and prepayment characteristics. MSRs
are a component of other assets on the Consolidated Balance Sheets.
Premises
and Equipment:
Premises
and equipment are stated at cost, less accumulated depreciation. Book
depreciation is computed using straight-line methods over the estimated useful
lives of generally fifteen to thirty-nine years for buildings and improvements
and five to ten years for furniture and equipment. Maintenance and
repairs of property and equipment are charged to operational expense as
incurred, while major improvements are capitalized. Net gains or
losses upon disposition are included in other income or operational expense, as
applicable.
Bank-Owned
Life Insurance (BOLI):
BOLI is
carried by the Corporation at the cash surrender value of the underlying
policies. Income earned on the policies is based on any increase in cash
surrender value less the cost of the insurance, which varies according to age
and health of the insured.
The life insurance policies owned by the Corporation had a cash surrender value
of $15,248,000 and $14,512,000 as of December 31, 2009, and 2008,
respectively.
Long-Lived
Assets:
Long-lived
assets to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the difference between the carrying value and the fair
market value of the asset. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair market value, less cost to sell
or dispose.
Advertising
Costs:
The
Corporation expenses advertising costs as incurred. Advertising costs for the
years ended December 31, 2009, 2008, and 2007, were $387,000, $411,000, and
$415,000, respectively.
Income
Taxes:
An asset
and liability approach is followed for financial accounting and reporting for
income taxes. Accordingly, a net deferred tax asset or liability is recorded in
the consolidated financial statements for the tax effects of temporary
differences, which are items of income and expense reported in different periods
for income tax and financial reporting purposes. Deferred tax expense is
determined by the change in the assets or liabilities related to deferred income
taxes. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Earnings
per Share:
The
Corporation currently maintains a simple capital structure with no stock option
plans that would have a dilutive effect on earnings per
share. Earnings per share are calculated by dividing net income by
the weighted-average number of shares outstanding for the periods.
Comprehensive
Income:
The
Corporation is required to present comprehensive income in a full set of
general-purpose consolidated financial statements for all periods
presented. Other comprehensive income consists of unrealized holding
gains and losses on the available for sale securities portfolio. The
Corporation has elected to report the effects of other comprehensive income as
part of the Consolidated Statement of Stockholders’ Equity.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
Segment
Disclosure:
U.S.
generally accepted accounting principles establish standards for the manner in
which public business enterprises report information about segments in the
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures regarding
financial products and services, geographic areas, and major
customers. The Corporation has only one operating segment consisting
of its banking and fiduciary operations.
Pension
Plans:
The
Corporation has a noncontributory defined contribution pension plan covering
substantially all employees. The Corporation contributes 7.5% of qualifying
employees’ covered compensation, plus 5.7% of covered compensation in excess of
the Social Security wage base, which is charged to operating expense and funded
on a current basis.
Trust
Assets and Income:
Assets
held by ENB’s Money Management Group in a fiduciary or agency capacity for
customers are not included in the Corporation’s Consolidated Balance Sheets
since these items are not assets of the Corporation. In accordance with banking
industry practice, trust income is recognized on a cash basis, and such income
does not differ significantly from amounts that would be recognized on an
accrual basis. Trust income is reported in the Corporation’s
Consolidated Statements of Income under other income.
Reclassification
of Comparative Amounts:
Certain
comparative amounts for the prior year have been reclassified to conform to
current-year classifications. Such reclassifications had no effect on
net income or stockholders’ equity.
Recently
Issued Accounting Standards:
In June
2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-01, Topic 105 - Generally Accepted
Accounting Principles - FASB Accounting Standards Codification™ and the
Hierarchy of Generally Accepted Accounting Principles. The Codification is the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place. Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC registrants. The
Corporation adopted this standard for the interim reporting period ending
September 30, 2009.
In April
2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and
Disclosures. This ASC provides additional guidance in
determining fair values when there is no active market or where the price inputs
being used represent distressed sales. It reaffirms the need to use
judgment to ascertain if a formerly active market has become inactive and in
determining fair values when markets have become inactive. The
adoption of this new guidance did not have a material effect on the
Corporation’s results of operations or financial position.
In
September 2006, the FASB issued an accounting standard related to fair value
measurements, which was effective for the Company on January 1,
2008. This standard defined fair value, established a framework for
measuring fair value, and expanded disclosure requirements about fair value
measurements. On January 1, 2008, the provisions of this accounting
standard became effective for the Corporation’s financial assets and financial
liabilities, and on January 1, 2009, for nonfinancial assets and nonfinancial
liabilities. This accounting standard was subsequently codified into
ASC Topic 820, Fair Value
Measurements and Disclosures. See Note S in this Annual
Report, Form 10-K filing for the necessary disclosures.
In August
2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value. This ASU provides amendments for fair value
measurements of liabilities. It provides clarification that, in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques. ASU 2009-05 also clarifies that when
estimating a fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. ASU
2009-05 is effective for the first reporting period (including interim periods)
beginning after issuance or fourth quarter 2009. The adoption of this
new guidance did not have a material impact on the Corporation’s financial
position or results of operations.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
In April
2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which
relates to fair value disclosures for any financial instruments that are not
currently reflected on the balance sheet of companies at fair
value. This guidance amended existing GAAP to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial
statements. This guidance is effective for interim and annual periods
ending after June 15, 2009. The Corporation adopted the new
guidelines beginning with the second quarter 2009 Form 10-Q filing and has
presented the necessary disclosures in Note S of this Annual Report, Form 10-K
filing herein.
In April
2009, the FASB issued new guidance impacting ASC 320-10, Investments — Debt and Equity
Securities, which provides additional guidance designed to create greater
clarity and consistency in accounting for and presenting impairment losses on
securities. This guidance is effective for interim and annual periods
ending after June 15, 2009. The Corporation adopted this guideline
beginning with the second quarter 2009 Form 10-Q filing and has presented the
necessary disclosures in Note B of this Annual Report, 10-K filing
herein.
In June
2009, the FASB issued an accounting standard related to the accounting for
transfers of financial assets, which is effective for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal
years. This standard enhances reporting about transfers of financial
assets, including securitizations, and where companies have continuing exposure
to the risks related to transferred financial assets. This standard eliminates
the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. This standard also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. This accounting standard was
subsequently codified into ASC Topic 860, Transfers and
Servicing. The adoption of this standard is not expected to
have a material effect on the Corporation’s results of operations or financial
position.
On
December 30, 2008, the FASB issued new authoritative accounting guidance under
ASC Topic 715, Compensation—Retirement
Benefits, which provides guidance related to an employer’s disclosures
about plan assets of defined benefit pension or other post-retirement benefit
plans. Under ASC Topic 715, disclosures should provide users of financial
statements with an understanding of how investment allocation decisions are
made, the factors that are pertinent to an understanding of investment policies
and strategies, the major categories of plan assets, the inputs and valuation
techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs on changes in plan
assets for the period, and significant concentrations of risk within plan
assets. This guidance is effective for fiscal years ending after December 15,
2009. The new authoritative accounting guidance under ASC Topic 715
became effective for the Corporation’s financial statements for the year ended
December 31, 2009, and the adoption of this new guidance did not have a material
impact on the Corporation’s financial statements.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
B - SECURITIES AVAILABLE FOR SALE
(DOLLARS
IN THOUSANDS)
The
amortized cost and fair value of securities held at December 31, 2009, and 2008,
are as follows:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
December
31, 2009
|
||||||||||||||||
|
U.S.
treasuries & government agencies
|
47,018 | 740 | (187 | ) | 47,571 | |||||||||||
|
Mortgage-backed
securities
|
41,392 | 1,073 | (75 | ) | 42,390 | |||||||||||
|
Collateralized
mortgage obligations
|
53,284 | 947 | (249 | ) | 53,982 | |||||||||||
|
Private
collateralized mortgage obligations
|
16,568 | 21 | (3,841 | ) | 12,748 | |||||||||||
|
Corporate
bonds
|
12,933 | 436 | - | 13,369 | ||||||||||||
|
Obligations
of states and political subdivisions
|
62,531 | 1,310 | (472 | ) | 63,369 | |||||||||||
|
Total
debt securities
|
233,726 | 4,527 | (4,824 | ) | 233,429 | |||||||||||
|
Marketable
equity securities
|
3,000 | - | (94 | ) | 2,906 | |||||||||||
|
Total
securities available for sale
|
236,726 | 4,527 | (4,918 | ) | 236,335 | |||||||||||
|
December
31, 2008
|
||||||||||||||||
|
U.S.
treasuries & government agencies
|
46,938 | 447 | (321 | ) | 47,064 | |||||||||||
|
Mortgage-backed
securities
|
45,405 | 761 | (73 | ) | 46,093 | |||||||||||
|
Collateralized
mortgage obligations
|
35,484 | 566 | (1 | ) | 36,049 | |||||||||||
|
Private
collateralized mortgage obligations
|
20,511 | - | (2,217 | ) | 18,294 | |||||||||||
|
Corporate
bonds
|
12,108 | 83 | (554 | ) | 11,637 | |||||||||||
|
Obligations
of states and political subdivisions
|
52,433 | 874 | (786 | ) | 52,521 | |||||||||||
|
Total
debt securities
|
212,879 | 2,731 | (3,952 | ) | 211,658 | |||||||||||
|
Marketable
equity securities
|
3,000 | - | (237 | ) | 2,763 | |||||||||||
|
Total
securities available for sale
|
215,879 | 2,731 | (4,189 | ) | 214,421 | |||||||||||
The
amortized cost and fair value of debt securities available for sale at December
31, 2009, 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
|
25,471 | 26,043 | ||||||
|
Due
after one year through five years
|
76,407 | 77,955 | ||||||
|
Due
after five years through ten years
|
77,759 | 76,917 | ||||||
|
Due
after ten years
|
54,089 | 52,514 | ||||||
|
Total
debt securities
|
233,726 | 233,429 | ||||||
Proceeds
from 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.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
PROCEEDS
FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS
IN THOUSANDS)
|
Securities Available for
Sale
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Proceeds
from sales
|
56,412 | 52,970 | 10,279 | |||||||||
|
Gross
realized gains
|
1,145 | 792 | 179 | |||||||||
|
Gross
realized losses
|
(970 | ) | (1,298 | ) | (22 | ) | ||||||
The gross
realized losses above include $369,000 of impairment in 2009, and $760,000 in
2008.
Securities
available for sale with a par value of $64,568,000 and $63,455,000 at December
31, 2009, and 2008, respectively, were pledged or restricted for public funds,
borrowings, or other purposes as required by law. The fair value of
these pledged securities was $67,383,000 at December 31, 2009, and $64,779,000
at December 31, 2008.
Management
evaluates all of the Corporation’s securities for other than temporary
impairment (OTTI) on a periodic basis. As of December 31, 2009, three
private collateralized mortgage obligation (PCMO) securities were considered to
be other than temporarily impaired. These securities were written
down by $369,000 as of December 31, 2009. As of December 31, 2008,
all of the Corporation’s other securities carrying unrealized losses were
determined to be temporarily impaired, and not permanently
impaired. Information pertaining to securities with gross unrealized
losses at December 31, 2009, and December 31, 2008, 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 December 31, 2009
|
||||||||||||||||||||||||
|
U.S.
treasuries & government agencies
|
14,315 | (187 | ) | - | - | 14,315 | (187 | ) | ||||||||||||||||
|
Mortgage-backed
securities
|
9,380 | (75 | ) | - | - | 9,380 | (75 | ) | ||||||||||||||||
|
Collateralized
mortgage obligations
|
9,737 | (249 | ) | - | - | 9,737 | (249 | ) | ||||||||||||||||
|
Private
collateralized mortgage obligations
|
- | - | 11,262 | (3,841 | ) | 11,262 | (3,841 | ) | ||||||||||||||||
|
Corporate
bonds
|
- | - | - | - | - | - | ||||||||||||||||||
|
Obligations
of states & political subdivisions
|
6,407 | (64 | ) | 9,451 | (408 | ) | 15,858 | (472 | ) | |||||||||||||||
| - | - | |||||||||||||||||||||||
|
Total
debt securities
|
39,839 | (575 | ) | 20,713 | (4,249 | ) | 60,552 | (4,824 | ) | |||||||||||||||
| - | - | |||||||||||||||||||||||
|
Marketable
equity securities
|
- | - | 2,906 | (94 | ) | 2,906 | (94 | ) | ||||||||||||||||
| - | - | |||||||||||||||||||||||
|
Total
temporarily impaired securities
|
39,839 | (575 | ) | 23,619 | (4,343 | ) | 63,458 | (4,918 | ) | |||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
U.S.
treasuries & government agencies
|
21,531 | (295 | ) | 1,813 | (26 | ) | 23,344 | (321 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
2,527 | (10 | ) | 3,971 | (63 | ) | 6,498 | (73 | ) | |||||||||||||||
|
Collateralized
mortgage obligations
|
215 | - | 495 | (1 | ) | 710 | (1 | ) | ||||||||||||||||
|
Private
collateralized mortgage obligations
|
18,294 | (2,217 | ) | - | - | 18,294 | (2,217 | ) | ||||||||||||||||
|
Corporate
bonds
|
7,491 | (554 | ) | - | - | 7,491 | (554 | ) | ||||||||||||||||
|
Obligations
of states & political subdivisions
|
9,628 | (380 | ) | 6,901 | (406 | ) | 16,529 | (786 | ) | |||||||||||||||
| - | - | |||||||||||||||||||||||
|
Total
debt securities
|
59,686 | (3,456 | ) | 13,180 | (496 | ) | 72,866 | (3,952 | ) | |||||||||||||||
| - | - | |||||||||||||||||||||||
|
Marketable
equity securities
|
- | - | 2,763 | (237 | ) | 2,763 | (237 | ) | ||||||||||||||||
|
Total
temporarily impaired securities
|
59,686 | (3,456 | ) | 15,943 | (733 | ) | 75,629 | (4,189 | ) | |||||||||||||||
ENB
Financial Corp
Notes to
Consolidated Financial Statements
Nearly
all of the Corporation’s unrealized losses as of December 31, 2009, originated
from debt rather than equity securities. Debt securities were
responsible for 98% of the unrealized losses as of December 31, 2009, compared
to 94% as of December 31, 2008. In the debt security portfolio, there
are 52 positions carrying unrealized losses as of December 31, 2009, compared to
67 positions as of December 31, 2008. Of those 52 positions, 49 were
considered temporarily impaired and three PCMOs were considered other than
temporarily impaired at December 31, 2009, whereas on December 31, 2008, all 67
positions were considered temporarily impaired.
Impairment
charges of $369,000 were recognized during 2009 on three PCMOs in order to write
the securities down to a level of anticipated principal recovery. Two
of the three PCMO securities show very minimal losses under all scenarios
tested. The amount of impairment recorded was determined by
evaluating cash flow analysis along the projected default and severity rates on
a security-by-security basis. Each of the three PCMO securities has a
level of credit protection. Consequently, impairment is taken only
after the analysis shows credit protection against past and present losses being
exhausted. Management tracks historical prepayment speeds and
projects future speeds. Faster prepayment speeds are beneficial
in accelerating the return of principal to the Corporation and minimizing the
risk of more defaults, resulting in credit losses. Management has determined
that it is likely all of the PCMOs will continue to pay an average of 8 constant
prepayment rate (CPR) or higher. An 8 CPR means that eight percent of
the principal would be expected to prepay in one year’s time. The
average CPR on the entire portfolio of PCMOs for the fourth quarter of 2009 was
15 CPR. However, these speeds are expected to slow going
forward. Based on the historical, current, and expected prepayment
speeds, management determined that it was appropriate to take impairment on the
three PCMOs with expectations of principal loss based on forward projections of
default and severity rates with the securities paying at an average of 8
CPR.
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 table
below details the other-than-temporary impairment charges recorded as of
December 31, 2009:
SECURITY
IMPAIRMENT CHARGES
(DOLLARS
IN THOUSANDS)
|
Book
|
Market
|
Unrealized
|
Impairment
|
|||||||||||||
|
Value
|
Value
|
Loss
|
Charge
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Private
collateralized mortgage obligations
|
6,284 | 4,527 | (1,757 | ) | 369 | |||||||||||
The above
table reflects the book value, market value, and unrealized losses carried on
the three PCMO securities after the Corporation recorded $369,000 of impairment
as of December 31, 2009. The $369,000 is deemed to be a credit loss
and is the amount that management expects the principal loss will be by the time
these three securities mature. The remaining $1,757,000 of unrealized
losses is deemed to be a market value loss that is temporary.
Recent
market conditions throughout the financial sector have made the evaluation
regarding the possible impairment of MBS and CMO securities difficult to fully
determine given the volatility of their pricing, based not only on rate changes,
but collateral uncertainty as well. The majority of the MBS and CMOs owned by
the Corporation are backed by the U.S. government. Approximately 15%
of the Corporation’s MBS and CMOs are PCMOs, not backed by the U.S.
government. As of December 31, 2009, seven PCMOs were held with three
of the seven rated AAA by either Moodys or S&P. The remaining
four PCMOs were rated below investment grade. Impairment charges, as
detailed above, were taken on three of these securities. Management
conducts impairment analysis on a quarterly basis and currently has no plans to
sell these securities. Cash flow analysis performed under severe
stress testing does not indicate a need to take impairment on the remaining four
bonds. Management has concluded that as of December 31, 2009, the
declines outlined in the above table represent temporary
declines. The Corporation does not intend to sell and does not
believe it will be required to sell these securities before recovery of their
cost basis, which may be at maturity.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
C - LOANS AND ALLOWANCE FOR LOAN LOSSES
LOAN
SUMMARY
(DOLLARS
IN THOUSANDS)
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Real
estate (a)
|
||||||||
|
Residential
|
163,625 | 163,076 | ||||||
|
Commercial
|
152,108 | 152,942 | ||||||
|
Construction
|
23,382 | 13,540 | ||||||
|
Commercial
|
76,526 | 71,765 | ||||||
|
Consumer
|
12,506 | 10,887 | ||||||
| 428,147 | 412,210 | |||||||
|
Less:
|
||||||||
|
Deferred
loan fees, net
|
295 | 256 | ||||||
|
Allowance
for loan losses
|
5,912 | 4,203 | ||||||
|
Total
net loans (b)
|
421,940 | 407,751 | ||||||
|
|
(a)
|
Real
estate loans serviced for Fannie Mae, which are not included in the
Consolidated Balance Sheets, totaled $11,754,000 and $11,058,000 as of
December 31, 2009, and 2008,
respectively.
|
ALLOWANCE
FOR LOAN LOSS SUMMARY
(DOLLARS
IN THOUSANDS)
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Balance
at January 1
|
4,203 | 3,682 | 3,244 | |||||||||
|
Amounts
charged off
|
(1,260 | ) | (241 | ) | (1,078 | ) | ||||||
|
Recoveries
of amounts previously charged off
|
49 | 93 | 70 | |||||||||
|
Balance
before current year provision
|
2,992 | 3,534 | 2,236 | |||||||||
|
Provision
charged to operating expense
|
2,920 | 669 | 1,446 | |||||||||
|
Balance
at December 31
|
5,912 | 4,203 | 3,682 | |||||||||
As of
December 31, 2009, 2008, and 2007, all of the loans on non-accrual status were
also considered impaired. Interest income on loans would have
increased by approximately $111,000, $1,000, and $0 during 2009, 2008, and 2007,
respectively, if these loans had performed in accordance with their original
terms.
Information
with respect to impaired loans as of and for the years ended December 31 is as
follows:
|
IMPAIRED
LOANS
|
2009
|
2008
|
2007
|
|||||||||
|
(DOLLARS
IN THOUSANDS)
|
$
|
$
|
$
|
|||||||||
|
Impaired
loans
|
||||||||||||
|
Loan
balances without a related allowance for loan losses
|
4,537 | - | - | |||||||||
|
Loan
balances with a related allowance for loan losses
|
3,078 | 2,889 | 425 | |||||||||
|
Related
allowance for loan losses
|
811 | 455 | 220 | |||||||||
|
Average
recorded balance of impaired loans
|
3,596 | 154 | 425 | |||||||||
|
Interest
income recognized on impaired loans
|
39 | 8 | 32 | |||||||||
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
D - PREMISES AND EQUIPMENT
(DOLLARS
IN THOUSANDS)
The major
classes of the Corporation's premises and equipment and accumulated depreciation
are as follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Land
|
3,017 | 3,017 | ||||||
|
Buildings
and improvements
|
19,649 | 19,533 | ||||||
|
Furniture
and equipment
|
9,045 | 8,654 | ||||||
|
Construction
in process
|
1,501 | 97 | ||||||
|
Total
|
33,212 | 31,301 | ||||||
|
Less
accumulated depreciation
|
12,354 | 11,388 | ||||||
|
Premises
and equipment
|
20,858 | 19,913 | ||||||
Depreciation
expense, which is included in operating expenses, amounted to $1,038,000 for
2009, $1,103,000 for 2008, and $1,033,000 for 2007. The construction in process
category represents expenditures for ongoing projects. When construction is
completed, these amounts will be reclassified into buildings and improvements,
and/or furniture and equipment. Depreciation only begins when the project or
asset is placed into service. As of December 31, 2009, the
construction in process consists of costs associated with renovations being made
to existing facilities to be completed in early 2010.
NOTE
E – FEDERAL HOME LOAN BANK STOCK
The Bank
is a member of the Federal Home Loan Bank of Pittsburgh (FHLB), which is one of
12 regional Federal Home Loan Banks. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded
primarily from funds deposited by member institutions and proceeds from the sale
of consolidated obligations of the FHLB System. It makes loans to members in
accordance with policies and procedures established by the board of directors of
the FHLB. As a member, the Bank is required to purchase and maintain
stock in the FHLB in an amount equal to the greater of 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year, or 5% of its outstanding advances
from the FHLB. At December 31, 2009, and December 31, 2008, the Bank
held $4,728,000 in stock of the FHLB, which was in compliance with this
requirement.
The
Corporation evaluated its holding of FHLB stock for impairment and deemed the
stock to not be impaired due to the expected recoverability of the par value,
which equals the value reflected within the Corporation’s financial
statements. The decision was based on several items ranging from the
estimated true economic losses embedded within the FHLB’s mortgage portfolio to
the FHLB’s liquidity position and credit rating. The Corporation
utilizes the impairment framework outlined in GAAP to evaluate FHLB stock for
impairment.
The
following factors were evaluated to determine the ultimate recoverability of the
par value of the Corporation’s FHLB stock holding; (i) the significance of the
decline in net assets of the FHLB as compared to the capital stock amount for
the FHLB and the length of time this situation has persisted; (ii) commitments
by the FHLB to make payments required by law or regulation and the level of such
payments in relation to the operating performance of the FHLB; (iii) the impact
of legislative and regulatory changes on the institutions and, accordingly, on
the customer base of the FHLB; (iv) the liquidity position of the FHLB; and (v)
whether a decline is temporary or whether it affects the ultimate recoverability
of the FHLB stock based on (a) the materiality of the carrying amount to the
member institution and (b) whether an assessment of the institution’s
operational needs for the foreseeable future allow management to dispose of the
stock.
Based on
its analysis of these factors, the Corporation determined that its holding of
FHLB stock was not impaired on December 31, 2009.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
F - DEPOSITS
(DOLLARS
IN THOUSANDS)
Deposits
by major classification are summarized as follows:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Non-interest
bearing demand
|
121,665 | 114,262 | ||||||
|
NOW
accounts
|
51,680 | 51,617 | ||||||
|
Money
market deposit accounts
|
48,404 | 42,074 | ||||||
|
Savings
accounts
|
86,533 | 72,210 | ||||||
|
Time
deposits under $100,000
|
188,654 | 174,918 | ||||||
|
Time
deposits of $100,000 or more
|
73,007 | 56,031 | ||||||
|
Total
deposits
|
569,943 | 511,112 | ||||||
At
December 31, 2009, the scheduled maturities of time deposits are as
follows:
|
2010
|
147,872 | |||
|
2011
|
60,258 | |||
|
2012
|
20,603 | |||
|
2013
|
11,667 | |||
|
2014
|
21,261 | |||
|
Total
|
261,661 |
NOTE
G - SHORT-TERM BORROWINGS
(DOLLARS
IN THOUSANDS)
Short-term
borrowings consist of Federal funds purchased that mature one day from the
transaction date, overnight borrowings from the FRB Discount Window and FHLB for
a term of less than one year.
A summary
of short-term borrowings is as follows for the years ended December 31, 2009,
and 2008:
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Total
short-term borrowings outstanding at year end
|
- | 11,800 | ||||||
|
Average
interest rate at year end
|
- | 0.56 | % | |||||
|
Maximum
outstanding at any month end
|
12,147 | 12,743 | ||||||
|
Average
amount outstanding for the year
|
3,379 | 3,926 | ||||||
|
Weighted-average
interest rate for the year
|
0.50 | % | 1.86 | % | ||||
As of
December 31, 2009, the Corporation had approved unsecured Federal funds lines of
$33 million. An additional $2 million of secured credit is available
upon the pledging of collateral. The Corporation also has the ability
to borrow through the FRB Discount Window. The amount of borrowing
available through the Discount Window was $8.2 million as of December 31,
2009. For further information on borrowings from the FHLB see Note
H.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
H – OTHER BORROWED FUNDS
(DOLLARS
IN THOUSANDS)
Maturities
of other borrowings at December 31, 2009, and 2008, are summarized as
follows:
|
At December 31, 2009
|
At December 31, 2008
|
|||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
FHLB
fixed rate loans
|
||||||||||||||||
|
2009
|
- | - | 15,000 | 4.51 | ||||||||||||
|
2010
|
10,000 | 4.42 | 12,500 | 4.14 | ||||||||||||
|
2011
|
9,500 | 3.83 | 9,500 | 3.83 | ||||||||||||
|
2012
|
5,000 | 4.13 | 5,000 | 4.13 | ||||||||||||
|
2013
|
8,000 | 2.76 | - | - | ||||||||||||
|
FHLB
convertible loans
|
||||||||||||||||
|
2011
|
5,000 | 4.79 | 5,000 | 4.79 | ||||||||||||
|
2012
|
7,500 | 4.62 | 7,500 | 4.62 | ||||||||||||
|
2014
and after
|
7,500 | 4.35 | 7,500 | 4.35 | ||||||||||||
|
Repurchase
agreements
|
||||||||||||||||
|
2010
|
5,000 | 3.15 | 5,000 | 3.15 | ||||||||||||
|
2011
|
5,000 | 4.64 | 5,000 | 4.64 | ||||||||||||
|
2012
|
5,000 | 4.82 | 5,000 | 4.82 | ||||||||||||
|
2014
and after
|
15,000 | 4.50 | 15,000 | 3.90 | ||||||||||||
|
Total
other borrowings
|
82,500 | 4.18 | 92,000 | 4.23 | ||||||||||||
As a
member of the FHLB Pittsburgh, the Corporation has access to significant credit
facilities. Borrowings from FHLB are secured with a blanket security
agreement and required investment of FHLB member bank stock. As
part of the security agreement, the Corporation maintains unencumbered
qualifying assets (principally 1-4 family residential mortgage loans in an
amount at least as much as the advances from the FHLB. Additionally,
the Corporation’s FHLB stock of $4,728,000 at December 31, 2009, and 2008, is
also pledged to secure these advances.
The
Corporation had a FHLB maximum borrowing capacity of $207.9 million as of
December 31, 2009, with remaining borrowing capacity of approximately $155.4
million. The borrowing arrangement with FHLB is subject to annual
renewal. The maximum borrowing capacity is recalculated
quarterly.
The terms
of FHLB convertible borrowings allow the FHLB to convert the interest rate to an
adjustable rate based on the three-month London Interbank Offering Rate (LIBOR).
The rates on these instruments can change quarterly, once certain conditions or
rate lockout periods are met. At conversion date, the Corporation has
the option of paying the borrowing off or continuing to borrow under the new
terms of the convertible borrowing.
As of
December 31, 2009, the Corporation had six repurchase agreements, securities
sold under an agreement to repurchase, for $30 million. The
Corporation pledged securities with a fair market value of $39.4 million as of
December 31, 2009, as collateral for these borrowings. One $5 million
repurchase instrument is at a fixed rate with no call features. The
remaining $25 million of instruments have call features with different
variable-to-fixed and fixed-to-variable rate provisions.
NOTE
I – CAPITAL TRANSACTIONS
On July
1, 2008, ENB Financial Corp, a bank holding company, was formed. At
that time, all shares of Ephrata National Bank stock were converted to ENB
Financial Corp shares on a one-for-one basis. The 130,443
treasury
ENB
Financial Corp
Notes to
Consolidated Financial Statements
shares
owned by the Bank as of June 30, 2008, were retired and the Corporation began
existence with 2,869,557 outstanding shares of common stock.
On August
14, 2008, the Board authorized a stock buyback plan for the purchase of up to
140,000 shares. Through December 31, 2009, 52,900 shares were purchased at a
weighted-average cost per share of $25.33.
Currently
two stock plans are in place, a nondiscriminatory employee stock purchase plan,
which allows employees to purchase shares at a 10% discount from the stock’s
fair market value at the end of each quarter, and a dividend reinvestment
plan. Both plans issue shares from treasury shares
acquired. During 2009, 15,305 shares were reissued from treasury
shares in connection with the two plans. As of December 31,
2009, the Corporation held 30,557 treasury shares, at a weighted-average cost of
$25.13 per share, with a cost basis of $768,000.
NOTE
J – RETIREMENT PLAN
The
Corporation has a defined contribution pension plan (the plan) covering all
employees aged 21 or older who work 1,000 or greater hours in a calendar year
and have completed at least one full year of employment. The
Corporation contributes 7.5% of the covered compensation of all plan
participants, plus 5.7% of covered compensation in excess of the Social Security
wage base, which was $106,800 for 2009, $102,000 for 2008, and $97,500 for
2007. For purposes of the plan, covered compensation was limited to
$245,000 in 2009, $230,000 in 2008, and $225,000 in 2007. Total
expenses of the plan were $531,000, $527,000, and $476,000, for 2009, 2008, and
2007, respectively. The Corporation’s pension plan is fully
funded.
The
Corporation also provides an optional 401(K) plan, in which employees may elect
to defer pre-tax salary dollars, subject to the maximum annual Internal Revenue
Service contribution amounts. The contribution maximum for 2009 was $16,500 for
persons under age 50, and $22,000 for persons over age 50. The 401(K) plan was
amended at the end of 2002 to allow for employer contributions. No
employer contributions were made into the plan for 2009, 2008, or
2007.
NOTE
K - DEFERRED COMPENSATION
Prior to
1999, directors of the Corporation had the ability to defer their directors'
fees into a directors’ deferred compensation plan. For the directors
who elected to have their compensation deferred, a contract was signed for each
period of deferred pay. At the time of deferment, the Corporation
used the amount of the annual directors’ fees to pay the premiums on the life
insurance policies, insuring the individual lives of the participating
directors. The Corporation could continue to pay premiums after the
deferment period, or could allow the policies to fund annual premiums through
loans against the policy’s cash surrender value. The Corporation has
continued to pay the premiums on the life insurance policies and no loans exist
on the policies.
The
Corporation is the owner and beneficiary of all life insurance policies on the
directors. The life insurance proceeds that the Corporation will
ultimately receive are designed to fund its present and future obligations to
the directors under these deferred compensation agreements; accordingly, the
amount of deferred compensation to be paid to each director was actuarially
determined based on the amount of life insurance the annual directors’ fees were
able to purchase. This amount varies for each director depending on age, general
health, and the number of years until the director is entitled to begin
receiving payments.
The life
insurance policies had an aggregate face amount of $3,911,000 for December
31, 2009, and 2008. The death benefits totaled $6,370,000 and $6,363,000
as of December 31, 2009, and 2008, respectively. The cash surrender
value of the above policies totaled $3,848,000 and
$3,573,000 as of December 31, 2009, and 2008, respectively. The net
present value of the vested portion of deferred payments totaled $1,583,000 at
December 31, 2009, and $1,883,000 at December 31, 2008. The interest
rate used to discount these obligations was 5.50% for 2009 and 2008, and 6.00%
for 2007. These net present value amounts are included in other
liabilities on the Corporation’s Consolidated Balance Sheets. Total
charges to expense for deferred compensation amounted to $94,000 for 2009,
$145,000 for 2008, and $171,000 for 2007, and are included in other operating
expenses in the Consolidated Statements of Income.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
L - COMPENSATORY OBLIGATIONS
In
October 2008, the Corporation recognized a $1,222,000 liability and
corresponding expense in connection with a voluntary separation
package. The separation package was offered to qualifying individuals
as part of a corporate-wide realignment of resources to improve
efficiency. The liability includes provisions for severance
compensation and medical insurance coverage. It has been and will
continue to be paid out bi-weekly, following the designated payroll schedule,
until all obligations are fully satisfied in 2010. The balance of the
separation liability account was $186,000 as of December 31, 2009, and
$1,188,000 as of December 31, 2008. No further liability is
anticipated in connection with the separation package in 2010 or
beyond.
NOTE
M - INCOME TAXES
Federal
income tax expense as reported differs from the amount computed by applying the
statutory Federal income tax rate to income before taxes. A
reconciliation of the differences by amount and percent is as
follows:
|
Federal
Income Tax Summary:
|
||||||||||||||||||||||||
|
(DOLLARS IN
THOUSANDS)
|
Year Ended December 31,
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||||||||
|
Income
tax at statutory rate
|
1,508 | 34.0 | 1,325 | 34.0 | 1,909 | 34.0 | ||||||||||||||||||
|
Tax-exempt
interest income
|
(1,260 | ) | (28.3 | ) | (1,213 | ) | (31.1 | ) | (1,317 | ) | (23.5 | ) | ||||||||||||
|
Non-deductible
interest expense
|
107 | 2.4 | 124 | 3.2 | 144 | 2.6 | ||||||||||||||||||
|
Bank-owned
life insurance
|
(220 | ) | (5.0 | ) | (215 | ) | (5.5 | ) | (160 | ) | (2.9 | ) | ||||||||||||
|
Other
|
1 | 0.0 | (138 | ) | (3.6 | ) | (23 | ) | (0.4 | ) | ||||||||||||||
|
Income
tax expense (benefit)
|
136 | 3.1 | (117 | ) | (3.0 | ) | 553 | 9.8 | ||||||||||||||||
The
ability to realize the benefit of deferred tax assets is dependent upon a number
of factors, including the generation of future taxable income, the ability to
carry back taxes paid in previous years, the ability to offset capital losses
with capital gains, the reversal of deferred tax liabilities, and certain tax
planning strategies. A
valuation allowance of $262,000 was established during the year ending
December 31, 2006, to offset in its entirety the tax benefits associated with
certain impaired securities that management believes may not be
realizable. Due to sales in 2007 and 2008 of previously impaired
securities at a book gain, this valuation allowance was reduced to $125,000 as
of December 31, 2008. The Corporation sold equity securities at a net
loss of $60,000 during 2009, which increased the valuation allowance by $20,000
to $145,000 as of December 31, 2009.
The
Corporation had a deferred tax asset of $1,093,000 and $820,000 for credits
related to Alternative Minimum Taxes (AMT) as of December 31, 2009, and 2008,
respectively, and a deferred tax asset of $107,000 and $80,000 as of December
31, 2009, and 2008, respectively, for credits related to low income
housing. In addition, as of the end of 2009, the Corporation had a
deferred tax asset of $151,000 related to a charitable contribution
carryover. The AMT credits have an unlimited carry-forward period,
while the low income housing credits can be carried forward 20 years, and the
charitable contributions 5 years. No valuation has been established
for these deferred tax assets in view of the Corporation’s ability to carry
forward taxes paid and credits earned in previous years, to future years,
coupled with the anticipated future taxable income as evidenced by the
Corporation’s earnings potential.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
Significant
components of income tax expense are as follows:
|
(DOLLARS IN
THOUSANDS)
|
Year
Ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Current
tax expense
|
1,099 | 816 | 983 | |||||||||
|
Deferred
tax benefit
|
(983 | ) | (857 | ) | (369 | ) | ||||||
|
Valuation
allowance adjustment
|
20 | (76 | ) | (61 | ) | |||||||
|
Income
tax expense (benefit)
|
136 | (117 | ) | 553 | ||||||||
Components
of the Corporation's net deferred tax position are as follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
$
|
$
|
$
|
||||||||||
|
Deferred
tax assets
|
||||||||||||
|
Allowance
for loan losses
|
2,010 | 1,429 | 1,252 | |||||||||
|
Net
unrealized holding losses on securities available for sale
|
133 | 496 | 93 | |||||||||
|
Deferred
compensation reserve
|
538 | 640 | 689 | |||||||||
|
Separation
compensation obligation reserve
|
63 | 404 | - | |||||||||
|
Unrealized
capital loss
|
- | - | 76 | |||||||||
|
Capital
loss carryforward
|
145 | 125 | 125 | |||||||||
|
Other
than temporary impairment
|
125 | - | - | |||||||||
|
Tax
credit carryforward
|
1,200 | 900 | 433 | |||||||||
|
Charitable
contribution carryforward
|
151 | 89 | 23 | |||||||||
|
Allowance
for off-balance sheet extensions of credit
|
73 | 72 | 65 | |||||||||
|
Interest
on non-accrual loans
|
86 | 19 | 3 | |||||||||
|
Other
|
3 | 6 | - | |||||||||
|
Total
deferred tax assets
|
4,527 | 4,180 | 2,759 | |||||||||
|
Valuation
allowance
|
(145 | ) | (125 | ) | (201 | ) | ||||||
|
Net
deferred taxes
|
4,382 | 4,055 | 2,558 | |||||||||
|
Deferred
tax liabilities
|
||||||||||||
|
Premises
and equipment
|
(1,595 | ) | (1,559 | ) | (1,391 | ) | ||||||
|
Discount
on investment securities
|
(195 | ) | (78 | ) | (55 | ) | ||||||
|
Other
|
(22 | ) | - | (5 | ) | |||||||
|
Total
deferred tax liabilities
|
(1,812 | ) | (1,637 | ) | (1,451 | ) | ||||||
|
Net
deferred tax assets
|
2,570 | 2,418 | 1,107 | |||||||||
NOTE
N – REGULATORY MATTERS AND RESTRICTIONS
The
Corporation and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet the
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation’s consolidated financial
statements.
Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. The quantitative measures established by regulation to ensure
capital adequacy, require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth below) of Tier 1 capital to average assets and
Tier 1 and total capital to risk-weighted assets.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
As of
December 31, 2009, and 2008, the Corporation and Bank were categorized as “well
capitalized” under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification
that management believes have changed the institution’s category. The
following chart details the Corporation’s and the Bank’s capital levels as of
December 31, 2009, and December 31, 2008, compared to regulatory
levels.
|
CAPITAL
LEVELS
|
To
Be Well
|
|||||||||||||||||||||||
|
(DOLLARS
IN THOUSANDS)
|
Capitalized
Under
|
|||||||||||||||||||||||
|
For
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provision
|
||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
|||||||||||||||||||
|
As
of December 31, 2009
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
75,679 | 16.0 | 37,818 | 8.0 | 47,273 | 10.0 | ||||||||||||||||||
|
Bank
|
74,990 | 15.9 | 37,818 | 8.0 | 47,273 | 10.0 | ||||||||||||||||||
|
Tier
I Capital to Risk-Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
69,767 | 14.8 | 18,909 | 4.0 | 28,364 | 6.0 | ||||||||||||||||||
|
Bank
|
69,077 | 14.6 | 18,909 | 4.0 | 28,364 | 6.0 | ||||||||||||||||||
|
Tier
I Capital to Average Assets
|
||||||||||||||||||||||||
|
Consolidated
|
69,767 | 9.7 | 28,894 | 4.0 | 36,118 | 5.0 | ||||||||||||||||||
|
Bank
|
69,077 | 9.6 | 28,905 | 4.0 | 36,132 | 5.0 | ||||||||||||||||||
|
As
of December 31, 2008
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
73,264 | 16.2 | 36,246 | 8.0 | 45,308 | 10.0 | ||||||||||||||||||
|
Bank
|
72,917 | 16.1 | 36,246 | 8.0 | 45,308 | 10.0 | ||||||||||||||||||
|
Tier
I Capital to Risk-Weighted Assets
|
||||||||||||||||||||||||
|
Consolidated
|
68,848 | 15.2 | 18,123 | 4.0 | 27,185 | 6.0 | ||||||||||||||||||
|
Bank
|
68,501 | 15.1 | 18,123 | 4.0 | 27,185 | 6.0 | ||||||||||||||||||
|
Tier
I Capital to Average Assets
|
||||||||||||||||||||||||
|
Consolidated
|
68,848 | 10.1 | 27,227 | 4.0 | 34,034 | 5.0 | ||||||||||||||||||
|
Bank
|
68,501 | 10.1 | 27,236 | 4.0 | 34,045 | 5.0 | ||||||||||||||||||
In
addition to the capital guidelines, certain laws restrict the amount of
dividends paid to stockholders in any given year. The approval of the
OCC shall be required if the total of all dividends declared by the Corporation
in any year shall exceed the total of its net profits for that year combined
with retained net profits of the preceding two years. Under this
restriction, the Corporation could declare dividends in 2010, without the
approval of the OCC, of approximately $1.4 million, plus an additional amount
equal to the Corporation’s net profits for 2010, up to the date of any such
dividend declaration.
NOTE
O – TRANSACTIONS WITH DIRECTORS AND OFFICERS
The
following table presents activity in the amounts due from directors, executive
officers, immediate family, and affiliated companies. These
transactions are made on the same terms and conditions, including interest rates
and collateral requirements as those prevailing at the time for comparable
transactions with others. An analysis of the activity with respect to
such aggregate loans to related parties is shown below.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
Loans to
Insiders
(DOLLARS
IN THOUSANDS)
|
Actual
|
||||
|
$
|
||||
|
Balance,
December 31, 2008
|
18,023 | |||
|
Advances
|
8,413 | |||
|
Repayments
|
(12,629 | ) | ||
|
Balance,
December 31, 2009
|
13,807 | |||
Deposits
from the insiders represented in the table above totaled $6,904,000 as of
December 31, 2009, and $8,858,000 as of December 31, 2008.
NOTE
P - COMMITMENTS AND CONTINGENCIES
In the
normal course of business, the Corporation makes various commitments that are
not reflected in the accompanying consolidated financial statements. These are
commonly referred to as off-balance sheet commitments and include firm
commitments to extend credit, unused lines of credit, and open letters of
credit. On December 31, 2009, firm loan
commitments totaled approximately $16 million; unused lines of credit totaled
approximately $91 million; and open letters of credit totaled approximately $9
million. The sum of these commitments, $116 million, represents total exposure
to credit loss in the event of nonperformance by customers with respect to these
financial instruments; however the vast majority of these commitments are
typically not drawn upon. The same credit policies for on-balance sheet
instruments apply for making commitments and conditional obligations and the
actual credit losses that could arise from the exercise of these commitments is
expected to compare favorably with the loan loss experience on the loan
portfolio taken as a whole. Commitments to extend credit on December 31, 2008,
totaled $98 million, representing firm loan commitments of $15 million, unused
lines of credit of $69 million, and open letters of credit totaling $14
million.
Firm
commitments to extend credit and unused lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer’s creditworthiness is
evaluated on an individual basis. The amount of collateral obtained, if deemed
necessary by the extension of credit, is based on management’s credit evaluation
of the customer. These commitments are supported by various types of collateral,
where it is determined that collateral is required.
Open
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. Most guarantees
expire within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to
customers. While various assets of the customer act as collateral for
these letters of credit, real estate is the primary collateral held for these
potential obligations.
NOTE
Q - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The
Corporation determines concentrations of credit risk by reviewing loans by
borrower, geographical area, and loan purpose. The amount of credit
extended to a single borrower or group of borrowers is capped by the legal
lending limit, which is defined as 15% of risk-based capital, less the allowance
for loan losses. The Corporation’s lending policy further restricts
the amount to 75% of the legal lending limit. As of December 31,
2009, the Corporation’s legal lending limit was $11,249,000, and the
Corporation’s policy limit was $8,436,000. This compared to a
legal lending limit of $10,928,000, and policy limit of $8,196,000 as of
December 31, 2008. As of December 31, 2009, one lending relationship
to a local municipality totaled $8,611,000, or 11.4%, of risk-based capital,
which exceeded the Corporation’s internal lending policy limit by $175,000, but
not the legal lending limit. As of December 31, 2008, the same
lending relationship totaled $8,858,000, or 12.1%, of risk-based capital,
exceeding the Corporation’s internal lending policy limit by $662,000, but not
the legal lending limit.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
Geographically,
the primary lending area for the Corporation encompasses Lancaster, Lebanon, and
Berks counties of Pennsylvania, with the majority of the loans made in Lancaster
County. The ability of debtors to honor their loan agreements is
impacted by the health of the local economy. The Corporation’s
immediate market area benefits from a diverse economy, which has resulted in a
diverse loan portfolio. As a community bank, the largest amount of
loans outstanding consists of personal mortgages, residential rental loans, and
personal loans secured by real estate. Beyond personal lending, the
Corporation’s business and commercial lending includes loans for agricultural,
construction, specialized manufacturing, service industries, many types of small
businesses, and loans to non-profit entities and governmental
units.
Management
evaluates concentrations of credit based on loan purpose on a quarterly
basis. The Corporation’s greatest concentration of loans by purpose
is residential real estate, which comprises $163.6 million, or 38.2%, of the
$428.1 million gross loans outstanding. Residential real estate
consists of first mortgages and home equity loans. A concentration in
commercial real estate of 35.5%, or $152.1 million, also exists; however, within
that category there is not a concentration by industry. More
specifically within these larger purpose categories, management monitors on a
quarterly basis the largest concentrations of non-consumer credit based on the
North American Industrial Classification System (NAICS). As of
December 31, 2009, the largest specific industry type categories were
non-residential real estate investment loans with a balance of $31.3 million, or
7.3%, of gross loans, dairy cattle and milk production of $27.8 million, or
6.5%, of gross loans, and residential investment real estate of $25.2 million,
or 5.9%, of gross loans.
To
evaluate risk for the securities portfolio, the Corporation reviews both
geographical concentration and credit ratings. As of December 31,
2009, the Corporation held obligations of states and political subdivisions
issued by municipalities located within the state of Pennsylvania totaling $14.2
million, which is 22.4% of the municipal portfolio, and 6.1% of the total
portfolio. Internal policy requires municipal bonds purchased to be rated at
least A2 by Moodys and/or A by Standard & Poor’s (S&P) at the time of
purchase. Presently, $8.6 million, or 13.5%, of the municipal bonds
are below the A2/A credit ratings the Corporation requires at the time of
purchase. Corporate bonds must carry an initial credit rating of A3
by Moodys and A- by S&P, and at all times corporate bonds are to be
investment grade, which is defined as Baa3 for Moodys and BBB- for S&P, or
above. All of the Corporation’s corporate bonds carry at least a
credit rating of A3 by Moodys and A- by S&P as of December 31,
2009.
As of
December 31, 2009, the Corporation held $16.6 million of book value in private
collateralized mortgage obligations (PCMO). The PCMOs are not backed
by the U.S. government. A total of seven PCMO instruments were held
as of December 31, 2009. Three of these securities, with a book value
of $6.6 million, carried an AAA credit rating by at least one of the major
credit rating services. The four remaining PCMOs, with a book value
of $10.0 million, had credit ratings below investment grade, which is BBB- for
S&P and Baa3 for Moodys.
NOTE
R - FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, the Corporation adopted the provisions outlined by U.S.
generally accepted accounting principles that govern fair value measurement for
financial assets and financial liabilities. The standard provides
enhanced guidance for using fair value to measure assets and liabilities and
applies whenever other standards require or permit assets or liabilities to be
measured at fair value. The standard does not expand the use of fair
value in any new circumstances. The FASB also deferred the effective
date of fair value implementation for all nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008.
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.
|
ENB
Financial Corp
Notes to
Consolidated Financial Statements
|
Level
III:
|
Assets
and liabilities that have little to no observable pricing as of the
reported date. These items do not have two-way markets and are
measured using management’s best estimate of fair value, where the inputs
into the determination of fair value require significant management
judgment or estimation.
|
The
following table presents the assets reported on the consolidated balance sheet
at their fair value as of December 31, 2009, by level within the fair value
hierarchy. 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
Reported at Fair Value
(DOLLARS
IN THOUSANDS)
|
December
31, 2009
|
||||||||||||||||
|
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
|
U.S.
treasuries & government agencies
|
- | 47,571 | - | 47,571 | ||||||||||||
|
Mortgage-backed
securities
|
- | 42,390 | - | 42,390 | ||||||||||||
|
Collateralized
mortgage obligations
|
- | 53,982 | - | 53,982 | ||||||||||||
|
Private
collateralized mortgage obligations
|
- | 12,748 | - | 12,748 | ||||||||||||
|
Corporate
debt securities
|
- | 13,369 | - | 13,369 | ||||||||||||
|
Obligations
of states and political subdivisions
|
- | 63,369 | - | 63,369 | ||||||||||||
|
Equity
securities
|
2,906 | - | - | 2,906 | ||||||||||||
|
Total
securities
|
2,906 | 233,429 | - | 236,335 | ||||||||||||
On
December 31, 2009, 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 are fair valued
utilizing level I inputs because the funds have their own quoted prices in an
active market. As of December 31, 2009, the CRA fund investments had a
$3,000,000 book value with a fair market value of $2,906,000.
Assets
Reported at Fair Value
(DOLLARS
IN THOUSANDS)
|
December
31, 2008
|
||||||||||||||||
|
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
|
U.S.
treasuries & government agencies
|
- | 47,064 | - | 47,064 | ||||||||||||
|
Mortgage-backed
securities
|
- | 46,093 | - | 46,093 | ||||||||||||
|
Collateralized
mortgage obligations
|
- | 36,049 | - | 36,049 | ||||||||||||
|
Private
collateralized mortgage obligations
|
- | 15,185 | 3,109 | 18,294 | ||||||||||||
|
Corporate
debt securities
|
- | 11,637 | - | 11,637 | ||||||||||||
|
Obligations
of states and political subdivisions
|
- | 52,521 | - | 52,521 | ||||||||||||
|
Equity
securities
|
2,763 | - | - | 2,763 | ||||||||||||
|
Total
securities
|
2,763 | 208,549 | 3,109 | 214,421 | ||||||||||||
On
December 31, 2008, the Corporation held one PCMO that was valued using level III
inputs due to the limited reliable observable inputs that were available at the
time for below investment grade PCMOs and volatility of the market for this type
of security. The security had a book value of $3,810,000, with a fair
market value of $3,109,000 using level III inputs.
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.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
The
following table represents fair value measurements using significant
unobservable inputs (Level III):
Fair
Value Measurements Utilizing Level III Pricing
|
(DOLLARS
IN THOUSANDS)
|
Available-
|
|||
|
For-Sale
|
||||
|
Securities
|
||||
|
Balance,
January 1, 2009,
|
$ | 3,109 | ||
|
Total
gains or losses (realized/unrealized):
|
- | |||
|
Included
in earnings
|
- | |||
|
Included
in other comprehensive income
|
- | |||
|
Purchases,
issuances, and settlements
|
- | |||
|
Transfers
in/(out) of Level III
|
(3,109 | ) | ||
|
Balance,
December 31, 2009
|
$ | - | ||
The
following table presents the assets measured on a nonrecurring basis on the
consolidated statements of financial condition at their fair value as of
December 31, 2009, and December 31, 2008, by level within the fair value
hierarchy.
|
(DOLLARS
IN THOUSANDS)
|
December 31, 2009
|
|||||||||||||||
|
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Impaired
Loans
|
$ | - | $ | 6,804 | $ | - | $ | 6,804 | ||||||||
|
OREO
|
520 | - | - | 520 | ||||||||||||
|
Total
|
$ | 520 | $ | 6,804 | $ | - | $ | 7,324 | ||||||||
|
December 31, 2008
|
||||||||||||||||
|
Level I
|
Level II
|
Level III
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Impaired
Loans
|
$ | - | $ | 2,444 | $ | - | $ | 2,444 | ||||||||
|
OREO
|
520 | - | - | 520 | ||||||||||||
|
Total
|
$ | 520 | $ | 2,444 | $ | - | $ | 2,964 | ||||||||
The
Corporation had a total of $7,615,000 of impaired loans as of December 31, 2009,
with $811,000 of specifically allocated allowance against these
loans. Management believes the fair value of the loans to be the
current loan amount less the specific allowance, or $6,804,000. As of
December 31, 2008, the Corporation had a total of $2,899,000 of impaired loans
with $455,000 of specifically allocated allowance against these
loans. Management believes the fair value of the loans to be the
current loan amount less the specific allowance, or $2,444,000.
Other
real estate owned (OREO) is measured at fair value less cost to sell at the date
of foreclosure. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value, less cost to sell. Management has had
an agreement of sale for an amount less expected settlement costs of
$520,000. Income and expenses from operations and changes in
valuation allowance are included in the net expenses from OREO.
NOTE
S - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
Cash
and Cash Equivalents, Accrued Interest Receivable, and Accrued Interest
Payable
For these
short-term instruments, the carrying amount is a reasonable estimate of fair
value.
ENB
Financial Corp
Notes to
Consolidated Financial Statements
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.
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.
Bank-Owned
Life Insurance
Fair
value is equal to the cash surrender value of the life insurance
policies.
Mortgage
Servicing Assets
The fair
value of mortgage servicing assets is based on the present value of future cash
flows for pools of mortgages, stratified by rate and maturity date.
Deposits
The fair
value of non-interest bearing demand deposit accounts and interest bearing
demand deposit and savings 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, which are
currently being offered for similar time deposits with similar remaining
maturities.
Borrowings
The fair
value for overnight borrowings is equal to the carrying value. The
fair value of a term borrowing is estimated by comparing the rate currently
offered for the same type of borrowing instrument with a matching remaining
term.
Firm
Commitments to Extend Credit, Lines of Credit, and Open Letters of
Credit
These
financial instruments are generally not subject to sale and estimated fair
values are not readily available. The carrying value, represented by
the net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining contractual
fee over the term of the commitment, using fees currently charged to enter into
similar agreements with similar credit risk, is not considered material for
disclosure purposes. The contractual amounts of unfunded commitments
are presented in Note P.
The
carrying amounts and estimated fair values of the Corporation's financial
instruments at December 31, 2009, and 2008, are as follows:
ENB
Financial Corp
Notes to
Consolidated Financial Statements
FAIR
VALUE OF FINANCIAL INSTRUMENTS
(DOLLARS
IN THOUSANDS)
|
December
31,
|
December
31,
|
|||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Carrying
|
Carrying
|
|||||||||||||||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
16,747 | 16,747 | 19,392 | 19,392 | ||||||||||||
|
Securities
available for sale
|
236,335 | 236,335 | 214,421 | 214,421 | ||||||||||||
|
Loans
held for sale
|
179 | 179 | 245 | 245 | ||||||||||||
|
Loans,
net of allowance
|
421,940 | 419,961 | 407,751 | 398,291 | ||||||||||||
|
Accrued
interest receivable
|
3,129 | 3,129 | 2,794 | 2,794 | ||||||||||||
|
Bank-owned
life insurance
|
15,248 | 15,248 | 14,512 | 14,512 | ||||||||||||
|
Mortgage
servicing assets
|
46 | 46 | 33 | 33 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Demand
deposits
|
121,665 | 121,665 | 114,262 | 114,262 | ||||||||||||
|
Interest
demand deposits
|
51,680 | 51,680 | 51,617 | 51,617 | ||||||||||||
|
Savings
deposits
|
86,534 | 86,534 | 72,210 | 72,210 | ||||||||||||
|
Money
market deposits
|
48,404 | 48,404 | 42,074 | 42,074 | ||||||||||||
|
Time
deposits
|
261,660 | 265,284 | 230,949 | 234,725 | ||||||||||||
|
Total
deposits
|
569,943 | 573,567 | 511,112 | 514,888 | ||||||||||||
|
Short-term
borrowings
|
- | - | 11,800 | 11,800 | ||||||||||||
|
Long-term
borrowings
|
82,500 | 87,490 | 92,000 | 98,251 | ||||||||||||
|
Total
borrowings
|
82,500 | 87,490 | 103,800 | 110,051 | ||||||||||||
|
Accrued
interest payable
|
1,493 | 1,493 | 1,703 | 1,703 | ||||||||||||
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
T – CONDENSED PARENT ONLY DATA
Condensed
Balance Sheet (Parent Company Only)
(DOLLARS
IN THOUSANDS)
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Assets
|
||||||||
|
Cash
|
690 | 347 | ||||||
|
Equity
in bank subsidiary
|
68,886 | 67,698 | ||||||
|
Total
assets
|
69,576 | 68,045 | ||||||
|
Capital
stock
|
574 | 574 | ||||||
|
Capital
surplus
|
4,415 | 4,457 | ||||||
|
Retained
earnings
|
65,613 | 64,629 | ||||||
|
Unrealized
loss on AFS securities
|
(258 | ) | (963 | ) | ||||
|
Treasury
stock
|
(768 | ) | (652 | ) | ||||
|
Total
stockholder's equity
|
69,576 | 68,045 | ||||||
Condensed
Statement of Income
|
(DOLLARS
IN THOUSANDS)
|
Year
|
Six-Months
|
||||||
|
Ended
|
Ended
|
|||||||
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Income
|
||||||||
|
Dividend
income
|
3,817 | 2,773 | ||||||
|
Undistributed
earnings (loss) of bank subsidiary
|
483 | (1,581 | ) | |||||
|
Net
Income
|
4,300 | 1,192 | ||||||
|
Condensed
Statement of Cash Flows
|
Year
|
Six
Months
|
||||||
|
(DOLLARS
IN THOUSANDS)
|
Ended
|
Ended
|
||||||
|
December 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
$
|
$
|
|||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
income
|
4,300 | 1,192 | ||||||
|
Equity
in undistributed earnings (loss) of subsidiaries
|
(483 | ) | 1,581 | |||||
|
Net
cash provided by operating activities
|
3,817 | 2,773 | ||||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Proceeds
from issuance of treasury stock
|
349 | 180 | ||||||
|
Payment
to repurchase common stock
|
(507 | ) | (833 | ) | ||||
|
Dividends
paid
|
(3,316 | ) | (1,773 | ) | ||||
|
Net
cash used by financing activities
|
(3,474 | ) | (2,426 | ) | ||||
|
Cash
and Cash Equivalents:
|
||||||||
|
Net
change in cash and cash equivalents
|
343 | 347 | ||||||
|
Cash
and cash equivalents at beginning of period
|
347 | - | ||||||
|
Cash
and cash equivalents at end of period
|
690 | 347 | ||||||
ENB
Financial Corp
Notes to
Consolidated Financial Statements
NOTE
U - SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
The
unaudited quarterly results of operations for the years ended 2009 and 2008 are
as follows:
|
2009
|
||||||||||||||||
|
1st
Qtr
|
2nd
Qtr
|
3rd
Qtr
|
4th
Qtr
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Interest
income
|
8,406 | 8,411 | 8,505 | 8,481 | ||||||||||||
|
Interest
expense
|
3,274 | 3,356 | 3,214 | 2,974 | ||||||||||||
|
Net
interest income
|
5,132 | 5,055 | 5,291 | 5,507 | ||||||||||||
|
Less
provision for loan losses
|
150 | 226 | 1,344 | 1,200 | ||||||||||||
|
Net
interest income after provision for loan losses
|
4,982 | 4,829 | 3,947 | 4,307 | ||||||||||||
|
Other
income
|
1,572 | 1,750 | 1,280 | 1,838 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Salaries
and employee benefits
|
2,864 | 2,708 | 2,684 | 2,611 | ||||||||||||
|
Occupancy
and equipment expenses
|
557 | 564 | 563 | 576 | ||||||||||||
|
Federal
deposit insurance
|
417 | 299 | 165 | 141 | ||||||||||||
|
Other
operating expenses
|
1,597 | 1,560 | 1,362 | 1,401 | ||||||||||||
|
Total
operating expenses
|
5,435 | 5,131 | 4,774 | 4,729 | ||||||||||||
|
Income
before income taxes
|
1,119 | 1,448 | 453 | 1,416 | ||||||||||||
|
Provision
(benefit) for Federal income taxes
|
38 | 188 | (189 | ) | 99 | |||||||||||
|
Net
income
|
1,081 | 1,260 | 642 | 1,317 | ||||||||||||
|
FINANCIAL
RATIOS
|
||||||||||||||||
|
Per
share data:.
|
||||||||||||||||
|
Net
income
|
0.38 | 0.45 | 0.23 | 0.46 | ||||||||||||
|
Cash
dividends paid
|
0.31 | 0.31 | 0.31 | 0.24 | ||||||||||||
|
2008
|
||||||||||||||||
|
1st
Qtr
|
2nd
Qtr
|
3rd
Qtr
|
4th
Qtr
|
|||||||||||||
|
$
|
$
|
$
|
$
|
|||||||||||||
|
Interest
income
|
8,585 | 8,668 | 8,818 | 8,654 | ||||||||||||
|
Interest
expense
|
3,752 | 3,641 | 3,625 | 3,580 | ||||||||||||
|
Net
interest income
|
4,833 | 5,027 | 5,193 | 5,074 | ||||||||||||
|
Less
provision for loan losses
|
199 | 150 | 170 | 150 | ||||||||||||
|
Net
interest income after provision for loan losses
|
4,634 | 4,877 | 5,023 | 4,924 | ||||||||||||
|
Other
income
|
1,356 | 1,363 | 441 | 1,747 | ||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Salaries
and employee benefits
|
2,638 | 2,607 | 2,654 | 3,993 | ||||||||||||
|
Occupancy
and equipment expenses
|
534 | 543 | 534 | 588 | ||||||||||||
|
Federal
deposit insurance
|
14 | 13 | 97 | 106 | ||||||||||||
|
Other
operating expenses
|
1,218 | 1,429 | 1,702 | 1,798 | ||||||||||||
|
Total
operating expenses
|
4,404 | 4,592 | 4,987 | 6,485 | ||||||||||||
|
Income
before income taxes (benefit)
|
1,586 | 1,648 | 477 | 186 | ||||||||||||
|
Provision
(benefit) for Federal income taxes
|
191 | 220 | 212 | (740 | ) | |||||||||||
|
Net
income
|
1,395 | 1,428 | 265 | 926 | ||||||||||||
|
FINANCIAL
RATIOS
|
||||||||||||||||
|
Per
share data:
|
||||||||||||||||
|
Net
income
|
0.49 | 0.50 | 0.09 | 0.32 | ||||||||||||
|
Cash
dividends paid
|
0.31 | 0.31 | 0.31 | 0.31 | ||||||||||||
ENB
FINANCIAL CORP
|
Item
9.
|
Changes
in and Disagreements with Accountant on Accounting and
Financial Disclosure
|
None
|
Item
9A (T).
|
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 December 31, 2009, 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 December 31, 2009,
are effective in timely alerting them to material information relating to the
Corporation required to be in the Corporation’s periodic filings under the
Exchange Act.
(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 has
materially affected, or is reasonably likely to materially affect, the
Corporation’s internal control over financial reporting.
(c)
Report on Management’s Assessment of Internal Control over Financial
Reporting
The
Corporation is responsible for the preparation, integrity, and fair presentation
of the financial statements included in this annual report. The financial
statements and notes included in this annual report have been prepared in
conformity with United States generally accepted accounting principles and
necessarily include some amounts that are based on management's best estimates
and judgments.
Management
of the Corporation is responsible for establishing and maintaining effective
internal control over financial reporting that is designed to produce reliable
financial statements in conformity with United States generally accepted
accounting principles. The system of internal control over financial reporting
as it relates to the financial statements is evaluated for effectiveness by
management and tested for reliability through a program of internal audits.
Actions are taken to correct potential deficiencies as they are identified. Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of internal control
will provide only reasonable assurance with respect to financial statement
preparation.
Management
assessed the Corporation’s system of internal control over financial reporting
as of December 31, 2009, in relation to criteria for effective internal control
over financial reporting as described in "Internal Control - Integrated
Framework," issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management concludes that, as of December
31, 2009, its system of internal control over financial reporting is effective
and meets the criteria of the "Internal Control – Integrated
Framework".
This
annual report does not include an attestation report of the Corporation’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Corporation’s registered public accounting firm pursuant to
ENB
FINANCIAL CORP
temporary
rules of the Securities and Exchange Commission that permit the Corporation to
provide only management’s report in this annual report.
|
/s/ Aaron L. Groff, Jr.
|
/s/ Scott E. Lied
|
|
Aaron
L. Groff, Jr.
|
Scott
E. Lied
|
|
President,
Chief Executive Officer
|
Treasurer
|
|
&
Chairman of the Board
|
(Principal
Financial Officer)
|
|
Ephrata,
PA
|
|
|
March
24, 2010
|
|
Item
9B.
|
Other
Information
|
None
ENB
FINANCIAL CORP
Part
III
|
Item
10.
|
Directors,
Executive Officers, and Corporate
Governance
|
The
information required by this Item, relating to directors, executive officers,
and control persons is set forth under the captions, “Election of Directors,”
“Information about Nominees and Current Directors,” “Meetings and Committees of
the Board of Directors – Audit Committee,” “Executive Officers,” “Audit
Committee Report,” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” of the Corporation’s definitive Proxy Statement to be used in
connection with the Annual Meeting of Shareholders, to be held on May 4, 2010,
which is incorporated herein by reference.
The
Corporation has adopted a Code of Ethics that applies to directors, officers,
and employees of the Corporation and the Bank. The Code of Ethics is
attached as Exhibit 14 to this Form 10-K.
There
were no material changes to the procedures by which security holders may
recommend nominees to the Corporation’s board of directors during the fourth
quarter of 2009.
|
Item
11.
|
Executive
Compensation
|
The
information required by this Item, relating to executive compensation, is set
forth under the captions, “Summary Compensation Table,” “Compensation Discussion
and Analysis,” Compensation Committee Report,” and “Compensation Committee
Interlocks and Insider Participation,” of the Corporation’s definitive Proxy
Statement to be used in connection with the Annual Meeting of Shareholders, to
be held on May 4, 2010, which is incorporated herein by reference.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The
information required by this Item, related to beneficial ownership of the
Corporation’s common stock, is set forth under the caption, “Share Ownership” of
the Corporation’s definitive Proxy Statement to be used in connection with the
Annual Meeting of Shareholders to be held on May 4, 2010, which is incorporated
herein by reference.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The
information required by this Item related to transactions with management and
others, certain business relationships, and indebtedness of management, is set
forth under the caption, “Transactions with Related Persons,” and “Governance of
the Company” of the Corporation’s definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 4, 2010, which is incorporated
herein by reference.
|
Item
14.
|
Principal
Accountant Fees and
Services
|
The information required by this Item
related to fees and the audit committees’ pre-approved policies are set forth
under the caption, “Audit Committee Report” of the Corporation’s definitive
Proxy Statement to be used in connection with the Annual Meeting of Shareholders
to be held on May 4, 2010, which is incorporated herein by
reference.
ENB
FINANCIAL CORP
Part
IV
|
Item
15.
|
Exhibits,
Financial Statement Schedules, and Reports on Form
8-K
|
|
|
(a)
|
1.
|
Financial
Statements.
|
The
following financial statements are included by reference in Part II, Item 8
hereof.
Report of
Independent Registered Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Income
Consolidated
Statements of Stockholders’ Equity
Consolidated
Statements of Cash Flows
Notes to
Consolidated Financial Statements
|
|
2.
|
The
financial statement schedules required by this Item are omitted because
the information is either inapplicable, not required, or is shown in the
respective consolidated financial statements or the notes
thereto.
|
|
|
3.
|
The
Exhibits filed herewith or incorporated by reference as a part of this
Annual Report, are set forth in (b),
below.
|
|
|
(b)
|
EXHIBITS
|
|
|
3
(i)
|
Articles
of Association of the Registrant, as amended. (Incorporated herein by
reference to Exhibit 3.1 of the Corporation’s Form 8-K12g3 filed with the
SEC on July 1, 2008.)
|
|
|
3
(ii)
|
Bylaws
of the Registrant, as amended. (Incorporated herein by reference to
Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January
15, 2010.)
|
|
|
10.1
|
Form
of Deferred Income Agreement. (Incorporated herein by reference to Exhibit
10.1 of the Corporation’s Form 10-Q, filed with the SEC on August 13,
2008.)
|
|
|
10.2
|
2001
Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
99.1 of the Corporation’s Registration Statement on Form S-8 filed with
the SEC on July 9, 2008.)
|
|
|
11
|
Statement
re: Computation of Earnings per Share as found on pages 31 and
73 of this 2009 Form 10-K filing, which is included
herein.
|
|
|
12
|
Statement
re: Computation of Ratios as found on page 31 of this 2009 Form
10-K filing, which is included
herein.
|
|
|
14
|
Code
of Ethics Policy of Registrant as amended March 11, 2009. (Incorporated
herein by reference to Exhibit 14 of the Corporation’s Form 10-K filed
with the SEC on March 12, 2009)
|
|
|
21
|
Subsidiaries
of the Registrant
|
|
|
23
|
Consent
of Independent Registered Public Accounting
Firm
|
|
|
31.1
|
Section
302 Chief Executive Officer Certification (Required by Rule
13a-14(a)/15a-14(a)).
|
|
|
31.2
|
Section
302 Principal Financial Officer Certification (Required by Rule
13a-14(a)/15a-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)).
|
|
|
(c)
|
NOT
APPLICABLE.
|
ENB
FINANCIAL CORP
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
ENB
FINANCIAL CORP
|
||
|
By:
|
/s/ Aaron L. Groff,
Jr.
|
|
|
Aaron
L. Groff, Jr., Chairman of the Board,
|
||
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
/s/ Aaron L. Groff, Jr.
|
Chairman
of the Board, President,
|
March
24, 2010
|
|
(Aaron
L. Groff, Jr.)
|
Chief
Executive Officer and Director
|
|
|
/s/ Scott E. Lied
|
Treasurer
|
March
24, 2010
|
|
(Scott
E. Lied)
|
(Principal
Financial Officer)
|
|
|
/s/ Paul W. Wenger
|
Secretary
|
March
24, 2010
|
|
(Paul
W. Wenger)
|
||
|
/s/ Donald Z. Musser
|
Director
|
March
24, 2010
|
|
(Donald
Z. Musser)
|
||
|
/s/ Willis R. Lefever
|
Director
|
March
24, 2010
|
|
(Willis
R. Lefever)
|
||
|
/s/ Susan Young Nicholas
|
Director
|
March
24, 2010
|
|
(Susan
Young Nicholas)
|
||
|
/s/ Bonnie R. Sharp
|
Director
|
March
24, 2010
|
|
(Bonnie
R. Sharp)
|
||
|
/s/ J. Harold Summers
|
Director
|
March
24, 2010
|
|
(J.
Harold Summers)
|
||
|
/s/ Mark C. Wagner
|
Director
|
March
24, 2010
|
|
(Mark
C. Wagner)
|
||
|
/s/ Paul M. Zimmerman, Jr.
|
Director
|
March
24, 2010
|
|
(Paul
M. Zimmerman, Jr.)
|
||
|
/s/ Thomas H. Zinn
|
Director
|
March
24, 2010
|
|
(Thomas
H. Zinn)
|
ENB FINANCIAL CORP
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
Page
number
on
Manually Signed
Original
|
|
3(i)
|
Articles
of Association of the Registrant, as amended. (Incorporated herein by
reference to Exhibit 3.1 of the Corporation’s Form 8-K 12g3 filed with the
SEC on July 1, 2008)
|
|
|
3
(ii)
|
Bylaws
of the Registrant, as amended. (Incorporated herein by reference to
Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January
15, 2010.)
|
|
|
10.1
|
Form
of Deferred Income Agreement. (Incorporated herein by reference to the
Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August
13, 2008.)
|
|
|
10.2
|
2001
Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
99.1 of the Corporation’s Registration Statement on Form S-8 filed with
the SEC on July 9, 2008.)
|
|
|
11
|
Statement
re: Computation of Earnings Per Share as found on page 73 of Form 10-K,
which is included herein.
|
|
|
12
|
Statement
re: Computation of Ratios as found on page 31 of Form 10-K, which is
included herein.
|
|
|
14
|
Code
of Ethics Policy of Registrant as amended March 11, 2009. (Incorporated
herein by reference to Exhibit 14 of the Corporation’s Form 10-K filed
with the SEC on March 12, 2009)
|
|
|
Subsidiaries
of the Registrant
|
Page
106
|
|
|
Consent
of Independent Registered Public Accounting Firm
|
Page
107
|
|
|
Section
302 Chief Executive Officer Certification (Required by Rule
13a-14(a)).
|
Page
108
|
|
|
Section
302 Principal Financial Officer Certification (Required by Rule
13a-14(a)).
|
Page
109
|
|
|
Section
1350 Chief Executive Officer Certification (Required by Rule
13a-14(b)).
|
Page
110
|
|
|
Section
1350 Principal Financial Officer Certification (Required by Rule
13a-14(b)).
|
Page
111
|
105