Item 7. 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 annual report. The financial condition and results
of operations presented are not indicative of future performance.
Strategic Overview
ENB Financial Corp and its wholly owned subsidiary, Ephrata National Bank,
are committed to remaining an independent community bank serving its market area and the greater communities surrounding Lancaster County,
Pennsylvania. The Corporation’s roots date back to the April 11, 1881 charter granted to Ephrata National Bank by the Office of
the Comptroller of the Currency. The Bank’s growth has been entirely organic over 140 years of existence. The Board and Management
are committed to the principals and values that have served the company well over its history and the desire is to produce strong financial
results that will ensure trust from the Bank’s customers and favorable returns to the shareholders.
Results of Operations
Overview
The year ended December 31, 2021 was positively impacted by a number of
items resulting in strong financial results. The COVID-19 pandemic and governmental and business responses thereto continues to impact
customer behavior and balance sheet growth, but as of the date of this report there has not been significant negative impacts on earnings
or credit. Customers have adapted to changes in behavior and the Corporation continues to seek ways to manage the structure of the balance
sheet to achieve positive financial results now and in future time periods.
The Corporation recorded net income of $14,916,000 for the year ended December
31, 2021, a $2,617,000, or 21.3% increase over the year ended December 31, 2020. The earnings per share, basic and diluted, were $2.68
in 2021, compared to $2.20 in 2020, a 21.8% increase. The increase in the Corporation’s 2021 earnings was caused primarily by growth
in other income and net interest income, coupled with a decline in the provision for loan losses.
Non-interest income excluding security and
mortgage gains increased by $2,524,000, or 28.8%, for the year ended December 31, 2021, due to many positive trends such as higher trust
income, higher commissions on debit card interchange fees, and lower mortgage servicing asset amortization. Mortgage gains were elevated
for the second year in a row at $5,526,000, compared to $5,850,000 in 2020. Additionally, gains on debt and equity securities were $321,000,
or 43.8% higher in 2021 compared to the prior year.
The Corporation’s net interest income
(NII) increased by $2,323,000, or 6.1%, in 2021, compared to 2020. The increase in NII primarily resulted from an increase in interest
on securities available for sale of $2,097,000, or 31.0%, for the year ended December 31, 2021, compared to 2020. In addition, interest
expense on deposits and borrowings decreased by $826,000, or 21.5%, in 2021 compared to the prior year. The low interest rate environment
has caused a rapid decline in asset yield, but also a decline in the cost of funds, which has resulted in these much lower levels of interest
expense.
The Corporation recorded a $475,000 provision
for loan losses in 2021, compared to $2,950,000 in 2020. The higher provision in 2020 was primarily caused by increasing the qualitative
factors across industry lines to various degrees as a result of potential forward credit concerns related to COVID-19 and a higher specific
allocation related to one commercial borrower that paid off in 2021.
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.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Key Performance Ratios
Year ended December 31,
Return on Average Assets 0.95% 0.96%
The results of the Corporation’s operations are best explained
by addressing in further detail the five major sections of the income statement, which are as follows:
· Net interest income
· Provision for loan losses
· Other income
· Operating expenses
· Income taxes
The following discussion analyzes each of these five
components.
Net Interest Income
NII represents the largest portion of the Corporation’s operating
income. In 2021, NII generated 69.4% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared
to 71.3% in 2020. This decrease is a result of much higher levels of non-interest income in 2021 compared to 2020. The overall performance
of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.
The following table shows a summary analysis of NII on a fully taxable
equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest
spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the
NII reported on the consolidated statements of income, which is not shown on an FTE basis.
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
$ $
Net interest income
NII is the difference between interest income earned on assets and interest
expense incurred on liabilities. Accordingly, two factors affect NII:
NII is impacted by yields earned on assets and rates paid on liabilities.
With the decrease in the short-term Federal Reserve rates in 2020, asset yields have declined significantly and the U.S. Treasury curve
has been relatively flat.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
During 2021, longer-term U.S. Treasury rates did increase adding some slope
to the yield curve, but asset yields are still constrained, which adds strain to NII and net interest margin (NIM).
As a result of a larger balance sheet in 2021, even with much lower asset
yields, the Corporation’s NII on a tax equivalent basis increased while the Corporation’s margin decreased to 2.81% for year
ended December 31, 2021, compared to 3.24% in 2020. Loan yields were lower in 2021 due to the 150 basis point Fed rate decline during
the first quarter of 2020 as well as competitive pressure throughout 2020 and 2021. The Corporation’s NII in 2021 increased over
2020, by $2,650,000, or 6.8%.
Security yields will generally fluctuate more rapidly than loan yields
based on changes to the U.S. Treasury rates and yield curve. With lower Treasury rates in 2020, security reinvestment had generally been
occurring at lower yields. With slightly higher Treasury rates in 2021, security yields have increased slightly, but still remain compressed
compared to years prior to 2020.
The Corporation’s overall cost of funds, including non-interest bearing
funds, remained stable through 2021 between 19 and 13 basis points. Core deposit interest rates were reduced throughout 2020 and time
deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products.
The average balance of borrowings was slightly higher in 2021 compared to 2020, resulting in higher interest expense of $25,000. Additionally,
the $20 million sub debt issuance beginning on December 30, 2020, carried a higher rate of interest than FHLB long-term advances. As a
result, the total cost of borrowings increased $145,000 when comparing 2021 to 2020, resulting in a total increase in borrowings interest
expense of $170,000.
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)
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
Securities available for sale:
INTEREST EXPENSE
Deposits:
Borrowings:
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
In 2021, the Corporation’s NII on an FTE basis increased by $2,650,000,
a 6.8% increase over 2020. Total interest income increased $1,824,000, or 4.3%, while interest expense decreased $826,000, or 21.5%, from
2020 to 2021. The FTE interest income from the securities portfolio increased by $2,448,000, or 32.5%, while loan interest income decreased
$417,000, or 1.2%. During 2021, additional loan volume added $2,180,000 to net interest income, and lower yields primarily due to the
Prime rate decreases in the first quarter of 2020, caused a $2,597,000 decrease, resulting in a net decrease of $417,000. Higher balances
in the securities portfolio caused an increase of $3,983,000 in net interest income, while lower yields on securities caused a $1,535,000
decrease, resulting in a net increase of $2,448,000.
The average balance of interest bearing liabilities increased by 18.0%
during 2021, driven by the growth in deposit balances. Deposit rates decreased significantly throughout 2020 and 2021 more than offsetting
the slightly higher interest expense caused by much higher balances of deposits. Lower interest rates contributed to $1,002,000 of interest
expense reduction while higher balances only caused $6,000 of increased expense, resulting in a total decline in interest expense of $996,000.
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 $342,000 in 2021, with $441,000 due to lower rates, offsetting the higher balances that caused an increase
of $99,000. Higher balances in savings accounts caused an increase of $16,000, while lower rates caused a decrease of $14,000, resulting
in the net increase in interest expense of $2,000 on savings deposits. Time deposit balances declined throughout 2021, resulting in lower
interest expense of $109,000, while lower rates caused a decline of $547,000, resulting in a net decrease of $656,000.
The average balance of total borrowings increased by $643,000, or 0.9%,
from December 31, 2020, to December 31, 2021. The increase in total borrowings increased interest expense by $25,000. Higher rates on
borrowings, driven by the subordinated debt issued at the end of 2020, resulted in higher interest expense of $145,000. The aggregate
of these amounts was an increase in interest expense of $170,000 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,
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
Securities available for sale:
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Non-interest bearing liabilities:
Net interest spread (b) 2.66 3.02
Effect of non-interest bearing funds 0.15 0.22
Net yield on interest earning assets (c) 2.81 3.24
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s average balance on securities increased by $202.7
million, or 58.4%, in 2021 compared to 2020 and the tax equivalent yield on investments declined by 36 basis points. Interest income on
securities increased due to the volume growth which offset the declining yield due to lower market rates. Security reinvestment in 2021
has been occurring at slightly higher rates due to the increase in U.S. Treasury rates, but reinvestment throughout the majority of 2020
was at much lower yields. 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.
Average balances on loans increased by $52.9 million, or 6.5%, for the
year ended December 31, 2021, compared to the prior year. Loan yields declined by 31 basis points for the year and loan interest income
decreased $417,000, or 1.2% as a result of these lower yields.
The average balance of interest-bearing deposit accounts increased by $128.7
million, or 19.8%, in 2021 compared to 2020. While the average balance of time deposits did decrease for the year-to-date time periods,
the average balance of demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest
rate paid on deposits decreased as well. This resulted in a decrease in interest expense on deposits of $996,000, or 46.6%, for the year
ended December 31, 2021, compared to 2020.
The Corporation’s average balance on borrowed funds increased marginally
in 2021. The Corporation’s borrowed funds consist of FHLB advances as well as subordinated debt issued in December of 2020 which
was used to support capital growth for the Corporation. The subordinated debt issuance caused average borrowings to increase year-over-year,
but the Corporation also paid off $10.6 million in FHLB advances during the year. The rate paid on borrowed funds increased by 22 basis
points for 2021, compared to 2020 as a result of the issuance of subordinated debt which carries a 4.00% rate, significantly higher than
the rate on FHLB advances.
For the year ended December 31, 2021, the net interest spread decreased
by 36 basis points to 2.66%, compared to 3.02% for 2020. The effect of non-interest bearing funds decreased to 15 basis points from 22
basis points when comparing both years. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the
Corporation does not pay interest. As rates go lower, the benefit of non-interest bearing deposits decreases because there is less difference
between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for 2021 was 2.81%, compared to 3.24%
for 2020.
Provision for Loan Losses
The allowance for credit losses (ACL) provides for losses inherent in
the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount
of the provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in
the loan portfolio. The Corporation gives special attention to the level of underperforming loans when calculating the necessary provision
for loan losses. The analysis of the credit loss allowance takes into consideration, among other things, the following factors:
· levels and trends in delinquencies, non-accruals, and charge-offs,
· levels of classified loans,
· trends within the loan portfolio,
· changes in lending policies and procedures,
· experience of lending personnel and management oversight,
· national and local economic trends,
· concentrations of credit,
· external factors such as legal and regulatory requirements,
· changes in the quality of loan review and Board oversight, and
· changes in the value of underlying collateral.
The Corporation recorded a provision of $475,000 in 2021, compared to $2,950,000
in 2020. The provision expense was elevated in 2020 due to the onset of COVID-19 and the deteriorating economic conditions that were expected
to impact credit risk moving forward. The Corporation also provided $1.1 million in a specific allocation to one commercial borrower in
2020. This loan paid off during 2021 resulting in a reversal of that specific allocation and an overall reduction in provision expense.
As of December 31, 2021, the allowance as a percentage of total loans was 1.40%, compared to 1.50% at December 31, 2020.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
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.
Other Income
Other income for 2021 was $17,881,000, an increase of $2,521,000, or 16.4%,
compared to the $15,360,000 earned in 2020. The following table details the categories that comprise other income.
OTHER INCOME
(DOLLARS IN THOUSANDS)
$ $ $ %
Earnings on bank-owned life insurance 880 829 51 6.2
Trust and investment services income increased by 19.7% from 2020 to 2021
primarily as a result of higher income on the non-deposit investment services side which increased by $281,000, or 38.6%. Service charges
on deposit accounts has remained stable from the prior year and other fees have decreased by 10.7% as a result of lower fees on a third
party sweep product in 2021. Commissions increased by $739,000, or 24.9% for the year ended December 31, 2021, compared to 2020, driven
by higher debit card interchange commissions. Gains on debt and equity securities were higher in 2021 driven by solid gains on debt securities
sold and gains recognized on the sale of equity securities and gains from the market value increases on equity securities. Mortgage gains
were very strong in both years but were higher in 2020 due to slightly higher refinancing volume and better margins on loans sold. Earnings
on bank-owned life insurance increased marginally year-over-year and other miscellaneous income was significantly higher due to improvements
in net mortgage servicing income and investment adjustments that positively impacted this category of income.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Operating Expenses
The following table provides details of the Corporation’s operating
expenses for the last two years along with the percentage increase or decrease compared to the previous year.
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
$ $ $ %
Salaries and employee benefits are the largest category of operating expenses.
For the year 2021, salaries and benefits increased $2,403,000, or 10.9%, compared to 2020. This was primarily due to merit and cost of
living increases, additions to staff, and higher costs to replace employees who retired or left the organization due to nationwide staffing
challenges. Occupancy and equipment expenses in total did not change significantly from the prior year. Advertising and marketing expenses
increased by 11.0% which is typical as the Corporation grows and promotes new market areas and new products and services. Computer software
and data processing expenses are growing at a rapid pace, 40.4% year-over year, as a result of higher technology costs and new bank-wide
initiatives that rely heavily on software platforms. Shares tax expense is based on the Corporation’s levels of shareholders’
equity and has grown substantially in the past two years commensurate with the growth in shareholders’ equity. Professional services
expenses declined by 9.4% in 2021 compared to the prior year driven lower by a decline in outside services. Other operating expenses increased
by 17.4% year-over-year primarily as a result of higher loan-related costs as well as higher FDIC insurance costs.
Income Taxes
Nearly all of the Corporation’s income is taxed at a corporate rate
of 21% for Federal income tax purposes. The Corporation is also subject to Pennsylvania 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 Pennsylvania Bank Shares Tax. The Bank Shares Tax expense appears on the Corporation’s Consolidated
Statements of Income under operating expenses.
Certain items of income are not subject to Federal income tax, such as
tax-exempt interest income on loans and securities, and increases in the cash surrender value of bank-owned life insurance; therefore,
the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing
the Corporation’s provision for income tax by the pre-tax income for the applicable period.
For the year ended December 31, 2021, the
Corporation recorded a tax provision of $2,620,000, compared to $2,285,000 for 2020.
This increase in tax expense can be attributed to higher pretax earnings. The effective tax rate for the Corporation was 14.9%
for 2021 and 15.7% for 2020. 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.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Financial Condition
Balance Sheet Overview and Liquidity
We maintain liquid assets at adequate levels
in order to meet the needs of our balance sheet. Our primary source of liquidity is core deposits and our available-for-sale investment
portfolio both of which provide more than enough liquidity to fund loans to customers and any other funding needs.
A portion of our liquidity consists of
cash and cash equivalents and borrowings. At December 31, 2021, cash and equivalents amounted to $158.4 million, an
increase of $63.5 million, or 66.9%, from balances at December 31, 2020. Our primary sources of cash are principal repayments on loans,
proceeds from the sales, calls, and maturities of investment securities, principal repayments of mortgage-backed securities, and increases
in deposit accounts. As of December 31, 2021, we had borrowings outstanding from the FHLB of $44.2 million and subordinated
debt of $19.7 million.
At December 31, 2021, we had $491.4 million
in loan commitments outstanding, which included $99.0 million in firm loan commitments, $379.6 million in unused lines of credit, and
open letters of credit of $12.8 million. Certificates of deposit due within one year totaled $63.6 million, or 55.8% of certificates of
deposit. We believe, based on past experience that a significant portion of our certificates of deposit will remain with us upon maturity
and we have ample liquidity outside of these funds. We have the ability to attract and retain deposits by adjusting the interest rates
offered.
As reported in the Consolidated Statements
of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash
provided by operating activities was $13.3 million and $16.4 million for the years ended December 31, 2021 and 2020, respectively. Net
cash used for investing activities was $195.2 million and $232.5 million in fiscal years 2021 and 2020, respectively, reflecting our loan
and investment security activities in the respective periods. Cash provided by financing activities amounted to $245.5 million and $269.9
million for years ended December 31, 2021 and 2020, respectively primarily representing increases in our core deposits through the year.
Investment Securities
The Corporation classifies all of its debt securities as available for
sale and reports the portfolio at fair market value. As of December 31, 2021, the Corporation had $567.1 million of debt and equity securities,
compared to $483.5 million at December 31, 2020, an increase of $83.6 million, or 17.3%.
The largest movements within the securities portfolio were shaped by market
factors, such as:
· slope of the U.S. Treasury curve and projected forward rates
· interest spread versus U.S. Treasury rates on the various securities
· pricing of the instruments, including supply and demand for the product
· structure of the instruments, including duration and average life
· portfolio weightings versus policy guidelines
· credit risk of each instrument and risk-based capital considerations
The Corporation purchased $14.8 million of U.S. Treasuries during 2021
and held no Treasuries in 2020. U.S. Treasuries represent a safe credit at a market appropriate yield which added some diversity to the
portfolio. The Corporation’s U.S. government agency sector decreased by $25.3 million, or 46.6%, since December 31, 2020. Management
had purchased $35.5 million of short-term discount notes at the end of 2020 to offset the Corporation’s shares tax expense. These
bonds were sold in the first quarter of 2021 and are responsible for the decline in this category. Management has increased the allocations
of both asset-backed securities (ABS) and obligations of states and political subdivisions (municipals) since December 31, 2020, in order
to better structure the portfolio to achieve higher yields while also protecting in preparation for a rates-up environment.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s asset-backed securities (ABS) and municipal sectors
have increased significantly since December 31, 2020, with ABS increasing $40.7 million, or 67.4%, and municipals increasing $53.7 million,
or 27.7%. ABS securities are floating rate student loan pools which are instruments that will perform well in a rates-up environment and
offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above
the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities
generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flows. With liquidity and
cash levels remaining high, management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in
a rates-up environment.
Obligations of states and political subdivisions, or municipal bonds, consist
of both tax-free and taxable securities that generally provide the highest yield in the securities portfolio. They also carry the longest
duration on average of any instrument in the securities portfolio. These instruments also experience significant fair market value gains
and losses when interest rates decrease and increase. Municipal bonds represented 44.3% of the debt securities portfolio as of December
31, 2021, compared to 40.7% as of December 31, 2020.
The Corporation’s U.S. agency MBS and CMO sectors decreased in total
by $23.0 million, or 21.7%, from December 31, 2020 to December 31, 2021. Management desires to maintain a portfolio 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
to the balance sheet. U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional
prepayment of principal.
As of December 31, 2021, the fair value of the Corporation’s corporate
bonds increased by $20.8 million, or 33.7%, from balances at December 31, 2020. 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.
The following table shows the weighted-average life and yield on the Corporation’s
debt securities by maturity intervals as of December 31, 2021, based on amortized cost. All of the Corporation’s securities are
classified as available for sale and are reported at fair value; however, for purposes of this schedule they are shown at amortized cost.
Securities are assigned to categories based on stated contractual maturity except for MBS and CMOs, which are based on anticipated payment
periods.
SECURITIES PORTFOLIO MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
1 Year Years Years Years Total
% % % % %
$ Yield $ Yield $ Yield $ Yield $ Yield
Loans
Net loans outstanding increased $97.0 million, or 12.0%, from $811.0 million
at December 31, 2020, to $908.0 million at December 31, 2021. Most major loan categories showed an increase in balances over the prior
year but the majority of loan growth came from the commercial and consumer real estate categories with a decline in the commercial and
industrial category as PPP loan balances declined by $36.6 million during 2021.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
Commercial real estate loans increased to $400.8 million at December 31,
2021, from $342.1 million at December 31, 2020, a 17.2% increase. Commercial mortgages increased by $34.7 million, or 24.3%, agriculture
mortgages increased by $27.7 million, or 15.7%, and commercial construction loans decreased by $3.8 million, or 16.2% from December 31,
2020, to December 31, 2021.
The consumer real estate category represents the largest group of loans
for the Corporation. The consumer residential real estate category of total loans increased from $345.6 million on December 31, 2020,
to $403.9 million on December 31, 2021, a 16.9% increase. This category includes closed-end fixed rate or adjustable rate residential
real estate loans secured by 1-4 family residential properties, including first and junior liens, and floating rate home equity loans.
The first lien 1-4 family mortgages increased by $53.5 million, or 20.3%, from December 31, 2020, to December 31, 2021. 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 2021, mortgage production increased 18.1%
over the prior year. The increase in overall production was due to a large increase in portfolio production, which was up 73% over
last year, while secondary market production decreased by 23%. The percentage of mortgage originations that went into the Corporation’s
held for investment mortgage portfolio increased to 63% compared to 55% in 2020. The interest rate environment throughout the year remained
relatively stable and created a nice balance within our mix; 36% of volume in 2021 was purchase, 31% was residential construction lending,
and 33% was refinance activity. The volume of mortgage production in 2021 led to a 20.7% increase in growth of the held for investment
residential loan portfolio and a 22.8% increase in the servicing on behalf of others portfolio, with mortgage servicing rights growing
to over $1.7 million.
As of December 31, 2021, the remainder of the residential real estate loans
consisted of $11.2 million of fixed rate junior lien home equity loans, and $75.7 million of variable rate home equity lines of credit
(HELOCs). This compares to $10.7 million of fixed rate junior lien home equity loans, and $71.3 million of HELOCs as of December 31, 2020.
Therefore, combined, these two types of home equity loans increased from $82.0 million to $86.9 million, an increase of 6.0%.
The other area of commercial lending is non-real estate secured commercial
lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate loans decreased
from $129.2 million at December 31, 2020, to $109.3 million at December 31, 2021, a 15.4% decrease, primarily attributable to the forgiveness
of PPP loans throughout 2021. 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. PPP loan balances declined by $36.6
million during 2021, and ended the year with a balance of only $11.3 million. Management expects that virtually all of the remaining balance
will be forgiven during 2022.
Consumer loans not secured by real estate represent a very small portion
of the Corporation’s loan portfolio, at $5.1 million as of December 31, 2021 and December 31, 2020. These loans consist of personal
loans, automobile loans, and other consumer-related loans.
The following tables show the maturities for the loan portfolio as of December
31, 2021, by time frame for the major categories, and also the loans, which are floating or fixed, maturing after one year.
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
LOAN MATURITIES
(DOLLARS IN THOUSANDS)
Due After Due After
One Year Five Years
Due in One Through Through Due After
Year or Less Five Years 15 Years 15 Years Total
$ $ $ $ $
Commercial real estate
Consumer real estate
Commercial and industrial
FIXED AND FLOATING RATE LOANS DUE AFTER ONE YEAR
(DOLLARS IN THOUSANDS)
Floating or
Fixed Rates Adjustable Rates Total
$ $ $
Commercial real estate
Consumer real estate
Commercial and industrial
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
The majority of the Corporation’s fixed-rate loans have a maturity
date longer than five years. The primary reason for the longevity of the portfolio is the high percentage of real estate loans, which
typically have maturities of 15 or 20 years. Out of all the loans due after one year, $268.9 million, or 31.5%, are fixed-rate loans as
of December 31, 2021. These loans will not reprice to a higher or lower interest rate unless they mature or are refinanced by the borrower.
The remaining $584.0 million, or 68.5% of loans due after one year, are made up of loans that are true floating loans and loans that will
reprice at a predetermined time in the amortization of the loan. True floating rate loans that would immediately reprice according to
changes in the Prime rate are favorable in reducing the Corporation’s total exposure to interest rate risk and fair value risk should
interest rates increase. 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, 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,
$ $
Loans past due 90 days or more and still accruing 325 1,373
Troubled debt restructurings, non-performing — —
Other real estate owned — —
Non-accrual loans to total loans 0.28% 0.09%
Non-performing loans to total loans 0.31% 0.25%
Allowance for credit losses to total loans 1.40% 1.50%
Allowance for credit losses to non-accrual loans 505.91% 1700.28%
Allowance for credit losses to non-performing loans 448.84% 587.56%
Non-performing assets increased by $783,000, or 37.3%, from December 31,
2020, to December 31, 2021, primarily as a result of increases in non-accrual loans and partially offset by a decline in loans past due
90 days or more and still accruing. Several customer relationships were added to non-accrual during 2021 resulting in an increase of $1,831,000
in the total balance of non-accrual loans. As of December 31, 2021, there were fifteen loans to seven unrelated borrowers totaling $2,556,000
on non-accrual compared to three loans to three unrelated borrowers totaling $725,000 as of December 31, 2020. The largest non-accrual
relationship at December 31, 2021, was a commercial loan to a single borrower with a balance of $466,000.
Loans past due 90 days or more and still accruing declined by $1,048,000
during 2021 partially offsetting the increases in non-accrual loans. There were no loans considered non-performing troubled debt restructurings
(TDR) as of December 31, 2021 or 2020. 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.
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Management’s Discussion and Analysis
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. 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 of December 31, 2021 and 2020, the Corporation had no properties classified
as other real estate owned (OREO). Expenses related to OREO are included in other operating expenses and gains or losses on the sale of
OREO are included in other income on the Consolidated Statements of Income.
Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent
in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of
the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses
in accordance with U.S. generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent
in the loan portfolio. The calculation, and detailed analysis supporting it, emphasizes the level of delinquent, non-performing and classified
loans. The allowance calculation includes specific provisions for non-performing loans and general allocations to cover anticipated losses
on all loan types based on historical losses. Based on the quarterly loan loss calculation, management will adjust the allowance for credit
losses through the provision as necessary. Changes to the allowance for credit losses during the year are primarily affected by three
events:
· Charge off of loans considered not recoverable
· Recovery of loans previously charged off
· Provision or credit for loan losses
The Corporation’s strong credit and collateral policies have been
instrumental in producing a favorable history. 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.
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Management’s Discussion and Analysis
The Net Charge-Off table below shows the net charge-offs as a percentage
of average loans outstanding for each segment of the Corporation’s loan portfolio as of December 31, 2021 and 2020.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
$ $
Loans charged-off:
Commercial real estate — 45
Consumer real estate 20 —
Commercial and industrial — 23
Total loans charged-off 55 88
Recoveries of loans previously charged-off
Commercial real estate 109 11
Consumer real estate 2 —
Commercial and industrial 56 4
Net charge-offs (recoveries)
Commercial real estate (109 ) 34
Consumer real estate 18 —
Commercial and industrial (56 ) 19
Total net charge-offs (recoveries) (129 ) 70
Average loans outstanding
Net charge-offs (recoveries) as a % of average loans outstanding
Commercial real estate (0.03%) 0.01%
Consumer real estate 0.01% 0.00%
Commercial and industrial (0.03%) 0.01%
The net charge-offs as a percentage of average total loans outstanding
indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period. The Corporation
has historically experienced very low net charge-off percentages due to conservative credit practices. During 2021, recoveries exceeded
charge-offs by $129,000, representing a net recovery position of (0.01%) of average loans outstanding as reflected above. Net charge-offs
for 2020 were very low at $70,000, resulting in a net charge-off as a percentage of average loans of 0.01% for the year.
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Management’s Discussion and Analysis
The following table provides the allocation of the Corporation’s
allowance for credit losses by major loan classifications. The percentage of loans indicates the percentage of the loan portfolio represented
by the indicated loan type.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31,
% of % of
$ Loans $ Loans
Real estate loans represent 87.5% of total loans with
78.1% of the allowance covering these loans. Real estate secured loans have historically experienced lower losses than non-real estate
secured loans, accounting for the difference. Commercial and industrial loans not secured by real estate have historically experienced
higher loan losses as a percentage of balances and therefore require a larger relative percentage of the reserve. The reserve allocated
to these loans has increased and decreased in recent years, but has not changed significantly as a percentage of total loans. For 2021,
the dollar amount of allocation for commercial and industrial loans increased by $140,000, or 7.1%, with this allocation accounting for
16.3% of the total allowance as of December 31, 2021. As of December 31, 2021, commercial and industrial loans make up 11.9% of all loans.
The amount of allowance allocated to consumer loans has always been very small as generally consumer loans more than 90 days delinquent
are charged off. The amount of allowance allocated to consumer loans and personal loans is based on historical losses and qualitative
factors.
The $635,000 unallocated portion of the allowance as of December 31, 2021,
increased slightly from the balance at the end of 2020, and the unallocated portion as a percentage of the total allowance increased from
4.3% at December 31, 2020, to 4.9% at December 31, 2021.
Premises and Equipment
Premises and equipment, net of accumulated depreciation,
decreased by $284,000, or 1.1%, from December 31, 2020, to December 31, 2021. During 2021, 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. The Corporation had $369,000 in construction in process at the end of 2021 compared to $385,000 at the
end of 2020. 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 the Federal Reserve Bank (FRB) and members of banks such as the Federal Home Loan Bank (FHLB) of Pittsburgh
and Atlantic Community Bankers Bank (ACBB). The Corporation’s $5,380,000 of regulatory stock holdings as of December 31, 2021, consisted
of $4,742,000 of FHLB of Pittsburgh stock, $601,000 of FRB stock, and $37,000 of Atlantic Community Bancshares, Inc. stock, the Bank Holding
Company of ACBB. All of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore,
the investment is carried at book value and there is no fair market value adjustment.
Bank-Owned Life Insurance (BOLI)
The Corporation owned life insurance with a total recorded cash surrender
value (CSV) of $35,414,000 on December 31, 2021, compared to $29,646,000 on December 31, 2020. The Corporation holds two distinct BOLI
programs. The first, with a CSV of $5,270,000, 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
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ENB FINANCIAL CORP
Management’s Discussion and Analysis
1979 through 1999. The second BOLI plan was originated in 2006 when life
insurance was first taken out on a select group of the Corporation’s officers. The additional income generated from this BOLI plan
is to assist in offsetting the rising cost of benefits currently being provided to all employees. The Corporation made a $5 million investment
in this BOLI plan during 2021, so the CSV was $30,144,000 as of December 31, 2021.
Deposits
The Corporation’s total ending deposits at December 31, 2021, increased
by $259.4 million, or 20.7%, from December 31, 2020. Customer deposits are the Corporation’s primary source of funding for loans
and securities. In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks
for safe places to invest money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed
moderately since December 31, 2020, with the changes being a $151.4 million, or 28.3% increase in non-interest bearing demand deposit
accounts, a $15.9 million, or 33.8% increase in interest bearing demand balances, a $2.0 million, or 1.4% increase in NOW balances, a