ENB Financial Corp - Quarter Report: 2022 March (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 March 31, 2022

OR

☐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)

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:

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.

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 May 1, 2022, the registrant had 5,595,152 shares of $0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

March 31, 2022

 

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

See Notes to the Unaudited Consolidated Interim Financial Statements

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

See Notes to the Unaudited Consolidated Interim Financial Statements

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(DOLLARS IN THOUSANDS)

See Notes to the Unaudited Consolidated Interim Financial Statements

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

See Notes to the Unaudited Consolidated Interim Financial Statements

ENB FINANCIAL CORP

See Notes to the Unaudited Consolidated Interim Financial Statements

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”). Ephrata National Bank has one wholly-owned subsidiary, ENB Insurance, LLC which is consolidated into its financial statements. This Form 10-Q, for the first quarter of 2022, is reporting on the results of operations and financial condition of ENB Financial Corp on a consolidated basis.

Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021.

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.

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 March 31, 2022, and December 31, 2021, are as follows:

The amortized cost and fair value of securities available for sale at March 31, 2022, 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)

Securities available for sale with a par value of $88,591,000 and $94,283,000 at March 31, 2022, and December 31, 2021, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $86,576,000 at March 31, 2022, and $96,521,000 at December 31, 2021.

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)

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 three months of 2022 or 2021.

Information pertaining to securities with gross unrealized losses at March 31, 2022, and December 31, 2021, 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)

In the debt security portfolio there were 289 positions that were carrying unrealized losses as of March 31, 2022. There were no instruments considered to be other-than-temporarily impaired at March 31, 2022.

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 March 31, 2022 and December 31, 2021.

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three months ended March 31, 2022 and 2021, and the portion of unrealized gains and losses for the period that relates to equity investments held as of March 31, 2022 and 2021.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

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 March 31, 2022, and December 31, 2021:

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $304,290,000 and $289,263,000 as of March 31, 2022 and December 31, 2021, respectively.

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of March 31, 2022 and December 31, 2021. 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.

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)

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 March 31, 2022 and December 31, 2021

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of March 31, 2022 and December 31, 2021:

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2022 and December 31, 2021:

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

As of March 31, 2022 and December 31, 2021, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three months ended March 31, 2022 and March 31, 2021, is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

No loan modifications were made during the first three months of 2021 or 2022 that would be considered a troubled debt restructuring (TDR). A modification of the payment terms to a loan customer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments. Included in the impaired loan portfolio is one loan to a commercial borrower that is being reported as a TDR. The balance of this TDR loan was $483,000 as of March 31, 2022. This TDR is not non-accrual.

The following tables summarize information regarding impaired loans by loan portfolio class as of March 31, 2022 and December 31, 2021:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

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 months ended March 31, 2022:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

During the three months ended March 31, 2022, management charged off $66,000 in loans while recovering $14,000 and added $100,000 to the provision. The unallocated portion of the allowance decreased from 4.9% of total reserves as of December 31, 2021, to 4.7% as of March 31, 2022. 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 three months ended March 31, 2022, net provision expense was recorded for the consumer real estate and commercial and industrial sectors while the commercial real estate and consumer sectors recorded a credit in provision. All of these amounts were minimal as total provision expense for the first quarter of 2022 was only $100,000 due to improved economic conditions as well as lower levels of classified loans.

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 following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

During the three months ended March 31, 2021, management charged off $14,000 in loans while recovering $2,000 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 6.0% as of March 31, 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%.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

During the three months ended March 31, 2021, net provision expense was recorded for the commercial real estate sector as well as the consumer sector with credit provisions recorded for the consumer real estate and commercial and industrial 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 three months ended March 31, 2021, so the provision expense was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance.

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 March 31, 2022 and December 31, 2021:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

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:

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 March 31, 2022, and December 31, 2021, 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)

On March 31, 2022, 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 March 31, 2022, the CRA fund investments had a $7,258,000 book and fair market value and the bank stock portfolio had a book value of $1,623,000, and fair market value of $1,736,000.

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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

On December 31, 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 December 31, 2021, the CRA fund investments had a $7,240,000 book and market value and the bank stocks had a book value of $1,570,000 and a market value of $1,742,000.

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 March 31, 2022 and December 31, 2021, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(DOLLARS IN THOUSANDS)

 

The Corporation had a total of $4,035,000 of impaired loans as of March 31, 2022, with $251,000 of specific allocation against these loans and $3,324,000 of impaired loans as of December 31, 2021, with $147,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

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)

 

(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.

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 March 31, 2022 and December 31, 2021:

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

(DOLLARS IN THOUSANDS)

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

(DOLLARS IN THOUSANDS)

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

6. 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 March 31, 2022, firm loan commitments were $100.5 million, unused lines of credit were $390.9 million, and open letters of credit were $12.1 million. The total of these commitments was $503.5 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.

7. Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 is as follows:

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (1) (2)

(DOLLARS IN THOUSANDS)

(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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)

(1) Amounts in parentheses indicate debits.

8. Recently Issued Accounting Standards

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

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

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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

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

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

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim 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 March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method. ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this Update allow non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. 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 2021 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 any other pandemic, epidemic, or health-related crisis 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
	·	Inflation and monetary fluctuations and volatility

·

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

·

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 three months ended March 31, 2022 were positively impacted by a number of items resulting in solid financial results, but in comparison to the prior year, the results were not as strong due to a number of non-recurring income items in the first quarter of 2021. The prior year was positively impacted by high amounts of PPP fees on forgiven loans as well as record mortgage gains due to increased refinance activity stemming from the low interest rate environment. The first quarter of 2022 experienced a sharp increase in market interest rates, a slower balance sheet growth rate, and less income earned from PPP fees and mortgage gains.

 

The Corporation recorded net income of $3,191,000 for the three-month period ended March 31, 2022, a $1,313,000, or 29.2% decrease from the $4,504,000 earned during the three months ended March 31, 2021. The earnings per share, basic and diluted, were $0.57 for the first quarter of 2022, compared to $0.81 for the same period in 2021, a 29.6% decrease. The decrease in the Corporation’s 2022 earnings was caused primarily by declines in other income and increases in operating expenses, partially offset by increases in net interest income and a lower provision for loan losses.

 

The Corporation’s net interest income (NII) increased by $1,042,000, or 10.8%, for the three months ended March 31, 2022, compared to the same period in 2021. The increase in NII primarily resulted from an increase in the balance of interest-earning assets which caused interest and fees on loans to increase by $430,000, or 5.1%, and interest on securities available for sale to increase by $427,000, or 21.0%. In addition, interest expense on deposits and borrowings decreased by $168,000, or 19.7%, for the three months ended March 31, 2022, compared to the same period in the prior year. The low interest rate environment has caused a rapid decline in asset yield, but also has resulted in a decline in the cost of funds. This decline in the cost of funds has resulted in these lower levels of interest expense.

 

The Corporation recorded a $100,000 provision for loan losses in the first quarter of 2022, compared to $375,000 for the first quarter of 2021. The lower provision in 2022 was primarily caused by lower non-performing and classified loans as well as slight decreases to several qualitative factors as a result of improved economic conditions.

 

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 three months ended March 31, 2022, compared to the same period in the prior year, due to lower earnings in 2022.

 

Key Ratios		Three Months Ended
		March 31,
		2022				2021
Return on Average Assets			0.76	%			1.24	%
Return on Average Equity			9.82	%			14.03	%

 

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 three months of 2022, NII generated 74.5% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared to 64.5% in the first three months of 2021. This increase is a result of higher levels of NII in the first three months of 2022 as well as lower non-interest income compared to 2021. The overall performance of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.

 

The following table shows a summary analysis of NII on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $304,000 for the three months ended March 31, 2022, compared to $268,000 for the same period in 2021.

 

 

NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
		Three Months Ended
		March 31,
		2022				2021
		$				$
Total interest income			11,404				10,530
Total interest expense			683				851
Net interest income			10,721				9,679
Tax equivalent adjustment			304				268
Net interest income (fully taxable equivalent)			11,025				9,947

 

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

 

·

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

·

The average balance of interest earning assets and interest bearing liabilities

 

NII is impacted by yields earned on assets and rates paid on liabilities. During 2021, longer-term U.S. Treasury rates increased adding some slope to the yield curve, but asset yields were still constrained. In the first quarter of 2022, interest rates increased more dramatically in anticipation of a Federal Reserve rate movement which happened in mid-March. The two through five year Treasury rates increased the most, with the longer rates increasing less. Management believes that although higher market rates higher market rates should help the net interest margin (NIM) moving forward, the first quarter still saw a decline due to the low asset yields for the majority of the quarter.

 

As a result of a larger balance sheet in the first quarter of 2022, even with low asset yields, the Corporation’s NII on a tax equivalent basis increased while the Corporation’s margin decreased to 2.73% for the quarter ended March 31, 2022, compared to 2.86% in the first quarter of 2021. The Corporation’s NII for the three months ended March 31, 2022, increased over the same period in 2021 by $1,078,000, or 10.8%. 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 throughout 2021 and through the first quarter of 2022. 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 2021, security reinvestment had generally been occurring at lower yields. With higher Treasury rates in 2022, security yields have increased and have helped to increase NII during the first quarter of 2022.

 

The Corporation’s overall cost of funds, including non-interest bearing funds, remained stable through the first three months of 2022 at 17 basis points. Core deposit interest rates are at historic lows and time deposit rates are not much higher than core deposit rates resulting in maturing time deposits repricing at lower levels or moving into core deposit products. The average balance of borrowings was slightly lower in the first three months of 2022 than 2021, and interest rates were also lower, resulting in the total cost of borrowings decreasing by $106,000.

 

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

 

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

		Three Months Ended March 31,												Three Months Ended March 31,
		2022 vs. 2021												2021 vs. 2020
		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			14				1				15				48				(86	)			(38	)
Securities available for sale:
Taxable			268				92				360				399				(552	)			(153	)
Tax-exempt			161				(61	)			100				606				(117	)			489
Total securities			429				31				460				1,005				(669	)			336
Loans			892				(450	)			442				837				(912	)			(75	)
Regulatory stock			(7	)			—				(7	)			(24	)			(54	)			(78	)
Total interest income			1,328				(418	)			910				1,866				(1,721	)			145
INTEREST EXPENSE
Deposits:
Demand deposits			6				5				11				55				(322	)			(267	)
Savings deposits			4				—				4				6				(15	)			(9	)
Time deposits			(11	)			(66	)			(77	)			(47	)			(172	)			(219	)
Total deposits			(1	)			(61	)			(62	)			14				(509	)			(495	)
Borrowings:
Total borrowings			(72	)			(34	)			(106	)			(41	)			116				75
Total interest expense			(73	)			(95	)			(168	)			(27	)			(393	)			(420	)
NET INTEREST INCOME			1,401				(323	)			1,078				1,893				(1,328	)			565

The following tables show a more detailed analysis of NII on an FTE basis with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities.

 

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

 

		For the Three Months Ended March 31,
		2022												2021
										(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			94,688				37				0.16				57,975				22				0.15
Securities available for sale:
Taxable			391,931				1,464				1.49				318,921				1,104				1.38
Tax-exempt			197,160				1,289				2.62				172,768				1,189				2.75
Total securities (d)			589,091				2,753				1.87				491,689				2,293				1.87
Loans (a)			931,158				8,858				3.82				838,954				8,416				4.03
Regulatory stock			5,410				60				4.42				6,033				67				4.45
Total interest earning assets			1,620,347				11,708				2.90				1,394,651				10,798				3.11
Non-interest earning assets (d)			80,048												79,897
Total assets			1,700,395												1,474,548
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits			371,516				49				0.05				324,277				38				0.05
Savings deposits			354,773				18				0.02				286,793				14				0.02
Time deposits			113,904				185				0.66				119,309				262				0.89
Borrowed funds			63,877				431				2.74				74,411				537				2.93
Total interest bearing liabilities			904,070				683				0.31				804,790				851				0.43
Non-interest bearing liabilities:
Demand deposits			659,028												534,503
Other			5,478												5,028
Total liabilities			1,568,576												1,344,321
Stockholders' equity			131,819												130,227
Total liabilities & stockholders' equity			1,700,395												1,474,548
Net interest income (FTE)							11,025												9,947
Net interest spread (b)											2.59												2.68
Effect of non-interest
bearing deposits											0.14												0.18
Net yield on interest earning assets (c)											2.73												2.86

 

(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 $1,832,000 as of March 31, 2022, and $1,199,000 as of March 31, 2021.  Such fees and costs recognized through income and included in the interest amounts totaled $90,000 in 2022, and $338,000 in 2021.

(b) Net interest spread is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.

(c) Net yield, also referred to as net interest margin, is computed by dividing NII (FTE) by total interest earning assets.

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

 

The Corporation’s average balance on securities increased by $97.4 million, or 19.8%, for the three months ended March 31, 2022, compared to the same period in 2021. The tax equivalent yield on investments remained the same at 1.87% for both the three months ended March 31, 2022, and 2021, respectively. Interest income on securities increased due to the volume growth which was caused by an excess of liquidity in 2021 and 2022 as a result of the low-rate environment that caused a large influx of deposits.

 

Average balances on loans increased by $92.2 million, or 11.0%, for the three months ended March 31, 2022, compared to the same period in the prior year. Loan yields declined by 21 basis points for the quarter but loan interest income increased $442,000, or 5.3%, as a result of the increase in loan balances.

 

The average balance of interest-bearing deposit accounts increased by $109.8 million, or 15.0%, for the three months ended March 31, 2022, compared to the same period in the prior year. While the average balance of time deposits did decrease, the average balance on interest-bearing demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest rate paid on deposits decreased for this time period as well. This resulted in a decrease in interest expense on deposits of $62,000, or 19.7%, for the three months ended March 31, 2022, compared to the same period in 2021.

 

The Corporation’s average balance on borrowed funds decreased by $10.5 million, or 14.2%, for the three months ended March 31, 2022, compared to the same period in 2021. The Corporation’s borrowed funds consist of FHLB advances and subordinated debt which is used to support capital growth for the Bank. The decrease in borrowed funds for the period is a result of paying off FHLB advances during 2021. The Corporation paid off $10.6 million of FHLB advances in 2021, resulting in the decrease in average balance. The rate paid on borrowed funds decreased by 19 basis points for the three months ended March 31, 2022, compared to the same period in the prior year attributed to the payoff of FHLB advances.

 

For the three months ended March 31, 2022, the net interest spread decreased by nine basis points to 2.59%, compared to 2.68% for the three months ended March 31, 2021. The effect of non-interest bearing funds decreased to 14 basis points from 18 basis points in the prior year. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for the first quarter of 2022 was 2.73%, compared to 2.86% for the first quarter of 2021.

 

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

 

Provision for Loan Losses

 

The allowance for credit losses (ACL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a provision expense of $100,000 for the first quarter of 2022, compared to $375,000 for the three months ended March 31, 2021. The provision expense was lower in the first quarter of 2022 due to a lower balance of classified loans as well as a small decrease in some qualititative factors related to collateral value stabilization and improvements in the dairy industry. As of March 31, 2022, the allowance as a percentage of total loans was 1.37%, compared to 1.51% at March 31, 2021. More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows.

 

Other Income

 

Other income for the first quarter of 2022 was $3,676,000, a decrease of $1,642,000, or 30.9%, compared to the $5,318,000 earned during the first quarter of 2021. The following table details the categories that comprise other income.

 

OTHER INCOME

(DOLLARS IN THOUSANDS)

 

		Three Months Ended March 31,
		2022				2021				Increase (Decrease)
		$				$				$				%
Trust and investment services			671				670				1				0.1
Service charges on deposit accounts			293				248				45				18.1
Other fees			295				366				(71	)			(19.4	)
Commissions			869				864				5				0.6
Net gains on debt and equity securities			131				335				(204	)			(60.9	)
Gains on sale of mortgages			735				1,930				(1,195	)			(61.9	)
Earnings on bank owned life insurance			190				216				(26	)			(12.0	)
Other miscellaneous income			492				689				(197	)			(28.6	)
Total other income			3,676				5,318				(1,642	)			(30.9	)

 

Service charges on deposit accounts increased by 18.1% primarily as a result of higher overdraft charges in the first quarter of 2022. Other fees decreased by 19.4%, driven by lower loan-related fees. Gains on debt and equity securities were lower in 2022 driven by higher interest rates which has resulted in fewer opportunities to sell investment securities at gains. Mortgage gains declined by $1,195,000, or 61.9%, in the first quarter of 2022 compared to the first quarter of 2021. This was primarly a result of the rapid increase in interest rates during 2022 that resulted in very low margins on mortgages sold. Earnings on bank-owned life insurance decreased by 12.0% as a result of a decrease in value of an old BOLI policy where expenses exceed the income on the policy. The miscellaneous income category was lower in 2022 by 28.6% as a result of non-recurring income items that impacted the first quarter of 2021.

 

Operating Expenses

 

Operating expenses for the first quarter of 2022 were $10,608,000, an increase of $1,421,000, or 15.5%, compared to the $9,187,000 for the first quarter of 2021. The following table provides details of the Corporation’s operating expenses for the three-month period ended March 31, 2022, compared to the same period in 2021.

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

 

		Three Months Ended March 31,
		2022				2021				Increase (Decrease)
		$				$				$				%
Salaries and employee benefits			6,512				5,699				813				14.3
Occupancy expenses			718				683				35				5.1
Equipment expenses			265				267				(2	)			(0.7	)
Advertising & marketing expenses			279				190				89				46.8
Computer software & data processing expenses			1,138				1,098				40				3.6
Shares tax			351				280				71				25.4
Professional services			630				439				191				43.5
Other operating expenses			715				531				184				34.7
Total Operating Expenses			10,608				9,187				1,421				15.5

 

Salaries and employee benefits are the largest category of operating expenses. For the first quarter of 2022, salaries and benefits increased $813,000, or 14.3%, compared to 2021. This was primarily due to merit and cost of living increases, higher costs to replace employees who retired or left the organization due to nationwide staffing challenges, and an accrual for the Corporation’s bank-wide incentive program. Occupancy and equipment expenses in total did not change significantly from the prior year. Advertising and marketing expenses increased by 46.8%, due to promoting new market areas as well as new products and services. Computer software and data processing expenses increased marginally, as a result of higher technology costs and increased volumes due to a larger customer base. Shares tax expense is based on the Corporation’s level of shareholders’ equity and has grown substantially, commensurate with the growth in shareholders’ equity. Professional services expenses increased by 43.5% in the first

quarter of 2022 compared to the prior year driven by higher legal fees and other outside services. Other operating expenses increased by 34.7% quarter-over-quarter primarily as a result of higher FDIC and OCC assessment costs, higher fraud-related charges-offs, higher travel costs, and miscellaneous other operating costs that are increasing to a lesser degree.

 

Income Taxes

 

Federal income tax expense was $498,000 for the first quarter of 2022 compared to $931,000 for the same period in 2021. The effective tax rate for the Corporation was 13.5% for the three months ended March 31, 2022 and 17.1% for the three months ended March 31, 2021. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and Bank Owned Life Insurance (BOLI) income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate and the effective tax rate for the first quarter of 2022 was lower than the prior year due to an increased level of tax-free assets.

 

 

 

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 March 31, 2022, the Corporation had $589.5 million of securities available for sale, which accounted for 34.6% of assets, compared to 32.5% as of December 31, 2021, and 34.7% as of March 31, 2021. Based on ending balances, the securities portfolio increased 10.9% from March 31, 2021, and 5.6% from December 31, 2021.

 

The debt securities portfolio was showing a net unrealized loss of $25,692,000 as of March 31, 2022, compared to an unrealized gain of $4,356,000 as of December 31, 2021. The valuation of the Corporation’s securities portfolio, predominately debt securities, is impacted by both the U.S. Treasury rates and the perceived forward direction of interest rates.

 

The table below summarizes the Corporation’s amortized cost, unrealized gain or loss position, and fair value for each sector of the securities portfolio for the periods ended March 31, 2022 and December 31, 2021.

 

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)  

 

						Net
		Amortized				Unrealized				Fair
		Cost				Gains (Losses)				Value
		$				$				$
March 31, 2022
U.S. treasuries			35,683				(1,392	)			34,291
U.S. government agencies			27,609				(1,718	)			25,891
U.S. agency mortgage-backed securities			56,150				(2,073	)			54,077
U.S. agency collateralized mortgage obligations			35,640				(1,192	)			34,448
Non-agency MBS/CMO			23,307				(275	)			23,032
Asset-backed securities			91,795				(1,002	)			90,793
Corporate bonds			81,973				(3,188	)			78,785
Obligations of states and political subdivisions			263,028				(14,852	)			248,176
Total debt securities, available for sale			615,185				(25,692	)			589,493
Equity securities			8,881				113				8,994
Total securities			624,066				(25,579	)			598,487
December 31, 2021
U.S. Treasuries			14,821				(8	)			14,813
U.S. government agencies			29,613				(592	)			29,021
U.S. agency mortgage-backed securities			51,964				24				51,988
U.S. agency collateralized mortgage obligations			30,917				160				31,077
Asset-backed securities			100,998				221				101,219
Corporate bonds			82,617				(108	)			82,509
Obligations of states and political subdivisions			242,807				4,659				247,466
Total debt securities			553,737				4,356				558,093
Equity securities			8,810				172				8,982
Total securities			562,547				4,528				567,075

 

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 establishes guidelines to promote diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk.

 

The Corporation purchased $19.5 million of U.S. Treasuries during the first quarter of 2022, and held $14.8 million at the end of 2021, resulting in a 131.5% increase in this sector. This sector 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 $3.1 million, or 10.8%, since December 31, 2021. Management has purchased Non-agency MBS and CMO securities since December 31, 2021, totaling $23.0 million, or 3.8% of the total portfolio. This sector will better structure the portfolio to achieve higher yields and shorten the duration while also protecting in a rates-up environment.

 

The Corporation’s U.S. agency MBS and CMO sectors have increased slightly since December 31, 2021, with MBS increasing $2.1 million, or 4.0%, and CMOs increasing $3.4 million, or 10.8%. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions. U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. The combined effect of all of these instruments paying monthly principal and interest provides the Corporation with a reasonably stable base cash flow of approximately $2.0 - $3.0 million per month. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield.

 

The Corporation’s asset-backed securities declined by $10.4 million, or 10.3%, from December 31, 2021, to March 31, 2022. Many of the bonds in this sector receive regular monthly principal payments which caused the value to decline.

Additionally, some asset-backed securities were sold at gains in the first quarter of 2022 to support the Corporation’s earnings and liquidity position.

 

As of March 31, 2022, the fair value of the Corporation’s corporate bonds decreased by $3.7 million, or 4.5%, from balances at December 31, 2021. Like any security, corporate bonds have both positive and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held.

 

Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. Municipal securities were purchased throughout 2020 and 2021 due to market conditions that led to favorable yields on some instruments. Municipal bonds represented 41.5% of the securities portfolio as of March 31, 2022, compared to 43.6% as of December 31, 2021.

 

Loans

 

Net loans outstanding increased by 13.1%, to $937.6 million at March 31, 2022, from $829.2 million at March 31, 2021. Net loans increased by 3.3%, an annualized rate of 13.0%, from $908.0 million at December 31, 2021. The following table shows the composition of the loan portfolio as of March 31, 2022, December 31, 2021, and March 31, 2021.

 

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

 

		March 31,								December 31,								March 31,
		2022								2021								2021
		$				%				$				%				$				%
Commercial real estate
Commercial mortgages			180,792				19.1				177,396				19.3				144,939				17.2
Agriculture mortgages			200,406				21.1				203,725				22.2				178,070				21.2
Construction			56,934				6.0				19,639				2.1				21,317				2.5
Total commercial real estate			438,132				46.2				400,760				43.6				344,326				40.9
Consumer real estate (a)
1-4 family residential mortgages			303,409				32.0				317,037				34.5				265,127				31.5
Home equity loans			11,819				1.2				11,181				1.2				10,614				1.3
Home equity lines of credit			77,499				8.2				75,698				8.2				70,898				8.4
Total consumer real estate			392,727				41.4				403,916				43.8				346,639				41.2
Commercial and industrial
Commercial and industrial			67,146				7.1				65,615				7.1				111,036				13.2
Tax-free loans			23,295				2.5				23,009				2.5				16,233				1.9
Agriculture loans			22,151				2.3				20,717				2.3				18,466				2.2
Total commercial and industrial			112,592				11.9				109,341				11.9				145,735				17.3
Consumer			5,141				0.5				5,132				0.6				4,827				0.6
Total loans			948,592				100.0				919,149				100.0				841,527				100.0
Less:
Deferred loan fees (costs), net			1,979								1,755								407
Allowance for credit losses			(12,979	)							(12,931	)							(12,690	)
Total net loans			937,592								907,973								829,244

 

(a)	Residential real estate loans do not include mortgage loans serviced for others which totaled $304,290,000 as of March 31, 2022, $289,263,000 as of December 31, 2021, and $253,527,000 as of March 31, 2021.

 

There was moderate growth in the loan portfolio since December 31, 2021, and March 31, 2021. Most major loan categories showed an increase in balances from both time periods with the exception of the consumer real estate which showed a decline due to a reclassification of balances to commercial construction during the first quarter of 2022, representing loans now properly coded as construction that were previously included in the consumer real estate segment. Additionally, commercial and industrial loans showed a decline due to the forgiveness of PPP loans since March 31, 2021.

 

The commercial real estate category represents the largest group of loans for the Corporation. Commercial real estate makes up 46.2% of total loans as of March 31, 2022, compared to 40.9% of total loans as of March 31, 2021. Within the commercial real estate segment, the increase has primarily been construction loans which was a direct result of reclassification from 1-4 family residential loans in the first quarter of 2022. The Corporation’s commercial construction loan balances increased by $35.6 million, or 167.1%, from March 31, 2021 to March 31, 2022. Commercial construction loans were 6.0% of the total loan portfolio as of March 31, 2022, and 2.5% as of March 31, 2021.

 

Commercial mortgages increased $35.9 million, or 24.7%, from balances at March 31, 2021. Commercial mortgages as a percentage of the total loan portfolio increased to 19.1% as of March 31, 2022, compared to 17.2% at March 31, 2021. Agricultural mortgages increased by $22.3 million, or 12.5%, from $178.1 million as of March 31, 2021, to $200.4 million as of March 31, 2022. Agricultural mortgages were 21.1% of the portfolio as of March 31, 2022, compared to 21.2% as of March 31, 2021.

 

The consumer residential real estate category of total loans increased from $346.6 million on March 31, 2021, to $392.7 million on March 31, 2022, a 13.3% 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 March 31, 2021, this percentage was 41.2%, and as of March 31, 2022, it increased to 41.4%. Although economic conditions for consumers had deteriorated with the COVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continued to remain relatively strong as consumers refinanced existing debt to lower rates.

 

The first lien 1-4 family mortgages increased by $38.3 million, or 14.4%, from March 31, 2021, to March 31, 2022. These first lien 1-4 family loans made up 76.5% of the residential real estate total as of March 31, 2021, and 77.3% as of March 31, 2022. 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 first quarter of 2022, mortgage production decreased 16% from the previous quarter and was down 3% from the first quarter of 2021.  Purchase money origination constituted 76% of the Corporation’s mortgage originations for the quarter, with construction-only and construction-permanent loans making up 65% of that mix.  With a higher volume of new construction business in combination with a rising interest rate environment, the percentage of mortgage originations being added into the Corporation’s held-for-investment mortgage portfolio increased quarter-over-quarter.  In the first quarter of 2022, 75% of all mortgage originations were held in the mortgage portfolio, 47% of which were adjustable rate mortgages.  As of March 31, 2022, ARM balances were $142.6 million, representing 47.0% of the 1-4 family residential loan portfolio of the Corporation.  With a decline in dollar volume of loans being delivered into the secondary market and an unprecedented increase in mortgage rates, the gains on the sale of mortgages declined quarter-over-quarter. 

 

As of March 31, 2022, the remainder of the residential real estate loans consisted of $11.8 million of fixed rate junior lien home equity loans, and $77.5 million of variable rate home equity lines of credit (HELOCs). This compares to $10.6 million of fixed rate junior lien home equity loans, and $70.9 million of HELOCs as of March 31, 2021. Therefore, combined, these two types of home equity loans increased from $81.5 million to $89.3 million, an increase of 9.6%.

 

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 11.9% of total loans as of March 31, 2022, a decline from the 17.3% at March 31, 2021. The balance of total commercial and industrial loans decreased from $145.7 million at March 31, 2021, to $112.6 million at March 31, 2022, a 29.4% 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 March 31, 2022 and March 31, 2021, also includes the PPP

loans, which have declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. The total balance of PPP loans declined by $53.4 million, or 91.8% from March 31, 2021, to March 31, 2022.

 

The consumer loan portfolio increased slightly from $4.8 million at March 31, 2021, to $5.1 million at March 31, 2022, a 6.3% increase. The consumer loan portfolio represents 0.5% of total loans. The long-term trend over the past decade has seen homeowners turning to the equity in their homes to finance cars and education rather than traditional consumer loans that are generally unsecured. Demand for unsecured credit is being matched by principal payments on existing loans resulting in stable balances.

 

Non-Performing Assets

 

Non-performing assets include:

 

·

Nonaccrual loans

·

Loans past due 90 days or more and still accruing

·

Non-performing troubled debt restructurings

·

Other real estate owned

 

 

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)  

		March 31,				December 31,				March 31,
		2022				2021				2021
		$				$				$
Nonaccrual loans			3,553				2,556				681
Loans past due 90 days or more and still accruing			86				325				152
Troubled debt restructurings, non-performing			—				—				—
Total non-performing loans			3,639				2,881				833
Other real estate owned			—				—				—
Total non-performing assets			3,639				2,881				833
Non-performing assets to net loans			0.39%				0.31%				0.10%

 

The total balance of non-performing assets increased by $2.8 million, or 336.9% from balances at March 31, 2021, and increased by $0.8 million, or 26.3%, from balances at December 31, 2021. There were no non-performing TDR loans in any of the periods presented. A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender. Non-accrual loans increased by $2.9 million, or 421.6%, since March 31, 2021, and increased $1.0 million, or 39.0% since December 31, 2021. The increase that occurred between December 31, 2021 and March 31, 2022 was primarily due to one agricultural relationship that was added to non-accrual in the first quarter of 2022 in the amount of $963,000. Loans past due 90 days or more and still accruing were down $66,000 from the prior year period, and down by $239,000, or 73.5% since December 31, 2021.

 

There was no other real estate owned (OREO) as of March 31, 2022, December 31, 2021, or March 31, 2021.

 

Allowance for Credit Losses

 

The allowance for credit losses is established to cover any losses inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses in accordance with generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in the loan portfolio. The allowance calculation includes specific provisions for under-performing loans and general allocations to cover anticipated losses on all loan types based on historical losses. The calculation is also influenced by nine qualitative factors that are adjusted on a quarterly basis as needed. Based on the quarterly credit

loss calculation, management will adjust the allowance for credit losses through the provision as necessary. Changes to the allowance for credit losses during the year are primarily affected by five main factors:

 

·

Historical loan losses

·

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

·

Growth trends of the loan portfolio

·

Recovery of loans previously charged off

·

Provision for loan losses

  

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Net Charge-Off table below shows the net charge-offs as a percentage of average loans outstanding for each segment of the Corporation’s loan portfolio as of March 31, 2022 and 2021.

 

 

Net Charge-Offs

(DOLLARS IN THOUSANDS)  

		March 31,				March 31,
		2022				2021
		$				$
Loans charged-off:
Commercial real estate			65				—
Consumer real estate			—				—
Commercial and industrial			—				—
Consumer			1				14
Total loans charged-off			66				14
Recoveries of loans previously charged-off
Commercial real estate			—				—
Consumer real estate			3				—
Commercial and industrial			10				1
Consumer			1				1
Total recoveries			14				2
Net charge-offs (recoveries)
Commercial real estate			65				—
Consumer real estate			(3	)			—
Commercial and industrial			(10	)			(1	)
Consumer			—				13
Total net charge-offs (recoveries)			52				12
Average loans outstanding
Commercial real estate			401,076				342,913
Consumer real estate			359,981				308,943
Commercial and industrial			164,553				181,591
Consumer			5,548				5,507
Total average loans outstanding			931,158				838,954
Net charge-offs (recoveries) as a % of average loans outstanding
Commercial real estate			0.02%				0.00%
Consumer real estate			0.00%				0.00%
Commercial and industrial			(0.01)%				0.00%
Consumer			0.00%				0.24%
Total net charge-offs (recoveries) as a % of average loans outstanding			0.01%				0.00%

 

The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period. The Corporation has historically experienced very low net charge-off percentages due to conservative credit practices. As of March 31, 2022, net charge-offs were $52,000,

representing a net charge off position of 0.01% of average loans outstanding as reflected above. As of March 31, 2021, net charge-offs were very low at $12,000, resulting in a net charge-off as a percentage of average loans of 0.00% for the quarter.

 

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

 

The Corporation’s level of classified loans was $17.0 million on March 31, 2022, compared to $21.9 million on March 31, 2021. Total classified loans have decreased from the prior year. 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 $251,000 of specifically allocated allowance against the classified loans as of March 31, 2022, $147,000 of specific allocation as of December 31, 2021, and $1.1 million of specific allocation as of March 31, 2021. The higher specific allocation at March 31, 2021, was related to a commercial customer with ongoing business concerns. This loan paid off during the third quarter of 2021, resulting in a decline in the provision for loan losses.

 

The allowance as a percentage of total loans was 1.37% as of March 31, 2022, and 1.51% as of March 31, 2021. It is typical for the allowance for credit losses to contain a small amount of excess reserves. Over the long term, management targets an excess reserve at approximately 5%-10% knowing that the reserve can fluctuate. The excess reserve stood at 4.7% as of March 31, 2022.

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation, decreased by $0.4 million, or 1.4%, to $24.4 million as of March 31, 2022, from $24.7 million as of March 31, 2021. As of March 31, 2022, $137,000 was classified as construction in process compared to $89,000 as of March 31, 2021. Fixed assets declined as a result of depreciation outpacing new purchases year over year.

 

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 $5.4 million of regulatory stock holdings as of March 31, 2022, consisted of $4.7 million of FHLB of Pittsburgh stock, $631,000 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 $4.7 million on March 31, 2022, $4.7 million on December 31, 2021, and $5.6 million on March 31, 2021, with no excess capital stock position. Any future stock repurchases would be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.

 

Deposits

 

The Corporation’s total ending deposits at March 31, 2022, increased by $5.7 million, or 0.4%, and by $192.6 million, or 14.5%, from December 31, 2021, and March 31, 2021, 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 March 31, 2021, with the changes being a $95.5 million, or 16.5% increase in non-interest bearing demand deposit accounts, a $19.6 million, or 42.1% increase in interest bearing demand balances, a $8.9 million, or 7.1% increase in NOW balances, a $13.6

million, or 9.0% increase in money market account balances, a $60.0 million, or 19.8% increase in savings account balances, and a $5.0 million, or 4.2% decrease in time deposit balances.

 

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

 

 

The Deposits by Major Classification table, shown below, provides the balances of each category for March 31, 2022, December 31, 2021, and March 31, 2021.

 

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

		March 31,				December 31,				March 31,
		2022				2021				2021
		$				$				$
Non-interest bearing demand			675,519				686,278				580,003
Interest bearing demand			66,083				63,015				46,509
NOW accounts			134,018				139,366				125,101
Money market deposit accounts			164,893				168,327				151,297
Savings accounts			363,300				341,291				303,324
Time deposits			114,144				113,936				119,153
Total deposits			1,517,957				1,512,213				1,325,387

 

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

 

·

Convenience and service provided

·

Current rates paid on deposits relative to competitor rates

·

Level of and perceived direction of interest rates

·

Financial condition and perceived safety of the institution

·

Possible risks associated with other investment opportunities

·

Level of fees on deposit products

 

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of March 31, 2022, time deposit balances had decreased $5.0 million, or 4.2%, from March 31, 2021, and increased $0.2 million, or 0.2% from December 31, 2021. The Corporation has experienced a slow and steady shift in deposit trends over the past five years as customers have moved money from time deposits into core checking and savings accounts. With the Federal Reserve rate decreases in 2020, there is minimal differences between shorter term CD rates and interest bearing non-maturity deposits, influencing customers to accumulate their funds in a liquid account that can be accessed at any time. This has resulted in declining time deposit balances and more significant growth in the core deposit areas.

 

Borrowings

 

Total borrowings were $63.9 million, $63.9 million, and $72.4 million as of March 31, 2022, December 31, 2021, and March 31, 2021, respectively. There were no short-term funds outstanding at the end of any time period. 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 $44.2 million as of March 31, 2022, $44.2 million as of December 31, 2021, and $52.8 million as of March 31, 2021. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. The decrease in FHLB borrowings since March 31, 2021, 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.

 

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $528.7 million. The Corporation’s internal policy limits are far more restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.

 

In addition to the long-term advances funded through the FHLB, on December 30, 2020, the Corporation completed the sale of a subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt notes with a maturity date of December 30, 2030. These notes are non-callable for 5 years and carry a fixed interest rate of 4% per year for 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of March 31, 2022, $16.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date on a pro-rata basis.

 

Stockholders’ Equity

 

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

 

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

 

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

REGULATORY CAPITAL RATIOS:
					Regulatory Requirements
					Adequately		Well
As of March 31, 2022			Capital Ratios		Capitalized		Capitalized
Total Capital to Risk-Weighted Assets
	Consolidated		15.2%		N/A		N/A
	Bank		14.3%		8.0%		10.0%
Tier 1 Capital to Risk-Weighted Assets
	Consolidated		12.2%		N/A		N/A
	Bank		13.1%		6.0%		8.0%
Common Equity Tier 1 Capital to Risk-Weighted Assets
	Consolidated		12.2%		N/A		N/A
	Bank		13.1%		4.5%		6.5%
Tier 1 Capital to Average Assets
	Consolidated		8.0%		N/A		N/A
	Bank		8.9%		4.0%		5.0%
As of December 31, 2021
Total Capital to Risk-Weighted Assets
	Consolidated		15.6%		N/A		N/A
	Bank		14.9%		8.0%		10.0%
Tier I Capital to Risk-Weighted Assets
	Consolidated		12.5%		N/A		N/A
	Bank		13.6%		6.0%		8.0%
Common Equity Tier I Capital to Risk-Weighted Assets
	Consolidated		12.5%		N/A		N/A
	Bank		13.6%		4.5%		6.5%
Tier I Capital to Average Assets
	Consolidated		8.2%		N/A		N/A
	Bank		9.1%		4.0%		5.0%
As of March 31, 2021
Total Capital to Risk-Weighted Assets
	Consolidated		16.8%		N/A		N/A
	Bank		16.2%		8.0%		10.0%
Tier 1 Capital to Risk-Weighted Assets
	Consolidated		13.4%		N/A		N/A
	Bank		14.9%		6.0%		8.0%
Common Equity Tier 1 Capital to Risk-Weighted Assets
	Consolidated		13.4%		N/A		N/A
	Bank		14.9%		4.5%		6.5%
Tier 1 Capital to Average Assets
	Consolidated		8.6%		N/A		N/A
	Bank		9.5%		4.0%		5.0%

 

As of March 31, 2022 the Bank’s Tier 1 Leverage Ratio stood at 8.9% while the Corporation’s Tier 1 Leverage Ratio was 8.0%. 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.

 

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 March 31, 2022.

 

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS) 

		March 31,
		2022
		$
Commitments to extend credit:
Revolving home equity			163,135
Construction loans			49,847
Real estate loans			88,950
Business loans			182,622
Consumer loans			1,452
Other			5,384
Standby letters of credit			12,125
Total			503,515

 

Significant Legislation

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

 

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

 

Holding Company Capital Requirements

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

 

Deposit Insurance

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

Corporate Governance

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

 

Consumer Financial Protection Bureau

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

 

Interstate Branching

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

 

Limits on Interstate Acquisitions and Mergers

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

·

Credit risk

·

Liquidity risk

·

Interest rate risk

 

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

 

Credit Risk

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

 

Liquidity Risk

Liquidity refers to having an adequate supply of cash available to meet business needs. Financial institutions must ensure that there is adequate liquidity to meet a variety of funding needs, at a minimal cost. Funding new loans and covering deposit withdrawals are the primary liquidity needs of the Corporation. The Corporation uses a variety of funding sources to meet liquidity needs, such as deposits, loan repayments, cash flows from securities, borrowings, and current earnings.

 

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

 

Management uses a cumulative maturity gap analysis to measure the amount of assets maturing within various periods versus liabilities maturing in those same periods. A gap ratio of 100% represents an equal amount of assets and liabilities maturing in the same stated period. Management monitors six-month, one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. As of March 31, 2022, all maturity gap ratios were higher than corporate policy guidelines, due to a larger amount of loans, securities, and cash balances now maturing in less than five years. The six-month gap ratio was 193.3%, compared to an upper policy guideline of 155%; the one-year gap ratio was 175.6%, compared to an upper policy guideline of 140%; the three-year gap ratio was 167.5%, compared to an upper guideline of 125%; and the five-year gap ratio was 167.8%, compared to an upper policy guideline of 115%. In a rising interest rate cycle higher gap ratios would be more beneficial to the Corporation. 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 higher 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 positively impacts future performance in the current rates-up interest rate scenario as there are more assets repricing to higher rates than liabilities. Management will continue to monitor and manage the length of the balance sheet in order to sustain reasonable asset yields in the current rising rate environment.

 

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

 

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

 

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. In the past two years, 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 2021 and 2022 even with steady loan growth. As of March 31, 2022, the loan-to-deposit ratio was 62.6%, compared to 60.9%, at December 31, 2021, and 63.5% at March 31, 2021.

 

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 to the same degree as the overnight Federal Funds rate. The Corporation’s average cost of funds was 13 basis points as of March 31, 2022, which is low from an historic perspective. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts.

 

Deposits had not been very rate sensitive for a number of years as a result of the limited desirable rates available to deposit customers. With low deposit rates throughout 2021 and into 2022, deposit growth has been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations.

 

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 decline from current levels as 2022 progresses.

 

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 March 31, 2022, the Corporation was within guidelines for all of the above measurements except for securities portfolio liquidity as a percentage of total assets and as a percentage of the portfolio. These ratios were 1.9% and 5.3%, respectively, compared to a policy range of 4% - 8% and 10% - 20%. This was primarily due to a much higher balance sheet at March 31, 2022. Investment liquidity is moderate in the current rate environment but has decreased as a percentage of the portfolio because of the rapid growth in investment balances.

 

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

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

 

·

Changes in net interest income

·

Changes in net portfolio value

 

Financial modeling is used to forecast net interest income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under seven different interest rate scenarios that can vary according to the present level of interest rates. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, or 300 basis points, or decrease 25, 50, or 75 basis points.

 

The 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 March 31, 2022. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis to be the most conservative and most accurate means to evaluate fair value and future interest rate risk.

 

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

 

Changes in Net Interest Income

 

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

 

The first quarter 2022 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of March 31, 2022, the Corporation was within guidelines for the maximum amount of net interest income change in all rate scenarios. The up-300 rate scenario shows a positive impact to net interest income. The

increase in net interest income in the up-300 rate scenario is largely due to the variable rate securities and loans held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates so deposit rates move at a fraction of the full overnight rate movement. Loans that are Prime-based will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by 200 or 300 basis points where variable loan rates will still increase by the same amount as the Prime rate.

 

For the rates-up 100 basis point scenario, net interest income decreases by 0.4% 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 decreases by 0.6% and increases by 0.7%, respectively, compared to the rates unchanged scenario. Management’s maximum permitted net interest income declines by policy are -5%, -10%, and -15%, for the rates-up 100, 200, and 300 basis point scenarios, respectively.

 

The positive impact of higher rates is slightly less than it was in previous quarters due partially to the assumption that deposit rates will need to be moved up proportionately as the Fed moves the overnight rate up. Additionally, the Corporation has a fairly long investment portfolio and a longer loan portfolio than in previous time periods due to the increase in residential mortgages as well as longer commercial loans. However, net interest income should increase as rates rise 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 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 more aggressive rates-up 300 basis point scenario also benefits from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. The change 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 up 300 rate environment, although less of a benefit than prior timeframes.

 

As of March 31, 2022, in the down scenarios of -25, -50, and -75 basis points, net interest income decreases by 0.7%, 1.4%, and 2.1%, respectively, compared to policy guidelines of -1.25%, -2.5% and -3.75%. Management does not expect the Corporation’s exposure to interest rate changes to increase or change significantly during the remainder of 2022.

 

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.

 

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 March 31, 2022, the Corporation was within guidelines for all rate scenarios. The Corporation shows a favorable benefit to net portfolio value in the rising rate scenarios, due primarily to the elevated amount of core deposits on the Corporation’s balance sheet as of March 31, 2022. 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 March 31, 2022, indicate that the Corporation’s net portfolio value would experience valuation gains of 3.9%, 3.7%, and 4.9% 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 -3.0%, -6.6%, and -10.6%, respectively, compared to policy guidelines of -3.75%, -7.5%, and -11.25%. The Corporation’s expected valuation loss was within guidelines for all down-rate scenarios. The Federal Reserve has signaled that their preferred course of action is to have several additional rate hikes in 2022. The behavior of the Corporation’s deposits will continue to have an impact on the Corporation’s net portfolio value. With the large balances in the Corporation’s core deposits, management is very well situated in an increasing rate environment to maintain a low cost of funds, as core deposits become more valuable.

 

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.

 

 

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 (Principal Executive Officer) and Treasurer (Principal Financial Officer), of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2022, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer (Principal Executive Officer) along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure controls and procedures as of March 31, 2022, 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.

  

 

PART II – OTHER INFORMATION

March 31, 2022

 

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, 2021 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 March 31, 2022.

 

 

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 *

January 2022

—

—

—

167,100

February 2022

—

—

—

167,100

March 2022

—

—

—

167,100

Total

—

 

* 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 March 31, 2022, a total of 32,900 shares were repurchased at a total cost of $669,000 for an average cost per share of $20.33.

 

Item 3. Defaults Upon Senior Securities – Nothing to Report

 

Item 4. Mine Safety Disclosures – Not Applicable

 

Item 5. Other Information – Nothing to Report

 

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 Nonqualified 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.)
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)).

 

 

 

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:  May 12, 2022	By:	/s/  Jeffrey S. Stauffer
		Jeffrey S. Stauffer
		Chairman of the Board
		Chief Executive Officer and President
		Principal Executive Officer
Dated: May 12, 2022	By:	/s/  Rachel G. Bitner
		Rachel G. Bitner
		Treasurer
		Principal Financial Officer