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ENB Financial Corp - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2023

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)

 

Pennsylvania   000-53297   51-0661129
(State or Other Jurisdiction of Incorporation)   (Commission File Number)   (IRS Employer Identification No)
         
31 E. Main St., Ephrata, PA   17522-0457    
(Address of principal executive offices)   (Zip Code)    

 

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

 

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

 

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

 

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

 

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

Yes ☒            No ☐

 

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

Yes ☒            No ☐

 

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

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

 

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

 

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

Yes ☐            No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 1, 2023, the registrant had 5,656,029 shares of $0.10 (par) Common Stock outstanding.

 

 

 

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 2023

 

Part I – FINANCIAL INFORMATION  
       
  Item 1. Financial Statements  
       
  Consolidated Balance Sheets at September 30, 2023 and 2022, and December 31, 2022 (Unaudited) 3
       
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 4
       
  Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 5
       
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 6
       
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (Unaudited) 7
       
  Notes to the Unaudited Consolidated Interim Financial Statements 8-31
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32-52
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 53-55
       
  Item 4. Controls and Procedures 56
       
       
Part II – OTHER INFORMATION 57
       
  Item 1. Legal Proceedings 57
       
  Item 1A. Risk Factors 57
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57
       
  Item 3. Defaults upon Senior Securities 58
       
  Item 4. Mine Safety Disclosures 58
       
  Item 5. Other Information 58
       
  Item 6. Exhibits 59
       
       
SIGNATURE PAGE 60

 

2 

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

 

   September 30,   December 31,   September 30, 
   2023   2022   2022 
   $   $   $ 
ASSETS               
Cash and due from banks   24,962    28,935    27,623 
Interest-bearing deposits in other banks   13,797    8,637    22,953 
Total cash and cash equivalents   38,759    37,572    50,576 
Securities available for sale (at fair value, net of allowance for credit losses of $0)   438,152    529,142    559,646 
Equity securities (at fair value)   9,041    9,118    8,951 
Loans held for sale   1,081    5,927    5,131 
Loans (net of unearned income)   1,335,597    1,191,117    1,114,504 
Less: Allowance for credit losses   16,349    14,151    14,150 
Net loans   1,319,248    1,176,966    1,100,354 
Premises and equipment   25,339    25,333    24,598 
Regulatory stock   8,283    6,670    5,897 
Bank owned life insurance   35,415    34,805    35,995 
Other assets   33,229    33,183    33,156 
Total assets   1,908,547    1,858,716    1,824,304 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
Liabilities:               
Deposits:               
Noninterest-bearing   583,145    672,342    670,563 
Interest-bearing   1,077,845    966,616    961,286 
Total deposits   1,660,990    1,638,958    1,631,849 
Short-term borrowings   
    16,000    15,000 
Long-term debt   98,528    58,039    44,206 
Subordinated debt   39,516    39,396    39,356 
Other liabilities   12,011    8,988    7,738 
Total liabilities   1,811,045    1,761,381    1,738,149 
Stockholders' equity:               
Common stock, par value $0.10               
Shares:  Authorized 24,000,000               
Issued 5,739,114 and Outstanding 5,651,378 as of 9/30/23, 5,635,533 as of 12/31/22, and 5,625,146 as of 9/30/22   574    574    574 
Capital surplus   4,237    4,437    4,475 
Retained earnings   147,033    142,677    138,760 
Accumulated other comprehensive loss, net of tax   (52,721)   (48,292)   (55,381)
Less: Treasury stock cost on 87,737 shares as of 9/30/23, 103,581 as of 12/31/22, and 113,969 as of 9/30/22   (1,621)   (2,061)   (2,273)
Total stockholders' equity   97,502    97,335    86,155 
Total liabilities and stockholders' equity   1,908,547    1,858,716    1,824,304 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

3 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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

 

   Three Months ended September 30,   Nine Months ended September 30, 
   2023   2022   2023   2022 
   $   $   $   $ 
Interest and dividend income:                    
Interest and fees on loans   15,892    11,022    44,540    29,357 
Interest on securities available for sale                    
Taxable   2,900    2,654    8,753    6,090 
Tax-exempt   736    1,074    2,265    3,182 
Interest on deposits at other banks   227    55    474    139 
Dividend income   282    167    803    367 
Total interest and dividend income   20,037    14,972    56,835    39,135 
Interest expense:                    
Interest on deposits   5,390    608    12,348    1,168 
Interest on borrowings   1,289    775    3,668    1,683 
Total interest expense   6,679    1,383    16,016    2,851 
Net interest income   13,358    13,589    40,819    36,284 
(Release) provision for credit losses   (504)   550    1,568    1,300 
Net interest income after (release) provision for credit losses   13,862    13,039    39,251    34,984 
Other income:                    
Trust and investment services income   663    680    2,122    1,979 
Service fees   1,382    791    3,404    2,063 
Commissions   917    941    2,729    2,762 
(Losses) gains on the sale of debt securities, net       
    (1,364)   139 
(Losses) gains on equity securities, net   (103)   9    (405)   (129)
Gains on sale of mortgages   180    186    506    1,249 
Earnings on bank-owned life insurance   245    242    708    667 
Other income   271    331    931    1,145 
Total other income   3,555    3,180    8,631    9,875 
Operating expenses:                    
Salaries and employee benefits   7,350    6,607    22,706    19,826 
Occupancy   833    713    2,429    2,125 
Equipment   327    312    996    913 
Advertising & marketing   387    259    1,074    833 
Computer software & data processing   1,798    1,727    5,277    4,251 
Shares tax   252    351    851    1,053 
Professional services   922    720    2,428    1,983 
Other expense   1,164    824    2,838    2,614 
Total operating expenses   13,033    11,513    38,599    33,598 
Income before income taxes   4,384    4,706    9,283    11,261 
Provision for federal income taxes   771    697    1,432    1,503 
Net income   3,613    4,009    7,851    9,758 
Earnings per share of common stock   0.64    0.71    1.39    1.74 
Cash dividends paid per share   0.17    0.17    0.51    0.51 
Weighted average shares outstanding   5,647,965    5,611,279    5,640,214    5,597,301 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

4 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

 

   Three Months ended September 30,  Nine Months Ended September 30,
   2023  2022  2023  2022
   $  $  $  $
Net income   3,613    4,009    7,851    9,758 
Other comprehensive (loss) income, net of tax:                    
Securities available for sale not other-than-temporarily impaired:                    
                     
Unrealized losses arising during the period   (14,528)   (23,500)   (6,971)   (74,319)
Income tax effect   3,051    4,935    1,464    15,607 
    (11,477)   (18,565)   (5,507)   (58,712)
Losses (gains) recognized in earnings   
    
    1,364    (139)
Income tax effect   
    
    (286)   29 
    
    
    1,078    (110)
Other comprehensive loss, net of tax   (11,477)   (18,565)   (4,429)   (58,822)
Comprehensive (Loss) Income   (7,864)   (14,556)   3,422    (49,064)

 

See Notes to the Unaudited Consolidated Interim Financial Statements

5 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

 

            Accumulated      
            Other     Total
   Common  Capital  Retained  Comprehensive  Treasury  Stockholders'
   Stock  Surplus  Earnings  Income (Loss)  Stock  Equity
   $  $  $  $  $  $
Balances, December 31, 2021   574    4,520    131,856    3,441    (3,103)   137,288 
Net income   
    
    3,191    
    
    3,191 
Other comprehensive loss net of tax   
    
    
    (23,739)   
    (23,739)
Treasury stock issued - 11,196 shares   
    24    
    
    224    248 
Cash dividends paid, $0.17 per share   
    
    (949)   
    
    (949)
Balances, March 31, 2022   574    4,544    134,098    (20,298)   (2,879)   116,039 
Net income   
    
    2,558    
    
    2,558 
Other comprehensive loss net of tax   
    
    
    (16,518)   
    (16,518)
Treasury stock purchased - 3,000 shares   
    
    
    
    (53)   (53)
Treasury stock issued - 18,418 shares   
    (42)   
    
    368    326 
Cash dividends paid, $0.17 per share   
    
    (951)   
    
    (951)
Balances, June 30, 2022   574    4,502    135,705    (36,816)   (2,564)   101,401 
Net income   
    
    4,009    
    
    4,009 
Other comprehensive loss net of tax   
    
    
    (18,565)   
    (18,565)
Treasury stock issued - 14,575 shares   
    (27)   
    
    291    264 
Cash dividends paid, $0.17 per share   
    
    (954)   
    
    (954)
Balances, September 30, 2022   574    4,475    138,760    (55,381)   (2,273)   86,155 
                               
Balances, December 31, 2022   574    4,437    142,677    (48,292)   (2,061)   97,335 
Cumulative effect of adoption of ASU 2016-13   
    
    (619)   
    
    (619)
Net income   
    
    2,441    
    
    2,441 
Other comprehensive income net of tax   
    
    
    7,659    
    7,659 
Stock-based compensation expense   
    14    
    
    
    14 
Treasury stock purchased - 8,903 shares   
    
    
    
    (147)   (147)
Treasury stock issued - 19,523 shares   
    (110)   
    
    383    273 
Cash dividends paid, $0.17 per share   
    
    (957)   
    
    (957)
Balances, March 31, 2023   574    4,341    143,542    (40,633)   (1,825)   105,999 
Net income   
    
    1,797    
    
    1,797 
Other comprehensive loss net of tax   
    
    
    (611)   
    (611)
Stock-based compensation expense   
    15    
    
    
    15 
Treasury stock purchased - 12,431 shares   
    
    
    
    (168)   (168)
Treasury stock issued - 20,692 shares   
    (97)   
    
    358    261 
Cash dividends paid, $0.17 per share   
    
    (959)   
    
    (959)
Balances, June 30, 2023   574    4,259    144,380    (41,244)   (1,635)   106,334 
Net income   
    
    3,613    
    
    3,613 
Other comprehensive loss net of tax   
    
    
    (11,477)   
    (11,477)
Stock-based compensation expense   
    17    
    
    
    17 
Treasury stock purchased - 8,800 shares   
    
    
    
    (125)   (125)
Treasury stock issued - 5,763 shares   
    (39)   
    
    139    100 
Cash dividends paid, $0.17 per share   
    
    (960)   
    
    (960)
Balances, September 30, 2023   574    4,237    147,033    (52,721)   (1,621)   97,502 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

6 

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS) 

  Nine Months Ended September 30,
   2023  2022
   $  $
Cash flows from operating activities:          
Net income   7,851    9,758 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization of securities premiums and discounts and loan fees   3,512    3,854 
Increase in interest receivable   (483)   (1,254)
Increase in interest payable   1,501    526 
Provision for credit losses   1,568    1,300 
Losses (gain) on the sale of debt securities, net   1,364    (139)
Losses on equity securities, net   405    129 
Gains on sale of mortgages   (506)   (1,249)
Loans originated for sale   (23,149)   (28,164)
Proceeds from sales of loans   28,501    27,476 
Earnings on bank-owned life insurance   (708)   (667)
Depreciation of premises and equipment and amortization of software   1,488    1,207 
Deferred income tax   (282)   (83)
Amortization of deferred fees on subordinated debt   120    76 
Stock-based compensation expense   46    
 
Other assets and other liabilities, net   1,635    2,459 
Net cash provided by operating activities   22,863    15,229 
           
Cash flows from investing activities:          
Securities available for sale:          
Proceeds from maturities, calls, and repayments   26,660    35,605 
Proceeds from sales   61,089    8,575 
Purchases   (6,982)   (123,852)
Equity securities          
Proceeds from sales   
    151 
Purchases   (328)   (249)
Purchase of regulatory bank stock   (2,398)   (974)
Redemptions of regulatory bank stock   785    457 
Proceeds from bank-owned life insurance   2,078    
 
Net increase in loans   (144,729)   (193,735)
Purchases of premises and equipment, net   (1,191)   (1,106)
Purchase of computer software   (499)   (141)
Net cash used for investing activities   (65,515)   (275,269)
Cash flows from financing activities:          
Net (decrease) increase in demand, NOW, and savings accounts   (104,636)   123,598 
Net increase (decrease) in time deposits   126,668    (3,962)
Proceeds from short-term borrowings   
    15,000 
Repayments of short-term debt   (16,000)   
 
Proceeds from long-term debt   46,989    19,600 
Repayments of long-term debt   (6,500)   
 
Dividends paid   (2,876)   (2,854)
Proceeds from sale of treasury stock   634    838 
Treasury stock purchased   (440)   (53)
Net cash provided by financing activities   43,839    152,167 
Increase (decrease) in cash and cash equivalents   1,187    (107,873)
Cash and cash equivalents at beginning of period   37,572    158,449 
Cash and cash equivalents at end of period   38,759    50,576 
Supplemental disclosures of cash flow information:          
Interest paid   14,514    2,325 
Income taxes paid   1,375    1,200 
Supplemental disclosure of non-cash investing and financing activities:          
Fair value adjustments for securities available for sale   (5,607)   (74,458)
Recognition of lease operating right-of-use assets   
    2,811 
Recognition of operating lease liabilities   
    2,811 

 

See Notes to the Unaudited Consolidated Interim Financial Statements

7 

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 third quarter of 2023, is reporting on the results of operations and financial condition of ENB Financial Corp on a consolidated basis.

 

Operating results for the nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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, 2022.

 

Accounting Pronouncements Adopted in 2023

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investments in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Corporation. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

 

The Corporation adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Corporation recorded a cumulative effect decrease to retained earnings of $619,000, net of tax, of which $537,000 related to loans, $82,000 related to unfunded commitments, and $0 related to available-for-sale securities.

 

The Corporation has elected to exclude accrued interest receivable from the measurement of its allowance for credit losses (ACL). When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

 

The Corporation adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023, using the prospective transition approach, though no such charges had been recorded on the securities held by the Corporation as of the date of adoption.

 

In connection with the adoption of ASU 2016-13, the Corporation made changes to the loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 5 Loans and Allowance for Credit Losses for further discussion of these portfolio segments. The new segmentation consists of: Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied Commercial Real Estate, and Residential Real Estate.

 

The impact of the change from the incurred loss model to the current expected credit loss model and the reclassification of loans for the identification of new portfolio loan segments under CECL is detailed below (in thousands).

 

8 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

             
   January 1, 2023 
   Pre-adoption   Adoption Impact   As Reported 
   $   $   $ 
Assets               
ACL on debt securities available for sale   
    
    
 
ACL on loans               
Commercial Real Estate   6,074    (6,074)   
 
Consumer Real Estate   5,442    (5,442)   
 
Commercial and Industrial   2,151    (2,151)   
 
Consumer   67    183    250 
Agriculture   
    3,537    3,537 
Business Loans   
    3,382    3,382 
Home Equity   
    2,129    2,129 
Non-Owner Occupied CRE   
    875    875 
Residential Real Estate   
    4,658    4,658 
Unallocated   417    (417)   
 
    14,151    680    14,831 
Liabilities               
ACL for unfunded commitments   1,017    103    1,120 
   $15,168   $783   $15,951 

 

Investment Securities

 

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

 

Investment securities classified as available for sale are those securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Unrealized gains or losses are reported as increases or decreases in other comprehensive income (loss), net of the deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The Corporation classifies all of its securities as available for sale. Equity securities are measured at fair value with changes in fair value recognized in net income.

 

Allowance for Credit Losses – Available for Sale Securities

 

The Corporation measures expected credit losses on available-for-sale debt securities when the Corporation does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is utilized to calculate the present value of expected cash flows. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

 

The allowance for credit losses on available-for-sale debt securities is included within investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within the provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Corporation believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

 

9 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Accrued interest receivable on available-for-sale debt securities totaled $3,757,000 at September 30, 2023, and is included within Other Assets on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

 

Loans Receivable

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for credit losses and any deferred fees or costs. Accrued interest receivable totaled $3,282,000 at September 30, 2023, and was reported in Other Assets on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation is amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

 

The loans receivable portfolio is segmented into Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied Commercial Real Estate (CRE), and Residential Real Estate.

 

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for credit losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income on a cash basis, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

 

Allowance for Credit Losses - Loans

 

The allowance for credit losses (ACL) is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans.  Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

 

The ACL is an estimate of expected credit losses, measured over the contractual life of a loan that considers historical loss experience, current conditions, and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.

 

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Corporation measures the ACL using the following methods. Historical credit loss experience is the basis for the estimation of expected credit losses. The Corporation applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Reasonable and supportable forecast adjustment is based on the unemployment forecast, BBB Rated Corporate Bond Spread, GDP Growth, Retail Sales, Asset Prices, and Management Judgement. The reasonable and supportable period is the life of the loan as credit loss models used produce reasonable estimates of losses over the life of the loan. The qualitative adjustments for current conditions are based upon changes in lending policies and procedures, loan portfolio trends, lending management experience, asset quality, loan review, underlying collateral, credit concentrations, and external factors.  These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve.

 

10 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

 

The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore should be individually assessed. Commercial loans are evaluated if they meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) when it is determined by management that a loan does not share similar risk characteristics with other loans.  Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Individual loan evaluations consist primarily of the fair value of collateral method because most of the Corporation’s loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance.

 

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

 

The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is carried as a liability and is included in other liabilities on the Corporation’s Consolidated Balance Sheets. The liability was $1,218,000 as of September 30, 2023, and $1,017,000 as of December 31, 2022. As the unadvanced portion of lines of credit increases, this allowance will increase.

 

2. Revenue from Contracts with Customers

 

The Corporation 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.

 

11 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

3. Securities Available for Sale

 

The amortized cost, gross unrealized gains and losses, approximate fair value, and allowance for credit losses of investment securities held at September 30, 2023, are as follows:  

 

      Gross  Gross  Allowance   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  for Credit  Fair
   Cost  Gains  Losses  Losses  Value
   $  $  $  $  $
September 30, 2023                         
U.S. treasuries   19,862    
    (2,319)   
    17,543 
U.S. government agencies   19,400    
    (2,464)   
    16,936 
U.S. agency mortgage-backed securities   45,121    
    (5,163)   
    39,958 
U.S. agency collateralized mortgage obligations   22,359    
    (2,723)   
    19,636 
Non-agency MBS/CMO   56,213    18    (4,323)   
    51,908 
Asset-backed securities   68,328    17    (1,375)   
    66,970 
Corporate bonds   61,262    
    (7,758)   
    53,504 
Obligations of states and political subdivisions   212,343    
    (40,646)   
    171,697 
Total securities available for sale   504,888    35    (66,771)   
    438,152 

 

The amortized cost, gross unrealized gains and losses, and approximate fair value of investment securities held at December 31, 2022, are as follows:

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
December 31, 2022                    
U.S. Treasuries   35,737    
    (3,080)   32,657 
U.S. government agencies   27,605    
    (2,818)   24,787 
U.S. agency mortgage-backed securities   49,939    
    (4,632)   45,307 
U.S. agency collateralized mortgage obligations   30,193    
    (2,703)   27,490 
Non-agency MBS/CMO   53,900    
    (3,650)   50,250 
Asset-backed securities   76,110    16    (2,892)   73,234 
Corporate bonds   76,685    10    (7,064)   69,631 
Obligations of states and political subdivisions   240,102    10    (34,326)   205,786 
Total securities available for sale   590,271    36    (61,165)   529,142 

 

The amortized cost and fair value of securities available for sale at September 30, 2023, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

 

CONTRACTUAL MATURITY OF DEBT SECURITIES

(DOLLARS IN THOUSANDS)      

 

   Amortized   
   Cost  Fair Value
   $  $
Due in one year or less   3,214    3,116 
Due after one year through five years   105,253    93,781 
Due after five years through ten years   64,468    52,885 
Due after ten years   331,953    288,370 
Total debt securities   504,888    438,152 

 

Securities available for sale with a par value of $119,215,000 and $116,179,000 at September 30, 2023, and December 31, 2022, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $106,154,000 at September 30, 2023, and $107,071,000 at December 31, 2022.

 

12 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

 

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2023  2022  2023  2022
   $  $  $  $
Proceeds from sales   
    
    61,089    8,575 
Gross realized gains   
    
    4    139 
Gross realized losses   
    
    (1,368)   
 

 

Information pertaining to securities with gross unrealized losses at September 30, 2023, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

   Less than 12 months  More than 12 months  Total
      Gross     Gross     Gross
   Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   Value  Losses  Value  Losses  Value  Losses
   $  $  $  $  $  $
As of September 30, 2023                              
U.S. Treasuries   
    
    17,543    (2,319)   17,543    (2,319)
U.S. government agencies   
    
    16,936    (2,464)   16,936    (2,464)
U.S. agency mortgage-backed securities   
    
    39,958    (5,163)   39,958    (5,163)
U.S. agency collateralized mortgage obligations   
    
    19,636    (2,723)   19,636    (2,723)
Non-Agency MBS/CMO   6,775    (73)   42,102    (4,250)   48,877    (4,323)
Asset-backed securities   2,810    (24)   60,928    (1,351)   63,738    (1,375)
Corporate bonds   
    
    53,504    (7,758)   53,504    (7,758)
Obligations of states & political subdivisions   515    (19)   171,152    (40,627)   171,667    (40,646)
                               
Total temporarily impaired securities   10,100    (116)   421,759    (66,655)   431,859    (66,771)

 

Information pertaining to securities with gross unrealized losses at December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

   Less than 12 months  More than 12 months  Total
      Gross     Gross     Gross
   Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
   Value  Losses  Value  Losses  Value  Losses
   $  $  $  $  $  $
As of December 31, 2022                              
U.S. Treasuries   19,721    (1,169)   12,936    (1,911)   32,657    (3,080)
U.S. government agencies   1,953    (52)   21,634    (2,766)   23,587    (2,818)
U.S. agency mortgage-backed securities   24,667    (1,653)   20,640    (2,979)   45,307    (4,632)
U.S. agency collateralized mortgage obligations   9,984    (500)   17,453    (2,203)   27,437    (2,703)
Non-Agency MBS/CMO   50,250    (3,650)   
    
    50,250    (3,650)
Asset-backed securities   29,283    (1,028)   42,032    (1,864)   71,315    (2,892)
Corporate bonds   15,197    (1,230)   43,417    (5,834)   58,614    (7,064)
Obligations of states & political subdivisions   103,200    (10,949)   100,575    (23,377)   203,775    (34,326)
                               
Total temporarily impaired securities   254,255    (20,231)   258,687    (40,934)   512,942    (61,165)

 

In the debt security portfolio there were 322 positions carrying unrealized losses as of September 30, 2023.

 

13 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Management evaluates all of the Corporation’s securities for expected credit losses. No securities in the portfolio required an allowance for credit losses to be recorded in the first nine months of 2023 or other-than-temporary impairment in 2022.

 

Unrealized losses on the Corporation’s available-for-sale debt securities have not been recognized into income because the bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is solely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

 

4. Equity Securities

 

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at September 30, 2023 and December 31, 2022.

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
September 30, 2023                    
CRA-qualified mutual funds   7,622    
    
    7,622 
Bank stocks   1,736    17    (334)   1,419 
Total equity securities   9,358    17    (334)   9,041 

 

 

      Gross  Gross   
(DOLLARS IN THOUSANDS)  Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
   $  $  $  $
December 31, 2022                    
CRA-qualified mutual funds   7,345    
    
    7,345 
Bank stocks   1,685    162    (74)   1,773 
Total equity securities   9,030    162    (74)   9,118 

 

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and nine months ended September 30, 2023 and 2022, and the portion of unrealized gains and losses for the period that relates to equity investments held as of September 30, 2023 and 2022.

 

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)  

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2023  2022  2023  2022
   $  $  $  $
             
Net (losses) gains recognized in equity securities during the period   (103)   9    (405)   (129)
                     
Less:  Net gains realized on the sale of equity securities during the period   
    
    
    51 
                     
Unrealized gains (losses) recognized in equity securities held at reporting date   (103)   9    (405)   (180)

 

14 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

5. Loans and Allowance for Credit Losses

 

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2023 (in thousands):

 

   September 30,
   2023
   $
    
Agriculture   248,540 
Business Loans   351,319 
Consumer   6,516 
Home Equity   105,593 
Non-Owner Occupied Commercial Real Estate   133,454 
Residential Real Estate (a)   487,833 
      
Gross loans prior to deferred costs   1,333,255 
      
Deferred loan costs, net   2,342 
Allowance for credit losses   (16,349)
Total net loans (b)   1,319,248 

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $298,899,000 as of September 30, 2023.
(b) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  

 

The following table presents the Corporation’s loan portfolio, prior to the adoption of ASC 326, by category of loans and the impact of the change from the adoption of the standard (in thousands):

 

           Post Adoption 
   December 31,   Adoption   January, 1 
   2022   Impact   2023 
   $   $   $ 
Agriculture   
    238,734    238,734 
Business Loans   
    336,340    336,340 
Home Equity   
    98,854    98,854 
Non-Owner Occupied CRE   
    111,333    111,333 
Residential Real Estate (a)   
    397,260    397,260 
Commercial real estate               
Commercial mortgages   210,823    (210,823)   
 
Agriculture mortgages   221,167    (221,167)   
 
Construction   86,793    (86,793)   
 
Total commercial real estate   518,783    (518,783)   
 
                
Consumer real estate (a)               
1-4 family residential mortgages   410,301    (410,301)   
 
Home equity loans   11,937    (11,937)   
 
Home equity lines of credit   98,349    (98,349)   
 
Total consumer real estate   520,587    (520,587)   
 
                
Commercial and industrial               
Commercial and industrial   87,528    (87,528)   
 
Tax-free loans   28,664    (28,664)   
 
Agriculture loans   27,122    (27,122)   
 
Total commercial and industrial   143,314    (143,314)   
 
                
Consumer   5,769    163    5,932 
                
Gross loans prior to deferred fees   1,188,453    
    1,188,453 
                
Deferred loan costs, net   2,664    
 
      
Allowance for credit losses   (14,151)   
 
      
Total net loans   1,176,966    
 
      

 

(a) Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $298,375,000 as of December 31, 2022.

 

15 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Age Analysis of Past-Due Loans Receivable

The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status as of September 30, 2023 (in thousands):

 

   September 30, 2023 
       31-60   61-90   Greater Than         
       Days   Days   90 Days   Total   Total 
   Current   Past Due   Past Due   Past Due   Past Due   Loans 
                         
Agriculture  $248,066   $474   $
   $
   $474   $248,540 
Business Loans   351,196    
    5    118    123    351,319 
Consumer   6,486    
    13    17    30    6,516 
Home Equity   105,352    121    120    
    241    105,593 
Non-Owner Occupied CRE   133,454    
    
    
    
    133,454 
Residential Real Estate   486,406    718    13    696    1,427    487,833 
Total (a)  $1,330,960   $1,313   $151   $831   $2,295   $1,333,255 

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

The following table presents the classes of the loan portfolio summarized by the past-due status as of December 31, 2022 (in thousands):

 

   December 31, 2022
                     Loans
         Greater           Receivable >
   30-59 Days  60-89 Days  than 90  Total Past     Total Loans  90 Days and
   Past Due  Past Due  Days  Due  Current  Receivable  Accruing
   $  $  $  $  $  $  $
Commercial real estate                                   
Commercial mortgages   
    
    554    554    210,269    210,823    
 
Agriculture mortgages   
    
    2,787    2,787    218,380    221,167    
 
Construction   
    
    
    
    86,793    86,793    
 
Consumer real estate                                   
1-4 family residential mortgages   905    
    447    1,352    408,949    410,301    139 
Home equity loans   17    
    339    356    11,581    11,937    
 
Home equity lines of credit   165    16    
    181    98,168    98,349    
 
Commercial and industrial                                   
Commercial and industrial   
    
    190    190    87,338    87,528    
 
Tax-free loans   
    
    
    
    28,664    28,664    
 
Agriculture loans   
    
    
    
    27,122    27,122    
 
Consumer   9    5    30    44    5,725    5,769    30 
Total   1,096    21    4,347    5,464    1,182,989    1,188,453    169 

 

16 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Nonperforming Loans

 

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of September 30, 2023, (in thousands): 

 

                     
   Nonaccrual   Nonaccrual       Loans Past     
   with no   with   Total   Due Over 90 Days   Total 
   ACL   ACL   Nonaccrual   Still Accruing   Nonperforming 
                     
Agriculture  $959   $
   $959   $
   $959 
Business Loans   1,857    
    1,857    
    1,857 
Consumer Loans   
    
    
    17    17 
Home Equity   
    
    
    
    
 
Non-Owner Occupied CRE   
    
    
    
    
 
Residential Real Estate   
    
    
    696    696 
Total (a)  $2,816   $
   $2,816   $713   $3,529 

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2022 (in thousands):

 

Nonaccrual Loans

 

   December 31, 
   2022 
   $ 
     
Commercial real estate     
Commercial mortgages   554 
Agriculture mortgages   2,787 
Construction   
 
Consumer real estate     
1-4 family residential mortgages   308 
Home equity loans   339 
Home equity lines of credit   
 
Commercial and industrial     
Commercial and industrial   190 
Tax-free loans   
 
Agriculture loans   
 
Consumer   
 
Total   4,178 

 

Credit Quality Indicators

 

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of September 30, 2023 and December 31, 2022. 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.

 

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.

 

17 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

 

Based on the most recent analysis performed, the following table presents the recorded investment by internal risk rating system for Commercial Credit exposure as of September 30, 2023 (in thousands):

 

                                     
                           Revolving   Revolving     
   Term Loans Amortized Costs Basis by Origination Year   Loans   Loans     
                           Amortized   Converted     
September 30, 2023  2023   2022   2021   2020   2019   Prior   Cost Basis   to Term   Total 
Agriculture                                    
Risk Rating                                             
Pass  $35,509   $43,270   $50,135   $20,372   $15,293   $61,641   $17,305   $
   $243,525 
Special Mention   63    28    578    
    182    1,173    153    
    2,177 
Substandard   
    
    
    730    303    1,805    
    
    2,838 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $35,572   $43,298   $50,713   $21,102   $15,778   $64,619   $17,458   $
   $248,540 
                                              
Agriculture                                             
Current period gross charge-offs  $
   $
   $
   $
   $
   $
   $
   $
   $
 
                                              
Business Loans                                             
Risk Rating                                             
Pass  $32,457   $103,772   $68,985   $38,030   $16,715   $47,291   $37,831   $
   $345,081 
Special Mention   
    
    
    
    
    272    
    
    272 
Substandard   3,172    1,459    
    281    
    881    173    
    5,966 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $35,629   $105,231   $68,985   $38,311   $16,715   $48,444   $38,004   $
   $351,319 
                                              
Business Loans                                             
Current period gross charge-offs  $
   $
   $
   $
   $
   $
   $
   $
   $
 
                                              
Non-Owner Occupied CRE                                             
Risk Rating                                             
Pass  $21,065   $47,016   $27,326   $13,014   $7,797   $13,410   $490   $
   $130,118 
Special Mention   
    643    
    
    
    
    
    
    643 
Substandard   
    
    
    
    2,386    307    
    
    2,693 
Doubtful   
    
    
    
    
    
    
    
    
 
Total  $21,065   $47,659   $27,326   $13,014   $10,183   $13,717   $490   $
   $133,454 
                                              
Non-Owner Occupied CRE                                             
Current period gross charge-offs  $
   $
   $
   $
   $
   $
   $
   $
   $
 
                                              
Total                                             
Risk Rating                                             
Pass  $89,031   $194,058   $146,446   $71,416   $39,805   $122,342   $55,626   $
   $718,724 
Special Mention   63    671    578    
    182    1,445    153    
    3,092 
Substandard   3,172    1,459    
    1,011    2,689    2,993    173    
    11,497 
Doubtful   
    
    
    
    
    
    
    
    
 
Total (a)  $92,266   $196,188   $147,024   $72,427   $42,676   $126,780   $55,952   $
   $733,313 

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  

 

18 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents the recorded investment in loans by internal risk rating system for Commercial Credit Exposure as of December 31, 2022 in accordance with ASC 310 (in thousands):

 

December 31, 2022  Commercial
Mortgages
  Agriculture
Mortgages
  Construction  Commercial
and
Industrial
  Tax-free
Loans
  Agriculture
Loans
  Total
   $  $  $  $  $  $  $
Grade:                                   
Pass   209,534    214,905    83,240    85,977    28,664    26,749    649,069 
Special Mention   
    1,966    3,553    893    
    132    6,544 
Substandard   1,289    4,296    
    658    
    241    6,484 
Doubtful   
    
    
    
    
    
    
 
Loss   
    
    
    
    
    
    
 
                                    
Total   210,823    221,167    86,793    87,528    28,664    27,122    662,097 

 

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 table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of September 30, 2023 (in thousands):

 

 

       Revolving   Revolving     
   Term Loans Amortized Costs Basis by Origination Year   Loans   Loans     
                           Amortized   Converted     
September 30, 2023  2023   2022   2021   2020   2019   Prior   Cost Basis   to Term   Total 
Consumer                                             
Payment Performance                                             
Performing  $2,820   $1,279   $458   $220   $41   $4   $1,677   $
   $6,499 
Nonperforming   
    17    
    
    
    
    
    
    17 
Total  $2,820   $1,296   $458   $220   $41   $4   $1,677   $
   $6,516 
                                              
Consumer                                             
Current period gross charge-offs  $
   $30   $7   $1   $1   $2   $
   $
   $41 
                                              
Home equity                                             
Payment Performance                                             
Performing  $5,189   $19,185   $1,084   $602   $566   $1,967   $74,598   $2,402   $105,593 
Nonperforming   
    
    
    
    
    
    
    
    
 
Total  $5,189   $19,185   $1,084   $602   $566   $1,967   $74,598   $2,402   $105,593 
                                              
Home equity                                             
Current period gross charge-offs  $
   $
   $
   $
   $
   $
   $
   $
   $
 
                                              
Residential Real Estate                                             
Payment Performance                                             
Performing  $101,537   $154,677   $107,045   $44,636   $32,391   $46,851   $
   $
   $487,137 
Nonperforming   
    239    359    
    
    98    
    
    696 
Total  $101,537   $154,916   $107,404   $44,636   $32,391   $46,949   $
   $
   $487,833 
                                              
Residential Real Estate                                             
Current period gross charge-offs  $
   $
   $
   $
   $
   $
   $
   $
   $
 
                                              
Total                                             
Payment Performance                                             
Performing  $109,546   $175,141   $108,587   $45,458   $32,998   $48,822   $76,275   $2,402   $599,229 
Nonperforming   
    256    359        
    98    
    
    713 
Total (a)  $109,546   $175,397   $108,946   $45,458   $32,998   $48,920   $76,275   $2,402   $599,942  

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  

 

19 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of December 31, 2022 in accordance with ASC 310 (in thousands):

 

December 31, 2022  1-4 Family
Residential
Mortgages
  Home Equity
Loans
  Home Equity
Lines of
Credit
  Consumer  Total
Payment performance:  $  $  $  $  $
                
Performing   409,854    11,598    98,349    5,739    525,540 
Non-performing   447    339    
    30    816 
                          
Total   410,301    11,937    98,349    5,769    526,356 

 

As of December 31, 2022, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired.

 

Information with respect to impaired loans for the three and nine months ended September 30, 2022, in accordance with ASC 310 is as follows:

 

   Three  Nine
   Months  Months
   Ended  Ended
   September 30,  September 30,
   2022  2022
   $  $
       
Average recorded balance of impaired loans   5,028    4,012 
Interest income recognized on impaired loans   5    19 

 

20 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information regarding impaired loans by loan portfolio class as of December 31, 2022, in accordance with ASC 310:

 

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)  

 

December 31, 2022  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
   $  $  $
          
With no related allowance recorded:               
Commercial real estate               
Commercial mortgages   1,201    1,271    
 
Agriculture mortgages   3,229    3,348    
 
Construction   
    
    
 
Total commercial real estate   4,430    4,619    
 
                
Commercial and industrial               
Commercial and industrial   190    199    
 
Tax-free loans   
    
    
 
Agriculture loans   
    
    
 
Total commercial and industrial   190    199    
 
                
Total with no related allowance   4,620    4,818    
 
                
With an allowance recorded:               
Commercial real estate               
Commercial mortgages   
    
    
 
Agriculture mortgages   
    
    
 
Construction   
    
    
 
Total commercial real estate   
    
    
 
                
Commercial and industrial               
Commercial and industrial   
    
    
 
Tax-free loans   
    
    
 
Agriculture loans   
    
    
 
Total commercial and industrial   
    
    
 
                
Total with a related allowance   
    
    
 
                
Total by loan class:               
Commercial real estate               
Commercial mortgages   1,201    1,271    
 
Agriculture mortgages   3,229    3,348    
 
Construction   
    
    
 
Total commercial real estate   4,430    4,619    
 
                
Commercial and industrial               
Commercial and industrial   190    199    
 
Tax-free loans   
    
    
 
Agriculture loans   
    
    
 
Total commercial and industrial   190    199    
 
                
Total   4,620    4,818    
 

 

21 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Allowance for Credit Losses

 

The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2023 (in thousands):

 

                     
   Beginning           Provisions   Ending 
   Balance   Charge-offs   Recoveries   (Reductions)   Balance 
Allowance for credit losses:                         
Agriculture   3,666    
    
    (290)   3,376 
Business Loans   3,449    
    
    (432)   3,017 
Consumer Loans   357    (26)   3    33    367 
Home Equity   2,339    
    
    (26)   2,313 
Non-Owner Occupied CRE   943    
    
    (30)   913 
Residential Real Estate   6,079    
    
    284    6,363 
                          
Total (a)  $16,833   $(26)  $3   $(461)  $16,349 

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

The following table presents the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2023 (in thousands):

 

       Impact of                 
   Beginning   adopting           Provisions   Ending 
   Balance   ASC 326   Charge-offs   Recoveries   (Reductions)   Balance 
Allowance for credit losses:                              
Commercial Real Estate  $6,074   $(6,074)  $
   $
   $
   $
 
Consumer Real Estate   5,442    (5,442)   
    
    
    
 
Commercial & Industrial   2,151    (2,151)   
    
    
    
 
Consumer   67    (67)   
    
    
    
 
Agriculture   
    3,537    
    71    (232)   3,376 
Business Loans   
    3,382    
    8    (373)   3,017 
Consumer Loans   
    250    (41)   3    155    367 
Home Equity   
    2,129    
    
    184    2,313 
Non-Owner Occupied CRE   
    875    
    
    38    913 
Residential Real Estate   
    4,658    
    8    1,697    6,363 
Unallocated   417    (417)   
    
    
    
 
                               
Total (a)  $14,151   $680   $(41)  $90   $1,469   $16,349 

 

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

During the nine months ended September 30, 2023, management charged off $41,000 in loans while recovering $90,000 and added $1,469,000 to the provision for credit losses related to loans and added $99,000 to the provision for off-balance sheet credit exposure for a combined provision of $1,568,000.

 

The ACL is maintained at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers historical loss experience, current conditions, and forecasts of future economic conditions as of the balance sheet date. The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied CRE, and Residential Real Estate.  The following are key risks within each portfolio segment:

 

Agriculture – Loans made to individuals or operating companies within the Agricultural industry.  These loans are generally secured by a first lien mortgage on agricultural land.  The primary source of repayment is the income and assets of the borrower.  The condition of the agriculture industry as well as the condition of the national economy is an important indicator of risk for this segment. 

 

22 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Business Loans —Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. The primary source of repayment for these loans is cash flow from the operations of the company.   The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. This segment also includes loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

 

Consumer - Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes personal loans and lines of credit that may be secured or unsecured. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

 

Home Equity– This segment generally includes lines of credit and term loans secured by the equity in the borrower’s residence. The primary source of repayment for these facilities is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the national housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

 

Non-Owner Occupied CRE - Loans secured by commercial purpose real estate for various purposes such as hotels, retail, multifamily and health care. The primary sources of repayment for these loans are the operations of the individual projects and global cash flows of the debtors. The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and the business prospects of the lessee.

 

Residential Real Estate—Loans secured by first liens on 1-4 family residential mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the national housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

 

The following table details activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2022:

 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

   Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Beginning balance - December 31, 2021   6,263    3,834    2,112    87    635    12,931 
                               
Charge-offs   (65)   
    
    (1)   
    (66)
Recoveries   
    3    10    1    
    14 
Provision   (90)   41    193    (16)   (28)   100 
                               
Balance - March 31, 2022   6,108    3,878    2,315    71    607    12,979 
                               
Charge-offs   
    
    (41)   
    
    (41)
Recoveries   2    3    12    1    
    18 
Provision   (239)   834    255    (28)   (172)   650 
                               
Balance - June 30, 2022   5,871    4,715    2,541    44    435    13,606 
                               
Charge-offs   
    
    (18)   (15)   
    (33)
Recoveries   10    3    13    1    
    27 
Provision   529    108    (109)   34    (12)   550 
                               
Balance - September 30, 2022   6,410    4,826    2,427    64    423    14,150 

 

23 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

During the nine months ended September 30, 2022, management charged off $140,000 in loans while recovering $59,000 and added $1,300,000 to the provision. The unallocated portion of the allowance decreased from 4.9% of total reserves as of December 31, 2021, to 3.0% as of September 30, 2022.

 

During the nine months ended September 30, 2022, net provision expense was recorded for all sectors except the consumer sector where a small credit provision was recorded. The provision expense for the commercial real estate, consumer real estate, and commercial and industrial sectors was primarily related to growth in those sectors of the loan portfolio through September 30, 2022, while the credit provision in the consumer sector was primarily related to declining qualitative factors in several areas since September 30, 2021

 

The following table presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on estimation method as of September 30, 2023:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of September 30, 2023:  Agriculture  Business
Loans
  Consumer
Loans
  Home
Equity
  Non-
Owner
Occupied
CRE
  Residential
Real Estate
  Total
   $  $  $  $  $  $  $
Allowance for credit losses:                                   
Ending balance: individually evaluated   
    
    
    
    
    
    
 
Ending balance: collectively evaluated   3,376    3,017    367    2,313    913    6,363    16,349 
                                    
Loans receivable:                                   
Ending balance   248,540    351,319    6,516    105,593    133,454    487,833    1,333,255 
Ending balance: individually evaluated   2,463    754    
    
    
    
    3,217 
Ending balance: collectively evaluated   246,077    350,565    6,516    105,593    133,454    487,833    1,330,038 

 

The following table presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of December 31, 2022:

 

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

 

As of December 31, 2022:  Commercial
Real Estate
  Consumer
Real Estate
  Commercial
and
Industrial
  Consumer  Unallocated  Total
   $  $  $  $  $  $
Allowance for credit losses:                              
Ending balance: individually evaluated for impairment   
    
    
    
    
    
 
Ending balance: collectively evaluated for impairment   6,074    5,442    2,151    67    417    14,151 
                               
Loans receivable:                              
Ending balance   518,783    520,587    143,314    5,769         1,188,453 
Ending balance: individually evaluated for impairment   4,430    
    190    
         4,620 
Ending balance: collectively evaluated for impairment   514,353    520,587    143,124    5,769         1,183,833 

 

6. 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:

 

24 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

 

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

 

Level III: Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

The following tables provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of September 30, 2023, and December 31, 2022, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

   September 30, 2023
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. treasuries   17,543    
    
    17,543 
U.S. government agencies   
    16,936    
    16,936 
U.S. agency mortgage-backed securities   
    39,958    
    39,958 
U.S. agency collateralized mortgage obligations   
    19,636    
    19,636 
Non-agency MBS/CMO   
    51,908    
    51,908 
Asset-backed securities   
    66,970    
    66,970 
Corporate bonds   
    53,504    
    53,504 
Obligations of states & political subdivisions   
    171,697    
    171,697 
Equity securities   9,041    
    
    9,041 
                     
Total securities   26,584    420,609    
    447,193 

 

On September 30, 2023, the Corporation held no securities valued using level III inputs. Most 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 U.S. Treasury bonds, 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.

 

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.

 

25 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

 

   December 31, 2022
   Level I  Level II  Level III  Total
   $  $  $  $
             
U.S. Treasuries   32,657    
    
 
    32,657 
U.S. government agencies   
    24,787    
    24,787 
U.S. agency mortgage-backed securities   
    45,307    
    45,307 
U.S. agency collateralized mortgage obligations   
    27,490    
    27,490 
Non-agency MBS/CMO   
 
    50,250    
    50,250 
Asset-backed securities   
    73,234    
    73,234 
Corporate bonds   
    69,631    
    69,631 
Obligations of states & political subdivisions   
    205,786    
    205,786 
Equity securities   9,118    
    
    9,118 
                     
Total securities   41,775    496,485    
    538,260 

 

On December 31, 2022, the Corporation held no securities valued using level III inputs. Most 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 U.S. Treasury bonds, 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.

 

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, by level within the fair value hierarchy:

 

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

 

   September 30, 2023 
   Level I   Level II   Level III   Total 
   $   $   $   $ 
Assets:                    
Individually analyzed loans  $
   $
   $3,217   $3,217 
Total  $
   $
   $3,217   $3,217 

 

   December 31, 2022 
   Level I   Level II   Level III   Total 
   $   $   $   $ 
Assets:                    
Impaired Loans  $
   $
   $4,620   $4,620 
Total  $
   $
   $4,620   $4,620 

 

The Corporation had a total of $3,217,000 of individually analyzed loans as of September 30, 2023 and $4,620,000 of impaired loans as of December 31, 2022. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

 

26 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

 

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)

 

  September 30, 2023  
  Fair Value Valuation Unobservable Range  
  Estimate Techniques Input (Weighted Avg)  
           
Individually analyzed loans 3,217 Appraisal of collateral (1) Appraisal adjustments (2) 0% to -20% (-20%)  
      Liquidation expenses (2) 0% to -10% (-10%)  

 

  December 31, 2022  
  Fair Value  Valuation Unobservable  Range  
  Estimate Techniques Input (Weighted Avg)  
           
Impaired loans 4,620 Appraisal of collateral (1) Appraisal adjustments (2) 0% to -20% (-20%)  
      Liquidation expenses (2) 0% to -10% (-10%)  

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

27 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables provide the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022:

 

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

(DOLLARS IN THOUSANDS)

 

   September 30, 2023
         Quoted Prices in      
         Active Markets  Significant Other  Significant
         for Identical  Observable  Unobservable
   Carrying     Assets  Inputs  Inputs
   Amount  Fair Value  (Level 1)  (Level II)  (Level III)
   $  $  $  $  $
Financial Assets:                         
Cash and cash equivalents   38,759    38,759    38,759    
    
 
Regulatory stock   8,283    8,283    8,283    
    
 
Loans held for sale   1,081    1,081    1,081    
    
 
Loans, net of allowance   1,319,248    1,233,701    
    
    1,233,701 
Mortgage servicing assets   2,121    2,923    
    
    2,923 
Accrued interest receivable   7,039    7,039    7,039    
    
 
Bank owned life insurance   35,415    35,415    35,415    
    
 
                          
Financial Liabilities:                         
Demand deposits   583,145    583,145    583,145    
    
 
Interest-bearing demand deposits   236,243    236,243    236,243    
    
 
NOW accounts   99,368    99,368    99,368    
    
 
Money market deposit accounts   157,684    157,684    157,684    
    
 
Savings accounts   324,053    324,053    324,053    
    
 
Time deposits   260,497    256,515    
    
    256,515 
Total deposits   1,660,990    1,657,008    1,400,493    
    256,515 
                          
Long-term debt   98,528    96,459    
    
    96,459 
Subordinated debt   39,516    33,473    
    
    33,473 
Accrued interest payable   2,099    2,099    2,099    
    
 

 

28 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

 

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

(DOLLARS IN THOUSANDS)

 

   December 31, 2022
         Quoted Prices in      
         Active Markets  Significant Other  Significant
         for Identical  Observable  Unobservable
   Carrying     Assets  Inputs  Inputs
   Amount  Fair Value  (Level 1)  (Level II)  (Level III)
   $  $  $  $  $
Financial Assets:                         
Cash and cash equivalents   37,572    37,572    37,572         
Regulatory stock   6,670    6,670    6,670         
Loans held for sale   5,927    5,927    5,927         
Loans, net of allowance   1,176,966    1,112,400            1,112,400 
Mortgage servicing assets   2,030    2,894            2,894 
Accrued interest receivable   6,249    6,249    6,249         
Bank owned life insurance   34,805    34,805    34,805         
                          
Financial Liabilities:                         
Demand deposits   672,342    672,342    672,342         
Interest-bearing demand deposits   164,208    164,208    164,208         
NOW accounts   139,846    139,846    139,846         
Money market deposit accounts   163,836    163,836    163,836         
Savings accounts   364,897    364,897    364,897         
Time deposits   133,829    129,422            129,422 
Total deposits   1,638,958    1,634,551    1,505,129        129,422 
                          
Short-term debt   16,000    15,721              15,721 
Long-term debt   58,039    56,431            56,431 
Subordinated debt   39,396    35,975            35,975 
Accrued interest payable   597    597    597         

 

7.  Commitments and Contingent Liabilities

 

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of September 30, 2023, firm loan commitments were $100.1 million, unused lines of credit were $510.6 million, and open letters of credit were $17.0 million. The total of these commitments was $627.7 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

 

29 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

8. Accumulated Other Comprehensive Income (Loss)

 

The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 is as follows:

 

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

(DOLLARS IN THOUSANDS)  

 

   Unrealized
   Gains (Losses)
   on Securities
   Available-for-Sale
   $
Balance at December 31, 2022   (48,292)
Other comprehensive loss before reclassifications   7,335 
Amount reclassified from accumulated other comprehensive income (loss)   324 
Period change   7,659 
      
Balance at March 31, 2023   (40,633)
Other comprehensive loss before reclassifications   (1,365)
Amount reclassified from accumulated other comprehensive income (loss)   754 
Period change   (611)
      
Balance at June 30, 2023   (41,244)
Other comprehensive loss before reclassifications   (11,477)
Amount reclassified from accumulated other comprehensive income (loss)    
Period change   (11,477)
      
Balance at September 30, 2023   (52,721)
      
Balance at December 31, 2021   3,441 
Other comprehensive loss before reclassifications   (23,629)
Amount reclassified from accumulated other comprehensive income (loss)   (110)
Period change   (23,739)
      
Balance at March 31, 2022   (20,298)
Other comprehensive loss before reclassifications   (16,518)
Amount reclassified from accumulated other comprehensive income (loss)   
 
Period change   (16,518)
      
Balance at June 30, 2022   (36,816)
Other comprehensive loss before reclassifications   (18,565)
Amount reclassified from accumulated other comprehensive income (loss)    
Period change   (18,565)
      
Balance at September 30, 2022   (55,381)

 

30 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)

 

   Amount Reclassified from   
   Accumulated Other Comprehensive   
   Income (Loss)   
   For the Three Months   
   Ended September 30,   
   2023  2022  Affected Line Item in the
   $  $  Consolidated Statements of Income
Securities available-for-sale:             
Net securities (losses) gains, reclassified into earnings   
   
   (Losses) gains on the sale of debt securities, net
Related income tax benefit (expense)   
     
   Benefit/(Provision) for federal income taxes
Net effect on accumulated other comprehensive income (loss) for the period   
    
    

 

(1) Amounts in parentheses indicate debits.

 

   Amount Reclassified from   
   Accumulated Other Comprehensive   
   Income (Loss)   
   For the Nine Months   
   Ended September 30,   
   2023  2022  Affected Line Item in the
   $  $  Consolidated Statements of Income
Securities available-for-sale:             
Net securities (losses) gains, reclassified into earnings   (1,364)   139   (Losses) gains on the sale of debt securities, net
Related income tax benefit (expense)   286    (29)  Benefit/(Provision) for federal income taxes
Net effect on accumulated other comprehensive  income (loss) for the period   (1,078)   110    

 

(1) Amounts in parentheses indicate debits.

 

9. Recently Issued Accounting Standards

 

In March 2023, the FASB issued ASU No. 2023-02, "Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)". The ASU allows entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria in Accounting Standards Codification (ASC) 323-740-25-1. While the ASU does not significantly alter the existing eligibility criteria, it does provide clarifications to address existing interpretive issues. It also prescribes specific information reporting entities must disclose about tax credit investments each period. This ASU is effective for reporting periods beginning after December 15, 2023, for public business entities, or January 1, 2024 for the Corporation. The Corporation does not expect the adoption of this ASU to have a material impact on the Corporation's financial statements.

 

31 

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 2022 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, regional and local economic conditions
Interest rate and monetary policies of the Federal Reserve Board
Inflation and monetary fluctuations and volatility
Continuing and future banking instability caused by recent bank failure and continuous financial uncertainty of various banks which may adversely impact the corporation and its securities values, deposit stability, capital adequacy, financial condition, operations, liquidity, and results of operations
Health of the housing market
Volatility of the securities markets including the valuation of securities
Real estate valuations and its impact on the loan portfolio
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
Operational, legal, and reputational 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
Effects of economic conditions particularly with regard to any pandemic, epidemic, or health-related crisis (such as COVID-19) and government and business responses thereto, specifically the effect on loan customers to repay loans

32 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

 

Critical Accounting Policies

 

See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

 

Results of Operations

 

Overview

 

The Corporation recorded net income of $3,613,000 for the three-month period ended September 30, 2023, a $396,000, or 9.9% decrease from the three months ended September 30, 2022. Net income for the nine-month period was $7,851,000, a $1,907,000, or 19.5% decrease from earnings in the nine-month period ended September 30, 2022. The earnings per share, basic and diluted, were $0.64 for the three months ended September 30, 2023, compared to $0.71 for the same period in 2022, and for the year-to-date period, earnings per share were $1.39 compared to $1.74 in 2022.

 

The Corporation’s net interest income (NII) decreased by $231,000, or 1.7%, and increased by $4,535,000, or 12.5%, for the three and nine months ended September 30, 2023, compared to the same periods in 2022. The decrease in NII for the quarter can be attributed to higher costs associated with deposits and borrowings. Interest on deposits increased by $4,782,000 for the three months ended September 30, 2023, and interest on borrowings increased by $514,000, partially offset by an increase in interest and dividend income of $5,065,000, or 33.8%, compared to the three months ended September 30, 2022. The increase in NII for the year-to-date period primarily resulted from an increase in interest and fees on loans of $15,183,000, or 51.7%, and an increase in interest on securities available-for-sale of $1,746,000, or 18.8%, compared to the nine months ended September 30, 2022. Offsetting these increases, interest expense on deposits and borrowings increased by $13,165,000, or 461.8%, for the nine months ended September 30, 2023, compared to the same period in the prior year.

 

The Corporation recorded a reversal of provision for credit losses of $504,000 in the third quarter of 2023, and provision expense of $1,568,000 for the year-to-date period, compared to expense of $550,000 in the third quarter of 2022 and a year-to-date provision of $1,300,000 through September 30, 2022. The Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments as of January 1, 2023. This standard implements a methodology that reflects credit losses that are expected to occur over the remaining life of the financial asset. The current expected credit loss model (CECL) is based on possible economic scenarios as well as qualitative factors specific to the Corporation. Due to the subjective methodology of the CECL standard, provision expense is currently more volatile than historical experience. The allowance as a percentage of total loans was 1.22% as of September 30, 2023, 1.19% as of December 31, 2022, and 1.27% as of September 30, 2022.

 

Other income was higher for the quarter but lower for the nine months ended September 30, 2023, compared to the prior year primarily as a result of fluctuations in service fees, mortgage gains, and losses on the sale of securities. Service fees were higher by $591,000, or 74.7% for the quarter primarily related to fees generated on an off-balance sheet sweep account. Conversely, gains from the sale of mortgages were lower by $6,000, or 3.2% for the quarter, and lower by $743,000, or 59.5% for the year-to-date period compared to the same period in the prior year.

33 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

The decrease in mortgage gains can be primarily attributed to the rapid rise in mortgage rates during the first nine months of 2023 which has caused customer activity to shift from fixed-rate mortgages that were sold on the secondary market, to adjustable rate mortgages held on the Corporation’s balance sheet. The Corporation recorded $103,000 of losses on securities transactions for the three months ended September 30, 2023, and $1,769,000 for the nine months ended September 30, 2023, compared to gains of $9,000 and $10,000 for the three and nine months ended September 30, 2022, respectively. The losses recorded in 2023 were primarily losses related to strategic sales of investments in the available-for-sale category in order to fund more profitable loan growth. The lower yields on the securities portfolio provided opportunities to sell at losses and still recover the loss within a twelve-month period due to the ability to reinvest in much higher yielding assets. Outside of mortgage and security gains and losses, other non-interest income increased by $493,000, or 16.5%, and $1,278,000, or 14.8%, for the three and nine months ended September 30, 2023. Operating expenses increased by $1,520,000, or 13.2%, and $5,001,000, or 14.9%, for the three and nine months ended September 30, 2023, compared to the same periods in the prior year. This increase can be primarily attributed to the rising cost of salaries and employee benefits as well as increased investments in technology and software.

 

The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The latter measurement typically receives more attention from shareholders. The ROA and ROE decreased for the quarter-to-date period and the year-to-date period ended September 30, 2023, compared to the same periods in the prior year, due to lower earnings in 2023.

 

Key Ratios  Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2023  2022  2023  2022
                     
Return on Average Assets   0.75%    0.89%    0.56%    0.75% 
Return on Average Equity   13.68%    15.63%    10.11%    11.49% 

 

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)

 

NII represents the largest portion of the Corporation’s operating income. In the first nine months of 2023, NII generated 82.5% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared to 78.6% in the first nine months of 2022. This increase is a result of higher levels of NII in the first nine months of 2023 as well as lower non-interest income compared to 2022. 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 $135,000 for the three months ended September 30, 2023, and $491,000 for the nine months ended September 30, 2023, compared to $314,000 and $934,000 for the same periods in 2022.

34 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   $   $   $   $ 
Total interest income   20,037    14,972    56,835    39,135 
Total interest expense   6,679    1,383    16,016    2,851 
                     
Net interest income   13,358    13,589    40,819    36,284 
Tax equivalent adjustment   135    314    491    934 
                     
Net interest income (fully taxable equivalent)   13,493    13,903    41,310    37,218 

 

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 2022, asset yields increased dramatically with the Federal Reserve rate movements, but liability costs were still low due to the slower increase in deposit rates. In the first nine months of 2023, interest rates on deposits increased more dramatically as a result of competitive pressure and the desire to retain existing deposits and attract new ones to add to the Corporation’s liquidity position. While higher market rates have helped the Corporation’s asset yields, the higher cost of funds has put pressure on the NIM causing slight compression. Management believes that compression will continue the higher cost of liabilities without a similar-sized increase in asset yield.

 

Despite the increase in assets yields, the Corporation’s net interest margin for the third quarter of 2023 declined to 2.89%, from 3.19% for the third quarter of 2022. The decline was driven entirely by the rapid increase in the cost of funds which resulted in a faster increase in interest expense that more than offset the increasing asset yields and interest income. However, for the year-to-date period, as a result of a larger balance sheet and improved asset yields, the Corporation’s NII and net interest margin on a tax equivalent basis increased. The Corporation’s margin increased to 2.99% for the year-to-date period ended September 30, 2023, compared to 2.96% for the year-to-date period in 2022. The Corporation’s NII on a fully-taxable-equivalent basis for the three months ended September 30, 2023, decreased from the same period in 2022 by $410,000, or 2.9%, but for the nine months ended September 30, 2023, NII increased by $4,092,000, or 11.0%.

 

The Corporation’s overall cost of funds has risen significantly through the first nine months of 2023. Core deposit interest rates have risen over the past year; however, time deposit rates have risen to higher levels and more quickly than core deposit rates. The change in deposit rates has resulted in some movement from low interest bearing core deposits to time deposits or other higher yielding money market deposits. This resulted in the total cost of deposits increasing by $4,782,000 for the quarter and $11,181,000 for the nine months ended September 30, 2023, compared to the same periods in the prior year. The average balance of borrowings was higher in the first nine months of 2023 compared to 2022, and interest rates were also higher, resulting in the total cost of borrowings increasing by $514,000, or 66.3%, and $1,984,000, or 117.9%, for the three and nine months ended September 30, 2023, compared to the same periods in 2022.

 

The following table provides an analysis of year-to-date changes in NII on a FTE basis 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.

35 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2023 vs. 2022  2023 vs. 2022
   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   37    136    173    (126)   461    335 
                               
Securities available for sale:                              
Taxable   (523)   833    310    (617)   3,512    2,895 
Tax-exempt   (280)   (252)   (532)   (756)   (656)   (1,412)
Total securities   (803)   581    (222)   (1,373)   2,856    1,483 
                               
Loans   2,691    2,194    4,885    8,908    6,327    15,235 
Regulatory stock   38    12    50    95    109    204 
                               
Total interest income   1,963    2,923    4,886    7,504    9,753    17,257 
                               
INTEREST EXPENSE                              
                               
Deposits:                              
Demand deposits   74    2,955    3,029    164    7,748    7,912 
Savings deposits   (2)   67    65    (3)   194    191 
Time deposits   298    1,390    1,688    458    2,620    3,078 
Total deposits   370    4,412    4,782    619    10,562    11,181 
                               
Borrowings:                              
Total borrowings   310    204    514    1,394    590    1,984 
                               
Total interest expense   680    4,616    5,296    2,013    11,152    13,165 
                               
NET INTEREST INCOME   1,283    (1,693)   (410)   5,491    (1,399)   4,092 

 

36 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

The following tables show a more detailed analysis of NII on a 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 September 30,
   2023  2022
         (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   22,715    227    3.97    15,294    55    1.42 
                               
Securities available for sale:                              
Taxable   359,965    3,030    3.37    434,872    2,720    2.50 
Tax-exempt   157,807    804    2.04    206,493    1,336    2.59 
Total securities (d)   517,772    3,834    2.96    641,365    4,056    2.53 
                               
Loans (a)   1,317,484    15,959    4.83    1,078,955    11,074    4.10 
                               
Regulatory stock   8,114    152    7.48    6,032    101    6.71 
                               
Total interest earning assets   1,866,085    20,172    4.32    1,741,646    15,286    3.51 
                               
Non-interest earning assets (d)   41,128              52,736           
                               
Total assets   1,907,213              1,794,382           
                               
LIABILITIES &                              
STOCKHOLDERS' EQUITY                              
Interest bearing liabilities:                              
Demand deposits   497,850    3,449    2.75    431,947    420    0.39 
Savings deposits   332,615    83    0.10    371,063    19    0.02 
Time deposits   221,755    1,858    3.32    112,188    169    0.60 
Borrowed funds   136,812    1,289    3.74    101,450    775    3.03 
Total interest bearing liabilities   1,189,032    6,679    2.23    1,016,648    1,383    0.54 
                               
Non-interest bearing liabilities:                              
                               
Demand deposits   602,012              668,287           
Other   11,369              7,690           
                               
Total liabilities   1,802,413              1,692,625           
                               
Stockholders' equity   104,800              101,757           
                               
Total liabilities & stockholders' equity   1,907,213              1,794,382           
                               
Net interest income (FTE)        13,493              13,903      
                               
Net interest spread (b)             2.09              2.97 
Effect of non-interest bearing deposits             0.80              0.22 
Net yield on interest earning assets (c)             2.89              3.19 

 

(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 $2,426,000 as of September 30, 2023, and $2,360,000 as of September 30, 2022. Such fees and costs recognized through income and included in the interest amounts totaled ($92,000) in 2023, and $92,000 in 2022.

(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.

 

37 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

 

   For the Nine Months Ended September 30,
   2023  2022
         (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   18,777    474    3.38    45,260    139    0.41 
                               
Securities available for sale:                              
Taxable   379,437    9,120    3.20    417,802    6,225    1.98 
Tax-exempt   160,783    2,563    2.13    203,711    3,975    2.60 
Total securities (d)   540,220    11,683    2.88    621,513    10,200    2.19 
                               
Loans (a)   1,274,727    44,733    4.68    1,002,612    29,498    3.93 
                               
Regulatory stock   7,734    436    7.53    5,742    232    5.38 
                               
Total interest earning assets   1,841,458    57,326    4.15    1,675,127    40,069    3.19 
                               
Non-interest earning assets (d)   43,137              64,565           
                               
Total assets   1,884,595              1,739,692           
                               
LIABILITIES &                              
STOCKHOLDERS' EQUITY                              
Interest bearing liabilities:                              
Demand deposits   488,441    8,498    2.33    397,487    586    0.20 
Savings deposits   345,160    246    0.10    364,704    55    0.03 
Time deposits   179,235    3,605    2.69    113,366    527    0.62 
Borrowed funds   133,655    3,667    3.67    79,923    1,683    2.82 
Total interest bearing liabilities   1,146,491    16,016    1.87    955,480    2,851    0.40 
                               
Non-interest bearing liabilities:                              
                               
Demand deposits   623,384              663,950           
Other   10,875              6,705           
                               
Total liabilities   1,780,750              1,626,135           
                               
Stockholders' equity   103,845              113,557           
                               
Total liabilities & stockholders' equity   1,884,595              1,739,692           
                               
Net interest income (FTE)        41,310              37,218      
                               
Net interest spread (b)             2.29              2.79 
Effect of non-interest bearing deposits             0.70              0.17 
Net yield on interest earning assets (c)             2.99              2.96 

 

(a) Includes balances of nonaccrual loans and the recognition of any related interest income.  The year-to-date average balances include net deferred loan costs of $2,541,000 as of September 30, 2023, and $2,238,000 as of September 30, 2022.  Such fees and costs recognized through income and included in the interest amounts totaled $(260,000) in 2023, and $54,000 in 2022.

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

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

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

 

38 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s average balances on securities decreased by $123.6 million, or 19.3%, for the three months ended September 30, 2023, and $81.3 million, or 13.1%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The tax equivalent yield on investments increased by 43 basis points for the quarter-to-date period and 69 basis points for the year-to-date period when comparing both years. As a result of the declining balances, interest income on securities decreased by $222,000, or 5.5%, for the three months ended September 30, 2023, compared to the same period in 2022. For the year-to-date period, as a result of the higher yields on securities, interest income increased by $1,483,000, or 14.5%, compared to 2022.

 

Average balances on loans increased by $238.5 million, or 22.1%, for the three months ended September 30, 2023, and $272.1 million, or 27.1%, for the nine months ended September 30, 2023, compared to the same periods in the prior year. Loan yields increased by 73 basis points for the quarter, and 75 basis points for the year-to-date period and loan interest income increased by $4,885,000, or 44.1%, and $15,235,000, or 51.6%, for both time frames due to the increase in loan balances and higher yields.

 

The average balance of interest-bearing deposit accounts increased by $137.0 million, or 15.0%, and $137.3 million, or 15.7%, for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year. Interest-bearing deposits increased as rates increased due to funds shifting from non-interest earning accounts to interest earning accounts due to the rapid increase in market rates. The average balance of savings accounts decreased as funds moved into higher-yielding accounts. The interest rate paid on all interest-bearing deposits increased significantly for both time periods. The average rate on interest-bearing deposits increased by 177 basis points for the quarter ended September 30, 2023, and 145 basis points for the year-to-date period, compared to the same periods in the prior year. The combination of these changes resulted in an increase in interest expense on deposits of $4,782,000, for the three months ended September 30, 2023, and $11,181,000, for the nine months ended September 30, 2023, compared to the same periods in 2022.

 

The Corporation’s average balance on borrowed funds increased by $35.4 million, or 34.9%, for the three months ended September 30, 2023, and $53.7 million, or 67.2%, for the nine months ended September 30, 2023, compared to the same periods in 2022. The Corporation’s borrowed funds consist of FHLB advances as well as subordinated debt issued in December of 2020 and July of 2022 which was used to support capital growth for the Corporation. The rate paid on borrowed funds increased by 71 basis points for the three months ended September 30, 2023, and 85 basis points for the nine months ended September 30, 2023, compared to the same periods in the prior year. This increase in rate can be attributed to initiating higher-rate FHLB advances in late 2022 and throughout 2023 as well as the issuance of subordinated debt in July of 2022.

 

For the three months ended September 30, 2023, the net interest spread decreased by 88 basis points to 2.09%, compared to 2.97% for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the net interest spread decreased by 50 basis points to 2.29%, compared to 2.79% for the nine months ended September 30, 2022. The effect of non-interest bearing funds increased to 80 basis points from 22 basis points for the three months ended September 30, 2023, and increased to 70 basis points from 17 basis points for the nine months ended September 30, 2023, compared to the same periods in 2022. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for the third quarter of 2023 was 2.89%, compared to 3.19% for the third quarter of 2022. For the year-to-date period, the Corporation’s NIM was 2.99%, compared to 2.96% for the same period in 2022.

 

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 Credit Losses

 

The provision for credit losses includes a provision for losses on loans, available-for-sale debt securities, and unfunded loan commitments. The provision provides for losses inherent in the financial assets as determined by a quarterly analysis and calculation of various factors related to the financial assets. The amount of the provision reflects the adjustment management determines necessary to ensure the Allowance for Credit Losses (ACL) is adequate to cover any losses inherent in the financial assets. The Corporation recorded a provision expense of $1,469,000 for credit losses related to loans, $99,000 for unfunded commitments, and $0 related to available-for-sale debt securities for the first nine months of 2023, compared to $1,300,000 related to loans for the nine months ended September 30, 2022. The provision expense was higher in the first nine months of 2023 due to the Corporation’s adoption of ASU 2016-13 which requires a reliance on forward economic indicators to project expected credit losses as well as a higher balance of classified loans. As of September 30, 2023, the allowance as a percentage of total loans was 1.22%, compared to 1.27% at September 30, 2022. More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows.

 

39 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Other Income

 

Other income for the third quarter of 2023 was $3,555,000, an increase of $375,000, or 11.8%, compared to the $3,180,000 earned during the third quarter of 2022. For the year-to-date period ended September 30, 2023, other income totaled $8,631,000, a decrease of $1,244,000, or 12.6%, compared to the same period in 2022. The following table details the categories that comprise other income.

 

OTHER INCOME

(DOLLARS IN THOUSANDS)

 

   Three Months Ended September 30,         
   2023   2022   Increase (Decrease) 
   $   $   $   % 
                 
Trust and investment services   663    680    (17)   (2.5)
Service charges on deposit accounts   372    361    11    3.0 
Other fees   1,010    430    580    >100% 
Commissions   917    941    (24)   (2.6)
Net gains (losses) on debt and equity securities   (103)   9    (112)   >100% 
Gains on sale of mortgages   180    186    (6)   (3.2)
Earnings on bank owned life insurance   245    242    3    1.2 
Other miscellaneous income   271    331    (60)   (18.1)
                     
Total other income   3,555    3,180    375    11.8 

 

OTHER INCOME

(DOLLARS IN THOUSANDS)

 

   Nine Months Ended September 30,   Increase (Decrease) 
   2023   2022         
   $   $   $   % 
                 
Trust and investment services   2,122    1,979    143    7.2 
Service charges on deposit accounts   1,003    987    16    1.6 
Other fees   2,401    1,076    1,325    >100% 
Commissions   2,729    2,762    (33)   (1.2)
Net gains (losses) on debt and equity securities   (1,769)   10    (1,779)   >100% 
Gains on sale of mortgages   506    1,249    (743)   (59.5)
Earnings on bank owned life insurance   708    667    41    6.1 
Other miscellaneous income   931    1,145    (214)   (18.7)
                     
Total other income   8,631    9,875    (1,244)   (12.6)

 

Trust and investment services income decreased marginally for the quarter and increased for the year-to-date period as a result of a larger level of assets under management and higher fees. Other fees increased for both time periods driven by fees earned on an off-balance-sheet sweep product. The Corporation incurred $103,000 of losses on debt and equity securities in the third quarter of 2023, and $1,769,000 of losses for the year-to-date period as a result of strategic sales of debt securities from the available-for-sale portfolio to fund higher yielding loan growth and depreciation of bank stock values causing an unrealized loss on equity securities. Mortgage gains declined marginally for the quarter and by $743,000, or 59.5%, for the nine months ended September 30, 2023, compared to the same period in 2022. This was primarily a result of the rapid increase in interest rates during the last three quarters of 2022 that resulted in very low margins on mortgages sold and a switch to mortgages held on the Corporation’s balance sheet as opposed to sold on the secondary market. The miscellaneous income category was lower for the three and nine months ended September 30, 2023, as a result of non-recurring income items that impacted 2022.

 

40 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Operating Expenses

 

Operating expenses for the third quarter of 2023 were $13,033,000, an increase of $1,520,000, or 13.2%, compared to the $11,513,000 for the third quarter of 2022. For the year-to-date period ended September 30, 2023, operating expenses totaled $38,599,000, an increase of $5,001,000, or 14.9%, compared to the same period in 2022. The following table provides details of the Corporation’s operating expenses for the three and nine-month periods ended September 30, 2023, compared to the same periods in 2022.

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

 

   Three Months Ended September 30,         
   2023   2022   Increase (Decrease) 
   $   $   $   % 
Salaries and employee benefits   7,350    6,607    743    11.2 
Occupancy expenses   833    713    120    16.8 
Equipment expenses   327    312    15    4.8 
Advertising & marketing expenses   387    259    128    49.4 
Computer software & data processing expenses   1,798    1,727    71    4.1 
Shares tax   252    351    (99)   (28.2)
Professional services   922    720    202    28.1 
Other operating expenses   1,164    824    340    41.3 
Total Operating Expenses   13,033    11,513    1,520    13.2 

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

 

   Nine Months Ended September 30,         
   2023   2022   Increase (Decrease) 
   $   $   $   % 
Salaries and employee benefits   22,706    19,826    2,880    14.5 
Occupancy expenses   2,429    2,125    304    14.3 
Equipment expenses   996    913    83    9.1 
Advertising & marketing expenses   1,074    833    241    28.9 
Computer software & data processing expenses   5,277    4,251    1,026    24.1 
Bank shares tax   851    1,053    (202)   (19.2)
Professional services   2,428    1,983    445    22.4 
Other operating expenses   2,838    2,614    224    8.6 
Total Operating Expenses   38,599    33,598    5,001    14.9 

 

41 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Salaries and employee benefits are the largest category of operating expenses. For the third quarter of 2023, salaries and benefits increased $743,000, or 11.2%, and for the nine months ended September 30, 2023, salaries and benefits increased $2,880,000, or 14.5%, compared to the same periods in 2022. This was primarily due to a competitive labor market that resulted in higher costs to attract and retain employees inclusive of costs related to merit increases and higher employee benefit expenses. Occupancy and equipment expenses in total increased by 13.2% for the quarter, and 12.7% for the year-to-date period, compared to the same periods in the prior year as a result of increased expenses to maintain buildings and normal costs to purchase and repair equipment. Advertising and marketing expenses increased by $128,000, or 49.4%, and $241,00, or 28.9%, for the three and nine months ended September 30, 2023, compared to the same periods in the prior year. This was primarily a result of increased newspaper and television advertising as well as some direct mail campaigns. Computer software and data processing expenses increased by $71,000, or 4.1%, and $1,026,00, or 24.1%, for the three and nine months ended September 30, 2023, as a result of higher technology costs caused primarily by a debit card conversion that took place in the third quarter of 2023 that resulted in amortized contract costs. Shares tax expense is based on the Corporation’s level of shareholders’ equity and has decreased due to the decline in the Corporation’s level of shareholders’ equity. Professional services expenses increased by 28.1% in the third quarter of 2023, and 22.4% for the year-to-date period compared to the prior year driven by higher fees associated with various third party support of strategic initiatives. Other operating expenses increased by $340,000, or 41.3%, and $224,000, or 8.6%, for the three and nine months ended September 30, 2023, compared to the same periods in the prior year due to largely to higher FDIC insurance costs.

 

Income Taxes

 

Federal income tax expense was $771,000 for the third quarter of 2023 compared to $697,000 for the same period in 2022. For the nine months ended September 30, 2023, the Corporation recorded Federal income tax expense of $1,432,000, compared to $1,503,000 for the nine months ended September 30, 2022. The effective tax rate for the Corporation was 15.4% for the nine months ended September 30, 2023, and 13.3% for the nine months ended September 30, 2022. 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.

 

42 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Financial Condition

 

Investment Securities

 

The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of September 30, 2023, the Corporation had $438.2 million of debt securities available for sale, which accounted for 23.0% of assets, compared to 28.5% as of December 31, 2022, and 30.7% as of September 30, 2022. Based on ending balances, the debt securities portfolio decreased 21.7% from September 30, 2022, and 17.2% from December 31, 2022.

 

The debt securities portfolio was showing a net unrealized loss of $66,736,000 as of September 30, 2023, compared to $61,129,000 as of December 31, 2022, and $70,102,000 as of September 30, 2022. 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.

 

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’s U.S. Treasury sector decreased $15.1 million during the first nine months of 2023, resulting in a 46.3% decrease in this sector. This sector represents a safe credit, but carries a low yield due to the investments made in 2020 and 2021. As a result, some Treasuries were sold during the first half of the year to provide liquidity for much higher yielding loan growth. The Corporation’s U.S. government agency sector decreased by $7.9 million, or 31.7%, since December 31, 2022.

 

The Corporation’s U.S. agency MBS and CMO sectors have decreased since December 31, 2022, with MBS decreasing $5.3 million, or 11.8%, and CMOs decreasing $7.9 million, or 28.6%. 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 portfolio of non-agency MBS and CMO securities stood at $51.9 million as of September 30, 2023, or 11.6% 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 non-agency portfolio stood at $50.3 million at December 31, 2022.

 

The Corporation’s asset-backed securities declined by $6.3 million, or 8.6%, from December 31, 2022, to September 30, 2023. Many of the bonds in this sector receive regular monthly principal payments which caused the value to decline. These bonds are primarily floating rate instruments, so in the current rates-up environment, they have added to the overall yield increase for the portfolio.

 

43 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

As of September 30, 2023, the fair value of the Corporation’s corporate bonds decreased by $16.1 million, or 23.2%, from balances at December 31, 2022. During the first half of 2023, some corporate bonds were sold to provide liquidity for loan growth. 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. 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 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 the levels of excess liquidity experienced due to deposit inflows. Municipal bonds represented 38.4% of the securities portfolio as of September 30, 2023, compared to 38.2% as of December 31, 2022.

 

Loans

 

Net loans outstanding increased by 19.9%, to $1,319.2 million at September 30, 2023, from $1,100.4 billion at September 30, 2022. Net loans increased by 12.1%, an annualized rate of 16.1%, from $1,177.0 million at December 31, 2022. The following table shows the composition of the loan portfolio as of September 30, 2023 and December 31, 2022.

 

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

 

   September 30,  December 31,
   2023  2022
   $  %  $  %
             
Agriculture   248,540    18.6    238,734    20.1 
Business Loans   351,319    26.4    336,340    28.3 
Consumer   6,516    0.5    5,932    0.5 
Home Equity   105,593    7.9    98,854    8.3 
Non-Owner Occupied CRE   133,454    10.0    111,333    9.4 
Residential Real Estate (a)   487,833    36.6    397,260    33.4 
                     
Total loans   1,333,255    100    1,188,453    100 
Less:                    
Deferred loan costs, net   2,342         2,664      
Allowance for credit losses   (16,349)        (14,151)     
Total net loans (b)   1,319,248         1,176,966      

 

(a) Residential real estate loans do not include mortgage loans serviced for others which totaled $298,899,000 as of September 30, 2023 and $298,375,000 as of December 31, 2022.

(b) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

 

There was moderate growth in the loan portfolio since December 31, 2022. All of the loan categories showed an increase in balances since December 31, 2022.

 

From December 31, 2022, the Agriculture Loan segment increased $9,806,000, or 4.1%, the Business Loan segment increased $14.978.000, of 4.5%, the Consumer Loan segment increased $584,000, or 9.8%, the Home Equity segment increased $6.739,000, or 6.8%, the Non-Owner Occupied segment increased $22,121,000, or 19.9%, and the Residential Real Estate segment increased $90,573,000, or 22.8% from December 31, 2022. The Agriculture segment is concentrated primarily in loans to dairy operators, poultry operators, and crop farmers.  Business loans are fairly diverse with small concentrations in lessors of residential buildings and dwellings and lessors of non-residential buildings.  These concentrations are less than 10% of the total business loan portfolio.

 

44 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

In the third quarter of 2023, mortgage production decreased 18% from the previous quarter and was down 16% from the third quarter of 2022.  Purchase money origination constituted 96% of the Corporation’s mortgage originations for the quarter, with construction-only and construction-permanent loans making up 44% of that mix.  With the continued elevated fixed interest rate environment, the percentage of mortgage originations placed in the Corporation’s held-for-investment mortgage portfolio remained high at 78%, 74% of which were adjustable rate mortgages.  As of September 30, 2023, ARM balances were $305.0 million, representing 63.4% of the 1-4 family residential loan portfolio of the Corporation.

 

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
Other real estate owned

 

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)

 

   September 30  December 31,  September 30
   2023  2022  2022
   $  $  $
          
Nonaccrual loans   2,816    4,178    4,505 
Loans past due 90 days or more and still accruing   713    169    147 
Total non-performing loans   3,529    4,347    4,652 
                
Other real estate owned            
                
Total non-performing assets   3,529    4,347    4,652 
                
Non-performing assets to net loans   0.28%    0.31%    0.42% 

 

 

The total balance of non-performing assets decreased by $1,123,000, or 18.8% from balances at September 30, 2022, and $818,000, or 18.8%, from balances at December 31, 2022 due to 3 loans that paid off. Non-accrual loans decreased by $1,689,000, or 37.5%, since September 30, 2022, and $1,362,000, or 32.6% since December 31, 2022. Loans past due 90 days or more and still accruing increased $566,000, or 384.7%, since September 30, 2022, and increased $544,000, or 321.6%, since December 31, 2022. This increase was primarily caused by the addition of two residential mortgages totaling $597,000.

 

There was no other real estate owned (OREO) as of September 30, 2023, December 31, 2022, or September 30, 2022.

 

Allowance for Credit Losses

 

The allowance for credit losses (ACL) is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on total loans. Management reviews the adequacy of the ACL on a quarterly basis.  The ACL represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The ACL is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist.  Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending policies and procedures, loan portfolio trends, lending management experience, asset quality, loan review, underlying collateral, credit concentrations, and external factors. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. Based on the quarterly calculation, management will adjust the ACL through the provision for credit losses as necessary.

 

45 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Net Charge-Off table below shows the net charge-offs for each segment of the Corporation’s loan portfolio as of September 30, 2023.

 

Net Charge-Offs

(DOLLARS IN THOUSANDS)

 

   September 30,
   2023
   $
    
Loans charged-off:     
Agriculture    
Business Loans    
Consumer Loans   41 
Home Equity    
Non-Owner Occupied CRE    
Residential Real Estate    
Total loans charged-off   41 
      
Recoveries of loans previously charged-off     
Agriculture   71 
Business Loans   8 
Consumer Loans   3 
Home Equity    
Non-Owner Occupied CRE    
Residential Real Estate   8 
Total recoveries   90 
      
Net charge-offs (recoveries)     
Agriculture   (71)
Business Loans   (8)
Consumer Loans   38 
Home Equity    
Non-Owner Occupied CRE    
Residential Real Estate   (8)
Total net charge-offs (recoveries)   (49)

 

46 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Net Charge-Off table below shows the net charge-offs for each segment of the Corporation’s loan portfolio as of September 30, 2022.

 

Net Charge-Offs

(DOLLARS IN THOUSANDS)

 

   September 30,
   2022
   $
    
Loans charged-off:     
Commercial real estate   65 
Consumer real estate    
Commercial and industrial   59 
Consumer   16 
Total loans charged-off   140 
      
Recoveries of loans previously charged-off     
Commercial real estate   12 
Consumer real estate   9 
Commercial and industrial   35 
Consumer   3 
Total recoveries   59 
      
Net charge-offs (recoveries)     
Commercial real estate   53 
Consumer real estate   (9)
Commercial and industrial   24 
Consumer   13 
Total net charge-offs (recoveries)   81 

 

The Corporation has historically experienced very low net charge-off percentages due to conservative credit practices. As of September 30, 2023, there were $41,000 in charge-offs and $90,000 of recoveries, representing a net recovery position of $49,000 as show above. As of September 30, 2022, there were $140,000 in charge-offs and $59,000 in recoveries, representing a net charge-off position of $81,000.

 

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 $12.9 million on September 30, 2023, compared to $12.9 million on September 30, 2022. 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.

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation, increased by $0.7 million, or 2.8%, to $25.3 million as of September 30, 2023, from $24.6 million as of September 30, 2022. As of September 30, 2023, $567,000 was classified as construction or improvement in process compared to $664,000 as of September 30, 2022. Fixed assets increased as a result of new purchases outpacing depreciation on existing assets 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 $8.3 million of regulatory stock holdings as of September 30, 2023, consisted of $7.1 million of FHLB of Pittsburgh stock, $1.1 million 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.

 

47 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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 $7.1 million on September 30, 2023, $5.6 million on December 31, 2022, and $5.2 million on September 30, 2022, with no excess capital stock position. Any future stock repurchases would be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.

 

Deposits

 

The Corporation’s total ending deposits at September 30, 2023, increased by $22.0 million, or 1.3%, and by $29.1 million, or 1.8%, from December 31, 2022, and September 30, 2022, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. The mix of the Corporation’s deposit categories has changed significantly since September 30, 2022, as customers have moved from non-interest bearing and low-interest bearing accounts into higher yielding checking accounts and time deposits. Since September 30, 2022, there has been a $87.4 million, or 13.0% decrease in non-interest bearing demand deposit accounts, a $59.9 million, or 34.0% increase in interest bearing demand balances, a $30.0 million, or 23.2% decrease in NOW balances, a $8.0 million, or 4.8% decrease in money market account balances, a $45.2 million, or 12.2% decrease in savings account balances, and a $139.8 million, or 115.9% increase in time deposit balances.

 

The growth in interest bearing demand balances was a result of participating in a reciprocal arrangement for the Corporation’s off balance sheet cash management sweep product as a strategic decision to fund loan growth. This product allows customers to sweep balances off the Corporation’s balance sheet, maintain a competitive yield, and receive full FDIC insurance coverage. The Corporation fully receives reciprocal balances back on balance sheet for this product and many customers moved funds into this product during 2023, resulting in the large increase in balances.

 

The significant increase in time deposit balances was a result of issuing $30 million in brokered time deposits since September 30, 2022, as well as increases in the Corporation’s customer time deposits as a result of the increased rate environment and offering several promotional rates on specific time deposit terms. Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution.

 

As of September 30, 2023 and 2022, the total uninsured deposits of the Corporation were approximately $204,614,000 and $305,890,000, respectively. Total uninsured deposits is calculated based on regulatory reporting requirements and reflects the portion of any deposit of a customer at an insured depository institution that exceeds the applicable FDIC insurance coverage for that depositor at that institution and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime.

 

The Deposits by Major Classification table, shown below, provides the balances of each category for September 30, 2023, December 31, 2022, and September 30, 2022.

 

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

 

   September 30,   December 31,   September 30, 
   2023   2022   2022 
   $   $   $ 
             
Non-interest bearing demand   583,145    672,342    670,563 
Interest bearing demand   236,243    164,208    176,308 
NOW accounts   99,368    139,846    129,390 
Money market deposit accounts   157,684    163,836    165,688 
Savings accounts   324,053    364,897    369,229 
Time deposits   260,497    133,829    120,671 
Total deposits   1,660,990    1,638,958    1,631,849 

 

48 

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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

 

Borrowings

 

Total borrowings were $138.0 million, $113.4 million, and $98.6 million as of September 30, 2023, December 31, 2022, and September 30, 2022, respectively. There were no short-term borrowings as of September 30, 2023, but as of December 31, 2022, there were $16.0 million, and $15.0 million at September 30, 2022. 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 $98.5 million as of September 30, 2023, $58.0 million as of December 31, 2022, and $44.2 million as of September 30, 2022, respectively. 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 increase in long-term FHLB borrowings since September 30, 2022, can be attributed to the changing interest rate environment and the desire to ladder out some borrowings into future years to cover liquidity needs. The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $664.6 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 June 30, 2023, $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.

 

On July 22, 2022, the Corporation completed the sale of an additional subordinated debt note offering.  The Corporation sold $20.0 million of subordinated debt notes with a maturity date of September 30, 2032.  These notes are all non-callable for 5 years and carry a fixed interest rate of 5.75% per year for the 5 years and then convert to a floating rate for the remainder of the term.  The notes can be redeemed at par beginning 5 years prior to maturity.  The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank.  As of September 30, 2023, $17.0 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.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

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 September 30, 2023  Capital Ratios   Capitalized   Capitalized 
Total Capital to Risk-Weighted Assets               
Consolidated   14.7%    N/A    N/A 
Bank   14.3%    8.0%    10.0% 
                
Tier 1 Capital to Risk-Weighted Assets               
Consolidated   10.7%    N/A    N/A 
Bank   13.1%    6.0%    8.0% 
                
Common Equity Tier 1 Capital to Risk-Weighted Assets               
Consolidated   10.7%    N/A    N/A 
Bank   13.1%    4.5%    6.5% 
                
Tier 1 Capital to Average Assets               
Consolidated   7.7%    N/A    N/A 
Bank   9.4%    4.0%    5.0% 
                
As of December 31, 2022               
Total Capital to Risk-Weighted Assets               
Consolidated   15.0%    N/A    N/A 
Bank   14.5%    8.0%    10.0% 
                
Tier I Capital to Risk-Weighted Assets               
Consolidated   10.9%    N/A    N/A 
Bank   13.4%    6.0%    8.0% 
                
Common Equity Tier I Capital to Risk-Weighted Assets               
Consolidated   10.9%    N/A    N/A 
Bank   13.4%    4.5%    6.5% 
                
Tier I Capital to Average Assets               
Consolidated   7.6%    N/A    N/A 
Bank   9.3%    4.0%    5.0% 
                
                
As of September 30, 2022               
Total Capital to Risk-Weighted Assets               
Consolidated   15.1%    N/A    N/A 
Bank   14.4%    8.0%    10.0% 
                
Tier 1 Capital to Risk-Weighted Assets               
Consolidated   10.9%    N/A    N/A 
Bank   13.2%    6.0%    8.0% 
                
Common Equity Tier 1 Capital to Risk-Weighted Assets               
Consolidated   10.9%    N/A    N/A 
Bank   13.2%    4.5%    6.5% 
                
Tier 1 Capital to Average Assets               
Consolidated   7.7%    N/A    N/A 
Bank   9.3%    4.0%    5.0% 

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

As of September 30, 2023, the Bank’s Tier 1 Leverage Ratio stood at 9.4% while the Corporation’s Tier 1 Leverage Ratio was 7.7%. 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 $40 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 September 30, 2023.

 

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

 

   September 30, 
   2023 
   $ 
Commitments to extend credit:     
Revolving home equity   215,754 
Construction loans   28,582 
Real estate loans   86,878 
Business loans   229,856 
Consumer loans   1,362 
Other   5,721 
Standby letters of credit   17,004 
      
Total   585,157 

 

Market Risks

 

During March and April 2023, three significant bank failures occurred (Silicon Valley Bank, Signature Bank, and First Republic Bank). This was and continues to be accompanied by financial instability at certain additional banks. These bank failures and bank instabilities have created and may continue to create market and other risks, for all financial institutions and banks, including the Corporation. These risks include, but are not limited to:

1.Market risk and loss of confidence in the financial services sector, and/or specific banks;
2.Deterioration of securities and loan portfolios;
3.Deposit reductions with higher volumes and occurring over shorter periods of time;
4.Increased liquidity demand and utilization of sources of liquidity; and
5.Interest rate volatility and abrupt, sudden and greater than usual rate changes.

These factors individually, or in any combination, could materially and adversely affect:

1.Financial condition;
2.Operations and results thereof; and
3.Stock price.

In addition, the previously mentioned bank failures and instabilities may result in an increase of FDIC deposit insurance premiums and/or result in special FDIC deposit insurance assessments, which also may adversely affect the Corporation’s financial condition, operations, results thereof or stock price.

 

The Corporation cannot predict the impact, timing or duration of such events.

 

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:

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

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.

 

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ENB FINANCIAL CORP

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.

 

The Corporation regularly reviews its liquidity position by measuring its projected net cash flows at a 30 and 90-day interval. The Corporation stresses the measurements by assuming a level of deposit out-flows that have not historically been realized. In addition to this forecast, other funding sources are reviewed as a method to provide emergency funding if necessary. The objective of this measurement is to identify the amount of cash that could be raised quickly without the need to liquidate assets. The Corporation also stresses its liquidity position utilizing different longer-term scenarios. The varying degrees of stress create pressure on deposit flows in its local market, reduce access to wholesale funding and limit access of funds available through brokered deposit channels. In addition to stressing cash flow, specific liquidity risk indicators are monitored to help identify risk areas. This analysis helps identify and quantify the potential cash surplus/deficit over a variety of time horizons to ensure the Corporation has adequate funding resources. Assumptions used for liquidity stress testing are subjective. Should an evolving liquidity situation or business cycle present new data, potential assumption changes will be considered. The Corporation believes it can meet all anticipated liquidity demands.

 

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as available for sale; therefore, securities that are unencumbered can be used as collateral for borrowings and are an additional source of readily available liquidity.

 

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

 

On-hand Liquidity/Total Liabilities – Net liquid assets as a percentage of total liabilities
Non-Core Funding Dependence – Non-core liabilities minus short-term investments as a percentage of long-term assets
Reliance on Wholesale Funding – Wholesale funding as a percentage of total funding
Net Short-term Liabilities/Total Assets – Short-term liabilities minus short-term assets as a percentage of total assets
Loan to Deposit Ratio – Total loans as a percentage of total deposits

 

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ENB FINANCIAL CORP

These measurements are designed to prevent undue reliance on outside sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available liquidity sources. As of September 30, 2023, the Corporation was within guidelines for all of the above measurements.

 

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

 

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

 

Changes in net interest income
Changes in net portfolio value

 

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 100, 200, or 300 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

 

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. Back testing of the model is completed to compare actual results to projections to ensure the validity of the assumptions in the model. The back testing analyses 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 change immediately, the Corporation would realize less net interest income in all up and down rate scenarios. In past years, the Corporation was generally showing asset sensitivity meaning in a rates-up environment, assets would reprice faster than liabilities resulting in higher net interest income. In the past few quarters, this increase in net interest income shifted to a decline primarily due to the increased impact from a higher cost of funds as rates continue to rise. While the Corporation would recognize higher interest income on its variable-rate assets, it would also now be repricing liabilities at a much faster pace resulting in increased interest expense that would offset the rise in interest income. Likewise, in the down-rate scenarios, asset yields would decline in conjunction with market rate moves, while deposit repricing would be slower to retain existing deposit balances.

 

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ENB FINANCIAL CORP

The third quarter of 2023 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of September 30, 2023, the Corporation was within guidelines for the maximum amount of net interest income change in all rate scenarios.

 

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 September 30, 2023, the Corporation was within guidelines for all rate scenarios except the down-300 basis point scenarios. The Corporation shows a favorable benefit to net portfolio value in the rising rate scenarios, due primarily to the large amount of core deposits on the Corporation’s balance sheet. 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 analysis shows a valuation loss in the down rate scenarios. Policy allows for a valuation decline of 30% for the down-300 basis point scenario and actual projected results show a valuation decline of 32%. While this loss is outside of policy guidelines, the Federal Reserve has signaled that their preferred course of action is to increase rates until inflation retracts. The Corporation will continue to monitor these measurements in the down-rate scenarios and adjust balance sheet structure as necessary to prepare for future potential lower rates.

 

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

 

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ENB FINANCIAL CORP

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures.

 

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer (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 September 30, 2023, 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 September 30, 2023, are effective to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

(b) Changes in Internal Controls.

 

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

 

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ENB FINANCIAL CORP

 

PART II – OTHER INFORMATION

September 30, 2023

 

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. Other than as noted below, there have been no material changes in risk factors applicable to the Corporation from those disclosed in "Risk Factors" in Item 1A of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.

 

Negative developments affecting the banking industry, including recent bank failures or concerns regarding liquidity, have eroded customer confidence in the banking system and may have a material adverse effect on the Corporation.

 

Events impacting the banking industry, including the high-profile failure or instability of certain banking institutions, have resulted and may continue to result in general uncertainty and eroded confidence in the safety, soundness, and financial strength of the financial services sector. In particular, the bank failures highlighted the potential serious impact of a financial institution unable to meet withdrawal requests by depositors. This has resulted in a growing concern about liquidity in the banking industry, access to and volatile capital markets and reduced stock valuations for certain financial institutions. Similar future events, including additional bank failures or bank instability, could directly or indirectly adversely impact our own liquidity, access to capital markets, stock price, financial condition and results of operations. Further, these recent events may also result in: greater regulatory scrutiny and enforcement; additional and more stringent laws and regulations for the financial services industry; increased FDIC deposit insurance premiums or special FDIC assessments; and higher capital ratio requirements, which as a result could have a material negative impact and adverse effect on our business, financial condition and results of operations.

 

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

 

Purchases

 

The following table details the Corporation’s purchase of its own common stock during the three months ended September 30, 2023.

 

Issuer Purchase of Equity Securities
                 
           Total Number of   Maximum Number 
   Total Number   Average   Shares Purchased   of Shares that May 
   of Shares   Price Paid   as Part of Publicly   Yet be Purchased 
Period  Purchased   Per Share   Announced Plans *   Under the Plan * 
                 
July 2023   8,800    14.25    8,800    130,510 
August 2023               130,510 
September 2023               130,510 
                     
Total   8,800                

 

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ENB FINANCIAL CORP

* On October 21, 2020, the Board of Directors of the Corporation approved a plan to repurchase, in open market and privately negotiated transactions, up to 200,000 shares of its outstanding common stock. The first purchase of common stock under this plan occurred on October 28, 2020. By September 30, 2023, a total of 69,490 shares were repurchased at a total cost of $1,226,000 for an average cost per share of $17.65.

 

Item 3. Defaults Upon Senior Securities – Nothing to Report

 

Item 4. Mine Safety Disclosures – Not Applicable

 

Item 5. Other Information – Nothing to Report

 

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ENB FINANCIAL CORP

Item 6. Exhibits:

 

Exhibit
No.
Description
3(i) Articles of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K  filed with the SEC on June 7, 2019)
3 (ii) By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on July 21, 2021.)
10.1 Form of Deferred Income Agreement. (Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August 13, 2008.)
10.2 2022 Employee Stock Purchase Plan (Incorporated herein by reference to Appendix A to the Corporation’s Definitive Proxy Statement filed with the SEC on April 4, 2022.)
10.3 2020 Non-Employee Directors’ Stock Plan. (Incorporated herein by reference to Exhibit 99.1 of the Corporation’s Form S-8 filed with the SEC on June 3, 2020.)
10.4 Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Chad E. Neiss dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.1 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.5 Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Jeffrey S. Stauffer dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.2 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.6 Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Rachel G. Bitner dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.4 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.7 Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Joselyn D. Strohm dated as of June 5, 2023. (Incorporated herein by reference to Exhibit 10.1 of the Corporation's Form 8-K filed with the SEC on June 7, 2023.)
31.1 Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)).
31.2 Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)).
32.1 Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)).
32.2 Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)).

 

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ENB FINANCIAL CORP

 

SIGNATURES

 

 

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

 

 

 

  ENB Financial Corp
  (Registrant)
     
     
Dated:  November 14, 2023 By: /s/  Jeffrey S. Stauffer
    Jeffrey S. Stauffer
    Chairman of the Board
    Chief Executive Officer and President
    Principal Executive Officer
     
     
Dated: November 14, 2023 By: /s/  Rachel G. Bitner
    Rachel G. Bitner
    Treasurer
    Principal Financial Officer

 

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