ENB FINANCIAL CORP 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 annual report. The financial condition and results of operations presented are not indicative of future performance.
Strategic Overview
ENB Financial Corp and its wholly owned subsidiary,Ephrata National Bank , are committed to remaining an independent community bank serving its market area. The Corporation's roots date back to theApril 11, 1881 charter granted toEphrata National Bank by theOffice of the Comptroller of the Currency . The Bank's growth has been entirely organic over 141 years of existence. The Board and Management are committed to the principles and values that have served the company well over its history and the desire is to produce strong financial results that will ensure trust from the Bank's customers and favorable returns to the shareholders. Results of Operations Overview The year endedDecember 31, 2022 was positively impacted by a number of items resulting in solid financial results. The Corporation grew interest-earning assets rapidly during 2022 resulting in significantly higher levels of net interest income. The growth in net interest income was also supported by the rapid increase in the Federal Funds rate and concurrently the Prime rate as theFederal Reserve moved to combat inflation by increasing overnight rates dramatically. While years prior to 2022 were marked by significant balance sheet growth because of growth in the deposit portfolio, 2022 was marked by significant loan growth. The Corporation recorded net income of$14,631,000 for the year endedDecember 31, 2022 , a$285,000 , or 1.9% decrease from the year endedDecember 31, 2021 . The earnings per share, basic and diluted, were$2.62 in 2022, compared to$2.68 in 2021, a 2.2% decrease. The decrease in the Corporation's 2022 earnings was caused primarily by a decline in non-interest income in addition to an increase in operating expenses and provision expense that was partially offset by the increase in net interest income. The Corporation's net interest income (NII) increased by$10,012,000 , or 24.7%, in 2022, compared to 2021. The increase in NII primarily resulted from an increase in interest and fees on loans of$7,698,000 , or 22.5%, and interest on securities available for sale of$4,406,000 , or 49.8%. Interest expense on deposits and borrowings increased by$2,356,000 , or 78.0%, in 2022 compared to the prior year. The increasing interest rate environment has caused an increase in asset yield, but also an increase in the cost of funds, which has resulted in these much higher levels of net interest income. The Corporation recorded a$1,300,000 provision for loan losses in 2022, compared to$475,000 in 2021. The higher provision in 2022 was primarily caused by the rapid volume growth in the loan portfolio. The increase in the provision was constrained by a decline in classified loan balances throughout the year and a decrease in several qualitative factors as a result of improved conditions. Non-interest income excluding security and mortgage gains increased by$951,000 , or 8.4%, for the year endedDecember 31, 2022 , compared to the prior year, due to many positive trends such as higher trust income, higher service fees, and higher earnings on bank-owned life insurance from two death benefit payouts. Mortgage gains decreased in 2022 to$1,302,000 , compared to$5,526,000 in 2021. Mortgage production was stable in 2022 compared to 2021, but the rapid market rate increases affected the margin that the Corporation was able to obtain on the sale of mortgages. The majority of mortgage production during 2022 were adjustable rate mortgages that were generated and retained on the Corporation's balance sheet. Additionally, gains on debt and equity securities were$1,044,000 , or 99.1% lower in 2022 compared to the prior year due to higher interest rates which resulted in fewer security sales. 26 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis 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. Key Performance Ratios Year ended December 31, 2022 2021 Return on Average Assets 0.83% 0.95% Return on Average Equity 13.63% 11.16% 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 ? Income taxes
The following discussion analyzes each of these five components.
Net Interest Income
NII represents the largest portion of the Corporation's operating income. In
2022, NII generated 78.9% of the Corporation's revenue stream, which consists of
NII and non-interest income, compared to 69.4% in 2021. This increase is a
result of much higher levels of interest-earning assets in 2022 compared to 2021
with lower non-interest income as a result of the changes in mortgage activity.
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.
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
2022 2021
$ $
Total interest income 55,959 43,591
Total interest expense 5,376 3,020
Net interest income 50,583 40,571
Tax equivalent adjustment 1,210 1,141
Net interest income
(fully taxable equivalent) 51,793 41,712
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect NII:
27
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ENB FINANCIAL CORP
Management's Discussion and Analysis
? The rates charged on interest earning assets and paid on interest bearing
liabilities
? The average balance of interest earning assets and interest bearing liabilities
NII is impacted by yields earned on assets and rates paid on liabilities. With the rapid increase in the short-termFederal Reserve rates in 2022, asset yields have increased and theU.S. Treasury curve increased dramatically on the short end but has been relatively flat on the long end. As a result of a larger balance sheet in 2022, with higher asset yields, the Corporation's NII on a tax equivalent basis increased significantly and the Corporation's margin increased to 3.03% for year endedDecember 31, 2022 , compared to 2.81% in 2021. Loan and investment yields were higher in 2022 due to the 425 basis point Fed rate increases during the year positively impacting yields on variable rate instruments and increasing the yields on new volume. The Corporation's NII on a tax equivalent basis in 2022 increased over 2021, by$10,081,000 , or 24.2%. The Corporation's overall cost of funds on a monthly annualized basis, including non-interest bearing funds, remained stable through the first half of 2022 between 18 and 22 basis points. In the second half of the year, core deposit interest rates as well as time deposit rates were increased resulting in a much higher cost of funds for the second half of 2022 ranging between 25 and 67 basis points. The average balance and interest rates of borrowings was higher in 2022 compared to 2021, resulting in higher interest expense of$509,000 , or 39.9%. The Corporation now carries a total of$40 million of subordinated debt that was issued at the holding company;$20 million beginning onDecember 30, 2020 , at a rate of 4.00%, and$20 million beginning onJuly 22, 2022 , at a rate of 5.75%. The additional subordinated debt resulted in an increase in interest expense of$511,000 , or 63.9%, when comparing 2022 to 2021. The following table provides an analysis of year-to-year changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
2022 vs. 2021 2021 vs. 2020
Increase (Decrease) Increase (Decrease)
Due To Change In Due To Change In
Net Net
Average Interest Increase Average Interest Increase
Balances Rates (Decrease) Balances Rates (Decrease)
$ $ $ $ $ $
INTEREST INCOME
Interest on deposits at
other banks (48 ) 129 81 65 (114 ) (49 )
Securities available for
sale:
Taxable 855 3,419 4,274 1,844 (987 ) 857
Tax-exempt 440 (187 ) 253 2,139 (548 ) 1,591
Total securities 1,295 3,232 4,527 3,983 (1,535 ) 2,448
Loans 7,041 713 7,754 2,180 (2,597 ) (417 )
Regulatory stock 1 74 75 (64 ) (94 ) (158 )
Total interest income 8,289 4,148 12,437 6,164 (4,340 ) 1,824
INTEREST EXPENSE
Deposits:
Demand deposits 42 1,572 1,614 99 (441 ) (342 )
Savings deposits 11 18 29 16 (14 ) 2
Time deposits (5 ) (31 ) (36 ) (109 ) (547 ) (656 )
Total deposits 48 1,559 1,607 6 (1,002 ) (996 )
Borrowings:
Total borrowings 509 240 749 25 145 170
Total interest expense 557 1,799 2,356 31 (857 ) (826 )
NET INTEREST INCOME 7,732 2,349 10,081 6,133 (3,483 ) 2,650
28
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ENB FINANCIAL CORP
Management's Discussion and Analysis
In 2022, the Corporation's NII on an FTE basis increased by $10,081,000 , a 24.2%
increase over 2021. Total interest income increased $12,437,000 , or 27.8%, while
interest expense increased $2,356,000 , or 78.0%, from 2021 to 2022. The FTE
interest income from the securities portfolio increased by $4,527,000 , or 45.4%,
while loan interest income increased $7,754,000 , or 22.5%. During 2022,
additional loan volume added $7,041,000 to net interest income, and higher
yields primarily due to the Prime rate increases in 2022, caused a $713,000
increase. Higher balances in the securities portfolio caused an increase of
$1,295,000 in net interest income, while higher yields on securities caused a
$3,232,000 increase, resulting in a net increase of $4,527,000 .
The average balance of interest bearing liabilities increased by 16.3% during
2022, driven by the growth in deposit and borrowings balances. Deposit rates
increased in 2022 causing a significant increase in interest expense. Higher
interest rates contributed to $1,559,000 of increased interest expense while
higher deposit balances caused $48,000 of increased expense, resulting in a
total increase in interest expense of $1,607,000 .
Interest-bearing demand deposits repriced causing a large increase in interest
expense due to the large quantity of accounts that were adjusted. Demand deposit
interest expense increased a total of $1,614,000 in 2022, with $1,572,000 due to
higher rates, while higher balances caused an increase of $42,000 . Higher
balances in savings accounts caused an increase of $11,000 , while higher rates
caused an increase of $18,000 , resulting in the net increase in interest expense
of $29,000 on savings deposits. Time deposit balances declined throughout 2022,
resulting in lower interest expense of $5,000 , while lower rates caused a
decline of $31,000 , resulting in a net decrease of $36,000 . While some time
deposit rates increased towards the end of 2022, time deposits were still
repricing to lower levels throughout the majority of the year.
The average balance of total borrowings increased by $17,295,000 , or 24.5%, from
December 31, 2021 , to December 31, 2022 . The increase in total borrowings
increased interest expense by $509,000 . Higher rates on borrowings, affected by
the Fed rate increases and the subordinated debt issued in July 2022 , resulted
in higher interest expense of $240,000 . The aggregate of these amounts was an
increase in interest expense of $749,000 related to total borrowings.
The following table shows a more detailed analysis of net interest income on an
FTE basis shown with all the major elements of the Corporation's balance sheet,
which consists of interest earning and non-interest earning assets and interest
bearing and non-interest bearing liabilities. Additionally, the analysis
provides the net interest spread and the net yield on interest earning assets.
The net interest spread is the difference between the yield on interest earning
assets and the interest rate paid on interest bearing liabilities. The net
interest spread has the deficiency of not giving credit for the non-interest
bearing funds and capital used to fund a portion of the total interest earning
assets. For this reason, management emphasizes the net yield on interest earning
assets, also referred to as the net interest margin (NIM). The NIM is calculated
by dividing net interest income on an FTE basis into total average interest
earning assets. The NIM is generally the benchmark used by analysts to measure
how efficiently a bank generates NII.
29
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ENB FINANCIAL CORP
Management's Discussion and Analysis
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
December 31,
2022 2021
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
deposits at other banks 35,710 172 0.48 59,199 91 0.15
Securities available for
sale:
Taxable 419,323 9,275 2.21 363,883 5,001 1.37
Tax-exempt 202,868 5,226 2.58 185,972 4,973 2.67
Total securities (d) 622,191 14,501 2.33 549,855 9,974 1.81
Loans (a) 1,043,065 42,142 4.04 868,460 34,388 3.96
Regulatory stock 5,894 354 6.01 5,870 279 4.75
Total interest earning
assets 1,706,860 57,169 3.35 1,483,384 44,732 3.02
Non-interest earning assets
(d) 57,510 82,827
Total assets 1,764,370 1,566,211
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Demand deposits 415,749 1,784 0.43 344,783 170 0.05
Savings accounts 365,460 92 0.03 315,161 63 0.02
Time deposits 116,615 874 0.75 117,320 910 0.78
Borrowed funds 87,768 2,626 2.99 70,473 1,877 2.66
Total interest bearing
liabilities 985,592 5,376 0.55 847,737 3,020 0.36
Non-interest bearing
liabilities:
Demand deposits 664,116 579,996
Other 7,305 4,867
Total liabilities 1,657,013 1,432,600
Stockholders' equity 107,357 133,611
Total liabilities &
stockholders' equity 1,764,370 1,566,211
Net interest income (FTE) 51,793 41,712
Net interest spread (b) 2.80 2.66
Effect of non-interest
bearing funds 0.23 0.15
Net yield on interest
earning assets (c) 3.03 2.81
(a) Includes balances of non-accrual loans and the recognition of any related
interest income. Average balances also include net deferred loan costs of
$2,239,000 in 2022 and $1,755,000 in 2021. Such fees recognized through income
and included in the interest amounts totaled ($175,000 ) in 2022 and $1,201,000
in 2021.
(b) Net interest spread is the arithmetic difference between the yield on
interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also referred to as net interest margin, is computed by dividing
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.
30
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The Corporation's average balance on securities increased by$72.3 million , or 13.2%, in 2022 compared to 2021 and the tax equivalent yield on investments increased by 52 basis points. Interest income on securities increased due to the volume growth and increasing yield due to higher market rates. The growth in the investment portfolio during a period of rising rates contributed to the increase in average security yield. Average balances on loans increased by$174.6 million , or 20.1%, for the year endedDecember 31, 2022 , compared to the prior year. Loan yields increased by 8 basis points for the year and loan interest income increased$7,754,000 , or 22.5% as a result of the significantly higher balances and slightly higher yields. The average balance of interest-bearing deposit accounts increased by$120.6 million , or 15.5%, in 2022 compared to 2021. While the average balance of time deposits did decrease minimally for the year-to-date time periods, the average balance of demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest rate paid on deposits increased as well. This resulted in an increase in interest expense on deposits of$1,607,000 , or 140.6%, for the year endedDecember 31, 2022 , compared to 2021 mostly due to the participation in the fully-reciprocal demand deposit marketplace program. The Corporation's average balance on borrowed funds increased by$17.3 million in 2022. The Corporation's borrowed funds consist of overnight borrowings, short and long-term 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 subordinated debt issuances and additional FHLB advances used to fund loan growth caused average borrowings to increase year-over-year. The rate paid on borrowed funds increased by 33 basis points for 2022, compared to 2021 as a result of the second issuance of subordinated debt in July of 2022 which carries a 5.75% rate, and additional FHLB advances which carried higher rates due to the Fed Funds rate increases throughout 2022. For the year endedDecember 31, 2022 , the net interest spread increased by 14 basis points to 2.80%, compared to 2.66% for 2021. The effect of non-interest bearing funds increased to 23 basis points from 15 basis points when comparing both years. 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 2022 was 3.03%, compared to 2.81% for 2021. Provision for Loan Losses The allowance for credit losses (ACL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in the loan portfolio. The Corporation gives special attention to the level of underperforming loans when calculating the necessary provision for loan losses. The analysis of the credit loss allowance takes into consideration, among other things, the following factors:
? levels and trends in delinquencies, non-accruals, and charge-offs,
? levels of classified loans,
? trends within the loan portfolio,
? changes in lending policies and procedures,
? experience of lending personnel and management oversight,
? national and local economic trends,
? concentrations of credit,
? external factors such as legal and regulatory requirements,
? changes in the quality of loan review and Board oversight, and
? changes in the value of underlying collateral.
The Corporation recorded a provision of$1,300,000 in 2022, compared to$475,000 in 2021. The provision expense was higher in 2022 due primarily to increased loan growth. As ofDecember 31, 2022 , the allowance as a percentage of total loans was 1.19%, compared to 1.40% atDecember 31, 2021 . Management continues to evaluate the allowance for credit losses in relation to the growth or decline of the loan portfolio and its associated credit risk, and believes the provision and the allowance for credit losses are adequate to provide for future losses. For further discussion of the calculation, see the "Allowance for Credit Losses" section. 31 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis Other Income
Other income for 2022 was
OTHER INCOME
(DOLLARS IN THOUSANDS)
2022 vs. 2021
2022 2021 Increase (Decrease)
$ $ $ %Trust and investment services 2,643 2,362 281 11.9 Service charges on deposit accounts 1,348 1,069
279 26.1 Other fees 1,590 1,443 147 10.2 Commissions 3,663 3,702 (39 ) (1.1 ) Net gains on debt and equity securities 10 1,054 (1,044 ) (99.1 ) Gains on sale of mortgages 1,302 5,526 (4,224 ) (76.4 ) Earnings on bank-owned life insurance 1,583 880 703 79.9 Other miscellaneous income 1,425 1,845
(420 ) (22.8 ) Total other income 13,564 17,881 (4,317 ) (24.1 ) Trust and investment services income increased by 11.9% from 2021 to 2022 primarily as a result of higher income on the trust services side which increased by$336,000 , or 24.8%. Service charges on deposit accounts increased by$279,000 , or 26.1% compared to the prior year and other fees have increased by$147,000 , or 10.2% as a result of higher fees on a third party sweep product in 2022 slightly offset by lower loan administration fees. Commissions remained stable for the year endedDecember 31, 2022 , compared to 2021. Gains on debt and equity securities were lower in 2022 driven by higher market interest rates which resulted in fewer sales. Mortgage gains were lower in 2022 due to rapid increase in interest rates which negatively impacted the margins on mortgages sold. Additionally, more mortgage originations in 2022 were in the form of adjustable-rate mortgages held on the Corporation's balance sheet as opposed to 2021 when most mortgage originations were fixed-rate and sold on the secondary market. Holding mortgages on balance sheet results in interest income as opposed to an immediate gain on sale when mortgages are sold in the secondary market. Earnings on bank-owned life insurance increased year-over-year primarily attributed to two Bank Owned Life Insurance (BOLI) payouts. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on a group of its former directors and current and former officers. Due to the death of two participants during 2022, the Corporation recorded BOLI income of$678,000 . Other miscellaneous income decreased$420,000 , or 22.8% in 2022 compared to 2021 due to non-recurring income items in 2021. 32 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis Operating Expenses
Operating expenses for 2022 were
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
2022 vs. 2021
2022 2021 Increase (Decrease)
$ $ $ %
Salaries and employee benefits 27,324 24,465
2,859 11.7 Occupancy expenses 2,846 2,621 225 8.6 Equipment expenses 1,240 1,053 187 17.8
Advertising & marketing expenses 1,083 992 91 9.2 Computer software & data processing expenses 5,591 4,420
1,171 26.5 Shares tax 1,380 1,282 98 7.6 Professional services 2,743 2,099 644 30.7 Other operating expenses 3,722 3,509 213 6.1 Total operating expenses 45,929 40,441 5,488 13.6 Salaries and employee benefits are the largest category of operating expenses. For the year 2022, salaries and benefits increased$2,859,000 , or 11.7%, compared to 2021. The increase in salary costs was primarily due to additions to staff as well as increasing costs to fill empty positions due to the competitive job market. Additionally, a bank-wide incentive plan was implemented during 2022, resulting in an accrual for the year-to-date period based on achievements of annual performance metrics. Occupancy and equipment expenses increased 8.6% from the prior year mostly due to two additional leases that were entered into in 2022. Advertising and marketing expenses increased by 9.2%, which is typical as the Corporation grows and promotes new market areas and new products and services. Computer software and data processing expenses are growing at a rapid pace, 26.5% year-over year, as a result of higher technology costs and new bank-wide initiatives that rely heavily on software platforms and additional costs related to the core conversion the Corporation will be undergoing in the 3rd quarter of 2023. Shares tax expense is based on the Corporation's level of shareholders' equity and has grown slightly year-over-year commensurate with the change in shareholders' equity. Professional services expenses increased by 30.7% in 2022, compared to the prior year driven higher by an increase in outside services costs primarily related to the core conversion. Other operating expenses increased by 6.1% year-over-year primarily as a result of higher general insurance andFDIC insurance costs. Income Taxes
Nearly all of the Corporation's income is taxed at a corporate rate of 21% for Federal income tax purposes. The Corporation is also subject toPennsylvania Corporate Net Income Tax; however, very limited taxable activity is conducted at the corporate level. The Corporation's wholly owned subsidiary,Ephrata National Bank , is not subject to state income tax, but does pay PennsylvaniaBank Shares Tax . The Bank Shares Tax expense appears on the Corporation's Consolidated Statements of Income under operating expenses. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and increases in the cash surrender value of bank-owned life insurance; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation's provision for income tax by the pre-tax income for the applicable period. For the year endedDecember 31, 2022 , the Corporation recorded a tax provision of$2,287,000 , compared to$2,620,000 for 2021. This decrease in tax expense can be attributed to lower pretax earnings and a higher level of tax-free income. The effective tax rate for the Corporation was 13.5% for 2022 and 14.9% for 2021. The Corporation's effective tax rate is lower than the 21% corporate rate as a result of tax-free assets that the Corporation holds on its balance sheet. The majority of the Corporation's tax-free assets are in the form of obligations of states and political subdivisions, referred to as municipal bonds. The Corporation also has a relatively small component of tax-free municipal loans. 33 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
Financial Condition
Balance Sheet Overview and Liquidity
We maintain liquid assets at adequate levels in order to meet the needs of our balance sheet. Our primary source of liquidity is core deposits and our available-for-sale investment portfolio both of which provide more than enough liquidity to fund loans to customers and any other funding needs.
A portion of our liquidity consists of cash and cash equivalents and
borrowings. At
AtDecember 31, 2022 , we had$596.4 million in loan commitments outstanding, which included$117.5 million in firm loan commitments,$467.8 million in unused lines of credit, and open letters of credit of$11.1 million . Certificates of deposit due within one year totaled$55.6 million , or 41.6% of certificates of deposit. We believe, based on past experience that a significant portion of our certificates of deposit will remain with us upon maturity and we have ample liquidity outside of these funds. We have the ability to attract and retain deposits by adjusting the interest rates offered. As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was$21.6 million and$13.3 million for the years endedDecember 31, 2022 and 2021, respectively. Net cash used for investing activities was$315.8 million and$195.2 million in fiscal years 2022 and 2021, respectively, reflecting our loan and investment security activities in the respective periods. Cash provided by financing activities amounted to$173.3 million and$245.5 million for years endedDecember 31, 2022 and 2021, respectively primarily representing increases in our core deposits through the year.Investment Securities
The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair market value. As ofDecember 31, 2022 , the Corporation had$538.3 million of debt and equity securities, compared to$567.1 million atDecember 31, 2021 , a decrease of$28.8 million , or 5.1%.
The largest movements within the securities portfolio were shaped by market factors, such as:
? slope of the
? interest spread versus
? pricing of the instruments, including supply and demand for the product
? structure of the instruments, including duration and average life
? portfolio weightings versus policy guidelines
? prepayment speeds on mortgage-backed securities and collateralized mortgage
obligations
? credit risk of each instrument and risk-based capital considerations
? Federal income tax considerations with regard to obligations of tax-free states
and political subdivisions. The Corporation'sU.S. Treasury sector increased by$17.8 million , or 120.5%, sinceDecember 31, 2021 .U.S. Treasuries represent a safe credit at a market appropriate yield which added some diversity to the portfolio. The Corporation'sU.S. government agency sector decreased by$4.2 million , or 14.6%, sinceDecember 31, 2021 . Agency MBS and CMO investments in total have declined by$10.3 million , or 12.4%. These bonds pay monthly principal and interest and the Corporation has not reinvested into this sector, so the fair value has been declining. The Corporation began investing in non-agency MBS and CMO instruments in 2022 as a way to achieve a higher yield with bonds that are well protected from a credit standpoint. As ofDecember 31, 2022 , this sector stood at$50.3 million . The Corporation's asset-backed securities (ABS) decreased significantly sinceDecember 31, 2021 , by$28.0 million , or 27.6%. ABS securities are floating rate student loan pools which are instruments that perform well in a rates-up 34 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that ofU.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation's ongoing cash flows. Management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in a rates-up environment. Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio but have a higher yield because of the longer interest rate risk. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. The Corporation sold some municipal bonds during 2022 and the rapid increase in market interest rates caused the unrealized losses on these bonds to increase dramatically. As a result, the fair value of this sector declined by$41.7 million , or 16.8% fromDecember 31, 2021 , toDecember 31, 2022 . Municipal bonds represented 38.9% of the debt securities portfolio as ofDecember 31, 2022 , compared to 44.3% as ofDecember 31, 2021 . As ofDecember 31, 2022 , the fair value of the Corporation's corporate bonds decreased by$12.9 million , or 15.6%, from balances atDecember 31, 2021 . Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a higher level of credit risk should the entity experience financial difficulties. The fair value of corporate bonds decreased primarily as a result of maturing bonds as well as a significant increase in the level of unrealized losses within
this portfolio. The following table shows the weighted-average life and yield on the Corporation's debt securities by maturity intervals as ofDecember 31, 2022 , based on amortized cost. All of the Corporation's securities are classified as available for sale and are reported at fair value; however, for purposes of this schedule they are shown at amortized cost. Securities are assigned to categories based on stated contractual maturity except for MBS and CMOs, which are based on anticipated payment periods. SECURITIES PORTFOLIO MATURITY ANALYSIS (DOLLARS IN THOUSANDS) Within 1 - 5 5 - 10 Over 10 1 Year Years Years Years Total % % % % % $ Yield $ Yield $ Yield $ Yield $ Yield U.S. Treasuries - - 20,890 1.62 14,847 1.40 - - 35,737 1.53 U.S. government agencies 8,205 1.28 19,400 0.78 - 0.00 - - 27,605 0.93
U.S. agency mortgage-backed securities 177 1.64 34,832 2.53 14,520 1.78 410 2.96 49,939 2.31 U.S. agency collateralized mortgage obligations 2,099 1.37
14,226 2.93 13,868 1.61 - 0.00 30,193 2.22 Non Agency MBS/CMO 2,823 2.96 29,346 4.89 17,872 3.60 3,859 5.19 53,900 4.38 Corporate bonds 12,007 4.93 40,287 2.11 24,391 3.13 - - 76,685 2.88
Obligations of states and political subdivisions - -
1,202 1.30 27,579 2.26 211,321 2.02 240,102 2.04 Asset-backed securities - - 20,370 4.98 55,740 5.05 - - 76,110 5.03
Total securities available for sale 25,311 3.21
180,553 2.83 168,817 3.28 215,590 2.08 590,271 2.70 Loans Net loans outstanding increased$269.0 million , or 29.6%, from$908.0 million atDecember 31, 2021 , to$1.2 billion atDecember 31, 2022 . Most major loan categories showed an increase in balances over the prior year but the majority of loan growth came from the commercial and consumer real estate categories. The Corporation's strategic plan specifically focused on loan growth while maintaining quality of credit standards. This focus resulted in significant loan growth across most loan segments in 2022. Commercial real estate loans increased to$518.8 million atDecember 31, 2022 , from$400.8 million atDecember 31, 2021 , a 29.4% increase. Commercial mortgages increased by$33.4 million , or 18.8%, agriculture mortgages increased 35 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis by$17.4 million , or 8.6%, and commercial construction loans increased by$67.2 million , or 341.9% fromDecember 31, 2021 , toDecember 31, 2022 . The increase in the commercial construction loans was a direct result of reclassification of 1-4 family residential loans, representing loans now properly coded as construction that were previously included in the consumer real estate sector. The consumer real estate category represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from$403.9 million onDecember 31, 2021 , to$520.6 million onDecember 31, 2022 , a 28.9% increase. This category includes closed-end fixed rate or adjustable rate residential real estate loans secured by 1-4 family residential properties, including first and junior liens, and floating rate home equity loans. The first lien 1-4 family mortgages increased by$93.3 million , or 29.4%, fromDecember 31, 2021 , toDecember 31, 2022 . The vast majority of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans, with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. During 2022, mortgage production decreased 11% from the prior year. The decrease in overall production was caused largely by an increasing interest rate environment, which resulted in a reduction in refinance activity, and a shift in consumer demand from secondary market fixed-rate products to portfolio adjustable-rate products. The percentage of mortgage originations that went into the Corporation's held-for-investment mortgage portfolio increased to 85% compared to 63% in 2021. The change in the interest rate environment created a dramatic shift in overall mix: 39% of volume in 2022 was purchase, 44% was residential construction lending, and only 17% was refinance activity. The volume of mortgage production in 2022 led to a 43% increase in growth of the held-for-investment residential loan portfolio but only a 3% increase in the servicing on behalf of others portfolio, with mortgage servicing rights growing to over$2.0 million .
As ofDecember 31, 2022 , the remainder of the residential real estate loans consisted of$11.9 million of fixed rate junior lien home equity loans, and$98.3 million of variable rate home equity lines of credit (HELOCs). This compares to$11.2 million of fixed rate junior lien home equity loans, and$75.7 million of HELOCs as ofDecember 31, 2021 . Therefore, combined, these two types of home equity loans increased from$86.9 million to$110.3 million , an increase of 26.9%.
The other area of commercial lending is non-real estate secured commercial lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate loans increased from$109.3 million atDecember 31, 2021 , to$143.3 million atDecember 31, 2022 , a 31.1% increase. The commercial and industrial category generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. Consumer loans not secured by real estate represent a very small portion of the Corporation's loan portfolio, at$5.8 million as ofDecember 31, 2022 and$5.1 million as ofDecember 31, 2021 . These loans consist of personal loans, automobile loans, and other consumer-related loans. 36 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis The following tables show the maturities for the loan portfolio as ofDecember 31, 2022 , by time frame for the major categories, and also the loans, which are floating or fixed, maturing after one year. LOAN MATURITIES (DOLLARS IN THOUSANDS) Due After Due After One Year Five Years Due in One Through Through Due After Year or Less Five Years 15 Years 15 Years Total $ $ $ $ $ Commercial real estate Commercial mortgages 8,866 16,154 84,154 101,649 210,823 Agriculture mortgages 11,734 3,446 59,535 146,452 221,167 Construction 15,510 7,753 8,761 54,769 86,793 Total commercial real estate 36,110 27,353 152,450 302,870 518,783 Consumer real estate 1-4 family residential mortgages 5,551 12,276 67,577 324,897 410,301 Home equity loans 5,754 2,087 3,069 1,027 11,937 Home equity lines of credit 156 4,314 23,851 70,028 98,349 Total consumer real estate 11,461 18,677 94,497 395,952 520,587 Commercial and industrial Commercial and industrial 24,948 34,681 27,399 500 87,528 Tax-free loans 9 6,187 6,335 16,133 28,664 Agriculture loans 18,094 5,271 3,757 - 27,122 Total commercial and industrial 43,051 46,139 37,491 16,633 143,314 Consumer 2,369 3,305 95 - 5,769 Total amount due 92,991 95,474 284,533 715,455 1,188,453 FIXED AND FLOATING RATE LOANS DUE AFTER ONE YEAR (DOLLARS IN THOUSANDS) Floating or Fixed Rates Adjustable Rates Total $ $ $ Commercial real estate Commercial mortgages 61,606 140,351 201,957 Agriculture mortgages 15,580 193,853 209,433 Construction 22,299 48,984 71,283
Total commercial real estate 99,485 383,188
482,673
Consumer real estate 1-4 family residential mortgages 167,132 237,618
404,750 Home equity loans 3,595 2,588 6,183 Home equity lines of credit 26,128 72,065 98,193 Total consumer real estate 196,855 312,271 509,126 Commercial and industrial Commercial and industrial 53,268 9,312 62,580 Tax-free loans 7,728 20,927 28,655 Agriculture loans 8,612 416 9,028
Total commercial and industrial 69,608 30,655
100,263
Consumer 3,400 - 3,400
Total amount due 369,348 726,114 1,095,462
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The majority of the Corporation's fixed-rate loans have a maturity date longer
than five years. The primary reason for the longevity of the portfolio is the
high percentage of real estate loans, which typically have maturities of 15 or
20 years. Out of all the loans due after one year, $369.3 million , or 33.7%, are
fixed-rate loans as of December 31, 2022 . These loans will not reprice to a
higher or lower interest rate unless they mature or are refinanced by the
borrower. The remaining $726.1 million , or 66.3% of loans due after one year,
are made up of loans that are true floating loans and loans that will reprice at
a predetermined time in the amortization of the loan. True floating rate loans
that would immediately reprice according to changes in the Prime rate are
favorable in reducing the Corporation's total exposure to interest rate risk and
fair value risk should interest rates increase.
For more details regarding how the length of the loan portfolio and its repricing affects interest rate risk, please see Item 7A Quantitative and Qualitative Disclosures about Market Risk.
Non-Performing Assets
Non-performing assets include:
? Non-accrual loans
? Loans past due 90 days or more and still accruing
? Troubled debt restructurings
? Other real estate owned
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
December 31,
2022 2021
$ $
Non-accrual loans 4,178 2,556
Loans past due 90 days or more and still accruing 169 325
Troubled debt restructurings, non-performing -
- Total non-performing loans 4,347 2,881 Other real estate owned - - Total non-performing assets 4,347 2,881 Non-accrual loans to total loans 0.35%
0.28%
Non-performing loans to total loans 0.36%
0.31%
Allowance for credit losses to total loans 1.19%
1.40%
Allowance for credit losses to non-accrual loans 338.70% 505.91% Allowance for credit losses to non-performing loans 325.53% 448.84%
Non-performing assets increased by
as a result of increases in non-accrual loans and partially offset by a decline in loans past due 90 days or more and still accruing. Several customer relationships were added to non-accrual during 2022 resulting in an increase of$1,622,000 in the total balance of non-accrual loans. As ofDecember 31, 2022 , there were twelve loans to ten unrelated borrowers totaling$4,178,000 on non-accrual compared to fifteen loans to seven unrelated borrowers totaling$2,556,000 as ofDecember 31, 2021 . The largest non-accrual relationship atDecember 31, 2022 , was a commercial mortgage to a single borrower with a balance of$931,000 . Loans past due 90 days or more and still accruing declined by$156,000 during 2022 partially offsetting the increases in non-accrual loans. There were no loans considered non-performing troubled debt restructurings (TDR) as ofDecember 31, 2022 or 2021. A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender. Management continues to monitor delinquency trends and the level of non-performing loans as a leading indicator of future credit risk. At this time, management believes that the potential for material losses related to non-performing loans remains low but is likely to trend higher in recessionary periods. It is far more likely the level of non-performing 38 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
assets would increase than decline to lower levels. The level of the Corporation's non-performing loans remains very low relative to the size of the portfolio and relative to peers.
As ofDecember 31, 2022 and 2021, the Corporation had no properties classified as other real estate owned (OREO). Expenses related to OREO are included in other operating expenses and gains or losses on the sale of OREO are included in other income on the Consolidated Statements of Income. Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses in accordance withU.S. generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in the loan portfolio. The calculation, and detailed analysis supporting it, emphasizes the level of delinquent, non-performing and classified loans. The allowance calculation includes specific provisions for non-performing loans and general allocations to cover anticipated losses on all loan types based on historical losses. Based on the quarterly loan loss calculation, management will adjust the allowance for credit losses through the provision as necessary. Changes to the allowance for credit losses during the year are primarily affected by three events:
? Charge off of loans considered not recoverable
? Recovery of loans previously charged off
? Provision or credit for loan losses
The Corporation's strong credit and collateral policies have been instrumental
in producing a favorable history of loan losses. In recent years, the
Corporation has primarily recorded provision expenses in order to account for
the growth in the loan portfolio as well as make adjustments for increasing
levels of delinquencies and classified loans.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The Net Charge-Off table below shows the net charge-offs as a percentage of
average loans outstanding for each segment of the Corporation's loan portfolio
as of
Net Charge-Offs
(DOLLARS IN THOUSANDS)
2022 2021
$ $
Loans charged-off:
Commercial real estate 84 -
Consumer real estate - 20
Commercial and industrial 44 -
Consumer 19 35
Total loans charged-off 147 55
Recoveries of loans previously charged-off
Commercial real estate 10 109
Consumer real estate 10 2
Commercial and industrial 42 56
Consumer 5 17
Total recoveries 67 184
Net charge-offs (recoveries)
Commercial real estate 74 (109 )
Consumer real estate (10 ) 18
Commercial and industrial 2 (56 )
Consumer 14 18Total net charge-offs (recoveries) 80
(129 )
Average loans outstanding
Commercial real estate 435,738 357,727
Consumer real estate 416,824 328,969
Commercial and industrial 184,483 176,212
Consumer 6,020 5,552Total average loans outstanding 1,043,065
868,460
Net charge-offs (recoveries) as a % of average loans outstanding Commercial real estate 0.02% (0.03% ) Consumer real estate 0.00% 0.01% Commercial and industrial 0.00% (0.03% ) Consumer 0.23% 0.32% Total net charge-offs (recoveries) as a % of average loans outstanding 0.01% (0.01% ) The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation's total loan portfolio that has been charged off during the period. The Corporation has historically experienced very low net charge-off percentages due to conservative credit practices. During 2022, charge-offs exceeded recoveries by$80,000 , representing a net charge-off position of 0.01% of average loans outstanding as reflected above. 40 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis
The following table provides the allocation of the Corporation's allowance for
credit losses by major loan classifications. The percentage of loans indicates
the percentage of the loan portfolio represented by the indicated loan type.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31,
2022 2021
% of % of
$ Loans $ Loans
Real estate 11,516 87.5 10,097 87.5
Commercial and industrial 2,151 12.0 2,112 11.9
Consumer 67 0.5 87 0.6
Unallocated 417 - 635 -Total allowance for loan losses 14,151 100.0 12,931 100.0
Real estate loans represent 87.5% of total loans with 81.4% of the allowance covering these loans. Real estate secured loans have historically experienced lower losses than non-real estate secured loans, accounting for the difference. Commercial and industrial loans not secured by real estate have historically experienced higher loan losses as a percentage of balances and therefore require a larger relative percentage of the reserve. The reserve allocated to these loans has increased and decreased in recent years, but has not changed significantly as a percentage of total loans. For 2022, the dollar amount of allocation for commercial and industrial loans increased by$39,000 , or 1.8%, with this allocation accounting for 15.2% of the total allowance as ofDecember 31, 2022 . As ofDecember 31, 2022 , commercial and industrial loans make up 12.0% of all loans. The amount of allowance allocated to consumer loans has always been very small as generally consumer loans more than 90 days delinquent are charged off. The amount of allowance allocated to consumer loans and personal loans is based on historical losses and qualitative factors. The$417,000 unallocated portion of the allowance as ofDecember 31, 2022 , decreased from the balance at the end of 2021, and the unallocated portion as a percentage of the total allowance decreased from 4.9% atDecember 31, 2021 ,
to 2.9% atDecember 31, 2022 . Premises and Equipment Premises and equipment, net of accumulated depreciation, increased by$857,000 , or 3.5%, fromDecember 31, 2021 , toDecember 31, 2022 . During 2022, capital investments were made by the Corporation in various projects including the improvements at the leasedQuarryville office as well as normal ongoing capital needs. The Corporation had$1,298,000 in construction in process at the end of 2022 compared to$369,000 at the end of 2021. These balances consisted of amounts for projects or equipment not yet placed in service as of each year-end. For further information on fixed assets refer to Note D to the Consolidated
Financial Statements. Regulatory Stock
The Corporation owns multiple forms of regulatory stock that is required to be a member of theFederal Reserve Bank (FRB) and members of banks such as theFederal Home Loan Bank (FHLB) ofPittsburgh andAtlantic Community Bankers Bank (ACBB). The Corporation's$6,670,000 of regulatory stock holdings as ofDecember 31, 2022 , consisted of$5,552,000 of FHLB ofPittsburgh stock,$1,081,000 of FRB stock, and$37,000 ofAtlantic Community Bancshares, Inc. stock, theBank 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.
Bank-Owned Life Insurance (BOLI)
The Corporation owned life insurance with a total recorded cash surrender value (CSV) of$34,805,000 onDecember 31, 2022 , compared to$35,414,000 onDecember 31, 2021 . The Corporation holds two distinct BOLI programs. The first, with a CSV of$4,771,000 , was the result of insurance policies taken out on directors of the Corporation electing to participate in a directors' deferred compensation plan. This CSV declined by$499,000 in 2022 due to the death of a participant which resulted in a death benefit payout and a decrease in the total policy value. The program was designed 41 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
to use the insurance policies to fund future annuity payments as part of a directors' deferred compensation plan that permitted deferral of Board pay from 1979 through 1999. The second BOLI plan was originated in 2006 when life insurance was first taken out on a select group of the Corporation's officers. The additional income generated from this BOLI plan is to assist in offsetting the rising cost of benefits currently being provided to all employees. The CSV of this plan was$30,034,000 , a decrease of$110,000 from the prior year-end. There was also a participant death in this plan during 2022 which resulted
in the decline in balance. Deposits
The Corporation's total ending deposits atDecember 31, 2022 , increased by$126.7 million , or 8.4%, fromDecember 31, 2021 . Customer deposits are the Corporation's primary source of funding for loans and securities. Deposit balances grew rapidly in 2021 and prior years due to the very low interest rate environment and the few options available for customers to earn a return on their investment. During 2022, the Corporation grew deposits at a slower pace due to the rapidly rising rate environment and the options available to customers.
The Deposits by Major Classification table, shown below, provides the average
balances of each category for
DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)
Average balances and average rates paid on deposits by major category are
summarized as follows:
December 31,
2022 2021
$ % $ %
Non-interest bearing demand 664,116 - 579,996 -
Interest-bearing demand 117,123 1.24 55,819 0.10
NOW accounts 131,613 0.05 130,328 0.03
Money market deposit accounts 167,013 0.16 158,635 0.05
Savings accounts 365,460 0.03 315,161 0.02
Time deposits 116,615 0.75 117,320 0.78
Total deposits 1,561,940 1,357,259
The average balance of the Corporation's core deposits increased by$204.7 million , or 15.1%, fromDecember 31, 2021 , toDecember 31, 2022 . Non-interest bearing demand accounts grew by$84.1 million , or 14.5%, and are the Corporation's cheapest source of funding for balance sheet growth. Interest-bearing demand accounts grew by$61.3 million , or 109.8%, as a result of participating in the reciprocal program for an off-balance sheet sweep product. Money market account average balances increased by$8.4 million , or 5.3%, and savings accounts increased by$50.3 million , or 16.0%, fromDecember 31, 2021 , toDecember 31, 2022 . Time deposits are typically a more rate-sensitive product making them a less reliable source of funding. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. In 2022, time deposits declined very slightly, by$705,000 , or 0.6%, compared to average balances
atDecember 31, 2021 . As ofDecember 31, 2022 , time deposits over$250,000 made up 7.2% of the total time deposits. This compares to 7.3% onDecember 31, 2021 . The total dollar amount of time deposits over$250,000 increased$1,364,000 , or 16.4%, fromDecember 31, 2021 toDecember 31, 2022 . Since time deposits over$250,000 are made up of relatively few customers with large dollar accounts, management monitors these accounts closely due to the potential for these deposits to rapidly increase or decrease. The following table provides the total amount of time deposits of$250,000 or more for the past two years by maturity distribution. 42 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis MATURITY OF TIME DEPOSITS OF$250,000 OR MORE (DOLLARS IN THOUSANDS) December 31, 2022 2021 $$ Three months or less 1,940 1,592
Over three months through six months 517 575 Over six months through twelve months 877 1,655 Over twelve months
6,351 4,499
Total 9,685 8,321
As of December 31, 2022 and 2021, the total uninsured deposits of the
Corporation were approximately $380,064,000 and $313,122,000 , 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.
Borrowings
Total borrowings were $113.4 million as of December 31, 2022 , and $63.9 million
as of December 31, 2021 . The Corporation had $16.0 million in short-term
borrowings at December 31, 2022 , and no short-term borrowings the prior
year-end. Long-term borrowings with the Federal Home Loan Bank (FHLB) increased
to $58.0 million as of December 31, 2022 , from $44.2 million as of December 31,
2021 . These borrowings are used as a secondary source of funding and to mitigate
interest rate risk. The increase in long-term FHLB borrowing balances during the
year related to strong loan growth and a desire to hedge against potential
deposit runoff as a result of the challenging economic environment. As of
December 31, 2022 , all the borrowings of FHLB were fixed-rate loans. The
Corporation continues to be well under the FHLB maximum borrowing capacity which
is $575.7 million as of December 31, 2022 .
In addition to the long-term advances funded through the FHLB, the Corporation
completed two sales of a subordinated debt note offering. The Corporation sold
$20.0 million of subordinated debt notes in December 2020 with a maturity date
of December 30, 2030 and another $20.0 million in July 2022 with a maturity date
of September 30, 2032 . These notes are non-callable for 5 years and carry a
fixed interest rate of 4.00% and 5.75%, respectively, 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 December 31, 2022 , $33.0
million of funds were invested in the Bank. The Corporation paid an issuance fee
of 2% that will be amortized to the call date on a pro-rata basis.
Stockholders' Equity
Federal regulatory authorities require banks to meet minimum capital levels. The
Corporation, as well as the Bank, as the solely owned subsidiary of the
Corporation, maintains capital ratios well above those minimum levels. The
risk-weighted capital ratios are calculated by dividing capital by total
risk-weighted assets. Regulatory guidelines determine the risk-weighted assets
by assigning assets to specific risk-weighted categories. The calculation of
tier I capital to risk-weighted average assets does not include an add-back to
capital for the amount of the allowance for credit losses, thereby making this
ratio lower than the total capital to risk-weighted assets ratio.
The consolidated asset limit on small bank holding companies is $3 billion and a
company with assets under that limit is not subject to the consolidated capital
rules but may disclose capital amounts and ratios. The Corporation has elected
to disclose those amounts and ratios.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The following tables reflect the capital ratios for the Corporation and Bank compared to the regulatory capital requirements.
REGULATORY CAPITAL RATIOS:
Regulatory Requirements
Adequately Well
As of December 31, 2022 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets
Consolidated 15.0% N/A N/A
Bank 14.5% 8.0% 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.4% 6.0% 8.0%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.4% 4.5% 6.5%
Tier 1 Capital to Average Assets
Consolidated 7.6% N/A N/A
Bank 9.3% 4.0% 5.0%
As of December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated 15.6% N/A N/A
Bank 14.9% 8.0% 10.0%
Tier I Capital to Risk-Weighted Assets
Consolidated 12.5% N/A N/A
Bank 13.6% 6.0% 8.0%
Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated 12.5% N/A N/A
Bank 13.6% 4.5% 6.5%
Tier I Capital to Average Assets
Consolidated 8.2% N/A N/A
Bank 9.1% 4.0% 5.0%
As of December 31, 2022 the Bank's Tier 1 Leverage Ratio stood at 9.3% while the
Corporation's Tier 1 Leverage Ratio was 7.6%. 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.
Since the Corporation elected to opt-out of the requirement to include most
components of accumulated other comprehensive income in calculating regulatory
capital, the significant devaluation of the investment portfolio that resulted
in a higher level of unrealized losses, has not affected the regulatory capital.
But the changes in investment unrealized gains and losses impact tangible
capital on the balance sheet on an ongoing basis and were adversely impacted by
the dramatic increase in market interest rates during 2022.
Contractual Cash Obligations
The Corporation has a number of contractual obligations that arise from the normal course of business. The following table summarizes the contractual cash obligations of the Corporation as ofDecember 31, 2022 , and shows the future periods in which settlement of the obligations is expected. The contractual obligation numbers below do not include accrued interest. Refer to Note O to the Consolidated Financial Statements referenced in the table for additional details regarding these obligations. 44 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis CONTRACTUAL OBLIGATIONS (DOLLARS IN THOUSANDS) Less than 1-3 4-5 More than 1 year years years 5 years Total $ $ $ $ $ Time deposits (Note F) 55,614 57,304 20,911 - 133,829 Borrowings (Notes G and H) 29,816 50,150 33,469 - 113,435 Operating Leases (Note Q) 450 800 467 1,428 3,145
Total contractual obligations 85,880 108,254 54,847
1,428 250,409
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 liquidity section to follow, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as ofDecember 31, 2022 . For further details regarding off-balance sheet arrangements, refer to Note O to the Consolidated Financial Statements. OFF-BALANCE SHEET ARRANGEMENTS (DOLLARS IN THOUSANDS)December 31, 2022 $ Commitments to extend credit: Revolving home equity loans 195,327 Construction loans 71,093 Real estate loans 112,335 Business loans 199,367 Consumer loans 1,386 Other 5,823 Standby letters of credit 11,084 Total 596,415
Critical Accounting Policies
The presentation of financial statements in conformity with accounting
principles generally accepted in
Allowance for Credit Losses
A material estimate that is particularly susceptible to significant change is
the determination of the allowance for credit losses. Management believes that
the allowance for credit losses is adequate and reasonable. The Corporation's
methodology for determining the allowance for credit losses is described in an
earlier section of Management's Discussion and Analysis. Given the very
subjective nature of identifying and valuing credit losses, it is likely that
well-informed individuals could make materially different assumptions and,
therefore, calculate a materially different allowance amount. Management uses
available information to recognize losses on loans; however, changes in economic
conditions may necessitate revisions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Corporation's allowance for credit losses. Such agencies may require the
Corporation
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ENB FINANCIAL CORP
Management's Discussion and Analysis
to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Fair Values of Assets and Liabilities
ASC Topic 820 defines fair value as the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. See Note R to the Consolidated Financial Statements for a complete discussion and summary of the Corporation's use of fair valuation of assets and liabilities and the related measurement techniques.
Other than Temporary Impairment of Securities
Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term "other than temporary" is not intended to indicate that the decline is permanent. It indicates that the prospect of a near-term recovery of value is not necessarily favorable or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Deferred Tax Assets
The Corporation uses an estimate of future earnings to support the position that
the benefit of deferred tax assets will be realized. If future income should
prove non-existent or less than the amount of the deferred tax assets within the
tax years to which they may be applied, the asset may not be realized and the
Corporation's net income will be reduced. Deferred tax assets are described
further in Note L to the Consolidated Financial Statements.
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ENB FINANCIAL CORP
Management's Discussion and Analysis© Edgar Online, source
