UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark One)
For the
fiscal year ended December 31, 2023
OR
For the
transition period from _______________ to _______________
Commission
File Number 000-53297
ENB
Financial Corp
(Exact
name of registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code (717)733-4181
Securities registered
pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A
Securities registered
pursuant to Section 12(g) of the Act:
Title of each
class
Common Stock,
Par Value $0.10 Per Share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark if the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2023, was approximately $43,227,028.
The number of shares
of the registrant’s Common Stock outstanding as of March 11, 2024, was 5,654,355.
DOCUMENTS
INCORPORATED BY REFERENCE
The Registrant’s
Definitive Proxy Statement for its 2024 Annual Meeting of Shareholders to be held on May 7, 2024, is incorporated into Parts III and IV
hereof.
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ENB FINANCIAL
CORP
Table of Contents
Part I
Item 1. Business 5
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 24
Item 1C. Cybersecurity 24
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Mine Safety Disclosures 25
Part II
Item 6. [Reserved] 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47
Item 8. Financial Statements and Supplementary Data 52
Item 9A. Controls and Procedures 105
Item 9B. Other Information 106
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 106
Part III
Item 10. Directors, Executive Officers, and Corporate Governance 107
Item 11. Executive Compensation 107
Item 14. Principal Accountant Fees and Services 107
Part IV
Item 15. Exhibits and Financial Statement Schedules 108
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ENB FINANCIAL
CORP
Part I
Forward-Looking Statements
The U.S. Private Securities Litigation Reform Act of 1995 provides
safe harbor in regard to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking
statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are
generally identified when terms such as “believe,” “estimate,” “anticipate,” “expect,”
“project,” “forecast,” and other similar wordings are used. The readers of this report should take into consideration
that these forward-looking statements represent management’s expectations as to future forecasts of financial performance, or the
likelihood that certain events will or will not occur. Due to the very nature of estimates or predictions, these forward-looking statements
should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance,
or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic
goals that management is striving to reach but may not be indicative of actual results.
Readers should note that many factors affect this forward-looking information,
some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These
factors include, but are not limited to, the following:
● Economic conditions
● Monetary and interest rate policies of the Federal Reserve Board
● Inflation and monetary fluctuations and volatility
● Political changes and their impact on new laws and regulations
● Competitive forces
● Operation, legal, and reputation risk
Readers should be aware if any of the above factors change significantly,
the statements regarding future performance could also change materially. The safe harbor provision provides that ENB Financial Corp is
not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this
report. Readers should review any changes in risk factors in documents filed by ENB Financial Corp periodically with the Securities and
Exchange Commission, including Item 1A. of this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form
8-K.
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ENB FINANCIAL CORP
Item 1. Business
General
ENB Financial Corp (“the Corporation”) is a bank holding
company that was formed on July 1, 2008. The Corporation’s wholly owned subsidiary, Ephrata National Bank (“the Bank”),
also referred to as ENB, is a full service commercial bank organized under the laws of the United States. Presently, no other subsidiaries
exist under the bank holding company. The Bank has one subsidiary, ENB Insurance, which is a full-service insurance agency that offers
a broad range of insurance products to commercial and personal clients. The Corporation and the Bank are both headquartered in Ephrata,
Lancaster County, Pennsylvania. The Bank was incorporated on April 11, 1881, pursuant to The National Bank Act under a charter granted
by the Office of the Comptroller of the Currency (OCC). The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts up to
the maximum extent provided by law. The Corporation’s retail, operational, and administrative offices are predominantly located
in Lancaster County, southeastern Lebanon County, and southwestern Berks County, Pennsylvania, the “Market Area”. Eleven full
service community banking offices are located in Lancaster County with one full service community banking office in Lebanon County and
one full service community banking office in Berks County, Pennsylvania.
The basic business of the Corporation is to provide a broad range of
financial services to individuals and small-to-medium-sized businesses in the Market Area. The Corporation utilizes funds gathered through
deposits from the general public to originate loans. The Corporation offers a range of demand accounts, in addition to savings and time
deposits. The Corporation also offers secured and unsecured commercial, real estate, and consumer loans. Ancillary services that provide
added convenience to customers include direct deposit and direct payments of funds through Electronic Funds Transfer, ATMs linked to the
NYCE® network, telephone banking, MasterCard® debit cards, Visa® or MasterCard credit cards, and safe deposit box facilities.
In addition, the Corporation offers internet banking including bill pay and wire transfer capabilities, remote deposit capture, and an
ENB Bank on the Go! app for iPhones or Android phones. The Corporation also offers a full complement of trust and investment advisory
services through ENB’s Wealth Solutions.
As of December 31, 2023, the Corporation employed 296 persons, consisting
of 281 full-time, 12 part-time, and 3 seasonal employees. The number of full-time employees decreased by 2 employees, and the number
of part-time employees remained the same from the previous year-end while 3 seasonal roles were added to provide support during time periods,
throughout the year, of higher volume. The decrease in the number of full-time employees is temporary and is reflective of
open positions that are expected to be filled. The Corporation expects to add additional personnel to support the initiatives within
technology, operations, and customer experience in 2024. A collective bargaining agent does not represent the employees and management
believes it maintains good relationships with its employees.
Operating Segments
The Corporation’s business is providing financial products and
services. These products and services are provided through the Corporation’s wholly owned subsidiary, the Bank. The Bank is presently
the only subsidiary of the Corporation, and the Bank only has one reportable operating segment, community banking, as described in Note
A of the Notes to the Consolidated Financial Statements included in this Report. The segment reporting information in Note A is incorporated
by reference into this Part I, Item 1. The Bank has one subsidiary, ENB Insurance, which is a full-service insurance agency that offers
a broad range of insurance products to commercial and personal clients. ENB Insurance is managed separately from the banking and related
financial services that the Bank offers.
Business Operations
Products and Services with Reputation Risk
The Corporation offers a diverse range of financial and banking products
and services. In the event one or more customers and/or governmental agencies becomes dissatisfied with or objects to any product or service
offered by the Corporation, negative publicity with respect to any such product or service, whether legally justified or not, could have
a negative impact on the Corporation’s reputation. The discontinuance of any product or service, whether or not any customer or
governmental agency has challenged any such product or service, could have a negative impact on the Corporation’s reputation.
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ENB FINANCIAL CORP
Market Area and Competition
The Corporation’s primary
market area is Lancaster County, Pennsylvania, where eleven full service offices are located and areas of contiguous Lebanon and
Berks Counties. The Corporation has one full service office in southeastern Lebanon County (Myerstown) and a full service office in
southwestern Berks County (Morgantown). The Corporation’s greater service area is considered to be Lancaster, Lebanon, and
southwestern Berks Counties of Pennsylvania. The area served by the Corporation is a mix of rural communities and small to mid-sized
towns.
The Corporation’s headquarters
and main campus are located in downtown Ephrata, Pennsylvania. The Corporation’s main office and drive-up are located in downtown
Ephrata, while the Cloister office is also located within Ephrata Borough. The Corporation ranks a commanding first in deposit market
share in the Ephrata area with 45.9% of deposits as of June 30, 2023, based on data compiled annually by the Federal Deposit Insurance
Corporation (FDIC). The Corporation’s deposit market share in the Ephrata area was 43.9% as of June 30, 2022. The Corporation’s
very high market share in the Ephrata area has led to the expansion of the Corporation’s branch network outside of the Ephrata area
but within the Corporation’s Market Area.
In the course of attracting and retaining
deposits and originating loans, the Corporation faces considerable competition. The Corporation competes with other commercial banks,
savings and loan institutions, and credit unions for traditional banking products, such as deposits and loans. The Corporation competes
with consumer finance companies for loans, mutual funds, and other investment alternatives for deposits. The Corporation competes for
deposits based on the ability to provide a range of products, low fees, quality service, competitive rates, and convenient locations and
hours. The competition for loan origination generally relates to interest rates offered, products available, quality of service, and loan
origination fees charged. Several competitors within the Corporation’s primary market have substantially higher legal lending limits
that enable them to service larger loans and larger commercial customers.
The Corporation continues to assess the competition and market area
to determine the best way to meet the financial needs of the communities it serves. Management also continues to pursue new market opportunities
based on the strategic plan to efficiently grow the Corporation, improve earnings performance, and bring the Corporation’s products
and services to customers currently not being reached. Management strategically addresses growth opportunities versus competitive issues
by determining the new products and services to be offered, expansion of existing footprint with new locations, as well as investing in
the expertise of staffing for expansion of these services.
Concentrations and Seasonality
The Corporation does not have any portion of its businesses dependent
on a single or limited number of customers, the loss of which would have a material adverse effect on its businesses’ financial
condition and results of operations. No substantial portion of loans or investments is concentrated within a single industry or group
of related industries, although a significant amount of loans are secured by real estate located in northern Lancaster County, Pennsylvania.
The business activities of the Corporation are generally not seasonal in nature. However, the sizable agricultural portfolio has certain
specific, limited elements that are predominately seasonal in nature due to typical farming operations. Financial instruments with concentrations
of credit risk are described in Note P of the Notes to Consolidated Financial Statements included in this Report. The concentration of
credit risk information in Note P is incorporated by reference into this Part I, Item 1.
Supervision and Regulation
Bank holding companies operate in a highly regulated environment and
are routinely examined by federal and state regulatory authorities. The following discussion concerns various federal and state laws and
regulations and the potential impact of such laws and regulations on the Corporation and the Bank.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. Proposals
to change laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies.
The Corporation cannot determine the likelihood or timing of any such proposals or legislation, or the impact they may have on the Corporation
and the Bank. A change in law, regulations, or regulatory policy may have a material effect on the Corporation and the Bank’s business.
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ENB FINANCIAL CORP
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose
deposits are insured by the FDIC. Bank operations are subject to regulations of the OCC, the Consumer Financial Protection Bureau (CFPB),
the Board of Governors of the Federal Reserve System, and the FDIC.
Bank Holding Company Supervision and Regulation
The Bank Holding Company Act of 1956
The Corporation is subject to the provisions of the Bank Holding Company
Act of 1956, as amended, and to supervision by the Federal Reserve Board. The following restrictions apply:
General Supervision by the Federal Reserve Board
As a bank holding company, the Corporation’s activities are limited
to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic
reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has adopted a risk-focused supervision
program for small shell bank holding companies that is tied to the examination results of the subsidiary bank. The Federal Reserve Board
has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial
strength to its subsidiary banks. As a result, the Federal Reserve Board may require that the Corporation stand ready to provide adequate
capital funds to the Bank during periods of financial stress or adversity.
Restrictions on Acquiring Control of Other Banks and Companies
A bank holding company may not:
In addition, a bank holding company may not:
● engage in a non-banking business, or
unless the Federal Reserve Board determines the business to be so closely
related to banking as to be a proper incident to banking. In making this determination, the Federal Reserve Board considers whether these
activities offer benefits to the public that outweigh any possible adverse effects.
Anti-Tie-In Provisions
A bank holding company and its subsidiaries may not engage in tie-in
arrangements in connection with any extension of credit or provision of any property or services. These anti-tie-in provisions state generally
that a bank may not:
● extend credit,
● lease or sell property, or
● furnish any service to a customer,
on the condition that the customer provides additional credit or service
to a bank or its affiliates, or on the condition that the customer not obtain other credit or service from a competitor of the bank.
Restrictions on Extensions of Credit by Banks to their Holding
Companies
Subsidiary banks of a holding company are also subject to restrictions
imposed by the Federal Reserve Act on:
● investments in the stock or other securities of the Corporation, and
● taking these stock or securities as collateral for loans to any borrower.
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ENB FINANCIAL CORP
Risk-Based Capital Guidelines
Bank holding companies must comply with the Federal Reserve Board’s
current risk-based capital guidelines, which are amended provisions of the Bank Holding Company Act of 1956. The required minimum ratio
of total capital to risk-weighted assets, including some off-balance sheet activities, such as standby letters of credit, is 8%. At least
half of the total capital is required to be Tier I Capital, consisting principally of common shareholders’ equity, less certain
intangible assets. The remainder, Tier II Capital, may consist of:
● some types of preferred stock,
● a limited amount of subordinated debt,
● some hybrid capital instruments,
● other debt securities, and
● a limited amount of the general credit loss allowance.
The risk-based capital guidelines are required to take adequate account
of interest rate risk, concentrations of credit risk, and risks of nontraditional activities.
Capital Leverage Ratio Requirements
The Federal Reserve Board requires a bank holding company to maintain
a leverage ratio of a minimum level of Tier I capital, as determined under the risk-based capital guidelines, equal to 3% of average total
consolidated assets for those bank holding companies that have the highest regulatory examination rating and are not contemplating or
experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above
the stated minimum. The Bank is subject to similar capital requirements pursuant to the Federal Deposit Insurance Act.
Restrictions on Control Changes
The Change in Bank Control Act of 1978 requires persons seeking control
of a bank or bank holding company to obtain approval from the appropriate federal banking agency before completing the transaction. The
law contains a presumption that the power to vote 10% or more of voting stock confers control of a bank or bank holding company. The Federal
Reserve Board is responsible for reviewing changes in control of bank holding companies. In doing so, the Federal Reserve Board reviews
the financial position, experience and integrity of the acquiring person, and the effect the change of control will have on the financial
condition of the Corporation, relevant markets, and federal deposit insurance funds.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act (SOX), also known as the “Public Company
Accounting Reform and Investor Protection Act,” was established in 2002 and introduced major changes to the regulation of financial
practice. SOX was established as a reaction to the outbreak of corporate and accounting scandals, including Enron and WorldCom. SOX represents
a comprehensive revision of laws affecting corporate governance, accounting obligations, and corporate reporting. SOX is applicable to
all companies with equity or debt securities that are either registered, or file reports under the Securities Exchange Act of 1934 such
as the Corporation. SOX includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has
adopted extensive additional disclosures, corporate governance provisions, and other related rules pursuant to it. The Corporation has
expended and will continue to expend, considerable time and money in complying with SOX.
Bank Supervision and Regulation
Safety and Soundness
The primary regulator for the Bank is the OCC. The OCC has the authority
under the Financial Institutions Supervisory Act and the Federal Deposit Insurance Act to prevent a national bank from engaging in any
unsafe or unsound practice in conducting business or from otherwise conducting activities in violation of the law.
Federal and state banking laws and regulations govern, but are not
limited to, the following:
● Scope of a bank’s business
● Investments a bank may make
● Reserves that must be maintained against certain deposits
● Loans a bank makes and collateral it takes
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ENB FINANCIAL CORP
● Merger and consolidation activities
● Establishment of branches
The Corporation is a member of the Federal Reserve System. Therefore,
the policies and regulations of the Federal Reserve Board have a significant impact on many elements of the Corporation’s operations,
including:
● Loan and deposit growth
● Rate of interest earned and paid
● Types of securities
● Breadth of financial services provided
● Levels of liquidity
● Levels of required capital
Management cannot predict the effect of changes to such policies and
regulations upon the Corporation’s business model and the corresponding impact they may have on future earnings.
FDIC Insurance Assessments
The FDIC imposes a risk-related premium schedule for all insured depository
institutions that results in the assessment of premiums based on the Bank’s capital and supervisory measures. Under the risk-related
premium schedule, the FDIC assigns, on a semi-annual basis, each depository institution to one of three capital groups, the best of these
being “Well Capitalized.” For purposes of calculating the insurance assessment, the Bank was considered “Well Capitalized”
as of December 31, 2023, and December 31, 2022. This designation has benefited the Bank in the past and continues to benefit it in terms
of a lower quarterly FDIC rate. The FDIC adjusts the insurance rates when necessary. The total FDIC assessments paid by the Bank in 2023
were $892,000, compared to $528,000 in 2022.
Community Reinvestment Act
Under the Community Reinvestment Act (CRA), as amended, the OCC is
required to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of
the community that they serve. The Act focuses specifically on low and moderate income neighborhoods. The OCC takes an institution’s
CRA record into account in its evaluation of any application made by any of such institutions for, among other things:
● Approval of a new branch or other deposit facility
● Closing of a branch or other deposit facility
● An office relocation or a merger
● Any acquisition of bank shares
The CRA, as amended, also requires that the OCC make publicly available
the evaluation of a bank’s record of meeting the credit needs of its entire community, including low and moderate income neighborhoods.
This evaluation includes a descriptive rating of either outstanding, satisfactory, needs to improve, or substantial noncompliance, along
with a statement describing the basis for the rating. These ratings are publicly disclosed. The Bank received a satisfactory rating on
the most recent CRA Performance Evaluation completed on July 12, 2021.
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ENB FINANCIAL CORP
The Federal Deposit Insurance Corporation Improvement Act of
1991
Capital Adequacy
Under the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), institutions are classified in one of five defined categories as illustrated below:
Tier I Capital Common Equity Tier I
Capital Category Total Capital Ratio Ratio Capital Ratio Leverage Ratio
Adequately Capitalized > 8.0 > 6.0 > 4.5 > 4.0*
Undercapitalized < 8.0 < 6.0 < 4.5 < 4.0*
Significantly Undercapitalized < 6.0 < 4.0 < 3.5 < 3.0
Critically Undercapitalized < 2.0
*3.0 for those banks having the highest available regulatory rating.
The Bank’s and Corporation’s capital ratios exceed the
regulatory requirements to be considered well capitalized for Total Risk-Based Capital, Tier I Risk-Based Capital, Common Equity Tier
I Capital, and Tier I Leverage Capital. The capital ratio table and Consolidated Financial Statement Note M – Regulatory Matters
and Restrictions, are incorporated by reference herein, from Item 8, and made a part hereof. Note M discloses capital ratios for both
the Bank and the Corporation, shown as Consolidated.
Regulatory Capital Changes
In July 2013, the federal banking agencies issued final rules to implement
the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The final rules call for the following capital requirements:
● A minimum ratio of tier I capital to risk-weighted assets of 6%
● A minimum ratio of total capital to risk-weighted assets of 8%
● A minimum leverage ratio of 4%
In addition, the final rules established a common equity tier I capital
conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital
above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions
and discretionary bonus payments.
Consistent with the Dodd-Frank Act, the rules replace the ratings-based
approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order
to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach
to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. The Corporation
does not securitize assets and has no plans to do so.
Under the rules, mortgage servicing assets (MSAs) and certain deferred
tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The rules
also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected
other changes in risk weights and credit conversion factors.
Management has evaluated the impact of the above rules on levels of
the Corporation’s capital. The final rulings were highly favorable in terms of the items that would have a more significant impact
to the Corporation and community banks in general. Specifically, the AOCI final ruling, which would have had the greatest impact, now
provides the Corporation with an opt-out provision. The final ruling on the risk weightings of mortgages was favorable and did not have
a material negative impact. The rulings as to trust preferred securities, preferred stock, and securitization of assets are not applicable
to the Corporation, and presently the revised treatment of MSAs is not material to capital. The remaining changes to risk weightings on
several items mentioned above such as past-due loans and certain
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ENB FINANCIAL CORP
commercial real estate loans do not have a material impact to capital
presently, but could change as these levels change.
Real Estate Lending Standards
Pursuant to the FDICIA, federal banking agencies adopted real estate
lending guidelines which would set loan-to-value (“LTV”) ratios for different types of real estate loans. The LTV ratio is
generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If the institution
does not hold a first lien position, the total loan amount would be combined with the amount of all junior liens when calculating the
ratio. In addition to establishing the LTV ratios, the guidelines require all real estate loans to be based upon proper loan documentation
and a recent appraisal or certificate of inspection of the property.
Prompt Corrective Action
In the event that an institution’s capital deteriorates to the
Undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including:
If capital reaches the significantly or critically undercapitalized
level, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management,
and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, FDICIA provides authority
for regulatory intervention where they deem the institution to be engaging in unsafe or unsound practices, or if the institution receives
a less than satisfactory examination report rating for asset quality, management, earnings, liquidity, or sensitivity to market risk.
Other FDICIA Provisions
Each depository institution must submit audited financial statements
to its primary regulator and the FDIC, whose reports are made publicly available. In addition, the audit committee of each depository
institution must consist of outside directors and the audit committee at “large institutions” (as defined by FDIC regulation)
must include members with banking or financial management expertise. The audit committee at “large institutions” must also
have access to independent outside counsel. In addition, an institution must notify the FDIC and the institution’s primary regulator
of any change in the institution’s independent auditor, and annual management letters must be provided to the FDIC and the depository
institution’s primary regulator. The regulations define a “large institution” as one with over $500 million in assets,
which does include the Bank. Also, under the rule, an institution's independent public accountant must examine the institution's internal
controls over financial reporting and perform agreed-upon procedures to test compliance with laws and regulations concerning safety and
soundness.
Under the FDICIA, each federal banking agency must prescribe certain
safety and soundness standards for depository institutions and their holding companies. Three types of standards must be prescribed:
● asset quality and earnings
● operational and managerial, and
● compensation
Such standards would include a ratio of classified assets to capital,
minimum earnings, and, to the extent feasible, a minimum ratio of market value to book value for publicly traded securities of such institutions
and holding companies. Operational and managerial standards must relate to:
● internal controls, information systems and internal audit systems
● loan documentation
● credit underwriting
● interest rate exposure
● asset growth, and
● compensation, fees and benefits
The FDICIA also sets forth Truth in Savings disclosure and advertising
requirements applicable to all depository institutions.
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ENB FINANCIAL CORP
USA PATRIOT Act of 2001/Bank Secrecy Act
In October 2001, the USA Patriot Act of 2001 (Patriot Act) was enacted
in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The Patriot
Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat
terrorism on a variety of fronts. The impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging.
The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards
for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and
law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Under the Bank Secrecy Act (BSA), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which a
bank is aware in any one day that aggregate in excess of $10,000 and to report suspicious transactions under specified criteria. Civil
and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by
the BSA, or for filing a false or fraudulent report.
Loans to Insiders/Regulation O
Regulation O, also known as Loans to Insiders, governs the permissible
lending relationships between a bank and its executive officers, directors, and principal shareholders and their related interests. The
primary restriction of Regulation O is that loan terms and conditions, including interest rates and collateral coverage, can be no more
favorable to the insider than loans made in comparable transactions to non-covered parties. Additionally, the loan may not involve more
than normal risk. The regulation requires quarterly reporting to regulators of the total amount of credit extended to insiders.
Under Regulation O, a bank is not required to obtain approval from
the bank’s Board of Directors prior to making a loan to an executive officer or Board of Director member as long as a first lien
on the executive officer’s residence secures the loan. The Corporation’s policy requires prior Board of Director approval
of any Executive Officer or Director loan that when aggregated with other outstanding extensions of credit to the Insider and their related
interests exceeds $500,000. Loans to any Executive Officer or Director with aggregate exposure of under $500,000 must be reported at the
next scheduled Board of Director meeting. Further amendments allow bank insiders to take advantage of preferential loan terms that are
available to substantially all employees. Regulation O does permit an insider to participate in a plan that provides more favorable credit
terms than the bank provides to non-employee customers provided that the plan:
● Is widely available to employees
● Does not give preference to any insider over other employees
The Bank has a policy in place that offers general employees more favorable
loan terms than those offered to non-employee customers. The Bank’s policy on loans to insiders allows insiders to participate in
the same favorable rate and terms offered to all other employees; however, any loan to an insider that does not fall within permissible
regulatory exceptions must receive the prior approval of the Bank’s Board of Directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dodd-Frank Act, was enacted in response to the financial crisis of
2007 - 2008. The act reshaped Wall Street and the American banking industry by bringing the most significant changes to financial regulation
in the United States since the regulatory reform that followed the Great Depression. The Act’s numerous provisions were to be implemented
over a period of several years and were intended to decrease various risks in the U.S. financial system. Dodd-Frank created a new Financial
Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators new authority to take control
of and liquidate financial firms. Dodd-Frank was expected to and did have an impact on the Corporation’s business operations as
its provisions began to take effect. To date the provisions that did go into effect, or began to phase in, did at a minimum increase
the Corporation’s operating and compliance costs.
Holding Company Capital Requirements
Dodd-Frank requires the Federal Reserve to apply consolidated capital
requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these
standards, trust preferred
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securities will be excluded from Tier I capital unless such securities were issued prior to May 19, 2010,
by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical
capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic
contraction, are consistent with safety and soundness.
Corporate Governance
Dodd-Frank requires publicly traded companies to give stockholders
a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive
compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals
of mergers and acquisitions unless previously voted on by shareholders. Additionally, Dodd-Frank directs the federal banking regulators
to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with
assets in excess of $1 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit
broker discretionary voting on elections of directors and executive compensation matters.
Consumer Financial Protection Bureau (CFPB)
Dodd-Frank created a new, independent federal agency called the Consumer
Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer
financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair
Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley Act, and certain other
statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more
in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking
regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive practices in connection with
the offering of consumer financial products. Dodd-Frank authorized the CFPB to establish certain minimum standards for the origination
of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers
to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.
Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level
and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Ability-to-Repay and Qualified Mortgage Rule
Pursuant to the Dodd-Frank Act, the CFPB amended Regulation Z as implemented
by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented
information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders
are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to
consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets;
(2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous
loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the
monthly debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate “qualified
mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In
general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments,
or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total
loan amount. Loans which meet these criteria will be considered qualified mortgages, and as a result generally protect lenders from fines
or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable
presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. Prime
loans) are given a safe harbor of compliance. The final rule, as issued, is not expected to have a material impact on the Corporation’s
lending activities and on the Corporation’s Consolidated Financial Statements.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve
adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic
debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Interchange fees or “swipe” fees, are charges that merchants
pay to the Corporation and other card-issuing banks for processing electronic payment transactions. The Federal Reserve Board has ruled
that for financial institutions with
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assets of $10 billion or more the maximum permissible interchange fee for an electronic debit transaction
is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The Federal Reserve Board also has
rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit
or prepaid product. While the Corporation’s asset size is presently under $10 billion, there is concern that these requirements
impacting financial institutions over $10 billion in assets will eventually be pushed down to either financial institutions over $1 billion
or to all financial institutions. This would negatively impact the Corporation’s non-interest income.
TILA/RESPA Integrated Disclosure (TRID) Rules
The TRID rules were mandated by Dodd-Frank to address the problem of
the sometimes duplicative and overlapping disclosures required by the Truth in Lending Act (TILA) and Real Estate Settlement Procedures
Act (RESPA) involving consumer purpose, closed end loans secured by real property. The CFPB was tasked with developing the new disclosures,
defining the regulatory compliance parameters, and implementation. The timing elements built around these new disclosures were established
to provide the consumer with ample time to consider the credit transaction and its associated costs. The final rules were implemented
by amending the Truth in Lending Act; however implementation proved to be difficult as this marked the first time in thirty years that
these standard disclosures were changed. Much reliance was placed on third party providers to the financial institutions to make all the
necessary changes to the disclosures. After one delay, the rules became effective October 3, 2015. The Corporation partnered with its
loan document software providers to ensure timely, compliant implementation.
Department of Defense Military Lending Rule
In 2015, the U.S. Department of Defense issued a final rule which restricts
pricing and terms of certain credit extended to active duty military personnel and their families. This rule, which was implemented
effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage rate of 36% and restricts other
fees. The rule requires financial institutions to verify whether customers are military personnel subject to the rule. The
impact of this final rule, and any subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s
statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the
rule for any potential side effects on the Corporation’s business.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding
cybersecurity. One statement instructed financial institutions to design multiple layers of security controls to establish lines of defense
and to ensure that their risk management practices cover the risk of compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial
institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery,
resumption and maintenance of the institution’s operations after a cyber-attack involving malware. Financial institutions are expected
to develop appropriate processes to enable recovery of data and business operations and address the rebuilding of network capabilities
and restoring data if the institution or its critical service providers are victim to a cyber-attack. The Corporation could be subject
to fines or penalties if it fails to observe this regulatory guidance. See Item 1A. Risk Factors for further discussion of risks related
to cybersecurity.
Ongoing Legislation
As a consequence of the extensive regulation of the financial services
industry and specifically commercial banking activities in the United States, the Corporation’s business is particularly susceptible
to changes in federal and state legislation and regulations. Over the course of time, various federal and state proposals for legislation
could result in additional regulatory and legal requirements for the Corporation. Management cannot predict if any such legislation will
be adopted, or if adopted, how it would affect the business of the Corporation. Past history has demonstrated that new legislation or
changes to existing legislation usually results in a heavier compliance burden and generally increases the cost of doing business.
It is possible that there will be regulatory proposals which, if implemented,
could have a material effect upon our liquidity, capital resources and results of operations. In addition, the general cost of compliance
with numerous federal and state laws does have, and in the future may have, a negative impact on our results of operations. As with other
banks, the status of the financial services industry can affect the Bank. Consolidations of institutions are expected to continue as the
financial services industry seeks greater efficiencies and market share. Bank
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management believes that such consolidations may enhance
the Bank’s competitive position as a community bank. See Item 1A. Risk Factors for more information.
Statistical Data
The statistical disclosures required by this item are incorporated
by reference herein from the Consolidated Statements of Income on page 57 as found in this Form 10-K filing.
Available Information
The Corporation maintains a website on the Internet at www.enbfc.com.
The Corporation makes available free of charge, on or through its website, its proxy statements, annual reports on From 10-K, quarterly
reports on From 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material
is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Corporation’s Internet address
shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or