ENB FINANCIAL CORP Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents management's view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this quarterly report, and in conjunction with the 2021 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance. Forward-Looking Statements TheU.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are generally identified when terms such as: "believe," "estimate," "anticipate," "expect," "project," "forecast," and other similar wordings are used. The readers of this report should take into consideration that these forward-looking statements represent management's expectations as to future forecasts of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance, or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative of actual results. Readers should note that many factors affect this forward-looking information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These factors include, but are not limited to, the following:
· National and local economic conditions
· Interest rate and monetary policies of the
· Inflation and monetary fluctuations and volatility
· Volatility of the securities markets including the valuation of securities
· Effects of economic conditions particularly with regard to the negative impact
of severe, wide-ranging and continuing disruptions caused by the spread of
coronavirus (COVID-19) and any other pandemic, epidemic, or health-related
crisis and government and business responses thereto, specifically the effect
on loan customers to repay loans
· Health of the housing market
· Real estate valuations and its impact on the loan portfolio
· Future actions or inactions of
failure to increase the government debt limit, a prolonged shutdown of the
federal government, increase in taxes or regulations, or increasing debt
balances
· Political changes and their impact on new laws and regulations
· Competitive forces
· Impact of mergers and acquisition activity in the local market and the effects
thereof
· Potential impact from continually evolving cybersecurity and other
technological risks and attacks, including additional costs, reputational
damage, regulatory penalties, and financial losses
· Changes in customer behavior impacting deposit levels and loan demand
· Changes in accounting principles, policies, or guidelines as may be adopted by
the regulatory agencies, as well as the Public Company Accounting Oversight
Board, the
setters
· Ineffective business strategy due to current or future market and competitive
conditions
· Management's ability to manage credit risk, liquidity risk, interest rate risk,
and fair value risk
· Operation, legal, and reputation risk
· Results of the regulatory examination and supervision process
· The impact of new laws and regulations
· Possible changes to the capital and liquidity requirements and other regulatory
pronouncements, regulations and rules
· Large scale global disruptions such as pandemics, terrorism, trade wars, and
armed conflict.
· Local disruptions due to flooding, severe weather, or other natural disasters
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Management's Discussion and Analysis
· The risk that our analyses of these risks and forces could be incorrect and/or
that the strategies developed to address them could be unsuccessful
· Business and competitive disruptions caused by new market and industry entrants
Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with theSecurities and Exchange Commission , including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K. Results of Operations Overview
The first nine months of 2022 were positively impacted by a number of items resulting in solid financial results, but in comparison to the prior year, the results were not as strong due to a number of non-recurring income items in the first nine months of 2021. The prior year was positively impacted by greater amounts of Paycheck Protection Program (PPP) fees on forgiven loans as well as record mortgage gains due to increased refinance activity stemming from the low interest rate environment. The first nine months of 2022 experienced a sharp increase in market interest rates, less income earned from PPP fees, and a slowing of mortgage gains. The Corporation recorded net income of$4,009,000 for the three-month period endedSeptember 30, 2022 , a$130,000 , or 3.1% decrease from the three months endedSeptember 30, 2021 . Net income for the nine-month period was$9,758,000 , a$2,436,000 , or 20.0% decrease from earnings in the nine-month period endedSeptember 30, 2021 . The earnings per share, basic and diluted, were$0.71 for the three months endedSeptember 30, 2022 , compared to$0.74 for the same period in 2021, and for the year-to-date period, earnings per share were$1.74 compared to$2.19 in 2021. The Corporation's net interest income (NII) increased by$2,961,000 , or 27.9%, and$6,247,000 , or 20.8%, for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. The increase in NII primarily resulted from an increase in interest and fees on loans of$2,036,000 , or 22.7%, and$3,816,000 , or 14.9%, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. Additionally, interest on securities available for sale increased by$1,412,000 , or 61.0%, for the three-month period endedSeptember 30, 2022 , and$2,684,000 , or 40.7%, for the nine-month period endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 . In addition, interest expense on deposits and borrowings increased by$594,000 , or 75.3%, and$405,000 , or 16.6%, for the three and nine months endedSeptember 30, 2022 , compared to the same periods in the prior year.
The Corporation recorded a$550,000 provision for loan losses in the third quarter of 2022, and$1,300,000 for the year-to-date period, compared to a credit provision of$250,000 in the third quarter of 2021, and a year-to-date provision of$125,000 throughSeptember 30, 2021 . The higher provision in 2022 was primarily caused by a significantly greater amount of loan growth. Other income was lower in 2022 compared to the prior year primarily as a result of lower levels of mortgage and security gains. The gains from the sale of mortgages were$186,000 for the three months endedSeptember 30, 2022 , compared to gains of$1,206,000 for the three months endedSeptember 30, 2021 , a decrease of$1,020,000 , or 84.6%. For the nine-month period, gains were$1,249,000 , compared to$4,381,000 for the nine months endedSeptember 30, 2021 , a decrease of$3,132,000 , or 71.5%. The decrease in mortgage gains can be primarily attributed to the rapid rise in mortgage rates during the first nine months of 2022 which has caused customer activity to shift from fixed-rate mortgages that were sold on the secondary market, to adjustable rate mortgages held on the Corporation's balance sheet. Similarly, gains on securities in total decreased by$373,000 , or 97.6%, for the three months endedSeptember 30, 2022 , and$957,000 , or 99.0%, for the nine months endedSeptember 30, 2022 , compared to the same periods in the prior year. Outside of mortgage and security gains, other non-interest income increased by$434,000 , or 17.0%, and$430,000 , or 5.3%, for the three and nine months endedSeptember 30, 2022 . Operating expenses increased by$1,395,000 , or 13.8%, and$4,597,000 , or 15.9%, for the three and nine months endedSeptember 30, 2022 , compared to the same periods in the prior year. This increase can be primarily attributed to the rising cost of salaries and employee benefits as well as higher computer software and data processing expenses. 32 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis The financial services industry uses two primary performance measurements to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the amount of equity or capital utilized. The ROA decreased for the quarter-to-date and year-to-date periods endedSeptember 30, 2022 , compared to the same periods in the prior year, due to lower earnings in 2022 and higher average assets in 2022. The ROE increased for the quarter-to-quarter period due to the decline in average equity as a result of the fair value adjustment on debt securities. The ROE for the year-to-date period declined slightly due to lower income in 2022. Key Ratios Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Return on Average Assets 0.89% 1.03% 0.75% 1.06% Return on Average Equity 15.63% 11.91% 11.49% 12.25% The results of the Corporation's operations are best explained by addressing, in further detail, the five major sections of the income statement, which are
as follows: · Net interest income
· Provision for loan losses
· Other income · Operating expenses
· Provision for income taxes
The following discussion analyzes each of these five components.
Net Interest Income (NII) NII represents the largest portion of the Corporation's operating income. During the nine months endedSeptember 30, 2022 , NII generated 78.6% of the Corporation's revenue stream, which consists of NII and non-interest income, compared to 68.8% in the first nine months of 2021. This increase is a result of higher levels of NII in the first nine months of 2022 as well as lower non-interest income compared to 2021. The overall performance of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income. The following table shows a summary analysis of NII on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled$314,000 for the three months endedSeptember 30, 2022 , and$934,000 for the nine months endedSeptember 30, 2022 , compared to$291,000 and$848,000 for the same periods in 2021. 33 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis NET INTEREST INCOME (DOLLARS IN THOUSANDS) Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 $ $ $ $ Total interest income 14,972 11,417 39,135 32,483 Total interest expense 1,383 789 2,851 2,446 Net interest income 13,589 10,628 36,284 30,037 Tax equivalent adjustment 314 291 934 848 Net interest income (fully taxable equivalent) 13,903 10,919 37,218 30,885
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect NII:
· The rates earned on interest earning assets and paid on interest bearing
liabilities
· The average balance of interest earning assets and interest bearing liabilities
NII is impacted by yields earned on assets and rates paid on liabilities. During 2021, longer-termU.S. Treasury rates increased adding some slope to the yield curve, but asset yields were still constrained. In the first nine months of 2022, interest rates increased much more dramatically in anticipation of the firstFederal Reserve rate movement which happened in mid-March.The Fed subsequently increased rates four additional times throughSeptember 30, 2022 . The overnight rate started the year at 0.25% and stood at 3.25% as ofSeptember 30, 2022 . As a result of a larger balance sheet in the first nine months of 2022, even with low asset yields, the Corporation's NII on a tax equivalent basis increased and the Corporation's margin increased to 3.19% for the quarter and 2.96% for the nine months endedSeptember 30, 2022 , compared to 2.89% in the third quarter of 2021 and 2.82% for the year-to-date period endedSeptember 30, 2021 . The Corporation's NII for the three and nine months endedSeptember 30, 2022 , increased over the same periods in 2021 by$2,985,000 , or 27.3% and$6,333,000 , or 20.5%, respectively. Management's asset liability sensitivity shows a decline to both margin and NII givenFederal Reserve rate increases. Actual results over the past two years have shown higher NII with interest rate increases, but the current cost of funds would increase dramatically should theFederal Reserve rate increases continue at the same levels. In a down-rate environment, the margin and NII would also 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 2021, security reinvestment had generally been occurring at lower yields. With higherTreasury rates in 2022, variable-rate security yields have increased and the increase in balances has helped to increase NII during the first nine months of 2022.
The following table provides an analysis of year-to-date changes in NII on a FTE
basis by distinguishing what changes were a result of average balance increases
or decreases and what changes were a result of interest rate increases or
decreases.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
Three Months Ended September 30, Nine Months Ended September 30,
2022 vs. 2021 2022 vs. 2021
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 (18 ) 56 38 (7 ) 87 80
Securities available for sale:
Taxable 190 1,197 1,387 670 1,859 2,529
Tax-exempt 90 (23 ) 67 374 (119 ) 255
Total securities 280 1,174 1,454 1,044 1,740 2,784
Loans 2,044 7 2,051 4,226 (374 ) 3,852
Regulatory stock 2 34 36 (8 ) 30 22
Total interest income 2,308 1,271 3,579 5,255 1,483 6,738
INTEREST EXPENSE
Deposits:
Demand deposits 12 364 376 25 441 466
Savings deposits 3 - 3 9 - 9
Time deposits (9 ) (40 ) (49 ) (28 ) (156 ) (184 )
Total deposits 6 324 330 6 285 291
Borrowings:
Total borrowings 246 18 264 170 (56 ) 114
Total interest expense 252 342 594 176 229 405
NET INTEREST INCOME 2,056 929 2,985 5,079 1,254 6,333
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The following tables show a more detailed analysis of NII on a FTE basis with
all the major elements of the Corporation's balance sheet, which consists of
interest earning and non-interest earning assets and interest bearing and
non-interest bearing liabilities.
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
For the Three Months Ended September 30,
2022 2021
(c) (c)
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
interest
on deposits at other banks 15,294 55 1.42 44,259 17 0.15
Securities available for
sale:
Taxable 434,872 2,720 2.50 385,330 1,333 1.38
Tax-exempt 206,493 1,336 2.59 192,614 1,269 2.64
Total securities (d) 641,365 4,056 2.53 577,944 2,602 1.80
Loans (a) 1,078,955 11,074 4.10 879,836 9,023 4.09
Regulatory stock 6,032 101 6.71 5,807 65 4.45
Total interest earning
assets 1,741,646 15,286 3.51 1,507,846 11,707 3.10
Non-interest earning assets
(d) 52,736 86,494
Total assets 1,794,382 1,594,340
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Demand deposits 431,947 420 0.39 352,448 44 0.05
Savings deposits 371,063 19 0.02 325,018 16 0.02
Time deposits 112,188 169 0.60 117,041 218 0.74
Borrowed funds 101,450 775 3.03 69,247 511 2.93
Total interest bearing
liabilities 1,016,648 1,383 0.54 863,754 789 0.39
Non-interest bearing
liabilities:
Demand deposits 668,287 588,125
Other 7,690 4,616
Total liabilities 1,692,625 1,456,495
Stockholders' equity 101,757 137,845
Total liabilities &
stockholders' equity 1,794,382 1,594,340
Net interest income (FTE) 13,903 10,918
Net interest spread (b) 2.97 2.71
Effect of non-interest
bearing deposits 0.22 0.18
Net yield on interest
earning assets (c) 3.19 2.89
(a) Includes balances of nonaccrual loans and the recognition of any related
interest income. The quarter-to-date average balances include net deferred loan
costs of $2,360,000 as of September 30, 2022 , and $872,000 as of September 30,
2021 . Such fees and costs recognized through income and included in the interest
amounts totaled $92,000 in 2022, and $617,000 in 2021.
(b) Net interest spread is the arithmetic difference between the yield on
interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also referred to as net interest margin, is computed by dividing
NII (FTE) by total interest earning assets.
(d) Securities recorded at amortized cost. Unrealized holding gains and losses
are included in non-interest earning assets.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
For the Nine Months Ended September 30,
2022 2021
(c) (c)
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
interest
on deposits at other banks 45,260 139 0.41 50,598 59 0.16
Securities available for
sale:
Taxable 417,802 6,225 1.98 359,530 3,696 1.38
Tax-exempt 203,711 3,975 2.60 184,663 3,720 2.69
Total securities (d) 621,513 10,200 2.19 544,193 7,416 1.82
Loans (a) 1,002,612 29,498 3.93 859,141 25,646 3.98
Regulatory stock 5,742 232 5.38 5,964 210 4.69
Total interest earning
assets 1,675,127 40,069 3.19 1,459,896 33,331 3.02
Non-interest earning assets
(d) 64,565 82,233
Total assets 1,739,692 1,542,129
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Demand deposits 397,487 586 0.20 338,365 120 0.05
Savings deposits 364,704 55 0.02 308,245 46 0.02
Time deposits 113,366 527 0.62 118,071 711 0.81
Borrowed funds 79,923 1,683 2.82 71,945 1,569 2.92
Total interest bearing
liabilities 955,480 2,851 0.40 836,626 2,446 0.39
Non-interest bearing
liabilities:
Demand deposits 663,950 567,408
Other 6,705 5,006
Total liabilities 1,626,135 1,409,040
Stockholders' equity 113,557 133,089
Total liabilities &
stockholders' equity 1,739,692 1,542,129
Net interest income (FTE) 37,218 30,885
Net interest spread (b) 2.79 2.63
Effect of non-interest
bearing deposits 0.17 0.19
Net yield on interest
earning assets (c) 2.96 2.82
(a) Includes balances of nonaccrual loans and the recognition of any related
interest income. The year-to-date average balances include net deferred loan
costs of $2,238,000 as of September 30, 2022 , and $834,000 as of September 30,
2021 . Such fees and costs recognized through income and included in the interest
amounts totaled $54,000 in 2022, and $990,000 in 2021.
(b) Net interest spread is the arithmetic difference between the yield on
interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also referred to as net interest margin, is computed by dividing
net interest income (FTE) by total interest earning assets.
(d) Securities recorded at amortized cost. Unrealized holding gains and losses
are included in non-interest earning assets.
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The Corporation's average balances on securities increased by $63.4 million , or
11.0%, for the three months ended September 30, 2022 , and $77.3 million , or
14.2%, for the nine months ended September 30, 2022 , compared to the same
periods in 2021. The tax equivalent yield on investments increased by 73 basis
points for the quarter-to-date period and 37 basis points for the year-to-date
period when comparing both years. Interest income on securities increased due to
this yield increase as well as volume growth which was caused by an excess of
liquidity in 2021 and early 2022 as a result of the low-rate environment that
caused a large influx of deposits.
Average balances on loans increased by $199.1 million , or 22.6%, for the three
months ended September 30, 2022 , and $143.5 million , or 16.7%, for the nine
months ended September 30, 2022 , compared to the same periods in the prior year.
This loan growth was primarily driven by a strategic desire to increase earning
assets with a renewed focus on internal sales culture. Loan yields increased by
one basis point for the quarter, but declined by five basis points for the
year-to-date period and loan interest income increased for both time frames due
to the increase in loan balances. The quarter-to-date increase in loan interest
income was $2,051,000 , or 22.7%, and the year-to-date increase was $3,852,000 ,
or 15.0%.
The average balance of interest-bearing deposit accounts increased by $120.7
million , or 15.2%, and $110.9 million , or 14.5%, for the three and nine months
ended September 30, 2022 , respectively, compared to the same periods in the
prior year. While the average balance of time deposits did decrease for both the
quarter and year-to-date time periods, the average balance on demand and savings
accounts increased significantly and more than offset the decline in time
deposits. The interest rate paid on demand deposits increased for both of these
time periods, while the interest rate on savings accounts remained the same and
the rate on time deposits declined. The combination of these changes resulted in
an increase in interest expense of $330,000 , or 118.7%, for the three months
ended September 30, 2022 , and an increase in interest expense of $291,000 , or
33.2%, for the nine months ended September 30, 2022 , compared to the same
periods in 2021.
The Corporation's average balance on borrowed funds increased by $32.2 million ,
or 46.5%, for the three months ended September 30, 2022 , and $8.0 million , or
11.1%, for the nine months ended September 30, 2022 , compared to the same
periods in 2021. The Corporation's borrowed funds consist of Federal Home Loan
Bank (FHLB) advances and subordinated debt issued in December of 2020 and July
2022 , which was used to support capital growth for the Bank. The increase in
borrowed funds for the quarter-to-date period is due to $20.0 million of
short-term advances initiated in the second quarter of 2022 to support loan
growth. Additionally, the Corporation issued $20.0 million of subordinated debt
in July of 2022. The rate paid on borrowed funds increased by 10 basis points
for the three months ended September 30, 2022 , and decreased 10 basis points for
the nine months ended September 30, 2022 , compared to the same periods in the
prior year. This increase in rate can be attributed to the new issuance of
subordinated debt.
For the three months ended September 30, 2022 , the net interest spread increased
by twenty-six basis points to 2.97%, compared to 2.71% for the three months
ended September 30, 2021 . For the nine months ended September 30, 2022 , the net
interest spread increased by 16 basis points to 2.79%, compared to 2.63% for the
nine months ended September 30, 2022 . The effect of non-interest bearing funds
increased to 22 basis points from 18 basis points for the three months ended
September 30, 2022 , and decreased to 17 basis points from 19 basis points for
the nine months ended September 30, 2022 , compared to the same periods in 2021.
The effect of non-interest bearing funds refers to the benefit gained from
deposits on which the Corporation does not pay interest. As rates go higher, the
benefit of non-interest bearing deposits increases because there is more
difference between non-interest bearing funds and interest bearing liabilities.
The Corporation's net interest margin (NIM) for the third quarter of 2022 was
3.19%, compared to 2.89% for the third quarter of 2021. For the year-to-date
period, the Corporation's NIM was 2.96%, compared to 2.82% for the same period
in 2021.
The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in NII, the Corporation's largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of changes in rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk. Provision for Loan Losses The allowance for credit losses (ACL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a provision expense of$550,000 for the third quarter of 2022, compared to a$250,000 credit provision recorded for the third quarter of 2021. For the year-to-date period, the Corporation recorded provision expense of$1,300,000 compared to$125,000 in 2021. The provision expense was higher in both time periods due to loan growth partially offset by a lower balance of classified loans. As ofSeptember 30, 2022 , the allowance as a percentage of total loans was 1.27%, compared to 1.41% atSeptember 30, 2021 . More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows. 38 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis Other Income Other income for the third quarter of 2022 was$3,180,000 , a decrease of$959,000 , or 23.2%, compared to the$4,139,000 earned during the third quarter of 2021. For the year-to-date period endedSeptember 30, 2022 , other income totaled$9,875,000 , a decrease of$3,659,000 , or 27.0%, compared to the same period in 2021. The following tables detail the categories that comprise other income. OTHER INCOME (DOLLARS IN THOUSANDS) Three Months Ended September 30, 2022 2021 Increase (Decrease) $ $ $ % Trust and investment services 680 540 140 25.9 Service charges on deposit accounts 361
282 79 28.0 Other fees 430 336 94 28.0 Commissions 941 945 (4 ) (0.4 ) Net gains (losses) on debt and equity securities 9 382 (373 ) (97.6 ) Gains on sale of mortgages 186 1,206 (1,020 ) (84.6 ) Earnings on bank owned life insurance 242
218 24 11.0
Other miscellaneous income 331 230 101 43.9
Total other income 3,180 4,139 (959 ) (23.2 )
OTHER INCOME
(DOLLARS IN THOUSANDS)
Nine Months Ended September 30, Increase (Decrease)
2022 2021
$ $ $ %
Trust and investment services 1,979 1,746 233 13.3Service charges on deposit accounts 987
776 211 27.2 Other fees 1,076 1,141 (65 ) (5.7 ) Commissions 2,762 2,761 1 0.0 Net gains (losses) on debt and equity securities 10 967 (957 ) (99.0 ) Gains on sale of mortgages 1,249 4,381 (3,132 ) (71.5 ) Earnings on bank owned life insurance 667 636 31 4.9 Other miscellaneous income 1,145
1,126 19 1.7 Total other income 9,875 13,534 (3,659 ) (27.0 ) Trust and investment services income increased for both time periods primarily as a result of higher fees on trust accounts partially offset by lower income related to the investment services area. Service charges on deposit accounts increased by 28.0% for the quarter and 27.2% for the year-to-date period, primarily as a result of higher overdraft charges and higher excess transaction charges in both time periods. Other fees increased by 28.0% for the quarter and decreased by 5.7% for the year-to-date period. Gains and losses on debt and equity securities were lower in 2022 driven by higher interest rates which has resulted in fewer opportunities to sell investment securities at gains. Mortgage gains declined by$1,020,000 , or 84.6%, and$3,132,000 , or 71.5%, in the third quarter and for the nine months endedSeptember 30, 2022 , compared to the same periods in the prior year. This was primarily a result of the rapid increase in interest rates during 2022 that resulted in very low margins on mortgages sold and fewer mortgages sold on the secondary market as customers turned to adjustable rate mortgages in 2022. Earnings on bank-owned life insurance increased as a result of the purchase of additional BOLI policies. The miscellaneous income category was higher for the quarter and for the year-to-date period in 2022 primarily as a result of higher mortgage servicing income. 39 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis Operating Expenses Operating expenses for the third quarter of 2022 were$11,513,000 , an increase of$1,395,000 , or 13.8%, compared to the$10,118,000 for the third quarter of 2021. For the year-to-date period endedSeptember 30, 2022 , operating expenses totaled$33,598,000 , an increase of$4,597,000 , or 15.9%, compared to the same period in 2021. The following tables provide details of the Corporation's operating expenses for the three and nine-month periods endedSeptember 30, 2022 , compared to the same periods in 2021. OPERATING EXPENSES (DOLLARS IN THOUSANDS) Three Months Ended September 30, 2022 2021 Increase (Decrease) $ $ $ % Salaries and employee benefits 6,607 6,142 465 7.6 Occupancy expenses 713 654 59 9.0 Equipment expenses 312 255 57 22.4 Advertising & marketing expenses 259 282 (23 ) (8.2 ) Computer software & data processing expenses 1,727 1,097 630 57.4 Shares tax 351 322 29 9.0 Professional services 720 535 185 34.6 Other operating expenses 824 831 (7 ) (0.8 ) Total Operating Expenses 11,513 10,118 1,395 13.8 OPERATING EXPENSES (DOLLARS IN THOUSANDS) Nine Months Ended September 30, 2022 2021 Increase (Decrease) $ $ $ % Salaries and employee benefits 19,826 17,800 2,026 11.4 Occupancy expenses 2,125 1,972 153 7.8 Equipment expenses 913 806 107 13.3 Advertising & marketing expenses 833 717 116 16.2 Computer software & data processing expenses 4,251 3,297 954 28.9 Bank shares tax 1,053 876 177 20.2 Professional services 1,983 1,572 411 26.1 Other operating expenses 2,614 1,961 653 33.3 Total Operating Expenses 33,598 29,001 4,597 15.9 40 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis Salaries and employee benefits are the largest category of operating expenses. For the three months endedSeptember 30, 2022 , salaries and benefits increased$465,000 , or 7.6%, compared to 2021. For the nine months endedSeptember 30, 2022 , salaries and benefits increased$2,026,000 , or 11.4%, from the year-to-date period in the prior year. This was primarily due to higher costs to replace employees who retired or left the organization due to nationwide, regional, and local staffing challenges, a realignment of salaries company-wide with market norms, and an accrual for the Corporation's bank-wide incentive program. Occupancy and equipment expenses are higher than the prior year primarily due to the addition of a community lending office as well as a full service branch office. Advertising and marketing expenses increased by 16.2%, for the year-to-date period, due to promoting new market areas as well as new products and services. Computer software and data processing expenses increased as a result of higher technology costs as new systems are implemented to support the ongoing growth and efficiency of the Corporation and increased volumes due to a larger customer base. Shares tax expense is based on the Corporation's level of stockholders' equity and has grown substantially, commensurate with the growth in stockholders' equity. Professional services expenses increased in the third quarter and the nine months endedSeptember 30, 2022 , compared to the prior year driven by higher legal fees and other outside services. Other operating expenses increased over the prior year primarily as a result of higherFDIC and OCC assessment costs, higher fraud-related charges-offs, higher travel costs, and miscellaneous other operating costs that are increasing to a lesser degree. Income Taxes Federal income tax expense was$697,000 for the third quarter of 2022 compared to$760,000 for the same period in 2021. For the nine months endedSeptember 30, 2022 , the Corporation recorded Federal income tax expense of$1,503,000 , compared to$2,251,000 for the nine months endedSeptember 30, 2021 . The effective tax rate for the Corporation was 13.3% for the nine months endedSeptember 30, 2022 , and 15.6% for the nine months endedSeptember 30, 2021 . Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and Bank Owned Life Insurance (BOLI) income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate and the effective tax rate for the first nine months of 2022 was lower than the prior year due to an increased level of tax-free assets. 41 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis Financial ConditionInvestment Securities The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As ofSeptember 30, 2022 , the Corporation had$560 million of securities available for sale, which accounted for 30.7% of assets, compared to 32.5% as ofDecember 31, 2021 , and 35.1% as ofSeptember 30, 2021 . Based on ending balances, the securities portfolio decreased 0.3% fromSeptember 30, 2021 , and increased 0.3% fromDecember 31, 2021 . The debt securities portfolio was showing a net unrealized loss of$70,102,000 as ofSeptember 30, 2022 , compared to an unrealized gain of$4,356,000 as ofDecember 31, 2021 , and$5,477,000 as ofSeptember 30, 2021 . The valuation of the Corporation's debt securities portfolio is impacted by both theU.S. Treasury rates and the perceived forward direction of interest rates. With the dramatic increase in rates during the nine months endedSeptember 30, 2022 , the valuation of the bond portfolio decreased rapidly. Because the bonds are recorded at market value on the Corporation's balance sheet, the unrealized losses, net of deferred taxes, are recorded as accumulated other comprehensive loss in the stockholders' equity section of the balance sheet. Earnings, net of dividends paid, positively impacted the Corporation's stockholders' equity levels throughSeptember 30, 2022 , but the accumulated other comprehensive loss on the bond portfolio had a negative impact. The table below summarizes the Corporation's amortized cost, unrealized gain or loss position, and fair value for each sector of the securities portfolio for the periods endedSeptember 30, 2022 ,December 31, 2021 andSeptember 30, 2021 . AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD (DOLLARS IN THOUSANDS) Net Amortized Unrealized Fair Cost Gains (Losses) Value $ $ $ September 30, 2022 U.S. treasuries 35,719 (3,287 ) 32,432
U.S. government agencies 27,606 (2,971 ) 24,635 U.S. agency mortgage-backed securities 51,655 (5,354 ) 46,301 U.S. agency collateralized mortgage obligations 32,309
(2,855 ) 29,454
Non-agency MBS/CMO 55,370 (3,496 ) 51,874
Asset-backed securities 84,110 (2,362 ) 81,748
Corporate bonds 81,829 (7,473 ) 74,356Obligations of states and political subdivisions 261,150 (42,304 ) 218,846 Total debt securities, available for sale 629,748
(70,102 ) 559,646
Equity securities 8,959 (8 ) 8,951
Total securities 638,707 (70,110 ) 568,597
December 31, 2021
U.S. Treasuries 14,821 (8 ) 14,813
U.S. government agencies 29,613 (592 ) 29,021U.S. agency mortgage-backed securities 51,964 24 51,988 U.S. agency collateralized mortgage obligations 30,917
160 31,077
Asset-backed securities 100,998 221 101,219
Corporate bonds 82,617 (108 ) 82,509
Obligations of states and political subdivisions 242,807 4,659 247,466
Total debt securities 553,737 4,356 558,093
Equity securities 8,810 172 8,982
Total securities 562,547 4,528 567,075
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Management's Discussion and Analysis
Net
Amortized Unrealized Fair
Cost Gains (Losses) Value
$ $ $
September 30, 2021
U.S. treasuries 4,981 17 4,998
U.S. government agencies 29,616 (335 ) 29,281U.S. agency mortgage-backed securities 56,941 521 57,462 U.S. agency collateralized mortgage obligations 33,173
420 33,593
Asset-backed securities 100,722 721 101,443
Corporate bonds 84,264 710 84,974Obligations of states and political subdivisions 246,413 3,423 249,836 Total debt securities, available for sale 556,110
5,477 561,587 Equity securities 8,740 104 8,844 Total securities 564,850 5,581 570,431
Each quarter, management sets portfolio allocation guidelines and adjusts the security portfolio strategy generally based on the following factors:
· ALCO positions as to liquidity, credit risk, interest rate risk, and fair value
risk
· Growth of the loan portfolio
· Slope of the
· Relative performance of the various instruments, including spread to
Treasuries
· Duration and average length of the portfolio
· Volatility of the portfolio
· Direction of interest rates
· Economic factors impacting debt securities
The investment policy of the Corporation establishes guidelines to promote diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk.
The Corporation'sU.S. Treasury sector increased$17.6 million during the first nine months of 2022, resulting in a 119.0% increase in this sector. This sector represents a safe credit at a market-appropriate yield which added some diversity to the portfolio. The Corporation'sU.S. government agency sector decreased by$4.4 million , or 15.1%, sinceDecember 31, 2021 . Management has purchased Non-agency mortgage backed securities (MBS) and collateralized mortgage obligation (CMO) securities sinceDecember 31, 2021 which has brought the portfolio to$51.9 million as ofSeptember 30, 2022 , or 9.1% of the total portfolio. This sector will better structure the portfolio to achieve higher yields and shorten the duration while also protecting in a rates-up environment. The Corporation'sU.S. agency MBS and CMO sectors have decreased sinceDecember 31, 2021 , with MBS decreasing$5.7 million , or 10.9%, and CMOs decreasing$1.6 million , or 5.2%. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions.U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio's length and yield. The Corporation's asset-backed securities declined by$19.5 million , or 19.2%, fromDecember 31, 2021 , toSeptember 30, 2022 . Many of the bonds in this sector receive regular monthly principal payments which caused the value to decline. Additionally, some asset-backed securities were sold at gains in the first quarter of 2022 to support the Corporation's earnings and liquidity position. 43 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
The combined effect of all of the amortizing bonds paying monthly principal and interest provides the Corporation with a reasonably stable base cash flow of approximately$2.0 -$3.0 million per month. As ofSeptember 30, 2022 , the fair value of the Corporation's corporate bonds decreased by$8.2 million , or 9.9%, from balances atDecember 31, 2021 . Like any security, corporate bonds have both positive and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held. Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. Municipal securities were purchased throughout 2020 and 2021 due to market conditions that led to favorable yields on some instruments. Municipal bonds represented 38.5% of the securities portfolio as ofSeptember 30, 2022 , compared to 43.6% as ofDecember 31, 2021 . Loans
Net loans outstanding increased by 26.8%, to$1.1 billion atSeptember 30, 2022 , from$867.8 million atSeptember 30, 2021 . Net loans increased by 21.2%, an annualized rate of 28.3%, from$908.0 million atDecember 31, 2021 . The following table shows the composition of the loan portfolio as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 . LOANS BY MAJOR CATEGORY (DOLLARS IN THOUSANDS) September 30, December 31, September 30, 2022 2021 2021 $ % $ % $ % Commercial real estate Commercial mortgages 207,480 18.6 177,396 19.3 166,741 19.0 Agriculture mortgages 212,351 19.1 203,725 22.2 188,455 21.4 Construction 80,008 7.2 19,639 2.1 18,786 2.1 Total commercial real estate 499,839 44.9 400,760 43.6 373,982 42.5 Consumer real estate (a)
1-4 family residential mortgages 366,534 33.0 317,037
34.5 302,670 34.4
Home equity loans 13,268 1.2 11,181 1.2 11,889 1.4
Home equity lines of credit 93,704 8.4 75,698 8.2 74,919 8.5
Total consumer real estate 473,506 42.6 403,916 43.9 389,478 44.3
Commercial and industrial
Commercial and industrial 80,964 7.3 65,615 7.1 73,695 8.4
Tax-free loans 26,398 2.4 23,009 2.5 17,279 2.0
Agriculture loans 25,520 2.3 20,717 2.3 19,180 2.2Total commercial and industrial 132,882 12.0 109,341
11.9 110,154 12.6
Consumer 5,755 0.5 5,132 0.6 5,211 0.6
Total loans 1,111,982 100.0 919,149 100.0 878,825 100.0
Less:Deferred loan costs (fees), net 2,522 1,755
(1,436 )
Allowance for credit losses (14,150 ) (12,931 ) 12,454
Total net loans 1,100,354 907,973 867,807
(a) Residential real estate loans do not include mortgage loans serviced for
others which totaled $304,479,000 as of September 30, 2022 , $289,263,000 as of
December 31, 2021 , and $274,892,000 as of September 30, 2021 .
There was significant growth in the loan portfolio since September 30, 2021 and
December 31, 2021 . This loan growth was primarily driven by a strategic desire
to increase earning assets with a renewed focus on internal sales culture. All
major loan categories showed an increase in balances from both time periods.
44
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The commercial real estate category represents the largest group of loans for
the Corporation. Commercial real estate makes up 44.9% of total loans as of
September 30, 2022 , compared to 42.5% of total loans as of September 30, 2021 .
Within the commercial real estate segment, the increase has primarily been
construction loans which was a direct result of reclassification from 1-4 family
residential loans in the first nine months of 2022. The Corporation's commercial
construction loan balances increased by $61.2 million , or 325.9%, from September
30, 2021 to September 30, 2022 . Commercial construction loans were 7.2% of the
total loan portfolio as of September 30, 2022 , and 2.1% as of September 30,
2021 .
Commercial mortgages increased $40.7 million , or 24.4%, from balances at
September 30, 2021 . Commercial mortgages as a percentage of the total loan
portfolio decreased to 18.6% as of September 30, 2022 , compared to 19.0% at
September 30, 2021 . Agricultural mortgages increased by $23.9 million , or 12.7%,
from $188.5 million as of September 30, 2021 , to $212.4 million as of September
30, 2022 . Agricultural mortgages were 19.1% of the portfolio as of September 30,
2022 , compared to 21.4% as of September 30, 2021 .
The consumer residential real estate category of total loans increased from
$389.5 million on September 30, 2021 , to $473.5 million on September 30, 2022 , a
21.6% increase. This category includes closed-end fixed rate or adjustable-rate
residential real estate loans secured by 1-4 family residential properties,
including first and junior liens, and floating rate home equity loans. The 1-4
family residential mortgages account for the vast majority of residential real
estate loans with fixed and floating home equity loans making up the remainder.
Historically, the entire consumer residential real estate component of the loan
portfolio has averaged close to 40% of total loans. As of September 30, 2021 ,
this percentage was 44.3%, and as of September 30, 2022 , it decreased to 42.6%.
Although economic conditions for consumers had deteriorated with the COVID-19
pandemic, increased unemployment, and decreased consumer spending, the mortgage
market was relatively strong as consumers refinanced existing debt to lower
rates throughout 2021. During the first nine months of 2022, mortgage activity
remained strong with the majority of consumers choosing adjustable rate
mortgages which remain in the Corporation's loan portfolio as opposed to the
30-year fixed rate mortgages that were being generated in the past couple of
years and sold on the secondary market.
The first lien 1-4 family mortgages increased by $63.9 million , or 21.1%, from
September 30, 2021 , to September 30, 2022 . These first lien 1-4 family loans
made up 77.7% of the residential real estate total as of September 30, 2021 , and
77.4% as of September 30, 2022 . The vast majority of the first lien 1-4 family
closed end loans consist of single family personal first lien residential
mortgages and home equity loans, with the remainder consisting of 1-4 family
residential non-owner-occupied mortgages. In the third quarter of 2022, mortgage
production decreased 11% from the previous quarter and was down 7% from the
third quarter of 2021. Purchase money origination constituted 87% of the
Corporation's mortgage originations for the quarter, with construction-only and
construction-permanent loans making up 41% of that mix. The percentage of
mortgage originations being added into the Corporation's held-for-investment
mortgage portfolio increased quarter-over-quarter driven primarily by the
continued increase in agency-eligible secondary market fixed mortgage rates. In
the third quarter of 2022, 90% of all mortgage originations were held in the
mortgage portfolio, 82% of which were adjustable rate mortgages. As of
September 30, 2022 , ARM balances were $187.1 million , representing 53.5% of the
1-4 family residential loan portfolio of the Corporation. With a continued
decline in dollar volume of loans being delivered into the secondary market
along with a continued increase in mortgage rates, the gains on the sale of
mortgages declined quarter-over-quarter.
As of September 30, 2022 , the remainder of the residential real estate loans
consisted of $13.3 million of fixed rate junior lien home equity loans, and
$93.7 million of variable rate home equity lines of credit (HELOCs). This
compares to $11.9 million of fixed rate junior lien home equity loans, and $74.9
million of HELOCs as of September 30, 2021 . Therefore, combined, these two types
of home equity loans increased from $86.8 million to $107.0 million , an increase
of 23.3%.
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 12.0% of total loans as ofSeptember 30, 2022 , a decline from the 12.6% atSeptember 30, 2021 . The balance of total commercial and industrial loans increased by$22.7 million , or 20.6%, fromSeptember 30, 2021 toSeptember 30, 2022 . This category of loans generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. The balance atSeptember 30, 2022 andSeptember 30, 2021 , also includes the PPP loans, which have declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. The total balance of PPP loans declined by$22.7 million , or 97.9% fromSeptember 30, 2021 , toSeptember 30, 2022 and represents balances of only$486,000 as of September
30,
2022.
45
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ENB FINANCIAL CORP
Management's Discussion and Analysis
The consumer loan portfolio increased slightly from $5.2 million at September
30, 2021 , to $5.8 million at September 30, 2022 , an 11.5% increase. The consumer
loan portfolio represents 0.5% of total loans. The long-term trend over the past
decade has seen homeowners turning to the equity in their homes to finance cars
and education rather than traditional consumer loans that are generally
unsecured. Demand for unsecured credit is being matched by principal payments on
existing loans resulting in stable balances.
Non-Performing Assets
Non-performing assets include:
· Nonaccrual loans
· Loans past due 90 days or more and still accruing
· Non-performing troubled debt restructurings
· Other real estate owned
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
September 30 December 31, September 30
2022 2021 2021
$ $ $
Nonaccrual loans 4,505 2,556 2,236
Loans past due 90 days or more and still accruing 147 325 183
Troubled debt restructurings, non-performing - - -
Total non-performing loans 4,652 2,881 2,419
Other real estate owned - - -
Total non-performing assets 4,652 2,881 2,419
Non-performing assets to net loans 0.42%
0.31% 0.28%
The total balance of non-performing assets increased by $2.2 million , or 92.3%
from balances at September 30, 2021 , and increased by $1.8 million , or 61.5%,
from balances at December 31, 2021 . There were no non-performing troubled debt
restructuring (TDR) loans in any of the periods presented. Non-accrual loans
increased by $2.3 million , or 101.5%, since September 30, 2021 , and increased
$1.9 million , or 76.3% since December 31, 2021 . The increase that occurred for
both time periods was primarily due to three agricultural relationships, a
business loan, a commercial real estate loan, and a business mortgage to
unrelated borrowers which all added to non-accrual loans in the first nine
months of 2022. Loans past due 90 days or more and still accruing were down
$36,000 from the prior year period, and $178,000 , since December 31, 2021 .
There was no other real estate owned (OREO) as of
Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent in
the loan portfolio. Management reviews the adequacy of the allowance each
quarter based upon a detailed analysis and calculation of the allowance for
credit losses. This calculation is based upon a systematic methodology for
determining the allowance for credit losses in accordance with generally
accepted accounting principles. The calculation includes estimates and is based
upon losses inherent in the loan portfolio. The allowance calculation includes
specific provisions for under-performing loans and general allocations to cover
anticipated losses on all loan types based on historical losses. The calculation
is also influenced by nine qualitative factors that are adjusted on a quarterly
basis as needed. Based on the quarterly credit loss calculation, management will
adjust the allowance for credit losses through the provision as necessary.
Changes to the allowance for credit losses during the year are primarily
affected by five main factors:
46
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ENB FINANCIAL CORP
Management's Discussion and Analysis
· Historical loan losses
· Qualitative factor adjustments including levels of delinquent and
non-performing loans
· Growth trends of the loan portfolio
· Recovery of loans previously charged off
· Provision for loan losses
Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Net Charge-Off table below shows the net charge-offs as a percentage of average loans outstanding for each segment of the Corporation's loan portfolio as ofSeptember 30, 2022 and 2021. Net Charge-Offs (DOLLARS IN THOUSANDS) 2022 2021 $ $ Loans charged-off: Commercial real estate 65 - Consumer real estate - - Commercial and industrial 59 - Consumer 16 30 Total loans charged-off 140 30 Recoveries of loans previously charged-off Commercial real estate 12 - Consumer real estate 9 - Commercial and industrial 35 19 Consumer 3 13 Total recoveries 59 32 Net charge-offs (recoveries) Commercial real estate 53 - Consumer real estate (9 ) - Commercial and industrial 24 (19 ) Consumer 13 17 Total net charge-offs (recoveries) 81 (2 ) Average loans outstanding Commercial real estate 422,933 351,320 Consumer real estate 395,182 320,275 Commercial and industrial 178,664 182,016 Consumer 5,834 5,531 Total average loans outstanding
1,002,613 859,142
Net charge-offs (recoveries) as a % of average loans outstanding Commercial real estate 0.01% 0.00% Consumer real estate 0.00% 0.00% Commercial and industrial 0.01% -0.01% Consumer 0.22% 0.31% Total net charge-offs (recoveries) as a % of average loans outstanding 0.01% 0.00% The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation's total loan portfolio that has been charged off during the period. The Corporation has historically experienced very low net charge-off percentages due to conservative credit practices. As ofSeptember 30, 2022 , net charge-offs were$81,000 , representing a net charge off position of 0.01% of average loans outstanding as reflected above. As ofSeptember 30, 2021 , net recoveries were$2,000 , resulting in a net charge-off as a percentage of average loans of 0.00% for the year-to-date period. 47 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis
The Corporation's level of classified loans was$12.9 million onSeptember 30, 2022 , compared to$17.9 million onSeptember 30, 2021 . Total classified loans have decreased from the prior year. Having more loans in a classified status could result in a larger allowance as higher amounts of projected historical losses and qualitative factors are attached to these loans. In addition to this impact, management performs a specific allocation test on these classified loans. There was$9,000 of specifically allocated allowance against the classified loans as ofSeptember 30, 2022 ,$147,000 of specific allocation as ofDecember 31, 2021 , and$0.2 million of specific allocation as ofSeptember 30, 2021 . The allowance as a percentage of total loans was 1.27% as ofSeptember 30, 2022 , and 1.41% as ofSeptember 30, 2021 . It is typical for the allowance for credit losses to contain a small amount of excess reserves. Premises and Equipment
Premises and equipment, net of accumulated depreciation, increased by$0.1 million , or 0.4%, to$24.6 million as ofSeptember 30, 2022 , from$24.5 million as ofSeptember 30, 2021 . As ofSeptember 30, 2022 ,$664,000 was classified as construction in process compared to$261,000 as ofSeptember 30, 2021 . Regulatory Stock
The Corporation owns multiple forms of regulatory stock that is required in order to be a member of theFederal Reserve Bank (FRB) and members of banks such as the FHLB ofPittsburgh andAtlantic Community Bankers Bank (ACBB). The Corporation's$5.9 million of regulatory stock holdings as ofSeptember 30, 2022 , consisted of$5.2 million of FHLB ofPittsburgh stock,$631,000 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. Deposits
The Corporation's total ending deposits atSeptember 30, 2022 , increased by$119.6 million , or 7.9%, and by$240.3 million , or 17.3%, fromDecember 31, 2021 , andSeptember 30, 2021 , respectively. Customer deposits are the Corporation's primary source of funding for loans and securities. In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks for safe places to invest money, despite historically low interest rates. The mix of the Corporation's deposit categories has changed moderately sinceSeptember 30, 2021 , with the changes being a$79.2 million , or 13.4% increase in non-interest bearing demand deposit accounts, a$23.4 million , or 40.1% increase in interest bearing demand balances, a$4.1 million , or 3.0% decrease in NOW balances, a$98.1 million , or 60.5% increase in money market account balances, a$39.3 million , or 11.9% increase in savings account balances, and a$4.3 million , or 3.7% increase in time deposit balances. The Deposits by Major Classification table, shown below, provides the balances of each category forSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 . DEPOSITS BY MAJOR CLASSIFICATION (DOLLARS IN THOUSANDS) September 30, December 31, September 30, 2022 2021 2021 $ $ $ Non-interest bearing demand 670,563 686,278 591,333 Interest bearing demand 81,855 63,015 58,425 NOW accounts 129,390 139,366 133,443 Money market deposit accounts 260,141 168,327 162,050 Savings accounts 369,229 341,291 329,900 Time deposits 120,671 113,936 116,351 Total deposits 1,631,849 1,512,213 1,391,502 48 Table of Contents ENB FINANCIAL CORP Management's Discussion and Analysis
The growth and mix of deposits is often driven by several factors including:
· Convenience and service provided
· Current rates paid on deposits relative to competitor rates
· Level of and perceived direction of interest rates
· Financial condition and perceived safety of the institution
· Possible risks associated with other investment opportunities
· Level of fees on deposit products
Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation's time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. The Corporation has experienced a slow and steady shift in deposit trends over the past five years as customers have moved money from time deposits into core checking and savings accounts although with increased rates in the 2nd half of 2022, there is a shift back into time deposits resulting in the increase in balances sinceSeptember 30, 2021 , andDecember 31, 2021 . Borrowings
Total borrowings were$98.6 million ,$63.9 million , and$66.4 million as ofSeptember 30, 2022 ,December 31, 2021 , andSeptember 30, 2021 , respectively. There was$15.0 million of short-term funds outstanding atSeptember 30, 2022 , and no short-term funds outstanding atDecember 31, 2021 , orSeptember 30, 2021 . Short-term funds are used for immediate liquidity needs and are not typically part of an ongoing liquidity or interest rate risk strategy; therefore, they fluctuate more rapidly. When short-term funds are used, they are purchased through correspondent and member bank relationships as overnight borrowings or through the FHLB for terms less than one year. The$15.0 million of short-term borrowings atSeptember 30, 2022 , consisted entirely of short-term FHLB advances. Total long-term borrowings, borrowings initiated for terms longer than one year, were$44.2 million as ofSeptember 30, 2022 ,$44.2 million as ofDecember 31, 2021 , and$46.7 million as ofSeptember 30, 2021 . The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. The decrease in long-term FHLB borrowings sinceSeptember 30, 2021 , can be attributed to management taking advantage of declining rates in 2021 by prepaying FHLB advances and incurring penalties in order to save on interest expense in future years. The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently$529.8 million . The Corporation's internal policy limits are far more restrictive than the FHLB MBC, which is calculated and
set quarterly by FHLB.
In addition to the long-term advances funded through the FHLB, 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 4.00% 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 ofSeptember 30, 2022 ,$16.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date on a pro-rata basis. OnJuly 22, 2022 , the Corporation completed the sale of an additional subordinated debt note offering. The Corporation sold$20.0 million of subordinated debt notes with a maturity date ofSeptember 30, 2032 . These notes are all non-callable for 5 years and carry a fixed interest rate of 5.75% per year for the 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As ofSeptember 30, 2022 ,$15.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date on a pro-rata basis. 49 Table of ContentsENB FINANCIAL CORP Management's Discussion and Analysis
Stockholders' Equity
Federal regulatory authorities require banks to meet minimum capital levels. The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, maintains capital ratios well above those minimum levels. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for credit losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio. The consolidated asset limit on small bank holding companies is$3 billion and a company with assets under that limit is not subject to the consolidated capital rules but may disclose capital amounts and ratios. The Corporation has elected to disclose those amounts and ratios.
The following tables reflect the capital ratios for the Corporation and Bank compared to the regulatory capital requirements.
REGULATORY CAPITAL RATIOS:
Regulatory Requirements
Adequately Well
As of September 30, 2022 Capital Ratios Capitalized CapitalizedTotal Capital to Risk-Weighted Assets
Consolidated 15.1% N/A N/A
Bank 14.4% 8.0% 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.2% 6.0% 8.0%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.2% 4.5% 6.5%
Tier 1 Capital to Average Assets
Consolidated 7.7% N/A N/A
Bank 9.3% 4.0% 5.0%
As of December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated 15.6% N/A N/A
Bank 14.9% 8.0% 10.0%
Consolidated 12.5% N/A N/A
Bank 13.6% 6.0% 8.0%
Consolidated 12.5% N/A N/A
Bank 13.6% 4.5% 6.5%
Consolidated 8.2% N/A N/A
Bank 9.1% 4.0% 5.0%
As of September 30, 2021
Total Capital to Risk-Weighted Assets
Consolidated 15.9% N/A N/A
Bank 15.4% 8.0% 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 12.8% N/A N/A
Bank 14.1% 6.0% 8.0%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 12.8% N/A N/A
Bank 14.1% 4.5% 6.5%
Tier 1 Capital to Average Assets
Consolidated 8.3% N/A N/A
Bank 9.2% 4.0% 5.0%
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ENB FINANCIAL CORP
Management's Discussion and Analysis
As of September 30, 2022 the Bank's Tier 1 Leverage Ratio stood at 9.3% while
the Corporation's Tier 1 Leverage Ratio was 7.7%. Tier 1 Capital levels at the
Corporation level were not impacted by the subordinated debt issue since
subordinated debt only qualifies as Tier 2 Capital at the corporate level. As
such, in terms of the Corporation's regulatory capital ratios, only the Total
Capital to Risk-Weighted Assets ratio was enhanced as a result of the $40
million subordinated debt issues. In 2022, the Corporation's earnings, net of
dividends paid, positively impacted the level of stockholders' equity, but a
devaluation of the investment portfolio, resulted in a higher level of
unrealized losses, and a negative impact.
Off-Balance Sheet Arrangements
In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation's financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as ofSeptember 30, 2022 . OFF-BALANCE SHEET ARRANGEMENTS (DOLLARS IN THOUSANDS)September 30, 2022 $ Commitments to extend credit: Revolving home equity 187,371 Construction loans 46,585 Real estate loans 92,296 Business loans 214,489 Consumer loans 1,250 Other 5,657 Standby letters of credit 10,411 Total 558,059 Significant Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a newFinancial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Among the provisions that have already or are likely to affect the Corporation are the following:
Holding Company Capital Requirements
Dodd-Frank requires theFederal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from tier I capital unless such securities were issued prior toMay 19, 2010 , by a bank holding company with less than$15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, are consistent with safety and soundness. 51 Table of ContentsENB FINANCIAL CORP Management's Discussion and AnalysisDeposit Insurance Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions, and credit unions to$250,000 per depositor. Additionally, onFebruary 7, 2011 , the Board of Directors of theFDIC approved a final rule based on the Dodd-Frank Act that revises the assessment base from one based on domestic deposits to one based on assets. This change, which was effective inApril 2011 , saved the Corporation a significant amount ofFDIC insurance premiums from the significantly higherFDIC insurance premiums placed into effect after the financial crisis.
Corporate Governance
Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on "golden parachute" payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. TheSEC has finalized the rules implementing these requirements which took effect onJanuary 21, 2011 . The Corporation was exempt from these requirements untilJanuary 21, 2013 , due to its status as a smaller reporting company.
Dodd-Frank created theConsumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley Act, and certain other statutes. TheCFPB has examination and primary enforcement authority with respect to depository institutions with$10 billion or more in assets. Smaller institutions will be subject to rules promulgated by theCFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. TheCFPB will have authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes theCFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by theCFPB . Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Interstate Branching
Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Limits on Interstate Acquisitions and Mergers
Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition - the acquisition of a bank outside its home state - unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and
adequately managed.
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