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 142 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, 2023, was positively impacted
by a number of items resulting in solid financial results. The Corporation grew interest income rapidly during 2023 as a result of interest-earning
asset growth in 2022 and 2023. The growth in 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. In conjunction with the rising
rate environment, the Corporation also experienced a rapid increase in interest expense during 2023 as the cost of funds on deposits and
borrowings increased dramatically. Even with the increased interest expense, net interest income still increased as interest income rose
faster than interest expense. The year was also marked by lower operating income and higher operating expenses with increases primarily
in salaries and benefits as well as software and technology costs.
The Corporation recorded net income of $12,375,000 for the
year ended December 31, 2023, a $2,256,000, or 15.4% decrease from the year ended December 31, 2022. The earnings per share, basic and
diluted, were $2.19 in 2023, compared to $2.62 in 2022, a 16.4% decrease. The decrease in the Corporation’s 2023 earnings was caused
primarily by a decline in non-interest income in addition to an increase in operating expenses that was partially offset by the increase
in net interest income and a decrease in the provision for credit losses.
The Corporation’s net interest income (NII) increased
by $3,456,000, or 6.8%, in 2023, compared to 2022. The increase in NII primarily resulted from an increase in interest and fees on loans
of $19,291,000, or 46.0%, and interest on securities available for sale of $1,387,000, or 10.5%. Interest expense on deposits and borrowings
increased by $18,462,000, or 343.4%, in 2023 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 interest expense.
The Corporation recorded a $520,000 provision for credit
losses in 2023, compared to $1,300,000 in 2022. The lower provision in 2023 was primarily caused by the adoption of ASU 2016-13 Financial
Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments as of January 1, 2023. This required standard
implements a methodology that reflects credit losses that are expected to occur over the remaining life of the financial asset. This
new current expected credit loss model (CECL) is based on possible economic scenarios as well as qualitative factors specific to the
Corporation. During 2023, the Corporation grew its loan portfolio by $169 million. However, during the third and fourth quarters, improved
economic factors resulted in a decrease in the allowance requirement resulting in a lower provision expense compared to 2022.
Non-interest income excluding security and mortgage gains increased
by $1,176,000, or 9.6%, for the year ended December 31, 2023, compared to the prior year, due primarily to higher fees earned on an off-balance
sheet sweep account which had increased participation and higher balances in 2023 compared to the prior year. Mortgage gains decreased
in 2023 to $767,000, compared to $1,302,000 in 2022. The majority of mortgage production during 2023 were adjustable rate mortgages that
were generated and retained on the Corporation’s balance sheet resulting in lower levels of mortgages originated for sale and lower
levels of gains on mortgages sold.
27
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Additionally, the Corporation recorded pre-tax losses on debt and equity
securities of $1,496,000 during 2023, compared to gains of $10,000 recorded in 2022. During 2023, the Corporation made the strategic decision
to update a partial portfolio restructuring and sell some low-yielding securities to reinvest in higher yielding loans. During the first
quarter of 2023, the Corporation sold approximately $28.1 million of municipal bonds that had a duration of 2.85 years with a book yield
of 2.96%. The loss on these sales was $435,000 with an earn-back period of approximately six months. During the second quarter
of 2023, the Corporation sold $33.0 million of bonds: $9.0 million of Corporate bonds, $15.3 million of U.S. Treasury bonds, and $8.7
million of U.S. Agency bonds. The Corporate bonds had a book yield of 5.66% with a duration of 3 months. The loss on sale
from this transaction was $24,000. The U.S. Treasury and Agency bonds resulted in a loss of $929,000. These bonds had a book
yield of 1.52% with a duration of 1.5 years. This strategic sale had an earn-back period of approximately 11 months. Proceeds from
all sales were used to fund higher yielding loan growth. New loans originated in the first half of 2023, had an average rate of
6.11% with an average life of 6 years.
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 0.65 % 0.83 %
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 credit losses
● Other income
● Operating expenses
● Income taxes
The following discussion analyzes each of these five
components.
Net Interest Income (NII)
NII represents the largest portion of the Corporation’s operating
income. In 2023, NII generated 81.0% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared
to 78.9% in 2022. This increase is a result of higher levels of interest-earning assets in 2023 compared to 2022 and lower non-interest
income as a result of losses on securities, lower levels of mortgage gains, and lower levels of bank owned life insurance income. 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.
28
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
$ $
Net interest income
NII is the difference between interest income earned on assets and
interest expense incurred on liabilities. Accordingly, two factors affect NII:
NII is impacted by yields earned on assets and rates paid on liabilities.
With the rapid increase in the short-term Federal Reserve rates in 2022 and 2023, 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 resulting in an inverted yield curve.
As a result of a larger balance sheet in 2023, with higher asset yields,
the Corporation’s NII on a tax equivalent basis increased significantly but the Corporation’s margin decreased to 2.94% for
year ended December 31, 2023, compared to 3.03% in 2022. Loan and investment yields were higher in 2023 due to the Fed rate increases
during the year positively impacting yields on variable rate instruments and increasing the yields on new volume. However, the rate on
interest-bearing liabilities increased at a faster pace resulting in the margin compression. The Corporation’s NII on a tax equivalent
basis in 2023 increased over 2022, by $2,879,000, or 5.6%.
The Corporation’s overall cost of funds increased dramatically
during 2023 with higher core deposit interest rates as well as time deposit rates. Customer behavior changed during 2023 as well with
balances moving out of non-interest bearing accounts into higher costs accounts like time deposits. The average balance and interest rates
of borrowings was higher in 2023 compared to 2022, resulting in higher interest expense. 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 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.
29
ENB FINANCIAL CORP
Management’s Discussion and Analysis
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
Increase (Decrease)
Due To Change In
Net
Average Interest Increase
Balances Rates (Decrease)
$ $ $
INTEREST INCOME
Interest on deposits at other banks (77 ) 795 718
Securities available for sale:
INTEREST EXPENSE
Deposits:
Borrowings:
In 2023, the Corporation’s NII on an FTE basis increased by $2,879,000,
a 5.6% increase over 2022. Total interest income increased $21,341,000, or 37.3%, while interest expense increased $18,462,000, or 343.3%,
from 2022 to 2023. The FTE interest income from the securities portfolio increased by $995,000, or 6.9%, while loan interest income increased
$19,380,000, or 46.0%. During 2023, additional loan volume added $11,161,000 to net interest income, and higher yields primarily due to
the higher interest rate environment in 2023, caused an $8,219,000 increase. Lower balances in the securities portfolio caused a decrease
of $2,106,000 in net interest income, while higher yields on securities caused a $3,101,000 increase, resulting in a net increase of $995,000.
The average balance of interest bearing liabilities increased by 18.7%
during 2023, driven by the growth in deposit and borrowings balances. Deposit rates increased in 2023 causing a significant increase in
interest expense. Higher interest rates contributed to $14,541,000 of increased interest expense while higher deposit balances caused
$1,475,000 of increased expense, resulting in a total increase in interest expense of $16,016,000.
Interest-bearing demand deposits repriced causing a large increase
in interest expense due to the large quantity of accounts that were adjusted as customers chose higher yielding products. Demand deposit
interest expense increased a total of $10,166,000 in 2023, with $9,804,000 due to higher rates, while higher balances caused an increase
of $362,000. Lower balances in savings accounts caused a decrease of $7,000, while higher rates caused an increase of $239,000, resulting
in the net increase in interest expense of $232,000 on savings deposits. Time deposit balances increased rapidly throughout 2023, resulting
in higher interest expense of $1,120,000, while higher rates caused an increase of $4,498,000, resulting in a net increase of $5,618,000.
The average balance of total borrowings increased by $48,475,000, or
55.2%, from December 31, 2022, to December 31, 2023. The increase in total borrowings increased interest expense by $1,687,000. Higher
rates on borrowings, affected by the Fed rate increases, resulted in higher interest expense of $759,000. The aggregate of these amounts
was an increase in interest expense of $2,446,000 related to total borrowings.
30
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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.
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:
Securities available for sale:
LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Non-interest bearing liabilities:
Net interest spread (b) 2.19 2.80
Effect of non-interest bearing funds 0.75 0.23
Net yield on interest earning assets (c) 2.94 3.03
31
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s average balance of securities decreased by
$89.0 million, or 14.3%, in 2023 compared to 2022 and the tax equivalent yield on investments increased by 58 basis points. Despite lower
balances, interest income on securities increased due to the increasing yield due to higher market rates.
Average balances on loans increased by $250.7 million, or 24.0%, for
the year ended December 31, 2023, compared to the prior year. Loan yields increased by 72 basis points for the year and loan interest
income increased $19,380,000, or 46.0% as a result of the significantly higher balances and higher yields.
The average balance of interest-bearing deposit accounts increased
by $136.2 million, or 15.2%, in 2023 compared to 2022. Interest-bearing demand deposits and time deposits increased rapidly during 2023
while the average balance of savings accounts declined as customers moved funds into higher yielding accounts. Coupled with higher average
balances, the interest rate paid on deposits increased as well resulting in an increase in interest expense on deposits of $16,016,000,
or 582.4%, for the year ended December 31, 2023.
The Corporation’s average balance on borrowed funds increased
by $48.5 million, or 55.2%, in 2023. 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 Bank.
The additional FHLB advances were used to fund loan growth and caused average borrowings to increase year-over-year. The rate paid on
borrowed funds increased by 73 basis points for 2023, compared to 2022 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
2023.
For the year ended December 31, 2023, the net interest spread decreased
by 61 basis points to 2.19%, compared to 2.80% for 2022. The effect of non-interest bearing funds increased to 75 basis points from 23
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 2023 was 2.94%, compared to 3.03%
for 2022.
Provision for Credit Losses
The provision for credit losses includes a provision for losses on
loans, available-for-sale debt securities, and unfunded loan commitments. The provision provides for losses inherent in the financial
assets as determined by a quarterly analysis and calculation of various factors related to the financial assets. The amount of the provision
reflects the adjustment management determines necessary to ensure the Allowance for Credit Losses (ACL) is adequate to cover any losses
inherent in the financial assets. The Corporation recorded a provision expense of $315,000 for credit losses related to loans, $205,000
for unfunded commitments, and $0 related to available-for-sale debt securities for the year ended December 31, 2023, compared to $1,300,000
related to loans for the year ended December 31, 2022. The provision expense was lower in 2023 due to the Corporation’s adoption
of ASU 2016-13 which requires a reliance on forward economic indicators to project expected credit losses. Improved economic conditions
in the third and fourth quarters of 2023 resulted in a reduction in provision expense. As of December 31, 2023, the allowance as a percentage
of total loans was 1.12%, compared to 1.19% at December 31, 2022.
Management continues to evaluate the allowance for credit losses in
relation to the growth or decline of the loan portfolio and its associated credit risk, and believes the provision and the allowance for
credit losses are adequate to provide for future losses. For further discussion of the calculation, see the “Allowance for Credit
Losses” section.
Other Income
Other income for 2023 was $12,699,000, a decrease of $865,000, or 6.4%,
compared to the $13,564,000 earned in 2022. The following table details the categories that comprise other income.
32
ENB FINANCIAL CORP
Management’s Discussion and Analysis
OTHER INCOME
(DOLLARS IN THOUSANDS)
$ $ $ %
Trust and investment services income increased by 9.1% from 2022 to
2023 primarily as a result of higher income on the trust services side which increased by $366,000, or 21.7%. Service charges on deposit
accounts increased by $30,000, or 2.2% compared to the prior year and other fees increased by $1,778,000, or 111.8% as a result of
higher fees on a third party sweep product in 2023. The Corporation sets rates on this sweep product and retains a certain percentage
of this rate which is recorded as other income. Commissions remained stable for the year ended December 31, 2023, compared to 2022. Gains
on debt and equity securities were lower in 2023 driven by the strategic sale of some investments in order to fund much higher yielding
loan growth. The losses on these securities will be recovered in fewer than twelve months due to the disparity in rate between the investments
and newly issued loans at much higher rates. Mortgage gains were lower in 2023, by $535,000, or 41.1%, due to rapid increases in interest
rates which negatively impacted the margins on mortgages sold. Additionally, more mortgage originations in 2023 were in the form of adjustable-rate
mortgages held on the Corporation’s balance sheet as opposed to 2022 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 (BOLI) decreased by $625,000, or 39.5%, year-over-year primarily
attributed to two BOLI payouts in the fourth quarter of 2022 that were not replicated in 2023. The Corporation purchased and is the beneficiary
of all BOLI 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 $202,000, or 14.2% in 2023 compared
to 2022 due to non-recurring income items in 2022.
Operating Expenses
Operating expenses for 2023 were $51,407,000, an increase of $5,478,000,
or 11.9%, compared to $45,929,000 in 2022. 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)
$ $ $ %
33
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Salaries and employee benefits are the largest category of operating
expenses. For the year 2023, salaries and benefits increased $2,828,000, or 10.3%, compared to 2022. 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. Occupancy and
equipment expenses combined increased 11.6%, from the prior year mostly due to higher depreciation costs related to new facilities and
equipment and increased lease expenses. Advertising and marketing expenses increased by $321,000, or 29.6%, as a result of higher levels
of advertising costs as the Corporation markets to new prospects in newer markets as well as promotes various products and services. Computer
software and data processing expenses are growing at a rapid pace, 23.3% 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 system conversions the Corporation implemented
in 2023. Shares tax expense is based on the Corporation’s level of shareholders’ equity from the prior year and has decreased by 15.4%,
year-over-year commensurate with the decline in shareholders’ equity from 2021 to 2022. Professional services expenses increased by 16.6% in 2023, compared to the
prior year driven higher by an increase in outside services costs primarily related to project management costs related to system conversions.
Other operating expenses increased by 8.4% year-over-year primarily as a result of higher FDIC insurance costs and higher expenses due
to fraud-related charge-offs.
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, 2023,
the Corporation recorded a tax provision of $2,436,000, compared to $2,287,000 for 2022.
This increase in tax expense can be attributed to lower levels of tax-free income. The effective tax rate for the Corporation was
16.4% for 2023 and 13.5% for 2022. 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.
34
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Financial Condition
Balance Sheet Overview and Liquidity
The Corporation maintains 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, 2023, cash and equivalents amounted to $89.0 million, an increase
of $51.4 million, or 136.9%, from balances at December 31, 2022. 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 securities,
and increases in deposit accounts. As of December 31, 2023, we had borrowings outstanding from the FHLB of $101.2 million
and subordinated debt of $39.6 million.
At December 31, 2023, the Corporation had
$614.5 million in loan commitments outstanding, which included $91.5 million in firm loan commitments, $504.7 million in unused lines
of credit, and open letters of credit of $18.3 million. Certificates of deposit due within one year totaled $247.2 million, or 82.3% 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 $30.1 million and $21.6 million for the years ended December 31, 2023 and 2022, respectively. Net
cash used for investing activities was $90.3 million and $315.8 million in fiscal years 2023 and 2022, respectively, reflecting our loan
and investment security activities in the respective periods. Cash provided by financing activities amounted to $111.6 million and $173.3
million for years ended December 31, 2023 and 2022, 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, 2023, the Corporation had $469.0 million of debt and equity
securities, compared to $538.3 million at December 31, 2022, a decrease of $69.2 million, or 12.9%.
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 decreased by $14.5 million,
or 44.4%, since December 31, 2022. 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 $7.2 million, or 29.2%, since December 31, 2022. The
decreases have been due to bond sales throughout the year as part of the portfolio restructuring. Agency MBS and CMO investments in total
have declined by $12.8 million, or 17.6%. 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, 2023, this sector stood at $56.2
million, an increase of $5.9 million year over year. There were not concentrations of issuers greater than 10% of the securities portfolio.
35
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s asset-backed securities (ABS) decreased since
December 31, 2022, by $7.9 million, or 10.8%. ABS securities are floating rate student loan pools which are instruments that perform well
in a rates-up environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable
rate return 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 2023 and the decrease in market interest rates in the fourth quarter of 2023 caused the
unrealized losses on these bonds to decrease. As a result, the fair value of this sector
declined by $18.4 million, or 8.9% from December 31, 2022, to December 31, 2023. Municipal bonds represented 40.8% of the debt securities
portfolio as of December 31, 2023, compared to 38.9% as of December 31, 2022. The largest geographical concentrations as of December 31,
2023, were obligations of states and political subdivisions located in the states of Pennsylvania and California.
As of December 31, 2023, the fair value of the
Corporation’s corporate bonds decreased by $14.6 million, or 21.0%, from balances at December 31, 2022. 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 during 2023.
The following table presents investment securities at December 31,
2023 by maturity, and the weighted average yield for each maturity presented. Actual maturities may differ from contractual maturities
because of prepayment or call options embedded in the securities. The yields presented are calculated using tax-equivalent interest and
the amortized cost.
SECURITIES PORTFOLIO MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
1 Year Years Years Years Total
% % % % %
$ Yield $ Yield $ Yield $ Yield $ Yield
Loans
Net loans outstanding increased $167.9 million, or 14.3%, from $1.18
billion at December 31, 2022, to $1.34 billion at December 31, 2023. All loan categories showed an increase in balances over the prior
period. The Corporation’s strategic plan specifically focused on loan growth while maintaining quality of credit standards. This
focus resulted in loan growth across all loan segments in 2023.
Agriculture loans increased to $257.3 million at December 31, 2023,
from $238.7 million at January 1, 2023, a 7.8% increase. Business loans increased by $17.9 million at December 31, 2023 from $336.3 million
at January 1, 2023, or 5.3%.
36
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Consumer loans not secured by real estate represent a very small portion
of the Corporation’s loan portfolio, at $6.4 million as of December 31, 2023 and $5.9 million as of January 1, 2023. These loans
consist of personal loans, automobile loans, and other consumer-related loans. Home Equity loans increased by $8.3 million at December
31, 2023 from $98.9 million at January 1, 2023, or 8.4%. Non-Owner Occupied CRE loans increased by $23.8 million at December 31, 2023
from $111.3 million at January 1, 2023, or 21.4%.
The Residential Real Estate category represents the largest group of
loans for the Corporation. The Residential Real Estate category of total loans increased from $397.3 million on January 1, 2023, to $497.6
million on December 31, 2023, a 25.2% 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. The majority of mortgage production during 2023
were adjustable rate mortgages that were generated and retained on the Corporation’s balance sheet resulting in lower levels of
mortgages originated for sale and lower levels of gains on mortgages sold.
The following tables show the maturities for the loan portfolio as
of December 31, 2023, 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
$ $ $ $ $
FIXED AND FLOATING RATE LOANS DUE AFTER ONE YEAR
(DOLLARS IN THOUSANDS)
Floating or
Fixed Rates Adjustable Rates Total
$ $ $
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, $321.8 million, or 24.2%, are fixed-rate loans as
of December 31, 2023. These loans will not reprice to a higher or lower interest rate unless they mature or are refinanced by the borrower.
The remaining $1,005.7 million, or 75.8% 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.
37
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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
● Other real estate owned
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
December 31,
$ $
Loans past due 90 days or more and still accruing 519 169
Other real estate owned — —
Non-accrual loans to total loans 0.20% 0.35%
Non-performing loans to total loans 0.24% 0.36%
Allowance for credit losses to total loans 1.12% 1.19%
Allowance for credit losses to non-accrual loans 550.25% 338.70%
Allowance for credit losses to non-performing loans 463.11% 325.53%
Non-performing assets decreased by $1,070,000, or 24.6%, from December 31, 2022, to December 31, 2023, primarily
due to three unrelated non-accrual loans that paid off during the year. As of December 31, 2023, there were twelve loans to ten unrelated
borrowers totaling $2,758,000 on non-accrual compared to twelve loans to ten unrelated borrowers totaling $4,178,000 as of December 31,
2022. The largest non-accrual relationship at December 31, 2023, was a commercial mortgage to a single borrower with a balance of $801,000.
Loans past due 90 days or more and still accruing increased by $350,000,
or 207.1%, during 2023 partially offsetting the decrease in non-accrual loans. This increase was primarily the result of a residential
mortgage loan for $356,000 that was past due by more than 90 days as of the end of 2023. There were only a total of four loans that reached
the 90 days past due level which is a very small number of loans.
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 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, 2023 and 2022, 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.
38
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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 credit loss calculation, management will adjust the allowance for
credit losses through the provision as necessary. Changes to the allowance for credit losses during the year are primarily affected by
three events:
● Charge off of loans considered not recoverable
● Recovery of loans previously charged off
● Provision for credit 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.
The Net Charge-Off table below shows the net charge-offs for each segment
of the Corporation’s loan portfolio as of December 31, 2023.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
$
Loans charged-off:
Agriculture —
Business Loans —
Consumer Loans 64
Home Equity —
Non-Owner Occupied CRE —
Residential Real Estate —
Total loans charged-off 64
Recoveries of loans previously charged-off
Agriculture 71
Business Loans 11
Consumer Loans 4
Home Equity —
Non-Owner Occupied CRE —
Residential Real Estate 8
Total recoveries 94
Net charge-offs (recoveries) —
Agriculture (71 )
Business Loans (11 )
Consumer Loans 60
Home Equity —
Non-Owner Occupied CRE —
Residential Real Estate (8 )
Total net charge-offs (recoveries) (30 )
Average loans outstanding
Residential Real Estate 455,199
Total average loans outstanding 1,281,744
Net charge-offs (recoveries) as a % of average loans outstanding
Agriculture (0.03% )
Business Loans 0.00%
Consumer Loans 1.20%
Home Equity 0.00%
Non-Owner Occupied CRE 0.00%
Residential Real Estate 0.00%
Total net charge-offs (recoveries) as a % of average loans outstanding 0.00%
39
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Net Charge-Off table below shows the net charge-offs for each segment of the Corporation’s loan portfolio
as of December 31, 2022.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
$
Loans charged-off:
Commercial real estate 84
Consumer real estate —
Commercial and industrial 44
Consumer 19
Total loans charged-off 147
Recoveries of loans previously charged-off
Commercial real estate 10
Consumer real estate 10
Commercial and industrial 42
Consumer 5
Total recoveries 67
Net charge-offs (recoveries)
Commercial real estate 74
Consumer real estate (10 )
Commercial and industrial 2
Consumer 14
Total net charge-offs (recoveries) 80
Average loans outstanding
Commercial and industrial 184,483
Total average loans outstanding 1,043,065
Net charge-offs (recoveries) as a % of average loans outstanding
Commercial real estate 0.02%
Consumer real estate 0.00%
Commercial and industrial 0.00%
Total net charge-offs (recoveries) as a % of average loans outstanding 0.01%
40
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. In connection with the adoption of ASU 2016-13, the Corporation made changes
to the loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note C Loans and
Allowance for Credit Losses for further discussion of these portfolio segments. The new segmentation consists of: Agriculture, Business
Loans, Consumer Loans, Home Equity, Non-Owner Occupied Commercial Real Estate, and Residential Real Estate.
The percentage of loans indicates the percentage of the loan portfolio
represented by the indicated loan type as of December 31, 2023.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31,
% of
$ Loans
Non-Owner Occupied CRE 818 10.0
Total allowance for credit losses 15,176 100.0
As of December 31, 2023, Residential Real
Estate loans represent 36.6% of total loans with 38.7% of the allowance covering these loans. Business Loans represent 26.1% of
total loans with 17.7% of the allowance covering these loans. Agriculture Loans represent 19.0% of total loans with 20.5% of the
allowance covering these loans. Non-Owner Occupied CRE represents 10.0% of total loans with 5.4% of the allowance covering these
loans. Home Equity Loans represent 7.9% of total loans with 15.4% of the allowance covering these 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 percentage of loans indicates the percentage of the loan portfolio
represented by the indicated loan type as of December 31, 2022.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31,
% of
$ Loans
Commercial and industrial 2,151 12.0
Unallocated 417 —
Deposits
The Corporation’s total ending deposits at December 31, 2023,
increased by $87.8 million, or 5.4%, from December 31, 2022. Customer deposits are the Corporation’s primary source of funding for
loans and securities. Deposit balances grew rapidly in 2022 and prior years due to the very low interest rate environment and the few
options available for customers to earn a return on their investment. During 2023, the Corporation grew deposits at a slower pace due
to the rapidly rising rate environment and the financial/product options available to customers.
41
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Deposits by Major Classification table, shown below, provides the
average balances of each category for December 31, 2023 and December 31, 2022.
DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)
Average balances and average rates paid on deposits by major category are summarized as follows:
December 31,
$ % $ %
The average balance of the Corporation’s core
deposits decreased by $4.5 million, or 0.3%, from December 31, 2022, to December 31, 2023. Non-interest bearing demand accounts decreased
by $48.9 million, or 7.4%, and are the Corporation’s cheapest source of funding for balance sheet growth. Interest-bearing demand
accounts grew by $97.0 million, or 82.8%, as a result of participating in the reciprocal program for an off-balance sheet sweep product.
Money market account average balances decreased by $3.8 million, or 2.2%, and savings accounts decreased by $27.8 million, or 7.6%, from
December 31, 2022, to December 31, 2023. Time deposits are typically a more rate-sensitive product making them a less reliable source
of funding. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial
institution. In 2023, time deposits grew significantly, by $91.7 million, or 78.6%, compared to average balances at December 31, 2022.
As of December 31, 2023, time deposits of $250,000 or more made up
17.7% of the total time deposits. This compares to 7.2% on December 31, 2022. The total dollar amount of time deposits of $250,000 or
more increased $49,446,000, or 510.5%, from December 31, 2022 to December 31, 2023. Since time deposits of $250,000 or more are made up
of relatively few customers with large dollar accounts, management monitors these accounts closely due to the potential for these deposits
to rapidly increase or decrease. The following table provides the total amount of time deposits of $250,000 or more for the past two years