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 the greater communities surroundingLancaster County, Pennsylvania . 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 139 years of existence. The Board and Management are committed to the principals and values that have served the company well over its long history. In order to remain an independent bank of undisputed integrity, the Board and Management's desire is to produce strong financial results that will ensure trust from the Bank's depositors and favorable returns to the shareholders over the long term. Every three years Management and the Board evaluate and revise the strategic plan to ensure the continuing success of the Corporation into the future. This endeavor is designed to continually sharpen the products and services the Bank provides in a manner that best serves the customer and attains the financial performance that shareholders expect. In the most recent strategic plan that covers the years 2019 to 2021, the Board and Management laid out a five-point plan laying a foundation for success during the next three years and beyond. Succession planning and managing leadership changes were a key element of this strategic plan. The Board and Management also set into place bold goals to further strengthen the Corporation's financial performance ratios so the Corporation is in a position to outperform the local peer group. The most visible of those targets is to meet and exceed a return on assets of 1.00% and to maintain a return on stockholder's equity of over 10.0%, with a target range of 10.5% to 11.0%. Management also desired to reduce the efficiency ratio under 70% for 2020. Management views return on assets as the best overall indicator of a financial institution's performance. Management and the Board believe that achieving a higher return on assets will directly correlate to improved earnings per share and dividends per share, and higher book value of common stock, which in the end will produce higher returns to the shareholder. Results of Operations Overview
The year of 2020 was impacted by a number of unprecedented items caused by the onset of the COVID-19 pandemic. The spread of COVID-19 quickly became global and impacted the global economy. This impact was felt rather quickly due toChina's large role in the world economy, second in GDP, but first in terms of supply chain impact for basic goods. The immediate impact and forward risk posed by the pandemic caused theFederal Reserve to take the unusual step of reducing the Federal Funds rate by 50 basis points to 1.25% onMarch 3, 2020 , at a special Fed meeting ahead of the regularly scheduledMarch 18, 2020 meeting. OnMarch 11, 2020 , theWorld Health Organization (WHO) recognized COVID-19 as a pandemic. The quick further expansion of the pandemic then caused theFederal Reserve to take an unprecedented step of a second special meeting on Sunday afternoon ofMarch 15, 2020 , to further reduce the Federal Funds rate 100 basis points to 0.25%. This move took the Federal Funds rate to the same historic low of 0.25% that occurred due to the Financial Crisis of 2008. OnMarch 15, 2020 , the Fed also reduced the Discount Window rate by 150 basis points, which took this rate down to 0.25%. This move importantly gave all banks easy access to very low cost funds. OnMarch 16, 2020 , the Fed also announced action to inject more liquidity into the financial system by purchasing up to$500 billion ofU.S. Treasuries and$200 billion of mortgage-backed securities. All major stock exchanges experienced dramatic sell-offs. The DOW, which had peaked at 29,568 in February, closed onFriday, March 20, 2020 at 19,174, down 10,394 points, or 35%. NASDAQ was down 30%, while the S&P 500 was down 32%. Even with a significant equity market recovery since the initial impact of COVID-19, economic conditions remain uncertain. With the closing of non-essential businesses throughout various parts of the country for a number of months and a continued impact to consumer spending, it is anticipated that the financial impact will be long-term. The Coronavirus Aid Relief and Economic Security Act, also known as the CARES Act, was a$2.2 trillion economic stimulus bill passed byCongress and signed into law onMarch 27, 2020 , by PresidentDonald Trump . The major provisions of the CARES Act were direct small business aid for employers with fewer than 500 employees; direct deposit stimulus payments to American households; enhanced unemployment compensation benefits; and direct aid to hospitals and health
care
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Management's Discussion and Analysis
providers. The Paycheck Protection Program (PPP) was part of this legislation,
which provided relief to businesses and organizations provided they would retain
their workforce and act within the provisions of the plan. The PPP was
responsible for the Corporation generating $77.7 million of loans by September
30, 2020 , which was the highpoint in PPP loans for 2020. By December 31, 2020 ,
PPP loan balances declined to $48.0 million , as a result of loan forgiveness and
payoffs.
After December 31, 2020 , but prior to the filing of this Form 10-K, legislation
for a second round of PPP loans was passed, which resulted in the Corporation's
total PPP loans increasing again in early 2021. Consistent with the marketplace,
the impact of the second round of PPP was not near as large as the first round.
Management anticipated that $25 million to $30 million of PPP loans would be
generated in the second round. Prior to the filing of this report, the
Corporation's total PPP loans had again started to decline due to further loan
forgiveness and payoffs.
The economic impact of COVID-19 had both negative and positive impacts on the
Corporation's financial results. The Corporation was able to achieve a higher
level of earnings in 2020 than in 2019, but the efficiency of these earnings was
reduced. The pandemic caused a very low interest rate environment, which in turn
caused a much larger balance sheet with a historic increase in deposits,
increasing the Corporation's net interest income, despite a lower net interest
margin. The Corporation's net interest income was also increased by the
recognition of PPP loan fee income. Offsetting the increase in net interest
income was a larger increase in the provision for loan losses. As a result of
the pandemic, management was guarded about expected increases in loan losses and
higher associated provision for loan losses. Management did incur $2.2 million
more provision for loan loss expense in 2020 than it did in 2019, however much
of the provision increase was focused on a very small number of commercial
loans. It remains to be determined what the long-term economic impact of
COVID-19 will be on the Corporation's borrowers and how it will affect the
Corporation's forward earnings.
The Corporation recorded net income of $12,299,000 for the year ended December
31, 2020 , a 7.9% increase from the $11,395,000 earned during the same period in
2019. The 2019 net income was 16.9% higher than the 2018 net income of
$9,749,000 . Earnings per share, basic and diluted, were $2.20 in 2020, compared
to $2.01 in 2019, and $1.71 in 2018.
The increase in the Corporation's 2020 earnings was caused primarily by an
increase in mortgage gains from selling mortgage assets on the secondary market.
These gains increased by $3,914,000 , or 202.2% in 2020 compared to 2019 due to a
high volume of mortgage refinancings stemming from the very low interest rate
environment as well as high margins received on loans sold on the secondary
market.
The Corporation's 2020 earnings were also aided by an increase in net interest
income of $1,630,000 , or 4.5%. Net interest income accounts for 71% of the gross
income stream of the Corporation. The Corporation's net interest margin
decreased in 2020 to 3.24%, from 3.53% in 2019. Loan yields decreased as a
result of the Federal Reserve rate decrease in the first quarter of 2020,
immediately impacting the yields on the Corporation's variable rate loans. The
decline in interest expense helped to partially offset the declining asset
yields, but to a much smaller degree.
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
Corporation's 2020 ROA was 0.96%, compared to 1.01% in 2019. ROE decreased from
10.36% in 2019 to 10.16% in 2020. The decrease in ROA and ROE was primarily due
to much higher levels of assets in 2020 compared to 2019 with only moderate
growth in earnings.
The below table highlights the Corporation's key performance ratios for the
years ended
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ENB FINANCIAL CORP
Management's Discussion and Analysis
Key Performance Ratios
Year ended December 31,
2020 2019 2018
Return on Average Assets 0.96% 1.01% 0.93%
Return on Average Equity 10.16% 10.36% 9.94%
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 Net interest income (NII) represents the largest portion of the Corporation's operating income. In 2020, NII generated 71.3% of the Corporation's gross revenue stream, compared to 76.4% in 2019, and 75.0% in 2018. Since NII comprises a significant portion of the operating income, the direction and rate of increase or decrease will often indicate the overall performance of the Corporation. 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. This differs from the NII reflected on the Corporation's Consolidated Statements of Income, where the NII is simply the interest earned on loans and securities less the interest paid on deposits and borrowings. By calculating the NII on an FTE basis, the added benefit of having tax-free loans and securities is factored in to more accurately represent what the Corporation earns through the NII. The FTE adjustment shows the benefit these tax free loans and securities bring in a dollar amount because the Corporation does not pay tax on the income they generate. As a result, the FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income. The amount of FTE adjustment totaled$814,000 for 2020,$749,000 for 2019, and$880,000 for 2018. Net Interest Income (DOLLARS IN THOUSANDS) Year ended December 31, 2020 2019 2018 $ $ $ Total interest income 42,094 41,737 36,498 Total interest expense 3,846 5,119 3,374 Net interest income 38,248 36,618 33,124 Tax equivalent adjustment 814 749 880 Net interest income
(fully taxable equivalent) 39,062 37,367 34,004
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect NII:
· The rates charged on interest earning assets and paid on interest bearing
liabilities
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Management's Discussion and Analysis
· The average balance of interest earning assets and interest bearing liabilities
The Federal funds rate, the Prime rate, the shape of theU.S. Treasury curve, and other wholesale funding curves, all affect NII. TheFederal Reserve controls the Federal funds rate, which is one of a number of tools available to theFederal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. During 2020, the Federal funds rate was decreased by 150 basis points in March taking the rate to 0.25% byMarch 31, 2020 . With the declines in the Federal funds rate, theU.S. Treasury yield curve became flatter. Long-term rates like the ten-yearU.S. Treasury were 232 basis points under the 3.25% Prime rate as ofDecember 31, 2020 . Long-termTreasury rates remained low throughout 2020, and with the decreases in theFederal Reserve short-term rates, the yield curve remained essentially flat throughout the year. Management had not anticipated the Fed rate decreases in the first quarter of 2020. With the current flat yield curve throughout most of 2020, it did make increasing asset yield much more difficult, which added strain to
NII and NIM. The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate decreased to 3.25% in March of 2020 after the 150 basis point Fed rate decline. The Corporation's Prime-based loans generally reprice a day after theFederal Reserve rate movement. As a result of a larger balance sheet in 2020, even with much lower asset yields, the Corporation's NII on a tax equivalent basis increased with the Corporation's margin decreasing to 3.24% for the year, compared to 3.53% in 2019. Loan yields were lower in 2020 due to the 150 basis point Fed rate decline during the first quarter. The Corporation's NII for 2020 increased over 2019, by$1,630,000 , or 4.5%. Management's asset liability sensitivity measurements continue to show a benefit to both margin and NII givenFederal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation's balance sheet. However, in a down-rate environment, the margin and NII would suffer unless balance sheet growth is enough to offset lower asset yields. Security yields will generally fluctuate more rapidly than loan yields based on changes to theU.S. Treasury rates and yield curve. With lowerTreasury rates in 2020 compared to 2019, security reinvestment has generally been occurring at lower yield levels. Because of the lower market interest rates and very flat yield curve, it is difficult to achieve substantially higher yields in the securities portfolio but there have been some pockets of opportunities to reposition the portfolio by selling securities at gains and reinvesting in slightly higher yielding instruments to benefit the Corporation's earnings
going forward.
The Corporation's loan portfolio yield has decreased from the prior years' period as the variable rate portion of the loan portfolio repriced lower with eachFederal Reserve rate movement and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation's commercial Prime-based loans were priced at the Prime rate, which was 4.75% to start 2020, and then 4.25% as ofMarch 4, 2020 , and 3.25% as ofMarch 16, 2020 throughDecember 31, 2020 . The pricing for the most typical five-year fixed rate commercial loans is currently in line with the Prime rate. With the significant March Federal Reserve rate reductions, adding variable rate loans to the portfolio means they will be priced at very low rates to start but can reprice lower if theFederal Reserve lowers rates any further and would reprice higher if theFederal Reserve would increase rates. There are elements of the Corporation's Prime-based commercial loans priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be influenced by local competition. Mid-term and long-term interest rates on average were much lower in 2020 compared to 2019. The average rate of the 10-yearU.S. Treasury was 0.89% in 2020 compared to 2.14% in 2019, and it stood at 0.93% onDecember 31, 2020 , compared to 1.92% onDecember 31, 2019 . The slope of the yield curve has been compressed throughout 2019 and 2020. As ofMarch 31, 2019 , theU.S. Treasury curve was inverted with the 10-yearU.S. Treasury rate 50 basis points lower than the Fed funds rate. As ofDecember 31, 2020 , the 10-yearU.S. Treasury rate was only 68 basis points higher than the Fed funds rate. The slope of the yield curve has fluctuated many times in the past two years with the 10-yearU.S. Treasury yield as high as 1.88% in 2020 and 2.79% in 2019, and as low as 0.52% in 2020, and 1.47% in 2019. 36 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis The Corporation's overall cost of funds, including non-interest bearing funds, remained stable through the first quarter of 2020 at 48 basis points, and then decreased throughout the remainder of the year influenced by lower costs on deposits and the payoff of higher FHLB long-term advances at above-market rates. The Corporation's cost of funds steadily declined during the remainder of the year ending at 20 basis points. The Corporation's costs on borrowings included$306,000 of prepayment penalties recorded on FHLB long-term advances paid off early during 2020. Management expects the cost of funds will decline slightly and then stabilize throughout 2021 as deposits reprice to lower rates but this decline should level out as continued savings become more difficult to achieve. Core deposit interest rates were reduced nine times throughout 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. Management does not anticipate significant deposit rate movements in 2021 as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest bearing accounts while making larger rate movements in the pricing of new or reissued time deposits. Borrowing costs, and the wholesale borrowing curves that they are based on, generally follow the direction and slope of theU.S. Treasury curve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation prepaid a number of FHLB advances in 2020 accelerating the interest expense, but achieving savings in future time periods. 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)
2020 vs. 2019 2019 vs. 2018
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 179 (410 ) (231 ) 17 (38 ) (21 )
Securities available for
sale:
Taxable 542 (1,479 ) (937 ) 6 223 229
Tax-exempt 559 (191 ) 368 (499 ) (53 ) (552 )
Total securities 1,101 (1,670 ) (569 ) (493 ) 170 (323 )
Loans 3,929 (2,610 ) 1,319 3,999 1,347 5,346
Regulatory stock 2 (99 ) (97 ) 53 54 107
Total interest income 5,211 (4,789 ) 422 3,576 1,533 5,109
INTEREST EXPENSE
Deposits:
Demand deposits 137 (1,298 ) (1,161 ) 132 993 1,125
Savings deposits 17 (60 ) (43 ) 4 - 4
Time deposits (118 ) (91 ) (209 ) (63 ) 419 356
Total deposits 36 (1,449 ) (1,413 ) 73 1,412 1,485
Borrowings:
Total borrowings (137 ) 277 140 74 187 261
Total interest expense (101 ) (1,172 ) (1,273 ) 147 1,599 1,746
NET INTEREST INCOME 5,312 (3,617 ) 1,695 3,429 (66 ) 3,363
In 2020, the Corporation's NII on an FTE basis increased by $1,695,000 , a 4.5%
increase over 2019. Total interest income increased $422,000 , or 1.0%, while
interest expense decreased $1,273,000 , or 24.9%, from 2019 to 2020.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The FTE interest income from the securities portfolio decreased by $569,000 , or
7.0%, while loan interest income increased $1,319,000 , or 3.9%. During 2020,
additional loan volume added $3,929,000 to net interest income, and lower yields
primarily due to the Prime rate decreases in the first quarter of 2020, caused a
$2,610,000 decrease, resulting in a net increase of $1,319,000 . Higher balances
in the securities portfolio caused an increase of $1,101,000 in net interest
income, while lower yields on securities caused a $1,670,000 decrease, resulting
in a net decrease of $569,000 .
The average balance of interest bearing liabilities increased by 6.7% during
2020, driven by the growth in deposit balances. Deposit rates decreased
significantly throughout 2020 more than offsetting the slightly higher interest
expense caused by much higher balances of deposits. Lower interest rates
contributed to $1,449,000 of interest expense reduction while higher balances
only caused $36,000 of increased expense, resulting in a total decline in
interest expense of $1,413,000 .
Out of all the Corporation's deposit types, interest-bearing demand deposits
reprice the most rapidly, as these rates can be adjusted lower after a Federal
Reserve rate decrease. Demand deposit interest expense decreased a total of
$1,161,000 in 2020, with $1,298,000 due to lower rates, offsetting the higher
balances that caused an increase of $137,000 . Interest expense on savings
deposits and time deposit balances decreased to a lesser degree. Higher balances
in savings accounts caused an increase of $17,000 , while lower rates caused a
decrease of $60,000 , resulting in the net decrease in interest expense of
$43,000 on savings deposits. Time deposit balances declined throughout 2020,
resulting in lower interest expense of $118,000 , while lower rates caused a
decline of $91,000 , resulting in a net decrease of $209,000 .
The average balance of total borrowings decreased by $6.6 million , or 8.7%, from
December 31, 2019 , to December 31, 2020 . The decrease in total borrowings
decreased interest expense by $137,000 . The Corporation paid off FHLB long-term
advances during 2020, which resulted in accelerated interest expense causing a
$277,000 increase in interest expense associated with higher rates. The
aggregate of these amounts was an increase in interest expense of $140,000
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.
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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,
2020 2019 2018
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
$ $ % $ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
deposits at other banks 35,261 140 0.40 19,596 371 1.89 18,772 392 2.09
Securities available for sale:
Taxable 238,995 4,144 1.73 214,160 5,082 2.37 213,907 4,853 2.27
Tax-exempt 108,154 3,382 3.13 90,539 3,014 3.33 105,513 3,566 3.38
Total securities (d) 347,149 7,526 2.17 304,699 8,096 2.66 319,420 8,419 2.64
Loans (a) 815,563 34,805 4.27 726,210 33,485 4.61 638,524 28,139 4.41
Regulatory stock 7,010 437 6.23 6,978 534 7.65 6,246 427 6.84
Total interest earning assets 1,204,983 42,908 3.56 1,057,483 42,486 4.02 982,962 37,377
3.80
Non-interest earning assets (d) 74,391 69,599 64,607 Total assets 1,279,374 1,127,082 1,047,569 LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing liabilities: Demand deposits 279,280 512 0.18 256,564 1,673 0.65 213,037 548 0.26 Savings accounts 242,572 61 0.03 204,179 104 0.05 196,392 100 0.05 Time deposits 126,742 1,566 1.24 136,075 1,774 1.30 142,125 1,418 1.00 Borrowed funds 69,830 1,707 2.44 76,461 1,568 2.05 72,282 1,307 1.81 Total interest bearing liabilities 718,424 3,846
0.54 673,279 5,119 0.76 623,836 3,373
0.54
Non-interest bearing liabilities: Demand deposits 435,495 340,130 322,733 Other 4,409 3,688 2,899 Total liabilities 1,158,328 1,017,097 949,468 Stockholders' equity 121,046 109,985 98,101
Total liabilities & stockholders' equity 1,279,374 1,127,082 1,047,569 Net interest income (FTE) 39,062 37,367 34,004 Net interest spread (b) 3.02 3.26
3.26
Effect of non-interest bearing funds 0.22 0.27
0.20
Net yield on interest earning assets (c) 3.24 3.53 3.46
(a) Includes balances of non-accrual loans and the recognition of any related
interest income. Average balances also include net deferred loan costs of
recognized through income and included in the interest amounts totaled
(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.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The Corporation's interest income increased primarily due to increased interest
income on loans, but the increase in income was the result of loan growth, not
an increase in asset yield, resulting in a lower NIM of 3.24% for 2020, compared
to 3.53% for 2019. The yield earned on assets decreased by 46 basis points
during the year, while the rate paid on liabilities decreased by 22 basis points
when comparing both years. This resulted in a 23 basis point decrease in
interest spread, and the effect of non-interest bearing deposits decreased by
six basis points during the year, resulting in the decrease in NIM of 29 basis
points. Management anticipates further declines in NIM during 2021 driven by
continued pressure on the Corporation's asset yields, which was first fully felt
in the second half of 2020. Loan yields decreased in 2020 compared to the prior
year primarily as a result of the 75 basis points of Prime decline experienced
in the second half of 2019 and the 150 basis points of Prime decline in the
first quarter of 2020. Growth in the loan portfolio would help to offset a
declining asset yield moving through 2021. The Corporation's loan yield
decreased 34 basis points in 2020 compared to 2019. Loan interest income
increased $1,319,000 , or 3.9%, for this time period as a result of the growth in
balances as well as PPP fees that caused an increase in interest and fees on
loans.
Loan pricing was challenging in 2020 as a result of the very low rate
environment and competition resulting in fixed-rate loans being priced at very
low levels and variable-rate loans priced at the Prime rate or below. The Prime
rate was 4.75% as of December 31, 2019 , and was moderately higher than the
typical business or commercial five-year fixed rates being extended at that
time. The Prime rate decreased by 1.50% in March of 2020 to 3.25%, which is now
comparable to the typical rate of a five-year fixed-rate loan. The commercial or
business fixed rates do increase with longer fixed terms or lower credit
quality. In terms of the variable rate pricing, nearly all variable rate loans
offered are Prime-based. Management is able to price loan customers with higher
levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, which
amounted to 4.00% at December 31, 2020 , still a relatively low rate. However,
only a small minority of the loans in the commercial and agricultural portfolios
are at these higher rates due to the strong credit quality of the Corporation's
borrowers and market competition. Competition in the immediate market area has
been pricing select shorter-term fixed-rate commercial and agricultural lending
rates below 3.25% for the strongest loan credits.
Tax equivalent yields on the Corporation's securities decreased by 49 basis
points for the year ended December 31, 2020 , compared to 2019. The Corporation's
securities portfolio consists of approximately 79% fixed income debt instruments
and 21% variable rate product as of December 31, 2020 . The Corporation's taxable
securities experienced a 64 basis-point decrease in yield for the year ended
December 31, 2020 , compared to 2019. Security reinvestment in 2020 has been
occurring at lower rates due to the significant decline in U.S. Treasury rates.
The sharp growth in the investment portfolio during a period of very low rates
also contributed to the decline in average security yield. This large amount of
new investment was caused by the significant influx of deposits, which caused
excess liquidity. The sharpest growth in the securities portfolio occurred in
the fourth quarter. In addition to these negative influences, the Corporation's
U.S. agency mortgage-backed securities and collateralized mortgage obligations
experience faster principal prepayments as market rates decrease, causing the
amortization of premium to increase, effectively decreasing the yield.
The yield on tax-exempt securities decreased by 20 basis points in 2020 compared
to 2019. For the Corporation, these bonds consist entirely of tax-free municipal
bonds. While the tax-exempt yields on municipal bonds declined with the tax rate
change at the end of 2017, yields became more attractive again during the latter
part of 2019 and throughout 2020. Management began investing in more of these
bonds in 2020 as yields stood out and provided better returns than other sectors
of the portfolio.
The interest rate paid on deposits decreased for the year ended December 31,
2020 , from the same period in 2019. Management follows a disciplined pricing
strategy on core deposit products that are not rate sensitive, meaning that the
balances do not fluctuate significantly when interest rates change. Rates on
interest-bearing checking accounts and money market accounts were decreased in
2020, resulting in a decrease in the cost of funds on these accounts of 47 basis
points. Savings account rates were also decreased during the year resulting in a
two basis point reduction in the cost of funds associated with these accounts.
Additionally, the cost of funds on time deposits decreased by six basis points
during 2020. Typically, the Corporation sees increases in core deposit products
during periods when consumers are not confident in the stock market and economic
conditions deteriorate. During these periods, there is a "flight to safety" to
federally insured deposits. This trend occurred in 2020. As the rate between
time deposits and core deposits narrowed, many customers chose to transfer funds
from maturing time deposits into checking and savings accounts.
Since the financial crisis, depositors have been more concerned about the financial health of their financial institution. This concern affects their desire to obtain the best possible market interest rates. This trend benefits the Corporation
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ENB FINANCIAL CORP
Management's Discussion and Analysis
due to its high capital levels and track record of strong and stable earnings.
The Corporation's Bauer Financial rating of 5, the highest level of their rating
scale, has assisted the Bank in gaining core deposits over the past several
years.
The Corporation's average rate on borrowed funds increased by 39 basis points
from 2019 to 2020, as FHLB borrowings were paid off early throughout the year
accelerating $234,000 of interest expense.
Provision for Loan Losses
The allowance for credit losses 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 that management determines is necessary to ensure that the allowance
for credit losses 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.
A provision expense of$2,950,000 was recorded in 2020, compared to$770,000 in 2019, and$660,000 in 2018. The increase in provision expense was primarily due to a specific allocation related to a commercial customer with ongoing business concerns as well as a decline in economic and business conditions related to COVID-19, which caused an increase in the qualitative factors regarding outside market conditions for the entire loan portfolio. This increase in qualitative factors caused a higher required provision as credit losses may be incurred as businesses deal with the challenges presented by COVID-19 and the change in business practice. As ofDecember 31, 2020 , total delinquencies represented 0.34% of total loans, compared to 0.91% as ofDecember 31, 2019 . These ratios are very low compared to local and national peer groups. The vast majority of the Corporation's loan customers have remained very steadfast in making their loan payments and avoiding delinquency, even during challenging economic conditions. The delinquency ratios speak to the long-term health, conservative nature, and, importantly, the character of the Corporation's customers and lending practices. Classified loans are primarily determined by loan-to-value and debt-to-income ratios. The level of classified loans has decreased fromDecember 31, 2019 toDecember 31, 2020 , from 19.3% of regulatory capital to 15.0% of regulatory capital. The delinquency and classified loan information is utilized in the quarterly allowance for credit loss calculation, which directly affects the provision expense. A sharp increase or decrease in delinquencies and/or classified loans during the year would be cause for management to increase or decrease the provision expense. The allowance as a percentage of loans increased from 1.25% atDecember 31, 2019 , to 1.50% atDecember 31, 2020 . It is anticipated that the Corporation will record a provision expense again in 2021 based on projected loan growth and continued economic concerns. Management also continues to provide for estimated losses on pools of similar loans based on historical loss experience. Management employs qualitative factors every quarter in addition to historical loss experience to take into consideration the current trends in loan volume, concentrations of credit, delinquencies, changes in lending practices, and the quality of the Corporation's underwriting, credit analysis, lending staff, and Board oversight. National and local economic trends and conditions are also considered when calculating an appropriate credit loss allowance for each loan pool. Qualitative factors increased for all loan pools except agriculture dairy in 2020 primarily due to deteriorating economic conditions due to the COVID-19 pandemic. 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. 41 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis Other Income
Other income for 2020 was
OTHER INCOME
(DOLLARS IN THOUSANDS)
2020 vs. 2019 2019 vs. 2018
2020 2019 Increase (Decrease) 2019 2018 Increase (Decrease)
$ $ $ % $ $ $ %
Trust and investment
services 1,974 2,042 (68 ) (3.3 ) 2,042 1,959 83 4.2
Service charges on
deposit accounts 1,047 1,376 (329 ) (23.9 ) 1,376 1,351 25 1.9
Other fees 1,615 1,368 247 18.1 1,368 1,578 (210 ) (13.3 )
Commissions 2,963 2,889 74 2.6 2,889 2,596 293 11.3
Net realized gains
(losses) on sales
of securities available
for sale 733 499 234 46.9 499 (291 ) 790 (271.5 )
Gains on sale of
mortgages 5,850 1,936 3,914 202.2 1,936 1,602 334 20.8
Earnings on bank-owned
life insurance 829 731 98 13.4 731 1,638 (907 ) (55.4 )
Other miscellaneous
income 349 465 (116 ) (24.9 ) 465 604 (139 ) (23.0 )
Total other income 15,360 11,306 4,054 35.9 11,306 11,037 269 2.4
Trust and investment services income decreased by $68,000 , or 3.3%, from 2019 to
2020, after increasing 4.2% from 2018 to 2019. In 2020, trust and investment
services revenue accounted for 3.7% of the Corporation's gross revenue stream,
including gains and losses on securities and mortgages, compared to 4.3% in 2019
and 4.4% in 2018. Trust and investment services revenue consists of income from
traditional trust services and income from investment services provided through
a third party. In 2020, the traditional trust business accounted for $1,245,000 ,
or 63.1%, of total trust and investment services income, with the investment
services totaling $728,000 , or 36.9%. In 2020, traditional trust services income
increased by $10,000 , or 0.9%, from 2019 levels, while investment services
income decreased $78,000 , or 9.7%. The amount of customer investment activity
drives the investment services income. A slowdown in activity as a result of
COVID-19 caused the decrease in investment services income. The trust and
investment services area continues to be an area of strategic focus for the
Corporation. Management believes there is a great need for retirement, estate,
and small business planning in the Corporation's service area. Management also
sees these services as being a necessary part of a comprehensive line of
financial solutions across the organization.
Service charges on deposit accounts for the year ended December 31, 2020 ,
decreased by $329,000 , or 23.9%, compared to 2019. Overdraft service charges for
2020, which comprise 78.9% of the total deposit service charges, decreased to
$826,000 , from $1,119,000 in 2019, a 26.2% decrease. This decrease was primarily
driven by a change in customer behavior throughout 2020 due to COVID-19
variables. Several other categories of fees increased or decreased by lesser
amounts.
Other fees increased by$247,000 , or 18.1%, for the year endedDecember 31, 2020 , compared to 2019. The increase is primarily due to an increase in loan administration fees that were higher by$238,000 , or 78.3%, in 2020 compared to 2019. This was a result of increased secondary market mortgage activity due to the very low interest rate environment. Additionally, loan modification fees were higher by$219,000 , for the year endedDecember 31, 2020 , compared to the prior year. Partially offsetting these increases, fees on an off-balance sheet cash management product decreased by$270,000 , or 65.3%. Various other fee income categories increased or decreased to lesser degrees making up the remainder of the variance compared to the prior year. Commissions increased by$74,000 , or 2.6%, for the year endedDecember 31, 2020 , compared to the prior year. The increase was primarily caused by commissions from Banker's Settlement Services, which increased by$86,000 , or 125.4%, due to increased settlement activity during 2020. Other categories of commissions increased or decreased by smaller amounts making up the remainder of the variance. 42 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis Gains/losses on security transactions were higher for the year endedDecember 31, 2020 , with a total of$733,000 of gains recorded compared to$499,000 in 2019, a$234,000 , or 46.9% increase in income. Gains or losses taken on securities fluctuate based on market conditions including:
· large swings in market pricing, utilizing volatility and market timing to the
Corporation's advantage,
· appreciation or deterioration of securities values due to changes in interest
rates, credit risk, financial performance, or market dynamics such as spread
and liquidity,
· sale of securities at gains or losses to fund loan growth,
· opportunities to reposition the securities portfolio to improve long-term
performance, or
· management's asset liability goals to improve liquidity or reduce interest rate
or fair value risk.
The gains or losses recorded depend on management's active trades based on the above as well as unrealized gains or losses on equity securities that are adjusted through income. Losses on debt securities can be in the form of active sales of securities, or impairment of securities, which involve writing the security down to a lower value based on anticipated credit losses. There were no impairment charges in 2018, 2019, or 2020, therefore all security gains and losses incurred during these years were active sales of debt securities designed to either take gains or losses, or reposition the portfolio, and unrealized gains or losses on equity securities due to market value movements. The number of debt securities sold in 2020 was higher because of the very low interest rate environment that presented many opportunities to sell securities at gains. During 2019, the rate environment was not quite as conducive to taking gains so the gains received were at slightly lower levels. Loan growth was strong in 2019 and PPP loan growth fueled growth in 2020. It continues to be one of the core elements of Management's plan to increase asset yield and protect margin, by converting securities into loans and improving the Corporation's loan-to-deposit ratio. Gains on the sale of mortgages in 2020 increased$3,914,000 , or 202.2%, from 2019. Mortgage activity was significantly higher in 2020 compared to the prior year as a result of historically low interest rates and a surge in mortgage refinancing activity. The level of gains from the sale of mortgages tends to be aided by a steady decline in interest rates, which has been the case. Should the direction of interest rates reverse in 2021 and start to steadily climb, it is likely the level of gains on the sale of mortgages would also decline. Future mortgage volume will be driven largely by interest rates and the strength of the local economy. Earnings on bank-owned life insurance (BOLI) increased by$98,000 , or 13.4%, for the year endedDecember 31, 2020 , compared to the prior year. Increases and decreases in BOLI income depend on insurance cost components on the Corporation's BOLI policies, the actual annual return of the policies, and any benefits paid upon death that exceed the policy's cash surrender value. There were no insurance proceeds received in 2020 or 2019, however the higher income recorded in 2018 was due to$913,000 of insurance proceeds received in the first quarter of 2018 due to the death of a participant. Increases in cash surrender value are a function of the return of the policy net of all expenses. The miscellaneous income category decreased by$116,000 , or 24.9%, for the year endedDecember 31, 2020 , compared to the same period in 2019. The primary reason for the decrease in miscellaneous income was a decrease in net mortgage servicing income of$140,000 , or 296.3%. Mortgage servicing right amortization was elevated in 2020 due to the very low interest rate environment resulting in lower valuations. Operating Expenses The following table provides details of the Corporation's operating expenses for the last three years along with the percentage increase or decrease compared to the previous year. 43 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis OPERATING EXPENSES (DOLLARS IN THOUSANDS) 2020 vs. 2019 2019 vs. 2018 2020 2019 Increase (Decrease) 2019 2018 Increase (Decrease) $ $ $ % $ $ $ % Salaries and employee benefits 22,062 21,032 1,030 4.9 21,032 20,240 792 3.9 Occupancy expenses 2,407 2,432 (25 ) (1.0 ) 2,432 2,475 (43 ) (1.7 ) Equipment expenses 1,196 1,172 24 2.0 1,172 1,129 43 3.8 Advertising & marketing expenses 894 820 74 9.0 820 773 47 6.1 Computer software & data processing expenses 3,148 2,637 511 19.4 2,637 2,341 296 12.6 Shares tax 1,060 930 130 14.0 930 901 29 3.2 Professional services 2,317 2,088 229 11.0 2,088 1,974 114 5.8 Other operating expenses 2,990 2,522 468 18.6 2,522 2,613 (91 ) (3.5 )
Total operating expenses 36,074 33,633 2,441 7.3 33,633 32,446 1,187
3.7
Salaries and employee benefits are the largest category of operating expenses.
In general, they comprise 61% of the Corporation's total operating expenses. For
the year 2020, salaries and benefits increased $1,030,000 , or 4.9%, compared to
2019. Salaries increased by $859,000 , or 5.5%, and employee benefits increased
by $171,000 , or 3.1%, for 2020, compared to 2019. Salary costs were higher for
the year due to higher commissions paid out on mortgage production, which were
partially offset by higher deferred costs on loan originations, which are
recorded as a contra salary expense. Additionally, salary costs were higher due
to a performance bonus paid out in the first quarter of 2020. Employee benefits
expense was at a higher level due to higher health insurance costs, which
increased by $207,000 , or 7.7%, for 2020 compared to 2019.
The Corporation has a 401(k) Savings Plan under which the Corporation makes an
employer matching contribution, a non-elective safe harbor contribution and a
discretionary non-elective profit sharing contribution. The employer matching
contribution is made on the compensation of all eligible employees, up to a
maximum of 2.5% of an eligible employee's compensation, at $0.50 for every $1.00
of employee contribution up to 5% of an eligible employee's salary. The employer
non-elective safe harbor contribution is 3% of all employee compensation for the
year. Based on the performance of the Corporation, the Compensation Committee
determined the discretionary non-elective profit sharing contribution would be
2% of all eligible employee compensation. For the Corporation, the expense of
the 401(k) matching contribution will be smaller than the non-elective safe
harbor and the discretionary non-elective profit sharing expenses, as the
Corporation is matching a maximum of up to 2.5% of salary, depending on employee
contributions, compared to contributing up to 5.0% of eligible employee's
salaries in the safe harbor and discretionary profit sharing contributions. The
401(k) matching contribution expense of the 401(k) Savings Plan increased
$35,000 , or 9.6% in 2020, a function of greater employee participation.
Occupancy expenses consist of the following:
· Depreciation of bank buildings
· Real estate taxes and property insurance
· Utilities
· Building repair and maintenance
· Lease expense
Occupancy expenses have decreased by$25,000 , or 1.0%, for 2020 compared to 2019. Utilities costs decreased by$21,000 , or 3.0% in 2020 compared to 2019, primarily a result of lower electricity and oil costs. Various other occupancy categories increased or decreased to lesser amounts making up the remainder
of the variance. Equipment expenses increased by$24,000 , or 2.0%, for 2020 compared to 2019. Equipment repair and maintenance costs increased by$64,000 , or 118.6% in 2020 compared to the prior year, offset by lower equipment depreciation expenses and lower service contract expenses, which declined by$47,000 , or 6.3%, and$36,000 , or 13.2%, respectively. Other equipment-related expenses increased or decreased to lesser degrees making up the remainder of the variance. 44 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis Advertising and marketing expenses for the year increased by$74,000 , or 9.0%, from 2019 levels. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses alone totaled$686,000 in 2020, which was a$150,000 , or 28.1% increase, over 2019. Marketing expenses support the overall business strategies of the Corporation; therefore, the timing of these expenses is dependent upon those strategies. Public relations, the smaller category of advertising and marketing expenses, totaled$208,000 for 2020, compared to$284,000 for 2019, a decrease of$76,000 , or 26.8%. Fairs and expos, promotional items, and sponsorships make up this category. Computer software and data processing expenses increased by$511,000 , or 19.4%, for 2020 compared to 2019. Software-related expenses were up by$393,000 , or 26.6%, for the year endedDecember 31, 2020 , compared to the prior year, primarily because of increased software maintenance agreement expenses, which support the overall strategy of the Corporation to gain efficiency. Management conducts internal studies showing rates of return on investment on all major software initiatives to ensure total cost savings that more than offset the total cost of implementation over the life of the software. Management's goal on all software investments is to improve processes, to provide better customer service, while also resulting in lower net salary and overhead costs. Software expenses are likely to continue to increase in 2021, but the actual increase will be dependent on how quickly new software platforms are identified, analyzed, approved and placed into service. Data processing fees were up$119,000 , or 10.2%, for the year endedDecember 31, 2020 , compared to the same period in 2019. These fees increase with the increase in customer transactions as well as any increases in debit card related fraud/charge-off expenses. Bank shares tax expense was$1,060,000 for 2020, an increase of$130,000 , or 14.0%, from 2019. Two main factors determine the amount of bank shares tax: the ending value of shareholders' equity and the ending value of tax-exemptU.S. obligations. The shares tax calculation uses a period-end balance of shareholders' equity and a tax rate of 0.95%. The increase in 2020 can be primarily attributed to the Corporation's growing value of shareholders' equity. Professional services expense increased$229,000 , or 11.0%, for 2020, compared to 2019. These services include accounting and auditing fees, legal fees, and fees for other third-party services. The Corporation began using contracted employees in 2020 to fill some temporary employment positions. These fees amounted to$70,000 with no corresponding expense in 2019. Additionally, legal fees increased by$56,000 , or 54.8%, for 2020 compared to 2019, primarily driven by legal fees related to the subordinated debt transaction that occurred in December of 2020. Outside services costs increased by$42,000 , or 4.3%, and accounting and auditing fees increased by$40,000 , or 11.2%, for 2020 compared to the prior year. Other professional services expense categories increased or decreased to lesser degrees making up the remainder of the variance. Other operating expenses increased by$468,000 , or 18.6%, for the year endedDecember 31, 2020 , compared to the same period in 2019. Contributing to this increase, loan-related expenses increased by$405,000 , or 74.7% for the year, driven primarily by an increase in the provision for off balance sheet credit losses that was impacted by higher qualitative factors in 2020. Additionally,FDIC insurance costs increased by$81,000 , or 57.3% in 2020 compared to the prior year. Operating supplies and fraud-related charge-offs increased by$93,000 , or 34.4%, and$44,000 , or 254.8% respectively, for the year endedDecember 31, 2020 , compared to the prior year. Partially offsetting these increases, travel-related costs were down$140,000 , or 62.6%. Several other operating expense categories increased or decreased by smaller amounts making up the remainder of this variance. Management uses the efficiency ratio as one metric to evaluate the Corporation's level of operating expenses. The efficiency ratio measures the efficiency of the Corporation in producingone dollar of revenue. For example, an efficiency ratio of 70% means it costsseventy cents to generateone dollar of revenue. A lower ratio represents better operational efficiency. The formula for calculating the efficiency ratio is total operating expenses, excluding foreclosed property and OREO expenses, divided by net interest income on an FTE basis, prior to the provision for loan losses, plus other income, excluding gain or loss on the sale of securities. A higher level of operating expenses may be justified if the Corporation is growing interest earning assets and is increasing net interest income and other income at faster levels. This was the case in 2020 as the Corporation's efficiency ratio was 67.2%, compared to 69.8% for 2019. Management has been successful in increasing both net interest income and fee income during this period, as well as holding operating expenses to lower growth rates, resulting in improved efficiency. In 2021, management anticipates possible compression in net interest margin, which could result in lower net interest income making improvements in efficiency more difficult to achieve. While management desires a lower efficiency ratio, the desire to capture additional market share in the near future and the interest rate environment, including the timing of theFederal Reserve's rate actions, will play a large part in determining when the Corporation's efficiency ratio improves further and the degree to which additional improvements can be made. 45 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis 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 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, 2020 , the Corporation recorded a tax provision of$2,285,000 , compared to$2,126,000 for 2019. This increase in tax expense can be attributed to higher pretax earnings. The effective tax rate for the Corporation was 15.7% for 2020 and 2019. 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. 46 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis Financial Condition Cash and Cash Equivalents Cash and cash equivalents consist of the cash on hand in the Corporation's vaults, operational transaction accounts with theFederal Reserve Bank (FRB), and deposits in other banks. The FRB requires a specified amount of cash available either in vault cash or in an FRB account. Known as cash reserves, these funds provide for the daily clearing house activity of the Corporation and fluctuate based on the volume of each day's transactions. Beyond these requirements, the Corporation maintains additional cash levels as part of Management's active asset liability and liquidity strategy. Management has been carrying larger cash balances as a result of the large increase in deposit balances during 2020 with lower levels of loan growth. Additionally, higher cash balances provide an immediate hedge against interest rate risk and liquidity risk. As ofDecember 31, 2020 , the Corporation had$94.9 million in cash and cash equivalents, compared to$41.1 million as ofDecember 31, 2019 . The overnight rate that theFederal Reserve Bank pays on excess cash balances fluctuates as the overnight Federal Funds rate fluctuates and as ofDecember 31, 2020 , it stood at 0.10%. The Corporation does not aim to keep excess cash at the FRB as the overnight rate is much less then rates received on balances held in correspondent money market accounts. Management invests excess cash in three money market accounts at other financial institutions. The money market accounts yielded a return of 0.15%, 0.31%, and 0.35% atDecember 31, 2020 , all more than the return received from the FRB. This diversification alters the mix of cash and cash equivalents to more interest bearing deposits in banks and less Federal funds sold. The cash and cash equivalents represent only one element of liquidity. For further discussion on liquidity management, refer to Item 7A Quantitative and Qualitative Disclosures about Market Risk. Sources and Uses of Funds
The following table shows an overview of the Corporation's primary sources and uses of funds. This table utilizes average balances to explain the change in the sources and uses of funding. Management uses this analysis tool to evaluate changes in each balance sheet category. For purposes of this analysis, securities available for sale are shown based on book value and not fair market value. Additionally, short-term investments only include interest-bearing funds. Trends identified from past performance assist management with decisions concerning future growth.
Some conclusions drawn from the following table are as follows:
· Balance sheet growth rate was 13.9% in 2020 compared to 7.6% in 2019.
· Balance sheet mix changed with average balances of securities growing at a rate
of 13.9%, compared to a 4.6% decrease in 2019.
· Interest bearing demand deposits and savings deposits grew in 2020 compared to
a decline in time deposits.
· Interest bearing demand deposits experienced a slowed growth, up 8.9% in 2020,
compared to 20.4% in 2019.
· Savings deposits experienced the most growth out of all deposit segments, up
18.8%.
· Non-interest bearing deposits, the most beneficial deposits, grew at a rate of
28.0% in 2020, compared to 5.4% growth in 2019.
· Time deposits continue to decline both in amount and as a percentage of total
deposits with a 6.9% decrease in 2020 compared to a 4.3% decline in 2019.
· Borrowings decreased by 8.8% in 2020, compared to an increase of 5.8% in 2019.
· The Corporation issued
subordinated debt on
47
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ENB FINANCIAL CORP
Management's Discussion and Analysis
SOURCES AND USES OF FUNDS
(DOLLARS IN THOUSANDS)
2020 vs. 2019 2019 vs. 2018
2020 2019 Increase (Decrease) 2019 2018 Increase (Decrease)
Average Balances $ $ $ % $ $ $ %
Short-term investments 35,261 19,596 15,665 79.9 19,596 18,772 824 4.4
Securities available for sale 347,149 304,699 42,450 13.9 304,699 319,420 (14,721 ) (4.6 )
Regulatory stock 7,010 6,978 32 0.5 6,978 6,245 733 11.7
Loans 815,563 726,210 89,353 12.3 726,210 638,525 87,685 13.7
Total Uses 1,204,983 1,057,483 147,500 13.9 1,057,483 982,962 74,521 7.6
Interest bearing demand 279,280 256,564 22,716 8.9 256,564 213,037 43,527 20.4
Savings accounts 242,572 204,179 38,393 18.8 204,179 196,392 7,787 4.0
Time deposits 126,742 136,075 (9,333 ) (6.9 ) 136,075 142,125 (6,050 ) (4.3 )
Borrowings 69,722 76,461 (6,739 ) (8.8 ) 76,461 72,282 4,179 5.8
Subordinated Debt 107 - 107 - - - - -
Non-interest bearing demand 435,495 340,130 95,365 28.0 340,130 322,733 17,397 5.4
Total Sources 1,153,918 1,013,409 140,509 13.9 1,013,409 946,569 66,840 7.1
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, 2020 , the Corporation had$483.5 million of investment securities, which accounted for 33.1% of assets, compared to 26.9% as ofDecember 31, 2019 . The securities portfolio increased in size and as a percentage of the balance sheet in 2020 due to the redeployment of excess cash from an increase in deposits. While the ending balance of securities increased 53.6% fromDecember 31, 2019 toDecember 31, 2020 , the average balance of securities increased 13.9% for the year compared to 2019.
Each quarter management sets portfolio allocation guidelines and adjusts security portfolio strategy generally based upon the following factors:
· Performance of the various instruments including spreads over
rates
· Slope of the
· Level of and projected direction of interest rates
· ALCO positions as to liquidity, interest rate risk, and net portfolio value
· Changes in credit risk of the various instruments
· State of the economy and projected economic trends
The securities policy of the Corporation imposes guidelines to ensure
diversification within the portfolio. The diversity specifications are designed
to control the level of risk presented by each security type. The amount of
diversity permitted through the policy allows management to pursue security
types with better total return profiles or securities with higher yields.
However, those securities that can provide higher levels of return will often
bring higher elements of duration or credit risk. Management's goal is to
optimize portfolio total return performance over the long term while staying
within portfolio policy guidelines. The composition of the securities portfolio
at year-end based on fair market value is shown in the following table.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
SECURITIES PORTFOLIO
(DOLLARS IN THOUSANDS)
December 31,
2020 2019 2018
$ % $ % $ %
U.S. government agencies 54,361 11.2 32,624 10.5 30,120 10.0U.S. agency mortgage-backed securities 71,052 14.7 48,626 15.4 44,639 14.9 U.S. agency collateralized mortgage obligations 35,035 7.2
60,253 19.1 54,090 18.0
Asset-backed securities 60,475 12.5 23,262 7.4 11,399 3.8
Corporate bonds 61,723 12.8 54,880 17.4 59,192 19.7Obligations of states and political subdivisions 193,782 40.1 88,452 28.1 94,625 31.6 Total debt securities, available for sale 476,428 98.5 308,097 97.9 294,065 98.0 Marketable equity securities 7,105 1.5
6,708 2.1 5,934 2.0
Total securities 483,533 100.0 314,805 100.0 299,999 100.0
The Corporation typically invests excess liquidity into securities, both
fixed-rate and variable-rate bonds which account for 98.5% of all securities,
with equity securities accounting for the other 1.5%. The securities portfolio
provides interest and dividend income to supplement the interest income on
loans. Additionally, the securities portfolio assists in the management of both
liquidity risk and interest rate risk. Refer to Item 7A Quantitative and
Qualitative Disclosures about Market Risk for further discussion of risk
strategies. To provide maximum flexibility for management of liquidity and
interest rate risks, the securities portfolio is classified as available for
sale and reported at fair value. Management adjusts the value of the portfolio
on a monthly basis to fair market value as determined in accordance with U.S.
generally accepted accounting principles. Management has the ability and intent
to hold all debt securities until maturity, and does not generally record
impairment on the bonds that are currently valued below book value.
The Corporation's marketable equity securities include an investment in
qualified Community Reinvestment Act (CRA) mutual funds and a small portfolio of
bank stocks held at the holding company level. A total of $6,176,000 has been
invested into one qualified CRA fund that carried an AAA credit rating as of
December 31, 2020 . The fund is a Small Business Administration (SBA) CRA fund
with a $6,176,000 book value and market value as it has a stable dollar price.
The current guideline used by management for the minimum amount to be invested
in CRA-approved investments is approximately 0.5% of assets. The current
$6,176,000 of CRA investments is equivalent to 0.4% of assets. The small
portfolio of bank stocks included in marketable equity securities had a book
value of $981,000 and a fair market value of $929,000 as of December 31, 2020 .
Overall, the tax equivalent yield on all of the Corporation's securities
decreased from 2.66% for 2019, to 2.17% for 2020. On the taxable segment of the
portfolio, Treasury rates were lower in 2020 compared to 2019, so the majority
of securities that matured or were sold had lower yields compared to the
securities purchased to replace them. The Corporation's securities portfolio
underwent a number of changes during 2020 including an increase in all
categories except collateralized mortgage obligations which decreased. The fair
market value of the Corporation's securities portfolio increased by $168.7
million , or 53.6%, from December 31, 2019 to December 31, 2020 , and the
portfolio accounted for a larger amount of the Corporation's assets at 33.1% as
of December 31, 2020 , compared to 26.9% as of December 31, 2019 .
During the first quarter of 2020, the Federal Reserve decreased short-term rates
two times for a total of 150 basis points. Market conditions during 2020 were
very unpredictable and fast changing due to the start of and continuing impact
of COVID-19 and the declaration of a global pandemic on March 11, 2020 . The
Fed's reduction of interest rates was in response to this pandemic and caused
short-term and long-term Treasury rates to decline at a rapid pace to reach
all-time lows. This pandemic continued to have far-reaching impacts on local,
national, and global economies and supply chains throughout all of 2020
impacting Treasury rates.
Management views the U.S. government agency sector as foundational to the
building of the securities portfolio. U.S. agencies have very low risk and high
liquidity, and depending on structure, are fairly predictable in terms of their
performance. Non-callable agencies have a set maturity date with no principal
payments until maturity. Callable agencies offer a higher yield but carry option
risk, the risk that the agency could call the issue after it reaches the call
date. This typically occurs if interest rates decline. The non-callable
structures have lower yield but a better total return
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ENB FINANCIAL CORP
Management's Discussion and Analysis
profile when considering all rate scenarios, however given a slow progression of
higher rates the callable structure would outperform given the higher yield. As
a result, management uses a blend of non-callable and callable instruments to
enhance yield performance but ensure a predictable cash flow ladder is built out
into the future. Management prefers to use corporate bonds to supplement U.S.
agencies in building a ladder of steady maturities in the one-year to five-year
time frame. Corporate bonds provide better return than U.S. agencies, especially
in this shorter time frame, since they provide better yields and are generally
not callable. While corporate bonds do carry substantially more credit risk than
U.S. agencies, the credit risk of corporate bonds is greatly mitigated by
maintaining shorter maturities and investing in A-rated Fortune 500 companies.
Investments in MBS and CMOs assist management in adding to and maintaining a
stable five-year ladder of cash flows, which is important in providing stable
liquidity and interest rate risk positions. Unlike U.S. agency bonds, corporate
bonds, and obligations of states and political subdivisions, which only pay
principal at final maturity, the U.S. agency MBS and CMO securities pay monthly
principal and interest. The combined effect of all of these instruments paying
monthly principal and interest provides the Corporation with a significant and
reasonably stable cash flow. Cash flows coming off of MBS and CMOs do slow down
and speed up as interest rates increase or decrease. During the majority of
2020, cash flows from these securities were higher than the prior year as a
result of lower Treasury rates. Management desires and pursues those MBS and CMO
securities that do not experience significant changes in prepayment speeds given
changes in interest rates. Since nearly all of these securities are purchased at
a premium, management is most concerned with how quickly that premium will be
amortized based on the average life of the security. Therefore, management
attempts to guard against those securities with fast or volatile prepayment
speeds in favor of those that demonstrate more consistent principal payments.
Management invests in asset-backed securities in the form of student loan
floaters in an effort to provide an instrument that will perform well in a
rates-up environment and offset the interest rate risk of the longer fixed-rate
municipal bonds. The investment in this segment grew throughout 2019 and 2020
and continues to be a good defensive structure to balance rates-up risk.
Obligations of states and political subdivisions, often referred to as municipal
bonds, are tax-free and taxable securities that generally provide the highest
yield in the securities portfolio on a tax-equivalent basis. In the continued
prolonged period of historically low interest rates and with a lower Corporate
tax rate, the municipal bond sector has lost some of its benefit compared to
other segments of the portfolio. Municipal tax-equivalent yields generally start
above other taxable bonds; however, they generally carry the longest duration
and highest interest rate risk exposure out of all the Corporation's securities.
Due to the lower tax rate in 2019 and 2020, municipal bonds do not provide
yields as high as previous years, but they still are an important component of
the Corporation's portfolio. The Corporation also began purchasing some taxable
municipal securities that added to the value of this sector. The municipal bond
portfolio had an unrealized gain position of $6,650,000 as of December 31, 2020 ,
compared to an unrealized gain position of $2,236,000 as of December 31, 2019 .
The vast majority of the municipal bonds held by the Corporation on December 31,
2020 carried between an A and an AA credit rating, with 5.0% carrying the
highest AAA rating. These are stronger ratings on average than the ratings on
the corporate bonds held by the Corporation. These ratings reflect the final
rating or the rating with any insurance backing or credit enhancements. The
Corporation's securities policy requires that municipal bonds not carrying
insurance have a minimum S&P credit rating of A- or a minimum Moody's credit
rating of A3 at the time of purchase. It is possible that municipalities have an
underlying rating of S&P BBB+ or Moody's Baa1 rating prior to insurance or
credit enhancement while having a final rating of S&P A- or Moody's A3 with the
insurance and/or credit enhancement. In the current environment, the major
rating services have tightened their credit underwriting procedures and are more
apt to downgrade municipalities. Additionally, the weaker economy has reduced
revenue streams for many municipalities and has called into question the basic
premise that municipalities have unlimited power to tax, i.e. the ability to
raise taxes to compensate for revenue shortfalls. Therefore, management closely
monitors any municipal bonds that have their credit ratings downgraded below
initial purchase guidelines. The Corporation has not experienced any losses due
to defaults or bankruptcies of states or political subdivisions. As of December
31, 2020 , all of the municipal bonds carried credit ratings within the
Corporation's initial purchase policy requirements.
As of December 31, 2020 , the Corporation held corporate bonds with a total book
value of $60.4 million and fair market value of $61.7 million . U.S. corporate
bonds, consisting of bonds issued by U.S. public companies as unsecured credit,
carry a 100% risk weighting for capital purposes and therefore are viewed as a
higher risk security. Corporate bonds issued as foreign sovereign debt carry a
20% risk weighting. Approximately 41% of the Corporation's corporate bond
portfolio is in the form of foreign sovereign debt and carries that lower 20%
risk weighting. Because of the higher risk
50
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ENB FINANCIAL CORP
Management's Discussion and Analysis
posed by the majority of the Corporation's corporate bonds, the Corporation has a policy that limits corporates to 20% of the portfolio book value. As ofDecember 31, 2020 , this$60.4 million book value of corporate debt amounted to 12.5% of the portfolio book value, compared to$54.6 million book value, or 17.5% of portfolio book value as ofDecember 31, 2019 . 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 relative yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. Management stands to possibly lose the entire principal amount if the entity that issued the corporate paper fails. As a result of the higher level of credit risk taken on by purchasing a corporate bond, management has in place certain minimal credit ratings that must be met in order for management to purchase a corporate bond. The financial performance of any corporate bond being considered for purchase is analyzed both prior to and after purchase. Management conducts periodic monitoring throughout the year including an internal financial analysis. An independent credit review is conducted at least annually in addition to management's periodic monitoring. Additionally, the Corporation's securities policy calls for corporate bonds purchased to not have maturities greater than six years with the preferred maturity range of two to five years. Credit risk grows exponentially with length. The shorter the maturity the more assurance the company's financial position will remain sufficiently strong to ensure full payment of the bond at maturity. The longer the time horizon the more difficult it is to project the financial health of the company. Management closely monitors the unrealized gain or loss positions of all the corporate bonds to identify any potential weakness. The trading levels of these securities are closely linked to the financial performance and health of the entity. Significant declines in the valuations of these securities, beyond what can be attributed to movement in interest rates, are generally an indication of higher credit risk. Management reviews all securities with unrealized losses approaching 10% or those carrying unrealized losses for prolonged periods of time, for possible impairment. As ofDecember 31, 2020 , the highest percentage of unrealized losses for any corporate bond was 0.5%. Most Corporate bonds had unrealized gains as ofDecember 31, 2020 . All but two of the corporate bonds had at least an A credit rating by one of the major credit rating services, with all corporate bonds considered investment grade. In addition, the Corporation purchased$1,000,000 of a 4% subordinated debt note in the fourth quarter of 2020 which is unrated. This is considered a corporate bond as it is subordinated debt of a domestic community bank but is unrated because it is not a typical corporate issuance. Currently, there are no indications that any of these bonds would discontinue contractual payments. The entire securities portfolio is reviewed monthly for credit risk and evaluated quarterly for possible impairment. Corporate bonds have the most potential credit risk out of the Corporation's debt instruments. Due to the rapidly changing credit environment and improving but sluggish economic conditions, management is closely monitoring all corporate bonds. For further information on impairment see Note B. For further details regarding credit
risk see Note P. The following table shows the weighted-average life and yield on the Corporation's securities by maturity intervals as ofDecember 31, 2020 , 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. 51 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
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. government agencies 35,497 0.06 11,227 0.58 7,500 1.45 - - 54,224 0.36U.S. agency mortgage-backed securities 19,080 0.62
29,223 1.13 8,369 1.57 13,105 1.79 69,777 1.17
13,550 1.77 5,586 0.98 1,105 0.82 34,449 0.94 Corporate bonds 13,030 2.15 39,922 1.75 7,435 2.04 - - 60,387 1.87
Obligations of states and political subdivisions 1,308 3.12
542 3.46 14,667 3.17 170,615 2.70 187,132 2.74
Asset-backed securities 2,062 0.97 11,142 0.94 15,117 0.94 32,066 1.07 60,387 1.01
Marketable equity securities - - - - - - 7,157 1.54 7,157 1.54
Total securities available for sale 85,185 0.59
105,606 1.38 58,674 1.80 224,048 2.37 473,513 1.76
Securities are assigned to categories based on stated contractual maturity except for MBS and CMOs, which are based on anticipated payment periods.
The yield on the securities portfolio, including equity securities, was 1.76% as ofDecember 31, 2020 , compared to 2.48% as ofDecember 31, 2019 . The reduction in yield was primarily due to the decline in market interest rates during 2020. Management also purchased$35.5 million in FHLB discount notes at a rate of 0.06% in an effort to use excess liquidity to reducePA Bank shares tax expense. This purchase caused a reduction in overall security yield. As ofDecember 31, 2020 , the effective duration of the Corporation's fixed income security portfolio was 2.7 years for the base case or rates unchanged scenario, compared to 2.2 years as ofDecember 31, 2019 . Effective duration is the estimated duration or length of a security or portfolio, which is implied by the price volatility. Effective duration is calculated by converting price volatility to a standard measurement representing length, expressed in years. It is a measurement of price sensitivity, with lower durations being advantageous in periods of rising rates and longer durations benefiting the holder in periods of declining rates. An effective duration of 3.0 years would approximate the duration of a three-yearU.S. Treasury , a security that has no option risk or call provisions. Management receives effective duration and price volatility information quarterly on an individual security basis. Management's target base case, or rates unchanged effective duration, is 3.0 years. The Corporation manages duration, along with interest rate sensitivity and fair value risk, across the entire balance sheet. Currently, assets are repricing quicker than liabilities, meaning the Corporation is asset sensitive and benefits by higher interest rates. Regardless of the Corporation's asset sensitive balance sheet position, management anticipates that the portfolio's effective duration will increase toward the 3.0 target throughout 2021. Effective duration is only one measurement of the length of the securities portfolio. Management receives and monitors a number of other measurements. In general, a shorter portfolio will adjust more quickly in a rising interest rate environment, whereas a longer portfolio will tend to generate more return over the long-term and will outperform a shorter portfolio when interest rates decline. Because the Corporation's securities portfolio is now shorter than it has been historically and shorter than the average peer bank, it will generally outperform the average peer bank given static rates or an increase in interest rates, and will generally underperform given lower interest rates. Additionally, with fixed rate instruments, the longer the term of the security, generally the more fair value risk there is when interest rates rise. The converse is true when interest rates decline. The securities portfolio is a significant piece of the Corporation's assets, but there are other crucial elements that management also uses to manage the Corporation's asset liability position such as cash and cash equivalents and borrowings. Beyond these, management also utilizes other elements of the Corporation's balance sheet to reduce exposure to higher interest rates. Prime-based loans account for approximately 17% of the Corporation's total loans which results in this segment of the portfolio having very minimal exposure to interest rate risk because these loans reprice to the new Prime rate whenever there is aFederal Reserve rate movement. The unusually extended period of historically low rates also caused the Corporation's deposits to undergo major changes in consistency with non-interest bearing accounts and savings accounts responsible for a larger percentage of deposits while time deposits have declined markedly. This has benefited the Corporation's asset liability position with more core deposits which model with longer lives causing liabilities to extend. The combination of Prime-based loans and longer core deposits has allowed management to historically take on more duration in the securities portfolio. See Item 7A Quantitative and Qualitative Disclosures about Market Risk for further discussion on the Corporation's management of asset liability risks including interest rate risk and fair value risk. 52 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis The majority of the Corporation's securities are held at the bank level with only a very small portfolio of bank stocks held at the holding company level. With only$981,000 of book value as ofDecember 31, 2020 , the non-maturity nature of the Corporation's bank stock portfolio is not material to the duration of the Corporation's securities portfolio or assets. The decision to purchase these equity securities at the holding company level took into account tax strategies, market conditions, and other strategic decisions. Loans
Net loans outstanding increased$66.8 million , or 9.0%, from$744.2 million atDecember 31, 2019 , to$811.0 million atDecember 31, 2020 . The following table shows the composition of the loan portfolio as ofDecember 31 for each of the past five years. LOANS BY MAJOR CATEGORY (DOLLARS IN THOUSANDS) December 31, 2020 2019 2018 2017 2016 $ % $ % $ % $ % $ % Commercial real estate Commercial mortgages 142,698 17.4 120,212 16.0 101,419 14.6 90,072 15.1 86,434 15.2 Agriculture mortgages 176,005 21.4 175,367 23.3 165,926 24.0 152,050 25.5 163,753 28.7 Construction 23,441 2.9 16,209 2.2 18,092 2.6 18,670 3.1 24,880 4.4
Total commercial real estate 342,144 41.7 311,788
41.5 285,437 41.2 260,792 43.7 275,067
48.3
Consumer real estate (a) 1-4 family residential mortgages 263,569 32.0 258,676
34.4 219,037 31.6 176,971 29.7 150,253 26.3 Home equity loans 10,708 1.3 9,770 1.3 10,271 1.5 11,181 1.9 10,391 1.8
Home equity lines of credit 71,290 8.7 70,809
9.4 64,413 9.3 61,104 10.2 53,127
9.3
Total consumer real estate 345,567 42.0 339,255
45.1 293,721 42.4 249,256 41.8 213,771
37.4
Commercial and industrial Commercial and industrial 97,896 11.9 58,019
7.7 61,043 8.8 41,426 6.9 42,471 7.4 Tax-free loans 10,949 1.3 16,388 2.2 22,567 3.3 20,722 3.5 13,091 2.3 Agriculture loans 20,365 2.5 20,804 2.8 20,512 3.0 18,794 3.2 21,630 3.8
Total commercial and industrial 129,210 15.7 95,211
12.7 104,122 15.1 80,942 13.6 77,192 13.5 Consumer 5,155 0.6 5,416 0.7 9,197 1.3 5,320 0.9 4,537 0.8 Total loans 822,076 100.0 751,670 100.0 692,477 100.0 596,310 100.0 570,567 100.0 Less: Deferred loan costs, net (1,294 ) (1,948 ) (1,596 ) (1,243 ) (1,000 ) Allowance for loan losses 12,327 9,447 8,666 8,240 7,562 Total net loans 811,043 744,171 685,407 589,313 564,005
(a) Residential real estate loans do not include mortgage loans serviced for
others. These loans totaled
There was significant growth in the loan portfolio sinceDecember 31, 2019 . Most major loan categories showed an increase in balances. Loan growth in 2020 was driven primarily by the funding of Payroll Protection Program (PPP) loans to local businesses. The composition of the loan portfolio has remained relatively stable in recent years, with the one major trend being the growth in 1-4 family residential lending. The total of all categories of real estate loans comprised 83.7% of total loans as ofDecember 31, 2020 , compared to 86.6% of total loans as ofDecember 31, 2019 . Consumer real estate has been the largest category of the loan portfolio for the past two years, with commercial real estate being the second largest category. 53 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
Commercial real estate consists of 41.7% of total loans as ofDecember 31, 2020 , compared to 41.5% of total loans as ofDecember 31, 2019 . Commercial real estate loans increased to$342.1 million atDecember 31, 2020 , from$311.8 million atDecember 31, 2019 , a 9.7% increase. The increase in commercial real estate occurred in all sectors, however 2020 was characterized as a better year for commercial real estate loans outside of agriculture, with solid growth as a number of businesses moved ahead on commercial projects. This was evident in terms of the construction commercial real estate which had the sharpest growth as a percentage. Commercial mortgages increased by$22.5 million , or 18.7%, agriculture mortgages increased by$638.000 , or 0.4%, and commercial construction loans increased by$7.2 million , or 44.6% fromDecember 31, 2019 , toDecember 31, 2020 . The agricultural mortgages, along with agricultural loans not secured by real estate, accounted for 23.9% of the entire loan portfolio as ofDecember 31, 2020 , compared to 26.1% as ofDecember 31, 2019 . Management expects both commercial and agricultural loans to increase in 2021. Management believes as economic conditions stabilize in 2021, other elements of the local diversified economy outside of the agriculture industry will expand and cause commercial mortgages to continue to grow as well. The Corporation's largest element of commercial real estate loans remains agricultural mortgages. The Corporation views itself as a leading agricultural lender in the greaterLancaster County marketplace. Agricultural purpose loans have averaged approximately 25% of the Corporation's total loans over the past five-year period, and had experienced a period of slow growth in 2016 followed by declines in 2017, and then growth again in 2018, 2019, and 2020. In 2016 the growth rate slowed as economic conditions, namely weaker commodity prices, became more difficult and changes occurred in the Corporation's agricultural lending team. The reduction in agricultural mortgages in 2017 was caused by a general slowing of the growth rate in the local agricultural industry, a more challenging year for dairy farmers, which account for approximately half the Corporation's agricultural loans, and a reduction in the pipeline of new agricultural loans caused by the prior changes in the agricultural lending staff. The Corporation has a history of an agricultural focus, which coincides with the market area and type of customers that we serve. In 2018 and 2019, agricultural loan growth picked up due to the Corporation's renewed commitment to and more agricultural relationships proceeding with projects. In 2020, agricultural loan growth was modest with concerns about economic stability and future economic concerns. Management believes the agricultural loan portfolio will continue to grow in 2021, but is also closely tracking the impact of weaker commodity prices on the Corporation's farmers. The other area of commercial lending is non-real estate secured commercial lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate accounted for 15.7% of total loans as ofDecember 31, 2020 , compared to 12.7% as ofDecember 31, 2019 . In scope, the commercial and industrial loan sector, at 15.7% of total loans, is significantly smaller than the commercial real estate sector at 41.7% of total loans. This is consistent with management's credit preference for obtaining real estate collateral when making commercial loans. The balance of total commercial and industrial loans increased from$95.2 million atDecember 31, 2019 , to$129.2 million atDecember 31, 2020 , a 35.7% increase, primarily attributable to the funding of PPP loans in 2020. Outside of PPP loans, 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. Based on current levels of demand for these types of loans and the higher level of commercial and industrial expertise that the Corporation now has, management anticipates that these loans will experience moderate growth in 2021. However, commercial and industrial loans in total will likely show a decline as forgiveness of PPP loans proceeds with new PPP loan originations
much slower than levels in 2020.
The Corporation provides credit to many small and medium-sized businesses. Much of this credit is in the form of Prime-based lines of credit to local businesses where the line may not be secured by real estate, but is based on the health of the borrower with other security interests on accounts receivable, inventory, equipment, or through personal guarantees. Additionally, PPP loans are included in this category resulting in the commercial and industrial loans increasing to$97.9 million atDecember 31, 2020 , a$39.9 million , or 68.8% increase, from the$58.0 million atDecember 31, 2019 . As ofDecember 31, 2020 , the Corporation had total PPP loans of$48.0 million , representing the full amount of annual growth in the commercial and industrial loan category. Outside of PPP loans, the remaining loans in this category actually experienced a decline in 2020. As a result of the regulatory concerns regarding commercial real estate (CRE) lending that arose out of the financial crisis of 2008, there has been a renewed focus on the amount of CRE loans as a percentage of total risk-based capital. The CRE loans are viewed as having more risk due to the specific types of commercial loans that fall into this category and their heavy reliance on the value of real estate that is used as collateral. During the financial crisis and years immediately after, many financial institutions had CRE loans in excess of 400% of total risk-based capital. Regulators were warning banks of concentrations in CRE loans and the increased risk that they could potentially bring. The Corporation's level of CRE loans has been low relative to other community banks and the CRE profile has not materially changed over the past several years. The Corporation remains well below the CRE guidelines of 100% of 54 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis total risk-based capital for construction and development loans, and 300% of risk-based capital for total CRE loans. There are nine categories of CRE loans by definition; however the Corporation only has seven of those types. The following chart details the Corporation's CRE loans as ofDecember 31, 2020 andDecember 31, 2019 . CRE SUMMARY BY CATEGORY (DOLLARS IN THOUSANDS) December 31, 2020 2019 Total Total Committed Risk-Based Committed Risk-Based Loan Amount Capital Loan Amount Capital CRE Description $ % $ % Land Development Loans 673 0.4 2,074 1.7
1-4 Family Residential Construction Loans 1,168 0.8
1,731 1.4
Commercial Construction Loans 22,248 14.5 19,550 15.6
Other Land Loans - - - -
Multi-Family Property 9,391 6.1 8,428 6.7Nonfarm, Nonresidential Property 43,598 28.3
22,021 17.6
Unsecured Loans to Developers 603 0.4 853 0.7
77,681 50.5 54,657 43.7
Corporation'sRisk-Based Capital 153,801
124,970
The Corporation's level of CRE loans is low relative to other financial
institutions in its peer group and as a percentage of risk-based capital, with
50.5% as of December 31, 2020 . Management does not believe the Corporation's CRE
profile will change significantly during 2021. Management is closely monitoring
all CRE loan types to be able to determine any negative trends that may occur.
Management does internally monitor the delinquencies and risk ratings of these
loans on a monthly basis and has established internal policy guidelines to
restrict the amount of each of the above seven types of CRE loans as a
percentage of capital. As of December 31, 2020 , the Corporation was well under
internal guidelines for all of the above CRE loan types.
The consumer residential real estate category represents the largest group of
loans for the Corporation. The consumer residential real estate category of
total loans increased from $339.3 million on December 31, 2019 , to $345.6
million on December 31, 2020 , a 1.9% 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 1-4 family residential mortgages account for the
vast majority of residential real estate loans with fixed and floating home
equity loans making up the remainder. Historically, the entire consumer
residential real estate component of the loan portfolio has averaged close to
40% of total loans. In 2019, this percentage was 45.1%, and in 2020 it decreased
to 42.0% due to the increase in the portfolio from the PPP loan originations.
Management expects the consumer residential real estate category to increase in
2021 due to a continued effort to increase mortgage volume.
The first lien 1-4 family mortgages increased by $4.9 million , or 1.9%, from
December 31, 2019 , to December 31, 2020 . These first lien 1-4 family loans made
up 76.3% of the residential real estate total as of December 31, 2020 , and 76.2%
as of December 31, 2019 . 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 2020, mortgage production increased 63.2%
over the prior year. The Corporation experienced increases in both portfolio
and secondary market production. The percentage of mortgage originations that
went into the Corporation's held for investment mortgage portfolio decreased to
55% compared to 61% in 2019. Market conditions were favorable throughout the
year, in combination with an increase in held for sale mortgage production.
Gains on the sale of mortgages increased by 202.2% in 2020 compared to 2019. The
low interest rate environment did lead to an incremental increase in refinance
activity; 32% of volume in 2020 was purchase, 19% was residential construction
lending, and 49% was refinance activity. The volume of mortgage production in
2020 led to a 4.9% increase in growth of the held for investment residential
loan portfolio and a 52.3% increase in the servicing on behalf of others
portfolio, with mortgage servicing rights growing to over $1 million .
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Management's Discussion and Analysis
As ofDecember 31, 2020 , the remainder of the residential real estate loans consisted of$10.7 million of fixed rate junior lien home equity loans, and$71.3 million of variable rate home equity lines of credit (HELOCs). This compares to$9.8 million of fixed rate junior lien home equity loans, and$70.8 million of HELOCs as ofDecember 31, 2019 . Therefore, combined, these two types of home equity loans increased from$80.6 million to$82.0 million , an increase of 1.7%.
Consumer loans not secured by real estate represent a very small portion of the Corporation's loan portfolio, accounting for 0.6% of total loans as ofDecember 31, 2020 , and 0.7% of loans atDecember 31, 2019 . In recent years, homeowners have turned to equity in their homes to finance cars and education rather than traditional consumer loans for those expenditures. Due to the credit crisis that occurred in 2008 and 2009, specialized lenders began pulling back on the availability of credit and more favorable credit terms. The underwriting standards of major financing and credit card companies began to strengthen in the past few years after years of lower credit standards. This led consumers to seek unsecured credit away from national finance companies and back to their bank of choice. Management has seen the need for additional unsecured credit increase; however, this increased need for credit has only resulted in low levels of additional consumer loans for the Corporation. Slightly higher demand for unsecured credit is being offset by principal payments on existing loans. Management anticipates that the Corporation's level of consumer loans will likely be relatively unchanged in the near future, as the need for additional unsecured credit in an environment of slow economic growth is generally being offset by those borrowers wishing to reduce debt levels and move away from the higher cost of unsecured financing relative to other forms of real estate secured financing. Management anticipates that the loan portfolio composition will remain largely the same in 2021 outside of the recent trend of consumer real estate loans slowly increasing as a percentage of the loan portfolio and the commercial and industrial loan segment decreasing due to the forgiveness of PPP loans. Commercial real estate and consumer real estate are the largest two segments of the portfolio with each accounting for over 40% of the portfolio over the last four years. The commercial real estate segment grew faster than the consumer real estate segment in 2020 but this could change in 2021 with a renewed focus on growing the held-for-investment residential real estate sector of the loan portfolio. The economic conditions that prevailed in 2019 and 2020, were more favorable to originating commercial real estate loans than consumer real estate loans. In 2019, management expanded the Corporation's geographic outreach in terms of marketing 1-4 family residential mortgages, which allowed these loans to grow despite an overall slowing of economic activity. Additionally, the threeFederal Reserve rate decreases in the second half of 2019 and two decreases in the first half of 2020 elevated the amount of mortgage activity. Economic conditions appeared to be weakening in late 2019, which began to impact the growth rate of commercial real estate loans. This impact is expected to continue into 2021, with further slowing of commercial loan growth. Outside of these two large loan segments, the Corporation's commercial and industrial segment increased in 2020 due to the PPP loans and would be expected to decrease as a percentage of the total loan portfolio in 2021 as many of these loans are forgiven. The Corporation's small unsecured consumer loan portfolio is expected to remain under 1% of the total loan portfolio in 2021. Management is still aggressively pursuing loan growth with a focus on residential and commercial real estate, and agriculture lending. Management believes the Corporation is well positioned for 2021 with a very strong brand image and history of expertise in these areas, however, the growth obtained will be highly dependent on economic conditions and competitive forces. The following tables show the maturities for the loan portfolio as ofDecember 31, 2020 , by time frame for the major categories, and also the loans, which are floating or fixed, maturing after one year. 56 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis LOAN MATURITIES (DOLLARS IN THOUSANDS) Due After One Year Due in One Through Due After Year or Less Five Years Five Years Total $ $ $ $ Commercial real estate Commercial mortgages 4,490 14,414 123,794 142,698 Agriculture mortgages 10,083 5,110 160,812 176,005 Construction 1,103 2,249 20,089 23,441 Total commercial real estate 15,676 21,773 304,695 342,144 Consumer real estate 1-4 family residential mortgages 5,048 8,975 249,546 263,569 Home equity loans 4,820 1,308 4,580 10,708 Home equity lines of credit 11 2,446 68,833 71,290 Total consumer real estate 9,879 12,729 322,959 345,567 Commercial and industrial Commercial and industrial 19,329 73,822 4,745 97,896 Tax-free loans - 2,836 8,113 10,949 Agriculture loans 11,328 7,758 1,279 20,365 Total commercial and industrial 30,657 84,416 14,137 129,210 Consumer 1,724 3,309 122 5,155 Total amount due 57,936 122,227 641,913 822,076
FIXED AND FLOATING RATE LOANS DUE AFTER ONE YEAR
(DOLLARS IN THOUSANDS)
Floating or
Fixed Rates Adjustable Rates Total
$ $ $
Commercial real estate
Commercial mortgages 27,889 110,319 138,208
Agriculture mortgages 5,022 160,900 165,922
Construction 2,701 19,637 22,338Total commercial real estate 35,612 290,856
326,468
Consumer real estate 1-4 family residential mortgages 95,727 162,794
258,521 Home equity loans 3,554 2,334 5,888 Home equity lines of credit 10,158 61,121 71,279 Total consumer real estate 109,439 226,249 335,688 Commercial and industrial Commercial and industrial 72,937 5,630 78,567 Tax-free loans 6,113 4,836 10,949 Agriculture loans 7,879 1,158 9,037
Total commercial and industrial 86,929 11,624
98,553
Consumer 3,431 - 3,431
Total amount due 235,411 528,729 764,140
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. Fixed-rate commercial mortgages have maturities that range from 3
years to 25 years. The most popular commercial mortgage term is a 20-year
amortization with a 5-year reset period. In this case, the loan matures in
twenty
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Management's Discussion and Analysis
years but after five years either the loan rate resets to the Prime rate plus
0.75%, or a fixed rate for another reset period. The original maturity date does
not change. Customers will generally opt for another fixed reset period within
the original term.
Out of all the loans due after one year, 30.8% are fixed-rate loans as of
December 31, 2020 . These loans will not reprice to a higher or lower interest
rate unless they mature or are refinanced by the borrower. Floating or
adjustable rate loans reflect different types of repricing. Approximately 23% of
the $528.9 million of loans due after one year are true floating loans. These
loans are tied to the Prime rate and will reprice when the Prime rate changes.
For commercial customers, generally all pass credits have been granted access to
the Prime rate since 2011. However, a number of the Corporation's business and
commercial Prime-based loans have been priced at levels above the Prime rate due
to the credit standing of the borrower. In terms of consumer real estate loans
utilizing the Prime rate for pricing, the most common rate is Prime; however,
the Corporation now utilizes risk-based pricing which causes HELOCs to be priced
at various multiples of the Prime rate. Outside of a six-month introductory
rate, the majority of the Corporation's HELOCs were priced at 3.00% and 3.25% as
of December 31, 2020 . The other 77% of the Corporation's floating or adjustable
loans due after one year are adjustable in nature and will reprice at a
predetermined time in the amortization of the loan. These loans are mostlyreal estate commercial loans. As ofDecember 31, 2019 , 24% of the$518.5 million of floating or adjustable loans due after one year were true floating rate loans that could reprice immediately, with the other 76% being adjustable after an initial fixed rate period. The percentage of loans that can reprice immediately decreased from 24% as ofDecember 31, 2019 , to 23% as ofDecember 31, 2020 . This decrease was a function of more consumers fixing their loans during 2020. 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. It is likely the borrowing habits of commercial borrowers will change if the Fed raises rates in the near term. More commercial customers will desire to lock into an initial fixed interest rate period to avoid future rate increases. However, if the customer perceives rates will remain low for an extended period of time or even decrease further, there is a greater likelihood that borrowers will opt for variable rate loans in order to get the best available pricing.
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,
2020 2019 2018 2017 2016
$ $ $ $ $
Non-accrual loans 725 1,984 1,833 393 721Loans past due 90 days or more and still accruing 1,373 821 397 440 384 Troubled debt restructurings, non-performing - 1,157 - 245 - Total non-performing loans 2,098 3,962
2,230 1,078 1,105 Other real estate owned - - - - -
Total non-performing assets 2,098 3,962
2,230 1,078 1,105
Non-performing assets to loans 0.25% 0.53%
0.32% 0.18% 0.20%
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Management's Discussion and Analysis
Non-performing assets decreased by$1,864,000 , or 47.0%, fromDecember 31, 2019 , toDecember 31, 2020 , primarily as a result of decreases in non-accrual loans, and troubled debt restructurings. Several large non-accrual loans were paid off in 2020 resulting in the decline in balance of these loans. Additionally, there were no non-performing TDR loans as ofDecember 31, 2020 . There were two non-performing TDR loans as ofDecember 31, 2019 . The first, an agricultural mortgage of$718,000 had cash flow difficulties and a modification in payment terms was made to allow annual interest and principal payments. The second TDR loan was a$439,000 real estate secured loan with a payment modification made in the form of granting a nine-month interest-only payment. This second TDR loan was both non-accrual and TDR. For this above non-performing chart the$439,000 real estate loan is listed under TDR loans. 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. This is more of a function of the Corporation's non-performing assets already being at very low historical levels. It is far more likely the level of non-performing 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, 2020 , there were three loans to three unrelated borrowers totaling$725,000 on non-accrual compared to seven loans to four unrelated borrowers totaling$1,984,000 as ofDecember 31, 2019 . The largest non-accrual relationship atDecember 31, 2020 , was a commercial loan to a single borrower with a balance of$469,000 . The Corporation's diverse customer base, with many small businesses and industry types represented, has helped to avoid large concentrations in industries where significant non-performance is more likely. See Note P for further discussion on concentrations of credit risk. Severe economic conditions naturally will impact nearly all industries to some extent; however, the impact can vary greatly. Some businesses simply are not as successful in negotiating more difficult times, or may be impacted by non-economic matters like succession planning and poor business practice. Based on present economic conditions, management does not anticipate any significant new trends or the emergence of more severe trends beyond those already discussed. As ofDecember 31, 2020 and 2019, 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. Total delinquencies include loans 30 to 59 days past due, loans 60 to 89 days past due, loans 90 days or more past due and still accruing, and non-accrual loans. Total delinquencies as a percentage of total loans decreased from 0.91% as ofDecember 31, 2019 , to 0.34% as ofDecember 31, 2020 . The level of non-performing loans in total remains low compared to the Corporation's peer group. The potential for significant losses related to delinquent loans is difficult to predict as actual charge-offs are dependent on more than the level of delinquency. Management does view that the levels of delinquency, as well as net charge-offs, could increase going forward if economic conditions worsen for borrowers or as the Corporation's loan portfolio continues to grow. However, management currently does not expect the overall level of delinquencies to
change materially in 2021. Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses in accordance 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
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Management's Discussion and Analysis
The Corporation's strong credit and collateral policies have been instrumental
in producing a favorable history of loan losses. While many financial
institutions experienced a pattern of an escalation of allowance for credit
losses after the financial crisis, then followed with reductions to the
allowance in the form of credit provisions, the Corporation generally lagged
this trend. This was due to a steady decline of the Corporation's classified
assets, delinquencies and non-performing loans. It took a longer period to bring
the allowance back down to levels supported by the quarterly allowance for
credit loss calculation. However, in recent years, the Corporation has recorded
more normal levels of 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.
The Allowance for Credit Losses table below shows the activity in the allowance
for credit losses for each of the past five years. At the bottom of the table,
two benchmark percentages are shown. The first is net charge-offs as a
percentage of average loans outstanding for the year. The second is the total
allowance for credit losses as a percentage of total loans.
ALLOWANCE FOR CREDIT LOSSES
(DOLLARS IN THOUSANDS)
December 31,
2020 2019 2018 2017 2016
$ $ $ $ $
Balance at January 1, 9,447 8,666 8,240 7,562 7,078
Loans charged off:
Commercial real estate (45 ) (122 ) (223 ) (200 ) -
Consumer real estate - - (20 ) - -
Commercial and industrial (23 ) (63 ) (110 ) (89 ) (23 )
Consumer (20 ) (26 ) (27 ) (28 ) (31 )
Total charge-offs (88 ) (211 ) (380 ) (317 ) (54 )
Recoveries of loans previously
charged off:
Commercial real estate 11 170 72 - -
Consumer real estate - 1 - 20 10
Commercial and industrial 4 48 66 24 193
Consumer 3 3 8 11 10
Total recoveries 18 222 146 55 213Net loans recovered (charged off) (70 ) 11 (234 ) (262 ) 159 Provision charged to operating expense 2,950 770 660 940 325 Balance at December 31, 12,327 9,447 8,666 8,240 7,562 Net (charge-offs) recoveries as a % of average total loans outstanding (0.01 ) 0.00 (0.04 )
(0.05 ) 0.03
Allowance at year end as a % of total loans 1.50 1.25 1.25 1.38 1.32
Charge-offs for the year endedDecember 31, 2020 , were$88,000 , compared to$211,000 for the same period in 2019. In 2020, the Corporation charged off a commercial real estate loan for$45,000 , a commercial and industrial loan for$23,000 , and several smaller consumer loans. In 2019, the Corporation charged off a commercial real estate loan and a commercial and industrial loan to one borrower totaling$164,000 and several smaller amounts related to consumer loans. The Corporation's level of charge-offs are very low when compared to the national uniform bank performance peer group of banks between$1 billion and$3 billion of asset size. Outside of these commercial charge-offs, the other charge-offs represent a fairly typical level of consumer and small business loan charge-offs that would result from management charging off unsecured debt over 90 days delinquent with little likelihood of recovery. The small amount of recoveries in 2020 represent small-balance recoveries on previously charged-off loans. Recoveries were higher in 2019 as the Corporation recovered$128,000 related to one real estate secured loan relationship and smaller amounts related to other loans. During 2020, the Corporation recorded provision expense of$2,950,000 compared to$770,000 during 2019. The provision is used to increase or decrease the allowance for credit losses to a level considered adequate to provide for losses inherent in the loan portfolio. Provision expense grew in 2020 primarily due to significant loan portfolio growth and uncertain financial consequences due to COVID-19 and the forward economic outlook. Management heavily 60 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis utilizes loan ratings in the allowance for credit loss calculation. FromDecember 31, 2019 toDecember 31, 2020 , there was a$2.0 million , or 8.6% decrease, in substandard loans, which are considered classified loans and receive the highest degree of attention from management due to identified weaknesses. Substandard loans have a larger impact to the allowance for credit loss calculation due to the increased likelihood of further credit deterioration. Special mention loans increased$7.3 million , from$7.3 million atDecember 31, 2019 , to$14.6 million atDecember 31, 2020 . Special mention loans, while not considered classified loans, do receive more scrutiny than a standard pass grade commercial loan and are assigned higher allocations for loan losses due to their status. All of the Corporation's substandard and special mention borrowers will be reassessed as final 2020 financial information is received in early 2021. The allowance as a percentage of total loans represents the portion of the total loan portfolio for which an allowance has been provided. For the five-year period from 2016 through 2020, the Corporation maintained an allowance as a percentage of loans in a range between 1.25% and 1.50%. The composition of the Corporation's loan portfolio has not changed materially from 2019 to 2020, and management views the overall risk profile of the portfolio to be increasing due to the economic impact of COVID-19. Management will continue to increase or decrease the allowance as a percentage of total loans based on the quarterly calculation of the allowance for credit losses. Any increases are based on the need to allocate additional amounts based on estimated credit losses inherent in the current portfolio, utilizing historical and projected credit losses and levels of qualitative and quantitative risks that are appropriate based on the current credit environment. The Corporation's allowance for credit losses as a percentage of loans will likely remain relatively unchanged throughout 2021. 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. In 2020, recoveries totaled$18,000 and net charge-offs represented 0.01% of average total loans outstanding.
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,
2020 2019 2018 2017 2016
% of % of % of % of % of
$ Loans $ Loans $ Loans $ Loans $ Loans
Real estate 9,778 83.7 7,174 86.6 6,704 83.6 5,915 85.5 5,447 85.7
Commercial and industrial 1,972 15.7 1,784 12.7 1,428 15.1 1,829 13.6 1,552 13.5
Consumer 52 0.6 41 0.7 103 1.3 98 0.9 82 0.8
Unallocated 525 - 448 - 431 - 398 - 481 -Total allowance for loan losses 12,327 100.0 9,447 100.0 8,666 100.0 8,240 100.0 7,562 100.0
Real estate loans represent 83.7% of total loans with 79.3% 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. The combined consumer and business real estate portion of the loan portfolio increased by$36.7 million , or 5.6%, fromDecember 31, 2019 , toDecember 31, 2020 causing an additional$2,604,000 to be placed in the allowance for these loans. 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 2020, the dollar amount of allocation for commercial and industrial loans increased by$188,000 , or 10.5%, with this allocation accounting for 16.0% of the total allowance as ofDecember 31, 2020 , compared to 18.9% of the total allowance as ofDecember 31, 2019 . As ofDecember 31, 2020 , commercial and industrial loans make up 15.7% of all loans. The increase in the commercial and industrial allocation is also a reflection of the higher level of risk taken on in this category of loans.
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Management's Discussion and Analysis
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
Premises and Equipment Premises and equipment, net of accumulated depreciation, decreased by$273,000 , or 1.1%, to$24,760,000 onDecember 31, 2020 , from$25,033,000 as ofDecember 31, 2019 . During 2020, capital investments were made by the Corporation in various small projects and normal ongoing capital needs. However, the new investments were more than offset by depreciation of the existing premises and equipment. In 2020,$1,063,000 of new investments were made in premises and equipment, while the Corporation recorded$1,336,000 of accumulated depreciation on existing assets, resulting in the decrease in net premises and equipment during the year. The Corporation had$385,000 in construction in process at the end of 2020 compared to$104,000 at the end of 2019. These balances consisted of amounts for small 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$6,107,000 of regulatory stock holdings as ofDecember 31, 2020 , consisted of$5,919,000 of FHLB ofPittsburgh stock,$151,000 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. 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 borrowings from FHLB. Excess stock is typically repurchased from the Corporation on a quarterly basis at par if outstanding borrowings decline to a predetermined level. The FHLB also pays a quarterly dividend on the outstanding shares held by the Corporation. The FHLB's quarterly dividend yield was 5.75% annualized on activity stock and 2.50% annualized on membership stock as ofDecember 31, 2020 . Most of the Corporation's dividend is based on the activity stock, which is based on the amount of borrowings and mortgage activity with FHLB. The Corporation will continue to monitor the financial condition of the FHLB quarterly to assess its ability to continue to regularly repurchase excess capital stock and pay a quarterly dividend.
Management believes that the FHLB will continue to be a primary source of wholesale liquidity for both short-term and long-term funding. Management's strategy in terms of future use of FHLB borrowings is addressed under the Borrowings section of this Management's Discussion and Analysis.
Bank-Owned Life Insurance (BOLI)
The Corporation owned life insurance with a total recorded cash surrender value (CSV) of$29,646,000 onDecember 31, 2020 , compared to$28,818,000 onDecember 31, 2019 . The Corporation holds two distinct BOLI programs. The first, with a CSV of$5,177,000 , was the result of insurance policies taken out on directors of the Corporation electing to participate in a directors' deferred compensation plan. The program was designed 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 plan was closed to entry in 1999, when directors were no longer provided the option of deferring their Board pay. The Corporation pays the required premiums for the policies and is the owner and beneficiary of the policies. The life insurance policies in the plan generally have annual premiums; however, the premium payments are not required after the first five years.
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 most recent BOLI
investment was a
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ENB FINANCIAL CORP
Management's Discussion and Analysis
made in December of 2017. The CSV for this plan was $24,469,000 as of December
31, 2020 , compared to $23,838,000 at December 31, 2019 . The CSV increase of
$631,000 during 2020 was the result of the internal return generated from these
policies net of the cost of insurance. The Corporation purchased whole life
policies for this BOLI plan and is the owner and beneficiary of the policies.
Deposits
The Corporation's total ending deposits increased$278.7 million , or 28.6%, from$974.1 million onDecember 31, 2019 , to$1.3 billion onDecember 31, 2020 . Customer deposits are the Corporation's primary source of funding for loans and investments. In recent years the economic weakness and volatile performance of the stock market and other types of investments like real estate led customers back to banks as safe places to invest money, in spite of historically low interest rates. In 2020, deposits increased significantly in most categories of core deposit accounts as a direct result of the PPP loan funding process as many customers applied for PPP loans with the approved funds deposited directly into their ENB deposit accounts. In addition, customer spending patterns have changed throughout the COVID-19 pandemic with government aid helping to financially support individuals and businesses and customers spending less and saving more. With the decrease in rates that occurred during 2020, customer deposits increased with few options in the market to earn any higher return. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility. Management believes deposit balances may continue to increase through 2021, but at a much slower pace than 2020. The Deposits By Major Classification table, shown below, provides the average balances and rates paid on each deposit category for each of the past three years. The average 2020 balance carried on all deposits was$1.1 billion , compared to$936.9 million for 2019. This represents an increase of 15.7% on average deposit balances. The increase in average deposit balances from 2018 to 2019 was 7.2%. Average balances provide a more accurate picture of growth in deposits because deposit balances can vary throughout the year. In addition, the interest paid is based on average deposit balances carried during the year calculated on a daily basis.
DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)
Average balances and average rates paid on deposits by major category are
summarized as follows:
December 31,
2020 2019 2018
$ % $ % $ %
Non-interest bearing
demand 435,495 - 340,130 - 322,733 -
Interest-bearing
demand 39,116 0.20 22,215 0.52 20,079 0.35
NOW accounts 107,104 0.11 91,710 0.36 88,219 0.24
Money market deposit
accounts 133,059 0.24 142,639 0.86 104,739 0.25
Savings accounts 242,572 0.03 204,178 0.05 196,392 0.05
Time deposits 126,742 1.24 136,075 1.30 142,125 1.00
Total deposits 1,084,088 936,947 874,287
The growth and mix of deposits is often driven by several factors including:
· Convenience and service provided
· Fees
· Strength of the financial institution
· Permanence of the financial institution
· Possible risks associated with other investment opportunities
· Current rates paid on deposits compared to financial competition
The Corporation has been a stable presence in the market area and offers
convenient locations, relatively low service fees, and competitive interest
rates because of a strong commitment to the customers and the communities that
it serves. Management has always priced products and services in a manner that
makes them affordable for all customers. This, in turn, creates a high degree of
customer loyalty, which has provided stability to the deposit base. In 2020,
deposit growth
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Management's Discussion and Analysis
increased substantially as a direct result of PPP funding and the change in customer's spending habits during the uncertain economic environment brought on by COVID-19. Due to limited safe investment options outside of banks, the Corporation saw customers bring deposit funds back to regular core checking and savings accounts in an effort to provide safety and financial flexibility. The deposit growth experienced throughout 2020 was far in excess of any prior annual deposit growth rate. The Corporation also continues to generally benefit from the customers' preference to conduct business with a smaller financial institution versus a larger institution. The average balance of the Corporation's core deposits, including non-interest bearing demand deposits, interest-bearing demand deposits, NOW accounts, MMDA accounts, and savings accounts, grew$156.5 million , or 19.5%, sinceDecember 31, 2019 . Interest rates had decreased significantly throughout 2020 with the drop in overnight rates. Management believes that throughout 2020 customers were sitting on more liquidity as a matter of prudence to position to invest at a later point when rates rise and the economy stabilizes. The safety ofFDIC -insured funds and immediate access to funds in a low interest rate environment was more of a priority to customers than interest rates. 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. Due to adequate funding levels from all sources, the Corporation's time deposit strategy prior to 2018 had been to offer rates that were not the highest in the local market or the lowest, but close to the average. This strategy will not grow time deposits in the current environment because interest rates being offered are still at historically low levels not attractive to many depositors. In the latter part of 2018, and through the third quarter of 2019, the Corporation offered some odd-term time deposit specials with better pricing to encourage the retention of existing time deposits that were rolling over. This strategy helped to stem the decline in time deposit balances and retain some of that funding from a liquidity standpoint to fund loan growth. Monitoring deposit rates going forward will be important as the interest rate environment will draw more and more attention from depositors. In 2020, time deposits declined in both dollars and as a percentage of the Corporation's deposits with the average balance decreasing by$9.3 million , or 6.9%, compared to 2019 average balances. This is a function of the interest rate environment and the relatively small difference between time deposit rates and interest bearing demand deposit and money market fund rates. The consumer weighs the benefit of the higher rate versus the inability to gain access to the time deposit funds until the maturity date. If rates remain low throughout 2021, there is a likelihood that the consumer will continue to keep funds in checking and savings accounts and fewer funds in time deposits as the interest rate differential is not significant enough to warrant locking up the funds for a set term. If market rates were to increase, the less willingness there will be for consumers to be content in low or non-interest bearing deposit accounts which could cause an increase in time deposit balances or a move to alternative investment options outside of deposits. A portion of the decrease in time deposit balances from 2019 to 2020 can also be attributed to customers redeploying their time deposits into other competing financial institutions that have different pricing strategies. A reduction in time deposits has worked in concert with management's asset liability plan for a better mix of core deposits relative to time deposits. Management was willing to see a decline in time deposit balances as the most expensive source of funding for the Corporation. Management follows a disciplined pricing strategy with regard to time deposit funds desiring not to pay materially above wholesale pricing levels. In this regard, if some elements of market competition prices materially above wholesale rates, management will not meet those pricing levels and will seek more cost effective wholesale funding opportunities. As ofDecember 31, 2020 , time deposits over$100,000 made up 31.8% of the total time deposits. This compares to 31.6% onDecember 31, 2019 . The total dollar amount of time deposits over$100,000 decreased$5.2 million , or 12.0%, fromDecember 31, 2019 toDecember 31, 2020 . Since time deposits over$100,000 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$100,000 or more for the past three years by maturity distribution. 64 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
MATURITY OF TIME DEPOSITS OF
(DOLLARS IN THOUSANDS)
December 31,
2020 2019 2018
$ $ $
Three months or less 6,208 6,879 7,656Over three months through six months 5,726 7,594 3,337 Over six months through twelve months 11,992 10,912 4,592 Over twelve months
13,894 17,601 21,998
Total 37,820 42,986 37,583
In order to meet future funding obligations, it is necessary to review the timing of maturity for large depositors, like the time deposits of$100,000 or more. The Corporation monitors all large depositors to ensure that there is a steady flow of maturities. As ofDecember 31, 2020 , the Corporation had a typical laddering of large time deposits; however the portfolio was more heavily weighted to time deposits maturing in less than twelve months. Longer term time deposits have declined as customers are not willing to lock in funds for longer terms at a time of historically low interest rates and with the uncertainty about future rate increases. For more information on liquidity management, refer to Item 7A Quantitative and Qualitative Disclosures about Market Risk. Additionally, for more information on the maturity of time deposits, see Note F to the Consolidated Financial Statements. Borrowings Total borrowings were$74.4 million as ofDecember 31, 2020 , and$78.1 million as ofDecember 31, 2019 . The Corporation had no short-term borrowings atDecember 31, 2020 , and$200,000 of short-term borrowings as ofDecember 31, 2019 . Short-term borrowings 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. Typical long-term borrowings decreased to$54.8 million as ofDecember 31, 2020 , from$77.9 million as ofDecember 31, 2019 . The Corporation primarily usesFederal Home Loan Bank (FHLB) advances as the source for long-term borrowings. These borrowings are used as a secondary source of funding and to mitigate interest rate risk. Management will continue to analyze and compare the costs and benefits of borrowing versus obtaining funding from deposits as part of an asset liability strategy to obtain the most effective long term funding sources. The decrease in long-term FHLB borrowing balances during the year related to management taking advantage of declining rates by prepaying FHLB advances in order to save on interest expense in future years. As ofDecember 31, 2020 , all the borrowings of FHLB were fixed-rate loans. To limit the Corporation's exposure and reliance on a single funding source, the Corporation's Asset Liability Policy sets a goal of maintaining the amount of borrowings from the FHLB to 15% of the Corporation's total assets. As ofDecember 31, 2020 , the Corporation was well within this policy guideline at 3.7% of asset size with$54.8 million of total FHLB borrowings. The Corporation also has a policy that limits total borrowings from all sources to 150% of the Corporation's capital. As ofDecember 31, 2020 , total borrowings from all sources amounted to 57.1% of the Corporation's capital, well under the policy guideline. The Corporation has maintained FHLB borrowings and total borrowings within these guidelines throughout the year. The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is$471.0 million as ofDecember 31, 2020 . The Corporation's two 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, onDecember 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 ofDecember 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 ofDecember 31, 2020 ,$12.5 million of funds were invested in the 65 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
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 maintains capital ratios well above those minimum levels and higher than the peer group average. The risk-weighted capital ratios are calculated by dividing capital by risk-weighted assets. Regulatory guidelines determine risk-weighted assets by assigning assets to a pre-defined risk-weighted category. The calculation ofTier I Capital to Risk-Weighted Assets includes an adjustment to remove the impact of the unrealized holding gains or losses on the Corporation's securities portfolio, adjusted for taxes. The Tier II or Total Capital to Risk-Weighted Assets ratio has the same adjustment but adds back any allowances for credit losses thereby making this ratio higher than theTier I Capital to Risk-Weighted Assets ratio. The newCommon Equity Tier I Capital Ratio could include an adjustment toTier I Capital for deferred tax items, but there was no adjustment for the Corporation as ofDecember 31, 2020 , 2019, or 2018, so theCommon Equity Tier I Capital ratio was the same as theTier I Capital ratio. See Notes I and M to the Consolidated Financial Statements for additional information on capital transactions.
The following table reflects the Corporation's capital ratios compared to regulatory capital requirements for prompt corrective action.
REGULATORY CAPITAL RATIOS Capital
Ratios Regulatory Requirements
As of As of As of
Dec. 31, Dec. 31, Dec. 31, Adequately Well
2020 2019 2018 Capitalized Capitalized
Total Capital to Risk-Weighted Assets 16.1 % 14.5 % 14.3 % 8.0 % 10.0 %
Tier I Capital to Risk-Weighted Assets 12.8 % 13.4 % 13.2 % 6.0 % 8.0 %
6.5 %
Tier I Leverage Capital to Average Assets 9.0 % 9.9 % 10.0 % 4.0 % 5.0 %
The high level of capital maintained by the Corporation provides a greater degree of financial security and acts as a non-interest bearing source of funds. Conversely, a high level of capital, also referred to as equity, makes it more difficult for the Corporation to improve return on average equity, which is a benchmark of shareholder return. The Corporation's capital is affected by earnings, the payment of dividends, changes in accumulated other comprehensive income or loss, and equity transactions. OnDecember 30, 2020 , the Corporation issued$20 million of subordinated debt in order to support capital levels which had declined due to the sharp balance sheet growth that had occurred during 2020. The$20 million of subordinated debt qualifies as Tier 2 capital at the Holding Company level, but can be transferred to the Bank where it qualifies as Tier 1 Capital. As ofDecember 31, 2020 ,$12.5 million of this subordinated debt funding was transferred down to the Bank to rebuild the Bank's capital levels. The goal was to restore the Bank's Tier 1 Leverage Ratio to approximately 9.75%, from approximately 8.85% as ofNovember 30, 2020 . As ofDecember 31, 2020 the Bank's Tier 1 Leverage Ratio stood at 9.83% while the Corporation's Tier 1 Leverage Ratio was 9.0%. The Bank's Tier 1 Leverage Ratio policy range is 9.5% to 12.0%. Tier 1 Capital levels at the Corporation level were not impacted by the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at the Corporate level. As such, in terms of the Corporation's regulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of the$20 million subordinated debt issue. Most of the marked improvement in capital ratios occurred at the Bank level. Total dividends paid to shareholders during 2020, were$3,573,000 , or$0.64 per share, compared to$3,518,000 , or$0.62 per share paid to shareholders during 2019. The Corporation uses current earnings and available retained earnings to pay dividends. The Corporation views the dividend as a capital management tool in addition to being a key element of the shareholder's return. The Corporation's dividend ratio will vary based on both earnings and capital levels, however management generally desires the dividend payout ratio to be approximately 30% to 35% of earnings over the long term. For 2020, the dividend payout ratio was 29.1%. This ratio on the lower end of the desired range was due to the higher earnings recorded in 2020. The Corporation anticipates that the payout ratio for 2021 will be close to 30%. While the Bank's capital levels have been restored to management's desired levels, the Corporation's equity to capital ratio and the Tier 1Leverage Capital ratio remain low from a historical standpoint, due to the very high growth of assets 66 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis in 2020. Management anticipates a much slower asset growth rate in 2021, which should allow for the Corporation's equity to capital and Tier 1Leverage Capital ratios to slowly increase. The amount of unrealized gain or loss on the Corporation's securities portfolio is reflected, net of tax, as an adjustment to capital, as required byU.S. generally accepted accounting principles. This is recorded as accumulated other comprehensive income or loss in the capital section of the Corporation's balance sheet. The change in unrealized holding gain or loss that occurred during 2020 is shown on the Corporation's Consolidated Statements of Comprehensive Income, along with a reclassification adjustment for losses included in the current year's income. The Corporation's Consolidated Statements of Comprehensive Income shows the impact of changes in unrealized gains and losses during the year on the Corporation's net income to arrive at net comprehensive income or loss. In terms of the Corporation's balance sheets, an unrealized gain increases capital while an unrealized loss reduces capital. This requirement takes the position that, if the Corporation liquidated at the end of each period, the current unrealized gain or loss on the securities portfolio would directly impact the Corporation's capital. As ofDecember 31, 2020 , the Corporation showed unrealized gains, net of tax, of$7,958,000 , compared to unrealized gains of$1,600,000 as ofDecember 31, 2019 . The changes in unrealized gains or losses are due to normal changes in market valuations of the Corporation's securities as a result of interest rate movements. OnJuly 1, 2008 ,ENB Financial Corp was formed. The retirement of all treasury shares was required as part of the formation ofENB Financial Corp. As a result, management needed treasury shares to be utilized for the existing Employee Stock Purchase Plan and Dividend Reinvestment Plan. Therefore, onAugust 14, 2008 , the Board authorized a stock buyback plan for the purchase of up to 140,000 shares of common stock for corporate purposes. A total of 133,290 shares were purchased under this plan before it was superseded by a new plan. OnJune 17, 2015 , the Board of Directors ofENB Financial Corp announced the approval of another new plan to purchase, in open market and privately negotiated transactions, up to 140,000 shares of its outstanding common stock. A total of 64,935 shares of treasury stock were purchased under this plan before it was superseded by a new plan. OnFebruary 20, 2019 , the Board of Directors of the Corporation approved a plan to repurchase, in the open market and privately renegotiated transactions, up to 200,000 shares of its outstanding common stock. A total of 176,669 shares of treasury stock were purchased under this plan before it was superseded by a new plan. OnOctober 21, 2020 , the Board of Directors of the Corporation approved a plan to repurchase, in the open market and privately renegotiated transactions, up to 200,000 shares of its common stock. The first purchase of common stock under this plan occurred onOctober 23, 2020 . ByDecember 31, 2020 , a total of 10,000 shares were repurchased at a total cost of$187,000 , for an average cost per share of$18.70 . 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, 2020 , 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. CONTRACTUAL OBLIGATIONS (DOLLARS IN THOUSANDS) Less than 1-3 4-5 More than 1 year years years 5 years Total $ $ $ $ $ Time deposits (Note F) 68,116 27,859 23,113 - 119,088 Borrowings (Notes G and H) - 24,400 49,991 - 74,391 Operating Leases 204 322 248 20 794 Total contractual obligations 68,320 52,581 73,352 20 194,273 67 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis
Off-Balance Sheet Arrangements
In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation's financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the 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, 2020 . 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,
2020
$
Commitments to extend credit:
Revolving home equity loans 123,615
Construction loans 34,418
Real estate loans 89,477
Business loans 145,301
Consumer loans 1,348
Other 4,899
Standby letters of credit 8,485
Total 407,543
Recently Issued Accounting Standards
Refer to Note A to the Consolidated Financial Statements for discussion on recently issued accounting standards.
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 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
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Management's Discussion and Analysis
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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Management's Discussion and Analysis© Edgar Online, source
