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. 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 141 years of existence. The Board and Management are committed to the principles and values that have served the company
well over its history and the desire is to produce strong financial results that will ensure trust from the Bank’s customers and
favorable returns to the shareholders.
Results of Operations
Overview
The year ended December 31, 2022 was positively impacted by a number of
items resulting in solid financial results. The Corporation grew interest-earning assets rapidly during 2022 resulting in significantly
higher levels of net interest income. The growth in net interest income was also supported by the rapid increase in the Federal Funds
rate and concurrently the Prime rate as the Federal Reserve moved to combat inflation by increasing overnight rates dramatically. While
years prior to 2022 were marked by significant balance sheet growth because of growth in the deposit portfolio, 2022 was marked by significant
loan growth.
The Corporation recorded net income of $14,631,000 for the year ended December
31, 2022, a $285,000, or 1.9% decrease from the year ended December 31, 2021. The earnings per share, basic and diluted, were $2.62 in
2022, compared to $2.68 in 2021, a 2.2% decrease. The decrease in the Corporation’s 2022 earnings was caused primarily by a decline
in non-interest income in addition to an increase in operating expenses and provision expense that was partially offset by the increase
in net interest income.
The Corporation’s net interest income
(NII) increased by $10,012,000, or 24.7%, in 2022, compared to 2021. The increase in NII primarily resulted from an increase in interest
and fees on loans of $7,698,000, or 22.5%, and interest on securities available for sale of $4,406,000, or 49.8%. Interest expense on
deposits and borrowings increased by $2,356,000, or 78.0%, in 2022 compared to the prior year. The increasing interest rate environment
has caused an increase in asset yield, but also an increase in the cost of funds, which has resulted in these much higher levels of net
interest income.
The Corporation recorded a $1,300,000 provision
for loan losses in 2022, compared to $475,000 in 2021. The higher provision in 2022 was primarily caused by the rapid volume growth in
the loan portfolio. The increase in the provision was constrained by a decline in classified loan balances throughout the year and a decrease
in several qualitative factors as a result of improved conditions.
Non-interest income excluding security and mortgage gains increased by
$951,000, or 8.4%, for the year ended December 31, 2022, compared to the prior year, due to many positive trends such as higher trust
income, higher service fees, and higher earnings on bank-owned life insurance from two death benefit payouts. Mortgage gains decreased
in 2022 to $1,302,000, compared to $5,526,000 in 2021. Mortgage production was stable in 2022 compared to 2021, but the rapid market rate
increases affected the margin that the Corporation was able to obtain on the sale of mortgages. The majority of mortgage production during
2022 were adjustable rate mortgages that were generated and retained on the Corporation’s balance sheet. Additionally, gains on
debt and equity securities were $1,044,000, or 99.1% lower in 2022 compared to the prior year due to higher interest rates which resulted
in fewer security sales.
26
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The financial services industry uses two primary performance measurements
to gauge performance: return on average assets (ROA) and return on average equity (ROE). ROA measures how efficiently a bank generates
income based on the amount of assets or size of a company. ROE measures the efficiency of a company in generating income based on the
amount of equity or capital utilized.
Key Performance Ratios
Year ended December 31,
Return on Average Assets 0.83% 0.95%
The results of the Corporation’s operations are best explained by
addressing in further detail the five major sections of the income statement, which are as follows:
● Net interest income
● Provision for loan losses
● Other income
● Operating expenses
● Income taxes
The following discussion analyzes each of these five
components.
Net Interest Income
NII represents the largest portion of the Corporation’s operating
income. In 2022, NII generated 78.9% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared
to 69.4% in 2021. This increase is a result of much higher levels of interest-earning assets in 2022 compared to 2021 with lower non-interest
income as a result of the changes in mortgage activity. The overall performance of the Corporation is highly dependent on the changes
in NII since it comprises such a significant portion of operating income.
The following table shows a summary analysis of NII on a fully taxable
equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest
spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the
NII reported on the consolidated statements of income, which is not shown on an FTE basis.
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
$ $
Net interest income
NII is the difference between interest income earned on assets and interest
expense incurred on liabilities. Accordingly, two factors affect NII:
27
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
NII is impacted by yields earned on assets and rates paid on liabilities.
With the rapid increase in the short-term Federal Reserve rates in 2022, asset yields have increased and the U.S. Treasury curve increased
dramatically on the short end but has been relatively flat on the long end.
As a result of a larger balance sheet in 2022, with higher asset yields,
the Corporation’s NII on a tax equivalent basis increased significantly and the Corporation’s margin increased to 3.03% for
year ended December 31, 2022, compared to 2.81% in 2021. Loan and investment yields were higher in 2022 due to the 425 basis point Fed
rate increases during the year positively impacting yields on variable rate instruments and increasing the yields on new volume. The Corporation’s
NII on a tax equivalent basis in 2022 increased over 2021, by $10,081,000, or 24.2%.
The Corporation’s overall cost of funds on a monthly annualized basis,
including non-interest bearing funds, remained stable through the first half of 2022 between 18 and 22 basis points. In the second half
of the year, core deposit interest rates as well as time deposit rates were increased resulting in a much higher cost of funds for the
second half of 2022 ranging between 25 and 67 basis points. The average balance and interest rates of borrowings was higher in 2022 compared
to 2021, resulting in higher interest expense of $509,000, or 39.9%. The Corporation now carries a total of $40 million of subordinated
debt that was issued at the holding company; $20 million beginning on December 30, 2020, at a rate of 4.00%, and $20 million beginning
on July 22, 2022, at a rate of 5.75%. The additional subordinated debt resulted in an increase in interest expense of $511,000, or 63.9%,
when comparing 2022 to 2021.
The following table provides an analysis of year-to-year changes in net
interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result
of interest rate increases or decreases.
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
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:
28
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
In 2022, the Corporation’s NII on an FTE basis increased by $10,081,000,
a 24.2% increase over 2021. Total interest income increased $12,437,000, or 27.8%, while interest expense increased $2,356,000, or 78.0%,
from 2021 to 2022. The FTE interest income from the securities portfolio increased by $4,527,000, or 45.4%, while loan interest income
increased $7,754,000, or 22.5%. During 2022, additional loan volume added $7,041,000 to net interest income, and higher yields primarily
due to the Prime rate increases in 2022, caused a $713,000 increase. Higher balances in the securities portfolio caused an increase of
$1,295,000 in net interest income, while higher yields on securities caused a $3,232,000 increase, resulting in a net increase of $4,527,000.
The average balance of interest bearing liabilities increased by 16.3%
during 2022, driven by the growth in deposit and borrowings balances. Deposit rates increased in 2022 causing a significant increase in
interest expense. Higher interest rates contributed to $1,559,000 of increased interest expense while higher deposit balances caused $48,000
of increased expense, resulting in a total increase in interest expense of $1,607,000.
Interest-bearing demand deposits repriced causing a large increase in interest
expense due to the large quantity of accounts that were adjusted. Demand deposit interest expense increased a total of $1,614,000 in 2022,
with $1,572,000 due to higher rates, while higher balances caused an increase of $42,000. Higher balances in savings accounts caused an
increase of $11,000, while higher rates caused an increase of $18,000, resulting in the net increase in interest expense of $29,000 on
savings deposits. Time deposit balances declined throughout 2022, resulting in lower interest expense of $5,000, while lower rates caused
a decline of $31,000, resulting in a net decrease of $36,000. While some time deposit rates increased towards the end of 2022, time deposits
were still repricing to lower levels throughout the majority of the year.
The average balance of total borrowings increased by $17,295,000, or 24.5%,
from December 31, 2021, to December 31, 2022. The increase in total borrowings increased interest expense by $509,000. Higher rates on
borrowings, affected by the Fed rate increases and the subordinated debt issued in July 2022, resulted in higher interest expense of $240,000.
The aggregate of these amounts was an increase in interest expense of $749,000 related to total borrowings.
The following table shows a more detailed analysis of net interest income
on an FTE basis shown with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest
earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread
and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and
the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest
bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net
yield on interest earning assets, also referred to as the net interest margin (NIM). The NIM is calculated by dividing net interest income
on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently
a bank generates NII.
29
Table of Contents
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) 2.80 2.66
Effect of non-interest bearing funds 0.23 0.15
Net yield on interest earning assets (c) 3.03 2.81
(a) Includes balances of non-accrual loans
and the recognition of any related interest income. Average balances also include net deferred loan costs of $2,239,000
in 2022 and $1,755,000 in 2021. Such fees recognized through income and included in the interest amounts totaled ($175,000) in 2022
and $1,201,000 in 2021.
(b) Net interest spread is the arithmetic difference
between the yield on interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also referred to as net interest
margin, is computed by dividing net interest income (FTE) by total interest earning assets.
(d) Securities recorded at amortized cost. Unrealized holding gains and losses are included in non-interest earning assets.
30
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s average balance on securities increased by $72.3
million, or 13.2%, in 2022 compared to 2021 and the tax equivalent yield on investments increased by 52 basis points. Interest income
on securities increased due to the volume growth and increasing yield due to higher market rates. The growth in the investment portfolio
during a period of rising rates contributed to the increase in average security yield.
Average balances on loans increased by $174.6 million, or 20.1%, for the
year ended December 31, 2022, compared to the prior year. Loan yields increased by 8 basis points for the year and loan interest income
increased $7,754,000, or 22.5% as a result of the significantly higher balances and slightly higher yields.
The average balance of interest-bearing deposit accounts increased by $120.6
million, or 15.5%, in 2022 compared to 2021. While the average balance of time deposits did decrease minimally for the year-to-date time
periods, the average balance of demand and savings accounts increased significantly and more than offset the decline in time deposits.
The interest rate paid on deposits increased as well. This resulted in an increase in interest expense on deposits of $1,607,000, or 140.6%,
for the year ended December 31, 2022, compared to 2021 mostly due to the participation in the fully-reciprocal demand deposit marketplace
program.
The Corporation’s average balance on borrowed funds increased by
$17.3 million in 2022. The Corporation’s borrowed funds consist of overnight borrowings, short and long-term FHLB advances, as well
as subordinated debt issued in December of 2020 and July of 2022, which was used to support capital growth for the Corporation. The subordinated
debt issuances and additional FHLB advances used to fund loan growth caused average borrowings to increase year-over-year. The rate paid
on borrowed funds increased by 33 basis points for 2022, compared to 2021 as a result of the second issuance of subordinated debt in July
of 2022 which carries a 5.75% rate, and additional FHLB advances which carried higher rates due to the Fed Funds rate increases throughout
2022.
For the year ended December 31, 2022, the net interest spread increased
by 14 basis points to 2.80%, compared to 2.66% for 2021. The effect of non-interest bearing funds increased to 23 basis points from 15
basis points when comparing both years. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the
Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference
between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for 2022 was 3.03%, compared to 2.81%
for 2021.
Provision for Loan Losses
The allowance for credit losses (ACL) provides for losses inherent in the
loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the
provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in the loan
portfolio. The Corporation gives special attention to the level of underperforming loans when calculating the necessary provision for
loan losses. The analysis of the credit loss allowance takes into consideration, among other things, the following factors:
● levels and trends in delinquencies, non-accruals, and charge-offs,
● levels of classified loans,
● trends within the loan portfolio,
● changes in lending policies and procedures,
● experience of lending personnel and management oversight,
● national and local economic trends,
● concentrations of credit,
● external factors such as legal and regulatory requirements,
● changes in the quality of loan review and Board oversight, and
● changes in the value of underlying collateral.
The Corporation recorded a provision of $1,300,000 in 2022, compared to
$475,000 in 2021. The provision expense was higher in 2022 due primarily to increased loan growth. As of December 31, 2022, the allowance
as a percentage of total loans was 1.19%, compared to 1.40% at December 31, 2021.
Management continues to evaluate the allowance for credit losses in relation
to the growth or decline of the loan portfolio and its associated credit risk, and believes the provision and the allowance for credit
losses are adequate to provide for future losses. For further discussion of the calculation, see the “Allowance for Credit Losses”
section.
31
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Other Income
Other income for 2022 was $13,564,000, a decrease of $4,317,000, or 24.1%,
compared to the $17,881,000 earned in 2021. The following table details the categories that comprise other income.
OTHER INCOME
(DOLLARS IN THOUSANDS)
$ $ $ %
Trust and investment services income increased by 11.9% from 2021 to 2022
primarily as a result of higher income on the trust services side which increased by $336,000, or 24.8%. Service charges on deposit accounts
increased by $279,000, or 26.1% compared to the prior year and other fees have increased by $147,000, or 10.2% as a result of higher fees
on a third party sweep product in 2022 slightly offset by lower loan administration fees. Commissions remained stable for the year ended
December 31, 2022, compared to 2021. Gains on debt and equity securities were lower in 2022 driven by higher market interest rates which
resulted in fewer sales. Mortgage gains were lower in 2022 due to rapid increase in interest rates which negatively impacted the margins
on mortgages sold. Additionally, more mortgage originations in 2022 were in the form of adjustable-rate mortgages held on the Corporation’s
balance sheet as opposed to 2021 when most mortgage originations were fixed-rate and sold on the secondary market. Holding mortgages on
balance sheet results in interest income as opposed to an immediate gain on sale when mortgages are sold in the secondary market. Earnings
on bank-owned life insurance increased year-over-year primarily attributed to two Bank Owned Life Insurance (BOLI) payouts. The Corporation
purchased and is the beneficiary of all BOLI life insurance policies taken out on a group of its former directors and current and former
officers. Due to the death of two participants during 2022, the Corporation recorded BOLI income of $678,000. Other miscellaneous income
decreased $420,000, or 22.8% in 2022 compared to 2021 due to non-recurring income items in 2021.
32
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Operating Expenses
Operating expenses for 2022 were $45,929,000, an increase of $5,488,000,
or 13.6%, compared to $40,441,000 in 2021. 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 2022, salaries and benefits increased $2,859,000, or 11.7%, compared to 2021. The increase in salary costs was primarily
due to additions to staff as well as increasing costs to fill empty positions due to the competitive job market. Additionally, a bank-wide
incentive plan was implemented during 2022, resulting in an accrual for the year-to-date period based on achievements of annual performance
metrics. Occupancy and equipment expenses increased 8.6% from the prior year mostly due to two additional leases that were entered into
in 2022. Advertising and marketing expenses increased by 9.2%, which is typical as the Corporation grows and promotes new market areas
and new products and services. Computer software and data processing expenses are growing at a rapid pace, 26.5% year-over year, as a
result of higher technology costs and new bank-wide initiatives that rely heavily on software platforms and additional costs related to
the core conversion the Corporation will be undergoing in the 3rd quarter of 2023. Shares tax expense is based on the Corporation’s
level of shareholders’ equity and has grown slightly year-over-year commensurate with the change in shareholders’ equity.
Professional services expenses increased by 30.7% in 2022, compared to the prior year driven higher by an increase in outside services
costs primarily related to the core conversion. Other operating expenses increased by 6.1% year-over-year primarily as a result of higher
general insurance and 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, 2022, the
Corporation recorded a tax provision of $2,287,000, compared to $2,620,000 for 2021.
This decrease in tax expense can be attributed to lower pretax earnings and a higher level of tax-free income. The effective tax
rate for the Corporation was 13.5% for 2022 and 14.9% for 2021. The Corporation’s effective tax rate is lower than the 21% corporate
rate as a result of tax-free assets that the Corporation holds on its balance sheet. The majority of the Corporation’s tax-free
assets are in the form of obligations of states and political subdivisions, referred to as municipal bonds. The Corporation also has a
relatively small component of tax-free municipal loans.
33
Table of Contents
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, 2022, cash and equivalents
amounted to $37.6 million, a decrease of $120.8 million, or 76.3%, from balances at December 31, 2021. 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 asset-backed, and increases in deposit accounts. As of December 31, 2022, we had borrowings outstanding
from the FHLB of $74.0 million and subordinated debt of $39.4 million.
At December 31, 2022, we had $596.4 million
in loan commitments outstanding, which included $117.5 million in firm loan commitments, $467.8 million in unused lines of credit, and
open letters of credit of $11.1 million. Certificates of deposit due within one year totaled $55.6 million, or 41.6% of certificates of
deposit. We believe, based on past experience that a significant portion of our certificates of deposit will remain with us upon maturity
and we have ample liquidity outside of these funds. We have the ability to attract and retain deposits by adjusting the interest rates
offered.
As reported in the Consolidated Statements
of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash
provided by operating activities was $21.6 million and $13.3 million for the years ended December 31, 2022 and 2021, respectively. Net
cash used for investing activities was $315.8 million and $195.2 million in fiscal years 2022 and 2021, respectively, reflecting our loan
and investment security activities in the respective periods. Cash provided by financing activities amounted to $173.3 million and $245.5
million for years ended December 31, 2022 and 2021, respectively primarily representing increases in our core deposits through the year.
Investment Securities
The Corporation classifies all of its debt securities as available for
sale and reports the portfolio at fair market value. As of December 31, 2022, the Corporation had $538.3 million of debt and equity securities,
compared to $567.1 million at December 31, 2021, a decrease of $28.8 million, or 5.1%.
The largest movements within the securities portfolio were shaped by market
factors, such as:
● slope of the 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’s U.S. Treasury sector increased by $17.8 million,
or 120.5%, since December 31, 2021. 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 $4.2 million, or 14.6%, since December 31, 2021. Agency
MBS and CMO investments in total have declined by $10.3 million, or 12.4%. These bonds pay monthly principal and interest and the Corporation
has not reinvested into this sector, so the fair value has been declining. The Corporation began investing in non-agency MBS and CMO instruments
in 2022 as a way to achieve a higher yield with bonds that are well protected from a credit standpoint. As of December 31, 2022, this
sector stood at $50.3 million.
The Corporation’s asset-backed securities (ABS) decreased significantly
since December 31, 2021, by $28.0 million, or 27.6%. ABS securities are floating rate student loan pools which are instruments that perform
well in a rates-up
34
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a
variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of
U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s
ongoing cash flows. Management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in a rates-up
environment.
Obligations of states and political subdivisions, or municipal bonds, consist
of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio but
have a higher yield because of the longer interest rate risk. These instruments also experience significant fair market value gains and
losses when interest rates decrease and increase. The Corporation sold some municipal bonds during 2022 and the rapid increase in market
interest rates caused the unrealized losses on these bonds to increase dramatically. As a result, the fair value of this sector declined
by $41.7 million, or 16.8% from December 31, 2021, to December 31, 2022. Municipal bonds represented 38.9% of the debt securities portfolio
as of December 31, 2022, compared to 44.3% as of December 31, 2021.
As of December 31, 2022, the fair value of the Corporation’s corporate
bonds decreased by $12.9 million, or 15.6%, from balances at December 31, 2021. Corporate bonds add diversity to the portfolio and provide
strong yields for short maturities; however, by their very nature, corporate bonds carry a higher level of credit risk should the entity
experience financial difficulties. The fair value of corporate bonds decreased primarily as a result of maturing bonds as well as a significant
increase in the level of unrealized losses within this portfolio.
The following table shows the weighted-average life and yield on the Corporation’s
debt securities by maturity intervals as of December 31, 2022, based on amortized cost. All of the Corporation’s securities are
classified as available for sale and are reported at fair value; however, for purposes of this schedule they are shown at amortized cost.
Securities are assigned to categories based on stated contractual maturity except for MBS and CMOs, which are based on anticipated payment
periods.
SECURITIES PORTFOLIO MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
1 Year Years Years Years Total
% % % % %
$ Yield $ Yield $ Yield $ Yield $ Yield
Loans
Net loans outstanding increased $269.0 million, or 29.6%, from $908.0 million
at December 31, 2021, to $1.2 billion at December 31, 2022. Most major loan categories showed an increase in balances over the prior year
but the majority of loan growth came from the commercial and consumer real estate categories. The Corporation’s strategic plan specifically
focused on loan growth while maintaining quality of credit standards. This focus resulted in significant loan growth across most loan
segments in 2022.
Commercial real estate loans increased to $518.8 million at December 31,
2022, from $400.8 million at December 31, 2021, a 29.4% increase. Commercial mortgages increased by $33.4 million, or 18.8%, agriculture
mortgages increased
35
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
by $17.4 million, or 8.6%, and commercial construction loans increased by $67.2 million, or 341.9% from December 31,
2021, to December 31, 2022. The increase in the commercial construction loans was a direct result of reclassification of 1-4 family residential
loans, representing loans now properly coded as construction that were previously included in the consumer real estate sector.
The consumer real estate category represents the largest group of loans
for the Corporation. The consumer residential real estate category of total loans increased from $403.9 million on December 31, 2021,
to $520.6 million on December 31, 2022, a 28.9% increase. This category includes closed-end fixed rate or adjustable rate residential
real estate loans secured by 1-4 family residential properties, including first and junior liens, and floating rate home equity loans.
The first lien 1-4 family mortgages increased by $93.3 million, or 29.4%, from December 31, 2021, to December 31, 2022. The vast majority
of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans,
with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. During 2022, mortgage production decreased 11% from
the prior year. The decrease in overall production was caused largely by an increasing interest rate environment, which resulted
in a reduction in refinance activity, and a shift in consumer demand from secondary market fixed-rate products to portfolio adjustable-rate
products. The percentage of mortgage originations that went into the Corporation’s held-for-investment mortgage portfolio
increased to 85% compared to 63% in 2021. The change in the interest rate environment created a dramatic shift in overall mix: 39%
of volume in 2022 was purchase, 44% was residential construction lending, and only 17% was refinance activity. The volume of mortgage
production in 2022 led to a 43% increase in growth of the held-for-investment residential loan portfolio but only a 3% increase in the
servicing on behalf of others portfolio, with mortgage servicing rights growing to over $2.0 million.
As of December 31, 2022, the remainder of the residential real estate loans
consisted of $11.9 million of fixed rate junior lien home equity loans, and $98.3 million of variable rate home equity lines of credit
(HELOCs). This compares to $11.2 million of fixed rate junior lien home equity loans, and $75.7 million of HELOCs as of December 31, 2021.
Therefore, combined, these two types of home equity loans increased from $86.9 million to $110.3 million, an increase of 26.9%.
The other area of commercial lending is non-real estate secured commercial
lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate loans increased
from $109.3 million at December 31, 2021, to $143.3 million at December 31, 2022, a 31.1% increase. The commercial and industrial category
generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities.
Consumer loans not secured by real estate represent a very small portion
of the Corporation’s loan portfolio, at $5.8 million as of December 31, 2022 and $5.1 million as of December 31, 2021. These loans
consist of personal loans, automobile loans, and other consumer-related loans.
36
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The following tables show the maturities for the loan portfolio as of December
31, 2022, by time frame for the major categories, and also the loans, which are floating or fixed, maturing after one year.
LOAN MATURITIES
(DOLLARS IN THOUSANDS)
Due After Due After
One Year Five Years
Due in One Through Through Due After
Year or Less Five Years 15 Years 15 Years Total
$ $ $ $ $
Commercial real estate
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
37
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The majority of the Corporation’s fixed-rate loans have a maturity
date longer than five years. The primary reason for the longevity of the portfolio is the high percentage of real estate loans, which
typically have maturities of 15 or 20 years. Out of all the loans due after one year, $369.3 million, or 33.7%, are fixed-rate loans as
of December 31, 2022. These loans will not reprice to a higher or lower interest rate unless they mature or are refinanced by the borrower.
The remaining $726.1 million, or 66.3% of loans due after one year, are made up of loans that are true floating loans and loans that will
reprice at a predetermined time in the amortization of the loan. True floating rate loans that would immediately reprice according to
changes in the Prime rate are favorable in reducing the Corporation’s total exposure to interest rate risk and fair value risk should
interest rates increase.
For more details regarding how the length of the loan portfolio and its
repricing affects interest rate risk, please see Item 7A Quantitative and Qualitative Disclosures about Market Risk.
Non-Performing Assets
Non-performing assets include:
● Non-accrual loans
● Loans past due 90 days or more and still accruing
● Troubled debt restructurings
● Other real estate owned
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
December 31,
$ $
Loans past due 90 days or more and still accruing 169 325
Troubled debt restructurings, non-performing — —
Other real estate owned — —
Non-accrual loans to total loans 0.35% 0.28%
Non-performing loans to total loans 0.36% 0.31%
Allowance for credit losses to total loans 1.19% 1.40%
Allowance for credit losses to non-accrual loans 338.70% 505.91%
Allowance for credit losses to non-performing loans 325.53% 448.84%
Non-performing assets increased by $1,466,000, or 50.9%, from December 31, 2021, to December 31, 2022, 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 2022 resulting
in an increase of $1,622,000 in the total balance of non-accrual loans. As of December 31, 2022, there were twelve loans to ten unrelated
borrowers totaling $4,178,000 on non-accrual compared to fifteen loans to seven unrelated borrowers totaling $2,556,000 as of December
31, 2021. The largest non-accrual relationship at December 31, 2022, was a commercial mortgage to a single borrower with a balance of
$931,000.
Loans past due 90 days or more and still accruing declined by $156,000
during 2022 partially offsetting the increases in non-accrual loans. There were no loans considered non-performing troubled debt restructurings
(TDR) as of December 31, 2022 or 2021. A TDR is a loan where management has granted a concession to the borrower from the original terms.
A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection
by the lender.
Management continues to monitor delinquency trends and the level of non-performing
loans as a leading indicator of future credit risk. At this time, management believes that the potential for material losses related to
non-performing loans remains low but is likely to trend higher in recessionary periods. It is far more likely the level of non-performing
38
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
assets would increase than decline to lower levels. The level of the Corporation’s non-performing loans remains very low relative
to the size of the portfolio and relative to peers.
As of December 31, 2022 and 2021, the Corporation had no properties classified
as other real estate owned (OREO). Expenses related to OREO are included in other operating expenses and gains or losses on the sale
of OREO are included in other income on the Consolidated Statements of Income.
Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent
in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of
the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses
in accordance 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 of loan losses. In recent years, the Corporation has primarily recorded provision expenses
in order to account for the growth in the loan portfolio as well as make adjustments for increasing levels of delinquencies and classified
loans.
39
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Net Charge-Off table below shows the net charge-offs as a percentage
of average loans outstanding for each segment of the Corporation’s loan portfolio as of December 31, 2022 and 2021.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
$ $
Loans charged-off:
Commercial real estate 84 —
Consumer real estate — 20
Commercial and industrial 44 —
Total loans charged-off 147 55
Recoveries of loans previously charged-off
Commercial real estate 10 109
Consumer real estate 10 2
Commercial and industrial 42 56
Net charge-offs (recoveries)
Commercial real estate 74 (109 )
Consumer real estate (10 ) 18
Commercial and industrial 2 (56 )
Total net charge-offs (recoveries) 80 (129 )
Average loans outstanding
Net charge-offs (recoveries) as a % of average loans outstanding
Commercial real estate 0.02% (0.03% )
Consumer real estate 0.00% 0.01%
Commercial and industrial 0.00% (0.03% )
The net charge-offs as a percentage of average total loans outstanding
indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period. The Corporation
has historically experienced very low net charge-off percentages due to conservative credit practices. During 2022, charge-offs exceeded
recoveries by $80,000, representing a net charge-off position of 0.01% of average loans outstanding as reflected above.
40
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The following table provides the allocation of the Corporation’s
allowance for credit losses by major loan classifications. The percentage of loans indicates the percentage of the loan portfolio represented
by the indicated loan type.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31,
% of % of
$ Loans $ Loans
Real estate loans represent 87.5% of total loans with
81.4% of the allowance covering these loans. Real estate secured loans have historically experienced lower losses than non-real estate
secured loans, accounting for the difference. Commercial and industrial loans not secured by real estate have historically experienced
higher loan losses as a percentage of balances and therefore require a larger relative percentage of the reserve. The reserve allocated
to these loans has increased and decreased in recent years, but has not changed significantly as a percentage of total loans. For 2022,
the dollar amount of allocation for commercial and industrial loans increased by $39,000, or 1.8%, with this allocation accounting for
15.2% of the total allowance as of December 31, 2022. As of December 31, 2022, commercial and industrial loans make up 12.0% of all loans.
The amount of allowance allocated to consumer loans has always been very small as generally consumer loans more than 90 days delinquent
are charged off. The amount of allowance allocated to consumer loans and personal loans is based on historical losses and qualitative
factors.
The $417,000 unallocated portion of the allowance as of December 31, 2022,
decreased from the balance at the end of 2021, and the unallocated portion as a percentage of the total allowance decreased from 4.9%
at December 31, 2021, to 2.9% at December 31, 2022.
Premises and Equipment
Premises and equipment, net of accumulated depreciation,
increased by $857,000, or 3.5%, from December 31, 2021, to December 31, 2022. During 2022, capital investments were made by the Corporation
in various projects including the improvements at the leased Quarryville office as well as normal ongoing capital needs. The Corporation
had $1,298,000 in construction in process at the end of 2022 compared to $369,000 at the end of 2021. These balances consisted of amounts
for projects or equipment not yet placed in service as of each year-end. For further information on fixed assets refer to Note D to the
Consolidated Financial Statements.
Regulatory Stock
The Corporation owns multiple forms of regulatory stock
that is required to be a member of 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 $6,670,000 of regulatory stock holdings as of December 31, 2022, consisted
of $5,552,000 of FHLB of Pittsburgh stock, $1,081,000 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 $34,805,000 on December 31, 2022, compared to $35,414,000 on December 31, 2021. The Corporation holds two distinct BOLI
programs. The first, with a CSV of $4,771,000, was the result of insurance policies taken out on directors of the Corporation electing
to participate in a directors’ deferred compensation plan. This CSV declined by $499,000 in 2022 due to the death of a participant
which resulted in a death benefit payout and a decrease in the total policy value. The program was designed
41
Table of Contents
ENB FINANCIAL CORP
Management’s Discussion and Analysis
to use the insurance policies
to fund future annuity payments as part of a directors’ deferred compensation plan that permitted deferral of Board pay from 1979
through 1999. The second BOLI plan was originated in 2006 when life insurance was first taken out on a select group of the Corporation’s
officers. The additional income generated from this BOLI plan is to assist in offsetting the rising cost of benefits currently being provided