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 143 years of existence. The Board and Management are committed to the principles and values that have served
the Corporation well over its history and the desire is to produce strong financial results that will engender trust from the Bank’s
customers and favorable returns to the shareholders.
Results of Operations
Overview
The year ended December 31, 2024, was positively impacted by
a number of items resulting in record earnings for the year. The Corporation grew interest income rapidly during 2024 as a result of interest-earning
asset growth and a disciplined management of asset and liability rates. The Corporation also experienced an increase in interest expense
during 2024 as the cost of funds on deposits and borrowings increased. 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 significantly higher operating income which
was only partially offset by higher operating expenses with increases primarily in salaries and benefits.
The Corporation recorded net income of $15,317,000 for the year
ended December 31, 2024, a $2,942,000, or 23.8% increase over the year ended December 31, 2023. The earnings per share, basic and diluted,
were $2.71 in 2024, compared to $2.19 in 2023.
The Corporation’s net interest income (NII) increased by
$2,702,000, or 5.0%, in 2024, compared to 2023. The increase in NII primarily resulted from an increase in interest and fees on loans
of $11,822,000, or 19.3%, and interest on securities available for sale of $1,665,000, or 11.4%. Interest expense on deposits and borrowings
increased by $12,289,000, or 51.6%, in 2024 compared to the prior year.
The Corporation recorded a $1,015,000 provision for credit losses
in 2024, compared to $520,000 in 2023. The higher provision in 2024 was primarily caused by loan growth as well as higher levels of non-accrual
and classified loans. During 2024, the Corporation grew its loan portfolio by $67.2 million.
Non-interest income excluding security and mortgage gains increased by
$2,717,000, or 20.2%, for the year ended December 31, 2024, compared to the prior year, due to increased income in all categories of operating
income. Mortgage gains increased in 2024 to $1,826,000, compared to $767,000 in 2023. The Corporation made a strategic shift to generate
more fixed-rate mortgages in 2024 that could be sold on the secondary market as opposed to primarily adjustable-rate mortgages originated
in 2023 that were held on the Corporation’s balance sheet.
Additionally, the Corporation recorded pre-tax gains on debt and equity
securities of $159,000 during 2024, compared to losses of $1,496,000 recorded in 2023. During 2023, the Corporation made the strategic
decision to execute a partial portfolio restructuring and sell some low-yielding securities to reinvest in higher yielding loans. During
2024, several equity securities were sold at gains, but the Corporation did not record any significant losses on available-for-sale debt
as it did in 2023.
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.
28
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Key Performance Ratios
Year ended December 31,
Return on Average Assets 0.75% 0.65%
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 2024, NII generated 75.8% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared
to 81.0% in 2023. This decrease is a result of higher levels of non-interest income in 2024 compared to the prior year. The overall performance
of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.
The following table shows a summary analysis of NII on a fully taxable
equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest
spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the
NII reported on the consolidated statements of income, which is not shown on an FTE basis.
Net Interest Income
(DOLLARS IN THOUSANDS)
Year ended December 31,
$ $
Tax equivalent adjustment 343 633
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 market rates during 2022 and 2023, asset yields increased, but rates paid on deposits and borrowings increased
at a faster pace.
29
ENB FINANCIAL CORP
Management’s Discussion and Analysis
As the Federal Reserve began lowering overnight rates in 2024, asset yields did not decline as quickly and the Corporation
managed liability rates well, moderating the negative impact on net interest margin.
As a result of a larger balance sheet in 2024, with higher asset yields,
the Corporation’s NII on a tax equivalent basis increased significantly and the Corporation’s margin decreased marginally
to 2.87% for year ended December 31, 2024, compared to 2.94% in 2023. Loan and investment yields were higher in 2024 due to the Fed rate
increases in prior years that offset the decline in variable rate pricing. 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 2024 increased over 2023, by $2,412,000,
or 4.4%.
The Corporation’s overall cost of funds increased during 2024 with
higher core deposit interest rates as well as time deposit rates. Customer behavior changed during 2023 and 2024 as well with balances
moving out of non-interest bearing accounts in 2023 into higher cost accounts like time deposits in 2024. The average balance and interest
rates of borrowings was higher in 2024 compared to 2023, 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.
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
Securities available for sale:
INTEREST EXPENSE
Deposits:
Savings deposits (49 ) 11 (38 )
Borrowings:
In 2024, the Corporation’s NII on an FTE basis increased by $2,412,000,
a 4.4% increase over 2023. Total interest income increased $14,701,000, or 18.7%, while interest expense increased $12,289,000, or 51.6%,
from 2023 to 2024. The FTE interest income from the securities portfolio increased by $1,466,000, or 9.5%, while loan interest income
increased $11,785,000, or 19.2%. During 2024, additional loan volume added $5,003,000 to net interest income, and higher yields primarily
due to the higher interest rate environment, caused a $6,782,000 increase.
30
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Larger balances in the securities portfolio caused an increase
of $191,000 in net interest income, while higher yields on securities caused a $1,275,000 increase, resulting in a net increase of $1,466,000.
The average balance of interest bearing liabilities increased by 11.2%
during 2024, driven by the growth in deposit and borrowings balances. Deposit balances and rates increased in 2024 causing a significant
increase in interest expense. Higher balances contributed to $6,678,000 of increased interest expense while higher rates caused $4,970,000
of increased expense, resulting in a total increase in interest expense of $11,648,000.
Interest-bearing demand deposits repriced at a slower pace in 2024 but
did cause an increase in interest expense due to the quantity of accounts and balances that were adjusted. Demand deposit interest expense
increased a total of $2,189,000 in 2024, with $1,870,000 due to higher rates, while higher balances caused an increase of $319,000. Lower
balances in savings accounts caused a decrease of $49,000, while higher rates caused an increase of $11,000, resulting in the net decrease
in interest expense of $38,000 on savings deposits. Time deposit balances increased rapidly throughout 2024, resulting in higher interest
expense of $6,408,000, while higher rates caused an increase of $3,089,000, resulting in a net increase of $9,497,000.
The average balance of total borrowings increased by $4,775,000, or 3.5%,
from December 31, 2023, to December 31, 2024. The increase in total borrowings increased interest expense by $137,000. Higher rates on
borrowings resulted in higher interest expense of $504,000. The aggregate of these amounts was an increase in interest expense of $641,000
related to total borrowings.
The following table shows a more detailed analysis of net interest income
on an FTE basis shown with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest
earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread
and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and
the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest
bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net
yield on interest earning assets, also referred to as the net interest margin (NIM). The NIM is calculated by dividing net interest income
on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently
a bank generates NII.
31
ENB FINANCIAL CORP
Management’s Discussion and Analysis
COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
December 31,
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
$ $ % $ $ %
ASSETS
Interest earning assets:
Federal funds sold and
Securities available for sale:
LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Non-interest bearing liabilities:
Net interest spread (b) 1.91 2.19
Effect of non-interest bearing funds 0.96 0.75
Net yield on interest earning assets (c) 2.87 2.94
32
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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 $1,017,000 for credit losses related to loans, a credit
provision of $2,000 related to unfunded commitments, and $0 related to available-for-sale debt securities for the year ended December
31, 2024, compared to $315,000 related to loans, $205,000 for unfunded commitments, and $0 related to available-for-sale debt securities
for the year ended December 31, 2023. The provision expense was higher in 2024 due to the Corporation’s growth in the loan portfolio
as well as slightly higher levels of delinquent, non-accrual, and classified loans. As of December 31, 2024, the allowance as a percentage
of total loans was 1.13%, compared to 1.12% at December 31, 2023.
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 2024 was $18,130,000, an increase of $5,431,000, or 42.8%,
compared to the $12,699,000 earned in 2023. The following table details the categories that comprise other income.
OTHER INCOME
(DOLLARS IN THOUSANDS)
$ $ $ %
Net (losses) gains on debt and equity securities 159 (1,496 ) 1,655 (110.6 )
Trust and investment services income increased by 27.1% from 2023 to 2024
primarily as a result of higher income on the trust services side which increased by $648,000, or 31.6%. This increase was due to new
assets under management as well as gains resulting from the sale of a limited number of specific trust assets during 2024. Service charges
on deposit accounts increased by $1,118,000, or 23.6% compared to the prior year, primarily as a result of higher fees on an off balance
sheet sweep product, higher account analysis fees, and higher foreign ATM fees. Commissions increased $458,000, or 12.7%, for 2024 compared
to the prior year as a result of higher debit card interchange fees. Gains on debt and equity securities were $159,000 in 2024, compared
to losses of $1,496,000 in 2023. The losses in 2023 were driven by the strategic sale of some investments in order to fund much higher
yielding loan growth. Mortgage gains were higher in 2024, by $1,059,000, or 138.1%, due to the strategic decision to generate more fixed-rate
mortgages that could be sold on the secondary market. Mortgage originations in 2023 were primarily in the form of adjustable-rate mortgages
held on the Corporation’s balance sheet. Earnings on bank-owned life insurance (BOLI) increased by $301,000, or 31.4%, year-over-year
primarily attributed to a BOLI death benefit recorded during 2024. 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.
Operating Expenses
Operating expenses for 2024 were $55,231,000, an increase of $3,824,000,
or 7.4%, compared to $51,407,000 in 2023. 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.
33
ENB FINANCIAL CORP
Management’s Discussion and Analysis
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
$ $ $ %
Computer software & data processing expenses 6,264 6,891 (627 ) (9.1 )
Salaries and employee benefits are the largest category of operating expenses.
For the year 2024, salaries and benefits increased $3,891,000, or 12.9%, compared to 2023. The increase in salary costs was due to additions
to staff as well as increasing costs to fill empty positions due to the competitive job market. In addition, the Corporation recorded
an accrual for incentive payout to its employees in 2024 which was $1,759,000 higher than incentive payout costs accrued in 2023. Occupancy
and equipment expenses combined did not change materially from the prior year. Advertising and marketing expenses decreased by $252,000,
or 17.9%. Computer software and data processing expenses decreased by $627,000, or 9.1%, from 2023 to 2024, as a result of higher costs
in 2023 related to a debit card conversion that resulted in contract breakage fees. Shares tax expense is based on the Corporation’s
level of shareholders’ equity from the prior year and has increased by $209,000, or 17.9%, year-over-year commensurate with the
increase in shareholders’ equity from 2023 to 2024. Professional services expenses only increased nominally, and other operating
expenses increased by $454,000, or 11.3%, year-over-year primarily as a result of higher amounts of amortization related to mortgage servicing
rights and higher levels of charitable contributions.
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, 2024, the
Corporation recorded a tax provision of $3,308,000, compared to $2,436,000 for 2023.
This increase in tax expense can be attributed to higher levels of taxable income. The effective tax rate for the Corporation was
17.8% for 2024 and 16.4% for 2023. 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, 2024, cash and cash equivalents amounted to $68.9 million,
a decrease of $20.1 million, or 22.6%, from balances at December 31, 2023. 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, 2024, we had borrowings outstanding from the FHLB of
$143.8 million and subordinated debt of $39.7 million.
At December 31, 2024, the Corporation had
$591.8 million in loan commitments outstanding, which included $64.9 million in firm loan commitments, $510.5 million in unused lines
of credit, and open letters of credit of $15.8 million. Certificates of deposit due within one year totaled $330.2 million, or 76.5% of
certificates of deposit. The Corporation believes, based on past experience that a significant portion of certificates of deposit will
remain at the Corporation upon maturity and ample liquidity exists 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 $15.8 million and $30.1 million for the years ended December 31, 2024 and 2023, respectively. Net
cash used for investing activities was $237.9 million and $90.3 million in fiscal years 2024 and 2023, respectively, reflecting our loan
and investment security activities in the respective periods. Cash provided by financing activities amounted to $202.0 million and $111.6
million for years ended December 31, 2024 and 2023, respectively primarily representing increases in our core deposits throughout 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, 2024, the Corporation had $626.1 million of debt and equity
securities, compared to $469.0 million at December 31, 2023.
In the third quarter of 2024, the Corporation adopted an investment strategy
to add $200 million of investments, both agency and non-agency collateralized mortgage obligations consistent with investment policy credit
quality parameters, in order to protect interest income in a rising rate environment. The goal of this strategy was to reduce
the interest rate risk that management believes was necessary to address the Corporation’s long-term fixed rate assets. The
Corporation paired the investments with off-balance sheet pay-fixed interest rate swaps to mitigate the identified rates-up risk. The
leverage strategy was funded primarily by callable brokered certificates of deposit and a small portion of short-term FHLB borrowings.
The funding was chosen to allow for maximum flexibility to protect against rates-down risk. With this strategy, the Corporation
has the ability to call the brokered CDs and replace at lower market rates, or unwind the swaps and offset with gains on the investments.
Outside of the strategy discussed above, 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
35
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The Corporation’s U.S. Treasury sector and U.S. government agency
sectors stayed relatively flat since December 31, 2023. U.S. Treasuries represent a safe credit at a market appropriate yield which added
some diversity to the portfolio. These bonds pay monthly principal and interest and the Corporation has invested into this sector in conjunction
with the strategy discussed above. 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, 2024, this sector stood at $145.2 million,
an increase of $89.0 million year over year. The increase in this sector was also primarily related to the strategy discussed previously.
There were no concentrations of issuers greater than 10% of the securities portfolio.
The Corporation’s asset-backed securities (ABS) decreased since December
31, 2023, by $8.0 million, or 12.3%. ABS 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 early in 2024 recognizing that the earn-back
period would be within the same calendar year due to the higher yield of the replacement assets. As a result, the portfolio declined by
$8.9 million, or 4.8% from December 31, 2023, to December 31, 2024. Municipal bonds represented 29.0% of the debt securities portfolio
as of December 31, 2024, compared to 40.8% as of December 31, 2023. The largest geographical concentrations as of December 31, 2024, were
obligations of states and political subdivisions located in the states of Pennsylvania and California.
As of December 31, 2024, the Corporation’s corporate bonds decreased
by $1.9 million, or 3.5%, from balances at December 31, 2023. 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 2024.
The following table presents investment securities at December 31, 2024
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
36
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Loans
Net loans outstanding increased $66.2 million, or 4.9%, from $1.34 billion
at December 31, 2023, to $1.41 billion at December 31, 2024. All loan categories showed an increase in balances over the prior period.
The Corporation’s strategic plan specifically focused on managed loan growth while maintaining quality of credit standards. This
focus resulted in loan growth across all loan segments in 2024.
Agriculture loans increased to $289.3 million at December 31, 2024, from
$257.3 million at December 31, 2023. Business loans increased by $6.6 million at December 31, 2024 from $354.3 million at December 31,
2023.
Consumer loans not secured by real estate represent a very small portion
of the Corporation’s loan portfolio, at $6.6 million as of December 31, 2024, and $6.4 million as of December 31, 2023. These loans
consist of personal loans, automobile loans, and other consumer-related loans. Home Equity loans increased by $11.2 million during 2024
from $107.2 million at December 31, 2023.
Non-Owner Occupied CRE loans increased by $1.2 million during 2024, from
$135.1 million at December 31, 2023. The Non-Owner Occupied CRE loans are further segmented by property type with the largest concentration
in Other Commercial representing 19.3% of total Non-Owner Occupied CRE loans outstanding. Office Space loans represent only 5.6% of total
Non-Owner Occupied CRE loans outstanding and Retail Center loans represent 7.8% of total Non-Owner Occupied CRE loans outstanding. There
is no significant single concentration in this category of loans.
The Residential Real Estate category represents the largest group of loans
for the Corporation. The Residential Real Estate category of total loans increased from $497.6 million on December 31, 2023, to $514.1
million on December 31, 2024. 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 held for investment mortgage growth in 2024 was related
to an increase in construction loan balances and adjustable rate mortgages. The Corporation also strategically generated more fixed-rate
mortgages during 2024 that were sold on the secondary market resulting in higher levels of gains on mortgages sold.
The following tables show the maturities for the loan portfolio as of December
31, 2024, 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
$ $ $ $ $
37
ENB FINANCIAL CORP
Management’s Discussion and Analysis
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, $308.8 million, or 22.2%, are fixed-rate loans as
of December 31, 2024. These loans will not reprice to a higher or lower interest rate unless they mature or are refinanced by the borrower.
The remaining $1,082.4 million, or 77.8% 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.
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
Other real estate owned — —
Non-accrual loans to total loans 0.83% 0.20%
Non-performing loans to total loans 0.83% 0.24%
Allowance for credit losses to total loans 1.13% 1.12%
Allowance for credit losses to non-accrual loans 135.63% 550.25%
Allowance for credit losses to non-performing loans 135.63% 463.11%
38
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Non-performing assets increased by $8,610,000, or 262.7%, from December
31, 2023, to December 31, 2024, primarily due to a number of unrelated relationships experiencing payment defaults. The primary reason
for the increase in non-accrual loans was the addition of a commercial loan relationship with balances of $3.8 million, a residential
mortgage loan in the amount of $1.1 million, another residential mortgage loan in the amount of $808,000, two agriculture mortgages in
the amount of $1.3 million, and a number of other much smaller loan relationships. The Corporation has taken a more disciplined approach
to classifying loans as non-accrual when they hit 90 days past due which is why there are no loans at December 31, 2024, that are 90 days
or more past due. While non-performing asset balances have increased in 2024, the Corporation’s total level of non-performing assets
is in line with its peer group.
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. The level of the Corporation’s non-performing
loans remains low relative to the size of the portfolio and relative to peers.
As of December 31, 2024 and 2023, the Corporation had no properties classified
as other real estate owned (OREO). Expenses related to OREO are included in other operating expenses and gains or losses on the sale of
OREO are included in other income on the Consolidated Statements of Income.
Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent
in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of
the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses
in accordance with U.S. generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent
in the loan portfolio.
The calculation, and detailed analysis supporting it, emphasizes the level
of delinquent, non-performing and classified loans. The allowance calculation includes specific provisions for non-performing loans and
general allocations to cover anticipated losses on all loan types based on historical losses. Based on the quarterly 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.
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, 2024 and December 31, 2023.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
$ $
Loans charged-off:
Agriculture 25 —
Total loans charged-off 98 64
Recoveries of loans previously charged-off
Agriculture — 71
Business Loans 6 11
Consumer Loans 21 4
Residential Real Estate — 8
Total recoveries 27 94
Net charge-offs (recoveries)
Business Loans (6 ) (11 )
Residential Real Estate — (8 )
Total net charge-offs (recoveries) 71 (30 )
Average loans outstanding
Net charge-offs (recoveries) as a % of average loans outstanding
Non-Owner Occupied CRE 0.00% 0.00%
Residential Real Estate 0.00% 0.00%
Total net charge-offs as a % of average loans outstanding 0.01% 0.00%
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.
The percentage of allowance indicates the percentage of the total allowance
and the percentage of loans indicates the percentage of the loan portfolio represented by the indicated loan type as of December 31, 2024
and December 31, 2023.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
December 31, December 31,
% of % of % of % of
$ Allowance Loans $ Allowance Loans
Deposits
The Corporation’s total ending deposits at December 31, 2024, increased
by $163.6 million, or 9.5%, from December 31, 2023. 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 2024, the Corporation grew core deposits at a slower pace due to
the rapidly rising rate environment and the financial/product options available to customers.
The Deposits by Major Classification table, shown below, provides the average
balances of each category for December 31, 2024 and December 31, 2023.
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 $51.8 million, or 3.6%, from December 31, 2023, to December 31, 2024. Non-interest bearing demand accounts decreased by $14.6
million, or 2.4%, and are the Corporation’s cheapest source of funding for balance sheet growth. Interest-bearing demand accounts
grew by $17.3 million, or 5.3%. Money market account average balances decreased by $4.6 million, or 2.8%, and savings accounts decreased
by $49.9 million, or 14.8%, from December 31, 2023, to December 31, 2024. 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 2024, time deposits grew significantly, by $163.8 million, or 78.6%, compared to average balances
at December 31, 2023, due partially to the derivative strategy which funded investment growth primarily with callable brokered CDs.
41
ENB FINANCIAL CORP
Management’s Discussion and Analysis
As of December 31, 2024, time deposits of $250,000 or more made up 15.4%
of the total time deposits. This compares to 17.2% on December 31, 2023. The total dollar amount of time deposits of $250,000 or more
increased $7.1 million, or 12.0%, from December 31, 2023 to December 31, 2024. 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
by maturity distribution.
MATURITY OF TIME DEPOSITS OF $250,000 OR MORE
(DOLLARS IN THOUSANDS)
December 31,
$ $
Over six months through twelve months 12,907 14,013
As of December 31, 2024 and 2023, the total uninsured deposits of the Corporation
were approximately $227,993,000 and $226,771,000, or 12.1% and 13.1% of total deposits, respectively. Total uninsured deposits is calculated
based on regulatory reporting requirements and reflects the portion of any deposit of a customer at an insured depository institution
that exceeds the applicable FDIC insurance coverage for that depositor at that institution and amounts in any other uninsured investment
or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime.
Borrowings
Total borrowings were $183.5 million as of December 31, 2024, and $140.8
million as of December 31, 2023. Short-term borrowings with the Federal Home Loan Bank (FHLB) increased to $60.0 million as of December
31, 2024, with no short-term borrowings at December 31, 2023. Long-term borrowings with the Federal Home Loan Bank (FHLB) decreased to
$83.8 million as of December 31, 2024, from $101.2 million as of December 31, 2023. These borrowings are used as a secondary source of
funding and to mitigate interest rate risk. The increase in short-term FHLB borrowing balances during the year was related to the derivative
strategy discussed above. As of December 31, 2024, all the borrowings of FHLB were fixed-rate loans. The Corporation continues to be well
under the FHLB maximum borrowing capacity which is $714.9 million as of December 31, 2024.
In addition to the long-term advances funded through the FHLB, the
Corporation previously completed two sales of a subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt
notes in December 2020 with a maturity date of December 30, 2030 and another $20.0 million in July 2022 with a maturity date of September
30, 2032. These notes are non-callable for 5 years and carry a fixed interest rate of 4.00% and 5.75%, respectively, for 5 years and then
convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes
are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the
Bank. As of December 31, 2024, $33.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% that will
be amortized to the call date on a pro-rata basis.
Stockholders’ Equity
Federal regulatory authorities require banks to meet minimum capital levels.
The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, maintains capital ratios well above those minimum
levels. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine
the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier I capital to risk-weighted
average assets does not include an add-back to capital for the amount of the allowance for credit losses, thereby making this ratio lower
than the total capital to risk-weighted assets ratio.
42
ENB FINANCIAL CORP
Management’s Discussion and Analysis
The consolidated asset limit on small bank holding companies is $3 billion
and a corporation with assets under that limit is not subject to the consolidated capital rules but may disclose capital amounts and ratios.
The Corporation has elected to disclose those amounts and ratios.
The following tables reflect the capital ratios for the Corporation and
Bank compared to the regulatory capital requirements.
REGULATORY CAPITAL RATIOS:
Regulatory Requirements
Adequately Well
As of December 31, 2024 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets
Consolidated 14.6% N/A N/A
Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Tier 1 Capital to Average Assets
Consolidated 7.5% N/A N/A
Total Capital to Risk-Weighted Assets
Consolidated 14.8% N/A N/A
Tier I Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Tier I Capital to Average Assets
Consolidated 7.7% N/A N/A
As of December 31, 2024 the Bank’s Tier 1 Leverage Ratio stood at
9.1% while the Corporation’s Tier 1 Leverage Ratio was 7.5%. Tier 1 Capital levels at the Corporation level were not impacted by
the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at the corporate level. As such, in terms of the
Corporation’s regulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of the $40
million subordinated debt issue. Most of the marked improvement in capital ratios occurred at the Bank level.
Since the Corporation elected to opt-out of the requirement to include
most components of accumulated other comprehensive income in calculating regulatory capital, the significant devaluation of the investment
portfolio that resulted in a higher level of unrealized losses, has not affected the regulatory capital. However, the changes in investment
unrealized gains and losses do impact tangible capital on the balance sheet on an ongoing basis and was adversely impacted by the dramatic
increase in market interest rates during years prior to 2024.
43
ENB FINANCIAL CORP
Management’s Discussion and Analysis
Contractual Cash Obligations
The Corporation has a number of contractual obligations that arise from
the normal course of business. The following table summarizes the contractual cash obligations of the Corporation as of December 31, 2024,
and shows the future periods in which settlement of the obligations is expected. The contractual obligation numbers below do not include
accrued interest. Refer to Note O to the Consolidated Financial Statements referenced in the table for additional details regarding these
obligations.
CONTRACTUAL OBLIGATIONS
(DOLLARS IN THOUSANDS)
Less than 1-3 4-5 More than
1 year years years 5 years Total
$ $ $ $ $
Critical Accounting Policies
The presentation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect many of
the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Credit Losses
A material estimate that is particularly susceptible to significant change
is the determination of the allowance for credit losses. Management believes that the allowance for credit losses is adequate and reasonable.
The Corporation’s methodology for determining the allowance for credit losses is described in an earlier section of Management’s
Discussion and Analysis. Given the very subjective nature of identifying and valuing credit losses, it is likely that well-informed individuals
could make materially different assumptions and, therefore, calculate a materially different allowance amount. Management uses available
information to recognize losses on loans; however, changes in economic conditions may necessitate revisions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for credit losses. Such
agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them