ENB Financial Corp - Quarter Report: 2021 June (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 June 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 August 1, 2021, the registrant had 5,569,977 shares of $0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

June 30, 2021


Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2021 and 2020, and December 31, 2020 (Unaudited)	3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	4
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	5
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2021 and 2020 (Unaudited)	6
Consolidated Statements of Cash Flows for the Six Months Ended June 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	34-66
Item 3. Quantitative and Qualitative Disclosures about Market Risk	67-72
Item 4. Controls and Procedures	73

Part II. OTHER INFORMATION	74
Item 1. Legal Proceedings	74
Item 1A. Risk Factors	74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3. Defaults upon Senior Securities	74
Item 4. Mine Safety Disclosures	74
Item 5. Other Information	74
Item 6. Exhibits	75

SIGNATURE PAGE	76

Table of Contents

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

	June 30,			December 31,			June 30,
	2021			2020			2020
	$			$			$
ASSETS
Cash and due from banks		19,033			21,665			21,320
Interest-bearing deposits in other banks		36,358			73,274			39,904
Total cash and cash equivalents		55,391			94,939			61,224
Securities available for sale (at fair value)		583,623			476,428			334,687
Equity securities (at fair value)		8,505			7,105			6,775
Loans held for sale		1,323			3,029			2,295
Loans (net of unearned income)		869,755			823,370			835,969
Less: Allowance for loan losses		12,703			12,327			10,770
Net loans		857,052			811,043			825,199
Premises and equipment		24,729			24,760			24,918
Regulatory stock		5,867			6,107			6,942
Bank owned life insurance		30,006			29,646			29,214
Other assets		12,288			9,256			8,222
Total assets		1,578,784			1,462,313			1,299,476

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		582,747			534,853			466,392
Interest-bearing		786,137			717,958			641,522
Total deposits		1,368,884			1,252,811			1,107,914
Long-term debt		50,204			54,790			65,072
Subordinated debt		19,640			19,601			—
Other liabilities		4,115			4,895			4,328
Total liabilities		1,442,843			1,332,097			1,177,314
Stockholders' equity:
Common stock, par value $0.10
Shares: Authorized 24,000,000
Issued 5,739,114 and Outstanding 5,569,978 as of 6/30/21, 5,566,230 as of 12/31/20, and 5,574,601 as of 6/30/20		574			574			574
Capital surplus		4,480			4,444			4,466
Retained earnings		126,891			120,670			115,914
Accumulated other comprehensive income		7,362			7,958			4,522
Less: Treasury stock cost on 169,137 shares as of 6/30/21, 172,884 as of 12/31/20, and 164,513 as of 6/30/20		(3,366	)		(3,430	)		(3,314	)
Total stockholders' equity		135,941			130,216			122,162
Total liabilities and stockholders' equity		1,578,784			1,462,313			1,299,476

See Notes to the Unaudited Consolidated Interim Financial Statements

Table of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020		2021		2020
	$			$		$		$
Interest and dividend income:
Interest and fees on loans		8,170			8,636		16,555		17,088
Interest on securities available for sale
Taxable		1,231			1,065		2,311		2,286
Tax-exempt		1,010			644		1,962		1,210
Interest on deposits at other banks		20			21		42		81
Dividend income		106			102		197		290

Total interest and dividend income		10,537			10,468		21,067		20,955

Interest expense:
Interest on deposits		285			543		599		1,352
Interest on borrowings		521			456		1,058		918

Total interest expense		806			999		1,657		2,270

Net interest income		9,731			9,469		19,410		18,685

Provision for loan losses		-			975		375		1,325

Net interest income after provision for loan losses		9,731			8,494		19,035		17,360

Other income:
Trust and investment services income		537			416		1,207		1,038
Service fees		684			635		1,298		1,314
Commissions		952			649		1,816		1,335
Gains on the sale of debt securities, net		274			367		362		649
Gains (losses) on equity securities, net		(24	)		5		223		(225	)
Gains on sale of mortgages		1,245			1,690		3,175		2,231
Earnings on bank-owned life insurance		202			205		418		411
Other income		207			101		896		82

Total other income		4,077			4,068		9,395		6,835

Operating expenses:
Salaries and employee benefits		5,959			4,966		11,658		10,662
Occupancy		635			616		1,318		1,207
Equipment		285			316		552		606
Advertising & marketing		245			218		435		492
Computer software & data processing		1,102			768		2,200		1,474
Shares tax		275			239		555		479
Professional services		598			507		1,036		1,130
Other expense		597			614		1,129		1,304

Total operating expenses		9,696			8,244		18,883		17,354

Income before income taxes		4,112			4,318		9,547		6,841

Provision for federal income taxes		561			719		1,492		1,077

Net income		3,551			3,599		8,055		5,764

Earnings per share of common stock		0.64			0.64		1.45		1.03

Cash dividends paid per share		0.17			0.16		0.33		0.32

Weighted average shares outstanding		5,564,712			5,581,961		5,563,420		5,604,609

See Notes to the Unaudited Consolidated Interim Financial Statements

Table of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	$			$			$			$

Net income		3,551			3,599			8,055			5,764

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

Unrealized gains (losses) arising during the period		5,892			4,695			(391	)		4,346
Income tax effect		(1,238	)		(986	)		81			(911	)
		4,654			3,709			(310	)		3,435

Gains recognized in earnings		(274	)		(367	)		(362	)		(649	)
Income tax effect		58			77			76			136
		(216	)		(290	)		(286	)		(513	)

Other comprehensive income (loss), net of tax		4,438			3,419			(596	)		2,922

Comprehensive Income		7,989			7,018			7,459			8,686

See Notes to the Unaudited Consolidated Interim Financial Statements

Table of Contents

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 - 9,066 shares		—		(10	)		—			—			167			157
Cash dividends paid, $0.16 per share		—		—			(892	)		—			—			(892	)
Balances, June 30, 2020		574		4,466			115,914			4,522			(3,314	)		122,162


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 - 7,600shares		—		—			—			—			(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 - 7,200shares		—		—			—			—			(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

See Notes to the Unaudited Consolidated Interim Financial Statements

Table of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)	Six Months Ended June 30,
	2021			2020
	$			$
Cash flows from operating activities:
Net income		8,055			5,764
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities premiums and discounts and loan fees		2,095			1,496
Amortization of operating leases right-of-use assets		92			89
Increase in interest receivable		(1,058	)		(396	)
Decrease in interest payable		(43	)		(111	)
Provision for loan losses		375			1,325
Gains on the sale of debt securities, net		(362	)		(649	)
(Gain) loss on equity securities, net		(223	)		225
Gains on sale of mortgages		(3,175	)		(2,231	)
Loans originated for sale		(50,168	)		(58,228	)
Proceeds from sales of loans		55,049			60,506
Earnings on bank-owned life insurance		(418	)		(411	)
Depreciation of premises and equipment and amortization of software		765			767
Deferred income tax		(2	)		(373	)
Amortization of deferred fees on subordinated debt		39			—
Other assets and other liabilities, net		(2,519	)		1,438
Net cash provided by operating activities		8,502			9,211

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		39,554			34,427
Proceeds from sales		59,303			43,818
Purchases		(208,913	)		(102,034	)
Equity securities
Proceeds from sales		428			—
Purchases		(1,605	)		(292	)
Purchase of regulatory bank stock		(512	)		(1,128	)
Redemptions of regulatory bank stock		752			1,477
Net increase in loans		(46,010	)		(82,304	)
Purchases of premises and equipment, net		(639	)		(589	)
Purchase of computer software		(161	)		(29	)
Net cash used for investing activities		(157,803	)		(106,654	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		118,093			143,139
Net decrease increase in time deposits		(2,020	)		(9,313	)
Net decrease in short-term borrowings		—			(200	)
Proceeds from long-term debt		—			12,984
Repayments of long-term debt		(4,586	)		(25,784	)
Dividends paid		(1,834	)		(1,794	)
Proceeds from sale of treasury stock		404			307
Treasury stock purchased		(304	)		(1,725	)
Net cash provided by financing activities		109,753			117,614
(Decrease) Increase in cash and cash equivalents		(39,548	)		20,171
Cash and cash equivalents at beginning of period		94,939			41,053
Cash and cash equivalents at end of period		55,391			61,224

Supplemental disclosures of cash flow information:
Interest paid		1,700			2,381
Income taxes paid		2,000			—
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale		753			(3,697	)

See Notes to the Unaudited Consolidated Interim Financial Statements

Table of Contents

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 second 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 six months ended June 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.

Table of Contents

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 June 30, 2021, and December 31, 2020, are as follows:

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
June 30, 2021
U.S. treasuries		4,981		43		—			5,024
U.S. government agencies		29,620		102		(363	)		29,359
U.S. agency mortgage-backed securities		62,258		971		(322	)		62,907
U.S. agency collateralized mortgage obligations		36,911		635		(18	)		37,528
Asset-backed securities		100,202		889		(88	)		101,003
Corporate bonds		84,052		1,045		(30	)		85,067
Obligations of states and political subdivisions		256,280		7,029		(574	)		262,735
Total securities available for sale		574,304		10,714		(1,395	)		583,623

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 June 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		40,966		41,493
Due after one year through five years		106,249		108,301
Due after five years through ten years		132,029		132,886
Due after ten years		295,060		300,943
Total debt securities		574,304		583,623

Securities available for sale with a par value of $85,114,000 and $86,849,000 at June 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 $88,177,000 at June 30, 2021, and $91,666,000 at December 31, 2020.

Table of Contents

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 June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
	$			$			$			$
Proceeds from sales		8,962			16,409			59,303			43,818
Gross realized gains		280			369			422			666
Gross realized losses		(6	)		(2	)		(60	)		(17	)

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 six months of 2021 or 2020.

Information pertaining to securities with gross unrealized losses at June 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 June 30, 2021
U.S. government agencies		24,045		(363	)		—		—			24,045		(363	)
U.S. agency mortgage-backed securities		25,828		(317	)		462		(5	)		26,290		(322	)
U.S. agency collateralized mortgage obligations		275		(1	)		4,560		(17	)		4,835		(18	)
Asset-backed securities		16,382		(60	)		7,673		(28	)		24,055		(88	)
Corporate bonds		9,413		(30	)		—		—			9,413		(30	)
Obligations of states & political subdivisions		49,465		(574	)		—		—			49,465		(574	)

Total temporarily impaired securities		125,408		(1,345	)		12,695		(50	)		138,103		(1,395	)


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 64 positions from 44 different issuers that were carrying unrealized losses as of June 30, 2021. There were no instruments considered to be other-than-temporarily impaired at June 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 June 30, 2021 and December 31, 2020.

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
June 30, 2021
CRA-qualified mutual funds		7,205		—		—			7,205
Bank stocks		1,225		90		(15	)		1,300
Total equity securities		8,430		90		(15	)		8,505

			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 six months ended June 30, 2021 and 2020, and the portion of unrealized gains and losses for the period that relates to equity investments held as of June 30, 2021 and 2020.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,					Six Months Ended June 30,
	2021			2020		2021		2020
	$			$		$		$

Net gains (losses) recognized in equity securities during the period		(24	)		5		223		(225	)

Less: Net gains realized on the sale of equity securities during the period		—			—		95		—

Unrealized gains (losses) recognized in equity securities held at reporting date		(24	)		5		128		(225	)

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 June 30, 2021, and December 31, 2020:

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

	June 30,			December 31,
	2021			2020
	$			$
Commercial real estate
Commercial mortgages		156,022			142,698
Agriculture mortgages		178,573			176,005
Construction		21,347			23,441
Total commercial real estate		355,942			342,144

Consumer real estate (a)
1-4 family residential mortgages		288,301			263,569
Home equity loans		11,525			10,708
Home equity lines of credit		71,694			71,290
Total consumer real estate		371,520			345,567

Commercial and industrial
Commercial and industrial		102,533			97,896
Tax-free loans		16,268			10,949
Agriculture loans		17,824			20,365
Total commercial and industrial		136,625			129,210

Consumer		5,133			5,155

Gross loans prior to deferred fees		869,220			822,076

Deferred loan costs, net		535			1,294
Allowance for credit losses		(12,703	)		(12,327	)
Total net loans		857,052			811,043


(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $263,005,000 and $235,437,000 as of June 30, 2021, and December 31, 2020, respectively.

The largest movement within the Corporation’s loan portfolio since December 31, 2020 was the growth in the consumer real estate loan loan sector, which experienced a $26.0 million, or 7.5% increase. This was primarily a result of an increase in 1-4 family residential mortgages as the housing market reacted to the low interest rate environment and many consumers refinanced their mortgages or purchased homes or new construction. While many 1-4 family mortgages were refinanced and sold on the secondary market, the Corporation did retain approximately $10 million of loans in the portfolio as of June 30, 2021, to assist with loan growth and to improve the yield on earning assets.

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 June 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
June 30, 2021	Mortgages		Mortgages		Construction		Industrial		Loans		Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		145,457		168,811		15,227		93,320		16,268		17,131		456,214
Special Mention		5,427		—		6,120		5,497		—		76		17,120
Substandard		5,138		9,762		—		3,716		—		617		19,233
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		156,022		178,573		21,347		102,533		16,268		17,824		492,567

							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

Substandard loans increased by $277,000, or 1.5%, while special mention loans have increased by $3,121,000, or 22.3%, from December 31, 2020 to June 30, 2021. Substandard loans increased from $19.0 million to $19.2 million from December 31, 2020, to June 30, 2021 while special mention loans increased from $14.0 million to $17.1 million during this same period. The loan areas that experienced material changes in special mention were commercial mortgages and construction loans. Under commercial mortgages, one $1.5 million loan was transferred to special mention due to COVID-19 negatively impacting business operations. This was the primary reason for the increase in special mention loans as well as other smaller loan relationships that were downgraded during the first half of 2021.

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 June 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
June 30, 2021	Mortgages		Loans		Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		287,978		11,525		71,694		5,126		376,323
Non-performing		323		—		—		7		330

Total		288,301		11,525		71,694		5,133		376,653

	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

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of June 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
June 30, 2021	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		190		190		155,832		156,022		—
Agriculture mortgages		—		—		—		—		178,573		178,573		—
Construction		—		—		—		—		21,347		21,347		—
Consumer real estate
1-4 family residential mortgages		286		15		323		624		287,677		288,301		280
Home equity loans		40		—		—		40		11,485		11,525		—
Home equity lines of credit		—		—		—		—		71,694		71,694		—
Commercial and industrial
Commercial and industrial		—		—		418		418		102,115		102,533		—
Tax-free loans		—		—		—		—		16,268		16,268		—
Agriculture loans		—		—		—		—		17,824		17,824		—
Consumer		1		11		7		19		5,114		5,133		7
Total		327		26		937		1,290		867,930		869,220		287

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

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

	June 30,		December 31,
	2021		2020
	$		$

Commercial real estate
Commercial mortgages		190		208
Agriculture mortgages		—		—
Construction		—		—
Consumer real estate
1-4 family residential mortgages		43		48
Home equity loans		—		—
Home equity lines of credit		—		—
Commercial and industrial
Commercial and industrial		418		469
Tax-free loans		—		—
Agriculture loans		—		—
Consumer		—		—
Total		651		725

As of June 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 six months ended June 30, 2021 and June 30, 2020, is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	$		$		$		$

Average recorded balance of impaired loans		5,457		3,178		5,597		3,557
Interest income recognized on impaired loans		80		18		138		43

No loan modifications were made during the first six 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. 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 are two loans to unrelated borrowers that are being reported as TDRs. The balance of these two TDR loans was $4,341,000 as of June 30, 2021. None of these TDR loans are 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 June 30, 2021 and December 31, 2020, and for the six months ended June 30, 2021, and the twelve months ended December 31, 2020:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

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

With no related allowance recorded:
Commercial real estate
Commercial mortgages		233		269		—		244		9
Agriculture mortgages		787		787		—		1,340		35
Construction		—		—		—		—		—
Total commercial real estate		1,020		1,056		—		1,584		44

Commercial and industrial
Commercial and industrial		418		464		—		443		10
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		418		464		—		443		10

Total with no related allowance		1,438		1,520		—		2,027		54

With an allowance recorded:
Commercial real estate
Commercial mortgages		3,554		3,554		1,083		3,570		84
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		3,554		3,554		1,083		3,570		84

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

Total with a related allowance		3,554		3,554		1,083		3,570		84

Total by loan class:
Commercial real estate
Commercial mortgages		3,787		3,823		1,083		3,814		93
Agriculture mortgages		787		787		—		1,340		35
Construction		—		—		—		—		—
Total commercial real estate		4,574		4,610		1,083		5,154		128

Commercial and industrial
Commercial and industrial		418		464		—		443		10
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		418		464		—		443		10

Total		4,992		5,074		1,083		5,597		138

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

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 six months ended June 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

During the six months ended June 30, 2021, management charged off $23,000 in loans while recovering $24,000 and added $375,000 to the provision. The unallocated portion of the allowance increased from 4.3% of total reserves as of December 31, 2020, to 4.7% as of June 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 six months ended June 30, 2021, net provision expense was recorded for all loan sectors. The higher provision in the commercial real estate sector was due to growth in this portfolio of loans since December 31, 2020, as well as an increase in the qualitative factor related to the trends in the nature and volume of this sector. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2021, so the provision expense was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance.

As of June 30, 2021, the Corporation’s total delinquencies were 0.15%, a decline from 0.34% at December 31, 2020. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group.

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 six months ended June 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

During the six months ended June 30, 2020, management charged off $16,000 in loans while recovering $14,000 and added $1,325,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 3.3% as of June 30, 2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

During the six months ended June 30, 2020, net provision expense was recorded for all sectors. The higher provision was 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. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2020, so the provision expense was primarily related to this change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the end of the second quarter of 2020 was slightly higher resulting in slightly more provision expense.

As of June 30, 2020, the Corporation’s total delinquencies were 0.41%, a decline from 0.91% at December 31, 2019. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group.

Table of Contents

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 June 30, 2021 and December 31, 2020:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)


	Commercial		Consumer		Commercial
As of June 30, 2021:	Real Estate		Real Estate		and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated for impairment		1,083		—		—		—		—		1,083
Ending balance: collectively evaluated for impairment		5,467		3,491		1,993		66		603		11,620

Loans receivable:
Ending balance		355,942		371,520		136,625		5,133				869,220
Ending balance: individually evaluated for impairment		4,574		—		418		—				4,992
Ending balance: collectively evaluated for impairment		351,368		371,520		136,207		5,133				864,228


	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.

Table of Contents

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 June 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)

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

U.S. treasuries		—		5,024		—		5,024
U.S. government agencies		—		29,359		—		29,359
U.S. agency mortgage-backed securities		—		62,907		—		62,907
U.S. agency collateralized mortgage obligations		—		37,528		—		37,528
Asset-backed securities		—		101,003		—		101,003
Corporate bonds		—		85,067		—		85,067
Obligations of states & political subdivisions		—		262,735		—		262,735
Equity securities		8,505		—		—		8,505

Total securities		8,505		583,623		—		592,128

On June 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 June 30, 2021, the CRA fund investments had a $7,205,000 book and fair market value and the bank stock portfolio had a book value of $1,225,000, and fair market value of $1,300,000.

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.

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

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 June 30, 2021 and December 31, 2020, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(DOLLARS IN THOUSANDS)

	June 30, 2021
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans	$	—	$	—	$	3,909	$	3,909
Total	$	—	$	—	$	3,909	$	3,909

	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 $4,992,000 of impaired loans as of June 30, 2021, with $1,083,000 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.

Table of Contents

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)

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

Impaired loans		3,909		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.

Table of Contents

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 June 30, 2021 and December 31, 2020:

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

(DOLLARS IN THOUSANDS)

	June 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		55,391		55,391		55,391		—		—
Regulatory stock		5,867		5,867		5,867		—		—
Loans held for sale		1,323		1,323		1,323		—		—
Loans, net of allowance		857,052		870,929		—		—		870,929
Mortgage servicing assets		1,437		1,785		—		—		1,785
Accrued interest receivable		5,604		5,604		5,604		—		—
Bank owned life insurance		30,006		30,006		30,006		—		—

Financial Liabilities:
Demand deposits		582,747		582,747		582,747		—		—
Interest-bearing demand deposits		55,419		55,419		55,419		—		—
NOW accounts		131,151		131,151		131,151		—		—
Money market deposit accounts		162,248		162,248		162,248		—		—
Savings accounts		320,251		320,251		320,251		—		—
Time deposits		117,068		117,926		—		—		117,926
Total deposits		1,368,884		1,369,742		1,251,816		—		117,926

Long-term debt		50,204		48,144		—		—		48,144
Subordinated debt		19,640		19,272		—		—		19,272
Accrued interest payable		282		282		282		—		—

Table of Contents

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 June 30, 2021, firm loan commitments were $99.1 million, unused lines of credit were $358.4 million, and open letters of credit were $11.2 million. The total of these commitments was $468.7 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.

Table of Contents

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 six months ended June 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 loss before reclassifications		4,654
Amount reclassified from accumulated other comprehensive income (loss)		(216	)
Period change		4,438

Balance at June 30, 2021		7,362

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

(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.

Table of Contents

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 June 30,
	2021			2020			Affected Line Item in the
	$			$			Consolidated Statements of Income
Securities available-for-sale:
Net securities gains, reclassified into earnings		274			367		Gains on the sale of debt securities, net
Related income tax expense		(58	)		(77	)	Provision for federal income taxes
Net effect on accumulated other comprehensive income (loss) for the period		216			290

(1) Amounts in parentheses indicate debits.

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Six Months
	Ended June 30,
	2021			2020			Affected Line Item in the
	$			$			Consolidated Statements of Income
Securities available-for-sale:
Net securities gains (losses), reclassified into earnings		362			649		Gains on the sale of debt securities, net
Related income tax expense		(76	)		(136	)	Provision for federal income taxes
Net effect on accumulated other comprehensive income for the period		286			513

(1) Amounts in parentheses indicate debits.

Table of Contents

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 June 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		169		87,761		77,001		8.85%
Lessors of Residential Buildings		215		44,670		40,456		4.65%
Specialized Freight		29		14,142		9,844		1.13%
Residential Remodelers		96		9,580		3,753		0.43%
New Single Family Housing Construction		51		10,372		4,701		0.54%
Passenger Car Leasing		160		9,787		9,627		1.11%
Hotels		14		8,507		8,174		0.94%
Religious Organizations		32		7,005		5,905		0.68%
Car Washes		7		6,158		5,997		0.69%
Concrete & Structural Contrators		21		5,253		3,520		0.40%
Other		68		14,395		7,825		0.90%

Totals		862		217,630		176,803		20.33%

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.

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, some of the original PPP loans became eligible for forgiveness. As a result of the forgiveness of some of the original PPP loans and the initiation of additional PPP loans, the total balance of PPP loans at June 30, 2021, was $48.9 million. Management’s focus has been to serve the customers and market area that the Corporation serves.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In accordance with the SBA terms and conditions on these PPP loans, as of June 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 $1,275,000 during the first six months of 2021, and $923,000 during the first six 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

As of June 30, 2021, over 330 of the Corporation’s customers had previously 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 $50.4 million, or 5.8% of the total loan portfolio as of June 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 are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Of the $50.4 million of current loan balances with payments being deferred, $40.6 million, or 80.6%, were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $9.6 million of residential mortgage deferrals and $142,000 of consumer loan deferrals. The vast majority of the COVID-19 loan payment deferrals were for a 90-day period. As of June 30, 2021, there were no commercial loans remaining on deferment.

As of June 30, 2021, the Corporation’s delinquent and non-performing levels were not materially impacted by the weaker economic conditions brought on by COVID-19. However, the Corporation did experience a sharp increase in the amount of impaired loans during the second half of 2020. This increase was solely due to a $3.6 million loan to one commercial borrower being classified as both impaired and a troubled debt restructuring. This borrower continues to perform according to restructured terms. Partially offsetting this additional impaired loan, other impaired loans paid off or paid down resulting in a lower level of increase.

Due to the severity and length of this economic interruption, management does anticipate that the levels of delinquencies and non-performing loans could rise in 2021. The significance of the credit deterioration will depend on the length of time local business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management significantly increased the Corporation’s provision for loan losses in 2020, as qualitative factors increased based on predicted prolonged economic weakness. In 2021, a number of qualitative factors were reduced reflecting improved economic conditions resulting in a lower provision compared to prior year.

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.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim 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.

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.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

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.

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim 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.

Table of Contents

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

Table of Contents

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 first half of 2021 was positively impacted by a number of items resulting in very strong financial results. The COVID-19 pandemic 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 $3,551,000 for the three-month period ended June 30, 2021, a $48,000, or 1.3% decrease from the three months ended June 30, 2020. Net income for the six-month period was $8,055,000, a $2,291,000, or 39.7% increase over earnings in the six-month period ended June 30, 2020. The earnings per share, basic and diluted, were $0.64 for the three months ended June 30, 2021, compared to $0.64 for the same period in 2020, and for the year-to-date period, earnings per share were $1.45 compared to $1.03 in 2020, a 40.8% increase. The increase in the Corporation’s 2021 earnings was caused primarily by growth in gains on mortgages sold, other income, and net interest income coupled with a decline in the provision for loan losses.

The gains from the sale of mortgages were $1,245,000 for the three months ended June 30, 2021, compared to gains of $1,690,000 for the three months ended June 30, 2020, a decrease of $445,000, or 26.3%. However, for the six-month period, gains were $3,175,000, an increase of $944,000, or 42.3%, over the six months ended June 30, 2020. This year-to-date increase in gains can be attributed to higher volume in the first half of 2021 compared to the first half of 2020, driven by low market rates, which has caused an increase in refinancing activity over the course of the past year. Additionally, margins received on sold mortgages have been at higher levels supporting this higher level of gains. Gains on securities in total decreased by $122,000, or 32.8%, for the three months ended June 30, 2021, and increased by $161,000, or 38.0%, for the six months ended June 30, 2021, compared to the same periods in the prior year. Outside of mortgage and security gains, other non-interest income increased by $576,000, or 28.7%, and $1,455,000, or 34.8%, for the three and six months ended June 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 NII increased by $262,000, or 2.8%, and $725,000, or 3.9%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. The increase in NII primarily resulted from an increase in interest on securities in the available for sale category of $532,000, or 31.1%, for the three-month period ended June 30, 2021, and $777,000, or 22.2%, for the six-month period ended June 30, 2021, compared to the three and six months ended June 30, 2020. In addition, interest expense on deposits and borrowings decreased by $193,000, or 19.3%, and $613,000, or 27.0%, for the three and six months ended June 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 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 decreased for the quarter-to-date period ended June 30, 2021, but increased for the year-to-date period compared to the same periods in the prior year, due to lower quarterly earnings and higher year-to-date earnings as of June 30, 2021.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Key Ratios	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

Return on Average Assets		0.92%		1.14%		1.07%		0.95%
Return on Average Equity		10.86%		12.31%		12.43%		9.86%

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 six months of 2021, NII generated 67.4% of the Corporation’s revenue stream, which consists of net interest income and non-interest income, compared to 73.2% in the first six months of 2020. This significant decrease is a result of much higher levels of non-interest income primarily driven by mortgage gains in the first six months of 2021 which made up 11.0% of the Corporation’s revenue stream, compared to 8.7% in the first six months of 2020. However, the overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income.

The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $289,000 for the three months ended June 30, 2021, and $556,000 for the six months ended June 30, 2021, compared to $197,000 and $370,000 for the same periods in 2020.

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
	$		$		$		$
Total interest income		10,537		10,468		21,067		20,955
Total interest expense		806		999		1,657		2,270

Net interest income		9,731		9,469		19,410		18,685
Tax equivalent adjustment		289		197		556		370

Net interest income (fully taxable equivalent)		10,020		9,666		19,966		19,055

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

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

The average balance of interest earning assets and interest bearing liabilities

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. During 2020, the Federal funds rate was decreased by 150 basis points in March taking the rate to 0.25% by March 31, 2020. With the declines in the Federal funds rate, the U.S. Treasury yield curve became flatter. Long-term rates like the ten-year U.S. Treasury were 232 basis points under the 3.25% Prime rate as of December 31, 2020. Long-term Treasury rates remained low throughout 2020, and with the decreases in the Federal Reserve short-term rates, the yield curve remained essentially flat throughout the year. Management had not anticipated the Fed rate decreases in the first quarter of 2020. During the first half of 2021, longer-term U.S. Treasury rates did increase adding some slope to the yield curve. The ten-year Treasury rate was 1.45% as of June 30, 2021, which was 180 basis points under the Prime rate. This Treasury rate movement makes it a little easier to get asset yield on the longer end of the curve, but yields are still compressed compared to years prior to 2020, making increasing asset yield much more difficult, which adds strain to NII and net interest margin (NIM).

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate decreased to 3.25% in March of 2020 after the 150 basis point Fed rate decline. The Corporation’s Prime-based loans generally reprice a day after the Federal Reserve rate movement.

As a result of a larger balance sheet in the first half of 2021, even with much lower asset yields, the Corporation’s NII on a tax equivalent basis increased while the Corporation’s margin decreased to 2.72% for the quarter and 2.79% for the six months ended June 30, 2021, compared to 3.24% in the second quarter of 2020 and 3.32% for the year-to-date period. Loan yields were lower in the first half of 2021 due to the 150 basis point Fed rate decline during the first quarter of 2020. The Corporation’s NII for the three and six months ended June 30, 2021, increased over the same periods in 2020, by $354,000, or 3.7%, and $911,000, or 4.8%, 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 half 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 the first half of 2021, security yields have increased slightly, but still remain compressed compared to years prior to 2020.

The Corporation’s loan portfolio yield has decreased from the prior years’ period as the variable rate portion of the loan portfolio repriced lower with the two Federal Reserve rate decreases in March 2020 and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation’s commercial Prime-based loans were priced at the Prime rate, which was 4.75% to start 2020, and then 4.25% as of March 4, 2020, and 3.25% as of March 16, 2020 through June 30, 2021. The pricing for the most typical five-year fixed rate commercial loans is currently in line with the Prime rate. With the significant 2020 Federal Reserve rate reductions, adding variable rate loans to the portfolio means they will be priced at very low rates to start but can reprice lower if the Federal Reserve lowers rates any further and would reprice higher if the Federal Reserve would increase rates. There are elements of the Corporation’s Prime-based commercial loans priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be influenced by local competition.

Mid-term and long-term interest rates on average were higher in the first half of 2021 compared to the first half of 2020. The average rate of the 10-year U.S. Treasury was 1.47% in the first half of 2021 compared to 1.02% in the first half of 2020, and it stood at 1.45% on June 30, 2021, compared to 0.66% on June 30, 2020. The slope of the yield curve has been compressed throughout 2020 and 2021 with a little more slope in the first half of 2021. As of December 31, 2020, the 10-year U.S. Treasury rate was only 68 basis points higher than the Fed funds rate and as of June 30, 2021, it was 120 basis points higher than the Fed funds rate. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 1.88% in the first half of 2020 and 1.74% in the first half of 2021, and as low as 0.54% in the first half of 2020, and 0.93% in the first half of 2021.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s overall cost of funds, including non-interest bearing funds, remained stable through the first half of 2021 between 22 and 16 basis points. Management expects the cost of funds will decline slightly and then stabilize throughout 2021 as limited deposits reprice to lower rates. Core deposit interest rates were reduced nine times throughout 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. Management does not anticipate significant deposit rate movements in 2021 as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest bearing accounts while making larger rate movements in the pricing of new or reissued time deposits. The Corporation’s costs on borrowings included $94,000 of prepayment penalties recorded on Federal Home Loan Bank (FHLB) long-term advances paid off early during the first half of 2021, and $154,000 of prepayment penalties recorded in the first half of 2020, accelerating the interest expense, but achieving savings in future time periods. While the average balance of borrowings was lower in the first half of 2021 than the first half of 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 from the first half of 2020 to the first half of 2021 by $140,000.

The following table provides an analysis of year-to-date changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

	Six Months Ended June 30,									Six Months Ended June 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		50			(89	)		(39	)		59			(144	)		(85	)

Securities available for sale:
Taxable		957			(943	)		14			217			(477	)		(260	)
Tax-exempt		1,237			(289	)		948			(3	)		(49	)		(52	)
Total securities		2,194			(1,232	)		962			214			(526	)		(312	)

Loans		1,141			(1,683	)		(542	)		1,779			(1,039	)		740
Regulatory stock		(39	)		(44	)		(83	)		28			(62	)		(34	)

Total interest income		3,346			(3,048	)		298			2,080			(1,771	)		309

INTEREST EXPENSE

Deposits:
Demand deposits		77			(415	)		(338	)		51			(514	)		(463	)
Savings deposits		9			(14	)		(5	)		6			(22	)		(16	)
Time deposits		(78	)		(332	)		(410	)		(31	)		125			94
Total deposits		8			(761	)		(753	)		26			(411	)		(385	)

Borrowings:
Total borrowings		(64	)		204			140			62			110			172

Total interest expense		(56	)		(557	)		(613	)		88			(301	)		(213	)

NET INTEREST INCOME		3,402			(2,491	)		911			1,992			(1,470	)		522

During the first six months of 2021, the Corporation’s NII on an FTE basis increased by $911,000, or 4.8%, over the same period in 2020. Total interest income on an FTE basis for the six months ended June 30, 2021, increased $298,000, or 1.4%, from 2020, while interest expense decreased $613,000, or 27.0%, for the six months ended June 30, 2021, compared to the same period in 2020. The FTE interest income from the securities portfolio increased by $962,000, or 25.0%, while loan interest income decreased $542,000, or 3.2%. During the first half of 2021, additional loan volume caused by loan growth added $1,141,000 to net interest income, but the lower yields caused a $1,683,000 decrease, resulting in a total decrease of $542,000. Higher balances in the securities portfolio caused an increase of $2,194,000 in NII, while lower yields on securities caused a $1,232,000 decrease, resulting in a net increase of $962,000.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The average balance of interest bearing liabilities increased by 16.4% during the six months ended June 30, 2021, compared to the prior year driven by growth in deposit balances. The lower cost on deposit accounts resulted in a decrease in interest expense. Lower rates on all deposit types caused a $761,000 decrease in interest expense while higher balances of demand and savings deposits caused an increase in expense of $8,000 resulting in a total decrease of $753,000.

Out of all the Corporation’s deposit types, interest-bearing demand deposits reprice the most rapidly, as nearly all accounts are immediately affected by rate changes. Time deposit balances decreased resulting in a $78,000 reduction to expense, and time deposits repricing to lower interest rates decreased interest expense by $332,000, causing a net total decrease of $410,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

The average balance of outstanding borrowings decreased by 7.3% from the prior year, due to early payoff of FHLB advances that occurred during 2020 and the first half of 2021. This resulted in a decrease in interest expense of $64,000. Although interest rates were lower in the first half of 2021 compared to the prior year, the Corporation incurred interest prepayment penalites of $94,000 to pay off two long-term FHLB advances. The Corporation also issued subordinated debt at the end of 2020, which was at a higher interest rate than the FHLB advances. These two events increased interest expense by $204,000. The combination of lower overall levels of borrowings at a materially higher weighted average interest rate caused an increase in interest expense of $140,000 on total borrowings. The sub debt issue was pursued because of the benefit of being treated as Tier 1 capital at the bank level and Tier II capital at the bank holding company level.

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	For the Three Months Ended June 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		49,710		20		0.16		31,764		21		0.26

Securities available for sale:
Taxable		373,610		1,259		1.35		229,341		1,085		1.89
Tax-exempt		188,390		1,262		2.68		97,514		802		3.29
Total securities (d)		562,000		2,521		1.79		326,855		1,887		2.31

Loans (a)		858,183		8,207		3.83		827,386		8,674		4.20

Regulatory stock		6,054		78		5.15		7,429		83		4.47

Total interest earning assets		1,475,947		10,826		2.94		1,193,434		10,665		3.58

Non-interest earning assets (d)		80,235						71,016

Total assets		1,556,182						1,264,450

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		338,060		40		0.05		274,419		110		0.16
Savings deposits		312,504		15		0.02		238,056		12		0.02
Time deposits		117,887		230		0.78		128,109		421		1.32
Borrowed funds		72,235		521		2.89		76,051		456		2.41
Total interest bearing liabilities		840,686		806		0.39		716,635		999		0.56

Non-interest bearing liabilities:

Demand deposits		579,007						425,773
Other		5,379						4,429

Total liabilities		1,425,072						1,146,837

Stockholders' equity		131,110						117,613

Total liabilities & stockholders' equity		1,556,182						1,264,450

Net interest income (FTE)				10,020						9,666

Net interest spread (b)						2.55						3.02
Effect of non-interest
bearing deposits						0.17						0.22
Net yield on interest earning assets (c)						2.72						3.24

(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 $435,000 as of June 30, 2021, and $2,129,000 as of June 30, 2020. Such fees and costs recognized through income and included in the interest amounts totaled $36,000 in 2021, and $168,000 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 net interest income (FTE) by total interest earning assets.

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	For the Six Months Ended June 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		53,820		42		0.16		25,312		81		0.64

Securities available for sale:
Taxable		346,417		2,362		1.36		229,245		2,348		2.05
Tax-exempt		180,622		2,451		2.72		92,105		1,503		3.26
Total securities (d)		527,039		4,813		1.82		321,350		3,851		2.40

Loans (a)		848,622		16,623		3.93		793,692		17,165		4.33

Regulatory stock		6,043		145		4.80		7,449		228		6.13

Total interest earning assets		1,435,524		21,623		3.02		1,147,803		21,325		3.72

Non-interest earning assets (d)		80,066						71,700

Total assets		1,515,590						1,219,503

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		331,207		77		0.05		270,095		415		0.31
Savings deposits		299,719		30		0.02		226,973		35		0.03
Time deposits		118,594		492		0.84		130,907		902		1.39
Borrowed funds		73,317		1,058		2.91		79,085		918		2.33
Total interest bearing liabilities		822,837		1,657		0.41		707,060		2,270		0.65

Non-interest bearing liabilities:

Demand deposits		556,878						390,775
Other		5,204						4,163

Total liabilities		1,384,919						1,101,998

Stockholders' equity		130,671						117,505

Total liabilities & stockholders' equity		1,515,590						1,219,503

Net interest income (FTE)				19,966						19,055

Net interest spread (b)						2.61						3.07
Effect of non-interest
bearing deposits						0.18						0.25
Net yield on interest earning assets (c)						2.79						3.32

(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 $815,000 as of June 30, 2021, and $2,057,000 as of June 30, 2020. Such fees and costs recognized through income and included in the interest amounts totaled $374,000 in 2021, and $49,000 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 net interest income (FTE) by total interest earning assets.

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s interest income increased primarily due to increased interest income on securities, but the increase in income was the result of growth in the securities portfolio, not an increase in asset yield, resulting in a lower NIM of 2.72% for the second quarter of 2021, compared to 3.24% for the second quarter of 2020, and 2.79% for the year-to-date period in 2021, compared to 3.32% for the prior year. The yield earned on assets decreased by 64 basis points during the three months ended June 30, 2021, and 70 basis points during the six months ended June 30, 2021, while the rate paid on liabilities decreased by 17 basis points and 24 basis points, respectively, when comparing both years. This resulted in a 47 basis point decrease in interest spread for the three-month period, and a 46 basis point decrease in spread for the six-month period, and the effect of non-interest bearing deposits decreased by five basis points during the three months ended June 30, 2021, and seven basis points during the six months ended June 30, 2021, compared to the same periods in the prior year, resulting in the decrease in NIM of 52 basis points and 53 basis points, respectively. Management anticipates a levelling out of NIM during the remainder of 2021 as Treasury rates have increased a little assisting with achieving higher yields in the securities portfolio and loan yields will benefit some by the remainder of the Paycheck Protection Program (PPP) fees that are accretive to loan interest income as PPP loans pay off or are forgiven. Loan yields decreased in the first half of 2021 compared to the prior year primarily as a result of the 150 basis points of Prime decline in the first quarter of 2020 that did not fully impact the loan yields until the second quarter of 2020. Growth in the loan portfolio will help to offset a declining asset yield moving through 2021. The Corporation’s loan yield decreased 37 basis points in the second quarter of 2021 compared to the second quarter of 2020, and decreased by 40 basis points for the year-to-date period. Loan interest income decreased $467,000, or 5.4%, and $1,009,000, or 5.9%, for the three and six-month periods as a result of the decline in yields.

Loan pricing was challenging in the first half of 2021 as a result of the very low rate environment and competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate or below. The Prime rate decreased by 1.50% in March of 2020 to 3.25%, which is now comparable to the typical rate of a five-year fixed-rate loan. The commercial or business fixed rates do increase with longer fixed terms or lower credit quality. In terms of the variable rate pricing, nearly all variable rate loans offered are Prime-based. Management is able to price loan customers with higher levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, which amounted to 4.00% at June 30, 2021, still a relatively low rate. However, only a small minority of the loans in the commercial and agricultural portfolios are at these higher rates due to the strong credit quality of the Corporation’s borrowers and market competition. Competitors in the immediate market area have been pricing select shorter-term fixed-rate commercial and agricultural lending rates below 3.25% for the strongest loan credits.

Tax equivalent yields on the Corporation’s securities decreased by 52 basis points for the three months ended June 30, 2021, and 58 basis points for the six months ended June 30, 2021, compared to the same periods in 2020. The Corporation’s securities portfolio consists of approximately 76% fixed income debt instruments and 24% variable rate product as of June 30, 2021. The Corporation’s taxable securities experienced a 54 basis-point decrease in yield for the three months ended June 30, 2021, and a 69 basis point decrease in yield for the six months ended June 30, 2021, compared to 2020. 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. The sharpest growth in the securities portfolio occurred in the fourth quarter of 2020 and the first quarter of 2021. In addition to these negative influences, the Corporation’s U.S. agency mortgage-backed securities and collateralized mortgage obligations experience faster principal prepayments as market rates decrease, causing the amortization of premium to increase, effectively decreasing the yield.

The yield on tax-exempt securities decreased by 61 basis points in the second quarter of 2021, and 54 basis points for the year-to-date period, compared to 2020. For the Corporation, these bonds consist entirely of tax-free municipal bonds. While the tax-exempt yields on municipal bonds declined with the tax rate change at the end of 2017, yields became more attractive again during 2020 and 2021. Management began investing in more of these bonds in 2020 as yields stood out and provided better returns than other sectors of the portfolio.

The interest rate paid on deposits decreased for the three and six months ended June 30, 2021, from the same periods in 2020. Management follows a disciplined pricing strategy on core deposit products that are not rate sensitive, meaning that the balances do not fluctuate significantly when interest rates change. Rates on interest-bearing checking accounts and money market accounts were decreased in 2020, resulting in a decrease in the cost of funds on these accounts of 11 basis points for the three-month period and 26 basis points for the six-month period. The cost of funds on time deposits decreased by 54 basis points during the second quarter of 2021, and 55 basis points for the six-month period, compared to the same periods in the prior year. Typically, the Corporation sees increases in core deposit products during periods when consumers are not confident in the stock market or economic conditions deteriorate. During these periods, there is a “flight to safety” to federally insured deposits. This trend occurred again in early 2020 as the federal, state and local governmental bodies began rapidly instituting social distancing measures in an effort to control the spread of the coronavirus. These measures had an immediate signicant negative impact to the economy, which also resulted in the Federal Reserve quickly dropping interest rates back to historic lows. This in turn resulted in market interest rates declining again to historic lows, with the Corporation reducing offering rates on deposit products. As the rate difference between time deposits and core deposits narrowed, many customers chose to transfer funds from maturing time deposits into checking and savings accounts.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s average deposits increased $281.1 million, or 26.4%, for the three-month period, and $287.6 million, or 28.2%, for the six-month period, with all types of interest-bearing deposits increasing $127.9 million, or 20.0%, and $121.5 million, or 19.4%, for the three and six-month periods ended June 30, 2021, compared to the same periods in the prior year, while non-interest bearing demand deposits increased $153.2 million, or 36.9%, and $166.1 million, or 42.5%, respectively. In the current rate environment, with short-term rates low and with small rate differences for longer-term deposits, the consumer generally elected to stay short and maintain funds in accessible deposit instruments. In addition to the consumer staying liquid with their available funds, there has been a general trend of funds flowing from time deposit accounts into non-interest checking, NOW, and savings accounts. The average balance of time deposits declined during the first six months of 2021 compared to 2020, but the other areas of NOW, MMDA, and savings grew sufficiently enough to compensate for the decline in time deposits, causing total interest bearing funds to increase significantly. Time deposit balances had been growing throughout 2018 and 2019 due to the odd-month CD promotions available at those times, but with the recent sharp decline in rates, time deposits declined throughout 2020 and management expects these time deposit balances to decrease throughout the remainder of 2021 as a result of customers electing to allow maturing time deposit balances to roll off and hold them in a liquid account until there is some sign of rate increases.

Interest expense on deposits decreased by $258,000, or 47.5%, and $753,000, or 55.7%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Demand and savings deposits reprice in their entirety whenever the offering rates are changed, so with each successive rate drop in 2020, these deposits repriced lower. Interest rates on interest checking and money market accounts were decreased nine times in 2020. For the three and six months ended June 30, 2021, the average balances of interest bearing demand deposits increased by $63.6 million, or 23.2%, and $61.1 million, or 22.6%, over the same periods in 2020, while the average balance of savings accounts increased by $74.4 million, or 31.3%, and $72.7 million, or 32.1%, respectively.

Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During the six months ended June 30, 2021, time deposit balances decreased compared to balances at June 30, 2020. The decrease can be attributed to the low rates paid on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be minimal. As a result, customers have elected to keep more of their funds in non-maturity deposits and less funds in time deposits. Because time deposits are the most expensive deposit product for the Corporation and the largest dollar expense from a funding standpoint, the reduction in time deposits, along with the increases in interest-bearing checking, savings, and non-interest bearing checking, has allowed the Corporation to achieve a more balanced deposit funding position and maintain a lower cost of funds. The Corporation’s interest expense on time deposits decreased by $191,000, or 45.4%, and $410,000, or 45.5%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Management anticipates the interest expense on time deposits and annualized rate paid will decline throughout the remainder of 2021 as these higher-priced time deposits mature and reprice at lower levels or convert to non-maturity deposits.

The Corporation’s average rate on borrowed funds increased by 48 basis points from the second quarter of 2021 compared to the second quarter of 2020, and increased by 58 basis points for the year-to-date period. The Corporation’s subordinated debt issued on December 30, 2020, is included in this total borrowed funds amount and is at a rate of 4.00% for 5 years, so the increase in rate paid on borrowed funds is a direct result of this.

The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of only $44,000 were utilized in the six months ended June 30, 2021, while average short-term advances of $4,638,000 were utilized in the six months ended June 30, 2020. Management has used FHLB long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source of liquidity. Average total long-term FHLB borrowings decreased by $21,646,000, or 29.1%, for the six months ended June 30, 2021, compared to the same period in 2020. The average balance of subordinated debt increased by $19,620,000, as subordinated debt was issued at the end of 2020 as a vehicle to support capital growth for the Corporation. This growth in debt balances contributed to an increase in interest expense for the three and six months ended June 30, 2021, compared to the same period in the prior year. Interest expense on borrowed funds increased $65,000, or 14.3%, for the three-month period and $140,000, or 15.3%, for the six-month period when comparing 2021 to 2020, driven higher by interest expense accrued on subordinated debt.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

For the three months ended June 30, 2021, the net interest spread decreased by 47 basis points to 2.55%, compared to 3.02% for the three months ended June 30, 2020. For the six months ended June 30, 2021, the net interest spread decreased by 46 basis points to 2.61%, compared to 3.07% for the six months ended June 30, 2020. The effect of non-interest bearing funds decreased to 17 basis points from 22 basis points for the three months ended June 30, 2021, and decreased to 18 basis points from 25 basis points for the six months ended June 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. For example, if an interest checking account with $10,000 earns 1%, the benefit for $10,000 of non-interest bearing deposits is equivalent to $100; but if the interest-checking rate is increased to 1.50%, then the benefit of the non-interest bearing funds is $150. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the higher cost of funds affects the benefit to non-interest bearing deposits.

The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk.

Provision for Loan Losses

The allowance for 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 no provision expense for the second quarter of 2021, and provision expense of $375,000 for the six months ended June 30, 2021, compared to $975,000 and $1,325,000, respectively, for the three and six months ended June 30, 2020. The analysis of the ACL takes into consideration, among other things, the following factors:

levels and trends in delinquencies, nonaccruals, charge-offs and recoveries,

trends within the loan portfolio,

changes in lending policies and procedures,

experience of lending personnel and management oversight,

national and local economic trends,

concentrations of credit,

external factors such as legal and regulatory requirements,

changes in the quality of loan review and board oversight, and

changes in the value of underlying collateral.

As of June 30, 2021, total delinquencies represented 0.15% of total loans, compared to 0.41% as of June 30, 2020. These ratios are very low compared to local and national peer groups. The vast majority of the Corporation’s loan customers have remained steadfast in making their loan payments and avoiding delinquency, even during challenging economic conditions. The delinquency ratios speak to the long-term health, conservative nature, and, importantly, the character of the Corporation’s customers and lending practices. Classified loans are primarily determined by loan-to-value and debt-to-income ratios. The level of classified loans has decreased from June 30, 2020, to June 30, 2021, from 19.7% of regulatory capital to 14.3% of regulatory capital. The delinquency and classified loan information is utilized in the quarterly ACL calculation, which directly affects the provision expense. A sharp increase or decrease in delinquencies and/or classified loans during the quarter would be cause for management to increase or decrease the provision expense. The level of actual charge-offs relative to the amount of recoveries can also have a significant impact on the provision. Management had minimal charge-offs and recoveries in the first six months of 2021.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Generally, management will evaluate and adjust, if necessary, the provision expense each quarter based upon completion of the quarterly ACL calculation. Future provision amounts will generally depend on the amount of loan growth achieved versus levels of delinquent, non-performing, and classified loans, as well as charge-offs and recoveries.

In addition to the above, provision expense is impacted by three major components that are all included in the quarterly calculation of the ACL. First, specific allocations are made for any loans where management has determined an exposure that needs to be provided for. These specific allocations are reviewed each quarter to determine if adjustments need to be made. It is common for specific allocations to be reduced as additional principal payments are made, so while some specific allocations are being added, others are being reduced. Second, management provides for estimated losses on pools of similar loans based on historical loss experience. Finally, management utilizes qualitative factors every quarter to adjust historical loss experience to take into consideration the current trends in loan volume, delinquencies, charge-offs, changes in lending practices, and the quality of the Corporation’s underwriting, credit analysis, lending staff, and Board oversight. National and local economic trends and conditions are also helpful to determine the amount of loan loss allowance the Corporation should be carrying on the various types of loans. Management evaluates and adjusts, if necessary, the qualitative factors on a quarterly basis.

In the first six months of 2021, qualitative factors were adjusted by management based on current internal information regarding trends in the nature and volume of the loan portfolio and delinquency. Since December 31, 2020, an increase in qualitative factors was made across four loan pools related to changes in lending policies and procedures and a decline was made across all loan pools related to an improvement in national and local economic trends. These factor changes were generally only 5 basis points. Other factors remained unchanged in the first six months of 2021.

Management also monitors the allowance as a percentage of total loans. The percentage of the allowance to total loans has increased since June 30, 2020, and remains higher than the Bank’s national peer group from the Uniform Bank Performance Reports. As of June 30, 2021, the allowance as a percentage of total loans was 1.46%, up from 1.29% at June 30, 2020. Management continues to evaluate the ACL in relation to the size of the loan portfolio and changes to the segments within the loan portfolio and their associated credit risk. Management believes the ACL is adequate to provide for future loan losses based on the current portfolio and the current economic environment. More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows.

Other Income

Other income for the second quarter of 2021 was $4,077,000, an increase of $9,000, or 0.2%, compared to the $4,068,000 earned during the second quarter of 2020. For the year-to-date period ended June 30, 2021, other income totaled $9,395,000, an increase of $2,560,000, or 37.5%, 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 June 30,					Increase (Decrease)
	2021			2020
	$			$		$			%

Trust and investment services		537			416		121			29.1
Service charges on deposit accounts		246			205		41			20.0
Other service charges and fees		438			430		8			1.9
Commissions		952			649		303			46.7
Gains on securities transactions, net		274			367		(93	)		(25.3	)
Gains (losses) on equity securities, net		(24	)		5		(29	)		>100%
Gains on sale of mortgages		1,245			1,690		(445	)		(26.3	)
Earnings on bank owned life insurance		202			205		(3	)		(1.5	)
Other miscellaneous income		207			101		106			>100%

Total other income		4,077			4,068		9			0.2

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

OTHER INCOME

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,					Increase (Decrease)
	2021		2020
	$		$			$			%

Trust and investment services		1,207		1,038			169			16.3
Service charges on deposit accounts		494		520			(26	)		(5.0	)
Other service charges and fees		804		794			10			1.3
Commissions		1,816		1,335			481			36.0
Gains on securities transactions, net		362		649			(287	)		(44.2	)
Gains (losses) on equity securities, net		223		(225	)		448			>100%
Gains on sale of mortgages		3,175		2,231			944			42.3
Earnings on bank owned life insurance		418		411			7			1.7
Other miscellaneous income		896		82			814			>100%

Total other income		9,395		6,835			2,560			37.5

Trust and investment services income increased $121,000, or 29.1%, and $169,000, or 16.3%, for the three and six months ended June 30, 2021, compared to the same periods last year. This revenue consists of income from traditional trust services and income from alternative investment services provided through a third party. In the second quarter of 2021, traditional trust income increased by $4,000, or 1.5%, while income from alternative investments increased by $116,000, or 81.8%, compared to the second quarter of 2020. For the six months ended June 30, 2021, traditional trust services income increased by $65,000, or 9.9%, while income from alternative investment services increased by $104,000, or 27.0%, 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 $60,000 in the first six months of 2021. The trust and investment services area continues to be an area of strategic focus for the Corporation. Management believes there continues to be great need for retirement, estate, small business succession planning, and personal investment services in the Corporation’s service area. Management also sees these services as being a necessary part of a comprehensive line of financial solutions across the organization.

Service charges on deposit accounts increased by $41,000, or 20.0%, and decreased by $26,000, or 5.0%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. The quarter-to-date increase and the year-to-date decrease can both be primarily attributed to changes in customer overdraft fees. With the onset of the COVID-19 pandemic in early 2020, overdraft fees declined significantly as customers were provided with government stimulus funds and were sitting on more cash and spending less. This caused overdraft fees to decline significantly in the second quarter of 2020. While the level of overdraft fees has increased by $28,000, or 17.4% for the second quarter of 2021 compared to 2020, the year-to-date fees are still lower by $44,000, or 10.4%. Various other fee income categories increased or decreased to lesser degrees making up the remainder of the variance compared to the prior year.

Commissions increased by $303,000, or 46.7%, and $481,000, or 36.0%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. The increase was primarily caused by an increase in debit card interchange income of $241,000, or 40.8%, for the three months ended June 30, 2021, and $404,000, or 34.7%, for the six months ended June 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 the first half of 2021.

For the three and six months ended June 30, 2021, $274,000 and $362,000 of gains on securities transactions were recorded, respectively, compared to gains of $367,000 and $649,000, 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 six months of 2021 and 2020 provided opportunities to take gains out of the portfolio.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Gains or losses on equity securities amounted to a loss of $24,000 during the second quarter of 2021, compared to a gain of $5,000 for the same period in the prior year. For the year-to-date period, gains on equity securities amounted to $223,000 in 2021, compared to a loss of $225,000 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 six months of 2021, $95,000 of gains were recorded on the sale of bank stocks and $128,000 was recorded as an unrealized gain due to the increase in market value of the bank stock portfolio. During the first six months of 2020, unrealized losses of $225,000 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 $1,245,000 for the three-month period ended June 30, 2021, compared to $1,690,000 for the same period in 2020, a $445,000, or 26.3% decrease. For the six-month period ended June 30, 2021, mortgage gains amounted to $3,175,000, compared to $2,231,000 for the same period in 2020, a $944,000, or 42.3% increase. While mortgage activity was slightly slower for the second 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. Management currently anticipates that gains throughout the remainder of 2021 will decrease compared to the prior year as refinance activity slows down.

The miscellaneous income category increased by $106,000 for the three months ended June 30, 2021, and $814,000 for the six months ended June 30, 2021, compared to the same periods in 2020. Net mortgage servicing income increased by $92,000 for the three months ended June 30, 2021, and $355,000 for the six months ended June 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. The slightly higher interest rate environment resulted in this lower level of amortization. Other miscellaneous income categories increased as well making up the remainder of the variance in this category.

Operating Expenses

Operating expenses for the second quarter of 2021 were $9,696,000, an increase of $1,452,000, or 17.6%, compared to the $8,244,000 for the second quarter of 2020. For the year-to-date period ended June 30, 2021, operating expenses totaled $18,883,000, an increase of $1,529,000, or 8.8%, compared to the same period in 2020. The following tables provide details of the Corporation’s operating expenses for the three and six-month periods ended June 30, 2021, compared to the same periods in 2020.

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,
	2021		2020		Increase (Decrease)
	$		$		$			%
Salaries and employee benefits		5,959		4,966		993			20.0
Occupancy expenses		635		616		19			3.1
Equipment expenses		285		316		(31	)		(9.8	)
Advertising & marketing expenses		245		218		27			12.4
Computer software & data processing expenses		1,102		768		334			43.5
Bank shares tax		275		239		36			15.1
Professional services		598		507		91			17.9
Other operating expenses		597		614		(17	)		(2.8	)
Total Operating Expenses		9,696		8,244		1,452			17.6

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2021		2020		Increase (Decrease)
	$		$		$			%
Salaries and employee benefits		11,658		10,662		996			9.3
Occupancy expenses		1,318		1,207		111			9.2
Equipment expenses		552		606		(54	)		(8.9	)
Advertising & marketing expenses		435		492		(57	)		(11.6	)
Computer software & data processing expenses		2,200		1,474		726			49.3
Bank shares tax		555		479		76			15.9
Professional services		1,036		1,130		(94	)		(8.3	)
Other operating expenses		1,129		1,304		(175	)		(13.4	)
Total Operating Expenses		18,883		17,354		1,529			8.8

Salaries and employee benefits are the largest category of operating expenses. In general, they comprise approximately 62% of the Corporation’s total operating expenses. For the three months ended June 30, 2021, salaries and benefit costs increased by $993,000, or 20.0%, from the second quarter of 2020. For the six months ended June 30, 2021, salaries and benefits increased by $996,000, or 9.3%, from the year-to-date period in the prior year. The growth in salaries can primarily be attributed to higher mortgage commissions stemming from higher volume, merit and cost of living increases, additions to staff, and higher deferred salaries costs in the second quarter of 2020 stemming from higher levels of PPP loan production.

Occupancy expenses consist of the following:

Depreciation of bank buildings

Real estate taxes and property insurance

Building lease expense

Utilities

Building repair and maintenance

Occupancy expenses increased $19,000, or 3.1%, and $111,000, or 9.2%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. Utilities costs increased by $22,000, or 13.4%, and $42,000, or 12.1%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. For the year-to-date period, snow removal costs increased by $46,000, or 321.7%, and building repair and maintenance costs increased by $22,000, or 20.5%, compared to the year-to-date period in 2020. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.

Equipment expenses decreased by $31,000, or 9.8%, and $54,000, or 8.9%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. Equipment depreciation costs decreased by $12,000, or 6.6%, and $40,000, or 10.8%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Additionally, equipment repair and maintenance costs decreased by $22,000, or 59.5%, and $22,000, or 37.8%, for the same time periods. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.

Advertising and marketing expenses increased by $27,000, or 12.4%, and decreased by $57,000, or 11.6%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses decreased by $17,000, or 9.1%, for the quarter-to-date period, and $78,000, or 21.4%, for the year-to-date period ended June 30, 2021, compared to the same periods in the prior year. Public relations expenses increased by $45,000, or 169.0%, and $20,000, or 15.8%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Marketing expenses support the overall business strategies of the Corporation; therefore, the timing of these expenses is highly dependent upon the execution of those strategies.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Computer software and data processing expenses increased by $334,000, or 43.5%, for the second quarter of 2021 compared to 2020, and $726,000, or 49.3%, for the six months ended June 30, 2021, compared to the same periods in 2020. Software-related expenses were up by $320,000, or 71.8%, for the three months ended June 30, 2021, and by $656,000, or 76.4%, for the six months ended June 30, 2021, compared to the same periods in the prior year. The increases were primarily as a result of of increased amortization on existing software as well as purchases of new software platforms to support the strategic initiatives of the Corporation. Software expenses are likely to continue to increase in 2021, but the actual increase will be dependent on how quickly new software platforms are identified, analyzed, approved and placed into service. Data processing fees were up $14,000, or 4.4%, and $70,000, or 11.4%, for the three and six months ended June 30, 2021, compared to the same periods in 2020.

Bank shares tax expense was $275,000 for the second quarter of 2021, an increase of $36,000, or 15.1%, from the second quarter of 2020. For the year-to-date period, shares tax increased by $76,000, or 15.9%, 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.

Professional services expense increased by $91,000, or 17.9%, and decreased by $94,000, or 8.3%, for the three and six-month periods ended June 30, 2021, compared to the same periods in 2020. These services include accounting and auditing fees, legal fees, and fees for other third-party services. Payroll-related processing costs as well as contract employee expenses increased in total by $ 74,000 for the quarter-to-date period; accounting and auditing fees were higher by $29,000, or 39.2%; and legal fees for the quarter increased by $24,000, or 356.3%. The year-to-date decrease was caused by a decline in other outside service fees by $260,000, or 47.2%, for the six months ended June 30, 2021, compared to the same period in 2020. Partially offsetting this decrease, payroll-related processing costs as well as contract employee expenses increased by $105,000 for the year-to-date period. Several other professional services expenses increased or decreased slightly making up the remainder of the variance.

Other operating expenses decreased by $17,000, or 2.8%, and $175,000, or 13.4%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Contributing to this decrease, operating supplies costs declined by $66,000, or 54.3%, for the quarter and $110,000, or 49.5% for the year-to-date period when comparing both years. Loan related expenses decreased by $56,000, or 35.8%, and $91,000, or 35.8%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Partially offsetting these declines, FDIC and OCC assessment charges increased by $61,000, or 53.1%, and $147,000, or 85.4% for the quarter and year-to-date periods. Fraud-related charge-offs decreased by $25,000 for the quarter, and $63,000 for the year-to-date period ended June 30, 2021, compared to the same periods in the prior year. Several other operating expense categories increased or decreased by smaller amounts making up the remainder of this variance.

Income Taxes

For the six months ended June 30, 2021, the Corporation recorded Federal income tax expense of $1,492,000, compared to $1,077,000 for the six months ended June 30, 2020. The effective tax rate for the Corporation was 15.6% for the six months ended June 30, 2021, and 15.7% for the six months ended June 30, 2020. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and BOLI income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation’s provision for Federal income taxes on the Consolidated Statements of Income by the income before income taxes for the applicable period.

The Corporation’s effective tax rate has historically been maintained at low levels primarily due to a relatively high level of tax-free municipal bonds held in the securities portfolio. The fluctuation of the effective tax rate will occur as a result of total tax-free revenue as a percentage of total revenue.

The Corporation is also subject to Pennsylvania Corporate Net Income Tax; however, the Corporation’s Holding Company has very limited taxable corporate net income activities. The Corporation’s wholly owned subsidiary, Ephrata National Bank, is subject to Pennsylvania Bank Shares Tax. Like Federal Corporate income tax, the Pennsylvania Bank Shares Tax is a significant expense for the Corporation, amounting to $555,000 in the first six months of 2021 compared to $479,000 in 2020. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income, under operating expenses.

Table of Contents

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 June 30, 2021, the Corporation had $592.1 million of securities available for sale, which accounted for 37.5% of assets, compared to 33.1% as of December 31, 2020, and 26.3% as of June 30, 2020. Based on ending balances, the securities portfolio increased 73.4% from June 30, 2020, and 22.5% from December 31, 2020.

The debt securities portfolio was showing a net unrealized gain of $9,319,000 as of June 30, 2021, compared to an unrealized gain of $10,072,000 as of December 31, 2020, and $5,724,000 as of June 30, 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 10-year U.S. Treasury yield was 0.66% as of June 30, 2020, 0.93% as of December 31, 2020, and 1.45% as of June 30, 2021. The lower Treasury rates have caused an increase in market valuation, which has resulted in the unrealized gains recorded in all time periods. Gains were lower as of June 30, 2021, compared to the end of 2020 due to the increase in Treasury rates experienced in the first and second quarters of 2021. Additionally, with the Federal Reserve’s sudden overnight rate decreases in March of 2020, the variable rate portion of the Corporation’s security portfolio lost market value due to the market’s recognition that these instruments would yield materially less going forward which resulted in the lower levels of unrealized gains at June 30, 2020.

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 June 30, 2021, December 31, 2020, and June 30, 2020.

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)

			Net
	Amortized		Unrealized			Fair
	Cost		Gains (Losses)			Value
	$		$			$
June 30, 2021
U.S. treasuries		4,981		43			5,024
U.S. government agencies		29,620		(261	)		29,359
U.S. agency mortgage-backed securities		62,258		649			62,907
U.S. agency collateralized mortgage obligations		36,911		617			37,528
Asset-backed securities		100,202		801			101,003
Corporate bonds		84,052		1,015			85,067
Obligations of states and political subdivisions		256,280		6,455			262,735
Total debt securities, available for sale		574,304		9,319			583,623
Equity securities		8,430		75			8,505
Total securities		582,734		9,394			592,128

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

			Net
	Amortized		Unrealized			Fair
	Cost		Gains (Losses)			Value
	$		$			$
June 30, 2020
U.S. government agencies		8,217		162			8,379
U.S. agency mortgage-backed securities		71,241		1,312			72,553
U.S. agency collateralized mortgage obligations		45,854		708			46,562
Asset-backed securities		33,340		(1,389	)		31,951
Corporate bonds		62,426		1,005			63,431
Obligations of states and political subdivisions		107,885		3,926			111,811
Total debt securities		328,963		5,724			334,687
Equity securities		6,977		(202	)		6,775
Total securities available for sale		335,940		5,522			341,462

Interest rate changes and the perceived forward direction of interest rates generally have a close correlation to the valuation of the Corporation’s fixed income securities portfolio. There are also a number of other market factors that impact bond prices. During the second half of 2019, the Federal Reserve decreased short-term rates three times for a total of 75 basis points, and during the first quarter of 2020, the Federal Reserve decreased short-term rates two times for a total of 150 basis points. Market conditions in the first quarter of 2020 were very unpredictable and fast changing due to the start of COVID-19 and the declaration of a global pandemic on March 11, 2020. The Fed’s reduction of interest rates was in response to this pandemic and caused short-term and long-term Treasury rates to decline at a rapid pace to reach all-time lows. During the first and second quarters of 2021, rates on the longer end of the yield curve did increase causing slight declines in the unrealized gains on the investment portfolio. The COVID-19 pandemic continues to have significant impacts on rates and the economy and management believes this will continue throughout 2021, but the absolute value and direction of Treasury rates could fluctuate as the pandemic recovery reaches new levels. Beyond interest rate movements, there are also a number of other factors that influence bond pricing including regulatory changes, financial performance of issuers, changes to credit rating of insurers of bonds, changes in market perception of certain classes of securities, and many more. Management monitors the changes in interest rates and other market influences to assist in management of the securities portfolio.

Any material increase in market interest rates would have a negative impact on the market value of the Corporation’s fixed income debt securities. As of June 30, 2021, approximately 76% of the Corporation’s debt securities were fixed rate securities with the other 24% variable rate. The variable rate instruments generally experience very little impact to valuation based on a change in rates because they trade on a spread over overnight rates such as LIBOR. However, with the Federal Reserve drastically reducing the Federal Funds rate by 1.50% in March of 2020 to 0.25%, caused the market to view floating rate bonds differently, as the new effective yields on those securities would be significantly reduced upon the next rate reset. Fixed rate securities without call options could maintain their effective yield in a new bond market with sharply lower yields. Therefore, the valuation of the fixed rate securities held up better when the securities portfolio was valued for June 30, 2020. Since that time, the pricing of variable rate instruments has become more rational and most bonds have experienced an increase in unrealized gain since March of 2020. Generally the longer the bond and the longer the call protection, the better the bond did in terms of valuation. The municipal bond sector is the largest of the portfolio and, as a result, management will closely monitor the 10-year U.S. Treasury yield due to its impact on these securities. The other sectors of the portfolio have shorter lives and duration and would be more influenced by the 2-year and 5-year U.S. Treasury rates. The change in value of unrealized gains and losses for the remainder of 2021 will be impacted by movements in U.S. Treasury rates and could increase and decrease throughout the remainder of the year as Treasury rates fluctuate.

The Corporation’s effective duration increased in the second quarter of 2021 to 3.8, from 2.7 at December 31, 2020, and 2.4 at June 30, 2020. Effective duration is a measurement of the length of the securities portfolio with a higher level indicating more length and more exposure to an increase in interest rates. Duration is expected to remain stable or increase slightly throughout the remainder of 2021. The Corporation increased effective duration by purchasing longer municipal securities in the first and second quarters of 2021. Additionally, with increasing rates, pass-through structures of mortgage backed securities (MBS) and collateralized mortgage obligations (CMO) instruments typically lengthen in duration as principal payments decrease.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Management’s actions to maintain reasonable effective duration of the securities portfolio are part of a broader asset liability plan to continually work to mitigate future interest rate risk and fair value risk to the Corporation. Part of that strategy is to retain higher levels of cash and cash equivalents to increase liquidity and provide an immediate hedge against higher interest rates and fair value risk. However, despite taking actions to mitigate the Corporation’s future risk, these risks are inherent to the banking model. Unrealized gains and losses on securities will vary significantly according to market forces. Management’s focus will continue to be on the long-term performance of these securities. While management has and will continue to take gains from the portfolio when opportunities exist, the broader securities strategy remains to buy and hold debt securities until maturity. Because market interest rates were declining rapidly in 2020, there was some opportunity to realize gains from the sales of securities. As a result, gains from the sales of debt securities were higher in the second quarter of 2020 than the second quarter of 2021.

The Corporation typically invests excess liquidity into securities, primarily fixed-income bonds. The securities portfolio provides interest and dividend income to supplement the interest income on loans. Additionally, the securities portfolio assists in the management of both liquidity risk and interest rate risk. In order to provide maximum flexibility for management of liquidity and interest rate risk, the securities portfolio is classified as available for sale and reported at fair value. Management adjusts the value of all the Corporation’s securities on a monthly basis to fair market value as determined in accordance with U.S. generally accepted accounting principles. Management has the ability and intent to hold all debt securities until maturity, and does not generally record impairment on bonds that are currently valued below book value. In addition to the fixed and variable rate bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book and fair market value of $7.2 million. The CRA fund is a Small Business Association (SBA) variable rate fund with a stable dollar price. The Corporation also has a small portfolio of bank stocks with a book value of $1,225,000 and fair market value of $1,300,000 as of June 30, 2021. The fair value of the bank stocks was significantly impacted by the COVID-19 pandemic and the drastic devaluation of bank stocks during 2020 but has rebounded as of June 30, 2021, and is responsible for the increase in gains on equity securities reported as of June 30, 2021.

All securities and bonds are evaluated for impairment on a quarterly basis. Should any impairment occur, management would write down the security to a fair market value in accordance with U.S. generally accepted accounting principles, with the amount of the write down recorded as a loss on securities.

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

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

Growth of the loan portfolio

Slope of the U.S. Treasury curve

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

Duration and average length of the portfolio

Volatility of the portfolio

Direction of interest rates

Economic factors impacting debt securities

The investment policy of the Corporation imposes guidelines to ensure diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk. The composition of the securities portfolio based on fair market value is shown in the following table.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)

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

U.S. treasuries		5,024		0.8		—		—		—		—
U.S. government agencies		29,359		5.0		54,361		11.2		8,379		2.5
U.S. agency mortgage-backed securities		62,907		10.6		71,052		14.7		72,553		21.2
U.S. agency collateralized mortgage obligations		37,528		6.3		35,035		7.2		46,562		13.6
Asset-backed securities		101,003		17.1		60,475		12.5		31,951		9.4
Corporate debt securities		85,067		14.4		61,723		12.8		63,431		18.6
Obligations of states and political subdivisions		262,735		44.4		193,782		40.1		111,811		32.7
Total debt securities, available for sale		583,623		98.6		476,428		98.5		334,687		98.0

Marketable equity securities		8,505		1.4		7,105		1.5		6,775		2.0

Total securities		592,128		100.0		483,533		100.0		341,462		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 $25.0 million, or 46.0%, since December 31, 2020, with the weighting decreased from 11.2% of the portfolio to 5.0%. 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. In the past, management’s goal was to maintain agency securities at approximately 10% of the securities portfolio. In the current rate environment, management is comfortable maintaining agencies below this level. In the past, this sector was important in maintaining adequate risk weightings of the portfolio and to ensure sufficient U.S. government securities for pledging purposes, but the Corporation is also utilizing both MBS and CMOs to do the same. Instead, Management has increased the allocations of both asset-backed securities (ABS) and obligations of states and political subdivisions (municipals) since June 30, 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 June 30, 2020, with ABS increasing $69.1 million, or 216.1%, and municipals increasing $150.9 million, or 135.0%. 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, are tax-free and taxable securities that generally provide the highest yield in the securities portfolio. They also carry the longest duration on average of any instrument in the securities portfolio. 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 the first half of 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 44.5% of the securities portfolio as of June 30, 2021, compared to 32.7% as of June 30, 2020. The Corporation’s investment policy limits municipal holdings to 150% of Tier 2 capital. As of June 30, 2021, municipal holdings amounted to 165% of Tier 2 capital, above this limit. The Corporation plans to sell some municipal bonds to be back within policy guidelines by September 30, 2021.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s U.S. agency MBS and CMO sectors have fluctuated since June 30, 2020, with MBS decreasing $9.6 million, or 13.3%, and CMOs decreasing $9.0 million, or 19.4%. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions. Unlike the typical U.S. agency paper, corporate bonds, and obligations of states and political subdivisions, which only pay principal at final maturity, the U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. The combined effect of all of these instruments paying monthly principal and interest provides the Corporation with a reasonably stable base cash flow of approximately $2.5 - $3.0 million per month. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield. As interest rates decline, prepayment of principal on securities increases, the duration of the security shortens, and the yield declines as more amortization is required on premium bonds. When interest rates increase, the opposite of this occurs. Despite the fluctuations that occur in terms of monthly cash flow as a result of changing prepayment speeds, the monthly cash flow generated by U.S. agency MBS and CMO securities is reasonably stable and as a group is material, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities.

As of June 30, 2021, the fair value of the Corporation’s corporate bonds increased by $21.6 million, or 34.1%, from balances at June 30, 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. Management stands to possibly lose the entire principal amount if the entity that issued the corporate paper fails. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held.

By policy, management is to identify and recommend whether to hold or sell securities with credit ratings that have fallen below minimum policy credit ratings required at the time of purchase, or below investment grade. Management monitors the security ratings on a monthly basis and reviews quarterly with the Board of Directors. Management, with Board approval, determines whether it is in the Corporation’s best interest to continue to hold any security that has fallen below policy guidelines or below investment grade based on the expectation of recovery of market value or improved performance. At this time management has elected, and the Board has approved, holding all securities that have fallen below initial policy guidelines. As of June 30, 2021, no securities have fallen below investment grade.

As of June 30, 2021, five of the 44 corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 99.7% of book value. The Corporation’s investment policy requires that corporate bonds have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase, or an average or composite rating of A-. As of June 30, 2021, all but two of the corporate bonds had at least one A3 or A- rating by one of the two predominate credit rating services, Moody’s and S&P. Two corporate bonds had a total book value of $4.6 million, and did not have an A3 or A- rating as of June 30, 2021. These bonds were rated Moody’s Baa1 and S&P BBB+, which are two levels above the minimum required to be considered investment grade. Management conducts ongoing monitoring of these securities and has chosen to continue to hold the bonds with Board approval. In addition, there are fifteen corporate bond instruments that have split ratings with the highest rating within the Corporation’s initial purchase policy guidelines and the lower rating outside of management guidelines, but all are still investment grade. The fifteen bonds have a book value of $24.4 million with a $391,000 unrealized gain as of June 30, 2021. Management conducts ongoing monitoring of these bonds with the Board approving holding these securities on a quarterly basis. In addition, the Corporation purchased $4,900,000 of subordinated debt notes from six different entities during late 2020 and into 2021, all of which are unrated. These are considered corporate bonds as they each are subordinated debt of a domestic community bank but are unrated because they are not a typical corporate issuance. Currently, there are no indications that any of these bonds would discontinue contractual payments.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s investment policy requires that municipal bonds not carrying any insurance coverage have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of June 30, 2021, one municipal bond with a par value of $500,000 was unrated, and no other municipal bonds carried a credit rating under these levels.

Management utilizes several municipal surveillance reports and engages an independent non-brokerage service third party to perform enhanced municipal credit evaluation. Management will typically sell municipal securities if negative trends in financial performance are found and/or ratings have declined to levels deemed unacceptable. As a result of the above monitoring and actions taken to proactively sell weaker municipal credits, the Corporation’s entire municipal bond portfolio consists of investment grade credits.

The entire securities portfolio is reviewed monthly for credit risk and evaluated quarterly for possible impairment. The Corporation’s municipal and corporate bonds present the largest credit risk and highest likelihood for any possible impairment. Due to the ability for corporate credit situations to change rapidly and ongoing nationwide concerns of pension obligations impacting municipalities, management continues to closely monitor all corporate and municipal securities.

Loans

Net loans outstanding increased by 3.9%, to $857.1 million at June 30, 2021, from $825.2 million at June 30, 2020. Net loans increased by 5.7%, an annualized rate of 11.4%, from $811.0 million at December 31, 2020. The following table shows the composition of the loan portfolio as of June 30, 2021, December 31, 2020, and June 30, 2020.

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

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

Commercial real estate
Commercial mortgages		156,022			17.9		142,698			17.4		125,925		15.1
Agriculture mortgages		178,573			20.5		176,005			21.4		175,108		20.9
Construction		21,347			2.5		23,441			2.9		20,285		2.4
Total commercial real estate		355,942			40.9		342,144			41.7		321,318		38.4

Consumer real estate (a)
1-4 family residential mortgages		288,301			33.2		263,569			32.0		261,772		31.3
Home equity loans		11,525			1.3		10,708			1.3		10,688		1.3
Home equity lines of credit		71,694			8.2		71,290			8.7		69,507		8.3
Total consumer real estate		371,520			42.7		345,567			42.0		341,967		40.9

Commercial and industrial
Commercial and industrial		102,533			11.8		97,896			11.9		129,459		15.5
Tax-free loans		16,268			1.9		10,949			1.3		16,607		2.0
Agriculture loans		17,824			2.1		20,365			2.5		21,581		2.6
Total commercial and industrial		136,625			15.8		129,210			15.7		167,647		20.1

Consumer		5,133			0.6		5,155			0.6		5,061		0.6

Total loans		869,220			100.0		822,076			100.0		835,993		100.0
Less:
Deferred loan fees (costs), net		(535	)				(1,294	)				24
Allowance for credit losses		12,703					12,327					10,770
Total net loans		857,052					811,043					825,199

(a)	Residential real estate loans do not include mortgage loans serviced for others which totaled $263,005,000 as of June 30, 2021, $235,437,000 as of December 31, 2020, and $187,258,000 as of June 30, 2020.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

There was moderate growth in the loan portfolio since June 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 June 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 $342.0 million on June 30, 2020, to $371.5 million on June 30, 2021, a 8.6% 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 June 30, 2020, this percentage was 40.9%, and as of June 30, 2021, it increased to 42.7%. Management expects the consumer residential real estate category to stabilize throughout the remainder of 2021. The strategic decision was made in the first half of 2021 to keep some shorter-term mortgages on the books as opposed to selling them on the secondary market, which resulted in an increase in 1-4 family portfolio mortgages. With a number of these long-term assets now on the balance sheet, management has backed off of this strategy in order to protect against rising interest rates in the future. Although economic conditions for consumers have deteriorated with the COVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continues to remain relatively strong as consumers refinance existing debt to lower rates. Market conditions have been changing rapidly throughout the first half of 2021 and the rest of the year is unpredictable, but management would expect mortgage volume to continue at fairly high levels from a historic perspective.

The first lien 1-4 family mortgages increased by $26.5 million, or 10.1%, from June 30, 2020, to June 30, 2021. These first lien 1-4 family loans made up 76.5% of the residential real estate total as of June 30, 2020, and 77.6% as of June 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 second quarter of 2021, mortgage production increased 22% over the previous quarter and was up 16% over the second quarter of 2020. Purchase money origination constituted 70% of the Corporation’s mortgage originations for the quarter, with construction-only and construction-permanent loans making up 50% of that mix. With a decrease in refinance activity as a percentage of overall volume, the percentage of mortgage originations going in the Corporation’s held-for-investment mortgage portfolio increased quarter-over-quarter, particularly with respect to a higher volume of new construction business. In the second quarter of 2021, 70% of all mortgage originations were held in the mortgage portfolio, 55% of which were adjustable rate mortgages. As of June 30, 2021, ARM balances were $129.9 million, representing 45.1% of the 1-4 family residential loan portfolio of the Corporation. The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period. With a small increase in interest rates, a decrease in volume being delivered into the secondary market, and a decision by management to move loans originally earmarked for sale on the secondary market into the bank’s own portfolio, the gains on the sale of mortgages decreased by 35% quarter-over-quarter.

As of June 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 $10.7 million of fixed rate junior lien home equity loans, and $69.5 million of HELOCs as of June 30, 2020. Therefore, combined, these two types of home equity loans increased from $80.2 million to $83.2 million, an increase of 3.7%. The majority of borrowers have been choosing variable rate HELOC loans in the historically low rate environment. With no sign of the Federal Reserve moving to increase rates, management expects HELOC activity to increase with customers choosing variable rate product over fixed rate product until rates begin to increase again.

Commercial real estate makes up 40.9% of total loans as of June 30, 2021, compared to 38.4% of total loans as of June 30, 2020. Within the commercial real estate segment, the increase has primarily been in commercial mortgages, with agriculture mortgages and construction loans remaining fairly stable. Agricultural mortgages increased by $3.5 million, or 2.0%, from $175.1 million as of June 30, 2020, to $178.6 million as of June 30, 2021. Dairy lending is showing signs of improvement. Locally, 2021 milk prices are trending positively. Nationally, prices have seen some normality return which is reflected in the futures price. Over the past 12 months, there has been a small percentage of dairy farmers that have left the conventional dairy operation and have switched to organic and/or specialty products. This has opened up new financing opportunities. While dairy remains the largest agricultural loan concentration, management believes dairy loans will decline as a percentage of total agricultural loans with other non-dairy agricultural areas growing. Currently, management is experiencing more growth in specialty crops and other areas outside of dairy like poultry and layers. Management anticipates that agricultural mortgages may increase through the remainder of 2021 as the economy stabilizes and more farmers move forward with capital improvements or expansion of current operations.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Commercial mortgages increased $30.1 million, or 23.9%, from balances at June 30, 2020. Commercial mortgages as a percentage of the total loan portfolio increased to 17.9% as of June 30, 2021, compared to 15.1% at June 30, 2020. New loan production in this segment is currently outpacing normal principal payments, pay downs, and payoffs. Commercial real estate loans have shown solid growth as a number of businesses move ahead on commercial projects. Management expects commercial real estate loans to remain stable as a percentage of the Corporation’s loans for the remainder of 2021.

The Corporation’s commercial construction loan balances increased by $1.1 million, or 5.2%, from June 30, 2020 to June 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 2.5% of the total loan portfolio as of June 30, 2021 and 2.4% as of June 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 15.8% of total loans as of June 30, 2021, compared to 20.1% as of June 30, 2020. In scope, the commercial and industrial loan sector, at 15.8% of total loans, is significantly smaller than the commercial real estate sector at 40.9% of total loans. This is consistent with management’s credit preference for obtaining real estate collateral when making commercial loans. The balance of total commercial and industrial loans decreased from $167.6 million at June 30, 2020, to $136.6 million at June 30, 2021, a 18.5% 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 June 30, 2021 and June 30, 2020, also includes the PPP loans, which has declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. Management anticipates that these loans will experience a significant decline in the remainder of 2021.

The Corporation provides credit to many small and medium-sized businesses. Much of this credit is in the form of Prime-based lines of credit to local businesses where the line may not be secured by real estate, but is based on the health of the borrower with other security interests on accounts receivable, inventory, equipment, or through personal guarantees. Commercial and industrial loans, including PPP loans, decreased to $102.5 million at June 30, 2021, a $27.0 million, or 20.8% decrease, from the $129.5 million at June 30, 2020. This decrease was driven primarily by the forgiveness of some of the first round of PPP loans during the fourth quarter of 2020 and the first quarter of 2021, but new loan generation during the first half of 2021 offset some of the forgiven balances. The tax-free loans declined by $0.3 million, or 2.0%, from balances at June 30, 2020, and the commercial and industrial agricultural loans declined by $3.8 million, or 17.4%.

The consumer loan portfolio remained the same from June 30, 2020, to June 30, 2021, at $5.1 million. Consumer loans made up 0.6% of total loans for both time periods. 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. Slightly higher demand for unsecured credit is being outpaced by principal payments on existing loans resulting in the decrease in balances. Management anticipates that the Corporation’s level of consumer loans will likely remain stable as a percentage of the portfolio, as the need for additional unsecured credit is generally offset by those borrowers wishing to reduce debt levels and move away from the higher cost of unsecured financing relative to other forms of real estate secured financing.

Non-Performing Assets

Non-performing assets include:

Nonaccrual loans

Loans past due 90 days or more and still accruing

Non-performing troubled debt restructurings

Other real estate owned

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)

	June 30,			December 31,			June 30,
	2021			2020			2020
	$			$			$

Nonaccrual loans		651			725			886
Loans past due 90 days or more and still accruing		287			1,373			309
Troubled debt restructurings, non-performing		—			—			439
Total non-performing loans		938			2,098			1,634

Other real estate owned		—			—			—

Total non-performing assets		938			2,098			1,634

Non-performing assets to net loans		0.11	%		0.25	%		0.38	%

The total balance of non-performing assets decreased by $0.7 million, or 42.7%, and $1.2 million, or 55.3%, from balances at June 30, 2020 and December 31, 2020, respectively. The decrease from the prior periods was primarily due to lower levels of loans past due 90 days or more as well as a decrease in non-performing troubled debt restructurings (TDRs). There were no non-performing TDR loans as of June 30, 2021 or December 31, 2020. 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. There was one non-performing TDR as of June 30, 2020; a $439,000 real estate secured loan with a payment modification to allow annual interest and principal payments. Non-accrual loans decreased, by $0.2 million, or 26.5%, since June 30, 2020, and loans past due 90 days or more and still accruing were down slightly from the prior year period, and down more significantly, by $1.1 million, or 79.2% since December 31, 2020. The $1.1 million of non-accrual reduction that occurred between June 30, 2020 and December 31, 2020 was due to two commercial borrowers paying off their loans during the remainder of 2020. One commercial borrower with three non-accrual loans totaling over $1.0 million paid them off in the second quarter of 2020, while another commercial borrower with a $92,000 non-accrual loan was paid off in December 2020.

Management continues to monitor delinquency trends and the level of non-performing loans closely. At this time, management believes that the potential for material losses related to non-performing loans is decreasing with the level of delinquencies and non-performing loans lower than what was experienced throughout 2020.

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

	Six Months Ended
	June 30
	2021			2020
	$			$

Balance at January 1,		12,327			9,447
Loans charged off:
Real estate		—			—
Commercial and industrial		—			—
Consumer		23			16
Total charged off		23			16

Recoveries of loans previously charged off:
Real estate		—			(11	)
Commercial and industrial		(17	)		(2	)
Consumer		(7	)		(1	)
Total recovered		(24	)		(14	)
Net loans charged off (recovered)		(1	)		2

Provision charged to operating expense		375			1,325

Balance at June 30,		12,703			10,770

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

Allowance at end of period as a % of total loans		1.46	%		1.29	%

Charge-offs for the six months ended June 30, 2021, were $23,000, compared to $16,000 for the same period in 2020. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first half of 2021 and 2020, the Corporation charged off several smaller amounts related to consumer loans. Recoveries were also low in the first half of 2020 and 2021with total recoveries of $24,000 in the first half of 2021 and $14,000 in the first quarter 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 $22.2 million on June 30, 2021, compared to $25.1 million on June 30, 2020. Total classified loans increased during 2020 but then decreased by December 31, 2020, and into the first half of 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 $1.1 million of specifically allocated allowance against the classified loans as of June 30, 2021, $1.1 million of specific allocation as of December 31, 2020, and $64,000 of specific allocation as of June 30, 2020. The higher specific allocation at June 30, 2021 and December 31, 2020, is related to a customer with ongoing business concerns. Typically, as the classified loan balances fluctuate, the associated specific allowance applied to them fluctuates, resulting in a lower or higher required allowance.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period, after reducing charge-offs by recoveries. The Corporation continues to experience low net charge-off percentages due to strong credit practices. Management continually monitors delinquencies, classified loans, and non-performing loans closely in regard to how they may impact charge-offs in the future. The actual charge-offs have been running at low levels, and management expects this to continue through the remainder of 2021. Management practices are in place to reduce the number and severity of losses. In regard to severely delinquent loans, management attempts to improve the Corporation’s collateral or credit position and, in the case of a loan workout, intervene to minimize additional charge-offs.

The allowance as a percentage of total loans was 1.46% as of June 30, 2021, 1.50% as of December 31, 2020, and 1.29% as of June 30, 2020. Management anticipates that the allowance percentage will remain fairly stable during the remainder of 2021, as the allowance balance is increased with additional provision expense to account for loan growth throughout the year. It is typical for the allowance for credit losses to contain a small amount of excess reserves. Over the long term, management targets and excess reserve at approximately 5% knowing that the reserve can fluctuate. The excess reserve stood at 4.7% as of June 30, 2021. Management would anticipate that this unallocated portion of the allowance will remain stable throughout the remainder of 2021.

Premises and Equipment

Premises and equipment, net of accumulated depreciation, decreased by $0.2 million, or 0.8%, to $24.7 million as of June 30, 2021, from $24.9 million as of June 30, 2020. As of June 30, 2021, $379,000 was classified as construction in process compared to $178,000 as of June 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 $5.9 million of regulatory stock holdings as of June 30, 2021, consisted of $5.3 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 $5.2 million on June 30, 2021, $5.9 million on December 31, 2020, and $6.8 million on June 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.

The 2021 second quarter dividend declaration made on FHLB stock by FHLB of Pittsburgh was at a 5.75% annualized yield on activity stock and 2.50% annualized yield on membership stock. Most of the Corporation’s dividend is based on the activity stock, which is based on the amount of borrowings and mortgage activity with FHLB.

Deposits

The Corporation’s total ending deposits at June 30, 2021, increased by $116.1 million, or 9.3%, and by $261.0 million, or 23.6%, from December 31, 2020, and June 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 June 30, 2020, with the changes being a $116.4 million, or 24.9% increase in non-interest bearing demand deposit accounts, a $14.3 million, or 34.9% increase in interest bearing demand balances, a $26.6 million, or 25.4% increase in NOW balances, a $39.0 million, or 31.7% increase in money market account balances, a $73.5 million, or 29.8% increase in savings account balances, and a $8.8 million, or 7.0% decrease in time deposit balances.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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. Due to limited safe investment options outside of banks, the Corporation saw customers bring deposit funds back to regular core checking and savings accounts in an effort to provide safety and financial flexibility. With the decrease in rates that occurred during 2020, customer deposits increased with few options in the market to earn a higher return. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility. Management believes deposit balances may continue to increase, but at a slower pace, through the remainder of 2021.

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

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

	June 30,		December 31,		June 30,
	2021		2020		2020
	$		$		$

Non-interest bearing demand		582,747		534,853		466,392
Interest bearing demand		55,419		47,092		41,083
NOW accounts		131,151		137,279		104,593
Money market deposit accounts		162,247		140,113		123,212
Savings accounts		320,252		274,386		246,762
Time deposits		117,068		119,088		125,872
Total deposits		1,368,884		1,252,811		1,107,914

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

The Corporation has been a stable presence in the local market area that has experienced several large bank mergers over the past several years. Three new convenient locations were added since 2016, significantly expanding the Corporation’s footprint, with a presence in three counties with a total of thirteen branch locations. The Corporation has a history of offering competitive interest rates and fair and understandable service fees because of a strong commitment to the customers and the communities that it serves. Management has always priced products and services in a manner that makes them affordable for all customers. This in turn creates a high degree of customer loyalty and a stable deposit base. Additionally, as financial institutions have come under increased scrutiny from both regulators and customers, the Corporation has maintained an outstanding reputation. Management believes the Corporation’s deposit base has benefited as a result of a growing desire by customers to seek a longstanding, reliable financial institution as a partner to meet their financial needs.

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of June 30, 2021, time deposit balances had decreased $8.8 million, or 7.0%, from June 30 2020, and decreased $2.0 million, or 1.7% 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.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Borrowings

Total borrowings were $69.8 million, $74.4 million, and $65.1 million as of June 30, 2021, December 31, 2020, and June 30, 2020, respectively. Of these amounts, there were no short-term funds outstanding as of June 30, 2021, December 31, 2020 or June 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 $50.2 million as of June 30, 2021, $54.8 million as of December 31, 2020, and $65.1 million as of June 30, 2020. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances at June 30, 2021, December 31, 2020, and June 30, 2020. 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 June 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.

In order to limit the Corporation’s exposure and reliance to a single funding source, the Corporation’s Asset Liability Policy sets a goal of maintaining the amount of borrowings from the FHLB to 15% of asset size. As of June 30, 2021, the Corporation was significantly under this policy guideline at 3.2% of asset size with $50.2 million of total FHLB borrowings. The Corporation also has a policy that limits total borrowings from all sources to 150% of the Corporation’s capital. As of June 30, 2021, the Corporation was significantly under this policy guideline at 51.4% of capital with $69.8 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of 2020 and through the first six months of 2021.

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $440.6 million. The Corporation’s two internal policy limits mentioned above are far more restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.

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 June 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.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

REGULATORY CAPITAL RATIOS:

				Regulatory Requirements
				Adequately			Well
As of June 30, 2021	Capital Ratios			Capitalized			Capitalized
Total Capital to Risk-Weighted Assets
Consolidated		16.1	%		8.0	%		10.0	%
Bank		15.6	%		8.0	%		10.0	%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.9	%		6.0	%		8.0	%
Bank		14.3	%		6.0	%		8.0	%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.9	%		4.5	%		6.5	%
Bank		14.3	%		4.5	%		6.5	%

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

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

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

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

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


As of June 30, 2020
Total Capital to Risk-Weighted Assets
Consolidated		13.4	%		8.0	%		10.0	%
Bank		13.3	%		8.0	%		10.0	%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.3	%		6.0	%		8.0	%
Bank		12.1	%		6.0	%		8.0	%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		12.3	%		4.5	%		6.5	%
Bank		12.1	%		4.5	%		6.5	%

Tier 1 Capital to Average Assets
Consolidated		9.3	%		4.0	%		5.0	%
Bank		9.2	%		4.0	%		5.0	%

On December 30, 2020, the Corporation issued $20 million of subordinated debt in order to support capital levels which had declined due to the dramatic balance sheet growth that had occurred during 2020. The $20 million of subordinated debt qualifies as Tier 2 capital at the Holding Company level. Amounts of the subordinated debt can be transferred to the Bank where it qualifies as Tier 1 Capital. As of June 30, 2021, $15.0 million of this subordinated debt funding was transferred down to the Bank to rebuild the Bank’s capital levels. As of June 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.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Dividends play a vital role in the management of capital levels of the Corporation. Management seeks a balance between maintaining a sufficient cushion of excess capital above regulatory limits versus the payment of dividends to the shareholders as a direct return of their investment. Due to a constant stream of stable earnings, the payment of a dividend is needed to maintain capital at acceptable levels in order to provide an adequate return of equity to the shareholders.

The Corporation’s dividends per share for the six months ended June 30, 2021, were $0.33, and the dividends per share for the six months ended June 30, 2020, were $0.32. Dividends are paid from current earnings and available retained earnings. The Corporation’s current capital plan calls for management to maintain tier I capital to average assets between 8.0% and 12.0%. As a secondary measurement, the capital plan also targets a long-term dividend payout ratio in the range of 30% to 45%. This ratio will vary according to income, but over the long term, the Corporation’s goal is to maintain and target a payout ratio within this range. For the six months ended June 30, 2021, the payout ratio was 22.8%. This dividend payout ratio is low as a result of the higher earnings in the first half of 2021, some of which are non-recurring. Management currently anticipates that the payout ratio may return to more normal levels as 2021 progresses. Management’s goal is to maintain all regulatory capital ratios at current levels. Future dividend payout ratios are dependent on the future level of earnings and other factors that impact the level of capital.

The amount of unrealized gain or loss on the securities portfolio is reflected, net of tax, as an adjustment to capital, as required by U.S. generally accepted accounting principles. This is recorded as accumulated other comprehensive income or loss in the capital section of the consolidated balance sheet. An unrealized gain increases capital, while an unrealized loss reduces capital. This requirement takes the position that, if the Corporation liquidated the securities portfolio at the end of each period, the current unrealized gain or loss on the securities portfolio would directly impact the Corporation’s capital. As of June 30, 2021, the Corporation showed an unrealized gain, net of tax, of $7,362,000, compared to an unrealized gain of $7,958,000 at December 31, 2020, and an unrealized gain of $4,522,000 as of June 30, 2020. These unrealized gains, net of tax are excluded from capital when calculating the tier I capital to average assets numbers above. The amount of unrealized gain or loss on the securities portfolio, shown net of tax, as an adjustment to capital, does not include any actual impairment taken on securities, which is shown as a reduction to income on the Corporation’s Consolidated Statements of Income. No impairment was recorded in the six months ended June 30, 2021, or in the same prior year period. The changes in unrealized gains and losses are due to normal changes in market valuations of the Corporation’s securities as a result of interest rate movements.

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 June 30, 2021.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

	June 30,
	2021
	$
Commitments to extend credit:
Revolving home equity		139,733
Construction loans		3,258
Real estate loans		133,014
Business loans		175,129
Consumer loans		1,279
Other		5,022
Standby letters of credit		11,295

Total		468,730

Significant Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant impact on the Corporation’s business operations as its provisions take effect. It is difficult to predict at this time what specific cumulative impact Dodd-Frank and the yet-to-be-written implementing rules and regulations will have on community banks. However, it is expected that, at a minimum, they will increase the Corporation’s operating and compliance costs and could increase interest expense. Among the provisions that have already or are likely to affect the Corporation are the following:

Holding Company Capital Requirements

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

Deposit Insurance

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

Corporate Governance

Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. The Corporation was exempt from these requirements until January 21, 2013, due to its status as a smaller reporting company. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Consumer Financial Protection Bureau

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

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

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

Limits on Interstate Acquisitions and Mergers

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

Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Credit risk

Liquidity risk

Interest rate risk

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

Credit Risk

For discussion on credit risk refer to the sections in Item 2. Management’s Discussion and Analysis, on securities, non-performing assets, and allowance for 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. Minimal cost is an important component of liquidity. If a financial institution is required to take significant action to obtain funding, and is forced to utilize an expensive source, it has not properly planned for its liquidity needs. Funding new loans and covering deposit withdrawals are the primary liquidity needs of the Corporation. The Corporation uses a variety of funding sources to meet liquidity needs, such as:

Deposits

Loan repayments

Maturities and sales of securities

Borrowings from correspondent and member banks

Current earnings

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

Management uses a cumulative maturity gap analysis to measure the amount of assets maturing within various periods versus liabilities maturing in those same periods. A gap ratio of 100% represents an equal amount of assets and liabilities maturing in the same stated period. Management monitors six-month, one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. As of June 30, 2021, all maturity gap ratios were higher than corporate policy guidelines, due to a larger amount of loans and securities now maturing in less than five years, influenced very directly by the PPP loans that will mature in the next one to five years. The six-month gap ratio was 243.2%, compared to an upper policy guideline of 155%; the one-year gap ratio was 206.8%, compared to an upper policy guideline of 140%; the three-year gap ratio was 188.8%, compared to an upper guideline of 125%; and the five-year gap ratio was 172.3%, compared to an upper policy guideline of 115%. The results show asset sensitivity. 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.

Table of Contents

ENB FINANCIAL CORP

Gap ratios decreased for the Corporation since the first quarter of 2021. Although the Corporation still shows as significantly asset sensitive, the measurements are heavily influenced by the very high levels of core deposits on the Corporation’s balance sheet. There are higher amounts of longer-term assets in the second quarter of 2021 compared to prior years and quarters, however the large increases in deposits have helped to offset this asset length. The Corporation’s assets are moderately long, but the length of the securities portfolio and the loan portfolio is more than offset by the length of the Corporation’s core deposit liabilities in conjunction with holding high levels of cash and cash equivalents. Beyond the non-maturity deposits, management is able to utilize the length of wholesale funding instruments to offset the declining length of the CD portfolio. Management believes that the Federal Reserve rate decreases early in 2020 will negatively impact net interest income for the remainder of 2021 as assets continue to reprice to lower levels. However, some savings can be achieved through deposits, primarily the CD portfolio, as the maturing CDs reprice to significantly lower levels.

The size and length of the Corporation’s 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 reductions to the cost of funds 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 funds earn.

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 June 30, 2021, the loan-to-deposit ratio was 63.5%, compared to 65.7%, at December 31, 2020, and 75.5% at June 30, 2020.

Management’s desired gap levels will also change due to the direction of interest rates. In March 2020, the Federal Reserve cut the overnight interest rate by 150 basis points at two separate special Federal Reserve Board meetings. Cash and other short term assets were directly impacted by this change in overnight rates. If the Corporation’s liquid assets cannot be deployed into higher yielding longer term assets, then management will reduce the amount of cash and short-term assets to reduce the exposure to future decreases in the overnight rate. Management believes the overnight Federal funds rate will not decline further in 2021, but the economic environment is unpredictable and future rate changes will be dependent on the national and global economic conditions.

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. A number of the Corporation’s maturing time deposits have already repriced to lower rates due to the rapid rate declines during March of 2020. However, a large portion of the Corporation’s deposits are core deposits with little repricing expected to occur in the near future. The Corporation’s maturing time deposits and borrowings are generally repricing to lower interest rates and will continue to do so throughout 2021. The Corporation’s average cost of funds was 19 basis points as of June 30, 2021, which is low from an historic perspective. The Corporation’s average cost of funds was 20 basis points as of December 31, 2020, and 32 basis points as of June 30, 2020. This cost of funds will likely remain around the current level throughout the remainder of 2021. 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 the deposit customers. The Corporation had experienced a steady growth in both non-interest bearing and interest bearing funds during this last prolonged and historically low interest rate cycle, but in 2018 and through 2019, deposit growth had been slower than in prior years. With the Federal Reserve rate declines in the first quarter of 2020, deposit growth has once again been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations. Additionally, with the government aid direct deposits and checks sent out in 2020 and 2021, the Corporation has experienced significant deposit growth throughout the latter part of 2020 and the first half of 2021.

Table of Contents

ENB FINANCIAL CORP

The performance of the equity markets also has a bearing on how much of the current deposits will remain at the Corporation. It is management’s observation that since the financial crisis, an element of the Corporation’s deposit customers has been reluctant to redeploy funds presently at banks back into the equity market. This became even more apparent with the COVID-19 pandemic and the volatility in the equity markets caused by this event. Investors have grown weary of the fluctuations in the equity markets. In 2019, the equity markets had very strong gains, which did not adversely impact the Corporation’s deposit growth. In March 2020, with the outbreak of COVID-19, the equity markets recorded their biggest decline in recent history with the market down between 30% and 35% after huge sell-offs. The equity market has since recovered and has steadily grown to new historic highs, well ahead of the expected continued COVID-19 recovery. But the previous history of unprecedented equity declines following a fueled bull market is causing many customers to keep a large percentage of their excess funds in banks which has caused the increase in the Corporation’s deposits through 2020 and the first half 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, but will continue to decline slowly.

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 June 30, 2021, the Corporation was within guidelines for all of the above measurements.

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

Table of Contents

ENB FINANCIAL CORP

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. Currently, the flat-rate scenario seems more likely for the remainder of 2021, with the Federal funds rate at 0.25% as of June 30, 2021. 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. Previous to the onset of COVID-19, management had more concerns about rates-down scenarios, but after the two large Federal Reserve rate reductions in March of 2020 the ability of the Federal Reserve to further reduce interest rates greatly diminished, and the exposure to higher interest rates became more of a focus. The overnight Federal funds rate and the current U.S. Treasury rates are presently at low historical levels. Because of this historical perspective, if management would take a neutral position in terms of the direction of forward interest rates, there is clearly more long term risk of rates going up than down. So while in the near term it is likely we may see no Federal Reserve rate increases or decreases, management remains guarded about the impact of higher interest rates and continues to prepare for rate increases on 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 June 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. The static balance sheet approach is used to reduce the number of variables in calculating the model’s accuracy in predicting future net interest income. It is appropriate to pull out various balance sheet growth scenarios which could be utilized to compensate for a declining margin. By testing the model using a base model assuming no growth, this variable is eliminated and management can focus on predicted net interest income based on the current existing balance sheet. Management does run additional scenarios with expected growth rates through the asset liability model to most accurately predict future financial performance. This is done separately and apart from the static balance sheet approach discussed above to test fair value and future interest rate risk.

As a result of the many assumptions, this information should not be relied upon to predict future results. Additionally, both of the analyses discussed below do not consider any action that management could take to minimize or offset the negative effect of changes in interest rates. These tools are used to assist management in identifying possible areas of risk in order to address them before a greater risk is posed. Personnel perform an in-depth annual validation and a quarterly review of the settings and assumptions used in the model to ensure reliability of the forecast results. In addition to the annual validation review, management also engages a third party every three years to obtain a complete external review of the model. That review was 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.

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.

Table of Contents

ENB FINANCIAL CORP

The second quarter 2021 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of June 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 loans and the recent purchases of variable rate securities and the cash balances held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates. Loans that are Prime-based will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by 200 or 300 basis points where variable loan rates will still increase by the same amount as the Prime rate. With the Federal Reserve acting to decrease interest rates by 225 basis points over five meetings held since June 30, 2019, the Corporation has had more exposure to all maturing fixed-rate loans and securities. These assets have been maturing and repricing to lower market rates, while most of the Corporation’s interest-bearing deposits could not be repriced any lower. This would result in a decline in net interest income in any down-rate scenario.

For the rates-up 100 basis point scenario, net interest income increases by 0.7% 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 0.8% and 1.1%, respectively, compared to the rates unchanged scenario. The Corporation’s asset sensitivity diminished from the prior quarter when the interest rate sensitivity analysis showed increases of 1.3%, 1.9% and 2.7%. Management was active in investing available cash into term securities in order to improve margin. Management was also active in adding longer loans carrying higher yields than equivalent investments in an effort to prevent the loan-to-deposit ratio from declining. Management desires to maintain an asset sensitivity position and has an initial goal of increasing the asset sensitivity back to March 31, 2021 levels. 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 June 30, 2021, the Corporation had no overnight or short term borrowings but had $50.2 million of long-term fixed-rate advances. Additionally, total borrowings only make up approximately 4.9% of the total funding provided by deposits and borrowings. The more aggressive rates-up scenarios also benefit from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. This allows management the ability to benefit from higher rates by controlling the amount of the interest rate increases on large amounts of liabilities that could reprice. 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, it’s just less of a benefit than prior timeframes.

As of June 30, 2021, in the down scenarios of -25, -50, and -75 basis points, net interest income decreases by 0.8%, 2.1%, and 3.2%, 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.

Table of Contents

ENB FINANCIAL CORP

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 June 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 June 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 June 30, 2021, indicate that the Corporation’s net portfolio value would experience valuation gains of 10.7%, 14.7%, and 15.7% 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 -7.6%, -16.8%, and -26.6%, 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.

Table of Contents

ENB FINANCIAL CORP

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 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 June 30, 2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Principal Financial Officer concluded that the Corporation’s disclosure controls and procedures as of June 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.

Table of Contents

ENB FINANCIAL CORP

PART II – OTHER INFORMATION

June 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 June 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 *

April 2021		—		—		—		182,400
May 2021		4,000		21.70		4,000		178,400
June 2021		3,200		21.66		3,200		175,200

Total		7,200

* 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 June 30, 2021, a total of 24,800 shares were repurchased at a total cost of $492,000 for an average cost per share of $19.84.

Item 3. Defaults Upon Senior Securities – Nothing to Report

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – Nothing to Report

Table of Contents

ENB FINANCIAL CORP

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)).

Table of Contents

ENB FINANCIAL CORP

SIGNATURES

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

	ENB Financial Corp
	(Registrant)


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


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