Add
ENBP.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ENBP.OB > SEC Filings for ENBP.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
On July 1, 2008, the Ephrata National Bank (the "Bank") completed its reorganization as a wholly owned subsidiary of ENB Financial Corp (the "Corporation"). Effective on July 1, 2008, the Corporation owns all shares of the Bank. Shareholders who previously owned shares of the Bank will own the equivalent amount of shares of ENB Financial Corp, upon conversion of those shares.
The following discussion and analysis represents management's view of the financial condition and results of the Corporation. This discussion and analysis should be read in conjunction with the financial statements and other financial schedules included in this quarterly report and in conjunction with the 2007 Annual Report to Shareholders of the Bank. The financial condition and results presented are not indicative of future performance.
The information contained in this interim report is unaudited. In the opinion of management, the financial information presented along with Management's Discussion and Analysis reflects all adjustments necessary to present fairly the financial condition and results of operations for the reported periods. Any adjustments made were of a normal, recurring nature.
The financial condition and results of operation for the period ended September 30, 2008, reflect the consolidated operations and results of the Corporation.
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 wording are used. The readers of this report should take into consideration that these forward-looking statements represent management's expectations as to future 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 financial targets or goals that management is striving to reach but these targets or goals should not be used to predict future 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:
· Monetary and interest rate policies of the Federal Reserve Board ("FRB")
· Economic conditions
· Political changes and their impact on new laws and regulations
· Competitive forces
· Management's ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk
· Operation, legal, and reputation risk
· Incorrect analysis of risk or unsuccessful strategies or implementation of strategies designed to mitigate risks
Readers should be aware that if any of the above factors change significantly, the statements regarding future performance could also change materially. Under the safe harbor provision, the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. The Corporation is not obligated to update publicly any forward-looking statements made in this quarterly report to reflect the effects of subsequent events. Readers should review any changes in risk factors in documents periodically filed by the Corporation with the Securities and Exchange Commission (SEC), including subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
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 a later section of this 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 could therefore calculate a materially different allowance amount. Management uses all available information to evaluate and provide for future loan losses. However, changes in economic conditions may necessitate revisions to the provision and respective allowance in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Another material estimate is the calculation of fair market values for the securities held by the Corporation on a consolidated basis. The Corporation receives estimated fair values of debt securities from the bond accounting services of a brokerage firm. This firm currently uses five independent valuation services to determine the fair market values of securities. In accordance with FAS 157, Fair Value Measurements, securities must be valued according to a specified level of input hierarchy, referred to as level 1, 2 or 3 inputs. Fair Value Presentation is covered in Note 2 in the Notes to the Unaudited Interim Financial Statements. Nearly all of the Corporation's securities are valued using Level 2 inputs which includes quoted prices for similar assets in active markets. Management reviews the level inputs used to value the securities on a quarterly basis and reports this in Note 2. Management also evaluates the valuation methodology annually for adequacy and believes the current valuation methodology to be materially accurate. All of the Corporation's securities are classified as available for sale and are carried at fair value on the balance sheets, with unrealized gains and losses excluded from earnings and reported separately through other comprehensive income (included in the stockholders' equity section of the balance sheet, net of tax).
RESULTS OF OPERATIONS
Overview
The Corporation recorded net income of $265,000 and $3,088,000 for the three and nine month periods ending September 30, 2008, representing an 83.9% and 15.0% decrease from the same periods in 2007.
The Corporation recognized in the operating results for the three and nine month periods ended September 30, 2008, other than temporary impairment ("OTTI") charges of $761,000 pretax on Fannie Mae preferred stock subsequent to the federal takeover of Fannie Mae. The Corporation also recognized $456,000 of pretax loss on the sale of Fannie Mae preferred stock in two transactions, one prior to the federal takeover and one post the takeover of Fannie Mae. The Emergency Economic Stimulus Act of 2008 ("EESA"), signed into law on October 3, 2008, provides that OTTI charges and the losses on the sale of Fannie Mae preferred stock may be treated as ordinary loss for tax purposes. This provision will allow the Corporation to recognize a tax benefit of approximately $413,000 on both the OTTI and losses on the sale of these securities. The accounting pronouncements governing the timing of the tax treatment require the Corporation to delay the recognition of the tax benefit of $413,000 until the fourth quarter of 2008.
Net interest income provides the majority of the Corporation's income. The Corporation recorded net interest income of $5,193,000 and $15,053,000 for the respective three months and nine months ended September 30, 2008. This is an improvement of the Corporation's net interest income ("NII") by 7.9% and 5.9% for the respective three and nine month periods ending September 30, 2008, compared to the same respective periods in 2007. This is a marked improvement over the last two years. The Corporation's NII only grew 2.3% in 2007 compared to 2006, and for 2006 the NII did not reflect any growth over 2005. For further discussion of the NII please see the net interest income section.
A provision for loan losses of $170,000 was recorded for the three months ended September 30, 2008, compared to $90,000 in the same period of 2007. The 2008 year-to-date provision was $519,000 compared to $1,326,000 through September 30, 2007. For the nine months ended September 30, 2008, the Corporation recorded net charge offs of $146,000. Comparatively, in 2007, the Corporation experienced significant losses on a large borrower; and therefore, recorded net charge-offs of $982,000, which required an additional provision to be recorded. For further information on credit quality of the loan portfolio refer to the non-performing and allowance for loan losses sections under Item 2 Financial Condition.
The banking industry uses two primary performance measurements to gauge a financial institutions performance; they are return on average assets ("ROA") and return on average equity ("ROE"). The first, return on average assets, measures how efficiently a financial institution generates income based on the amount of assets or size of an institution. The
second, return on equity, measures the efficiency of a financial institution in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The Corporation's key performance ratios in the following table reflect the Corporation's lower earnings for the three and nine-month periods ended September 30, 2008, as compared to the same periods in 2007. Although the current year has produced lower earnings performance, the Corporation's asset growth and equity remain strong.
Key Ratios
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Return on Average Assets 0.16 % 1.05 % 0.62 % 0.79 %
Return on Average Equity 1.57 % 9.90 % 6.00 % 7.38 %
|
The results of the Corporation's operations can be 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
· Non-interest income
· Non-interest expenses
· Provision for income taxes
Each of these five areas is analyzed in the following discussion.
Net Interest Income
Net interest income ("NII") constitutes the largest portion of the operating income, usually over 80%; therefore, the direction of NII and the rate of increase or decrease will often determine the overall performance of the Corporation.
For analytical purposes and throughout this discussion, all yields, rates, and measurements such as NII, net interest spread, and net yield on interest-earning assets are all presented on a fully taxable equivalent ("FTE") basis. The FTE net interest income shown in the tables below, and the comparative average balance sheets and net interest tables to follow, will exceed the NII, as reported on the statements of income. The benefit provided by nontaxable assets resulted in the FTE adjustment of $387,000, and $441,000 for third quarter of 2008 and 2007, respectively. The year-to-date FTE adjustment was $1,259,000 through September 30, 2008, and $1,337,000 for the same period in 2007. The following table shows a summary analysis of net interest income on an FTE basis
Net Interest Income
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
$ $ $ $
Total interest income 8,818 8,538 26,071 25,166
Total interest expense 3,625 3,726 11,018 10,950
Net interest income 5,193 4,812 15,053 14,216
Tax equivalent adjustment 387 441 1,259 1,337
Net interest income
(fully taxable equivalent) 5,580 5,253 16,312 15,553
|
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:
· The rates 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 the net interest income. 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 of 2007 to 2.00% through September 30, 2008. The Federal funds rate was reduced by 100 basis points in the second half of 2007, with another 225 basis points of reductions in the first nine months of 2008. 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 of the Prime rate had a direct negative impact to the yield on the Corporation's prime based loans. Therefore, the interest income for the Corporation was reduced by these same rate movements. The interest rate reductions had little effect on the Corporation's fixed rate loans, however, the impact of having over $50 million of Prime Rate loans reprice from an 8.25% rate in August of 2007 to 5.00% as of September 30, 2008, reducing the average yield of the loan portfolio and average asset yield.
Through most of 2007, the U.S. Treasury curve was primarily flat. By the first quarter of 2008, overnight and short-term funds were at significantly lower rates than in 2007, while mid-term and long-term rates did not decline, resulting in a positively sloped yield curve. The change in slope of the U. S. Treasury curve made it possible for management to grow interest earning assets at favorable yields. Since deposits and borrowings are priced on the short-term rates while loans and securities are priced on rates out beyond one year, the significant rate drops on the short end of the rate curve permitted management to reduce the overall cost of funds by repricing time deposits and borrowings to lower levels and remain competitive. Rates on interest bearing core deposit accounts were also reduced. Meanwhile, management continued to invest in securities and originate loans at longer terms, where the U.S. Treasury curve and market rates remained higher.
Rates continue to move in part as a result of the current economic and credit situation. Since September 30, 2008, the Federal Reserve has decreased the Federal funds rate twice, a total reduction of another 100 basis points. Likewise, the Prime rate has also reduced 100 basis points. This will have the same offsetting effect on the NII as previous rate moves. It is likely that initially the reduction of interest income will be higher than the savings on funding; however as rates stabilize, the lower cost of funding will compensate for the decrease in interest income. Management currently anticipates that the U.S. Treasury curve will have a positive slope for the remainder of 2008 based on available economic data. This will allow management to continue to price the vast majority of liabilities based at lower short term rates, while pricing loans and investments off the 5 year and 10 year treasury rates that are significantly above short term rates. Management currently anticipates that the margin will stabilize and could improve slightly in the fourth quarter as additional time deposits and borrowed funds are repriced to lower interest rates.
The following tables show a more detailed analysis of net interest income on a FTE basis shown with all the major elements of the balance sheet, which consists of interest-earning and non-interest-earning assets and interest-bearing and non-interest-bearing liabilities. The charts provide comprehensive detail supporting all of the main categories of the balance sheet and the impact on net interest income. 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 places more emphasis on the net yield on interest-earning assets, also referred to as net interest margin ("NIM"). The NIM is calculated by dividing net interest income into total interest-earning assets. NIM is generally the benchmark used by analysts to measure how efficiently a bank generates net interest income. For example, a bank with a NIM of 3.75% would be able to use fewer assets and still achieve the same level of net interest income as a bank with a NIM of 3.50%.
ENB FINANCIAL CORP
Management's Discussion and Analysis
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(Dollars in thousands)
For the Three Months Ended September 30,
2008 2007
(c) (c)
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and interest
on deposits at other banks 383 2 2.23 8,259 110 5.28
Securities available for sale:
Taxable 180,329 2,306 5.12 125,867 1,451 4.61
Tax-exempt 52,753 824 6.25 62,830 985 6.27
Total securities (d) 233,082 3,130 5.37 188,697 2,436 5.16
Loans (a) 389,770 6,031 6.17 378,169 6,370 6.71
Regulatory stock 4,923 42 3.37 4,187 63 6.02
Total interest earning assets 628,158 9,205 5.85 579,312 8,979 6.18
Non-interest earning assets (d) 47,934 44,187
Total assets 676,092 623,499
|
LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing liabilities: Demand deposits 100,307 296 1.12 98,395 455 1.83 Savings deposits 74,630 77 0.41 69,307 89 0.51 Time deposits 218,549 2,173 3.96 201,317 2,225 4.38 Borrowed funds 101,990 1,079 4.21 82,910 957 4.58 Total interest bearing liabilities 495,476 3,625 2.91 451,929 3,726 3.27 Non-interest bearing liabilities: Demand deposits 107,996 100,704 Other 5,126 4,996 Total liabilities 608,598 557,629 Stockholders' equity 67,494 65,870 Total liabilities & stockholders' equity 676,092 623,499 Net interest income (FTE) 5,580 5,253 Net interest spread (b) 2.94 2.91 Effect of non-interest bearing funds 0.62 0.72 Net yield on interest earning assets (c) 3.56 3.63 |
(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The quarter to date average balances include net deferred loan fees and costs of ($308,000) as of September 30, 2008, and ($319,000) as of September 30, 2007. Such fees and costs recognized through income and included in the interest amounts totaled $18,000 in 2008 and $19,000 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
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(Dollars in thousands)
For the Nine Months Ended September 30,
2008 2007
(c) (c)
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and interest
on deposits at other banks 1,665 31 2.45 5,525 217 5.25
Securities available for sale:
Taxable 165,873 6,208 4.99 127,015 4,416 4.64
Tax-exempt 55,301 2,689 6.50 63,553 2,993 6.28
Total securities (d) 221,174 8,897 5.36 190,568 7,409 5.18
Loans (a) 387,987 18,266 6.28 373,637 18,693 6.67
Regulatory stock 4,553 136 4.00 4,190 184 5.86
Total interest earning assets 615,379 27,330 5.93 573,920 26,503 6.16
Non-interest earning assets (d) 48,607 41,957
Total assets 663,986 615,877
|
LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing liabilities: Demand deposits 100,450 976 1.30 94,552 1,300 1.84 Savings deposits 72,213 238 0.44 69,264 290 0.56 Time deposits 216,166 6,710 4.15 205,915 6,715 4.36 Borrowed funds 96,800 3,094 4.27 78,399 2,645 4.51 Total interest bearing liabilities 485,629 11,018 3.03 448,130 10,950 3.27 Non-interest bearing liabilities: Demand deposits 104,543 96,861 Other 5,013 5,039 Total liabilities 595,185 550,030 Stockholders' equity 68,801 65,847 Total liabilities & stockholders' equity 663,986 615,877 Net interest income (FTE) 16,312 15,553 . . . |
|
|