ENB Financial Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from _________________ to _________________

ENB Financial Corp

(Exact name of registrant as specified in its charter)

Pennsylvania	000-53297	51-0661129
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No)

31 E. Main St., Ephrata, PA		17522-0457
(Address of principal executive offices)		(Zip Code)

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None.		N/A		N/A

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 1, 2021, the registrant had 5,575,451 shares of $0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2021


Part I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets at September 30, 2021 and 2020, and December 31, 2020 (Unaudited)	3

		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	4

		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	5

		Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	6

		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)	7

		Notes to the Unaudited Consolidated Interim Financial Statements	8-33

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34-58

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59-63

	Item 4.	Controls and Procedures	64



Part II – OTHER INFORMATION			65

	Item 1.	Legal Proceedings	65

	Item 1A.	Risk Factors	65

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65

	Item 3.	Defaults upon Senior Securities	65

	Item 4.	Mine Safety Disclosures	65

	Item 5.	Other Information	65

	Item 6.	Exhibits	66


SIGNATURE PAGE			67

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ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	September 30,			December 31,			September 30,
	2021			2020			2020
	$			$			$
ASSETS
Cash and due from banks		16,100			21,665			19,979
Interest-bearing deposits in other banks		62,720			73,274			24,347
Total cash and cash equivalents		78,820			94,939			44,326
Securities available for sale (at fair value)		561,587			476,428			360,029
Equity securities (at fair value)		8,844			7,105			6,854
Loans held for sale		3,174			3,029			5,008
Loans (net of unearned income)		880,261			823,370			843,177
Less: Allowance for loan losses		12,454			12,327			11,996
Net loans		867,807			811,043			831,181
Premises and equipment		24,507			24,760			24,696
Regulatory stock		5,635			6,107			6,525
Bank owned life insurance		35,200			29,646			29,418
Other assets		12,478			9,256			8,964
Total assets		1,598,052			1,462,313			1,317,001

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		591,333			534,853			465,247
Interest-bearing		800,169			717,958			661,574
Total deposits		1,391,502			1,252,811			1,126,821
Short-term borrowings		-			-			1,500
Long-term debt		46,706			54,790			60,010
Subordinated debt		19,660			19,601			-
Other liabilities		3,967			4,895			3,362
Total liabilities		1,461,835			1,332,097			1,191,693
Stockholders' equity:
Common stock, par value $0.10
Shares: Authorized 24,000,000
Issued 5,739,114 and Outstanding 5,575,451 as of 9/30/21, 5,566,230 as of 12/31/20, and 5,566,413 as of 9/30/20		574			574			574
Capital surplus		4,498			4,444			4,456
Retained earnings		130,082			120,670			117,960
Accumulated other comprehensive income		4,326			7,958			5,756
Less: Treasury stock cost on 163,663 shares as of 9/30/21, 172,884 as of 12/31/20, and 172,701 as of 9/30/20		(3,263	)		(3,430	)		(3,438	)
Total stockholders' equity		136,217			130,216			125,308

Total liabilities and stockholders' equity		1,598,052			1,462,313			1,317,001

See Notes to the Unaudited Consolidated Interim Financial Statements

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021		2020
	$			$			$		$
Interest and dividend income:
Interest and fees on loans		8,986			8,617			25,541		25,705
Interest on securities available for sale
Taxable		1,301			920			3,611		3,207
Tax-exempt		1,015			690			2,977		1,899
Interest on deposits at other banks		17			31			59		112
Dividend income		98			129			295		419

Total interest and dividend income		11,417			10,387			32,483		31,342

Interest expense:
Interest on deposits		278			430			877		1,782
Interest on borrowings		511			415			1,569		1,333

Total interest expense		789			845			2,446		3,115

Net interest income		10,628			9,542			30,037		28,227

(Credit) provision for loan losses		(250	)		1,250			125		2,575

Net interest income after (credit) provision for loan losses		10,878			8,292			29,912		25,652

Other income:
Trust and investment services income		540			442			1,746		1,480
Service fees		618			701			1,917		2,015
Commissions		945			781			2,761		2,116
Gains on the sale of debt securities, net		350			55			711		704
Gains (losses) on equity securities, net		32			(54	)		256		(279	)
Gains on sale of mortgages		1,206			2,081			4,381		4,312
Earnings on bank-owned life insurance		218			209			636		620
Other income		230			159			1,126		241

Total other income		4,139			4,374			13,534		11,209

Operating expenses:
Salaries and employee benefits		6,142			5,860			17,800		16,522
Occupancy		654			598			1,972		1,805
Equipment		255			298			806		904
Advertising & marketing		282			184			717		676
Computer software & data processing		1,097			835			3,297		2,309
Shares tax		322			239			876		718
Professional services		535			549			1,572		1,679
Other expense		831			635			1,961		1,939

Total operating expenses		10,118			9,198			29,001		26,552

Income before income taxes		4,899			3,468			14,445		10,309

Provision for federal income taxes		760			533			2,251		1,610

Net income		4,139			2,935			12,194		8,699

Earnings per share of common stock		0.74			0.53			2.19		1.56

Cash dividends paid per share		0.17			0.16			0.50		0.48

Weighted average shares outstanding		5,570,416			5,564,158			5,565,777		5,591,027

See Notes to the Unaudited Consolidated Interim Financial Statements

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	$			$			$			$

Net income		4,139			2,935			12,194			8,699

Other comprehensive income, net of tax:
Securities available for sale not other-than-temporarily impaired:

Unrealized gains (losses) arising during the period		(3,492	)		1,616			(3,884	)		5,962
Income tax effect		733			(339	)		814			(1,250	)
		(2,759	)		1,277			(3,070	)		4,712

Gains recognized in earnings		(350	)		(55	)		(711	)		(704	)
Income tax effect		73			12			149			148
		(277	)		(43	)		(562	)		(556	)

Other comprehensive income (loss), net of tax		(3,036	)		1,234			(3,632	)		4,156

Comprehensive Income		1,103			4,169			8,562			12,855

See Notes to the Unaudited Consolidated Interim Financial Statements

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

									Accumulated
									Other						Total
	Common		Capital			Retained			Comprehensive			Treasury			Stockholders'
	Stock		Surplus			Earnings			Income (Loss)			Stock			Equity
	$		$			$			$			$			$

Balances, December 31, 2019		574		4,482			111,944			1,600			(1,912	)		116,688
Net income		-		-			2,165			-			-			2,165
Other comprehensive loss net of tax		-		-			-			(497	)		-			(497	)
Treasury stock purchased - 49,911 shares		-		-			-			-			(1,098	)		(1,098	)
Treasury stock issued - 7,670 shares		-		(6	)		-			-			156			150
Cash dividends paid, $0.16 per share		-		-			(902	)		-			-			(902	)
Balances, March 31, 2020		574		4,476			113,207			1,103			(2,854	)		116,506
Net income		-		-			3,599			-			-			3,599
Other comprehensive income net of tax		-		-			-			3,419			-			3,419
Treasury stock purchased - 32,966 shares		-		-			-			-			(627	)		(627	)
Treasury stock issued - 8,354 shares		-		(10	)		-			-			167			157
Cash dividends paid, $0.16 per share		-		-			(892	)		-			-			(892	)
Balances, June 30, 2020		574		4,466			115,914			4,522			(3,314	)		122,162
Net income		-		-			2,935			-			-			2,935
Other comprehensive income net of tax		-		-			-			1,234			-			1,234
Treasury stock purchased - 16,526 shares		-		-			-			-			(304	)		(304	)
Treasury stock issued - 9,050 shares		-		(10	)		-			-			180			170
Cash dividends paid, $0.16 per share		-		-			(889	)		-			-			(889	)
Balances, September 30, 2020		574		4,456			117,960			5,756			(3,438	)		125,308


Balances, December 31, 2020		574		4,444			120,670			7,958			(3,430	)		130,216
Net income		-		-			4,504			-			-			4,504
Other comprehensive loss net of tax		-		-			-			(5,034	)		-			(5,034	)
Treasury stock purchased - 7,600 shares		-		-			-			-			(149	)		(149	)
Treasury stock issued - 7,936 shares		-		16			-			-			157			173
Cash dividends paid, $0.16 per share		-		-			(889	)		-			-			(889	)
Balances, March 31, 2021		574		4,460			124,285			2,924			(3,422	)		128,821
Net income		-		-			3,551			-			-			3,551
Other comprehensive income net of tax		-		-			-			4,438			-			4,438
Treasury stock purchased - 7,200 shares		-		-			-			-			(155	)		(155	)
Treasury stock issued - 10,611 shares		-		20			-			-			211			231
Cash dividends paid, $0.17 per share		-		-			(945	)		-			-			(945	)
Balances, June 30, 2021		574		4,480			126,891			7,362			(3,366	)		135,941
Net income		-		-			4,139			-			-			4,139
Other comprehensive loss net of tax		-		-			-			(3,036	)		-			(3,036	)
Treasury stock purchased - 3,100 shares		-		-			-			-			(68	)		(68	)
Treasury stock issued - 8,574 shares		-		18			-			-			171			189
Cash dividends paid, $0.17 per share		-		-			(948	)		-			-			(948	)
Balances, September 30, 2021		574		4,498			130,082			4,326			(3,263	)		136,217

See Notes to the Unaudited Consolidated Interim Financial Statements

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)	Nine Months Ended September 30,
	2021			2020
	$			$
Cash flows from operating activities:
Net income		12,194			8,699
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities premiums and discounts and loan fees		2,851			2,173
Amortization of operating leases right-of-use assets		60			134
Increase in interest receivable		(958	)		(586	)
Decrease in interest payable		146			(162	)
Provision for loan losses		125			2,575
Gains on the sale of debt securities, net		(711	)		(704	)
(Gain) loss on equity securities, net		(256	)		279
Gains on sale of mortgages		(4,381	)		(4,312	)
Loans originated for sale		(71,607	)		(101,044	)
Proceeds from sales of loans		75,843			102,690
Earnings on bank-owned life insurance		(636	)		(620	)
Depreciation of premises and equipment and amortization of software		1,164			1,137
Deferred income tax		164			(586	)
Amortization of deferred fees on subordinated debt		59			-
Other assets and other liabilities, net		(2,291	)		(111	)
Net cash provided by operating activities		11,766			9,562

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		58,837			51,451
Proceeds from sales		77,259			50,819
Purchases		(228,981	)		(150,728	)
Equity securities
Proceeds from sales		460			-
Purchases		(1,945	)		(425	)
Purchase of regulatory bank stock		(524	)		(1,225	)
Redemptions of regulatory bank stock		996			1,991
Purchase of bank-owned life insurance		(4,918	)		-
Net increase in loans		(55,899	)		(89,270	)
Purchases of premises and equipment, net		(745	)		(705	)
Purchase of computer software		(471	)		(133	)
Net cash used for investing activities		(155,931	)		(138,225	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		141,428			165,296
Net decrease in time deposits		(2,737	)		(12,563	)
Net increase in short-term borrowings		-			1,300
Proceeds from long-term debt		-			12,984
Repayments of long-term debt		(8,084	)		(30,846	)
Dividends paid		(2,782	)		(2,683	)
Proceeds from sale of treasury stock		593			477
Treasury stock purchased		(372	)		(2,029	)
Net cash provided by financing activities		128,046			131,936
(Decrease) Increase in cash and cash equivalents		(16,119	)		3,273
Cash and cash equivalents at beginning of period		94,939			41,053
Cash and cash equivalents at end of period		78,820			44,326

Supplemental disclosures of cash flow information:
Interest paid		2,300			3,277
Income taxes paid		2,200			2,225
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale		4,595			(5,258	)
Recognition of lease operating right-of-use assets		80			-
Recognition of operating lease liabilities		80			-

See Notes to the Unaudited Consolidated Interim Financial Statements

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.Summary of Significant Accounting Policies

Basis of Presentation

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

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the third quarter of 2021, is reporting on the results of operations and financial condition of ENB Financial Corp on a consolidated basis.

Operating results for the nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, 2020.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

2.Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of securities held at September 30, 2021, and December 31, 2020, are as follows:

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
September 30, 2021
U.S. treasuries		4,981		17		-			4,998
U.S. government agencies		29,616		85		(420	)		29,281
U.S. agency mortgage-backed securities		56,941		857		(336	)		57,462
U.S. agency collateralized mortgage obligations		33,173		436		(16	)		33,593
Asset-backed securities		100,722		868		(147	)		101,443
Corporate bonds		84,264		854		(144	)		84,974
Obligations of states and political subdivisions		246,413		5,127		(1,704	)		249,836
Total securities available for sale		556,110		8,244		(2,767	)		561,587

December 31, 2020
U.S. government agencies		54,224		144		(7	)		54,361
U.S. agency mortgage-backed securities		69,777		1,441		(166	)		71,052
U.S. agency collateralized mortgage obligations		34,449		640		(54	)		35,035
Asset-backed securities		60,387		433		(345	)		60,475
Corporate bonds		60,387		1,348		(12	)		61,723
Obligations of states and political subdivisions		187,132		6,727		(77	)		193,782
Total securities available for sale		466,356		10,733		(661	)		476,428

The amortized cost and fair value of securities available for sale at September 30, 2021, 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		35,395		35,774
Due after one year through five years		102,504		104,210
Due after five years through ten years		139,182		139,739
Due after ten years		279,029		281,864
Total debt securities		556,110		561,587

Securities available for sale with a par value of $91,079,000 and $86,849,000 at September 30, 2021, and December 31, 2020, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $94,538,000 at September 30, 2021, and $91,666,000 at December 31, 2020.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
	$			$			$			$
Proceeds from sales		17,957			7,001			77,259			50,819
Gross realized gains		369			64			791			730
Gross realized losses		(19	)		(9	)		(80	)		(26)

Management evaluates all of the Corporation’s securities for other-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first nine months of 2021 or 2020.

Information pertaining to securities with gross unrealized losses at September 30, 2021, and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)


	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	$		$			$		$			$		$
As of September 30, 2021
U.S. government agencies		23,985		(420	)		-		-			23,985		(420	)
U.S. agency mortgage-backed securities		24,270		(310	)		2,988		(26	)		27,258		(336	)
U.S. agency collateralized mortgage obligations		3,243		(1	)		3,569		(15	)		6,812		(16	)
Asset-backed securities		27,718		(123	)		4,919		(24	)		32,637		(147	)
Corporate bonds		18,381		(144	)		-		-			18,381		(144	)
Obligations of states & political subdivisions		97,126		(1,704	)		-		-			97,126		(1,704	)

Total temporarily impaired securities		194,723		(2,702	)		11,476		(65	)		206,199		(2,767	)


As of December 31, 2020
U.S. government agencies		42,988		(7	)		-		-			42,988		(7	)
U.S. agency mortgage-backed securities		15,995		(157	)		2,221		(9	)		18,216		(166	)
U.S. agency collateralized mortgage obligations		12,933		(54	)		-		-			12,933		(54	)
Asset-backed securities		8,465		(20	)		18,080		(325	)		26,545		(345	)
Corporate bonds		-		-			3,016		(12	)		3,016		(12	)
Obligations of states & political subdivisions		15,666		(77	)		-		-			15,666		(77	)

Total temporarily impaired securities		96,047		(315	)		23,317		(346	)		119,364		(661	)

In the debt security portfolio there were 101 positions from 78 different issuers that were carrying unrealized losses as of September 30, 2021. There were no instruments considered to be other-than-temporarily impaired at September 30, 2021.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation evaluates fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income.

3.Equity Securities

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at September 30, 2021 and December 31, 2020.

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
September 30, 2021
CRA-qualified mutual funds		7,222		-		-			7,222
Bank stocks		1,518		119		(15	)		1,622
Total equity securities		8,740		119		(15	)		8,844

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
December 31, 2020
CRA-qualified mutual funds		6,176		-		-			6,176
Bank stocks		982		53		(106	)		929
Total equity securities		7,158		53		(106	)		7,105

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and nine months ended September 30, 2021 and 2020, and the portion of unrealized gains and losses for the period that relates to equity investments held as of September 30, 2021 and 2020.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021		2020
	$		$			$		$

Net gains (losses) recognized in equity securities during the period		32		(54	)		256		(279	)

Less: Net gains realized on the sale of equity securities during the period		3		-			99		-

Unrealized gains (losses) recognized in equity securities held at reporting date		29		(54	)		157		(279	)

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4.Loans and Allowance for Credit Losses

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2021, and December 31, 2020:

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

	September 30,			December 31,
	2021			2020
	$			$
Commercial real estate
Commercial mortgages		166,741			142,698
Agriculture mortgages		188,455			176,005
Construction		18,786			23,441
Total commercial real estate		373,982			342,144

Consumer real estate (a)
1-4 family residential mortgages		302,670			263,569
Home equity loans		11,889			10,708
Home equity lines of credit		74,919			71,290
Total consumer real estate		389,478			345,567

Commercial and industrial
Commercial and industrial		73,695			97,896
Tax-free loans		17,279			10,949
Agriculture loans		19,180			20,365
Total commercial and industrial		110,154			129,210

Consumer		5,211			5,155

Gross loans prior to deferred fees		878,825			822,076

Deferred loan costs, net		1,436			1,294
Allowance for credit losses		(12,454	)		(12,327	)
Total net loans		867,807			811,043


(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $274,892,000 and $235,437,000 as of September 30, 2021, and December 31, 2020, respectively.

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2021 and December 31, 2020. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

•

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

•

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

•

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

•

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

•

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

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

							Commercial
	Commercial		Agriculture				and		Tax-free		Agriculture
September 30, 2021	Mortgages		Mortgages		Construction		Industrial		Loans		Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		162,806		179,880		12,648		64,457		17,279		18,657		455,727
Special Mention		2,458		-		6,138		5,082		-		-		13,678
Substandard		1,477		8,575		-		4,156		-		523		14,731
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		166,741		188,455		18,786		73,695		17,279		19,180		484,136

							Commercial
	Commercial		Agriculture				and		Tax-free		Agriculture
December 31, 2020	Mortgages		Mortgages		Construction		Industrial		Loans		Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		133,853		166,102		21,142		87,767		10,949		18,586		438,399
Special Mention		3,683		1,651		2,299		5,592		-		774		13,999
Substandard		5,162		8,252		-		4,537		-		1,005		18,956
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		142,698		176,005		23,441		97,896		10,949		20,365		471,354

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of September 30, 2021 and December 31, 2020:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

	1-4 Family				Home Equity
	Residential		Home Equity		Lines of
September 30, 2021	Mortgages		Loans		Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		302,436		11,889		74,919		5,200		394,444
Non-performing		234		-		-		11		245

Total		302,670		11,889		74,919		5,211		394,689

	1-4 Family				Home Equity
	Residential		Home Equity		Lines of
December 31, 2020	Mortgages		Loans		Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		262,185		10,708		71,267		5,141		349,301
Non-performing		1,384		-		23		14		1,421

Total		263,569		10,708		71,290		5,155		350,722

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 2021 and December 31, 2020:

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


													Loans
					Greater								Receivable > 90 Days
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		and
September 30, 2021	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		-		-		186		186		166,555		166,741		-
Agriculture mortgages		756		-		1,516		2,272		186,183		188,455		-
Construction		-		-		-		-		18,786		18,786		-
Consumer real estate
1-4 family residential mortgages		529		-		234		763		301,907		302,670		172
Home equity loans		19		-		-		19		11,870		11,889		-
Home equity lines of credit		47		-		-		47		74,872		74,919		-
Commercial and industrial
Commercial and industrial		-		-		377		377		73,318		73,695		-
Tax-free loans		-		-		-		-		17,279		17,279		-
Agriculture loans		24		-		95		119		19,061		19,180		-
Consumer		5		-		11		16		5,195		5,211		11
Total		1,380		-		2,419		3,799		875,026		878,825		183

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


													Loans
													Receivable
					Greater								> 90 Days
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		and
December 31, 2020	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		-		-		208		208		142,490		142,698		-
Agriculture mortgages		-		-		-		-		176,005		176,005		-
Construction		-		-		-		-		23,441		23,441		-
Consumer real estate
1-4 family residential mortgages		618		-		1,384		2,002		261,567		263,569		1,336
Home equity loans		1		-		-		1		10,707		10,708		-
Home equity lines of credit		-		-		23		23		71,267		71,290		23
Commercial and industrial
Commercial and industrial		-		-		469		469		97,427		97,896		-
Tax-free loans		-		-		-		-		10,949		10,949		-
Agriculture loans		42		-		-		42		20,323		20,365		-
Consumer		23		3		14		40		5,115		5,155		14
Total		684		3		2,098		2,785		819,291		822,076		1,373

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2021 and December 31, 2020:

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

	September 30,		December 31,
	2021		2020
	$		$

Commercial real estate
Commercial mortgages		186		208
Agriculture mortgages		1,516		-
Construction		-		-
Consumer real estate
1-4 family residential mortgages		62		48
Home equity loans		-		-
Home equity lines of credit		-		-
Commercial and industrial
Commercial and industrial		377		469
Tax-free loans		-		-
Agriculture loans		95		-
Consumer		-		-
Total		2,236		725

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

As of September 30, 2021 and December 31, 2020, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and nine months ended September 30, 2021 and September 30, 2020, is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	$		$		$		$

Average recorded balance of impaired loans		2,012		5,060		4,391		4,062
Interest income recognized on impaired loans		38		31		176		72

No loan modifications were made during the first nine months of 2021 that would be considered a troubled debt restructuring (TDR). There was one loan modification made during the third quarter of 2020 that was considered a TDR. One $3.6 million loan was restructured to provide relief to the commercial borrower by reducing the interest rate, providing a six-month interest only period, and extending the amortization period by an additional nine years. This loan paid off in the third quarter of 2021. In addition to this TDR, deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. A modification of the payment terms to a loan customer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments. Included in the impaired loan portfolio is one loan to a commercial borrower that is being reported as a TDR. The balance of this TDR loans was $776,000 as of September 30, 2021. This TDR is not non-accrual.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information regarding impaired loans by loan portfolio class as of September 30, 2021 and December 31, 2020, and for the nine months ended September 30, 2021, and the twelve months ended December 31, 2020:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
September 30, 2021	Investment		Balance		Allowance		Investment		Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		247		285		-		2,802		116
Agriculture mortgages		1,720		1,721		-		1,158		45
Construction		-		-		-		-		-
Total commercial real estate		1,967		2,006		-		3,960		161

Commercial and industrial
Commercial and industrial		377		428		-		429		15
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		377		428		-		429		15

Total with no related allowance		2,344		2,434		-		4,389		176

With an allowance recorded:
Commercial real estate
Commercial mortgages		-		-		-		-		-
Agriculture mortgages		572		572		57		2		-
Construction		-		-		-		-		-
Total commercial real estate		572		572		57		2		-

Commercial and industrial
Commercial and industrial		-		-		-		-		-
Tax-free loans		-		-		-		-		-
Agriculture loans		95		95		95		-		-
Total commercial and industrial		95		95		95		-		-

Total with a related allowance		667		667		152		2		-

Total by loan class:
Commercial real estate
Commercial mortgages		247		285		-		2,802		116
Agriculture mortgages		2,292		2,293		57		1,160		45
Construction		-		-		-		-		-
Total commercial real estate		2,539		2,578		57		3,962		161

Commercial and industrial
Commercial and industrial		377		428		-		429		15
Tax-free loans		-		-		-		-		-
Agriculture loans		95		95		95		-		-
Total commercial and industrial		472		523		95		429		15

Total		3,011		3,101		152		4,391		176

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2020	Investment		Balance		Allowance		Investment		Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		256		318		-		798		-
Agriculture mortgages		806		835		-		1,170		46
Construction		-		-		-		-		-
Total commercial real estate		1,062		1,153		-		1,968		46

Commercial and industrial
Commercial and industrial		469		504		-		513		23
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		469		504		-		513		23

Total with no related allowance		1,531		1,657		-		2,481		69

With an allowance recorded:
Commercial real estate
Commercial mortgages		3,581		3,581		1,110		1,468		57
Agriculture mortgages		651		651		21		679		34
Construction		-		-		-		-		-
Total commercial real estate		4,232		4,232		1,131		2,147		91

Commercial and industrial
Commercial and industrial		-		-		-		-		-
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		-		-		-		-		-

Total with a related allowance		4,232		4,232		1,131		2,147		91

Total by loan class:
Commercial real estate
Commercial mortgages		3,837		3,899		1,110		2,266		57
Agriculture mortgages		1,457		1,486		21		1,849		80
Construction		-		-		-		-		-
Total commercial real estate		5,294		5,385		1,131		4,115		137

Commercial and industrial
Commercial and industrial		469		504		-		513		23
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		469		504		-		513		23

Total		5,763		5,889		1,131		4,628		160

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2021:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)


	Commercial			Consumer			Commercial
	Real Estate			Real Estate			and Industrial			Consumer			Unallocated			Total
	$			$			$			$			$			$
Allowance for credit losses:
Beginning balance - December 31, 2020		6,329			3,449			1,972			52			525			12,327

Charge-offs		-			-			-			(14	)		-			(14	)
Recoveries		-			-			1			1			-			2
Provision		173			(41	)		(15	)		20			238			375

Balance - March 31, 2021		6,502			3,408			1,958			59			763			12,690

Charge-offs		-			-			-			(9	)		-			(9	)
Recoveries		-			-			16			6			-			22
Provision		48			83			19			10			(160	)		-

Balance - June 30, 2021		6,550			3,491			1,993			66			603			12,703

Charge-offs		-			-			-			(7	)		-			(7	)
Recoveries		-			-			2			6			-			8
Provision		(909	)		216			81			(3	)		365			(250	)

Balance - September 30, 2021		5,641			3,707			2,076			62			968			12,454

During the nine months ended September 30, 2021, management charged off $30,000 in loans while recovering $32,000 and added $125,000 to the provision. The unallocated portion of the allowance increased from 4.3% of total reserves as of December 31, 2020, to 7.8% as of September 30, 2021. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

During the nine months ended September 30, 2021, net provision expense was recorded for all loan sectors except for the commercial real estate sector. The lower provision in the commercial real estate sector was due to the pay off of one loan during the third quarter of 2021 that had a specific allocation. Due to this pay off, the specific allocation was reversed resulting in a credit provision for the nine months ended September 30, 2021. There were minimal charge-offs and recoveries recorded during the nine months ended September 30, 2021, as well as minimal provision expense due to the improving economic conditions and the reversal of specific allocation from the previous time periods.

Outside of the above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the potential credit risks across the Corporation’s various loan types. In addition, the loan portfolio is sectored out into nine different categories to evaluate these qualitative factors. A total score of the qualitative factors for each loan sector is calculated to utilize in the allowance for loan loss calculation. The agricultural dairy sector carries the highest level of qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused a sharp decline in milk prices.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2020:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)


	Commercial		Consumer		Commercial
	Real Estate		Real Estate		and Industrial			Consumer			Unallocated			Total
	$		$		$			$			$			$
Allowance for credit losses:
Beginning balance - December 31, 2019		4,319		2,855		1,784			41			448			9,447

Charge-offs		-		-		-			(6	)		-			(6	)
Recoveries		11		-		1			-			-			12
Provision		252		296		171			21			(390	)		350

Balance - March 31, 2020		4,582		3,151		1,956			56			58			9,803

Charge-offs		-		-		-			(10	)		-			(10	)
Recoveries		-		-		1			1			-			2
Provision		356		146		175			5			293			975

Balance - June 30, 2020		4,938		3,297		2,132			52			351			10,770

Charge-offs		-		-		(23	)		(3	)		-			(26	)
Recoveries		-		-		1			1			-			2
Provision		1,289		75		(18	)		4			(100	)		1,250

Balance - September 30, 2020		6,227		3,372		2,092			54			251			11,996

During the nine months ended September 30, 2020, management charged off $42,000 in loans while recovering $16,000 and added $2,575,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 2.1% as of September 30, 2020.

During the nine months ended September 30, 2020, net provision expense was recorded for all sectors. The higher provision in the commercial real estate sector was due to a specific allocation of $1.1 million for a customer with ongoing business concerns. The higher provisions across the other categories were primarily caused by increasing the qualitative factors across all industry lines to various degrees as a result of the impact and effect from COVID-19 and the declining economic conditions. There were minimal charge-offs and recoveries recorded during the nine months ended September 30, 2020, so the provision expense was primarily related to the specific allocation as well as the change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the end of the third quarter of 2020 was slightly higher resulting in slightly more provision expense.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of September 30, 2021 and December 31, 2020:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


	Commercial		Consumer		Commercial
As of September 30, 2021:	Real Estate		Real Estate		and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated for impairment		57		-		95		-		-		152
Ending balance: collectively evaluated for impairment		5,584		3,707		1,981		62		968		12,302

Loans receivable:
Ending balance		373,982		389,478		110,154		5,211				878,825
Ending balance: individually evaluated for impairment		2,539		-		472		-				3,011
Ending balance: collectively evaluated for impairment		371,443		389,478		109,682		5,211				875,814

forg


	Commercial		Consumer		Commercial
As of December 31, 2020:	Real Estate		Real Estate		and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated for impairment		1,131		-		-		-		-		1,131
Ending balance: collectively evaluated for impairment		5,198		3,449		1,972		52		525		11,196

Loans receivable:
Ending balance		342,144		345,567		129,210		5,155				822,076
Ending balance: individually evaluated for impairment		5,294		-		469		-				5,763
Ending balance: collectively evaluated for impairment		336,850		345,567		128,741		5,155				816,313

5.Fair Value Presentation

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

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

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

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.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of September 30, 2021, and December 31, 2020, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

	September 30, 2021
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. treasuries		-		4,998		-		4,998
U.S. government agencies		-		29,281		-		29,281
U.S. agency mortgage-backed securities		-		57,462		-		57,462
U.S. agency collateralized mortgage obligations		-		33,593		-		33,593
Asset-backed securities		-		101,443		-		101,443
Corporate bonds		-		84,974		-		84,974
Obligations of states & political subdivisions		-		249,836		-		249,836
Equity securities		8,844		-		-		8,844

Total securities		8,844		561,587		-		570,431

On September 30, 2021, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of September 30, 2021, the CRA fund investments had a $7,222,000 book and fair market value and the bank stock portfolio had a book value of $1,518,000, and fair market value of $1,622,000.

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

	December 31, 2020
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. government agencies		-		54,361		-		54,361
U.S. agency mortgage-backed securities		-		71,052		-		71,052
U.S. agency collateralized mortgage obligations		-		35,035		-		35,035
Asset-backed securities		-		60,475		-		60,475
Corporate bonds		-		61,723		-		61,723
Obligations of states & political subdivisions		-		193,782		-		193,782
Equity securities		7,105		-		-		7,105

Total securities		7,105		476,428		-		483,533

On December 31, 2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2020, the CRA fund investments had a $6,176,000 book and market value and the bank stocks had a book value of $982,000 and a market value of $929,000.

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(DOLLARS IN THOUSANDS)

	September 30, 2021
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans	$	-	$	-	$	2,859	$	2,859
Total	$	-	$	-	$	2,859	$	2,859

	December 31, 2020
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans	$	-	$	-	$	4,632	$	4,632
Total	$	-	$	-	$	4,632	$	4,632

The Corporation had a total of $3,011,000 of impaired loans as of September 30, 2021, with $152,000 of specific allocation against these loans and $5,763,000 of impaired loans as of December 31, 2020, with $1,131,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)

	September 30, 2021
	Fair Value		Valuation		Unobservable		Range
	Estimate		Techniques		Input		(Weighted Avg)

Impaired loans		2,859		Appraisal of collateral (1)		Appraisal adjustments (2)		-20% (-20%)
						Liquidation expenses (2)		-10% (-10%)

	December 31, 2020
	Fair Value		Valuation		Unobservable		Range
	Estimate		Techniques		Input		(Weighted Avg)

Impaired loans		4,632		Appraisal of collateral (1)		Appraisal adjustments (2)		-20% (-20%)
						Liquidation expenses (2)		-10% (-10%)

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

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

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020:

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	September 30, 2021
					Quoted Prices in Active Markets		Significant Other		Significant
					for Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
	Amount		Fair Value		(Level I)		(Level II)		(Level III)
	$		$		$		$		$
Financial Assets:
Cash and cash equivalents		78,820		78,820		78,820		-		-
Regulatory stock		5,635		5,635		5,635		-		-
Loans held for sale		3,174		3,155		3,155		-		-
Loans, net of allowance		867,807		879,942		-		-		879,942
Mortgage servicing assets		1,591		2,003		-		-		2,003
Accrued interest receivable		5,504		5,504		5,504		-		-
Bank owned life insurance		35,200		35,200		35,200		-		-

Financial Liabilities:
Demand deposits		591,333		591,333		591,333		-		-
Interest-bearing demand deposits		58,425		58,425		58,425		-		-
NOW accounts		133,443		133,443		133,443		-		-
Money market deposit accounts		162,050		162,050		162,050		-		-
Savings accounts		329,900		329,900		329,900		-		-
Time deposits		116,351		117,050		-		-		117,050
Total deposits		1,391,502		1,392,201		1,275,151		-		117,050

Long-term debt		46,706		44,912		-		-		44,912
Subordinated debt		19,660		19,227		-		-		19,227
Accrued interest payable		470		470		470		-		-

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	December 31, 2020
					Quoted Prices in Active Markets		Significant Other		Significant
					for Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
	Amount		Fair Value		(Level I)		(Level II)		(Level III)
	$		$		$		$		$
Financial Assets:
Cash and cash equivalents		94,939		94,939		94,939		-		-
Regulatory stock		6,107		6,107		6,107		-		-
Loans held for sale		3,029		3,029		3,029		-		-
Loans, net of allowance		811,043		829,902		-		-		829,902
Mortgage servicing assets		1,076		1,083		-		-		1,083
Accrued interest receivable		4,546		4,546		4,546		-		-
Bank owned life insurance		29,646		29,646		29,646		-		-

Financial Liabilities:
Demand deposits		534,853		534,853		534,853		-		-
Interest-bearing demand deposits		47,092		47,092		47,092		-		-
NOW accounts		137,279		137,279		137,279		-		-
Money market deposit accounts		140,113		140,113		140,113		-		-
Savings accounts		274,386		274,386		274,386		-		-
Time deposits		119,088		121,470		-		-		121,470
Total deposits		1,252,811		1,255,193		1,133,723		-		121,470

Long-term debt		54,790		51,800		-		-		51,800
Subordinated debt		19,601		19,601		-		-		19,601
Accrued interest payable		325		325		325		-		-

7.Commitments and Contingent Liabilities

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of September 30, 2021, firm loan commitments were $103.9 million, unused lines of credit were $364.7 million, and open letters of credit were $13.1 million. The total of these commitments was $481.7 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

8.Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 is as follows:

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)

	Unrealized
	Gains (Losses)
	on Securities
	Available-for-Sale
	$
Balance at December 31, 2020		7,958
Other comprehensive loss before reclassifications		(4,964	)
Amount reclassified from accumulated other comprehensive income (loss)		(70	)
Period change		(5,034	)

Balance at March 31, 2021		2,924

Other comprehensive income before reclassifications		4,654
Amount reclassified from accumulated other comprehensive income (loss)		(216	)
Period change		4,438

Balance at June 30, 2021		7,362

Other comprehensive loss before reclassifications		(2,759	)
Amount reclassified from accumulated other comprehensive income (loss)		(277	)
Period change		(3,036	)

Balance at September 30, 2021		4,326

Balance at December 31, 2019		1,600
Other comprehensive loss before reclassifications		(274	)
Amount reclassified from accumulated other comprehensive income (loss)		(223	)
Period change		(497	)

Balance at March 31, 2020		1,103

Other comprehensive loss before reclassifications		3,709
Amount reclassified from accumulated other comprehensive income (loss)		(290	)
Period change		3,419

Balance at June 30, 2020		4,522

Other comprehensive income before reclassifications		1,277
Amount reclassified from accumulated other comprehensive income		(43	)
Period change		1,234

Balance at September 30, 2020		5,756

(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of 21%.

(2) Amounts in parentheses indicate debits.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Three Months
	Ended September 30,
	2021			2020			Affected Line Item in the
	$			$			Consolidated Statements of Income
Securities available-for-sale:
Net securities gains, reclassified into earnings		350			55		Gains on the sale of debt securities, net
Related income tax expense		(73	)		(12	)	Provision for federal income taxes
Net effect on accumulated other comprehensive income (loss) for the period		277			43

(1) Amounts in parentheses indicate debits.

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Nine Months
	Ended September 30,
	2021			2020			Affected Line Item in the
	$			$			Consolidated Statements of Income
Securities available-for-sale:
Net securities gains, reclassified into earnings		711			704		Gains on the sale of debt securities, net
Related income tax expense		(149	)		(148	)	Provision for federal income taxes
Net effect on accumulated other comprehensive income for the period		562			556

(1) Amounts in parentheses indicate debits.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

9.Risks and Uncertainties

COVID-19 Update

The following table provides information with respect to concentrations within our commercial loan portfolio that may be more significantly impacted by the effects of the COVID-19 pandemic at September 30, 2021.

At Risk

(Dollars in Thousands)	#		$		$		%
	Number		Total		Principal		of Total
	of		Loan		Balance		Loan
Loan Type	Loans		Exposure		of Loans		Balance
Lessors of Nonresidential Buildings		177		104,261		85,142		9.67%
Lessors of Residential Buildings		227		48,681		44,558		5.06%
Specialized Freight		24		10,813		6,501		0.74%
Residential Remodelers		85		9,457		3,645		0.41%
New Single Family Housing Construction		45		9,596		5,281		0.60%
Passenger Car Leasing		172		9,496		9,256		1.05%
Hotels		12		8,274		8,039		0.91%
Religious Organizations		23		6,413		5,313		0.60%
Car Washes		7		6,030		5,869		0.67%
Concrete & Structural Contrators		19		4,879		3,039		0.35%
Other		59		9,850		3,209		0.36%

Totals		850		227,750		179,852		20.43%

The Corporation has a diversified commercial loan portfolio that is consistent with the diversified economies of Lancaster, Lebanon and Berks Counties in Pennsylvania, the Corporation’s market area. The above chart is focused on loan types that are commonly known to be at risk or negatively impacted by the COVID-19 pandemic and its effects. The Corporation’s largest exposure to at risk loan types are loans on leased commercial property and loans on residential investment properties. The Corporation has a relatively low exposure to the hospitality industry, including restaurants. Single loan type exposures falling under the other category do not exceed 0.5% of total loans and include loan types such as site preparation contractors, fuel dealers, and recreational centers. The above levels of exposure to these at risk loan types have not had significant movements from 2020 to 2021. Management does not expect any significant movements in these exposures going forward.

Paycheck Protection Program (PPP)

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, providing over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was authorized to originate PPP loans.

In terms of qualifying for a PPP loan, an eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10 million. The PPP loans have the following terms: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is eligible to be reduced by the amount of loan forgiveness available under the PPP, provided the employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses such as utilities.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In the initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the end of April 2020. Congress then passed an additional allocation of funds for the PPP loans, allowing a second round of applications to begin. The Corporation generated PPP loans under this initial plan in the amount of approximately $78 million. In the first quarter of 2021, the SBA made another round of PPP funding available and the Corporation made additional loans to qualifying small businesses. Additionally, all rounds of PPP loans became eligible for forgiveness. As a result of the forgiveness of some of the original PPP loans, the initiation of additional PPP loans, and the forgiveness of a portion of these loans, the total balance of PPP loans at September 30, 2021, was $23.2 million. Management’s focus has been to serve the customers and market area that the Corporation serves.

In accordance with the SBA terms and conditions on these PPP loans, as of September 30, 2021, the Corporation received approximately $5.5 million in fees associated with the processing of these loans. All fee income is being deferred over the expected life of each PPP loan. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the majority of the Corporation’s PPP loans carry a two-year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. This income amounted to $2,119,000 during the first nine months of 2021, and $1,442,000 during the first nine months of 2020. The Corporation expects there to be few loans that are on the books until the stated maturity dates.

COVID-19 Loan Forbearance Programs

Throughout 2020 and into 2021, 330 of the Corporation’s customers had requested payment deferrals, or payments of interest only, on loans originally totaling over $65 million at the time of deferment. These loans now have a current balance of $43.4 million, or 4.9% of the total loan portfolio as of September 30, 2021. The balance of these loans was $54.6 million as of December 31, 2020. In accordance with interagency guidance issued in March 2020, these short-term deferrals were not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans would not be considered past due until after the deferral period ended and scheduled payments resumed. The vast majority of the COVID-19 loan payment deferrals were for a 90-day period. As of September 30, 2021, there were no commercial loans remaining on deferment and the Corporation’s delinquent and non-performing levels were not materially impacted by the weaker economic conditions brought on by COVID-19.

10.Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for credit losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments ‒ Credit Losses, which, in addition to addressing other matters, ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13. This Update is not expected to have a significant impact on the Corporation’s financial statements.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Corporation qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Corporation qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Corporation’s financial statements.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Corporation’s financial statements.

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Corporation’s financial statements.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2020 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

Forward-Looking Statements

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

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

National and local economic conditions

Effects of economic conditions particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus (COVID-19) and government and business responses thereto, specifically the effect on loan customers to repay loans

Health of the housing market

Real estate valuations and its impact on the loan portfolio

Interest rate and monetary policies of the Federal Reserve Board

Volatility of the securities markets including the valuation of securities

Future actions or inactions of the United States government, including a failure to increase the government debt limit, a prolonged shutdown of the federal government, increase in taxes or regulations, or increasing debt balances

Political changes and their impact on new laws and regulations

Competitive forces

Impact of mergers and acquisition activity in the local market and the effects thereof

Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses

Changes in customer behavior impacting deposit levels and loan demand

Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters

Ineffective business strategy due to current or future market and competitive conditions

Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk

Operation, legal, and reputation risk

Results of the regulatory examination and supervision process

The impact of new laws and regulations

Possible changes to the capital and liquidity requirements and other regulatory pronouncements, regulations and rules

Large scale global disruptions such as pandemics, terrorism, trade wars, and armed conflict.

Local disruptions due to flooding, severe weather, or other natural disasters

The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Business and competitive disruptions caused by new market and industry entrants

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

Results of Operations

Overview

The nine months ended September 30, 2021 were positively impacted by a number of items resulting in strong financial results. The COVID-19 pandemic and governmental and business responses thereto continues to impact customer behavior and balance sheet growth, but as of the date of this report there has not been significant negative impacts on earnings or credit. Customers have adapted to changes in behavior and the Corporation continues to seek ways to manage the structure of the balance sheet to achieve positive financial results now and in future time periods.

The Corporation recorded net income of $4,139,000 for the three-month period ended September 30, 2021, a $1,204,000, or 41.0% increase over the three months ended September 30, 2020. Net income for the nine-month period was $12,194,000, a $3,495,000, or 40.2% increase over earnings in the nine-month period ended September 30, 2020. The earnings per share, basic and diluted, were $0.74 for the three months ended September 30, 2021, compared to $0.53 for the same period in 2020, and for the year-to-date period, earnings per share were $2.19 in 2021, compared to $1.56 in 2020, a 40.4% increase. The increase in the Corporation’s 2021 earnings was caused primarily by growth in gains on securities, other income, and net interest income, coupled with a decline in the provision for loan losses.

Gains on securities in total increased by $381,000, for the three months ended September 30, 2021, and increased by $542,000, or 127.5%, for the nine months ended September 30, 2021, compared to the same periods in the prior year. Outside of mortgage and security gains, other non-interest income increased by $259,000, or 11.3%, and $1,714,000, or 26.5%, for the three and nine months ended September 30, 2021, due to many positive trends such as higher trust income, higher commissions on debit card interchange fees, and lower mortgage servicing asset amortization.

The Corporation’s net interest income (NII) increased by $1,086,000, or 11.4%, and $1,810,000, or 6.4%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020. The increase in NII primarily resulted from an increase in interest on securities available for sale of $706,000, or 43.9%, for the three-month period ended September 30, 2021, and $1,482,000, or 29.0%, for the nine-month period ended September 30, 2021, compared to the three and nine months ended September 30, 2020. In addition, interest expense on deposits and borrowings decreased by $56,000, or 6.6%, and $669,000, or 21.5%, for the three and nine months ended September 30, 2021, compared to the same periods in the prior year. The low interest rate environment has caused a rapid decline in asset yield, but also a decline in the cost of funds, which has resulted in these much lower levels of interest expense.

The Corporation recorded a $250,000 credit provision for loan losses in the third quarter of 2021, due to the reversal of a specific allocation assigned to a commercial loan that paid off during the quarter. Provision expense was $1,250,000 for the third quarter of 2020. For the year-to-date period ended September 30, 2021, provision expense was $125,000, a decrease of $2,450,000, compared to the $2,575,000 recorded for the nine months ended September 30, 2020. The higher provision in 2020 was primarily caused by increasing the qualitative factors across industry lines to various degrees as a result of potential forward credit concerns related to COVID-19 and a higher specific allocation related to one commercial borrower.

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for both periods ended September 30, 2021, compared to the same periods in the prior year, due to higher earnings in 2021.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Key Ratios	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

Return on Average Assets		1.03%		0.89%		1.06%		0.93%
Return on Average Equity		11.91%		9.46%		12.25%		9.72%

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

Net interest income

Provision for loan losses

Other income

Operating expenses

Provision for income taxes

The following discussion analyzes each of these five components.

Net Interest Income

NII represents the largest portion of the Corporation’s operating income. In the first nine months of 2021, NII generated 68.9% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared to 71.6% in the first nine months of 2020. This decrease is a result of much higher levels of NII in the first nine months of 2021 compared to 2020. The overall performance of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.

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 an FTE basis. The FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $291,000 for the three months ended September 30, 2021, and $848,000 for the nine months ended September 30, 2021, compared to $209,000 and $579,000 for the same periods in 2020.

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	$		$		$		$
Total interest income		11,417		10,387		32,483		31,342
Total interest expense		789		845		2,446		3,115

Net interest income		10,628		9,542		30,037		28,227
Tax equivalent adjustment		291		209		848		579

Net interest income (fully taxable equivalent)		10,919		9,751		30,885		28,806

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

The rates earned on interest earning assets and paid on interest bearing liabilities

The average balance of interest earning assets and interest bearing liabilities

NII is impacted by yields earned on assets and rates paid on liabilities. With the decrease in the short-term Federal Reserve rates in 2020, asset yields have declined significantly and the U.S. Treasury curve has been relatively flat. During 2021, longer-term U.S. Treasury rates did increase adding some slope to the yield curve, but asset yields are still compressed, which adds strain to NII and net interest margin (NIM).

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

As a result of a larger balance sheet in 2021, even with much lower asset yields, the Corporation’s NII on a tax equivalent basis increased while the Corporation’s margin decreased to 2.89% for the quarter and 2.82% for the nine months ended September 30, 2021, compared to 3.16% in the third quarter of 2020 and 3.26% for the year-to-date period. Loan yields were lower in 2021 due to the 150 basis point Fed rate decline during the first quarter of 2020 as well as competitive pressure throughout 2020 and 2021. The Corporation’s NII for the three and nine months ended September 30, 2021, increased over the same periods in 2020, by $1,168,000, or 12.0%, and $2,079,000, or 7.2%, respectively. Management’s asset liability sensitivity shows a small benefit to both margin and NII given Federal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation’s balance sheet, however there was some decline in this asset sensitivity in the first nine months of 2021. In a down-rate environment, the margin and NII would suffer unless balance sheet growth is enough to offset lower asset yields.

Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With lower Treasury rates in 2020, security reinvestment had generally been occurring at lower yields. With slightly higher Treasury rates in 2021, security yields have increased slightly, but still remain compressed compared to years prior to 2020.

The Corporation’s overall cost of funds, including non-interest bearing funds, remained stable through the first nine months of 2021 between 22 and 16 basis points. Core deposit interest rates were reduced throughout 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. The Corporation’s costs on borrowings included $140,000 of prepayment penalties recorded on Federal Home Loan Bank (FHLB) long-term advances paid off early during the first nine months of 2021, and $234,000 of prepayment penalties recorded in the first nine months of 2020, accelerating the interest expense, but achieving savings in future periods. While the average balance of borrowings was lower in the first nine months of 2021 than 2020, the interest expense was higher, as the new $20 million sub debt issue beginning on December 30, 2020, carried a higher rate of interest than FHLB long-term advances that were paid off. As a result, the total cost of borrowings increased $236,000 when comparing the nine months ended September 30, 2021, to the same period in the prior year.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The following table provides an analysis of year-to-date changes in NII 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.

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

	Nine Months Ended September 30,									Nine Months Ended September 30,
	2021 vs. 2020									2020 vs. 2019
	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

Interest on deposits at other banks		55			(108	)		(53	)		98			(280	)		(182	)

Securities available for sale:
Taxable		1,448			(1,041	)		407			382			(928	)		(546	)
Tax-exempt		1,803			(445	)		1,358			149			(92	)		57
Total securities		3,251			(1,486	)		1,765			531			(1,020	)		(489	)

Loans		1,539			(1,714	)		(175	)		2,989			(2,131	)		858
Regulatory stock		(54	)		(73	)		(127	)		21			(76	)		(55	)

Total interest income		4,791			(3,381	)		1,410			3,639			(3,507	)		132

INTEREST EXPENSE

Deposits:
Demand deposits		94			(447	)		(353	)		82			(874	)		(792	)
Savings deposits		13			(15	)		(2	)		11			(40	)		(29	)
Time deposits		(97	)		(453	)		(550	)		(71	)		48			(23	)
Total deposits		10			(915	)		(905	)		22			(866	)		(844	)

Borrowings:
Total borrowings		(36	)		272			236			(13	)		188			175

Total interest expense		(26	)		(643	)		(669	)		9			(678	)		(669	)

NET INTEREST INCOME		4,817			(2,738	)		2,079			3,630			(2,829	)		801

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

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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,
	2021						2020
					(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		44,259		17		0.15		33,928		31		0.36

Securities available for sale:
Taxable		385,330		1,333		1.38		243,765		941		1.54
Tax-exempt		192,614		1,269		2.64		109,198		859		3.15
Total securities (d)		577,944		2,602		1.80		352,963		1,800		2.04

Loans (a)		879,836		9,023		4.09		840,252		8,656		4.11

Regulatory stock		5,807		65		4.45		6,871		109		6.33

Total interest earning assets		1,507,846		11,707		3.10		1,234,014		10,596		3.43

Non-interest earning assets (d)		86,494						77,629

Total assets		1,594,340						1,311,643

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		352,448		43		0.05		275,279		59		0.09
Savings deposits		325,018		16		0.02		251,130		13		0.02
Time deposits		117,041		218		0.74		124,479		359		1.15
Borrowed funds		69,247		511		2.93		64,877		415		2.54
Total interest bearing liabilities		863,754		788		0.39		715,765		846		0.48

Non-interest bearing liabilities:

Demand deposits		588,125						467,030
Other		4,616						5,377

Total liabilities		1,456,495						1,188,172

Stockholders' equity		137,845						123,471

Total liabilities & stockholders' equity		1,594,340						1,311,643

Net interest income (FTE)				10,919						9,750

Net interest spread (b)						2.71						2.95
Effect of non-interest
bearing deposits						0.18						0.21
Net yield on interest earning assets (c)						2.89						3.16

(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The quarter-to-date average balances include net deferred loan costs of $872,000 as of September 30, 2021, and $171,000 as of September 30, 2020. Such fees and costs recognized through income and included in the interest amounts totaled $617,000 in 2021, and $265,000 in 2020.

(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 NII (FTE) by total interest earning assets.

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

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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,
	2021						2020
					(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		50,598		59		0.16		28,205		112		0.53

Securities available for sale:
Taxable		359,530		3,696		1.38		234,121		3,289		1.87
Tax-exempt		184,663		3,720		2.69		97,843		2,362		3.22
Total securities (d)		544,193		7,416		1.82		331,964		5,651		2.27

Loans (a)		859,141		25,646		3.98		809,325		25,821		4.26

Regulatory stock		5,964		210		4.69		7,255		337		6.19

Total interest earning assets		1,459,896		33,331		3.02		1,176,749		31,921		3.62

Non-interest earning assets (d)		82,233						73,691

Total assets		1,542,129						1,250,440

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		338,365		120		0.05		271,836		473		0.23
Savings deposits		308,245		46		0.02		235,084		48		0.03
Time deposits		118,071		711		0.81		128,749		1,261		1.31
Borrowed funds		71,945		1,569		2.92		74,314		1,333		2.40
Total interest bearing liabilities		836,626		2,446		0.39		709,983		3,115		0.59

Non-interest bearing liabilities:

Demand deposits		567,408						416,379
Other		5,006						4,570

Total liabilities		1,409,040						1,130,932

Stockholders' equity		133,089						119,508

Total liabilities & stockholders' equity		1,542,129						1,250,440

Net interest income (FTE)				30,885						28,806

Net interest spread (b)						2.63						3.03
Effect of non-interest
bearing deposits						0.19						0.23
Net yield on interest earning assets (c)						2.82						3.26

(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The year-to-date average balances include net deferred loan costs of $834,000 as of September 30, 2021, and $1,424,000 as of September 30, 2020. Such fees and costs recognized through income and included in the interest amounts totaled $990,000 in 2021, and $315,000 in 2020.

(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 NII (FTE) by total interest earning assets.

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s average balance on securities increased by $225.0 million, or 63.7%, for the three months ended September 30, 2021, and $212.2 million, or 63.9%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The tax equivalent yield on investments declined by 24 basis points for the quarter-to-date period and 45 basis points for the year-to-date period when comparing both years. Interest income on securities increased due to the volume growth which offset the declining yield due to lower market rates. Security reinvestment in 2021 has been occurring at slightly higher rates due to the increase in U.S. Treasury rates, but reinvestment throughout the majority of 2020 was at much lower yields. The sharp growth in the investment portfolio during a period of very low rates also contributed to the decline in average security yield. This large amount of new investment was caused by the significant influx of deposits, which caused excess liquidity.

Average balances on loans increased by $39.6 million, or 4.7%, for the three months ended September 30, 2021, and $49.8 million, or 6.2%, for the nine months ended September 30, 2021, compared to the same periods in the prior year. Loan yields declined by two basis points for the quarter and 28 basis points for the year-to-date period when comparing both years. Loan interest income increased $367,000, or 4.2%, for the three-month period as a result of the increase in loan balances. However, loan interest income decreased $175,000, or 0.7%, for the nine-month period as a result of the decline in yields.

The average balance of deposit accounts increased by $143.6 million, or 22.1%, and $129.0 million, or 20.3%, for the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. While the average balance of time deposits did decrease for both the quarter and year-to-date time periods, the average balance on demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest rate paid on deposits decreased for both of these time periods as well. This resulted in a decrease in interest expense on deposits of $154,000, or 35.7%, and $905,000, or 50.8%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020.

The Corporation’s average balance on borrowed funds increased by $4.4 million, or 6.7%, for the three months ended September 30, 2021, but decreased by $2.4 million, or 3.2%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The Corporation’s borrowed funds consist of FHLB advances as well as subordinated debt issued in December of 2020 which was used to support capital growth for the Corporation. The increase in borrowed funds for the quarter-to-date period is a result of this subordinated debt issuance. However, the decrease for the year-to-date period is a result of paying off FHLB advances. The Corporation paid off $35.6 million of FHLB advances in the nine months ended September 30, 2020, compared to $8.1 million for the year-to-date period in 2021. The rate paid on borrowed funds increased by 39 basis points for the three months ended September 30, 2021, and 52 basis points for the nine months ended September 30, 2021, compared to the same periods in the prior year. This increase in rate can be attributed to the issuance of subordinated debt which carries a 4.00% rate, significantly higher than the rate on FHLB advances.

For the three months ended September 30, 2021, the net interest spread decreased by 24 basis points to 2.71%, compared to 2.95% for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the net interest spread decreased by 40 basis points to 2.63%, compared to 3.03% for the nine months ended September 30, 2020. The effect of non-interest bearing funds decreased to 18 basis points from 21 basis points for the three months ended September 30, 2021, and decreased to 19 basis points from 23 basis points for the nine months ended September 30, 2021, compared to the same periods in 2020. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for the third quarter of 2021 was 2.89%, compared to 3.16% for the third quarter of 2020. For the year-to-date period, the Corporation’s NIM was 2.82%, compared to 3.26% for the same period in 2020.

The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in NII, 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 changes in rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Provision for Loan Losses

The allowance for credit losses (ACL) 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 ACL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a credit provision of $250,000 for the third quarter of 2021, and provision expense of $125,000 for the nine months ended September 30, 2021, compared to provision expense of $1,250,000 and $2,575,000, respectively, for the three and nine months ended September 30, 2020. The provision expense was elevated in 2020 due to the onset of COVID-19 and the deteriorating economic conditions that were expected to impact credit risk moving forward. The Corporation also provided $1.1 million in a specific allocation to one commercial borrower in 2020. This loan paid off during the third quarter of 2021 resulting in a reversal of that specific allocation and the credit provision for the quarter. As of September 30, 2021, the allowance as a percentage of total loans was 1.41%, compared to 1.42% at September 30, 2020. More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows.

Other Income

Other income for the third quarter of 2021 was $4,139,000, a decrease of $235,000, or 5.4%, compared to the $4,374,000 earned during the third quarter of 2020. For the year-to-date period ended September 30, 2021, other income totaled $13,534,000, an increase of $2,325,000, or 20.7%, compared to the same period in 2020. The following tables detail the categories that comprise other income.

OTHER INCOME

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,					Increase (Decrease)
	2021		2020
	$		$			$			%

Trust and investment services		540		442			98			22.2
Service charges on deposit accounts		282		250			32			12.8
Other service charges and fees		336		451			(115	)		(25.5	)
Commissions		945		781			164			21.0
Gains on securities transactions, net		350		55			295			536.4
Gains (losses) on equity securities, net		32		(54	)		86			>100%
Gains on sale of mortgages		1,206		2,081			(875	)		(42.0	)
Earnings on bank owned life insurance		218		209			9			4.3
Other miscellaneous income		230		159			71			44.7

Total other income		4,139		4,374			(235	)		(5.4	)

OTHER INCOME

(DOLLARS IN THOUSANDS)

	Nine Months Ended September 30,					Increase (Decrease)
	2021		2020
	$		$			$			%

Trust and investment services		1,746		1,480			266			18.0
Service charges on deposit accounts		776		770			6			0.8
Other service charges and fees		1,141		1,245			(104	)		(8.4	)
Commissions		2,761		2,116			645			30.5
Gains on securities transactions, net		711		704			7			1.0
Gains (losses) on equity securities, net		256		(279	)		535			>100%
Gains on sale of mortgages		4,381		4,312			69			1.6
Earnings on bank owned life insurance		636		620			16			2.6
Other miscellaneous income		1,126		241			885			>100%

Total other income		13,534		11,209			2,325			20.7

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Trust and investment services income increased $98,000, or 22.2%, and $266,000, or 18.0%, for the three and nine months ended September 30, 2021, compared to the same periods last year. This revenue consists of income from traditional trust services and income from non-deposit investment services provided through a third party. In the third quarter of 2021, traditional trust income increased by $17,000, or 6.3%, while income from non-deposit investments increased by $81,000, or 48.0%, compared to the third quarter of 2020. For the nine months ended September 30, 2021, traditional trust services income increased by $82,000, or 8.9%, while income from non-deposit investment services increased by $185,000, or 33.4%, compared to the same period in 2020. The increase in income from the investment services area for both time periods can be partially attributed to transfer fees received from a new broker dealer that resulted in additional income of $89,000 in the first nine months of 2021. The trust and investment services area continues to be an area of strategic focus for the Corporation.

Other service charges and fees decreased by $115,000, or 25.5%, and $104,000, or 8.4%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020. The decline can be primarily attributed to loan administration fees which declined by $76,000, or 46.8%, and $95,000, or 23.3%, for the three and nine months ended September 30, 2021, compared to the same periods in the prior year. Loan administration fees were higher in 2020 with higher levels of mortgage volume at that time.

Commissions increased by $164,000, or 21.0%, and $645,000, or 30.5%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020. The increase was primarily caused by an increase in debit card interchange income of $138,000, or 21.0%, for the three months ended September 30, 2021, and $543,000, or 29.7%, for the nine months ended September 30, 2021, compared to the same periods in the prior year. The interchange income is a direct result of the volume of debit card transactions processed and this income decreased during the second quarter of 2020 as customer spending changed with lower levels of purchases impacted by COVID-19, but increased again in late 2020 and throughout 2021.

For the three and nine months ended September 30, 2021, $350,000 and $711,000 of gains on securities transactions were recorded, respectively, compared to gains of $55,000 and $704,000, respectively, for the same periods in 2020. Gains or losses on securities transactions fluctuate based on market opportunities to take gains and reposition the securities portfolio to improve long-term earnings, or as part of management’s asset liability goals to improve liquidity or reduce interest rate risk or fair value risk. The gains or losses recorded by the Corporation depend heavily on market pricing and the volume of security sales. Generally, the lower U.S. Treasury yields go, the more management will be motivated to pursue taking gains from the sale of securities. However, these market opportunities are evaluated subject to the Corporation’s other asset liability measurements and goals. The yield curve in the first nine months of 2021 and 2020 provided opportunities to take gains out of the portfolio.

Gains or losses on equity securities amounted to a gain of $32,000 during the third quarter of 2021, compared to a loss of $54,000 for the same period in the prior year. For the year-to-date period, gains on equity securities amounted to $256,000 in 2021, compared to a loss of $279,000 in 2020. Gains or losses on equity securities are impacted by actual sales of securities as well as changes in the market value of these securities since market value gains and losses are recorded through income. In the first nine months of 2021, $99,000 of gains were recorded on the sale of bank stocks and $157,000 was recorded as an unrealized gain due to the increase in market value of the bank stock portfolio. During the first nine months of 2020, unrealized losses of $279,000 were recorded due to the decline in bank stock prices as the COVID-19 pandemic began and negatively impacted the market.

Gains on the sale of mortgages were $1,206,000 for the three-month period ended September 30, 2021, compared to $2,081,000 for the same period in 2020, a $875,000, or 42.0% decrease. For the nine-month period ended September 30, 2021, mortgage gains amounted to $4,381,000, compared to $4,312,000 for the same period in 2020, a $69,000, or 1.6% increase. While mortgage activity was slower for the third quarter of 2021 compared to 2020, year-to-date activity was still higher resulting in the year-to-date increase in mortgage gains. The increased mortgage activity is the result of historically low interest rates and a surge in mortgage refinancing activity.

The miscellaneous income category increased by $71,000 for the three months ended September 30, 2021, and $885,000 for the nine months ended September 30, 2021, compared to the same periods in 2020. Net mortgage servicing income increased by $88,000 for the three months ended September 30, 2021, and $443,000 for the nine months ended September 30, 2021, compared to the same periods in the prior year. This was due to much lower levels of mortgage servicing asset amortization in 2021. Other miscellaneous income categories increased as well making up the remainder of the variance in this category.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Operating Expenses

Operating expenses for the third quarter of 2021 were $10,118,000, an increase of $920,000, or 10.0%, compared to the $9,198,000 for the third quarter of 2020. For the year-to-date period ended September 30, 2021, operating expenses totaled $29,001,000, an increase of $2,449,000, or 9.2%, compared to the same period in 2020. The following tables provide details of the Corporation’s operating expenses for the three and nine-month periods ended September 30, 2021, compared to the same periods in 2020.

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,
	2021		2020		Increase (Decrease)
	$		$		$			%
Salaries and employee benefits		6,142		5,860		282			4.8
Occupancy expenses		654		598		56			9.4
Equipment expenses		255		298		(43	)		(14.4	)
Advertising & marketing expenses		282		184		98			53.3
Computer software & data processing expenses		1,097		835		262			31.4
Bank shares tax		322		239		83			34.7
Professional services		535		549		(14	)		(2.6	)
Other operating expenses		831		635		196			30.9
Total Operating Expenses		10,118		9,198		920			10.0

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

	Nine Months Ended September 30,
	2021		2020		Increase (Decrease)
	$		$		$			%
Salaries and employee benefits		17,800		16,522		1,278			7.7
Occupancy expenses		1,972		1,805		167			9.3
Equipment expenses		806		904		(98	)		(10.8	)
Advertising & marketing expenses		717		676		41			6.1
Computer software & data processing expenses		3,297		2,309		988			42.8
Bank shares tax		876		718		158			22.0
Professional services		1,572		1,679		(107	)		(6.4	)
Other operating expenses		1,961		1,939		22			1.1
Total Operating Expenses		29,001		26,552		2,449			9.2

Salaries and employee benefit costs increased by $282,000, or 4.8%, for the third quarter of 2021, and $1,278,000, or 7.7%, for the year-to-date period ended September 30, 2021, compared to the same periods in the prior year. The growth in salaries can primarily be attributed to merit and cost of living increases, additions to staff, and higher deferred salaries costs in the second and third quarters of 2020 stemming from higher levels of Paycheck Protection Program (PPP) loan production.

Computer software and data processing expenses increased by $262,000, or 31.4%, for the third quarter of 2021 compared to 2020, and $988,000, or 42.8%, for the nine months ended September 30, 2021, compared to the same periods in 2020. Software-related expenses were up by $285,000, or 60.1%, for the three months ended September 30, 2021, and by $941,000, or 70.6%, for the nine months ended September 30, 2021, compared to the same periods in the prior year. The increases were primarily a result of increased amortization on existing software as well as purchases of new software platforms to support the strategic initiatives of the Corporation.

Bank shares tax expense was $322,000 for the third quarter of 2021, an increase of $83,000, or 34.7%, from the third quarter of 2020. For the year-to-date period, shares tax increased by $158,000, or 22.0%, compared to the prior year. Two main factors determine the amount of bank shares tax: the ending value of shareholders’ equity and the ending value of tax-exempt U.S. obligations. The shares tax calculation uses a period-end balance of shareholders’ equity and a tax rate of 0.95%. The increase in 2021 can be primarily attributed to the Corporation’s growing value of shareholders’ equity.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Other operating expenses increased by $196,000, or 30.9%, and $22,000, or 1.1%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020. The quarter-to-date increase can be primarily attributed to loan related expenses which increased by $111,000, or 63.2%, for the three months ended September 30, 2021, compared to the same period in 2020. FDIC insurance charges increased by $27,000, or 33.6%, and travel-related costs increased by $25,000, or 133.5%, for the three months ended September 30, 2021, compared to the same period in the prior year.

Income Taxes

Federal income tax expense was $760,000 for the third quarter of 2021 compared to $533,000 for the same period in 2020. For the nine months ended September 30, 2021, the Corporation recorded Federal income tax expense of $2,251,000, compared to $1,610,000 for the nine months ended September 30, 2020. The effective tax rate for the Corporation was 15.6% for the nine months ended September 30, 2021 and 2020. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and Bank Owned Life Insurance (BOLI) income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Financial Condition

Investment Securities

The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of September 30, 2021, the Corporation had $561.6 million of securities available for sale, which accounted for 35.1% of assets, compared to 32.6% as of December 31, 2020, and 27.3% as of September 30, 2020. Based on ending balances, the securities portfolio increased 56.0% from September 30, 2020, and 17.9% from December 31, 2020.

The debt securities portfolio was showing a net unrealized gain of $5,477,000 as of September 30, 2021, compared to an unrealized gain of $10,072,000 as of December 31, 2020. The valuation of the Corporation’s securities portfolio, predominately debt securities, is impacted by both the U.S. Treasury rates and the perceived forward direction of interest rates.

The table below summarizes the Corporation’s amortized cost, unrealized gain or loss position, and fair value for each sector of the securities portfolio for the periods ended September 30, 2021 and December 31, 2020.

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)

			Net
	Amortized		Unrealized			Fair
	Cost		Gains (Losses)			Value
	$		$			$
September 30, 2021
U.S. treasuries		4,981		17			4,998
U.S. government agencies		29,616		(335	)		29,281
U.S. agency mortgage-backed securities		56,941		521			57,462
U.S. agency collateralized mortgage obligations		33,173		420			33,593
Asset-backed securities		100,722		721			101,443
Corporate bonds		84,264		710			84,974
Obligations of states and political subdivisions		246,413		3,423			249,836
Total debt securities, available for sale		556,110		5,477			561,587
Equity securities		8,740		104			8,844
Total securities		564,850		5,581			570,431

December 31, 2020
U.S. government agencies		54,224		137			54,361
U.S. agency mortgage-backed securities		69,777		1,275			71,052
U.S. agency collateralized mortgage obligations		34,449		586			35,035
Asset-backed securities		60,387		88			60,475
Corporate bonds		60,387		1,336			61,723
Obligations of states and political subdivisions		187,132		6,650			193,782
Total debt securities		466,356		10,072			476,428
Equity securities		7,158		(53	)		7,105
Total securities		473,514		10,019			483,533

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

ALCO positions as to liquidity, credit risk, interest rate risk, and fair value risk

Growth of the loan portfolio

Slope of the U.S. Treasury curve

Relative performance of the various instruments, including spread to U.S. Treasuries

Duration and average length of the portfolio

Volatility of the portfolio

Direction of interest rates

Economic factors impacting debt securities

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The investment policy of the Corporation imposes guidelines to ensure diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk.

The composition of the securities portfolio based on fair market value is shown in the following table.

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)

	Period Ending
	September 30, 2021				December 31, 2020
	$		%		$		%

U.S. treasuries		4,998		0.9		—		—
U.S. government agencies		29,281		5.1		54,361		11.2
U.S. agency mortgage-backed securities		57,462		10.1		71,052		14.7
U.S. agency collateralized mortgage obligations		33,593		5.9		35,035		7.2
Asset-backed securities		101,443		17.8		60,475		12.5
Corporate debt securities		84,974		14.9		61,723		12.8
Obligations of states and political subdivisions		249,836		43.8		193,782		40.1
Total debt securities, available for sale		561,587		98.5		476,428		98.5

Marketable equity securities		8,844		1.5		7,105		1.5

Total securities		570,431		100.0		483,533		100.0

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

slope of the U.S. Treasury curve and projected forward rates

interest spread versus U.S. Treasury rates on the various securities

pricing of the instruments, including supply and demand for the product

structure of the instruments, including duration and average life

portfolio weightings versus policy guidelines

prepayment speeds on mortgage-backed securities and collateralized mortgage obligations

credit risk of each instrument and risk-based capital considerations

Federal income tax considerations with regard to obligations of tax-free states and political subdivisions.

The Corporation purchased $5.0 million of U.S. treasuries during the second quarter of 2021 and held no treasuries in 2020, resulting in the increase in this sector which represents a safe credit at a market appropriate yield which added some diversity to the portfolio. The Corporation’s U.S. government agency sector decreased by $25.1 million, or 46.1%, since December 31, 2020, with the weighting decreased from 11.2% of the portfolio to 5.1%. Management had purchased $35.5 million of short-term discount notes at the end of 2020 to offset the Corporation’s shares tax expense. These bonds were sold in the first quarter of 2021 and are responsible for the decline in this category. Management has increased the allocations of both asset-backed securities (ABS) and obligations of states and political subdivisions (municipals) since December 31, 2020, in order to better structure the portfolio to achieve higher yields while also protecting in preparation for a rates-up environment.

The Corporation’s ABS and municipal sectors have increased significantly since December 31, 2020, with ABS increasing $41.0 million, or 67.7%, and municipals increasing $56.1 million, or 28.9%. ABS securities are floating rate student loan pools which are instruments that will perform well in a rates-up environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flows. With liquidity and cash levels remaining high, management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in a rates-up environment.

Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities that generally provide the highest yield in the securities portfolio. They also carry the longest duration on average of any instrument in the securities portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. Municipal securities were purchased throughout 2020 and 2021 due to market conditions that led to favorable yields on some instruments. The Corporation also began purchasing some taxable municipal securities that added to the value of this sector. Municipal bonds represented 43.8% of the securities portfolio as of September 30, 2021, compared to 40.1% as of December 31, 2020. The Corporation’s investment policy limits municipal holdings to 150% of Tier 2 capital. As of September 30, 2021, municipal holdings amounted to 155% of Tier 2 capital, above this limit. The Corporation plans to be back within policy guidelines by December 31, 2021.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s U.S. agency MBS and CMO sectors have fluctuated since December 31, 2020, with MBS decreasing $13.6 million, or 19.1%, and CMOs decreasing $1.4 million, or 4.1%. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions. U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. The combined effect of all of these instruments paying monthly principal and interest provides the Corporation with a reasonably stable base cash flow of approximately $2.0 - $3.0 million per month. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield.

As of September 30, 2021, the fair value of the Corporation’s corporate bonds increased by $23.3 million, or 37.7%, from balances at December 31, 2020. Like any security, corporate bonds have both positive and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held.

Loans

Net loans outstanding increased by 4.4%, to $867.8 million at September 30, 2021, from $831.2 million at September 30, 2020. Net loans increased by 7.0%, an annualized rate of 9.3%, from $811.0 million at December 31, 2020. The following table shows the composition of the loan portfolio as of September 30, 2021, December 31, 2020, and September 30, 2020.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

	September 30,					December 31,					September 30,
	2021					2020					2020
	$			%		$			%		$			%

Commercial real estate
Commercial mortgages		166,741			19.0		142,698			17.4		136,125			16.2
Agriculture mortgages		188,455			21.4		176,005			21.4		174,150			20.7
Construction		18,786			2.1		23,441			2.9		22,380			2.7
Total commercial real estate		373,982			42.5		342,144			41.7		332,655			39.6

Consumer real estate (a)
1-4 family residential mortgages		302,670			34.4		263,569			32.0		260,465			30.9
Home equity loans		11,889			1.4		10,708			1.3		10,788			1.3
Home equity lines of credit		74,919			8.5		71,290			8.7		68,368			8.1
Total consumer real estate		389,478			44.3		345,567			42.0		339,621			40.3

Commercial and industrial
Commercial and industrial		73,695			8.4		97,896			11.9		128,414			15.2
Tax-free loans		17,279			2.0		10,949			1.3		16,423			1.9
Agriculture loans		19,180			2.2		20,365			2.5		20,494			2.4
Total commercial and industrial		110,154			12.6		129,210			15.7		165,331			19.5

Consumer		5,211			0.6		5,155			0.6		5,190			0.6

Total loans		878,825			100.0		822,076			100.0		842,797			100.0
Less:
Deferred loan fees (costs), net		(1,436	)				(1,294	)				(380	)
Allowance for credit losses		12,454					12,327					11,996
Total net loans		867,807					811,043					831,181

(a)	Residential real estate loans do not include mortgage loans serviced for others which totaled $274,892,000 as of September 30, 2021, $235,437,000 as of December 31, 2020, and $217,812,000 as of September 30, 2020.

There was moderate growth in the loan portfolio since September 30, 2020, and December 31, 2020. Most major loan categories showed an increase in balances from both time periods with the exception of the commercial and industrial loans which showed a decline due to the forgiveness of PPP loans since September 30, 2020.

The consumer residential real estate category represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from $339.6 million on September 30, 2020, to $389.5 million on September 30, 2021, a 14.7% increase. This category includes closed-end fixed rate or adjustable-rate residential real estate loans secured by 1-4 family residential properties, including first and junior liens, and floating rate home equity loans. The 1-4 family residential mortgages account for the vast majority of residential real estate loans with fixed and floating home equity loans making up the remainder. Historically, the entire consumer residential real estate component of the loan portfolio has averaged close to 40% of total loans. As of September 30, 2020, this percentage was 40.3%, and as of September 30, 2021, it increased to 44.3%. Although economic conditions for consumers had deteriorated with the COVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continued to remain relatively strong as consumers refinanced existing debt to lower rates.

The first lien 1-4 family mortgages increased by $42.2 million, or 16.2%, from September 30, 2020, to September 30, 2021. These first lien 1-4 family loans made up 76.7% of the residential real estate total as of September 30, 2020, and 77.7% as of September 30, 2021. The vast majority of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans, with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. In the third quarter of 2021, mortgage production decreased 17% from the previous quarter and was down 10% from the third quarter of 2020. Purchase money origination constituted 69% of the Corporation’s mortgage originations for the quarter, with construction-only and construction-permanent loans making up 37% of that mix. With a lower volume of new construction business, the percentage of mortgage originations being added into the Corporation’s held-for-investment mortgage portfolio decreased quarter-over-quarter. In the third quarter of 2021, 65% of all mortgage originations were held in the mortgage portfolio, 49% of which were adjustable rate mortgages. As of September 30, 2021, ARM balances were $133.5 million, representing 44.1% of the 1-4 family residential loan portfolio of the Corporation. With the dollar volume being delivered into the secondary market remaining stable, the gains on the sale of mortgages remained consistent quarter-over-quarter.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

As of September 30, 2021, the remainder of the residential real estate loans consisted of $11.5 million of fixed rate junior lien home equity loans, and $71.7 million of variable rate home equity lines of credit (HELOCs). This compares to $10.8 million of fixed rate junior lien home equity loans, and $68.4 million of HELOCs as of September 30, 2020. Therefore, combined, these two types of home equity loans increased from $79.2 million to $83.2 million, an increase of 5.1%.

Commercial real estate makes up 42.5% of total loans as of September 30, 2021, compared to 39.6% of total loans as of September 30, 2020. Within the commercial real estate segment, the increase has primarily been in commercial and agricultural mortgages. Commercial mortgages increased $30.6 million, or 22.5%, from balances at September 30, 2020. Commercial mortgages as a percentage of the total loan portfolio increased to 19.0% as of September 30, 2021, compared to 16.2% at September 30, 2020. Agricultural mortgages increased by $14.3 million, or 8.2%, from $174.2 million as of September 30, 2020, to $188.5 million as of September 30, 2021. Agricultural mortgages were 21.4% of the portfolio as of September 30, 2021, compared to 20.7% as of September 30, 2020.

The Corporation’s commercial construction loan balances decreased by $3.6 million, or 16.1%, from September 30, 2020 to September 30, 2021. Management was experiencing some demand for smaller residential builds like construction on existing lots but no new large scale projects. Commercial construction loans were 2.1% of the total loan portfolio as of September 30, 2021, and 2.7% as of September 30, 2020.

The other area of commercial lending is non-real estate secured commercial lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate accounted for 12.6% of total loans as of September 30, 2021, compared to 19.5% as of September 30, 2020. The balance of total commercial and industrial loans decreased from $165.3 million at September 30, 2020, to $110.2 million at September 30, 2021, a 33.3% decrease. This category of loans generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. The balance at September 30, 2021 and September 30, 2020, also includes the PPP loans, which have declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. The total balance of PPP loans declined by $54.5 million, or 70.1% from September 30, 2020, to September 30, 2021.

The consumer loan portfolio remained the same from September 30, 2020, to September 30, 2021, at $5.2 million and 0.6% of total loans. The long-term trend over the past decade has seen homeowners turning to the equity in their homes to finance cars and education rather than traditional consumer loans that are generally unsecured. Demand for unsecured credit is being matched by principal payments on existing loans resulting in stable balances.

Non-Performing Assets

Non-performing assets include:

Nonaccrual loans

Loans past due 90 days or more and still accruing

Non-performing troubled debt restructurings

Other real estate owned

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)

	September 30,		December 31,		September 30,
	2021		2020		2020
	$		$		$

Nonaccrual loans		2,236		725		846
Loans past due 90 days or more and still accruing		183		1,373		284
Troubled debt restructurings, non-performing		—		—		5,513
Total non-performing loans		2,419		2,098		6,643

Other real estate owned		—		—		—

Total non-performing assets		2,419		2,098		6,643

Non-performing assets to net loans		0.28%		0.25%		0.80%

The total balance of non-performing assets decreased by $4.2 million, or 63.6% from balances at September 30, 2020, and increased by $0.3 million, or 15.3%, from balances at December 31, 2020. The decrease from September 30, 2020 was primarily due to a decrease in non-performing troubled debt restructurings (TDRs) related to the payoff of one commercial borrower. There were no non-performing TDR loans as of September 30, 2021 or December 31, 2020. As of September 30, 2020, there were four non-performing TDR loans that totaled $5.5 million. A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender. Non-accrual loans increased by $1.4 million, or 164.3%, since September 30, 2020, and increased $1.5 million, or 208.4% since December 31, 2020. The increase that occurred between September 30, 2021 and December 31, 2020 was due to three agricultural relationships that were added to non-accrual in the third quarter of 2021. Loans past due 90 days or more and still accruing were down slightly from the prior year period, and down more significantly, by $1.2 million, or 86.7% since December 31, 2020.

There was no other real estate owned (OREO) as of September 30, 2021, December 31, 2020, or September 30, 2020.

Allowance for Credit Losses

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

Historical loan losses

Qualitative factor adjustments including levels of delinquent and non-performing loans

Growth trends of the loan portfolio

Recovery of loans previously charged off

Provision for loan losses

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Allowance for Credit Losses table below shows the activity in the allowance for credit losses for the nine-month periods ended September 30, 2021 and September 30, 2020. 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 credit losses as a percentage of total loans.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

	Nine Months Ended
	September 30
	2021			2020
	$			$

Balance at January 1,		12,327			9,447
Loans charged off:
Real estate		—			—
Commercial and industrial		—			23
Consumer		30			19
Total charged off		30			42

Recoveries of loans previously charged off:
Real estate		—			(11	)
Commercial and industrial		(19	)		(3	)
Consumer		(13	)		(2	)
Total recovered		(32	)		(16	)
Net loans charged off (recovered)		(2	)		26

Provision charged to operating expense		125			2,575

Balance at September 30,		12,454			11,996

Net charge-offs as a % of average total loans outstanding		0.00%			0.00%

Allowance at end of period as a % of total loans		1.41%			1.42%

Charge-offs for the nine months ended September 30, 2021, were $30,000, compared to $42,000 for the same period in 2020. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first nine months of 2021 and 2020, the Corporation charged off several smaller amounts related to consumer loans and a commercial and industrial loan in 2020. Recoveries were also low in 2020 and 2021with total recoveries of $32,000 in the first nine months of 2021 and $16,000 in the first nine months of 2020.

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

The Corporation’s level of classified loans was $17.9 million on September 30, 2021, compared to $26.1 million on September 30, 2020. Total classified loans have decreased during 2021. Having more loans in a classified status could result in a larger allowance as higher amounts of projected historical losses and qualitative factors are attached to these loans. In addition to this impact, management performs a specific allocation test on these classified loans. There was $0.2 million of specifically allocated allowance against the classified loans as of September 30, 2021, $1.1 million of specific allocation as of December 31, 2020, and $1.1 million of specific allocation as of September 30, 2020. The higher specific allocation at December 30, 2020 and September 30, 2020, was related to a commercial customer with ongoing business concerns. This loan paid off during the third quarter of 2021, resulting in a decline in the provision for loan losses.

The allowance as a percentage of total loans was 1.41% as of September 30, 2021, and 1.42% as of September 30, 2020. It is typical for the allowance for credit losses to contain a small amount of excess reserves. Over the long term, management targets an excess reserve at approximately 5%-10% knowing that the reserve can fluctuate. The excess reserve stood at 8.4% as of September 30, 2021.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Premises and Equipment

Premises and equipment, net of accumulated depreciation, decreased by $0.2 million, or 0.8%, to $24.5 million as of September 30, 2021, from $24.7 million as of September 30, 2020. As of September 30, 2021, $261,000 was classified as construction in process compared to $220,000 as of September 30, 2020. Fixed assets declined as a result of depreciation outpacing new purchases in 2021.

Regulatory Stock

The Corporation owns multiple forms of regulatory stock that is required in order to be a member of the Federal Reserve Bank (FRB) and members of banks such as the Federal Home Loan Bank (FHLB) and Atlantic Community Bankers Bank (ACBB). The Corporation’s $5.6 million of regulatory stock holdings as of September 30, 2021, consisted of $5.0 million of FHLB of Pittsburgh stock, $601,000 of FRB stock, and $37,000 of Atlantic Community Bancshares, Inc. stock, the Bank Holding Company of ACBB. All of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the investment is carried at book value and there is no fair market value adjustment.

The Corporation’s investment in FHLB stock is required for membership in the organization. The amount of stock required is dependent upon the relative size of outstanding FHLB borrowings and mortgage activity. Excess stock is typically repurchased from the Corporation at par if the borrowings decline to a predetermined level. The Corporation’s FHLB stock position was $5.0 million on September 30, 2021, $5.9 million on December 31, 2020, and $6.3 million on September 30, 2020, with no excess capital stock position. Any future stock repurchases would be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.

Deposits

The Corporation’s total ending deposits at September 30, 2021, increased by $138.7 million, or 11.1%, and by $264.7 million, or 23.5%, from December 31, 2020, and September 30, 2020, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks for safe places to invest money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since September 30, 2020, with the changes being a $126.1 million, or 27.1% increase in non-interest bearing demand deposit accounts, a $12.9 million, or 28.4% increase in interest bearing demand balances, a $21.6 million, or 19.3% increase in NOW balances, a $36.4 million, or 29.0% increase in money market account balances, a $74.0 million, or 28.9% increase in savings account balances, and a $6.3 million, or 5.1% decrease in time deposit balances.

The growth across most categories of core deposit accounts is a direct result of the PPP funding, government stimulus payments, and the change in customer’s spending habits during the uncertain economic conditions brought on by COVID-19. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Deposits by Major Classification table, shown below, provides the balances of each category for September 30, 2021, December 31, 2020, and September 30, 2020.

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

	September 30,		December 31,		September 30,
	2021		2020		2020
	$		$		$

Non-interest bearing demand		591,333		534,853		465,247
Interest bearing demand		58,425		47,092		45,502
NOW accounts		133,443		137,279		111,849
Money market deposit accounts		162,050		140,113		125,665
Savings accounts		329,900		274,386		255,936
Time deposits		116,351		119,088		122,622
Total deposits		1,391,502		1,252,811		1,126,821

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

Convenience and service provided

Current rates paid on deposits relative to competitor rates

Level of and perceived direction of interest rates

Financial condition and perceived safety of the institution

Possible risks associated with other investment opportunities

Level of fees on deposit products

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of September 30, 2021, time deposit balances had decreased $6.3 million, or 5.1%, from September 30 2020, and $2.7 million, or 2.3% from December 31, 2020. The Corporation has experienced a slow and steady shift in deposit trends over the past five years as customers have moved money from time deposits into core checking and savings accounts. With the Federal Reserve rate decreases in 2020, there is minimal differences between shorter term CD rates and interest bearing non-maturity deposits, influencing customers to accumulate their funds in a liquid account that can be accessed at any time. This has resulted in declining time deposit balances and more significant growth in the core deposit areas.

Borrowings

Total borrowings were $66.4 million, $74.4 million, and $61.5 million as of September 30, 2021, December 31, 2020, and September 30, 2020, respectively. Of these amounts, there were no short-term funds outstanding as of September 30, 2021 and December 31, 2020 and $1.5 million outstanding as of September 30, 2020. Short-term funds are used for immediate liquidity needs and are not typically part of an ongoing liquidity or interest rate risk strategy; therefore, they fluctuate more rapidly. When short-term funds are used, they are purchased through correspondent and member bank relationships as overnight borrowings or through the FHLB for terms less than one year.

Total long-term borrowings, borrowings initiated for terms longer than one year, were $46.7 million as of September 30, 2021, $54.8 million as of December 31, 2020, and $60.0 million as of September 30, 2020. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. The decrease in FHLB borrowings since September 30, 2020, can be attributed to management taking advantage of declining rates by prepaying FHLB advances and incurring penalties in order to save on interest expense in future years.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $478.2 million. The Corporation’s internal policy limits are far more restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.

In addition to the long-term advances funded through the FHLB, on December 30, 2020, the Corporation completed the sale of a subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt notes with a maturity date of December 30, 2030. These notes are non-callable for 5 years and carry a fixed interest rate of 4% per year for 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of September 30, 2021, $15.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date on a pro-rata basis.

Stockholders’ Equity

Federal regulatory authorities require banks to meet minimum capital levels. The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, maintains capital ratios well above those minimum levels. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for credit losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio.

The consolidated asset limit on small bank holding companies is $3 billion and a company with assets under that limit is not subject to the consolidated capital rules but may disclose capital amounts and ratios. The Corporation has elected to disclose those amounts and ratios.

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

REGULATORY CAPITAL RATIOS:

			Regulatory Requirements
			Adequately		Well
As of September 30, 2021	Capital Ratios		Capitalized		Capitalized
Total Capital to Risk-Weighted Assets
Consolidated		15.9%		N/A		N/A
Bank		15.4%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.8%		N/A		N/A
Bank		14.1%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.8%		N/A		N/A
Bank		14.1%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		8.3%		N/A		N/A
Bank		9.2%		4.0%		5.0%

As of December 31, 2020
Total Capital to Risk-Weighted Assets
Consolidated		16.1%		N/A		N/A
Bank		15.3%		8.0%		10.0%

Tier I Capital to Risk-Weighted Assets
Consolidated		12.8%		N/A		N/A
Bank		14.0%		6.0%		8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated		12.8%		N/A		N/A
Bank		14.0%		4.5%		6.5%

Tier I Capital to Average Assets
Consolidated		9.0%		N/A		N/A
Bank		9.8%		4.0%		5.0%


As of September 30, 2020
Total Capital to Risk-Weighted Assets
Consolidated		13.4%		N/A		N/A
Bank		13.3%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.2%		N/A		N/A
Bank		12.1%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.2%		N/A		N/A
Bank		12.1%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		9.2%		N/A		N/A
Bank		9.1%		4.0%		5.0%

As of September 30, 2021 the Bank’s Tier 1 Leverage Ratio stood at 9.2% while the Corporation’s Tier 1 Leverage Ratio was 8.3%. The Bank’s Tier 1 Leverage Ratio policy range is 9.0% to 12.0% while the Corporation’s Tier 1 Leverage Ratio policy range is 8.0% - 12.0%. Tier 1 Capital levels at the Corporation level were not impacted by the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at the corporate level. As such, in terms of the Corporation’s regulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of the $20 million subordinated debt issue. Most of the marked improvement in capital ratios occurred at the Bank level.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation’s financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as of September 30, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

	September 30,
	2021
	$
Commitments to extend credit:
Revolving home equity		144,709
Construction loans		1,534
Real estate loans		130,204
Business loans		185,596
Consumer loans		1,383
Other		5,154
Standby letters of credit		13,125

Total		481,705

Significant Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Among the provisions that have already or are likely to affect the Corporation are the following:

Holding Company Capital Requirements

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

Deposit Insurance

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Corporate Governance

Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. The Corporation was exempt from these requirements until January 21, 2013, due to its status as a smaller reporting company.

Consumer Financial Protection Bureau

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

Interstate Branching

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

Limits on Interstate Acquisitions and Mergers

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Credit risk

Liquidity risk

Interest rate risk

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

Credit Risk

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

Liquidity Risk

Liquidity refers to having an adequate supply of cash available to meet business needs. Financial institutions must ensure that there is adequate liquidity to meet a variety of funding needs, at a minimal cost. 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, cash flows from securities, borrowings, and current earnings.

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

Management uses a cumulative maturity gap analysis to measure the amount of assets maturing within various periods versus liabilities maturing in those same periods. A gap ratio of 100% represents an equal amount of assets and liabilities maturing in the same stated period. Management monitors six-month, one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. As of September 30, 2021, all maturity gap ratios were higher than corporate policy guidelines, due to a larger amount of loans, securities, and cash balances now maturing in less than five years. The six-month gap ratio was 267.2%, compared to an upper policy guideline of 155%; the one-year gap ratio was 241.0%, compared to an upper policy guideline of 140%; the three-year gap ratio was 196.9%, compared to an upper guideline of 125%; and the five-year gap ratio was 177.5%, compared to an upper policy guideline of 115%. In a rising interest rate cycle higher gap ratios would be more beneficial to the Corporation. However, in a declining rate environment, being asset sensitive is unfavorable. Even though the Corporation shows asset sensitivity above policy guidelines for the longer-term gap measurements, it is likely we would be back in a rising rate environment for those longer three and five-year periods and having asset sensitivity would be beneficial in that case. The current asset sensitivity of the Corporation’s balance sheet does negatively impact performance in the current rates-down interest rate scenario as there are more assets repricing to lower rates than liabilities. This asset sensitivity will be beneficial in the next rates-up cycle. Management will continue to monitor and manage the length of the balance sheet in order to sustain reasonable asset yields in a declining rate environment, while still positioning for a likely rising rate environment out in the future.

The size and length of the Corporation’s core deposit liabilities provide the most extension in terms of lengthening the liabilities on the balance sheet. The length of the core deposits is significantly longer than the Corporation’s longest term time deposits and wholesale borrowings. The mix of the Corporation’s liabilities alone would be sufficient to offset the Corporation’s longer assets and to maintain gap ratios within management’s guidelines.

Management desires to show improvements to asset yields and improve the loan-to-deposit ratio and does have a large securities portfolio to draw liquidity from in the event deposit growth slows or reverses. With gap ratios that are already sufficiently high, management can put more of the available cash to work earning higher returns than overnight cash.

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Management may desire to have higher gap ratios when factoring in future loan growth or other funding changes to the balance sheet. Management has been actively working to increase the Corporation’s loan-to-deposit ratio. As the loan-to-deposit ratio increases and more loans go on to the Corporation’s balance sheet, the asset mix will generally lengthen and the gap ratios will decline. However, in 2020 and 2021, the Corporation’s deposits have experienced very strong growth attributable to the very low interest rates and a desire by consumers to safeguard more cash during uncertain times. This has caused the loan-to-deposit ratio to decline during 2020 and 2021 even with moderate loan growth. As of September 30, 2021, the loan-to-deposit ratio was 63.3%, compared to 65.7%, at December 31, 2020, and 74.8% at September 30, 2020.

The risk of liabilities repricing at higher interest rates is low in the present environment as the Corporation does not foresee the need to raise deposit interest rates any time in the near future. The Corporation’s average cost of funds was 19 basis points as of September 30, 2021, which is low from an historic perspective. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts.

Deposits had not been very rate sensitive for a number of years as a result of the limited desirable rates available to deposit customers. With the Federal Reserve rate declines in the first quarter of 2020, deposit growth has been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations. Additionally, with the government aid issued in 2020 and 2021, the Corporation has experienced significant deposit growth throughout the latter part of 2020 and the first nine months of 2021.

The Corporation’s net interest margin is down materially from levels in the previous quarter and previous year. Management’s future asset liability decisions will be dependent upon improvements in asset yield as well as the expected timing of further short-term rate increases or decreases. Management expects that the gap ratios will remain above the established guidelines throughout the remainder of 2021.

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

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

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

Core Deposit Ratio – Core deposits as a percentage of assets

Funding Concentration Analysis – Alternative funding sources outside of core deposits as a percentage of assets

Short-term Funds Availability – Readily available short-term funds as a percentage of assets

Securities Portfolio Liquidity – Cash flows maturing in one year or less as a percentage of assets and securities

Readily Available Unencumbered Securities and Cash – Unencumbered securities as a percentage of the securities portfolio and as a percentage of total assets

Borrowing Limits – Internal borrowing limits in terms of both FHLB and total borrowings

Three, Six, and Twelve-month Projected Sources and Uses of Funds – Projection of future liquidity positions

These measurements are designed to prevent undue reliance on outside sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available liquidity sources. As of September 30, 2021, the Corporation was within guidelines for all of the above measurements except for securities portfolio liquidity as a percentage of total assets. This ratio was 3.3% as of September 30, 2021, compared to a policy range of 4% - 8%. This was primarily due to a much higher balance sheet at September 30, 2021. Investment liquidity is strong in the current low-rate environment and having higher levels of liquidity is not necessarily a good thing because it then gets reinvested at lower rates.

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The Corporation’s liquidity measurements are tracked and reported quarterly by management to both observe trends and ensure the measurements stay within desired ranges. Management is confident that a sufficient amount of internal and external liquidity exists to provide for significant unanticipated liquidity needs.

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

Changes in net interest income

Changes in net portfolio value

Financial modeling is used to forecast net interest income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under seven different interest rate scenarios that can vary according to the present level of interest rates. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, or 300 basis points, or decrease 25, 50, or 75 basis points. The rates-down scenarios are much less likely now with the Federal Reserve rate cuts that already occurred in 2020. For that reason, management believes it appropriate to model rates down 25, 50, and 75 basis points to most adequately cover all the reasonably possible declining rate scenarios that the Corporation could face, while continuing to model rates up scenarios of 100, 200, and 300 basis points. While in the near term it is likely we may see no Federal Reserve rate increases or decreases, management remains guarded about the impact of higher interest rates and continues to prepare for rate increases on a larger scale than decreases.

The results obtained through the use of forecasting models are based on a variety of factors. Both the net interest income and fair value forecasts make use of the maturity and repricing schedules to determine the changes to the balance sheet over the course of time. Additionally, there are many assumptions that factor into the results. These assumptions include, but are not limited to, the following:

Projected forward interest rates

Slope of the U.S. Treasury curve

Spreads available on securities over the U.S. Treasury curve

Prepayment speeds on loans held and mortgage-backed securities

Anticipated calls on securities with call options

Deposit and loan balance fluctuations

Competitive pressures affecting loan and deposit rates

Economic conditions

Consumer reaction to interest rate changes

For the interest rate sensitivity analysis and net portfolio value analysis discussed below, results are based on a static balance sheet reflecting no projected growth from balances as of September 30, 2021. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis to be the most conservative and most accurate means to evaluate fair value and future interest rate risk.

As a result of the many assumptions, this information should not be relied upon to predict future results. Additionally, both of the analyses discussed below do not consider any action that management could take to minimize or offset the negative effect of changes in interest rates. These tools are used to assist management in identifying possible areas of risk in order to address them before a greater risk is posed. Personnel perform an in-depth annual validation and a quarterly review of the settings and assumptions used in the model to ensure reliability of the forecast results. In addition to the annual validation review, management also engages a third party every three years to obtain a complete external review of the model. That review was completed in the third quarter of 2020. The purpose was to conduct a comprehensive evaluation of the model input, assumptions, and output and this study concluded that the model is managed appropriately and generating acceptable results. Back testing of the model to actual results is performed quarterly to ensure the validity of the assumptions in the model. The internal and external validations as well as the back testing indicate that the model assumptions are reliable.

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Changes in Net Interest Income

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

The third quarter 2021 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of September 30, 2021, the Corporation was within guidelines for the maximum amount of net interest income change in all rate scenarios. All up-rate scenarios show a positive impact to net interest income. The increase in net interest income in the up-rate scenarios is largely due to the increase in variable rate securities and loans and the cash balances held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates so deposit rates move at a fraction of the full overnight rate movement. Loans that are Prime-based will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by 200 or 300 basis points where variable loan rates will still increase by the same amount as the Prime rate.

For the rates-up 100 basis point scenario, net interest income increases by 1.1% compared to the rates unchanged scenario. The higher interest rates go, the greater the likelihood that the proportionality of the Corporation’s deposit rate changes decreases as a percentage of the Federal Reserve’s action. For the rates-up 200 and 300 basis point scenarios, net interest income increases by 1.3% and 2.7%, respectively, compared to the rates unchanged scenario. Management’s maximum permitted net interest income declines by policy are -5%, -10%, and -15%, for the rates-up 100, 200, and 300 basis point scenarios, respectively.

The positive impact of higher rates is primarily due to the favorable impact of all of the Corporation’s variable rate loans repricing by the full amount of the Federal rate change, assisted by the Corporation’s relatively high interest earning cash balances and that component of the loans and securities portfolios that reprice in less than one year. This more than offsets the increase in interest expense caused by repricing deposits, where they are only repricing by a fraction of the rate change. The Corporation’s short term borrowings do price up faster than deposits, generally equivalent to the U.S. Treasury market. However, as of September 30, 2021, the Corporation had no overnight or short term borrowings but had $46.7 million of long-term fixed-rate advances. Additionally, total borrowings only make up approximately 4.6% of the total funding provided by deposits and borrowings. The more aggressive rates-up scenarios also benefit from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. The increase in net interest income in the up-rate scenarios has declined since prior quarters due to the lengthening of the Corporation’s assets and the lower yields on these assets. The model still shows a benefit in the rates-up environment, although less of a benefit than prior timeframes.

As of September 30, 2021, in the down scenarios of -25, -50, and -75 basis points, net interest income decreases by 0.8%, 2.0%, and 3.1%, respectively, compared to policy guidelines of -1.25%, -2.5% and -3.75%. Management does not expect the Corporation’s exposure to interest rate changes to increase or change significantly during the remainder of 2021.

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.

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Changes in Net Portfolio Value

The change in net portfolio value is considered a tool to measure long-term interest rate risk. The analysis measures the exposure of the balance sheet to valuation changes due to changes in interest rates. The calculation of net portfolio value discounts future cash flows to the present value based on current market rates. The change in net portfolio value estimates the gain or loss in value that would occur on market sensitive instruments given an interest rate increase or decrease in the same seven scenarios mentioned above. As of September 30, 2021, the Corporation was within guidelines for all up-rate scenarios and out of policy guidelines for the down-rate scenarios. The Corporation shows a very favorable benefit to net portfolio value in the rising rate scenarios, due primarily to the very low market rates and the elevated amount of core deposits on the Corporation’s balance sheet as of September 30, 2021. The non-interest bearing demand deposit accounts and low-interest bearing checking, NOW, and money market accounts provide more benefit to the Corporation when interest rates are higher and the difference between the overnight funding costs compared to the average interest bearing core deposit rates are greater. As interest rates increase, the discount rate used to value the Corporation’s interest bearing accounts increases, causing a lower net present value for these interest-bearing deposits. This improves the modeling of the Corporation’s fair value risk to higher interest rates as the liability amounts decrease causing a higher net portfolio value of the Corporation’s balance sheet. However, as interest rates decrease, the discount rate used to value the Corporation’s interest bearing accounts decreases, causing a higher net present value for these interest-bearing deposits.

The results as of September 30, 2021, indicate that the Corporation’s net portfolio value would experience valuation gains of 14.1%, 19.3%, and 24.1% in the rates-up 100, 200, and 300 basis point scenarios. Management’s maximum permitted declines in net portfolio value by policy are -5% for rates-up 100 basis points, graduating up to -15% for rates-up 300 basis points. A valuation loss would indicate that the value of the Corporation’s assets is declining at a faster pace than the decrease in the value of the Corporation’s liabilities. The analysis does show a valuation loss in the down 25, 50, and 75 basis point scenarios of -7.2%, -15.9%, and -25.1%, respectively, compared to policy guidelines of -3.75%, -7.5%, and -11.25%. The Corporation’s expected valuation loss was outside of guidelines for all down-rate scenarios. With the significant declines in the overnight and Prime rate since 2019, the Corporation’s exposure to valuation changes based on lower rates has also changed materially. Management does not anticipate any further Federal Reserve rate reductions as another 0.25% move down would cause the Federal funds rate range to be in negative territory at -0.25% to 0.00%. The Federal Reserve has signaled that their preferred course of action would be to use other tools available to support the economy before resorting to further rate reductions. The behavior of the Corporation’s deposits will continue to have an impact on the Corporation’s net portfolio value. With the recent rapid increase in the Corporation’s core deposits, management is guarded against further valuation declines in the rates-down interest rate scenarios throughout the remainder of 2021, even though the likelihood of lower interest rates is remote.

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

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Treasurer (Principal Financial Officer), of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure controls and procedures as of September 30, 2021, are effective to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

(b) Changes in Internal Controls.

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

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PART II – OTHER INFORMATION

September 30, 2021

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. Management has not identified any new risk factors since the December 31, 2020 Form 10-K filing.

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

Purchases

The following table details the Corporation’s purchase of its own common stock during the three months ended September 30, 2021.

Issuer Purchase of Equity Securites

Total Number of

Maximum Number

Total Number

Average

Shares Purchased

of Shares that May

of Shares

Price Paid

as Part of Publicly

Yet be Purchased

Period

Purchased

Per Share

Announced Plans *

Under the Plan *

July 2021

—

175,200

August 2021

—

175,200

September 2021

3,100

21.95

3,100

172,100

Total

3,100

* On October 21, 2020, the Board of Directors of the Corporation approved a plan to repurchase, in open market and privately negotiated transactions, up to 200,000 shares of its outstanding common stock. The first purchase of common stock under this plan occurred on October 28, 2020. By September 30, 2021, a total of 27,900 shares were repurchased at a total cost of $560,000 for an average cost per share of $20.07.

Item 3. Defaults Upon Senior Securities – Nothing to Report

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – Nothing to Report

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Item 6. Exhibits:

Exhibit No.

Description

3(i)

Articles of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on June 7, 2019)

3 (ii)

By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on July 21, 2021.)

10.1

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

10.2

2020 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 99.1 of the Corporation’s Form S-8, filed with the SEC on October 1, 2020.)

10.3

2020 Non-Employee Directors’ Stock Plan. (Incorporated herein by reference to Exhibit 99.1 of the Corporation’s Form S-8 filed with the SEC on June 3, 2020.)

10.4

2020 Nonqualified Employee Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 of the Corporation’s Form S-8 filed with the SEC on October 1, 2020.)

31.1

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

31.2

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

32.1

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

32.2

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

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SIGNATURES

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

	ENB Financial Corp
	(Registrant)


Dated: November 12, 2021	By:	/s/ Jeffrey S. Stauffer
		Jeffrey S. Stauffer
		Chairman of the Board
		Chief Executive Officer and President
		Principal Executive Officer


Dated: November 12, 2021	By:	/s/ Rachel G. Bitner
		Rachel G. Bitner
		Treasurer
		Principal Financial Officer