UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September~~June 30, ~~2017~~2020

o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period ~~from ________________________~~from________________________________ to ~~________________________~~

________________________________

ENB Financial Corp

(Exact name of registrant as specified in its charter)

Pennsylvania	000-53297	51-0661129
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No)


31 E. Main St., Ephrata, PA	17522-0457
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (717) 733-4181

Former name, former address, and former fiscal year, if changed since last report Not Applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
None.		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ Noo ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive ~~Date~~Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yesx ☒ Noo ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o☐	Accelerated filer	o☐
Non-accelerated filer	o	~~(Do not check if a smaller reporting company)~~
	☒	Smaller reporting company	x☒
		Emerging growth company	o☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ~~Act.~~ Act. o¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso ☐ Nox ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of~~November 5, 2017,~~August 1, 2020,the registrant had~~2,845,679~~5,568,601shares of ~~$0.20~~$0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

~~September~~June 30, ~~2017~~2020

Part I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

			Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019, and December 31, ~~2016~~2019 (Unaudited)	3

			Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	4

			Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	5

			Consolidated Statements of ~~Cash Flows~~Changes in Stockholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 (Unaudited)	6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)		~~Notes to the Unaudited Consolidated Interim Financial Statements~~	~~7-33~~7

	Notes to the Unaudited Consolidated Interim Financial Statements		8-35

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~34-70~~36-71

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	~~71-75~~72-77

	Item 4.	Controls and Procedures	76



~~Part II – OTHER INFORMATION~~			77

	~~Item 1.~~	~~Legal Proceedings~~	77

	~~Item 1A.~~	~~Risk Factors~~	77

	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	77

	~~Item 3.~~	~~Defaults Upon Senior Securities~~	77

	~~Item 4.~~	~~Mine Safety Disclosures~~	77

	~~Item 5.~~	~~Other Information~~	77

	~~Item 6.~~	~~Exhibits~~	78


Part II – ~~SIGNATURE PAGE~~OTHER INFORMATION			79

	Item 1.	Legal Proceedings	79

	Item 1A.	Risk Factors	79

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79

	Item 3.	Defaults upon Senior Securities	80

	Item 4.	Mine Safety Disclosures	80

	Item 5.	Other Information	80

	Item 6.	Exhibits	81


SIGNATURE PAGE			82

Index

ENB FINANCIAL CORP

Part I - Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

September 30, December 31, September 30,
2017 2016 2016
$ $ $
ASSETS
Cash and due from banks 18,426 19,852 16,055
Interest-bearing deposits in other banks 25,814 25,780 33,812

   Total cash and cash equivalents 44,240 45,632 49,867

Securities available for sale (at fair value) 320,695 308,111 298,139

Loans held for sale 3,809 2,552 4,525

Loans (net of unearned income) 584,077 571,567 565,968

   Less: Allowance for loan losses 8,028 7,562 7,435

   Net loans 576,049 564,005 558,533

Premises and equipment 24,402 22,568 22,776
Regulatory stock 6,139 5,372 5,218
Bank owned life insurance 25,161 24,687 24,489
Other assets 9,583 11,326 7,140

       Total assets 1,010,078 984,253 970,687

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposits:
    Noninterest-bearing 301,978 280,543 260,873
    Interest-bearing 536,847 536,948 531,787

    Total deposits 838,825 817,491 792,660

  Short-term borrowings — 8,329 12,053
  Long-term debt 68,350 61,257 63,757
  Other liabilities 2,036 2,237 2,264

       Total liabilities 909,211 889,314 870,734

Stockholders' equity:
  Common stock, par value $0.20;
Shares:  Authorized 12,000,000
             Issued 2,869,557 and Outstanding  2,848,679
            (Issued 2,869,557 and Outstanding 2,850,382 as of 12/31/16)
          (Issued 2,869,557 and Outstanding  2,851,338 as of 9/30/16) 574 574 574
  Capital surplus 4,413 4,403 4,398
  Retained earnings 98,815 95,475 94,353
  Accumulated other comprehensive income (loss) net of tax (2,232 ) (4,885 ) 1,221
  Less: Treasury stock cost on 20,878 shares (19,175 shares
   as of 12/31/16 and 18,219 shares as of 9/30/16) (703 ) (628 ) (593 )

       Total stockholders' equity 100,867 94,939 99,953

       Total liabilities and stockholders' equity 1,010,078 984,253 970,687

	June 30,			December 31,			June 30,
	2020			2019			2019
	$			$			$
ASSETS
Cash and due from banks		21,320			24,304			17,210
Interest-bearing deposits in other banks		39,904			16,749			34,460

Total cash and cash equivalents		61,224			41,053			51,670

Securities available for sale (at fair value)		334,687			308,097			290,927
Equity securities (at fair value)		6,775			6,708			6,231

Loans held for sale		2,295			2,342			3,473

Loans (net of unearned income)		835,969			753,618			718,356

Less: Allowance for loan losses		10,770			9,447			8,957

Net loans		825,199			744,171			709,399

Premises and equipment		24,918			25,033			25,339
Regulatory stock		6,942			7,291			6,959
Bank owned life insurance		29,214			28,818			28,429
Other assets		8,222			8,237			9,218

Total assets		1,299,476			1,171,750			1,131,645

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits:
Noninterest-bearing		466,392			363,857			345,483
Interest-bearing		641,522			610,231			596,123

Total deposits		1,107,914			974,088			941,606

Short-term borrowings		—			200			—
Long-term debt		65,072			77,872			74,628
Other liabilities		4,328			2,902			2,897

Total liabilities		1,177,314			1,055,062			1,019,131

Stockholders' equity:
Common stock, par value $0.10
Shares: Authorized 24,000,000
Issued 5,739,114 and Outstanding 5,574,601 as of 6/30/20,
5,640,742 as of 12/31/19, and 5,692,384 as of 6/30/19		574			574			574
Capital surplus		4,466			4,482			4,454
Retained earnings		115,914			111,944			108,024
Accumulated other comprehensive income		4,522			1,600			298
Less: Treasury stock cost on 164,513 shares as of 6/30/20, 98,372 as of 12/31/19,
and 46,730 as of 6/30/19		(3,314	)		(1,912	)		(836	)

Total stockholders' equity		122,162			116,688			112,514

Total liabilities and stockholders' equity		1,299,476			1,171,750			1,131,645

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	Three Months ended September 30,				Nine Months ended September 30,				Three Months ended June 30,				Six Months ended June 30,
	2017		2016		2017		2016		2020		2019		2020			2019
	$		$		$		$		$		$		$			$
Interest and dividend income:
Interest and fees on loans		6,180		5,721		17,996		16,716		8,636		8,309		17,088			16,332
Interest on securities available for sale
Taxable		997		581		2,818		729		1,065		1,242		2,286			2,517
Tax-exempt		1,051		966		3,281		2,788		644		608		1,210			1,255
Interest on deposits at other banks		111		38		257		94		21		119		81			166
Dividend income		105		87		287		246		102		184		290			354

Total interest and dividend income		8,444		7,393		24,639		20,573		10,468		10,462		20,955			20,624

Interest expense:
Interest on deposits		489		509		1,438		1,568		543		913		1,352			1,737
Interest on borrowings		265		242		749		751		456		391		918			746

Total interest expense		754		751		2,187		2,319		999		1,304		2,270			2,483

Net interest income		7,690		6,642		22,452		18,254		9,469		9,158		18,685			18,141

Provision for loan losses		240		200		450		200		975		30		1,325			210

Net interest income after provision for loan losses		7,450		6,442		22,002		18,054		8,494		9,128		17,360			17,931

Other income:
Trust and investment services income		427		344		1,335		1,104		416		505		1,038			1,042
Service fees		648		589		1,894		1,644		635		693		1,314			1,323
Commissions		583		552		1,714		1,611		649		756		1,335			1,411
Gains on securities transactions, net		170		464		417		2,130
Gains on the sale of debt securities, net										367		106		649			187
Gains (losses) on equity securities, net										5		27		(225	)		44
Gains on sale of mortgages		510		557		1,302		1,109		1,690		415		2,231			764
Earnings on bank-owned life insurance		170		210		514		604		205		179		411			357
Other income		114		112		370		364		101		81		82			178

Total other income		2,622		2,828		7,546		8,566		4,068		2,762		6,835			5,306

Operating expenses:
Salaries and employee benefits		4,840		4,219		14,370		12,230		4,966		5,105		10,662			10,293
Occupancy		624		555		1,828		1,584		616		590		1,207			1,220
Equipment		299		276		878		811		316		287		606			574
Advertising & marketing		143		120		539		422		218		166		492			416
Computer software & data processing		575		471		1,654		1,345		768		609		1,474			1,266
Shares tax		215		227		644		680		239		232		479			465
Professional services		377		380		1,260		1,207		507		556		1,130			1,031
Other expense		574		500		1,707		1,663		614		672		1,304			1,234

Total operating expenses		7,647		6,748		22,880		19,942		8,244		8,217		17,354			16,499

Income before income taxes		2,425		2,522		6,668		6,678		4,318		3,673		6,841			6,738

Provision for federal income taxes		391		445		935		1,045		719		584		1,077			1,046

Net income		2,034		2,077		5,733		5,633		3,599		3,089		5,764			5,692

Earnings per share of common stock		0.71		0.73		2.01		1.98		0.64		0.54		1.03			1.00

Cash dividends paid per share		0.28		0.27		0.84		0.81		0.160		0.155		0.320			0.305

Weighted average shares outstanding		2,848,504		2,851,939		2,849,849		2,851,184		5,581,961		5,692,506		5,604,609			5,693,418

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Three Months ended September 30,						Nine Months ended September 30,						Three Months ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2020			2019			2020			2019
	$			$			$			$			$			$			$			$

Net income		2,034			2,077			5,733			5,633			3,599			3,089			5,764			5,692

Other comprehensive income (loss):
Other comprehensive income, net of tax:
Securities available for sale not other-than-temporarily impaired:

Unrealized gains (losses) arising during the period		(406	)		(650	)		4,437			4,362
Unrealized gains arising during the period														4,695			4,520			4,346			7,751
Income tax effect		138			221			(1,509	)		(1,483	)		(986	)		(949	)		(911	)		(1,627	)
		(268	)		(429	)		2,928			2,879			3,709			3,571			3,435			6,124

Gains recognized in earnings		(170	)		(464	)		(417	)		(2,130	)		(367	)		(106	)		(649	)		(187	)
Income tax effect		58			158			142			724			77			22			136			39
		(112	)		(306	)		(275	)		(1,406	)		(290	)		(84	)		(513	)		(148	)

Other comprehensive income (loss), net of tax		(380	)		(735	)		2,653			1,473
Other comprehensive income, net of tax														3,419			3,487			2,922			5,976

Comprehensive Income		1,654			1,342			8,386			7,106			7,018			6,576			8,686			11,668

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) Nine Months Ended September 30,
2017 2016
$ $
Cash flows from operating activities:
Net income 5,733 5,633
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees 2,936 5,393
Decrease in interest receivable 359 452
Increase (decrease) in interest payable 7 (41 )
Provision for loan losses 450 200
Gains on securities transactions, net (417 ) (2,130 )
Gains on sale of mortgages (1,302 ) (1,109 )
Loans originated for sale (34,064 ) (36,127 )
Proceeds from sales of loans 34,109 33,837
Earnings on bank-owned life insurance (514 ) (604 )
Depreciation of premises and equipment and amortization of software 1,229 1,209
Net increase in deferred income tax (159 ) (314 )
Other assets and other liabilities, net (71 ) 29
Net cash provided by operating activities 8,296 6,428

Cash flows from investing activities:
Securities available for sale:
   Proceeds from maturities, calls, and repayments 14,855 51,739
   Proceeds from sales 60,404 142,095
   Purchases (86,007 ) (203,307 )
Purchase of regulatory bank stock (2,537 ) (1,894 )
Redemptions of regulatory bank stock 1,770 990
Net increase in loans (12,829 ) (45,803 )
Purchases of premises and equipment, net (2,882 ) (2,136 )
Purchase of computer software (102 ) (295 )
Net cash used for investing activities (27,328 ) (58,611 )

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts 30,680 68,433
Net decrease in time deposits (9,346 ) (15,835 )
Net increase (decrease) in short-term borrowings (8,329 ) 3,317
Proceeds from long-term debt 17,093 17,163
Repayments of long-term debt (10,000 ) (13,000 )
Dividends paid (2,393 ) (2,309 )
Proceeds from sale of treasury stock 403 368
Treasury stock purchased (468 ) (314 )
Net cash provided by financing activities 17,640 57,823
Increase (decrease) in cash and cash equivalents (1,392 ) 5,640
Cash and cash equivalents at beginning of period 45,632 44,227
Cash and cash equivalents at end of period 44,240 49,867

Supplemental disclosures of cash flow information:
    Interest paid 2,180 2,360
    Income taxes paid 1,175 1,340

Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale (4,020 ) (2,231 )

									Accumulated
									Other						Total
	Common		Capital			Retained			Comprehensive			Treasury			Stockholders'
	Stock		Surplus			Earnings			Income (Loss)			Stock			Equity
	$		$			$			$			$			$

Balances, December 31, 2018		574		4,435			104,067			(5,678	)		(596	)		102,802

Net income		—		—			2,603			—			—			2,603

Other comprehensive income net of tax		—		—			—			2,489			—			2,489
Treasury stock purchased - 18,800 shares		—		—			—			—			(330	)		(330	)

Treasury stock issued - 8,188 shares		—		3			—			—			143			146

Cash dividends paid, $0.15 per share		—		—			(852	)		—			—			(852	)

Balances, March 31, 2019		574		4,438			105,818			(3,189	)		(783	)		106,858

Net income		—		—			3,089			—			—			3,089

Other comprehensive income net of tax		—		—			—			3,487			—			3,487

Treasury stock purchased - 29,366 shares		—		—			—			—			(204	)		(204	)

Treasury stock issued - 16,686 shares		—		16			—			—			151			167

Cash dividends paid, $0.155 per share		—		—			(883	)		—			—			(883	)

Balances, June 30, 2019		574		4,454			108,024			298			(836	)		112,514


Balances, December 31, 2019		574		4,482			111,944			1,600			(1,912	)		116,688

Net income		—		—			2,165			—			—			2,165

Other comprehensive loss net of tax		—		—			—			(497	)		—			(497	)

Treasury stock purchased - 49,911 shares		—		—			—			—			(1,098	)		(1,098	)

Treasury stock issued - 7,670 shares		—		(6	)		—			—			156			150

Cash dividends paid, $0.16 per share		—		—			(902	)		—			—			(902	)

Balances, March 31, 2020		574		4,476			113,207			1,103			(2,854	)		116,506

Net income		—		—			3,599			—			—			3,599

Other comprehensive income net of tax		—		—			—			3,419			—			3,419

Treasury stock purchased - 32,966 shares		—		—			—			—			(627	)		(627	)

Treasury stock issued - 9,066 shares		—		(10	)		—			—			167			157

Cash dividends paid, $0.16 per share		—		—			(892	)		—			—			(892	)

Balances, June 30, 2020		574		4,466			115,914			4,522			(3,314	)		122,162

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)	Six Months Ended June 30,
	2020			2019
	$			$
Cash flows from operating activities:
Net income		5,764			5,692
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of securities premiums and discounts and loan fees		1,496			1,692
Amortization of operating leases right-of-use assets		89			87
Increase in interest receivable		(396	)		(343	)
(Decrease) increase in interest payable		(111	)		96
Provision for loan losses		1,325			210
Gains on the sale of debt securities, net		(649	)		(187	)
Loss on equity securities, net		225			(44	)
Gains on sale of mortgages		(2,231	)		(764	)
Loans originated for sale		(58,228	)		(20,210	)
Proceeds from sales of loans		60,506			18,930
Earnings on bank-owned life insurance		(411	)		(357	)
Depreciation of premises and equipment and amortization of software		767			783
Deferred income tax		(373	)		(274	)
Other assets and other liabilities, net		1,438			123
Net cash provided by operating activities		9,211			5,434

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		34,427			10,813
Proceeds from sales		43,818			28,648
Purchases		(102,034	)		(30,115	)
Equity securities
Proceeds from sales		—			—
Purchases		(292	)		(153	)
Purchase of regulatory bank stock		(1,128	)		(1,102	)
Redemptions of regulatory bank stock		1,477			491
Net increase in loans		(82,304	)		(24,451	)
Purchases of premises and equipment, net		(589	)		(517	)
Purchase of computer software		(29	)		(31	)
Net cash used for investing activities		(106,654	)		(16,417	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		143,139			18,222
Net (decrease) increase in time deposits		(9,313	)		3,650
Net decrease in short-term borrowings		(200	)		(7,870	)
Proceeds from long-term debt		12,984			16,212
Repayments of long-term debt		(25,784	)		(6,970	)
Dividends paid		(1,794	)		(1,735	)
Proceeds from sale of treasury stock		307			313
Treasury stock purchased		(1,725	)		(534	)
Net cash provided by financing activities		117,614			21,288
Increase in cash and cash equivalents		20,171			10,305
Cash and cash equivalents at beginning of period		41,053			41,365
Cash and cash equivalents at end of period		61,224			51,670

Supplemental disclosures of cash flow information:
Interest paid		2,381			2,387
Income taxes paid		—			800

Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale		(3,697	)		(7,564	)
Initial recognition of operating right-of-use assets		—			1,075
Initial recognition of operating lease liabilities		—			1,075

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and to general practices within the banking industry. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all significant adjustments considered necessary for fair presentation have been included. Certain items previously reported have been reclassified to conform to the current period’s reporting format. Such reclassifications did not affect net income or stockholders’ equity.

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the ~~third~~second quarter of ~~2017,~~2020, is reporting on the results of operations and financial condition of ENB Financial Corp.

Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2017.~~2020. For further information, refer to the consolidated financial statements and footnotes thereto included in ENB Financial Corp’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Revenue from Contracts with Customers

The Company records revenue from contracts with customers in accordance with Accounting Standards Topic 606, Revenue from Contracts with Customers (Topic 606). Under Topic 606, the Corporation must identify contracts with customers, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Corporation satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

The Corporation’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Corporation has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

2. Securities Available for Sale

The amortized cost, gross unrealized gains and losses, and fair value of securities held at ~~September~~June 30, ~~2017,~~ 2020,

and December 31, ~~2016,~~2019, are as follows:

			Gross		Gross							Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	$		$		$			$		$
September 30, 2017
June 30, 2020
U.S. government agencies		29,107		3		(463	)		28,647		8,217		163		(1	)		8,379
U.S. agency mortgage-backed securities		54,181		36		(634	)		53,583		71,241		1,379		(67	)		72,553
U.S. agency collateralized mortgage obligations		54,503		117		(582	)		54,038		45,854		857		(149	)		46,562
Asset-backed securities											33,340		—		(1,389	)		31,951
Corporate bonds		57,384		64		(312	)		57,136		62,426		1,209		(204	)		63,431
Obligations of states and political subdivisions		123,344		505		(2,176	)		121,673		107,885		4,103		(177	)		111,811
Total debt securities		318,519		725		(4,167	)		315,077
Marketable equity securities		5,557		61		—			5,618
Total securities available for sale		324,076		786		(4,167	)		320,695		328,963		7,711		(1,987	)		334,687

December 31, 2016
December 31, 2019
U.S. government agencies		33,124		—		(863	)		32,261		32,621		31		(28	)		32,624
U.S. agency mortgage-backed securities		56,826		22		(979	)		55,869		48,859		215		(448	)		48,626
U.S. agency collateralized mortgage obligations		38,737		41		(842	)		37,936		60,124		323		(194	)		60,253
Asset-backed securities											23,646		7		(391	)		23,262
Corporate bonds		52,928		8		(845	)		52,091		54,604		316		(40	)		54,880
Obligations of states and political subdivisions		128,428		346		(4,344	)		124,430		86,216		2,245		(9	)		88,452
Total debt securities		310,043		417		(7,873	)		302,587
Marketable equity securities		5,469		55		—			5,524
Total securities available for sale		315,512		472		(7,873	)		308,111		306,070		3,137		(1,110	)		308,097

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

The amortized cost and fair value of ~~debt~~ securities available for sale at ~~September~~June 30, ~~2017,~~2020, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

CONTRACTUAL MATURITY OF DEBT SECURITIES
(DOLLARS IN THOUSANDS)
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
	$		$		$
Due in one year or less		17,425		17,322		38,520		38,932
Due after one year through five years		127,834		126,947		111,575		113,440
Due after five years through ten years		54,502		53,703		49,932		50,325
Due after ten years		118,758		117,105		128,936		131,990
Total debt securities		318,519		315,077		328,963		334,687

Securities available for sale with a par value of ~~$63,286,000~~$90,333,000 and ~~$63,726,000~~$66,712,000 at ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was ~~$65,495,000~~$95,814,000 at ~~September~~June 30, ~~2017,~~2020, and ~~$65,770,000~~$68,732,000 at December 31, ~~2016.~~2019.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Proceeds from active sales of securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.

~~PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE~~

~~(DOLLARS IN THOUSANDS)~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
$ $ $ $
Proceeds from sales 20,319 38,592 60,404 142,095
Gross realized gains 243 468 631 2,186
Gross realized losses 73 4 214 56

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE
(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	$			$			$			$
Proceeds from sales		16,409			18,401			43,818			28,648
Gross realized gains		369			122			666			218
Gross realized losses		(2	)		(16	)		(17	)		(31	)

Management evaluates all of the Corporation’s securities for ~~other than temporary~~other-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first ~~nine~~six months of ~~2017~~2020 or ~~2016.~~2019.

Information pertaining to securities with gross unrealized losses at ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

TEMPORARY IMPAIRMENTS OF SECURITIES	TEMPORARY IMPAIRMENTS OF SECURITIES
(DOLLARS IN THOUSANDS)	(DOLLARS IN THOUSANDS)
		Less than 12 months					More than 12 months					Total					Less than 12 months						More than 12 months						Total
				Gross					Gross					Gross						Gross						Gross						Gross
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
		Value		Losses			Value		Losses			Value		Losses			Value			Losses			Value			Losses			Value			Losses
		$		$			$		$			$		$			$			$			$			$			$			$
As of September 30, 2017
As of June 30, 2020
U.S. government agencies			10,925		(111	)		15,718		(352	)		26,643		(463	)		1,195			(1	)		—			—			1,195			(1	)
U.S. agency mortgage-backed securities			29,092		(267	)		15,140		(367	)		44,232		(634	)		5,790			(15	)		4,130			(52	)		9,920			(67	)
U.S. agency collateralized mortgage obligations			23,804		(277	)		11,438		(305	)		35,242		(582	)		17,034			(149	)		—			—			17,034			(149	)
Asset-backed securities																			18,904			(672	)		13,047			(717	)		31,951			(1,389	)
Corporate bonds			17,539		(69	)		18,513		(243	)		36,052		(312	)		11,548			(73	)		2,903			(131	)		14,451			(204	)
Obligations of states & political subdivisions			35,033		(595	)		50,271		(1,581	)		85,304		(2,176	)		10,873			(177	)		—			—			10,873			(177	)

Total debt securities			116,393		(1,319	)		111,080		(2,848	)		227,473		(4,167	)

Marketable equity securities			—		—			—		—			—		—

Total temporarily impaired securities			116,393		(1,319	)		111,080		(2,848	)		227,473		(4,167	)		65,344			(1,087	)		20,080			(900	)		85,424			(1,987	)

As of December 31, 2016

As of December 31, 2019
U.S. government agencies			32,261		(863	)		—		—			32,261		(863	)		1,222			(3	)		15,971			(25	)		17,193			(28	)
U.S. agency mortgage-backed securities			47,418		(856	)		3,989		(123	)		51,407		(979	)		5,040			(32	)		24,027			(416	)		29,067			(448	)
U.S. agency collateralized mortgage obligations			33,206		(842	)		—		—			33,206		(842	)		17,457			(50	)		17,512			(144	)		34,969			(194	)
Asset-backed securities																			10,278			(169	)		9,126			(222	)		19,404			(391	)
Corporate bonds			45,335		(830	)		2,002		(15	)		47,337		(845	)		2,562			(4	)		13,041			(36	)		15,603			(40	)
Obligations of states & political subdivisions			101,229		(4,063	)		8,041		(281	)		109,270		(4,344	)		2,642			(9	)		—			—			2,642			(9	)

Total debt securities			259,449		(7,454	)		14,032		(419	)		273,481		(7,873	)

Marketable equity securities			—		—			—		—			—		—

Total temporarily impaired securities			259,449		(7,454	)		14,032		(419	)		273,481		(7,873	)		39,201			(267	)		79,677			(843	)		118,878			(1,110	)

In the debt security portfolio there were ~~162~~48 positions that were carrying unrealized losses as of ~~September~~June 30, ~~2017.~~2020. There were no instruments considered to be other-than-temporarily impaired at ~~September~~June 30, ~~2017.~~2020.

The Corporation evaluates ~~both equity and~~ fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income.

As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impact the value of the bonds by causing accelerated amortization. If a security was purchased at a high premium, or dollar price above par, the remaining premium has to be amortized on a straight line basis to the known call date. Calls can occur in a majority of the securities the Corporation purchases but they are dependent on the structure of the instrument, and can also be dependent on certain conditions.

On March 15, 2016, management was made aware of a regulatory call provision on a CoBank bond held by the Corporation. CoBank is a sub-U.S. agency and cooperative of the Farm Credit Association (FCA), a U.S. government sponsored enterprise (GSE). The bond is classified as a corporate bond for disclosure purposes. The regulatory call was not anticipated and the high coupon bond was purchased at a high premium. The call required accelerated amortization to the April 15, 2016 call date, resulting in an additional $479,000 of amortization through September 30, 2016. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018.

910

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~On April 26, 2016, management became aware of an AgriBank bond call. AgriBank is another cooperative of~~3. Equity Securities

The following table summarizes the ~~FCA. The Corporation owned $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book~~amortized cost, gross unrealized gains and losses, and fair value of ~~$6.6 million~~equity securities held at June 30, 2020 and December 31, 2019.

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
June 30, 2020
CRA-qualified mutual funds		6,148		—		—			6,148
Bank stocks		829		—		(202	)		627
Total equity securities		6,977		—		(202	)		6,775

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
December 31, 2019
CRA-qualified mutual funds		6,071		—		—			6,071
Bank stocks		614		26		(3	)		637
Total equity securities		6,685		26		(3	)		6,708

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and six months ended June 30, 2020 and 2019, and the portion of unrealized gains and losses for the period that relates to equity investments held as of June 30, 2016. AgriBank went public with this call, stating they intended to call the bonds on July 15, 2016. As a result of this par call notice, management accelerated the amortization of the remaining premium on the AgriBank bond, beginning in April2020 and running until the call date of July 15, 2016. As of September 30, 2016, $1,202,000 of accelerated amortization was recorded on this bond. After July 15, 2016, the Corporation no longer held any sub-U.S. Agency debt of FCA or any other U.S. GSE.2019.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS
(DOLLARS IN THOUSANDS)
	Three Months Ended				Six Months Ended
	June 30, 2020		June 30, 2019		June 30, 2020			June 30, 2019
	$		$		$			$

Net gains (losses) recognized in equity securities during the period		5		27		(225	)		44

Less: Net gains realized on the sale of equity securities during the period		—		—		—			—

Unrealized gains (losses) recognized in equity securities held at reporting date		5		27		(225	)		44

In both the CoBank and AgriBank matters investors, including the Corporation, have contested the ability of both CoBank and AgriBank to conduct these regulatory calls. Presently, the Corporation is listed on a complaint filed in the U.S District Court for the Southern District of New York against CoBank by over 30 previous holders of CoBank bonds. The complaint has gone through initial mediation phases and the discovery stage which concluded on September 29, 2017. The parties are presently engaged in expert discovery, with the matter proceeding toward trial. Management anticipates going through a similar process with AgriBank, however that litigation is taking the form of a class action lawsuit with a plaintiff representing the class. The Corporation, as a member of the class, initially waited for the court to issue a ruling on AgriBank’s motion to dismiss. The District Court Judge issued an opinion in mid-September 2017, denying AgriBank’s motion to dismiss. The District Court recently entered a discovery schedule that establishes mid-May 2018 as the deadline to complete fact discovery, and mid-August 2018 as the deadline for expert discovery. In both litigation efforts management is contesting the process that was undertaken to exercise these regulatory calls. Management cannot make any prediction or draw any conclusion as to the outcome of any negotiations and/or litigation in connection with these matters.

1011

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4. Loans and Allowance for Loan Losses

The following table presents the Corporation’s loan portfolio by category of loans as of ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016:~~2019:

~~LOAN PORTFOLIO~~

~~(DOLLARS IN THOUSANDS)~~

LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
	September 30,			December 31,			June 30,			December 31,
	2017			2016			2020			2019
	$			$			$			$
Commercial real estate
Commercial mortgages		90,468			86,434			125,925			120,212
Agriculture mortgages		150,269			163,753			175,108			175,367
Construction		18,762			24,880			20,285			16,209
Total commercial real estate		259,499			275,067			321,318			311,788

Consumer real estate (a)
1-4 family residential mortgages		168,984			150,253			261,772			258,676
Home equity loans		11,457			10,391			10,688			9,770
Home equity lines of credit		57,991			53,127			69,507			70,809
Total consumer real estate		238,432			213,771			341,967			339,255

Commercial and industrial
Commercial and industrial		41,724			42,471			129,459			58,019
Tax-free loans		19,632			13,091			16,607			16,388
Agriculture loans		18,487			21,630			21,581			20,804
Total commercial and industrial		79,843			77,192			167,647			95,211

Consumer		5,166			4,537			5,061			5,416

Gross loans prior to deferred fees		582,940			570,567			835,993			751,670
Less:

Deferred loan costs, net		1,137			1,000			(24	)		1,948
Allowance for loan losses		(8,028	)		(7,562	)		(10,770	)		(9,447	)
Total net loans		576,049			564,005			825,199			744,171

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled ~~$90,123,000~~$187,258,000 and ~~$66,767,000~~$154,577,000 as of ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, respectively.

The largest movement within the Corporation’s loan portfolio since December 31, 2019 was the sharp growth in the commercial and industrial loan sector, which experienced a $71.4 million, or 123.1% increase. This was a direct result of the Small Business Administration’s new Paycheck Protection Program (PPP) established as part of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020, and by June 30, 2020 had approved over 950 applications that resulted in $76.1 million in PPP loan balances. The majority of these loans have been written with a two-year term, however management expects the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2020 with further declines during 2021.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016.~~2019. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

The Corporation's internally assigned grades for commercial credits are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem, if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

June 30, 2020	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		123,203		159,455		20,285		119,227		16,607		19,192		457,969
Special Mention		813		3,242		—		5,062		—		832		9,949
Substandard		1,909		12,411		—		5,139		—		1,557		21,016
Doubtful		—		—		—		31		—		—		31
Loss		—		—		—		—		—		—		—

Total		125,925		175,108		20,285		129,459		16,607		21,581		488,965

September 30, 2017 Commercial
Mortgages Agriculture
Mortgages Construction Commercial
and
Industrial Tax-free
Loans Agriculture
Loans Total
$ $ $ $ $ $ $
Grade:
Pass 84,614 139,458 17,762 37,900 19,422 17,490 316,646
Special Mention 373 5,095 — 795 210 229 6,702
Substandard 5,481 5,716 1,000 3,029 — 768 15,994
Doubtful — — — — — — —
Loss — — — — — — —

Total 90,468 150,269 18,762 41,724 19,632 18,487 339,342

December 31, 2016	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
December 31, 2019															Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$		$		$		$		$		$		$		$
Grade:
Pass		78,367		155,820		23,880		36,887		13,091		20,245		328,290		117,875		158,896		16,209		52,028		16,388		18,530		379,926
Special Mention		4,860		5,360		—		1,955		—		653		12,828		827		4,546		—		618		—		939		6,930
Substandard		3,207		2,573		1,000		3,629		—		732		11,141		1,510		11,925		—		5,293		—		1,335		20,063
Doubtful		—		—		—		—		—		—		—		—		—		—		80		—		—		80
Loss		—		—		—		—		—		—		—		—		—		—		—		—		—		—

Total		86,434		163,753		24,880		42,471		13,091		21,630		352,259		120,212		175,367		16,209		58,019		16,388		20,804		406,999

1213

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Substandard loans increased by $953,000, or 4.8%, while special mention loans have increased by $3.0 million, or 43.6%, from December 31, 2019 to June 30, 2020. Substandard loans increased from $20.1 million to $21.0 million from December 31, 2019, to June 30, 2020 while special mention loans increased from $6.9 million to $9.9 million during this same period. The loan areas that experienced material changes in special mention and substandard loans were commercial and industrial, agricultural mortgages, and commercial mortgages. Under commercial and industrial loans, $4.4 million of pass-rated loans were transferred to special mention with $3.9 million of this amount consisting of loans to a commercial leasing company. Under agricultural mortgages, the changes in both substandard and special mention were caused by a number of unrelated borrowers experiencing grading changes or paying off. During the second quarter of 2020, a livestock operating farm with $1.3 million of balances was transferred into substandard from pass. Partially offsetting this, the Corporation received a $825,000 loan payoff on another real estate secured agricultural mortgage. There was also $745,000 of loans transferred into substandard from special mention in the first quarter of 2020. In addition to these loans, two other dairy farm loans primarily accounted for the remaining variance in substandard agricultural mortgages from December 31, 2019 to June 30, 2020. One dairy farmer with $1,130,000 of loans came off of substandard in the second quarter of 2020, while another dairy farmer with three loans totaling $778,000 was placed into substandard.

Two agricultural mortgages were primarily responsible for the $1.3 million reduction in special mention agricultural mortgages between December 31, 2019 and June 30, 2020. One was the $745,000 farm loan that was transferred from special mention to substandard in the first quarter of 2020. The other was a dairy farmer that sold out and paid off $730,000 of special mention agricultural mortgage loans in the second quarter of 2020. Lastly, under commercial mortgages, one residential investment property borrower with $443,000 of loans was placed on substandard in the first quarter of 2020. Note the sharp growth in commercial and industrial pass loans was a result of the introduction of the new PPP loans, which started in April 2020.

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. Non-performing loans consist of those loans greater than 90 days delinquent and nonaccrual loans. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

September 30, 2017	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
June 30, 2020											1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$		$		$		$		$		$

Performing		168,863		11,457		57,991		5,160		243,471		260,990		10,596		69,497		5,053		346,136
Non-performing		121		—		—		6		127		782		92		10		8		892

Total		168,984		11,457		57,991		5,166		243,598		261,772		10,688		69,507		5,061		347,028

December 31, 2016	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
December 31, 2019											1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$		$		$		$		$		$

Performing		149,873		10,388		53,127		4,536		217,924		257,374		9,678		70,799		5,412		343,263
Non-performing		380		3		—		1		384		1,302		92		10		4		1,408

Total		150,253		10,391		53,127		4,537		218,308		258,676		9,770		70,809		5,416		344,671

1314

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

Loans
Greater Receivable >
30-59 Days 60-89 Days than 90 Total Past Total Loans 90 Days and
September 30, 2017 Past Due Past Due Days Due Current Receivable Accruing
$ $ $ $ $ $ $
Commercial real estate
   Commercial mortgages 248 110 418 776 89,692 90,468 —
   Agriculture mortgages — — — — 150,269 150,269 —
   Construction — — — — 18,762 18,762 —
Consumer real estate
   1-4 family residential mortgages 1,310 124 121 1,555 167,429 168,984 57
   Home equity loans 9 — — 9 11,448 11,457 —
   Home equity lines of credit — 30 — 30 57,961 57,991 —
Commercial and industrial
   Commercial and industrial — — 266 266 41,458 41,724 191
   Tax-free loans — — — — 19,632 19,632 —
   Agriculture loans — — — — 18,487 18,487 —
Consumer 9 8 6 23 5,143 5,166 6
       Total 1,576 272 811 2,659 580,281 582,940 254

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
June 30, 2020	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		221		221		125,704		125,925		—
Agriculture mortgages		305		—		—		305		174,803		175,108		—
Construction		1,038		—		—		1,038		19,247		20,285		—
Consumer real estate
1-4 family residential mortgages		307		—		782		1,089		260,683		261,772		291
Home equity loans		2		—		92		94		10,594		10,688		—
Home equity lines of credit		9		—		10		19		69,488		69,507		10
Commercial and industrial
Commercial and industrial		23		—		521		544		128,915		129,459		—
Tax-free loans		—		—		—		—		16,607		16,607		—
Agriculture loans		47		—		—		47		21,534		21,581		—
Consumer		6		8		8		22		5,039		5,061		8
Total		1,737		8		1,634		3,379		832,614		835,993		309

AGING OF LOANS RECEIVABLE

Loans
Greater Receivable >
30-59 Days 60-89 Days than 90 Total Past Total Loans 90 Days and
December 31, 2016 Past Due Past Due Days Due Current Receivable Accruing
$ $ $ $ $ $ $
Commercial real estate
   Commercial mortgages — 419 417 836 85,598 86,434 —
   Agriculture mortgages 165 — — 165 163,588 163,753 —
   Construction — — — — 24,880 24,880 —
Consumer real estate
   1-4 family residential mortgages 565 662 380 1,607 148,646 150,253 380
   Home equity loans 178 — 3 181 10,210 10,391 3
   Home equity lines of credit — — — — 53,127 53,127 —
Commercial and industrial
   Commercial and industrial 266 — 75 341 42,130 42,471 —
   Tax-free loans — — — — 13,091 13,091 —
   Agriculture loans — — — — 21,630 21,630 —
Consumer 16 4 1 21 4,516 4,537 1
       Total 1,190 1,085 876 3,151 567,416 570,567 384

(DOLLARS IN THOUSANDS)

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
December 31, 2019	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		228		228		119,984		120,212		—
Agriculture mortgages		962		—		1,070		2,032		173,335		175,367		—
Construction		—		—		—		—		16,209		16,209		—
Consumer real estate
1-4 family residential mortgages		2,254		161		1,302		3,717		254,959		258,676		807
Home equity loans		52		—		92		144		9,626		9,770		—
Home equity lines of credit		43		—		10		53		70,756		70,809		10
Commercial and industrial
Commercial and industrial		68		—		538		606		57,413		58,019		—
Tax-free loans		—		—		—		—		16,388		16,388		—
Agriculture loans		2		—		—		2		20,802		20,804		—
Consumer		14		12		4		30		5,386		5,416		4
Total		3,395		173		3,244		6,812		744,858		751,670		821

1415

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents nonaccrual loans by classes of the loan portfolio as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

NONACCRUAL LOANS BY LOAN CLASS
(DOLLARS IN THOUSANDS)
September 30, December 31,
2017 2016
$ $

Commercial real estate
  Commercial mortgages 528 646
  Agriculture mortgages — —
  Construction — —
Consumer real estate
  1-4 family residential mortgages 64 —
  Home equity loans — —
  Home equity lines of credit — —
Commercial and industrial
  Commercial and industrial 75 75
  Tax-free loans — —
  Agriculture loans — —
Consumer 20 —
             Total 687 721

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

	June 30,		December 31,
	2020		2019
	$		$

Commercial real estate
Commercial mortgages		221		228
Agriculture mortgages		—		1,070
Construction		—		—
Consumer real estate
1-4 family residential mortgages		491		495
Home equity loans		92		92
Home equity lines of credit		—		—
Commercial and industrial
Commercial and industrial		521		538
Tax-free loans		—		—
Agriculture loans		—		—
Consumer		—		—
Total		1,325		2,423

As of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~September~~June 30, ~~2016,~~2019, is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

Three months ended September 30, Nine months ended September 30,
2017 2016 2017 2016
$ $ $ $

Average recorded balance of impaired loans 2,152 1,830 2,394 1,894
Interest income recognized on impaired loans 17 14 49 42

	Three Months Ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
	$		$		$		$

Average recorded balance of impaired loans		3,178		3,412		3,557		3,057
Interest income recognized on impaired loans		18		11		43		22

~~During~~There were no loan modifications made during the ~~nine~~first six months ~~ended September 30, 2017 there was one loan modification made causing a loan to~~of 2020 that would be considered a troubled debt restructuring (TDR). Deferments of principal related to the impact of COVID-19 did occur beginning in late March 2020, however these modifications are not considered a TDR under the revised COVID-19 regulatory guidance. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A ~~TDR is~~modification of the payment terms to a loan ~~where management has granted~~customer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

In the first quarter of 2019, a loan modification was made on a $718,000 agricultural mortgage which moved the timing of the annual principal payment and changed interest payments from monthly to annually. The ~~loan classified as~~farmer had suffered a ~~TDR during the nine months ended September 30, 2017, was an agricultural loan with a principal balance at September 30, 2017, of $263,000.~~fire loss in late 2018 impacting one year’s harvest. The concession granted to the borrower was an interest-only period initially running for three months to March 31, 2017. However, in April 2017, that deferral period was extended for an additional three months, causing management to classify the loan as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest ~~payments~~payment due date was reset to November 15, 2019, when it was paid. No other loans were modified during 2019.

Included in the impaired loan portfolio are three loans to unrelated borrowers that are being reported as TDRs. The balance of these three TDR loans was $1,941,000 as of ~~July 2017. There were no~~June 30, 2020. One of these TDR loans ~~classified~~with a balance of $439,000 is also on nonaccrual and is included under 1-4 family residential mortgages shown in the nonaccrual table above. For both of these TDR loans the borrowers have a history of being delinquent. Management will continue to report these loans as a TDR ~~during the nine months ended September 30, 2016.~~

loans until they have been paid off or charged off.

1516

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information ~~in regards to~~regarding impaired loans by loan portfolio class as of ~~September~~June 30, ~~2017,~~2020, and for the six months ended June 30, 2020, and as of December 31, ~~2016, and September 30, 2016:~~2019:

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
June 30, 2020	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		712		759		—		720		—
Agriculture mortgages		824		853		—		1,528		43
Construction		—		—		—		—		—
Total commercial real estate		1,536		1,612		—		2,248		43

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with no related allowance		1,536		1,612		—		2,248		43

With an allowance recorded:
Commercial real estate
Commercial mortgages		92		100		28		92		—
Agriculture mortgages		677		677		5		685		—
Construction		—		—		—		—		—
Total commercial real estate		769		777		33		777		—

Commercial and industrial
Commercial and industrial		521		543		31		532		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		521		543		31		532		—

Total with a related allowance		1,290		1,320		64		1,309		—

Total by loan class:
Commercial real estate
Commercial mortgages		804		859		28		812		—
Agriculture mortgages		1,501		1,530		5		2,213		43
Construction		—		—		—		—		—
Total commercial real estate		2,305		2,389		33		3,025		43

Commercial and industrial
Commercial and industrial		521		543		31		532		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		521		543		31		532		—

Total		2,826		2,932		64		3,557		43

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2017 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
$ $ $ $ $

With no related allowance recorded:
Commercial real estate
    Commercial mortgages 195 292 — 281 4
    Agriculture mortgages 1,193 1,193 — 1,220 40
    Construction — — — — —
Total commercial real estate 1,388 1,485 — 1,501 44

Commercial and industrial
    Commercial and industrial 75 75 — 75 —
    Tax-free loans — — — — —
    Agriculture loans 263 263 — 400 5
Total commercial and industrial 338 338 — 475 5

Total with no related allowance 1,726 1,823 — 1,976 49

With an allowance recorded:
Commercial real estate
    Commercial mortgages 418 418 98 418 —
    Agriculture mortgages — — — — —
    Construction — — — — —
Total commercial real estate 418 418 98 418 —

Commercial and industrial
    Commercial and industrial — — — — —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial — — — — —

Total with a related allowance 418 418 98 418 —

Total by loan class:
Commercial real estate
    Commercial mortgages 613 710 98 699 4
    Agriculture mortgages 1,193 1,193 — 1,220 40
    Construction — — — — —
Total commercial real estate 1,806 1,903 98 1,919 44

Commercial and industrial
    Commercial and industrial 75 75 — 75 —
    Tax-free loans — — — — —
    Agriculture loans 263 263 — 400 5
Total commercial and industrial 338 338 — 475 5

Total 2,144 2,241 98 2,394 49

1617

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		724		765		—		859		—
Agriculture mortgages		1,912		1,928		—		1,903		43
Construction		—		—		—		—		—
Total commercial real estate		2,636		2,693		—		2,762		43

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with no related allowance		2,636		2,693		—		2,762		43

With an allowance recorded:
Commercial real estate
Commercial mortgages		92		100		49		93		—
Agriculture mortgages		718		718		60		760		—
Construction		—		—		—		—		—
Total commercial real estate		810		818		109		853		—

Commercial and industrial
Commercial and industrial		538		549		80		261		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		538		549		80		261		—

Total with a related allowance		1,348		1,367		189		1,114		—

Total by loan class:
Commercial real estate
Commercial mortgages		816		865		49		952		—
Agriculture mortgages		2,630		2,646		60		2,663		43
Construction		—		—		—		—		—
Total commercial real estate		3,446		3,511		109		3,615		43

Commercial and industrial
Commercial and industrial		538		549		80		261		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		538		549		80		261		—

Total		3,984		4,060		189		3,876		43

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2016 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
$ $ $ $ $

With no related allowance recorded:
Commercial real estate
    Commercial mortgages 646 743 — 768 2
    Agriculture mortgages 1,248 1,248 — 1,285 55
    Construction — — — — —
Total commercial real estate 1,894 1,991 — 2,053 57

Commercial and industrial
    Commercial and industrial 75 75 — 76 —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial 75 75 — 76 —

Total with no related allowance 1,969 2,066 — 2,129 57

With an allowance recorded:
Commercial real estate
    Commercial mortgages — — — — —
    Agriculture mortgages — — — — —
    Construction — — — — —
Total commercial real estate — — — — —

Commercial and industrial
    Commercial and industrial — — — — —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial — — — — —

Total with a related allowance — — — — —

Total by loan class:
Commercial real estate
    Commercial mortgages 646 743 — 768 2
    Agriculture mortgages 1,248 1,248 — 1,285 55
    Construction — — — — —
Total commercial real estate 1,894 1,991 — 2,053 57

Commercial and industrial
    Commercial and industrial 75 75 — 76 —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial 75 75 — 76 —

Total 1,969 2,066 — 2,129 57

1718

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2016 Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
$ $ $ $ $

With no related allowance recorded:
Commercial real estate
    Commercial mortgages 730 827 — 561 —
    Agriculture mortgages 1,267 1,267 — 1,295 42
    Construction — — — — —
Total commercial real estate 1,997 2,094 — 1,856 42

Commercial and industrial
    Commercial and industrial 75 75 — 38 —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial 75 75 — 38 —
��
Total with no related allowance 2,072 2,169 — 1,894 42

With an allowance recorded:
Commercial real estate
    Commercial mortgages — — — — —
    Agriculture mortgages — — — — —
    Construction — — — — —
Total commercial real estate — — — — —

Commercial and industrial
    Commercial and industrial — — — — —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial — — — — —

Total with a related allowance — — — — —

Total by loan class:
Commercial real estate
    Commercial mortgages 730 827 — 561 —
    Agriculture mortgages 1,267 1,267 — 1,295 42
    Construction — — — — —
Total commercial real estate 1,997 2,094 — 1,856 42

Commercial and industrial
    Commercial and industrial 75 75 — 38 —
    Tax-free loans — — — — —
    Agriculture loans — — — — —
Total commercial and industrial 75 75 — 38 —

Total 2,072 2,169 — 1,894 42

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

The following table details activity in the allowance for loan losses by portfolio segment for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017:~~2020:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

Commercial
Real Estate Consumer
Real Estate Commercial
and Industrial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Beginning balance - December 31, 2016 3,795 1,652 1,552 82 481 7,562

    Charge-offs — — (7 ) (4 ) — (11 )
    Recoveries — 20 9 2 — 31
    Provision (275 ) 163 95 3 104 90

Balance - March 31, 2017 3,520 1,835 1,649 83 585 7,672

    Charge-offs — — — (3 ) — (3 )
    Recoveries — — 10 3 — 13
    Provision 208 83 (42 ) 36 (165 ) 120

Ending Balance - June 30, 2017 3,728 1,918 1,617 119 420 7,802

    Charge-offs — — (7 ) (9 ) — (16 )
    Recoveries — — 2 — — 2
    Provision 31 (16 ) 201 (18 ) 42 240

Ending Balance - September 30, 2017 3,759 1,902 1,813 92 462 8,028

	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer			Unallocated			Total
	$		$		$		$			$			$
Allowance for credit losses:
Beginning balance - December 31, 2019		4,319		2,855		1,784		41			448			9,447

Charge-offs		—		—		—		(6	)		—			(6	)
Recoveries		11		—		1		—			—			12
Provision		252		296		171		21			(390	)		350

Balance - March 31, 2020		4,582		3,151		1,956		56			58			9,803

Charge-offs		—		—		—		(10	)		—			(10	)
Recoveries		—		—		1		1			—			2
Provision		356		146		175		5			293			975

Ending Balance - June 30, 2020		4,938		3,297		2,132		52			351			10,770

During the six months ended June 30, 2020, management charged off $16,000 in loans while recovering $14,000 and added $1,325,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 3.3% as of June 30, 2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% over the long term, with a requirement of it not to exceed 10%.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, net provision ~~expenses were~~expense was recorded for all sectors. The higher provision was primarily caused by increasing the ~~consumer real estate, commercial~~qualitative factors across all industry lines to various degrees as a result of the impact and ~~industrial,~~effect from COVID-19 and ~~consumer loan segments, with~~the declining economic conditions. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2020, so the provision expense was primarily related to this change in economic conditions and potential for credit ~~provision recorded in the commercial real estate loan category.~~declines moving forward. The ~~decrease in the~~total amount of ~~allowance for loan losses allocated to commercial real estate was primarily due to a material drop in commercial real estate~~substandard loans ~~over~~at the ~~first nine months~~end of 2017. As of December 31, 2016, 50.2% of the Corporation’s allowance for loan losses was allocated to commercial real estate loans, which consisted of 48.2% of all loans. As of September 30, 2017, 46.8 % of the allowance was allocated to commercial real estate loans which consisted of 44.5% of total loans.

Delinquency rates among the Corporation’s loan pools remain very low. Additionally, there have been no charge-offs for three of our loan pools over the past three years. However, classified loans experienced a large increase in the first nine months of 2017. The Corporation’s classified loans were relatively low and stable throughout 2016 but in the first quarter of 2017 increased by $7.4 million, from $14.2 million to $21.6 million. Two large loan relationships, one consisting of business loans and mortgages, and the other agriculture mortgages were classified as substandard in the first quarter. In the second quarter of ~~2017, classified loans increased another $4.0 million,~~2020 was slightly higher resulting in slightly more provision expense.

As of June 30, 2020, the Corporation’s total delinquencies were 0.41%, a decline from 0.91% at December 31, 2019. The Corporation’s total delinquencies continue to ~~$25.6 million. This increase~~compare favorably to the national uniform bank performance group, which was ~~primarily caused by four loan customers being classified~~at 1.05% as ~~substandard, two being commercial and two agricultural-related. However, in the third quarter~~ of 2017, classified loans decreased by $4.6 million, bringing the outstanding balance to $21.0 million. Currently, the agricultural lending sector remains under stress due to weak milk and egg prices impacting farmers. December 31, 2019.

Outside of the ~~commercial loan relationships noted~~ above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the ~~health of~~potential credit risks across the Corporation’s commercial real estate and commercial and industrial borrowers is generally stable with no material trends related to certain types of industries. Commercial borrowers that have exposure to agriculture are subject to more financial stress in the current environment. Qualitative factors regarding trends invarious loan types. In addition, the loan portfolio ~~as well as national and local economic conditions were increased~~is sectored out into nine different categories to evaluate these qualitative factors. A total score of the qualitative factors for ~~several~~each loan ~~pools~~sector is calculated to utilize in the ~~third quarter~~allowance for loan loss calculation. The agricultural dairy sector carries the highest level of ~~2017. The increases in classified loans along with higher~~ qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused ~~management to record provision expense of $450,000 through September 30, 2017 despite the continuation of very low levels of delinquencies and charge-offs.~~a sharp decline in milk prices.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for loan losses by portfolio segment for the ~~nine~~six months ended ~~September~~June 30, ~~2016:~~2019:

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

Commercial
Real Estate Consumer
Real Estate Commercial
and Industrial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Beginning balance - December 31, 2015 3,831 1,403 1,314 62 468 7,078

    Charge-offs — — (4 ) (12 ) — (16 )
    Recoveries — 10 16 2 — 28
    Provision (303 ) (45 ) 47 15 236 (50 )

Balance - March 31, 2016 3,528 1,368 1,373 67 704 7,040

    Charge-offs — — — (2 ) — (2 )
    Recoveries — — 159 — — 159
    Provision 255 105 (271 ) 6 (45 ) 50

Ending Balance - June 30, 2016 3,783 1,473 1,261 71 659 7,247

    Charge-offs — — (19 ) (10 ) — (29 )
    Recoveries — 1 9 7 — 17
    Provision 95 95 101 20 (111 ) 200

Ending Balance - September 30, 2016 3,878 1,569 1,352 88 548 7,435

	Commercial Real Estate			Consumer Real Estate			Commercial and Industrial			Consumer			Unallocated		Total
	$			$			$			$			$		$
Allowance for credit losses:
Beginning balance - December 31, 2018		4,296			2,408			1,428			102			432		8,666

Charge-offs		—			—			—			(17	)		—		(17	)
Recoveries		44			—			13			—			—		57
Provision		148			(140	)		128			16			28		180

Balance - March 31, 2019		4,488			2,268			1,569			101			460		8,886

Charge-offs		—			—			—			(6	)		—		(6	)
Recoveries		43			—			1			3			—		47
Provision		(114	)		122			(204	)		(22	)		248		30

Balance - June 30, 2019		4,417			2,390			1,366			76			708		8,957

During the six months ended June 30, 2019, management charged off $23,000 in loans while recovering $104,000 and added $210,000 to the provision. The unallocated portion of the allowance increased from 5.3% as of December 31, 2018, and 5.5% as of March 31, 2019, to 8.6% as of June 30, 2019.

During the ~~nine~~six months ended ~~September~~June 30, ~~2016, a credit~~2019, net provision expense was recorded for the commercial real estate segment, while net credit provisions were recorded in the consumer real estate, commercial and industrial, ~~segment with provision expense recorded in all other loan categories. For the entire portfolio, $200,000 of additional provision expense~~and consumer segments. This was ~~needed~~due to continued very low historical loss experience for these three segments. In the first ~~nine months~~half of ~~2016. Delinquency rates among most~~2019, management adjusted the qualitative factors across the loan ~~pools remained very low with~~portfolio to better reflect the ~~total amount of delinquent loans lower on September 30, 2016 than on December 31, 2015, even with~~forward risk in each loan segment. This resulted in a slightly larger ~~loan balances. The Corporation received $157,000 more recoveries than charge-offs~~allowance for ~~the nine months ended September 30, 2016. These favorable results acted to offset higher levels of classified~~commercial real estate loans and ~~non-accruals resulting~~slightly lower allowances for consumer real estate, commercial and industrial, and consumer, while the unallocated portion of the allowance increased. The Corporation’s commercial real estate allocation for credit losses was reduced by $114,000 in ~~$200,000~~the second quarter of ~~additional provision being sufficient~~2019, influenced by a reduction in real estate secured agricultural delinquencies that declined materially since March 31, 2019. The allowance for credit losses on consumer real estate grew in the second quarter of 2019 relative to ~~cover~~ the sharper growth in this segment offset partially by lower delinquencies than March 31, 2019 but unchanged from the ~~loan portfolio. Changes~~prior June 30, 2019. The Commercial and industrial allocation for credit losses was reduced by $204,000 in ~~qualitative factors were minimal during~~ the ~~third~~second quarter ~~and the provision expense recorded was mostly to account for significant loan growth during the year-to-date period.~~of 2019 as delinquencies declined significantly.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016:~~2019:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

As of September 30, 2017: Commercial
Real Estate Consumer
Real Estate Commercial
and Industrial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Ending balance: individually evaluated
  for impairment 98 — — — — 98
Ending balance: collectively evaluated
  for impairment 3,661 1,902 1,813 92 462 7,930

Loans receivable:
Ending balance 259,499 238,432 79,843 5,166 582,940
Ending balance: individually evaluated
  for impairment 1,806 — 338 — 2,144
Ending balance: collectively evaluated
  for impairment 257,693 238,432 79,505 5,166 580,796

As of December 31, 2016: Commercial
Real Estate Consumer
Real Estate Commercial
and Industrial Consumer Unallocated Total
$ $ $ $ $ $
Allowance for credit losses:
Ending balance: individually evaluated
  for impairment — — — — — —
Ending balance: collectively evaluated
  for impairment 3,795 1,652 1,552 82 481 7,562

Loans receivable:
Ending balance 275,067 213,771 77,192 4,537 570,567
Ending balance: individually evaluated
  for impairment 1,894 — 75 — 1,969
Ending balance: collectively evaluated
  for impairment 273,173 213,771 77,117 4,537 568,598

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

As of June 30, 2020:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment		33		—		31		—		—		64
Ending balance: collectively evaluated
for impairment		4,905		3,297		2,101		52		351		10,706

Loans receivable:
Ending balance		321,318		341,967		167,647		5,061				835,993
Ending balance: individually evaluated
for impairment		2,305		—		521		—				2,826
Ending balance: collectively evaluated
for impairment		319,013		341,967		167,126		5,061				833,167

As of December 31, 2019:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment		109		—		80		—		—		189
Ending balance: collectively evaluated
for impairment		4,210		2,855		1,704		41		448		9,258

Loans receivable:
Ending balance		311,788		339,255		95,211		5,416				751,670
Ending balance: individually evaluated
for impairment		3,446		—		538		—				3,984
Ending balance: collectively evaluated
for impairment		308,342		339,255		94,673		5,416				747,686

5. Fair Value Presentation

U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows:

~~Level I:~~

~~Quoted prices are available in active markets for identical assets or liabilities as of the reported date.~~

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

~~Level II:~~

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

~~Level III:~~

Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Level III: Assets and liabilities that have little to no observable pricing as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables ~~present~~provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the ~~consolidated balance sheets at their fair value~~Consolidated Balance Sheets as of ~~September~~June 30, ~~2017,~~2020, and December 31, ~~2016,~~2019, by level within the fair value hierarchy. As required by U.S. generally accepted accounting principles, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
	June 30, 2020
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. government agencies		—		8,379		—		8,379
U.S. agency mortgage-backed securities		—		72,553		—		72,553
U.S. agency collateralized mortgage obligations		—		46,562		—		46,562
Asset-backed securities		—		31,951		—		31,951
Corporate bonds		—		63,431		—		63,431
Obligations of states & political subdivisions		—		111,811		—		111,811
Equity securities		6,775		—		—		6,775

Total securities		6,775		334,687		—		341,462

~~Fair Value Measurements:~~

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
September 30, 2017
Level I Level II Level III Total
$ $ $ $

U.S. government agencies — 28,647 — 28,647
U.S. agency mortgage-backed securities — 53,583 — 53,583
U.S. agency collateralized mortgage obligations — 54,038 — 54,038
Corporate bonds — 57,136 — 57,136
Obligations of states & political subdivisions — 121,673 — 121,673
Marketable equity securities 5,618 — — 5,618

Total securities 5,618 315,077 — 320,695

On ~~September~~June 30, ~~2017,~~2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable, but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of ~~September~~June 30, ~~2017,~~2020, the CRA fund investments had a ~~$5,250,000~~$6,148,000 book and fair market value and the bank stock portfolio had a book value of ~~$307,000,~~$829,000, and fair market value of ~~$368,000.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

~~Fair Value Measurements:~~

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
December 31, 2016
Level I Level II Level III Total
$ $ $ $

U.S. government agencies — 32,261 — 32,261
U.S. agency mortgage-backed securities — 55,869 — 55,869
U.S. agency collateralized mortgage obligations — 37,936 — 37,936
Corporate bonds — 52,091 — 52,091
Obligations of states & political subdivisions — 124,430 — 124,430
Marketable equity securities 5,524 — — 5,524

Total securities 5,524 302,587 — 308,111

On December 31, 2016, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. As of December 31, 2016, the Corporation’s CRA fund investments had a book and fair market value of $5,250,000 and the bank stock portfolio had a book value of $219,000 and a market value of $274,000 utilizing level I pricing.$627,000.

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. ~~There were~~

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS
(DOLLARS IN THOUSANDS)
	December 31, 2019
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. government agencies		—		32,624		—		32,624
U.S. agency mortgage-backed securities		—		48,626		—		48,626
U.S. agency collateralized mortgage obligations		—		60,253		—		60,253
Asset-backed securities		—		23,262		—		23,262
Corporate bonds		—		54,880		—		54,880
Obligations of states & political subdivisions		—		88,452		—		88,452
Equity securities		6,708		—		—		6,708

Total securities		6,708		308,097		—		314,805

On December 31, 2019, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities astraded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of ~~September 30, 2017 or~~ December 31, ~~2016.~~2019, the CRA fund investments had a $6,071,000 book and market value and the bank stocks had a book value of $614,000 and a market value of $637,000.

The following tables ~~present~~provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets ~~at their fair value~~ as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016,~~2019, by level within the fair value hierarchy:

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)

September 30, 2017
Level I
$ Level II
$ Level III
$ Total
$
Assets:
Impaired Loans — — 2,046 2,046
Total — — 2,046 2,046

	June 30, 2020
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans	$	—	$	—	$	2,762	$	2,762
Total	$	—	$	—	$	2,762	$	2,762

									December 31, 2019
	December 31, 2016								Level I		Level II		Level III		Total
	Level I $		Level II $		Level III $		Total $		$		$		$		$
Assets:
Impaired Loans		—		—		1,969		1,969	$	—	$	—	$	3,795	$	3,795
Total		—		—		1,969		1,969	$	—	$	—	$	3,795	$	3,795

The Corporation had a total of ~~$2,144,000~~$2,826,000 of impaired loans as of ~~September~~June 30, ~~2017,~~2020, with ~~$98,000~~$64,000 of specific allocation against these loans and ~~$1,969,000~~$3,984,000 of impaired loans as of December 31, ~~2016,~~2019, with no$189,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral. ~~The Corporation had no OREO (Other Real Estate Owned) assets as of December 31, 2016 and September 30, 2017.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS
(DOLLARS IN THOUSANDS)
	~~September~~June 30, ~~2017~~2020
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)

Impaired loans	~~2,046~~2,762	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

	December 31, ~~2016~~2019
	Fair Value	Valuation	Unobservable	Range
	Estimate	Techniques	Input	(Weighted Avg)

Impaired loans	~~1,969~~3,795	Appraisal of	Appraisal	-20% (-20%)
		collateral (1)	adjustments (2)
			Liquidation	-10% (-10%)
			expenses (2)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

2425

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~Interim Disclosures about Fair Value of Financial Instruments~~

The following ~~methods and assumptions were used to estimate~~table provides the ~~fair value of~~carrying amount for each class of ~~financial instrument:~~

~~Cash~~assets and ~~Cash Equivalents~~

~~For these short-term instruments, the carrying amount is a reasonable estimate of fair value.~~

~~Securities Available for Sale~~

Management utilizes quoted market pricing for the fair value of the Corporation's securities that are available for sale, if available. If a quoted market rate is not available, fair value is estimated using quoted market prices for similar securities.

~~Regulatory Stock~~

~~Regulatory stock is valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the carrying amount is a reasonable estimate of fair value.~~

~~Loans Held for Sale~~

~~Loans held for sale are individual loans for which the Corporation has a firm sales commitment; therefore, the carrying value is a reasonable estimate of the fair value.~~

~~Loans~~

The fair value of fixed and variable rate loans is estimated by discounting back the scheduled future cash flows of the particular loan product, using the market interest rates of comparable loan products in the Corporation’s greater market area, with the same general structure, comparable credit ratings, and for the same remaining maturities.

~~Mortgage Servicing Assets~~

~~The fair value of mortgage servicing assets is based on the present value of estimated future cash flows and estimates the price at which a portfolio would prospectively be sold.~~

~~Accrued Interest Receivable~~

~~The carrying amount of accrued interest receivable is a reasonable estimate of fair value.~~

~~Bank Owned Life Insurance~~

~~Fair value is equal to the cash surrender value of the life insurance policies.~~

~~Deposits~~

The fair value of non-interest bearing demand deposit accounts and interest bearing demand, savings, and money market deposit accounts is based on the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated by discounting back the expected cash flows of the time deposit using market interest rates from the Corporation’s greater market area currently offered for similar time deposits with similar remaining maturities.

~~Borrowings~~

The carrying amount of short-term borrowing is a reasonable estimate of fair value. The fair value of long-term borrowing is estimated by comparing the rate currently offered for the same type of borrowing instrument with a matching remaining term.

~~Accrued Interest Payable~~

~~The carrying amount of accrued interest payable is a reasonable estimate of fair value.~~

~~Firm Commitments to Extend Credit, Lines of Credit, and Open Letters of Credit~~

These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit,liabilities and the fair value ~~determined by discounting~~for certain financial instruments that are not required to be measured or reported at fair value on the ~~remaining contractual fee over the term~~Consolidated Balance Sheets as of the commitment, using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure purposes. The contractual amounts of unfunded commitments are presented in Note 6.June 30, 2020 and December 31, 2019:

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	June 30, 2020
					Quoted Prices in
					Active Markets		Significant Other		Significant
					for Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level II)		(Level III)
	$		$		$		$		$
Financial Assets:
Cash and cash equivalents		61,224		61,224		61,224		—		—
Regulatory stock		6,942		6,942		6,942		—		—
Loans held for sale		2,295		2,295		2,295		—		—
Loans, net of allowance		825,199		833,431		—		—		833,431
Mortgage servicing assets		863		898		—		—		898
Accrued interest receivable		4,164		4,164		4,164		—		—
Bank owned life insurance		29,214		29,214		29,214		—		—

Financial Liabilities:
Demand deposits		466,392		466,392		466,392		—		—
Interest-bearing demand deposits		41,083		41,083		41,083		—		—
NOW accounts		104,594		104,594		104,594		—		—
Money market deposit accounts		123,212		123,212		123,212		—		—
Savings accounts		246,763		246,763		246,763		—		—
Time deposits		125,870		128,724		—		—		128,724
Total deposits		1,107,914		1,110,768		982,044		—		128,724

Long-term debt		65,072		61,612		—		—		61,612
Accrued interest payable		410		410		410		—		—

2526

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~Fair Value of Financial Instruments~~

~~The carrying amounts and estimated fair values of the Corporation's financial instruments at September 30, 2017 and December 31, 2016, are summarized as follows:~~

FINANCIAL INSTRUMENTS NOT REQUIRED TO BE MEASURED OR REPORTED AT FAIR VALUE ~~OF FINANCIAL INSTRUMENTS~~

(DOLLARS IN THOUSANDS)

September 30, 2017
Quoted Prices in
Active Markets Significant Other Significant
for Identical Observable Unobservable
Carrying Assets Inputs Inputs
Amount Fair Value (Level 1) (Level II) (Level III)
$ $ $ $ $
Financial Assets:
Cash and cash equivalents 44,240 44,240 44,240 — —
Securities available for sale 320,695 320,695 5,618 315,077 —
Regulatory stock 6,139 6,139 6,139 — —
Loans held for sale 3,809 3,809 3,809 — —
Loans, net of allowance 576,049 573,681 — — 573,681
Mortgage servicing assets 592 678 — — 678
Accrued interest receivable 3,391 3,391 3,391 — —
Bank owned life insurance 25,161 25,161 25,161 — —

Financial Liabilities:
Demand deposits 301,978 301,978 301,978 — —
Interest-bearing demand deposits 19,279 19,279 19,279 — —
NOW accounts 78,061 78,061 78,061 — —
Money market deposit accounts 99,235 99,235 99,235 — —
Savings accounts 188,015 188,015 188,015 — —
Time deposits 152,257 153,163 — — 153,163
Total deposits 838,825 839,731 686,568 — 153,163

Long-term debt 68,350 68,429 — — 68,429
Accrued interest payable 391 391 391 — —

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

~~FAIR VALUE OF FINANCIAL INSTRUMENTS~~

~~(DOLLARS IN THOUSANDS)~~

	December 31, 2016										December 31, 2019
					Quoted Prices in										Quoted Prices in
					Active Markets		Significant Other		Significant						Active Markets		Significant Other		Significant
					for Identical		Observable		Unobservable						for Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs		Carrying				Assets		Inputs
	Amount		Fair Value		(Level 1)		(Level II)		(Level III)		Amount		Fair Value		(Level 1)		(Level II)		(Level III)
	$		$		$		$		$		$
Financial Assets:
Cash and cash equivalents		45,632		45,632		45,632		—		—		41,053		41,053		41,053		—		—
Securities available for sale		308,111		308,111		5,524		302,587		—
Regulatory stock		5,372		5,372		5,372		—		—		7,291		7,291		7,291		—		—
Loans held for sale		2,552		2,552		2,552		—		—		2,342		2,342		2,342		—		—
Loans, net of allowance		564,005		563,418		—		—		563,418		744,171		759,011		—		—		759,011
Mortgage servicing assets		410		531		—		—		531		892		1,049		—		—		1,049
Accrued interest receivable		3,750		3,750		3,750		—		—		3,768		3,768		3,768		—		—
Bank owned life insurance		24,687		24,687		24,687		—		—		28,818		28,818		28,818		—		—

Financial Liabilities:
Demand deposits		280,543		280,543		280,543		—		—		363,857		363,857		363,857		—		—
Interest-bearing demand deposits		20,108		20,108		20,108		—		—		25,171		25,171		25,171		—		—
NOW accounts		85,540		85,540		85,540		—		—		96,941		96,941		96,941		—		—
Money market deposit accounts		93,943		93,943		93,943		—		—		141,649		141,649		141,649		—		—
Savings accounts		175,753		175,753		175,753		—		—		211,285		211,285		211,285		—		—
Time deposits		161,604		163,464		—		—		163,464		135,185		136,781		—		—		136,781
Total deposits		817,491		819,351		655,887		—		163,464		974,088		975,684		838,903		—		136,781

Short-term borrowings		8,329		8,329		8,329		—		—		200		200		200		—		—
Long-term debt		61,257		61,372		—		—		61,372		77,872		76,825		—		—		76,825
Accrued interest payable		384		384		384		—		—		521		521		521		—		—

6. Commitments and Contingent Liabilities

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of ~~September~~June 30, ~~2017,~~2020, firm loan commitments were ~~$40.5~~$64.0 million, unused lines of credit were ~~$209.3~~$305.4 million, and open letters of credit were ~~$11.1~~$8.8 million. The total of these commitments was ~~$260.9~~$378.2 million, which represents the Corporation’s exposure to credit loss in the event of nonperformance by its customers with respect to these financial instruments. The actual credit losses that may arise from these commitments are expected to compare favorably with the Corporation’s loan loss experience on its loan portfolio taken as a whole. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for balance sheet financial instruments.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

7. Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income ~~(loss)~~ for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 is as follows:

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)

~~ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (1) (2)~~	Unrealized
	Gains (Losses)
	on Securities
	Available-for-Sale
	$
Balance at December 31, 2019		1,600
Other comprehensive loss before reclassifications		(274	)
Amount reclassified from accumulated other comprehensive income		(223	)
Period change		(497	)

~~(DOLLARS IN THOUSANDS)~~Balance at March 31, 2020		1,103
		~~Unrealized~~
		~~Gains (Losses)~~
		~~on Securities~~
		~~Available-for-Sale~~
		$
~~Balance at December 31, 2016~~			~~(4,885~~	)
Other comprehensive income before reclassifications			~~418~~3,709
Amount reclassified from accumulated other comprehensive income			(92290	)
Period change			~~326~~3,419

Balance at ~~March 31, 2017~~June 30, 2020		4,522

Balance at December 31, 2018		(~~4,559~~5,678	)
Other comprehensive income before reclassifications			~~2,778~~2,553
Amount reclassified from accumulated other comprehensive income			(7164	)
Period change			~~2,707~~2,489

Balance at ~~June 30, 2017~~	March 31, 2019		(~~1,852~~	)
~~Other comprehensive loss before reclassifications~~			~~(268~~	)
~~Amount reclassified from accumulated other comprehensive loss~~			~~(112~~	)
~~Period change~~			~~(380~~	)

~~Balance at September 30, 2017~~			~~(2,232~~	)

~~Balance at December 31, 2015~~			~~(252~~3,189	)
Other comprehensive income before reclassifications			~~1,050~~3,571
Amount reclassified from accumulated other comprehensive income			(~~480~~84	)
Period change			~~570~~3,487

~~Balance at March 31, 2016~~			~~318~~
~~Other comprehensive income before reclassifications~~			~~2,258~~
~~Amount reclassified from accumulated other comprehensive income~~			~~(620~~	)
~~Period change~~			~~1,638~~

Balance at June 30, ~~2016~~2019			~~1,956~~
~~Other comprehensive loss before reclassifications~~			~~(429~~	)
~~Amount reclassified from accumulated other comprehensive loss~~			~~(306~~	)
~~Period change~~			~~(735~~	)

~~Balance at September 30, 2016~~			~~1,221~~298

(1) All amounts are net of tax. Related income tax expense or benefit is calculated using a Federal income tax rate of ~~34%~~21%.

(2) Amounts in parentheses indicate debits.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)~~

~~(DOLLARS IN THOUSANDS)~~

DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)								DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)
(DOLLARS IN THOUSANDS)
	Amount Reclassified from							Amount Reclassified from
	Accumulated Other Comprehensive							Accumulated Other Comprehensive
	Income (Loss)							Income (Loss)
	For the Three Months							For the Three Months
	Ended September 30,							Ended June 30,
	2017			2016			Affected Line Item in the	2020	2019	Affected Line Item in the
	$			$			Consolidated Statements of Income	$		Consolidated Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings		170			464		Gains on securities transactions, net
Net securities gains,								367	106	Gains on the sale of
reclassified into earnings										debt securities, net
Related income tax expense		(58	)		(158	)	Provision for federal income taxes	(77)	(22)	Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period		112			306
income (loss) for the period								290	84

(1) Amounts in parentheses indicate debits.

~~DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) COMPONENTS (1)~~

~~(DOLLARS IN THOUSANDS)~~

	Amount Reclassified from							Amount Reclassified from
	Accumulated Other Comprehensive							Accumulated Other Comprehensive
	Income (Loss)							Income (Loss)
	For the Nine Months							For the Six Months
	Ended September 30,							Ended June 30,
	2017			2016			Affected Line Item in the	2020	2019	Affected Line Item in the
	$			$			Consolidated Statements of Income	$		Consolidated Statements of Income
Securities available-for-sale:
Net securities gains reclassified into earnings		417			2,130		Gains on securities transactions, net
Net securities gains,								649	187	Gains on the sale of
reclassified into earnings										debt securities, net
Related income tax expense		(142	)		(724	)	Provision for federal income taxes	(136)	(39)	Provision for federal income taxes
Net effect on accumulated other comprehensive
income for the period		275			1,406
income (loss) for the period								513	148

(1) Amounts in parentheses indicate debits.

8. ~~Recently Issued Accounting Standards~~Leases

~~In May 2014,~~A lease is defined as a contract, or part of a contract, that conveys the ~~FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that~~right to control the use of identified property, plant or equipment for a ~~company will recognize revenue to depict the transfer~~period of ~~goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled~~time in exchange for ~~those goods or services. In addition, this Update specifies~~consideration. On January 1, 2019, the Corporation adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 primarily affected the accounting treatment for ~~certain costs to obtain or fulfill a contract~~operating lease agreements in which the Corporation is the lessee.

All of these leases in which the Corporation is the lessee are comprised of real estate property for branches and office space with ~~a customer and expands disclosure requirements for revenue recognition. Subsequently, the FASB issued ASU 2015-14,~~~~Revenue from Contracts with Customers (Topic 606)~~. The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.terms extending through 2026. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Corporation’s ~~financial instruments~~leases are classified as operating leases, and therefore, were previously not ~~within~~recognized on the ~~scope~~Corporation’s Consolidated Balance Sheets. With the adoption of Topic ~~606. However, we do expect that~~842, operating lease agreements are required to be recognized on the ~~standard will result in new disclosure requirements, which are currently being evaluated.~~Consolidated Balance Sheets as a right-of use (“ROU”) asset and a corresponding lease liability.

The following table represents the Consolidated Balance Sheet classification of the Corporation’s ROU assets and lease liabilities.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Lease Consolidated Balance Sheets Classification
(Dollars in Thousands)	Classification	June 30, 2020		December 31, 2019
Lease Right-of-Use Assets

Operating lease right-of use assets	Other Assets	$	819		908

Lease Liabilities
Operating lease liabilties	Other Liabilities	$	828		916

~~In January 2016, the FASB issued ASU 2016-01,~~~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidationThe calculated amount of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s)ROU assets and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total changelease liabilities in the ~~fair value~~table above are impacted by the length of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

~~In February 2016, the FASB issued ASU 2016-02,~~~~Leases (Topic 842)~~. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term ~~is 12 months~~and the discount rate used to determine the present value of the minimum lease payments. The Corporation’s lease agreements often include one or ~~less and (b) there is not an~~more options to renew at the Corporation’s discretion. If at lease inception, the Corporation considers the exercising of a renewal option to ~~purchase the underlying asset that the lessee is~~be reasonably certain, ~~to exercise. For short-term leases, lessees may elect to recognize~~the Corporation will include the extended term in the calculation of the ROU asset and lease ~~payments over~~liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease ~~term~~whenever this rate is readily determinable. As the rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a ~~straight-line basis.~~collateralized basis, over a similar term. For ~~public business entities,~~operating leases existing prior to January 1, 2019, the ~~amendments in this Update are effective~~rate for ~~fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities,~~ the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permittedremaining lease term as of January 1, 2019 was used.

	June 30, 2020		December 31, 2019
Weighted-average remaining lease term
Operating leases		4.8 years	5.3 years
Weighted-average discount rate
Operating leases		3.10%	3.09%

The following table represents lease costs and other lease information. As the ~~beginning~~Corporation elected, for all classes of ~~an interim or annual reporting period. The Corporation is currently assessing~~underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Corporation’s preliminary analysis of its current portfolio, the impact to the Corporation’s balance sheet is estimated to result in less than a one percent increase in assetsvariable lease cost primarily represents variable payments such as common area maintenance and ~~liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.~~utilities.

~~In March 2016, the FASB issued ASU 2016-06,~~~~Derivatives and Hedging (Topic 815)~~~~. The amendments apply to all entities that are issuers~~Future minimum payments for operating leases with initial or remaining terms of one year or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the paymentmore as of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities otherthan public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.June 30, 2020 were as follows:

Lease Payment Schedule
(Dollars in Thousands)	Operating Leases
Twelve Months Ended:
June 30, 2021	$	202
June 30, 2022		197
June 30, 2023		150
June 30, 2024		155
June 30, 2025		155
Thereafter		35
Total Future Minimum Lease Payments		894
Amounts Representing Interests		(66	)
Present Value of Net Future Minimum Lease Payments	$	828

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~In March 2016,~~9. Change in Capital Structure

On April 17, 2019 ENB Financial Corp announced the ~~FASB issued ASU 2016-08,~~~~Revenue from Contracts with Customers (Topic 606).~~ ~~The amendments in this Update affect entities with transactions included within the scope~~Board of ~~Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output~~Directors declared a two-for-one stock split of the ~~entity’s ordinary activities) in exchange~~Corporation’s issued and outstanding common stock pursuant to which one (1) additional share of common stock was issued for ~~consideration. The amendments in this Update do not change the core principle~~each share of common stock held by shareholders of record as of the ~~guidance in Topic 606; they simply clarify~~close of business on May 31, 2019. The additional shares were issued on June 28, 2019. The stock split was effected pursuant to articles of amendment to the ~~implementation guidance on principal versus agent considerations. The amendments in this Update are intended~~articles of incorporation to ~~improve~~reduce the ~~operability and understandability~~par value of the ~~implementation guidance on principal versus agent considerations. The amendments in this Update affect~~common stock from $0.20 to $0.10 and increase the ~~guidance in ASU 2014-09,~~~~Revenue~~authorized shares of common stock proportionately from ~~Contracts with Customers (Topic 606),~~ which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14,~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,~~~~defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have~~12,000,000 to 24,000,000. Per share data reflected on the Corporation’s ~~financial position~~consolidated statements of income are restated as if the stock split had occurred at the beginning of the earliest period presented.

10. Risks and Uncertainties

COVID-19 Update

The following table provides information with respect to our commercial loans by type at June 30, 2020.

At Risk

(Dollars in Thousands)	#		$		$		%
	Number		Total		Principal		of Total
	of		Loan		Balance		Loan
Loan Type	Loans		Exposure		of Loans		Balance
Lessors of Nonresidential Buildings		151		62,901		57,085		6.83%
Lessors of Residential Buildings		225		44,104		39,395		4.71%
Specialized Freight		30		16,049		11,733		1.40%
Residential Remodelers		99		10,256		4,158		0.50%
New Single Family Housing Construction		58		8,965		4,189		0.50%
Passenger Car Leasing		136		8,808		8,789		1.05%
Hotels		12		7,843		3,138		0.38%
Religious Organizations		58		7,365		6,269		0.75%
Car Washes		11		6,959		5,286		0.63%
Concrete & Structural Contrators		27		6,875		4,767		0.57%
Other		71		14,945		8,597		1.03%

Totals		878		195,070		153,406		18.35%

The Corporation has a diversified commercial loan portfolio that is consistent with the diversified economies of Lancaster, Lebanon and Berks Counties in Pennsylvania, the Corporation’s market area. The above chart is focused on loan types that are commonly known to be at risk or ~~results~~negatively impacted by the COVID-19 pandemic and its effects. The Corporation’s largest exposure to at risk loan types are loans on leased commercial property and loans on residential investment properties. The Corporation has a relatively low exposure to the hospitality industry, including restaurants. Single loan type exposures falling under the other category do not exceed 0.5% of ~~operations.~~total loans and include loan types such as site preparation contractors, fuel dealers, and recreational centers. The above levels of exposure to these at risk loan types have not had significant movements from 2019 to 2020. Management does not expect any significant movements in these exposures going forward.

Paycheck Protection Program (PPP)

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, providing over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was authorized to originate PPP loans.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In terms of qualifying for a PPP loan, an eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10 million. The PPP loans have the following terms: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is eligible to be reduced by the amount of loan forgiveness available under the PPP, provided the employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses such as utilities.

In ~~April 2016~~, the ~~FASB issued ASU 2016-10,~~~~Revenue from Contracts with Customers (Topic 606).~~ ~~The amendments in this Update affect entities with transactions included within~~initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the ~~scope~~end of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2)April. Congress then passed an additional ~~implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree~~allocation of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09,~~Revenue from Contracts with Customers (Topic 606)~~~~, which is not yet effective. The effective date and transition requirements~~funds for the ~~amendments in~~PPP loans, allowing a second round of applications to begin. As of June 30, 2020, the Corporation had approved and originated 951 PPP loans totaling $79,710,000 with a current balance of $76,068,000. Management’s focus has been to serve the customers and market area that the Corporation serves. Subsequent to June 30, 2020, but prior to the filing of this ~~Update are~~report, the ~~same as the effective date~~Corporation has approved and ~~transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14,~~~~Revenue from Contracts~~originated 990 PPP loans totaling $80,821,000 with ~~Customers (Topic 606)~~:~~Deferral~~a current balance of ~~the Effective Date~~, defers the effective date of Update 2014-09 by one year. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.$77,180,000.

In ~~May 2016,~~accordance with the ~~FASB issued ASU 2016-12,~~~~Revenue from Contracts~~SBA terms and conditions on these PPP loans, the Corporation expects to receive approximately $3.25 million in fees associated with ~~Customers (Topic 606)~~~~, which among other things clarifies~~ the ~~objective~~processing of these loans. Management received the first $3.15 million in fees in June associated with processing the first $76 million of PPP loans submitted, however all fee income is being deferred over the expected life of each PPP loan. Management will receive the remainder of the ~~collectability criterion~~fee income as much smaller final batches of PPP loans are processed. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the vast majority of the Corporation’s PPP loans will carry a two year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. It is expected that the vast majority of these PPP borrowers will provide the necessary support in ~~Topic 606,~~order to have their principal balances forgiven in a period of time significantly shorter than the two-year life of the loan.

COVID-19 Loan Forbearance Programs

As of June 30, 2020, over 300 of the Corporation’s customers had requested payment deferrals or payments of interest only on loans totaling $61.7 million, or 7.4% of the total loan portfolio. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Of the $61.7 million of loan balances with payments being deferred, $49.5 million, or 77.0% were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $11.9 million of residential mortgage deferrals and $200,000 of consumer loan deferrals. The vast majority all of the COVID-19 loan payment deferrals were for a 90-day period.

As of June 30, 2020, the Corporation’s delinquent, non-performing, and impaired loans were not yet materially impacted by the rapidly declining economic conditions brought on by COVID-19. However, due to the magnitude of this economic interruption, management does anticipate that these levels will rise in the third quarter of 2020, and will likely show further deterioration in the remainder of 2020 and into 2021. The significance of a credit deterioration with depend on the length of time business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management has already significantly increased the Corporation’s provision for loan losses in the second quarter of 2020, as ~~well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09,~~~~Revenue from Contracts with Customers (Topic 606)~~,qualitative factors have been increased based on predicted prolonged economic weakness, which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14,~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~~~, defers the effective date of Update 2014-09 by one year. This Update is not~~ expected to ~~have a significant~~ impact onmore and more borrowers.

Index

ENB FINANCIAL CORP

Notes to the ~~Corporation’s financial statements~~Unaudited Consolidated Interim Financial Statements

11. Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13,Financial ~~Instruments-Credit~~Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments~~(“ASU 2016-13”)~~, which changes the impairment model for most financial assets. This ~~ASU~~Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ~~ASU~~Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Notes to the Unaudited Consolidated Interim Financial Statements~~

In August ~~2016,~~2018, the FASB issued ASU ~~2016-15,~~2018-13, ~~Statement~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of ~~Cash Flows (Topic 230): Classification~~and reasons for transfers between Level I and Level II of ~~Certain Cash Receipts~~the fair value hierarchy; the policy for timing of transfers between levels; and ~~Cash Payments, which addresses eight specific cash flow issues with~~ the ~~objective~~valuation processes for Level III fair value measurements. The Update requires disclosure of ~~reducing diversity~~changes in ~~practice. Among these include recognizing cash payments~~unrealized gains and losses for ~~debt prepayment or debt extinguishment as cash outflows~~the period included in other comprehensive income (loss) for ~~financing activities; cash proceeds received from~~recurring Level III fair value measurements held at the ~~settlement~~end of ~~insurance claims should be classified~~the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the ~~basis~~Corporation’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the ~~related insurance coverage;~~affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and ~~cash proceeds received from~~interim periods within those fiscal years. For all other public business entities, the ~~settlement of bank-owned life insurance policies should~~effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investingissued in mid-November. Topic 815, Derivatives and ~~operating activities. The~~ Hedging amendments ~~in this Update~~ are effective for public business entities for fiscal years beginning after December 15, ~~2017,~~2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, ~~2018,~~2019, and interim periods ~~within fiscal years~~ beginning after December 15, ~~2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts~~2020. For entities that have adopted the amendments in ~~an interim period, any adjustments should be reflected~~Update 2017-12, the effective date is as of the beginning of the ~~fiscal year that includes that interim period. An entity that elects early adoption must adopt all~~first annual period beginning after the issuance of ~~the amendments in the same period. The amendments in~~ this ~~Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the~~ Update. Topic 825, Financial Instruments amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

~~In October 2016, the FASB issued ASU 2016-16,~~~~Income Taxes (Topic 740)~~, which requires recognition of current and deferred income taxes resulting from an intra-entity transfer of any asset (excluding inventory) when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this Update are effective ~~for public business entities~~ for fiscal years beginning after December 15, ~~2017, including~~2019, and interim periods within those annual reporting periods. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In ~~October 2016,~~May 2019, the FASB issued ASU ~~2016-18,~~2019-05, ~~Statement of Cash Flows (Topic 230)~~Financial Instruments – Credit Losses, Topic 326, which ~~requires~~allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a ~~statement~~cumulative-effect adjustment to opening retained earnings as of ~~cash flows explains~~ the ~~change during~~date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the ~~period~~effective dates and transition requirements are the same as those in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public businessASU 2016-13. For entities ~~for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are~~that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, ~~2018, and~~2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, ~~2019. Early adoption~~2022, and interim periods within those fiscal years. The final ASU is ~~permitted, including adoption~~expected to be issued in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in thismid-November. This Update ~~should be applied using~~is not expected to have a ~~retrospective transition method to each period presented. The Corporation is currently evaluating the~~significant impact ~~the adoption of the standard will have~~ on the Corporation’s ~~statement of cash flows.~~financial statements.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In ~~March 2017,~~July 2019, the FASB issued ASU ~~2017-08, Receivables~~2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – ~~Nonrefundable Fees~~Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and ~~Other Costs (Subtopic 310-20).~~extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The ~~amendments~~effective dates in this Update ~~shorten~~are the ~~amortization period~~same as those applicable for ASU 2019-10. The Corporation qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain ~~callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized~~tax transactions, and make minor improvements to the ~~earliest call date.~~codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or was a separate transaction. The ~~amendments do not require~~Update also changes current guidance for making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing operations, determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting, ~~change~~accounting for ~~securities held at a discount;~~tax law changes and year-to-date losses in interim periods, and determining how to apply the ~~discount continues~~income tax guidance to ~~be amortized to maturity.~~franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018.~~2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, ~~2019,~~2021, and interim periods within fiscal years beginning after December 15, ~~2020.~~2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Corporation’s financial statements.

In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted ~~including~~before an entity’s adoption ~~in an interim period. If an entity early adopts~~of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim ~~period, any adjustments should be reflected as~~periods within those years. Other amendments are effective upon issuance of ~~the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in~~ this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.ASU. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s financial position or results of operations.

3234

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In ~~September 2017,~~January 2020, the FASB issued ASU ~~2017-13,~~2020-4, ~~Revenue Recognition~~Reference Rate Reform (Topic ~~605)~~848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, ~~Revenue from Contracts with Customers (Topic 606), Leases (Topic 840),~~to provide temporary optional expedients and ~~Leases (Topic 842~~):~~Amendments to SEC Paragraphs Pursuant~~exceptions to the ~~Staff Announcement~~U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the ~~July 20, 2017 EITF Meeting~~modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and ~~Rescission of Prior SEC Staff Announcements~~can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and ~~Observer Comments.The SEC Observer said that~~ the SEC staff would not object if entities that are considered public business entities only because their financial statements or financial information is required to be included in another entity’s SEC filing use the effective dates for private companies when they adopt ASC 606,~~Revenue from Contracts with Customers~~~~, and ASC 842,~~~~Leases~~~~. The Update also supersedes certain SEC paragraphs in the Codification related to previous SEC staff announcements and moves other paragraphs, upon~~ adoption of ~~ASC 606 or ASC 842. This Update is not expected to~~the ASU will have a ~~significant~~material impact on the Corporation’s financial statements.

3335

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Item 2. 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 quarterly report, and in conjunction with the ~~2016~~2019 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

Forward-Looking Statements

The U.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regards to the inclusion of forward-looking statements in this document and documents incorporated by reference. Forward-looking statements pertain to possible or assumed future results that are made using current information. These forward-looking statements are generally identified when terms such as: “believe,” “estimate,” “anticipate,” “expect,” “project,” “forecast,” and other similar wordings are used. The readers of this report should take into consideration that these forward-looking statements represent management’s expectations as to future forecasts of financial performance, or the likelihood that certain events will or will not occur. Due to the very nature of estimates or predications, these forward-looking statements should not be construed to be indicative of actual future results. Additionally, management may change estimates of future performance, or the likelihood of future events, as additional information is obtained. This document may also address targets, guidelines, or strategic goals that management is striving to reach but may not be indicative of actual results.

Readers should note that many factors affect this forward-looking information, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference into this document. These factors include, but are not limited to, the following:

National and local economic conditions

Effects of ~~slow~~ economic conditions ~~or prolonged economic weakness,~~particularly with regard to the negative impact of severe, wide-ranging and continuing disruptions caused by the spread of coronavirus (COVID-19) and government and business responses thereto, specifically the effect on loan customers to repay loans

Health of the housing market

Real estate valuations and its impact on the loan portfolio

Interest rate and monetary policies of the Federal Reserve Board

Volatility of the securities markets including the valuation of securities

Future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government

Political changes and their impact on new laws and regulations

Competitive forces

Impact of mergers and acquisition activity in the local market and the effects thereof

Potential impact from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses

Changes in customer behavior impacting deposit levels and loan demand

Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters

Ineffective business strategy due to current or future market and competitive conditions

Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk

Operation, legal, and reputation risk

Results of the regulatory examination and supervision process

The impact of new laws and regulations ~~including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations issued thereunder~~

Possible ~~impacts of~~changes to the capital and liquidity requirements ~~of the Basel III standards~~ and other regulatory pronouncements, regulations and rules

~~Disruptions~~Large scale global disruptions such as pandemics, terrorism, trade wars, and armed conflict.

Local disruptions due to flooding, severe weather, or other natural disasters

The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

3436

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Readers should be aware if any of the above factors change significantly, the statements regarding future performance could also change materially. The safe harbor provision provides that the Corporation is not required to publicly update or revise forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should review any changes in risk factors in documents filed by the Corporation periodically with the Securities and Exchange Commission, including Item 1A of Part II of this Quarterly Report on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K.

Results of Operations

Overview

The first six months of 2020 were impacted by a number of unprecedented items caused by the onset of the COVID-19 pandemic. The spread of COVID-19 quickly became global and impacted the global economy. This impact was felt rather quickly due to China’s large role in the world economy, second in GDP but first in terms of supply chain impact for basic goods. The immediate impact and forward risk posed by the pandemic caused the Federal Reserve to take the unusual step of reducing the Federal Funds rate by 50 basis points to 1.25% on March 3, 2020, at a special Fed meeting ahead of the regularly scheduled March 18, 2020 meeting. On March 11, 2020, the World Health Organization (WHO) recognized COVID-19 as a pandemic. The quick further expansion of the pandemic then caused the Federal Reserve to take an unprecedented step of a second special meeting on Sunday afternoon of March 15, 2020, to further reduce the Federal Funds rate 100 basis points to 0.25%. This move took the Federal Funds rate to the same historic low of 0.25% that occurred due to the Financial Crisis of 2008. On March 15, 2020, the Fed also reduced the Discount Window rate by 150 basis points, which took this rate down to 0.25%. This move importantly gave all banks easy access to very low cost funds. On March 16, 2020, the Fed also announced action to inject more liquidity into the financial system by purchasing up to $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities. All major stock exchanges experienced dramatic sell-offs. The DOW which had peaked at 29,568 in February, closed on Friday, March 20, 2020 at 19,174, down 10,394 points, or 35%. NASDAQ was down 30%, while the S&P 500 was down 32%. Even with a significant equity market recovery since the initial impact of COVID-19, economic conditions remain uncertain. With the closing of non-essential businesses throughout various part of the country and a continued impact to consumer spending, it is anticipated that the financial impact will be long-term. The U.S. Government passed a massive Coronavirus Relief Bill that included direct small business aid for employers with fewer than 500 employees; direct deposit stimulus payments to American households; enhanced unemployment compensation benefits; and direct aid to hospitals and health care providers. Additional federal and local government support has helped to sustain businesses and individuals in the short-term, but once these programs have ended, the financial impact will be felt more fully.

The economic impact of COVID-19 had an impact on the Corporation’s financial results for the first six months of 2020 but is currently expected to have much more measurable results into the future. The Corporation recorded net income of ~~$2,034,000~~$3,599,000 and $5,764,000 for the third quarter of 2017, a 2.1% decrease from the $2,077,000 earned in the third quarter of 2016, while for the nine-month period ended September 30, 2017, the Corporation recorded $5,733,000 of net income, a 1.8% increase over the same period in 2016. The Corporation experienced strong levels of growth in net interest income (NII) for both the three and ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017, which were largely offset by decreases~~2020, a 16.5% and 1.3% increase from the $3,089,000 and $5,692,000 earned during the same periods in other income and increases in interest expense. For the third quarter of 2017, the increase in operating expenses and reduction in other income outweighed the increase in NII. For the nine-month period, the Corporation’s NII improvement was more significant relative to the decrease in other income and increase in operating expenses, resulting in higher net income. Earnings2019. The earnings per share (EPS), basic and diluted, were ~~$0.71 and $2.01~~$0.64 for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2020, and $1.03 for the six months ended June 30, 2020, compared to ~~$0.73~~$0.54 and ~~$1.98~~$1.00 for the same periods in ~~2016.~~2019, a 18.5% and 3.0% increase, respectively. The increase in the Corporation’s 2020 earnings was caused primarily by an increase in mortgage gains and net interest income, partially offset by a significantly higher provision for loan losses. The larger percentage increases in EPS over the percentage increase in net income are the result of a reduction in average shares outstanding.

The Corporation’s NII has grown each successive quarter since the third quarter of 2016 due to three Federal Reserve interest rate increases and $1,681,000 of non-recurring amortization on U.S. sub-agency bonds recorded in the first nine months of 2016. The Corporation’s NII increased by ~~$1,048,000,~~$311,000, or ~~15.8%~~3.4%, and ~~$4,198,000,~~$544,000, or ~~23.0%~~3.0%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. The increase in NII primarily resulted from an increase in interest and fees on ~~securities and dividend income~~loans of ~~$519,000,~~$327,000, or ~~31.8%~~3.9%, and ~~$2,623,000,~~$756,000, or ~~69.7%~~4.6%, for the three and ~~nine-month~~six months ended June 30, 2020, compared to the same periods ~~ended September 30, 2017.~~in the prior year. The portion of the increase that was caused by non-recurring amortization was $170,000 for the three-month period and $1,681,000 for the nine-month period ended September 30, 2017. The Corporation’s NII also benefited from a $459,000, or 8.0%, and $1,280,000, or 7.7% increase in interest and fees on loans was partially offset by decreases of $141,000, or 7.6%, and $276,000, or 7.3%, on interest earned on securities for the three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017, compared to 2016.~~2020. The Corporation’s interest expense ~~was relatively flat~~on deposits and borrowings decreased by $305,000, or 23.4%, and $213,000, or 8.6%, for the three ~~months~~and six-month periods ended ~~September~~June 30, ~~2017, but declined by $132,000, or 5.7%, for~~2020, compared to the ~~nine-month period ended September 30, 2017.~~same periods in 2019.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The Corporation recorded ~~$240,000 of provision expense in the third quarter of 2017, compared to $200,000 for the third quarter of 2016, and~~ provision expense of ~~$450,000~~$975,000 for the ~~nine months ended September 30, 2017,~~second quarter of 2020, and $1,325,000 for the year-to-date period, compared to ~~$200,000~~$30,000 and $210,000 for the ~~same period~~three and six-month periods in ~~2016, representing a $250,000 decrease in income in 2017 compared to 2016. The~~2019. This represents an increase in ~~provision~~quarterly expense of $945,000 and an increase in year-to-date expense of $1,115,000. Provision expense was ~~largely driven~~impacted by ~~higher levels of classified loans,~~economic factors caused by COVID-19, which ~~required more provision expense in 2017, as well as~~could have a ~~specific allocation of $98,000 for an impaired loan in the third quarter of 2017.~~longer-term impact on asset quality. The gains from the sale of debt securities were ~~$170,000~~$367,000 for the three months ended June 30, 2020, and ~~$417,000~~$649,000 for the six months ended June 30, 2020, compared to gains of $106,000 and $187,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, compared to $464,000 and $2,130,000 for the same periods in 2016, representing decreases of $294,000, or 63.4%, and $1,713,000, or 80.4%, respectively.~~2019. Market interest rates were lower in ~~2016,~~2020, making it more conducive to achieving gains from the sale of securities. For the six months ended June 30, 2020, there were unrealized losses of $225,000 on the Corporation’s portfolio of equity securities that consists of stocks held in other banks. This loss flows through the income statement and was the result of the devaluation of bank stocks given the economic current environment during the period that began with the COVID-19 pandemic. For the six months ended June 30, 2019, there was an unrealized gain of $44,000 on this portfolio, resulting in a negative impact to income of $269,000 for the first six months of 2020 compared to the prior year. The gain on the sale of mortgages ~~decreased~~increased by ~~$47,000,~~$1,275,000, or ~~8.4%~~307.2%, and ~~increased by $193,000,~~$1,467,000, or ~~17.4%~~192.0%, for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the prior year’s periods. ~~Both mortgage production and margins realized on~~The volume of mortgages sold ~~mortgages were~~was significantly higher during the first six months of 2020 compared to the same period in the ~~first nine months of 2017 compared~~prior year due to ~~2016.~~the very low interest rate environment, which caused a surge in refinancing activity. Total operating expenses increased ~~$899,000,~~by $27,000, or ~~13.3%~~0.3%, and ~~$2,938,000,~~$855,000, or ~~14.7%~~5.2%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. The larger increase in operating expenses for the six month period was driven by higher salary costs in the first quarter related payment of a 2019 performance bonus as well as increases in profession services and other expenses.

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. The latter measurement typically receives more attention from shareholders. The ROA and ROE increased for the ~~nine~~three months ended ~~September~~June 30, ~~2017,~~2020, compared to the same period in the prior year, ~~due primarily to higher earnings. The ROA~~but decreased for the ~~nine months ended September 30, 2017, compared to the prior year~~year-to-date period due to a ~~faster asset growth rate that outpaced the increase in~~much larger balance sheet and only slightly higher earnings. ~~However, ROE increased for the nine-month period as equity did not increase at a rapid pace allowing the growth in earnings to positively impact ROE.~~

Key Ratios	Three Months Ended				Nine Months Ended				Three Months Ended						Six Months Ended
	September 30,				September 30,				June 30,						June 30,
	2017		2016		2017		2016		2020			2019			2020			2019

Return on Average Assets		0.80%		0.87%		0.77%		0.81%		1.14	%		1.11	%		0.95	%		1.04	%
Return on Average Equity		8.06%		8.31%		7.86%		7.71%		12.31	%		11.48	%		9.86	%		10.87	%

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The results of the Corporation’s operations are best explained by addressing, in further detail, the five major sections of the income statement, which are as follows:

Net interest income

Provision for loan losses

Other income

Operating expenses

Provision for income taxes

The following discussion analyzes each of these five components.

Net Interest Income

~~Net interest income (NII)~~NII represents the largest portion of the Corporation’s operating income. In the first ~~nine~~six months of ~~2017,~~2020, NII generated ~~74.8%~~73.2% of the Corporation’s ~~gross~~ revenue stream, which consists of net interest income and non-interest income, compared to ~~68.1%~~77.4% in the first ~~nine~~six months of 2016. The higher NII as a percentage of gross revenue was primarily caused by a combination of the last three Federal Reserve interest rate increases as well as non-recurring accelerated amortization expense in 2016.2019. The overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income. ~~Without the impact of the accelerated amortization on the U.S. Sub-Agency bonds, the Corporation’s NII would have accounted for 69.9% of the gross revenue stream for the first nine months of 2016.~~

The following table shows a summary analysis of net interest income 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 net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled ~~$582,000~~$197,000 and ~~$1,793,000~~$370,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$524,000~~$190,000 and ~~$1,570,000~~$392,000 for the same periods in ~~2016.~~2019.

Index

NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30 , September 30,
2017 2016 2017 2016
$ $ $ $
Total interest income 8,444 7,393 24,639 20,573
Total interest expense 754 751 2,187 2,319

Net interest income 7,690 6,642 22,452 18,254
Tax equivalent adjustment 582 524 1,793 1,570

Net interest income (fully taxable equivalent) 8,272 7,166 24,245 19,824

ENB FINANCIAL CORP
Management’s Discussion and Analysis

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
	$		$		$		$
Total interest income		10,468		10,462		20,955		20,624
Total interest expense		999		1,304		2,270		2,483

Net interest income		9,469		9,158		18,685		18,141
Tax equivalent adjustment		197		190		370		392

Net interest income (fully taxable equivalent)		9,666		9,348		19,055		18,533

NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect net interest income:

The rates earned on interest earning assets and paid on interest bearing liabilities

The average balance of interest earning assets and interest bearing liabilities

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. ~~Until December 16, 2015,~~For the first half of 2019 the Federal funds rate ~~had not changed since December 16, 2008. On December 16, 2015,~~remained at 2.50%, however, in the second half of 2019 the Federal ~~funds rate was increased~~Reserve decreased rates three times, by 25 basis points ~~to 0.50%, from 0.25%~~each, beginning in July of 2019. By December 31, 2019, the Fed funds rate stood at 1.75%. On ~~December 14, 2016,~~March 3, 2020, the Federal Reserve dropped the Fed funds rate ~~was increased 25~~by 50 basis points to ~~0.75%. On~~1.25%, and on March 15, ~~2017 and on June 14, 2017,~~2020, the ~~Federal funds~~Fed dropped the rate ~~was again increased 25~~by 100 basis points ~~so the~~to 0.25%. These rate ~~since June 14, 2017, has been 1.25%. Prior to December of 2015, the period of seven years with extremely low and unchanged overnight rates was the lowest and longest~~drops were in ~~U.S. history. The impact has been a lower net interest margin~~response to the ~~Corporation and generally across the financial industry.~~ COVID-19 global pandemic.

The increase in December of 2015 and 2016, as well as the increases in March and June of 2017 resulted in higher short-term U.S. Treasury rates, but the long-term rates initially decreased, resulting in a flattening of the yield curve. Long-term rates like the ten-year U.S. Treasury were 192 basis points under the 4.25% Prime rate as of September 30, 2017. It appears that the general conditions of a flatter yield curve with low long-term U.S. Treasury rates, significantly below the Prime rate, will continueexpectations for the remainder of ~~2017.~~the year are that there will be no further rate drops or increases. Management anticipates a reduction in interest income in the ~~next 0.25%~~remaining quarters of 2020 as a result of the significant Federal Reserve rate ~~increase could occur~~decreases. All of the Corporation’s Prime-based floating rate loans reset lower in March, while floating rate securities reset when the ~~fourth quarter~~quarterly reset dates were reached. Asset yields are much lower going into the second half of ~~2017. It remains~~2020 and interest income will become harder to ~~be seen whether mid~~grow without significant growth in earning assets.

The shape of the U.S. Treasury curve also directly impacts the Corporation’s net interest income. The U.S. Treasury curve was flat coming into 2020, and after the rapid decline in short and long-term ~~U.S. Treasury~~ rates ~~will also increase to~~driven by the ~~same degree that~~COVID-19 environment and the Federal Reserve ~~will move the overnight Federal funds rate. If they do not,~~rate drops, the yield curve ~~would further flatten making~~remained flat, but rates also reached historic lows. This is detrimental to banks as funding sources are typically shorter terms than the assets invested in and asset yields are much lower than they were even a year ago. A sharper yield curve is beneficial to financial institutions as a larger spread can be made on the asset versus the liability utilized. For the first two months of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged around 21 basis points. For the month of March, this spread averaged 42 basis points but the Treasury rates were at much lower levels. For the second quarter of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged 49 basis points. These spreads are very low from a historical perspective.

The combination of lower rates, and a generally flat yield curve out to longer rates, makes it ~~harder~~more difficult for the Corporation to generate higher net interest income. The Corporation’s net interest margin declined slightly in the first quarter of 2020 and declined more significantly in the second quarter of 2020. It is likely the net interest margin will continue to decline through the remainder of 2020. Any increase ~~asset yield.~~in net interest income will need to come from growth of interest earning assets.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The Prime rate is generally used by commercial banks to extend variable rate loans to business and commercial customers. For many years, the Prime rate has been set at 300 basis points, or 3.00% higher, than the Federal funds rate and typically moves when the Federal funds rate changes. As such, the Prime rate ~~increased from~~was 5.50% as of June 30, 2019, 4.75% as of December 31, 2019, and 3.25% ~~to 3.50% on December 16, 2015, from 3.50% to 3.75% on December 14, 2016, from 3.75% to 4.00% on~~as of June 30, 2020, after the 150 basis points of Federal Reserve rate drops in March ~~15, 2017, and from 4.00% to 4.25% on June 14, 2017.~~of 2020. The Corporation’s Prime-based loans, including home equity lines of credit and some variable rate commercial loans, reprice a day after the Federal Reserve rate movement.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

As a result of the ~~Federal Reserve rate increases,~~significant growth of the loan portfolio and savings on the interest expense side, the Corporation’s NII on a tax equivalent basis has been increasing. Despite a lower net interest margin, the Corporation still achieved a slightly higher NII in the second quarter of 2020 and for the first half of 2020 compared to the same periods in the prior year. The net interest margin began ~~to increase~~decreasing on a quarterly basis in ~~2017~~the latter part of 2019 after the Federal Reserve dropped rates by 75 basis points. This margin decreased slightly in the first quarter of 2020 and more significantly in the second quarter of 2020 with the ~~Corporation’s margin increasing to 3.46% for the year-to-date period ended September 30, 2017, compared to 3.04% for the nine months ended September 30, 2016.~~drastic rate drops in March. The Corporation’s NII on a tax-equivalent basis increased for the ~~first nine~~three months ~~of 2017 increased substantially~~ended June 30, 2020, by $318,000, or 3.4%, over the same period in ~~2016, by $4,421,000,~~2019. For the six months ended June 30, 2020, NII increased $522,000, or ~~22.3%~~2.8%, ~~with the margin increasing~~compared to ~~3.46%. However, there was non-recurring security amortization of $1,681,000 recorded in~~ the first ~~nine~~six months of ~~2016, which had a negative impact on NII and margin. Without this impact, NII would have increased by $2,740,000, or 12.7%, in 2017 compared to 2016.~~2019. Management’s asset liability sensitivity measurements continue to show a benefit to both margin and NII given ~~further~~ Federal Reserve rate increases. Actual results over the past ~~nine quarters~~two years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any ~~additional Federal Reserve rate increases~~improvements in ~~2017 would further improve both margin and~~ NII ~~although~~will be driven primarily by loan growth since asset yields will continue to a limited degree because the rate change would likely only affect the last half of December. However, a fourth quarter Federal Reserve rate increase would have a positive impact on 2018 NII and margin.decline.

The ~~extended extremely~~Corporation has maintained a low ~~Federal~~average cost of funds over the past few years but funding costs had increased slightly throughout the first part of 2019 before the Fed rate ~~has enabled management to reduce~~drops. Deposit rates had been increasing slightly and the cost of ~~funds on overnight~~ borrowings ~~and allowed lower interest~~was up due to a higher rate environment. However, with the recent steep drops in market rates, ~~paid on deposits, reducing the Corporation’s interest expense. It was only after the third 25-basis point Fed rate increase in March of 2017 that~~funding costs are once again declining and the Corporation ~~raised some~~is achieving savings on both the deposit ~~rates minimally. While the~~and borrowings side. With a very low Prime rate reduced the yield on the Corporation’s loans for many years, the rate increases through September of 2017 did act to boost interest income and help improve the Corporation’s margin. With a higher Prime rate and elevated Treasury rates, higher asset yields should be possibleprojected throughout the remainder of ~~2017. Due~~2020, the Corporation’s asset yields will see a decrease, but helping to offset this decline will be a stabilization of costs on the ~~increasing number~~interest expense side. The recent sharp Federal Reserve rate decreases have already reduced the Corporation’s NII and net interest margin (NIM), primarily because of the variable rate ~~loans in~~portion of the ~~Corporation’s~~ loan portfolio, ~~the 25 basis point increase in~~which resets every time the Prime rate atchanges. Variable rate loans have averaged between 17% and 20% of the end of 2015, 2016, and in March and June of 2017, did cause NII to increase progressively. The full impact of all of these increases was experienced in the third quarter of 2017. Any additional Federal Reserve rate increase in the fourth quarter of 2017 would increase NII but the full impact would not be seen untilloan portfolio for the first ~~quarter~~half of ~~2018.~~2020.

Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With ~~higher~~lower Treasury rates in the first ~~nine~~six months of ~~2017~~2020 compared to the same period in ~~2016,~~2019, security reinvestment has generally been occurring at lower yield levels. Because of the lower market interest rates and very flat yield curve, it is difficult to achieve substantially higher yields in the securities portfolio but there have been some pockets of opportunities to reposition the portfolio by selling securities at gains and reinvesting in slightly higher ~~yields and amortization has slowed resulting in higher yields.~~ yielding instruments to benefit the Corporation’s earnings going forward.

The Corporation’s loan portfolio yield has ~~begun to increase~~decreased from the prior years’ period as the variable rate portion of the loan portfolio ~~is repricing higher~~repriced lower with each Federal Reserve rate ~~movement.~~movement and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation’s commercial Prime-based loans ~~are~~were priced at the Prime rate, ~~currently at~~which was 4.75% to start 2020, and then 4.25%. as of March 4, 2020, and 3.25% as of March 16, 2020 through June 30, 2020. The pricing for the most typical five-year fixed rate commercial loans is currently ~~very similar to~~slightly higher than the Prime rate. ~~Previously, any increases in~~With the significant March Federal Reserve rate reductions, adding variable rate loans ~~acted to bring down overall loan yield. Now with the rates being very similar it is much more beneficial~~ to the ~~Corporation~~portfolio means they will be priced at very low rates to ~~grow~~start but can reprice lower if the ~~variable rate loans in a period of rising~~Federal Reserve lowers rates any further and would reprice higher if the Federal Reserve would increase rates. ~~An element~~There are elements of the Corporation’s Prime-based commercial loans is priced above the Prime rate based on the level of credit risk of the borrower. Management does price a portion of consumer variable rate loans above the Prime rate, which also helps to improve loan yield. Both commercial and consumer Prime-based pricing continues to be ~~driven largely~~influenced by local competition.

Mid-term and long-term interest rates on average were ~~higher~~much lower in ~~2017~~2020 compared to ~~2016.~~2019. The average rate of the 10-year U.S. Treasury was ~~2.32%~~1.02% in the first ~~nine~~six months of ~~2017~~2020 compared to ~~1.74%~~2.49% in the first ~~nine~~six months of ~~2016,~~2019, and it stood at ~~2.33%~~0.66% on ~~September~~June 30, ~~2017,~~2020, compared to ~~1.60% at September~~2.00% on June 30, ~~2016.~~2019. The slope of the yield curve has been compressed throughout ~~most~~2019 and 2020. As of ~~2016 and through~~March 31, 2019, the ~~first nine months of 2017,~~U.S. Treasury curve was inverted with ~~a difference of 108 basis points between the Fed Funds rate of 1.25% and~~ the 10-year U.S. Treasury ~~as of September 30, 2017, compared to 110~~rate 50 basis points aslower than the Fed funds rate. As of ~~September~~June 30, ~~2016.~~2020, the 10-year U.S. Treasury rate was only 41 basis points higher than the Fed funds rate. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as ~~2.25%~~1.88% in ~~2016~~the first six months of 2020 and ~~2.62%~~2.79% in ~~2017,~~the first six months of 2019, and as low as ~~1.37%~~0.54% in ~~2016~~2020, and ~~2.05%~~2.00% in 2017. Because the yield curve is still relatively flat, management was not able to increase loan rates to improve yield, but security yields have improved as a result of slightly higher investment rates and lower amortization on existing bonds. The non-recurring sub-agency amortization of $1,681,000 for the year-to-date period ended September 30, 2016, negatively affected security yield resulting in artificially low yields during 2016 and higher yields during 2017. With higher long-term rates in 2017 and the likelihood of further Fed rate increases, the Corporation’s asset yield is projected to increase throughout the remainder of 2017 and during 2018.2019.

3740

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

~~While it is becoming increasingly difficult to achieve savings on the~~The Corporation’s ~~overall~~ cost of funds remained low and stable through the ~~Corporation has been able~~first quarter of 2020 and then decreased through the second quarter of 2020 influenced by lower costs on deposits, but offset partially by elevated costs on borrowings with $154,000 of prepayment penalties recorded on FHLB long-term advances. Management expects the cost of funds will decline during the remainder of 2020 as deposits continue to ~~maintain relatively low offering rates on longer-term time deposits. These interest rates are still below the interest rates that existed four or five years ago. Rollover of these longer time deposits~~reprice to lower rates ~~has caused a decrease~~and the new FHLB advances initiated in the first half of 2020 are at lower rates than those that were paid off early. Core deposit interest ~~expense. Generally, it was~~rates were reduced six times throughout the ~~longer-term~~first half of 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower ~~rates that helped to achieve interest expense reductions on total deposits, as the savings account~~levels or moving into core deposit products. Management does not anticipate significant deposit rate has not changed, and there were limited rate increases for select interest bearing demand deposit accounts. It is anticipated that interest rates on interest bearing core deposits can be held at the current levels formovements in the remainder of ~~2017. If~~ the ~~Federal Reserve does act to raise~~year as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest ~~rates during the fourth quarter, deposit interest~~bearing accounts while making larger rate increases ~~may need to be implemented beginning~~ in ~~2018. Management selectively repriced some~~the pricing of new or reissued time ~~deposit rates higher after the March Federal Reserve rate increase, but the time deposits repricing to lower rates offset any increased interest expense for those that were selectively priced higher.~~deposits. Borrowing costs, and the wholesale borrowing curves that they are based on, generally follow the direction and slope of the U.S. Treasury curve. However, these curves can be quicker to rise and slower to fall as the providers of these funds seek to protect themselves from rate movements. The Corporation ~~was able to refinance some~~refinanced the maturing or paid off borrowings at lower rates in ~~2016 but lower-priced borrowings matured in 2017 with no ability to refinance at lower rates,~~2020, so the ~~yield~~interest expense on borrowings ~~increased slightly during 2017 and~~ will ~~likely continue to do so~~decline moving ~~into 2018.~~forward.

Management currently anticipates that the overnight interest rate and Prime rate will ~~remain~~stay at the current ~~levels until December~~level for the remainder of ~~2017 with the possibility of one more 0.25% rate increase by year-end.~~2020. It is likely that mid and long-term U.S. Treasury rates will ~~increase slowly~~remain relatively suppressed throughout the ~~fourth quarter~~remainder of ~~2017 as~~ the ~~market anticipates an additional Federal Reserve rate movement.~~year. This ~~would allow management to achieve higher earnings on new higher yielding securities~~very low and ~~allow for the ability to price new loans at higher market rates. However, it is also possible that even after a Federal Reserve rate increase, the~~flat yield curve ~~could flatten, making~~makes it more difficult for management to lend out or reinvest at higher interest rates out further on the yield curve. ~~Additionally, any additional Federal Reserve rate increases would have a greater effect on~~However, the ~~repricing of~~recent decline in rates provides the ~~Corporation’s liabilities as~~ability to hold deposit rates at current levels to help to mitigate the cost of money increases and more marketplace competition returns. Management anticipates that more deposit rate increases will need to be made to remain competitive in the market while maturing borrowings would also likely reprice to higher rates.lower interest income.

The following table provides an analysis of year-to-date 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.

3841

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

	Nine Months Ended September 30,									Nine Months Ended September 30,									Six Months Ended June 30,									Six Months Ended June 30,
	2017 vs. 2016									2016 vs. 2015									2020 vs. 2019									2019 vs. 2018
	Increase (Decrease)									Increase (Decrease)									Increase (Decrease)									Increase (Decrease)
	Due To Change In									Due To Change In									Due To Change In									Due To Change In
				Net									Net												Net									Net
	Average			Interest			Increase			Average			Interest			Increase			Average			Interest			Increase			Average			Interest			Increase
	Balances			Rates			(Decrease)			Balances			Rates			(Decrease)			Balances			Rates			(Decrease)			Balances			Rates			(Decrease)
	$			$			$			$			$			$			$			$			$			$			$			$
INTEREST INCOME

Interest on deposits at other banks		27			136			163			—			43			43			59			(144	)		(85	)		(54	)		(27	)		(81	)

Securities available for sale:
Taxable		44			2,059			2,103			(212	)		(1,610	)		(1,822	)		217			(477	)		(260	)		(29	)		280			251
Tax-exempt		766			(49	)		717			466			92			558			(3	)		(49	)		(52	)		(315	)		5			(310	)
Total securities		810			2,010			2,820			254			(1,518	)		(1,264	)		214			(526	)		(312	)		(344	)		285			(59	)

Loans		938			340			1,278			1,982			(292	)		1,690			1,779			(1,039	)		740			2,270			970			3,240
Regulatory stock		31			(3	)		28			44			(100	)		(56	)		28			(62	)		(34	)		21			22			43

Total interest income		1,806			2,483			4,289			2,280			(1,867	)		413			2,080			(1,771	)		309			1,893			1,250			3,143

INTEREST EXPENSE

Deposits:
Demand deposits		19			32			51			32			(41	)		(9	)		51			(514	)		(463	)		54			594			648
Savings deposits		10			(1	)		9			8			(2	)		6			6			(22	)		(16	)		2			—			2
Time deposits		(93	)		(97	)		(190	)		(204	)		(123	)		(327	)		(31	)		125			94			(52	)		148			96
Total deposits		(64	)		(66	)		(130	)		(164	)		(166	)		(330	)		26			(411	)		(385	)		4			742			746

Borrowings:
Total borrowings		(25	)		23			(2	)		17			(261	)		(244	)		62			110			172			5			116			121

Total interest expense		(89	)		(43	)		(132	)		(147	)		(427	)		(574	)		88			(301	)		(213	)		9			858			867

NET INTEREST INCOME		1,895			2,526			4,421			2,427			(1,440	)		987			1,992			(1,470	)		522			1,884			392			2,276

During the first ~~nine~~six months of ~~2017,~~2020, the Corporation’s NII on an FTE basis increased by ~~$4,421,000, a 22.3% increase~~$522,000, or 2.8%, over the same period in ~~2016.~~2019. Total interest income on an FTE basis for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, increased ~~$4,289,000,~~$309,000, or ~~19.4%~~1.5%, from ~~2016,~~2019, while interest expense decreased ~~$132,000,~~$213,000, or ~~5.7%~~8.6%, for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same period in ~~2016.~~2019. The FTE interest income from the securities portfolio ~~increased~~decreased by ~~$2,820,000,~~$312,000, or ~~56.7%~~7.5%, while loan interest income increased ~~$1,278,000,~~$740,000, or ~~7.6%~~4.5%. During ~~2017,~~the first six months of 2020, additional loan volume caused by loan growth added ~~$938,000~~$1,779,000 to net interest income, ~~and~~but the ~~slightly higher~~lower yields caused a ~~$340,000 increase,~~$1,039,000 decrease, resulting in a total increase of ~~$1,278,000.~~$740,000. Higher balances in the securities portfolio caused an increase of ~~$810,000~~$214,000 in ~~net interest income,~~NII, while ~~higher~~lower yields on securities caused a ~~$2,010,000 increase,~~$526,000 decrease, resulting in a ~~total increase~~net decrease of $2,820,000. The Corporation recorded $1,681,000 in non-recurring accelerated amortization on U.S. sub-agency securities during the nine months ended September 30, 2016, which was responsible for the lower yields on securities in 2016.$312,000.

The average balance of interest bearing liabilities increased by ~~4.5%~~6.2% during the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the prior year driven by ~~the~~ growth in deposit balances. The ~~shift between time~~lower cost on deposit ~~balances and demand and savings~~ accounts resulted in a ~~more favorable net~~decrease in interest ~~income.~~expense. Lower rates on demand and savings deposits partially offset by higher rates on time deposits caused a $411,000 decrease in interest expense while slightly higher balances of ~~higher cost~~demand and savings deposits ~~contributed to savings~~caused an increase in expense of ~~$64,000 on deposit costs while lower interest rates on all deposit groups caused $66,000 of savings,~~$26,000 resulting in a total ~~savings~~decrease of ~~$130,000.~~$385,000.

Out of all the Corporation’s deposit types, interest-bearing demand deposits reprice the most rapidly, as nearly all accounts are immediately affected by rate changes. Time deposit balances decreased resulting in a ~~$93,000~~$31,000 reduction to expense, and time deposits repricing to ~~lower~~higher interest rates ~~reduced~~increased interest expense by ~~an additional $97,000,~~$125,000, causing a net total ~~reduction~~increase of ~~$190,000~~$94,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

The average balance of outstanding borrowings increased by 7.6% from the prior year, which resulted in an increase in interest expense of $62,000. Although interest rates were lower in the first half of 2020 compared to the prior year, the Corporation paid off a number of long-term advances with prepayment penalties, which increased interest expense by $110,000. The aggregate of these amounts was an increase in interest expense of $172,000 related to total borrowings.

3942

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The average balance of outstanding borrowings decreased by $3.1 million, or 4.2%, from September 30, 2016, to September 30, 2017. The decrease in total borrowings reduced interest expense by $25,000. The increase in market interest rates increased interest expense by $23,000, as some long-term borrowings at lower rates matured and were replaced with new advances at marginally higher rates. The aggregate of these amounts was a decrease in interest expense of $2,000 related to total borrowings.

The following tables show a more detailed analysis of net interest income on an FTE basis 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).~~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.

4043

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	For the Three Months Ended September 30,												For the Three Months Ended June 30,
	2017						2016						2020						2019
					(c)						(c)						(c)						(c)
	Average				Annualized		Average				Annualized		Average				Annualized		Average				Annualized
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
	$		$		%		$		$		%		$		$		%		$		$		%
ASSETS
Interest earning assets:
Federal funds sold and interest
on deposits at other banks		29,497		112		1.51		25,973		39		0.60		31,764		21		0.26		22,292		119		2.14

Securities available for sale:
Taxable		200,043		1,030		2.06		183,607		608		1.32		229,341		1,085		1.89		211,520		1,289		2.44
Tax-exempt		124,262		1,566		5.04		113,566		1,444		5.09		97,514		802		3.29		89,831		753		3.35
Total securities (d)		324,305		2,596		3.20		297,173		2,052		2.76		326,855		1,887		2.31		301,351		2,042		2.71

Loans (a)		583,592		6,246		4.28		560,576		5,766		4.11		827,386		8,674		4.20		721,770		8,354		4.64

Regulatory stock		5,723		72		5.03		4,936		60		4.86		7,429		83		4.47		6,859		137		7.99

Total interest earning assets		943,117		9,026		3.83		888,658		7,917		3.56		1,193,434		10,665		3.58		1,052,272		10,652		4.05

Non-interest earning assets (d)		64,845						64,291						71,016						68,746

Total assets		1,007,962						952,949						1,264,450						1,121,018

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		199,001		93		0.19		192,147		72		0.15		274,419		110		0.16		260,750		449		0.69
Savings deposits		189,863		24		0.05		166,111		21		0.05		238,056		12		0.02		202,415		26		0.05
Time deposits		153,710		372		0.96		165,638		416		1.01		128,109		421		1.32		136,721		439		1.29
Borrowed funds		69,629		265		1.51		73,411		242		1.32		76,051		456		2.41		75,160		390		2.08
Total interest bearing liabilities		612,203		754		0.49		597,307		751		0.50		716,635		999		0.56		675,046		1,304		0.77

Non-interest bearing liabilities:

Demand deposits		293,124						253,527						425,773						334,287
Other		2,570						2,683						4,429						3,777

Total liabilities		907,897						853,517						1,146,837						1,013,110

Stockholders' equity		100,065						99,432						117,613						107,908

Total liabilities & stockholders' equity		1,007,962						952,949						1,264,450						1,121,018

Net interest income (FTE)				8,272						7,166						9,666						9,348

Net interest spread (b)						3.34						3.06						3.02						3.28
Effect of non-interest
bearing deposits						0.16						0.16						0.22						0.28
Net yield on interest earning assets (c)						3.50						3.22						3.24						3.56

(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The quarter-to-date average balances include net deferred loan costs of ~~$1,122,000~~$2,129,000 as of ~~September~~June 30, ~~2017,~~2020, and ~~$863,000~~$1,669,000 as of ~~September~~June 30, ~~2016.~~2019. Such fees and costs recognized through income and included in the interest amounts totaled ~~($112,000)~~$168,000 in ~~2017,~~2020, and ($~~99,000)~~129,000) in ~~2016.~~2019.

(b) Net interest spread is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.

(c) Net yield, also referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.

(d) Securities recorded at amortized cost. Unrealized holding gains and losses are included in non-interest earning assets.

4144

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME

(DOLLARS IN THOUSANDS)

	For the Nine Months Ended September 30,												For the Six Months Ended June 30,
	2017						2016						2020						2019
					(c)						(c)						(c)						(c)
	Average				Annualized		Average				Annualized		Average				Annualized		Average				Annualized
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
	$		$		%		$		$		%		$		$		%		$		$		%
ASSETS
Interest earning assets:
Federal funds sold and interest
on deposits at other banks		28,086		257		1.22		22,635		94		0.55		25,312		81		0.64		16,846		166		1.99

Securities available for sale:
Taxable		195,093		2,904		1.98		185,399		802		0.58		229,245		2,348		2.05		210,622		2,608		2.48
Tax-exempt		127,520		4,894		5.12		107,556		4,176		5.18		92,105		1,503		3.26		92,269		1,555		3.37
Total securities (d)		322,613		7,798		3.22		292,955		4,978		2.27		321,350		3,851		2.40		302,891		4,163		2.75

Loans (a)		578,496		18,176		4.19		548,492		16,898		4.11		793,692		17,165		4.33		713,243		16,424		4.62

Regulatory stock		5,581		201		4.80		4,724		173		4.88		7,449		228		6.13		6,680		263		7.86

Total interest earning assets		934,776		26,432		3.77		868,806		22,143		3.40		1,147,803		21,325		3.72		1,039,660		21,016		4.05

Non-interest earning assets (d)		62,695						62,200						71,700						66,595

Total assets		997,471						931,006						1,219,503						1,106,255

LIABILITIES &
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		200,471		256		0.17		183,852		204		0.15		270,095		415		0.31		254,536		878		0.70
Savings deposits		186,339		71		0.05		160,506		62		0.05		226,973		35		0.03		201,972		51		0.05
Time deposits		156,860		1,111		0.95		169,478		1,302		1.03		130,907		902		1.39		135,999		808		1.20
Borrowed funds		71,973		749		1.39		75,090		751		1.34		79,085		918		2.33		73,487		746		2.02
Total interest bearing liabilities		615,643		2,187		0.47		588,926		2,319		0.53		707,060		2,270		0.65		665,994		2,483		0.75

Non-interest bearing liabilities:

Demand deposits		281,620						241,786						390,775						331,319
Other		2,671						2,700						4,163						3,352

Total liabilities		899,934						833,412						1,101,998						1,000,665

Stockholders' equity		97,537						97,594						117,505						105,590

Total liabilities & stockholders' equity		997,471						931,006						1,219,503						1,106,255

Net interest income (FTE)				24,245						19,824						19,055						18,533

Net interest spread (b)						3.30						2.87						3.07						3.30
Effect of non-interest
bearing deposits						0.16						0.17						0.25						0.27
Net yield on interest earning assets (c)						3.46						3.04						3.32						3.57

(a) Includes balances of nonaccrual loans and the recognition of any related interest income. The year-to-date average balances include net deferred loan costs of ~~$1,066,000~~$2,057,000 as of ~~September~~June 30, ~~2017,~~2020, and ~~$796,000~~$1,639,000 as of ~~September~~June 30, ~~2016.~~2019. Such fees and costs recognized through income and included in the interest amounts totaled ~~($335,000)~~$49,000 in ~~2017,~~2020, and ($~~275,000)~~248,000) in ~~2016.~~2019.

(b) Net interest spread is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.

(c) Net yield, also referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.

(d) Securities recorded at amortized cost. Unrealized holding gains and losses are included in non-interest earning assets.

4245

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The Corporation’s interest income increased ~~at a faster pace~~ primarily due to ~~non-recurring security amortization~~increased interest income on loans, but the increase in income was the ~~first nine months~~result of ~~2016,~~loan growth, not an increase in asset yield, resulting in a ~~higher~~lower NIM of ~~3.50%~~3.24% for the ~~third~~second quarter of ~~2017,~~2020, compared to ~~3.22%~~3.56% for the ~~third~~second quarter of ~~2016~~2019, and ~~3.46%~~3.32% for the ~~nine months ended September 30, 2017,~~year-to-date period in 2020, compared to ~~3.04% for the same period~~3.57% in ~~2016.~~2019. The yield earned on assets ~~increased~~decreased by 2733 basis points ~~for~~during the ~~quarter and 37 basis points for the year-to-date period~~six months ended June 30, 2020, while the rate paid on liabilities ~~dropped one~~decreased by 10 basis ~~point for the quarter and six basis~~ points ~~for the year-to-date period~~ when comparing both years. This resulted in a 22 basis point decrease in interest spread, and the effect of non-interest bearing deposits decreased by three basis points during the six months ended June 30, 2020, compared to the prior year, resulting in the decrease in NIM of 25 basis points. Management ~~does anticipate~~anticipates further ~~improvements~~declines in NIM during the remainder of ~~2017 with~~2020 as the ~~possibility~~Federal Reserve has decreased rates by 150 basis points in March of ~~another rate increase~~2020, putting pressure on the Corporation’s asset yields, which was first fully felt in the ~~fourth quarter.~~second half of 2020. Loan yields ~~were at historically low levels during 2016~~decreased in the first six months of 2020 compared to the prior year primarily as a result of the 75 basis points of Prime decline experienced in the second half of 2019 and the ~~first nine months~~150 basis points of ~~2017 due to the extended low-rate environment as well as extremely competitive pricing for the loan opportunities~~Prime decline in the ~~market. It is anticipated that these yields will remain relatively unchanged during the remainder~~first quarter of 2017 with increases occurring during 2018 as the economy improves and loan demand increases, reducing pricing pressures and intense competition for loans. The increase in the Prime rate has helped to increase loan yields on variable rate consumer and commercial loans.2020. Growth in the loan portfolio ~~coupled with better yields on variable rate loans caused loan interest income~~will help to ~~increase.~~offset a declining asset yield moving through 2020. The Corporation’s loan yield ~~increased 17~~decreased 29 basis points in the ~~third quarter~~first six months of ~~2017~~2020 compared to the ~~third quarter~~first six months of ~~2016 and 8 basis points when comparing the year-to-date periods in both years.~~2019. Loan interest income increased ~~$480,000,~~$741,000, or ~~8.3%, and $1,278,000, or 7.6%~~4.5%, for this time period as a result of the ~~three and nine months ended September 30, 2017, compared to the same periods~~growth in ~~2016.~~balances.

Loan pricing was challenging in ~~2016, and continues to be in 2017~~the first half of 2020 as a result of ~~intense~~the very low rate environment and competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate or below. The ~~current~~ Prime rate was 5.50% as of ~~4.25%~~June 30, 2019, and was moderately higher than the typical business or commercial five-year fixed rates being extended at that time. The Prime rate decreased by 1.50% in March of 2020 to 3.25%, which is ~~generally~~now just below the typical rate of a five-year fixed-rate loan. The commercial or business fixed rates do increase with longer fixed terms or lower ~~than most fixed-rate business and commercial~~credit quality. In terms of the variable rate pricing, nearly all variable rate loans ~~which typically range between 4.00% and 6.00%, depending on term and credit risk.~~offered are Prime-based. Management is able to price loan customers with higher levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, ~~currently 5.00%.~~which amounted to 4.00% at June 30, 2020, still a relatively low rate. However, ~~there are relatively few~~only a small minority of ~~these higher rate~~the loans in the commercial and agricultural portfolios are at these higher rates due to the strong credit quality of the Corporation’s ~~borrowers.~~borrowers and market competition. Competition in the immediate market area ishas been pricing select shorter-term fixed-rate commercial and agricultural lending rates below ~~4.00%~~3.50% for the strongest loan credits. This current market environment has largely prevented the Corporation from gaining yield on fixed rate commercial and agricultural loans. The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, please refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

~~Earnings and~~Tax equivalent yields on the Corporation’s securities ~~increased~~decreased by 4435 basis points for the ~~three~~six months ended ~~September~~June 30, ~~2017, and 95 basis points for the nine months ended September 30, 2017,~~2020, compared to the same ~~periods~~period in ~~2016.~~2019. The Corporation’s securities portfolio consists of ~~nearly all~~approximately 79% fixed income debt ~~instruments.~~instruments and 21% variable rate product as of June 30, 2020. The Corporation’s taxable securities experienced a 7443 basis-point ~~increase~~decrease in yield for the ~~three~~six months ended ~~September~~June 30, ~~2017, and a 140 basis-point increase in yield for the nine months ended September 30, 2017,~~2020, compared to the same ~~periods~~period in ~~2016. This was largely due to accelerated amortization that caused significantly lower interest income for the first nine months of 2016. Additionally, some security~~2019. Security reinvestment in the first ~~nine~~six months of ~~2017~~2020 has been occurring at ~~higher~~lower rates ~~and regular amortization has been lower~~ due to the ~~slightly higher interest rate environment. These variables have caused taxable security yields~~significant decline in U.S. Treasury rates. In addition, the Corporation’s U.S. agency mortgage-backed securities and collateralized mortgage obligations experience faster principal prepayments as market rates decrease, causing the amortization of premium to increase, ~~significantly.~~ effectively decreasing the yield.

The yield on tax-exempt securities decreased ~~minimally~~ by ~~five basis points and six~~11 basis points for the ~~three and nine~~six months ended ~~September~~June 30, 2020. For the Corporation, these bonds consist entirely of tax-free municipal bonds. While the tax-exempt yields on municipal bonds declined with the tax rate change at the end of 2017, ~~compared~~yields became more attractive again during the latter part of 2019 and the first half of 2020. After selling out of many of these instruments to shorten the ~~same periods~~duration of the Corporation’s portfolio and provide a better interest rate risk profile, management began investing in ~~2016.~~more of these bonds in the first and second quarters of 2020 as yields stood out and provided better returns than other sectors of the portfolio.

~~Prior to 2017,~~The Corporation’s average deposits increased $94.9 million, or 10.3%, with all types of interest-bearing deposits increasing $35.5 million, or 6.0%, while non-interest bearing demand deposits increased $59.5 million, or 17.9%. In the current rate environment, with short-term rates ~~extremely~~ low and with small rate differences for longer-term deposits, the consumer generally elected to stay short and maintain funds in accessible deposit instruments. During the first nine months of 2017, with higher short-term rates but still low longer-term rates, the customer still prefers keeping balances in both non-interest and interest bearing checking products and savings accounts. In addition to the consumer staying liquid with their available funds, there has been a general trend of funds flowing from time deposit accounts into ~~both~~ non-interest checking, NOW and savings accounts. The average balance of ~~the Corporation’s interest bearing liabilities increased during the three and nine months ended September 30, 2017. The average balance of~~ time deposits declined during ~~these same periods~~the first six months of 2020 compared to ~~2016,~~2019, but the other areas of NOW, MMDA, and savings grew sufficiently enough to compensate for the decline in time deposits, causing total interest bearing funds to increase. ~~However,~~Time deposit balances had been growing throughout 2018 and 2019 due to the odd-month CD promotions available at those times, but with ~~more~~the recent sharp decline in rates, management expects these time deposit balances to decrease throughout the remainder of ~~the interest bearing funds~~2020 as a result of customers electing to allow maturing time deposit balances to roll off and hold them in ~~the form~~a liquid account until there is some sign of ~~NOW, MMDA, and savings accounts the average interest~~ rate ~~paid on these instruments is significantly less than what is paid on time deposits, resulting in less interest expense.~~increases.

4346

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Interest expense on deposits ~~declined~~decreased by ~~$20,000,~~$385,000, or ~~3.9%, and $130,000, or 8.3%~~22.2%, for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same ~~periods~~period in ~~2016.~~2019. Demand and savings deposits reprice in their entirety whenever the offering rates are ~~changed. This allows management to reduce~~changed, so with each successive rate drop in the first half of 2020, these deposits repriced lower. Interest rates on interest ~~costs rapidly; however, it becomes difficult to continue to gain cost savings once offering rates decline to these historically low levels.~~checking and money market accounts were decreased four times in March of 2020 and two times in the second quarter of 2020. For the ~~third quarter of 2017 and the nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the average balances of interest bearing demand deposits increased by ~~$6.9~~$15.6 million, or ~~3.6%, and $16.6 million, or 9.0%~~6.1%, over the same ~~periods~~period in ~~2016,~~2019, while the average balance of savings accounts increased by ~~$23.8~~$25.0 million, or ~~14.3%, and $25.8 million, or 16.1%, respectively. This increase in balances of lower cost accounts has helped to reduce the Corporation’s overall interest expense in 2017 compared to 2016.~~12.4%.

Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, time deposit balances decreased compared to balances at ~~September~~June 30, ~~2016.~~2019. The decrease can be attributed to the ~~lowest~~low rates paid ~~historically~~ on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be ~~minimal.~~minimal, as well as more competitive time deposit rates being offered by other financial institutions in the local market area. As a result, customers have elected to keep more of their funds in non-maturity deposits and less funds in time deposits. Because time deposits are the most expensive deposit product for the Corporation and the largest dollar expense from a funding standpoint, the reduction in time deposits, along with the increases in interest-bearing checking, savings, and non-interest bearing checking, has allowed the Corporation to achieve a ~~lower cost and~~ more balanced deposit funding ~~position.~~position and maintain a lower cost of funds. The Corporation ~~was able to reduce~~did offer two odd-month CD specials during 2018 and 2019 that did impact interest expense paid on time deposits. For this reason, the Corporation’s interest expense on time deposits increased by ~~$44,000,~~$94,000, or ~~10.6%~~11.6%, for the ~~third quarter~~first six months of ~~2017,~~2020, compared to the same period in ~~2016, and by $191,000, or 14.7%, for~~2019 despite the ~~nine months ended September 30, 2017, compared~~decrease in average balance. This growth in interest expense was due to the ~~same period~~higher promotional rates that were offered beginning in the ~~prior year. Average balances~~fourth quarter of ~~time deposits decreased by $11.9 million, or 7.2%, and $12.6 million, or 7.4%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016.~~2018. The average annualized interest rate paid on time deposits ~~decreased~~increased by ~~five~~19 basis points for the ~~three-month period and eight basis points for the nine-month~~six-month period when comparing both years. Management anticipates the interest expense on time deposits and annualized rate paid will begin to decline throughout the remainder of 2020 as these higher-priced time deposits mature and reprice at much lower levels or convert to non-maturity deposits.

The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of ~~$2,709,000 and $9,714,000~~$4,638,000 were utilized in the ~~three and nine~~six months ended ~~September~~June 30, ~~2017, respectively,~~2020, while average short-term advances of ~~$10,052,000 and $11,131,000~~$2,506,000 were utilized in the ~~three and nine~~six months ended ~~September~~June 30, ~~2016.~~2019. Management has used long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source of liquidity. Average total borrowings ~~decreased~~increased by ~~$3,782,000,~~$5,598,000, or ~~5.2%, and $3,117,000, or 4.2%~~7.6%, for the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same ~~periods~~period in ~~2016.~~2019. Interest expense on borrowed funds ~~was $23,000,~~increased $172,000, or ~~9.5% higher, and $2,000, or 0.3% lower,~~23.1%, for the ~~three and nine-month periods~~six-month period when comparing ~~2017~~2020 to ~~2016.~~2019, driven higher by $154,000 of FHLB interest prepayment penalties on the early payoff of several advances.

For the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2020, the net interest spread ~~increased 28~~decreased by 23 basis points to ~~3.34%~~3.07%, ~~from 3.06%~~compared to 3.30% for the ~~three~~six months ended ~~September~~June 30, ~~2016. For the nine months ended September 30, 2017, the net interest spread increased 43 basis points to 3.30%, from 2.87% for the same period in 2016.~~2019. The effect of non-interest bearing funds ~~stayed the same~~decreased to 25 basis points from 27 basis points for the ~~three-month period and dropped by one basis point for the nine-month period compared to the same periods in the prior year.~~six months ended June 30, 2019. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go ~~lower,~~higher, the benefit of non-interest bearing deposits ~~is reduced~~increases because there is ~~less~~more difference between non-interest bearing funds and interest bearing liabilities. For example, if an interest checking account with $10,000 earns 1%, the benefit for $10,000 of non-interest bearing deposits is equivalent to $100; but if the interest-checking rate is ~~reduced~~increased to ~~0.20%~~1.50%, then the benefit of the non-interest bearing funds is ~~only $20.~~$150. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the ~~lower~~higher cost of funds affects the benefit to non-interest bearing deposits.

The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income, the Corporation’s largest source of revenue. For more information on the plans and strategies in place to protect the NIM and moderate the impact of rising rates, refer to Item 7A: Quantitative and Qualitative Disclosures about Market Risk.

Provision for Loan Losses

The allowance for loan losses (ALLL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ALLL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a provision expense of ~~$240,000~~$975,000 for the three months ended ~~September~~June 30, ~~2017,~~2020, and ~~$450,000~~$1,325,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to ~~a provision expense of $200,000~~$30,000 and $210,000 for the three and six months ended ~~September~~June 30, ~~2016, and $200,000 for the nine months ended September 30, 2016.~~2019, respectively. The analysis of the ALLL takes into consideration, among other things, the following factors:

4447

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

levels and trends in delinquencies, nonaccruals, charge-offs and recoveries,

trends within the loan portfolio,

changes in lending policies and procedures,

experience of lending personnel and management oversight,

national and local economic trends,

concentrations of credit,

external factors such as legal and regulatory requirements,

changes in the quality of loan review and board oversight, and

changes in the value of underlying collateral.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Corporation recorded provision expense of ~~$450,000~~$1,325,000 primarily due to ~~higher balances of classified loans~~a decline in economic and ~~a specific allocation of $98,000~~business conditions related to COVID-19, which caused an ~~impaired loan. During~~increase in the ~~first nine months of 2016,~~qualitative factors regarding outside market conditions. This increase in qualitative factors caused a higher required provision as credit losses may be incurred as businesses deal with the ~~Corporation recorded $200,000 of provision expense. Management closely tracks delinquent, non-performing,~~challenges presented by COVID-19 and ~~classified loans as a percentage of capital and of~~ the ~~loan portfolio.~~change in business practice.

As of ~~September~~June 30, ~~2017,~~2020, total delinquencies represented ~~0.46%~~0.41% of total loans, compared to ~~0.45%~~0.44% as of ~~September~~June 30, ~~2016.~~2019. These ratios are ~~extremely~~very low compared to local and national peer groups. The vast majority of the Corporation’s loan customers have remained ~~very~~ steadfast in making their loan payments and avoiding delinquency, even during challenging economic conditions. The delinquency ratios speak to the long-term health, conservative nature, and, importantly, the character of the Corporation’s customers and lending practices. Classified loans are primarily determined by loan-to-value and debt-to-income ratios. The ~~prolonged economic downturn, including devaluation~~level of ~~residential and commercial real estate, had stressed these ratios in past periods and the addition~~classified loans has increased from June 30, 2019 to June 30, 2020, from 14.8% of ~~a commercial loan relationship in the first quarter~~regulatory capital to 19.7% of ~~2017 had caused an increase in these levels. However, a classified loan relationship that paid off helped to reduce the total classified balances during the third quarter of 2017.~~regulatory capital. The delinquency and classified loan information is utilized in the quarterly ALLL calculation, which directly affects the provision expense. A sharp increase or decrease in delinquencies and/or classified loans during the quarter would be cause for management to increase or decrease the provision expense. The level of actual charge-offs relative to the amount of recoveries can also have a significant impact on the provision. Management had ~~recoveries that exceeded~~minimal charge-offs ~~by $16,000~~and recoveries in the first ~~nine~~six months of ~~2017.~~2020.

Generally, management will evaluate and adjust, if necessary, the provision expense each quarter based upon completion of the quarterly ALLL calculation. Future provision amounts will generally depend on the amount of loan growth achieved versus levels of delinquent, non-performing, and classified loans, as well as charge-offs and recoveries.

In addition to the above, provision expense is impacted by three major components that are all included in the quarterly calculation of the ALLL. First, specific allocations are made for any loans where management has determined an exposure that needs to be provided for. These specific allocations are reviewed each quarter to determine if adjustments need to be made. It is common for specific allocations to be reduced as additional principal payments are made, so while some specific allocations are being added, others are being reduced. ~~Secondly,~~Second, management provides for estimated losses on pools of similar loans based on historical loss experience. Finally, management utilizes qualitative factors every quarter to adjust historical loss experience to take into consideration the current trends in loan volume, delinquencies, charge-offs, changes in lending practices, and the quality of the Corporation’s underwriting, credit analysis, lending staff, and Board oversight.National and local economic trends and conditions are also helpful to determine the amount of loan loss allowance the Corporation should be carrying on the various types of loans. Management evaluates and adjusts, if necessary, the qualitative factors on a quarterly basis.

In the first ~~nine~~six months of ~~2017,~~2020, qualitative factors were adjusted based on current information regarding delinquency, economic conditions, and other factors. ~~Changes~~Increases in qualitative factors were ~~unchanged for two~~made across all loan pools ~~while they~~related to national and local economic trends and conditions. This factor was increased ~~for four pools and declined for three. Adjustments to the qualitative factors were minor in nature with most changes being only five~~by 5 or ~~ten~~10 basis points ~~of adjustment,~~based on the lowest amount of adjustment that management will make. The four pools with factor increases were agricultural dairy, credit lines, personal loans, and residential real estate. These increases were due to changesloan pool. Other factors changed minimally in the trending of those pools including balances, delinquencies, concentrations of credit, and the personnel that handle those loans. Out of these four pools, the two containing the largest balances are agricultural dairy and residential real estate. The dairy industry continues to be impacted by lower milk prices, which lowers the profit margin for these farmers and has impacted delinquencies. Residential real estate balances have grown significantly, especially adjustable rate mortgages, resulting in a higher concentration of residential mortgages.2020.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

Management also monitors the allowance as a percentage of total loans. The percentage of the allowance to total loans has increased since ~~September~~June 30, ~~2016 and December 31, 2016,~~2019, and remains ~~comparable with~~higher than the Bank’s national peer ~~group.~~group from the Uniform Bank Performance Reports. As of ~~September~~June 30, ~~2017,~~2020, the allowance as a percentage of total loans was ~~1.37%~~1.29%, up from ~~1.32%~~1.25% at June 30, 2019, and December 31, ~~2016, and 1.31% at September 30, 2016.~~2019. Management continues to evaluate the ~~allowance for loan losses~~ALLL in relation to the size of the loan portfolio and changes to the segments within the loan portfolio and their associated credit risk. Management believes the ~~allowance for loan losses~~ALLL is adequate to provide for future loan losses based on the current portfolio and the current economic environment. More detail is provided under Allowance for Loan Losses in the Financial Condition section that follows.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Other Income

Other income for the ~~third~~second quarter of ~~2017~~2020 was ~~$2,622,000, a decrease~~$4,068,000, an increase of ~~$206,000,~~$1,306,000, or ~~7.3%~~47.3%, compared to the ~~$2,828,000~~$2,762,000 earned during the ~~third~~second quarter of ~~2016.~~2019. For the year-to-date period ended ~~September~~June 30, ~~2017,~~2020, other income totaled ~~$7,546,000, a decrease~~$6,835,000, an increase of ~~$1,020,000,~~$1,529,000, or ~~11.9%~~28.8%, compared to the same period in ~~2016.~~2019. The following tables detail the categories that comprise other income. As illustrated in the tables below the primary contributor to the increase was the gains on the sales of mortgages.

OTHER INCOME
(DOLLARS IN THOUSANDS)
Three Months Ended September 30, Increase (Decrease)
2017 2016
$ $ $ %

Trust and investment services 427 344 83 24.1
Service charges on deposit accounts 320 285 35 12.3
Other service charges and fees 328 304 24 7.9
Commissions 583 552 31 5.6
Gains on securities transactions, net 170 464 (294 ) (63.4 )
Gains on sale of mortgages 510 557 (47 ) (8.4 )
Earnings on bank owned life insurance 170 210 (40 ) (19.0 )
Other miscellaneous income 114 112 2 1.8

Total other income 2,622 2,828 (206 ) (7.3 )

OTHER INCOME

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,				Increase (Decrease)
	2020		2019
	$		$		$			%

Trust and investment services		416		505		(89	)		(17.6	)
Service charges on deposit accounts		205		355		(150	)		(42.3	)
Other service charges and fees		430		338		92			27.2
Commissions		649		756		(107	)		(14.2	)
Gains on securities transactions, net		367		106		261			246.2
Gains on equity securities, net		5		27		(22	)		(81.5	)
Gains on sale of mortgages		1,690		415		1,275			307.2
Earnings on bank owned life insurance		205		179		26			14.5
Other miscellaneous income		101		81		20			24.7

Total other income		4,068		2,762		1,306			47.3

OTHER INCOME
(DOLLARS IN THOUSANDS)
Nine Months Ended September 30, Increase (Decrease)
2017 2016
$ $ $ %

Trust and investment services 1,335 1,104 231 20.9
Service charges on deposit accounts 908 820 88 10.7
Other service charges and fees 986 824 162 19.7
Commissions 1,714 1,611 103 6.4
Gains on securities transactions, net 417 2,130 (1,713 ) (80.4 )
Gains on sale of mortgages 1,302 1,109 193 17.4
Earnings on bank owned life insurance 514 604 (90 ) (14.9 )
Other miscellaneous income 370 364 6 1.6

Total other income 7,546 8,566 (1,020 ) (11.9 )

OTHER INCOME

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,					Increase (Decrease)
	2020			2019
	$			$		$			%

Trust and investment services	1,038			1,042		(4)			(0.4)
Service charges on deposit accounts		520			677		(157	)		(23.2	)
Other service charges and fees		794			646		148			22.9
Commissions		1,335			1,411		(76	)		(5.4	)
Gains on securities transactions, net		649			187		462			247.1
Gains (losses) on equity securities, net		(225	)		44		(269	)		(611.4	)
Gains on sale of mortgages		2,231			764		1,467			192.0
Earnings on bank owned life insurance		411			357		54			15.1
Other miscellaneous income		82			178		(96	)		(53.9	)

Total other income		6,835			5,306		1,529			28.8

Trust and investment services income ~~increased $83,000,~~decreased $89,000, or ~~24.1%~~17.6%, and ~~$231,000,~~$4,000, or ~~20.9%~~0.4%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods last year. This revenue consists of income from traditional trust services and income from alternative investment services provided through a third party. In the ~~third~~second quarter of ~~2017,~~2020, traditional trust income ~~increased~~decreased by ~~$42,000,~~$10,000, or ~~17.5%~~3.3%, while income from alternative investments ~~increased~~decreased by ~~$41,000,~~$79,000, or ~~39.7%~~35.5%, compared to the ~~third~~second quarter of ~~2016.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, traditional trust services income increased by ~~$158,000,~~$6,000, or ~~21.2%~~1.0%, while income from alternative investment services ~~increased~~decreased by ~~$73,000,~~$10,000, or ~~20.4%~~2.5%, compared to the same period in ~~2016. Trust~~2019. The decline in income ~~was up~~from the investment services area for both time periods ~~as a result of~~can be attributed to less new business, ~~higher fees,~~which was impacted, by COVID-19 and ~~higher~~the branch lobby closures during the second quarter. Management would expect activity to increase again going into the remainder of 2020. The trust ~~valuations. Several new trust accounts were opened~~and investment services area continues to be an area of strategic focus for the Corporation. Management believes there continues to be great need for retirement, estate, small business succession planning, and personal investment services in the ~~fourth quarter~~Corporation’s service area. Management also sees these services as being a necessary part of ~~2016 adding revenue beginning in 2017. A new trust fee schedule was implemented in March~~a comprehensive line of 2016, which resulted in more first quarter and year-to-date income in 2017. Trust income was also elevated due to increases in unscheduled executor fee income over both periods of 2016. Lastly, equity markets were up since December 31, 2016, and have continued to increase throughout 2017, which has increased trust valuations andfinancial solutions across the ~~fees generated from their fair market values.~~

organization.

4649

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Service charges on deposit accounts ~~increased~~decreased by ~~$35,000,~~$150,000, or ~~12.3%~~42.3%, and ~~$88,000,~~$157,000, or ~~10.7%~~23.2%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in 2016. Overdraft service charges are the largest component of this category and comprised approximately 80% of the total deposit service charges for the three and nine months ended September 30, 2017. Total2019. The decrease is primarily due to a decrease in overdraft fees ~~increased~~that were lower by ~~$29,000,~~$128,000, or ~~12.8%~~44.7%, and ~~$77,000,~~$119,000, or ~~11.8%~~22.0%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, compared to the same periods in ~~2016. Management attributes higher overdraft~~2019. This decline can be primarily attributed to the current economic environment, which has necessitated changes in customer behaviors. Various other fee income ~~primarily~~categories increased or decreased to lesser degrees making up the ~~growth in deposit accounts and new customers. No changes to Bank fees or policies have occurred. Most~~remainder of the ~~other service charge areas showed minimal increases or decreases from~~variance compared to the prior year.

Other service charges and fees increased by ~~$24,000,~~$92,000, or ~~7.9%~~27.2%, and ~~$162,000,~~$148,000, or ~~19.7%~~22.9%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. The ~~quarterly and year-to-date~~ increase is primarily due to an increase in loan administration fees that were higher by ~~$40,000,~~$119,000, or ~~37.7%~~206.5%, and $116,000, or 88.8%, for the ~~three-month period~~three and six months ended ~~September~~June 30, ~~2017,~~2020, respectively, compared to the same periods in 2019. This was a result of increased secondary market mortgage activity due to the very low interest rate environment. Additionally, loan modification fees were higher by $60,000, or 558.8%, and ~~$133,000,~~$74,000, or ~~47.8%~~406.7%, for the ~~nine-month period~~three and six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in the prior year. ~~A significant increase in mortgage volume is being generated through the mortgage expansion and was the primary reason for~~Partially offsetting these ~~increased fees. Account analysis~~increases, fees ~~increased~~on an off-balance sheet cash management product decreased by ~~$6,000,~~$72,000, or ~~53.9%~~70.3%, and ~~$23,000,~~$48,000, or ~~86.3%~~25.7%, for the ~~quarter~~three and ~~year-to-date periods~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in the previous year primarily as a result of increased focus on cash management customers and assessing proper fees for the services provided. Partially offsetting these increases, fees for 30-year mortgage originations decreased by $23,000, or 30.5%, and $11,000, or 6.0%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. The other service charges and fees area is expected to continue to grow at a faster pace than other elements of the Corporation’s fees but the percentage increase will decline going forward.2019. Various other fee income categories increased or decreased to lesser degrees making up the remainder of the variance compared to the prior year.

Commissions ~~increased~~decreased by ~~$31,000,~~$107,000, or ~~5.6%~~14.2%, and ~~$103,000,~~$76,000, or ~~6.4%~~5.4%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. This was primarily caused by debit card interchange income, which ~~increased~~decreased by ~~$23,000,~~$64,000, or ~~4.8%~~9.7%, and ~~$90,000,~~$71,000, or ~~6.4%~~5.7%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. The interchange income is a direct result of the volume of debit card transactions processed and this income ~~increases~~decreased during the second quarter of 2020 as customer ~~accounts increase or as customers utilize their debit cards to a higher degree. Additionally, insurance commissions from Banker’s Settlement Services increased~~spending changed with lower levels of purchases impacted by $7,000, or 30.0%, and $14,000, or 22.6%, for the three and nine months ended September 30, 2017, compared to the same periods in the prior year. The vast majority of the insurance commissions were from residential mortgage transactions.COVID-19.

For the three and six months ended ~~September~~June 30, ~~2017, $170,000~~2020, $372,000 and $424,000 of gains on securities transactions were recorded, respectively, compared to ~~$464,000~~gains of $133,000 and $231,000, respectively, for the same ~~period~~periods in 2016, a $294,000, or 63.4% decrease. For the nine months ended September 30, 2017, $417,000 of gains on securities transactions were recorded compared to $2,130,000 for the nine months ended September 30, 2016, a $1,713,000, or 80.4% decrease.2019. Gains or losses on securities transactions fluctuate based on market opportunities to take gains and reposition the securities portfolio to improve long-term earnings, or as part of management’s asset liability goals to improve liquidity or reduce interest rate risk or fair value risk. The gains or losses recorded by the Corporation depend heavily on market pricing and the volume of security sales. Generally, the lower U.S. Treasury yields go, the more management will be motivated to pursue taking gains from the sale of securities. However, these market opportunities are evaluated subject to the Corporation’s other asset liability measurements and goals. The yield curve in the first ~~nine~~six months of ~~2016~~2020 provided ~~greater~~better opportunities to take ~~significant~~ gains out of the portfolio than during the first ~~nine~~six months of 2017. Management also executed more gains in the first nine months of 2016 to offset the non-recurring Sub-U.S. Agency amortization of $1,681,000. Market timing was favorable as the bond market was stronger and loan growth was also strong so management did not have to reinvest a significant amount of the proceeds from the sale of securities.2019.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

Gains on the sale of mortgages were ~~$510,000~~$1,690,000 for the three-month period ended ~~September~~June 30, ~~2017,~~2020, compared to ~~$557,000~~$415,000 for the same period in ~~2016,~~2019, a ~~$47,000,~~$1,275,000, or ~~8.4% decrease. Gains on~~307.2% increase. For the ~~sale of mortgages for the nine months~~six-month period ended ~~September~~June 30, ~~2017, increased by $193,000, or 17.4%,~~2020, mortgage gains amounted to $2,231,000, compared to $764,000 for the same period in ~~2016. Secondary mortgage financing~~2019, a $1,467,000, or 192.0% increase. Mortgage activity ~~drives the gains on the sale of mortgages, and the activity~~was significantly higher in the first ~~nine months~~half of ~~2017 was at increased levels due~~2020 compared to the ~~greater marketing efforts~~prior year as a result of ~~the Corporation’s~~historically low interest rates and a surge in mortgage ~~area, a slightly improved local economy, as well as attractive mortgage rates.~~refinancing activity. Management currently anticipates that gains ~~should continue at these higher levels~~ throughout the remainder of ~~2017, with~~2020 may continue at a higher level compared to the ~~continued increased focus~~prior year, but a lower level compared to ~~grow~~ the ~~Corporation’s mortgage origination activity, continued low mortgage rates,~~first half of 2020, due to the favorable rate environment and ~~expanded adjustable rate mortgage offerings. Most of~~reasonable margins received on the ~~Corporation’s recent held for investment mortgage growth has come in the form of 5/1 and 7/1 year adjustable rate mortgages.~~mortgages that are being sold.

For the three months ended ~~September~~June 30, ~~2017,~~2020, earnings on bank-owned life insurance (BOLI) ~~decreased~~increased by ~~$40,000,~~$26,000, or ~~19.0%~~14.5%, and for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, earnings on BOLI ~~decreased~~increased by ~~$90,000,~~$54,000, or ~~14.9%~~15.1%, compared to the same periods in 2016. The decrease was primarily due to declining performance on the grandfathered directors’ life insurance policies, which were initiated prior to 1995 in connection with a previous Directors Deferred Compensation Plan. These director-related policies are not generating as much income due to the age of the directors and structure of the policies. The lower levels of return on these policies will likely continue throughout the remainder of 2017 and into 2018.2019. The amount of BOLI income is generally dependent upon the actual return of the policies, the insurance cost components, and any benefits paid upon death that exceed the policy’s cash surrender value. Increases in cash surrender value are a function of the return of the policy net of all expenses.

The miscellaneous income category increased by $20,000, or 24.7%, for the three months ended June 30, 2020, and decreased by $96,000, or 53.9%, for the six months ended June 30, 2020, compared to the same periods in 2019. The quarterly increase can be attributed to an increase of $28,000 in net mortgage servicing income while the year-to-date decrease can be attributed to a decline in this income of $108,000. Amortization on mortgage servicing assets was very high in the first quarter of 2020 and then came down significantly in the second quarter resulting in these variances.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Operating Expenses

Operating expenses for the ~~third~~second quarter of ~~2017~~2020 were ~~$7,647,000, an~~$8,244,000, a modest increase of ~~$899,000,~~$27,000, or ~~13.3%~~0.3%, compared to the ~~$6,748,000~~$8,217,000 for the ~~third~~second quarter of ~~2016.~~2019. For the year-to-date period ended ~~September~~June 30, ~~2017,~~2020, operating expenses totaled ~~$22,880,000,~~$17,354,000, an increase of ~~$2,938,000,~~$855,000, or ~~14.7%~~5.2%, compared to the same period in ~~2016.~~2019. The following tables provide details of the Corporation’s operating expenses for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~2019.

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

OPERATING EXPENSES
(DOLLARS IN THOUSANDS)

	Three Months Ended September 30,				Increase (Decrease)						Three Months Ended June 30,
	2017		2016								2020		2019		Increase (Decrease)
	$		$		$			%			$		$		$			%
Salaries and employee benefits		4,840		4,219		621			14.7			4,966		5,105		(139	)		(2.7	)
Occupancy expenses		624		555		69			12.4			616		590		26			4.4
Equipment expenses		299		276		23			8.3			316		287		29			10.1
Advertising & marketing expenses		143		120		23			19.2			218		166		52			31.3
Computer software & data processing expenses		575		471		104			22.1			768		609		159			26.1
Bank shares tax		215		227		(12	)		(5.3	)		239		232		7			3.0
Professional services		377		380		(3	)		(0.8	)		507		556		(49	)		(8.8	)
Other operating expenses		574		500		74			14.8			614		672		(58	)		(8.6	)
Total Operating Expenses		7,647		6,748		899			13.3			8,244		8,217		27			0.3

OPERATING EXPENSES
(DOLLARS IN THOUSANDS)

Nine Months Ended September 30, Increase (Decrease)
2017 2016
$ $ $ %
Salaries and employee benefits 14,370 12,230 2,140 17.5
Occupancy expenses 1,828 1,584 244 15.4
Equipment expenses 878 811 67 8.3
Advertising & marketing expenses 539 422 117 27.7
Computer software & data processing expenses 1,654 1,345 309 23.0
Bank shares tax 644 680 (36 ) (5.3 )
Professional services 1,260 1,207 53 4.4
Other operating expenses 1,707 1,663 44 2.6
Total Operating Expenses 22,880 19,942 2,938 14.7

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2020		2019		Increase (Decrease)
	$		$		$			%
Salaries and employee benefits		10,662		10,293		369			3.6
Occupancy expenses		1,207		1,220		(13	)		(1.1	)
Equipment expenses		606		574		32			5.6
Advertising & marketing expenses		492		416		76			18.3
Computer software & data processing expenses		1,474		1,266		208			16.4
Bank shares tax		479		465		14			3.0
Professional services		1,130		1,031		99			9.6
Other operating expenses		1,304		1,234		70			5.7
Total Operating Expenses		17,354		16,499		855			5.2

Salaries and employee benefits are the largest category of operating expenses. In general, they comprise ~~63%~~approximately 61% of the Corporation’s total operating expenses. For the three months ended ~~September~~June 30, ~~2017,~~2020, salaries and benefits ~~increased $621,000,~~decreased $139,000, or ~~14.7%~~2.7%, from the same period in ~~2016.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, salaries and benefits increased ~~$2,140,000,~~$369,000, or ~~17.5%~~3.6%, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. Salaries ~~increased~~decreased by ~~$459,000,~~$301,000, or ~~14.3%~~8.1%, and employee benefits increased by ~~$162,000,~~$161,000, or ~~15.9%~~11.7%, for the three months ended ~~September~~June 30, ~~2017,~~2020, compared to the same period in ~~2016.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, salary expense increased by ~~$1,528,000,~~$96,000, or ~~16.9%~~1.3%, while employee benefits increased by ~~$611,000,~~$273,000, or ~~19.3%~~9.6%, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2019. Salary ~~and benefit expenses have grown significantly~~costs were lower for the quarter due to higher deferred costs on loan originations, which are recorded as a contra salary expense. However, for the year-to-date period, salary costs were higher primarily due to a performance bonus paid out in the first quarter of 2020. Employee benefits expense was at a higher level for the quarter and year-to-date periods in 2020 due to higher health insurance costs, which increased by $146,000, or 21.8%, and $311,000, or 22.7%, for the three ~~new branch locations added~~and six months ended June 30, 2020, compared to the same periods in ~~2016, but also as a result of additional operational positions to support the growth of the Corporation.~~2019.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Occupancy expenses consist of the following:

Depreciation of bank buildings

Real estate taxes and property insurance

Building lease expense

Utilities

Building repair and maintenance

Occupancy expenses increased ~~$69,000,~~$26,000, or ~~12.4%~~4.4%, and ~~$244,000,~~decreased by $13,000, or ~~15.4%~~1.1%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in the prior year. Building repair and maintenance costs increased by ~~$18,000,~~$44,000, or ~~41.8%~~173.2%, and ~~$85,000,~~$47,000, or ~~84.7%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Utilities costs increased by $10,000, or 5.9%, and $68,000, or 15.1%~~79.4%, when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, to the same periods in the prior year. ~~Lease expense increased~~For the year-to-date period, depreciation costs decreased by ~~$22,000,~~$21,000, or ~~61.5%~~5.9%, and ~~$59,000,~~snow removal costs decreased by $55,000, or ~~63.6%~~79.2%. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.

Equipment expenses increased $29,000, or 10.1%, and $32,000, or 5.6%, for the three and ~~nine-month periods in 2017 compared to 2016. Cleaning services increased by $10,000, or 35.0%, and $28,000, or 35.8%, for the three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in the prior year. ~~Occupancy expenses were higher for both the quarter~~Equipment repair and ~~year-to-date periods as a result of projects at existing locations and the expense associated with the three new branch locations and leased office space added during the last half of 2016.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

~~Equipment expenses~~maintenance costs increased by ~~$23,000,~~$25,000, or ~~8.3%~~190.4%, and ~~$67,000,~~$33,000, or ~~8.3%~~126.7%, ~~for~~when comparing the three and ~~nine~~six months ended ~~September~~June 30, ~~2017, compared~~2020, to the same periods in 2016. Equipment service contract expenses increased by $16,000, or 24.7%, and $38,000, or 22.2%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Equipment repair and maintenance costs did not change for the quarterly period in both years, but increased by $15,000, or 48.5%, for the nine months ended September 30, 2017, compared to the same period in the prior year. ~~Other miscellaneous equipment expenses~~Various other occupancy expense categories increased ~~by $4,000,~~ or ~~23.5%, and $27,000, or 74.0%, for the three and nine months ended September 30, 2017, compared to 2016. Partially offsetting these increases, depreciation on furniture and equipment~~ decreased by ~~$3,000, or 1.6%, and $14,000, or 2.6% for~~smaller amounts making up the ~~three and nine-month periods in 2017 compared to 2016. In general, furniture and equipment expenses are increasing as a result~~remainder of the ~~expanded branch~~quarter and ~~office network.~~year-to-date variance.

Advertising and marketing expenses increased by ~~$23,000,~~$52,000, or ~~19.2%~~31.3%, and $76,000, or 18.3%, for the three and six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same ~~period~~periods in ~~2016, and increased by $117,000, or 27.7%, for the nine months ended September 30, 2017, compared to the same period in 2016.~~2019. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses ~~remained the same~~increased by $70,000, or 58.3%, for the ~~quarter ended September 30, 2017, compared to the third quarter of 2016, but for the nine months ended September 30, 2017, these expenses~~quarter-to-date period, and increased by ~~$84,000,~~$88,000, or ~~31.7%~~31.9%, ~~compared to~~for the year-to-date period ~~in 2016. Public relations expenses increased by $23,000, or 72.1%, for the three months~~ ended ~~September~~June 30, ~~2017, and $34,000, or 21.7%, for the nine months ended September 30, 2017,~~2020, compared to the same periods in ~~2016.~~the prior year. Public relations expenses decreased by $19,000, or 42.0%, and $12,000, or 8.7%, for the three and six months ended June 30, 2020, compared to the same periods in 2019. Marketing expenses support the overall business strategies of the Corporation; therefore, the timing of these expenses is highly dependent upon the execution of those strategies.

Computer software and data processing expenses increased by ~~$104,000,~~$159,000, or ~~22.1%~~26.1%, for the ~~third~~second quarter of ~~2017,~~2020 compared to 2019, and ~~$309,000,~~$208,000, or ~~23.0%~~16.4%, for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in ~~2016.~~2019. Software-related expenses were up ~~$78,000,~~by $118,000, or ~~30.3%, and $242,000, or 33.4%~~35.9%, for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~2020, and by $141,000, or 19.7%, for the six months ended June 30, 2020, compared to the same periods in the prior ~~year,~~year. The increases were primarily as a result of increased amortization on existing software as well as purchases of new software platforms to support the strategic initiatives of the Corporation. Software expenses are likely to continue to increase in 2020, but the actual increase will be dependent on how quickly new software platforms are identified, analyzed, approved and placed into service. Data processing fees were up ~~$27,000,~~$42,000, or ~~12.3%~~14.8%, and ~~$68,000,~~$66,000, or ~~10.9%~~12.1%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, compared to the same periods in 2016. These fees are likely to continue to increase throughout the remainder of 2017 as new software platforms are installed and the cost of annual maintenance contracts increases and data processing fees increase with the increase in customer transactions.2019.

~~The Pennsylvania~~ Bank ~~Shares Tax~~shares tax expense ~~decreased $12,000, or 5.3%, and $36,000, or 5.3%,~~was $239,000 for the ~~three and nine months ended September 30, 2017,~~second quarter of 2020, an increase of $7,000, or 3.0%, from the second quarter of 2019. For the year-to-date period, shares tax increased by $14,000, or 3.0%, compared to the ~~same periods in 2016. Three~~prior year. Two main factors determine the amount of bank shares tax: the ending value of shareholders’ equity and the ending value of tax-exempt U.S. ~~obligations, and the actual tax rate.~~obligations. The shares tax calculation ~~in 2014 changed to using~~uses a ~~year-end~~period-end balance of shareholders’ equity ~~less tax-exempt U.S. obligations multiplied by~~and a tax rate of ~~0.89%~~0.95%. ~~In 2016, as part~~The increase in 2020 can be primarily attributed to the Corporation’s growing value of the State of Pennsylvania Budget discussions, the Governor proposed a Bank Shares Tax rate increase to 1.25%. Later proposals were 0.99%, and the 0.95% tax rate that was approved. As a result of these budget discussions, in the beginning of 2016 management was accruing for a higher level of PA Bank Shares Tax, which caused the expense for both the three and nine-month periods ended September 30, 2016 to be elevated. Once it was known the Pennsylvania Bank Shares Tax rate was approved at 0.95% for the 2016 PA Bank Shares Tax year, the amount of expense was reduced in the second half of 2016 and throughout 2017.shareholders’ equity.

~~Other operating expenses~~Professional services expense decreased by $49,000, or 8.8%, and increased by ~~$74,000,~~$99,000, or ~~14.8%, and by $44,000, or 2.6%~~9.6%, for the three and ~~nine months~~six-month periods ended ~~September~~June 30, ~~2017 respectively,~~2020, compared to the same periods in ~~2016. Loan-related expenses increased~~2019. These services include accounting and auditing fees, legal fees, and fees for other third-party services. Trust department processing fees were lower by $95,000 for the quarter and by $100,000 for the year-to-date periods when comparing 2017 to 2016. The primary reason for this increase was the implementation of a third party origination loan program which generates revenue from loans referred by another financial institution, with a commission paid to that institution which runs through this other operating expense category. Additionally, fraud-related charge-offs increased by $14,000,$48,000, or ~~63.4%, and $45,000, or 50.7%~~56.3%, for the three ~~and nine-month periods~~months ended ~~September~~June 30, ~~2017,~~2020, compared to the same ~~periods~~period in the prior ~~year.~~year accounting for the quarterly decrease. Other outside service fees increased by $130,000, or 30.9%, for the six months ended June 30, 2020, compared to the same period in 2019 making up the year-to-date variance. Several other professional services expenses increased or decreased slightly making up the remainder of the variance.

5052

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Income Taxes

~~The majority of the Corporation’s income is taxed at a corporate rate of 34% for Federal income tax purposes.~~ For the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Corporation recorded Federal income tax expense of ~~$391,000 and $935,000,~~$1,077,000, compared to ~~tax expense of $445,000 and $1,045,000~~$1,046,000 for the ~~three and nine~~six months ended ~~September~~June 30, ~~2016.~~2019. The effective tax rate for the Corporation was ~~16.1%~~15.7% for the ~~three~~six months ended ~~September~~June 30, ~~2017, and 14.0% for the nine months ended September 30, 2017,~~2020, compared to ~~17.6% and 15.6%~~15.5% for the same periods in 2016. The Corporation’s effective tax rate has historically been maintained at low levels primarily due to a relatively high level of tax-free municipal bonds held in the securities portfolio. The fluctuation of the effective tax rate will occur as a result of total tax-free revenue as a percentage of total revenue. The lower effective tax rate for the year-to-date period in ~~2017 was primarily caused by an increase in the Corporation’s tax-free municipal bond portfolio.~~

2019. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and BOLI income; 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 Federal income taxes on the Consolidated Statements of Income by the income before income taxes for the applicable period.

The Corporation’s effective tax rate has historically been maintained at low levels primarily due to a relatively high level of tax-free municipal bonds held in the securities portfolio. The fluctuation of the effective tax rate will occur as a result of total tax-free revenue as a percentage of total revenue. The higher effective tax rate for the year-to-date period in 2020 was primarily caused by the higher income before taxes.

The Corporation is also subject to Pennsylvania Corporate Net Income Tax; however, the Corporation’s Holding Company has very limited taxable corporate net income activities. The Corporation’s wholly owned subsidiary, Ephrata National Bank, is subject to Pennsylvania Bank Shares Tax. Like Federal Corporate income tax, the Pennsylvania Bank Shares Tax is a significant expense for the Corporation, amounting to ~~$215,000~~$479,000 in the ~~third quarter~~first six months of ~~2017 and $644,000 for the nine months ended September 30, 2017,~~2020 compared to ~~$227,000 and $680,000 for the same periods~~$465,000 in ~~2016.~~2019. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income, under operating expenses.

5153

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Financial Condition

Investment Securities ~~Available for Sale~~

The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of ~~September~~June 30, ~~2017,~~2020, the Corporation had ~~$320.7~~$341.5 million of securities available for sale, which accounted for ~~31.7%~~26.3% of assets, compared to ~~31.3%~~26.9% as of December 31, ~~2016,~~2019, and ~~30.7%~~26.3% as of ~~September~~June 30, ~~2016.~~2019. Based on ending balances, the securities portfolio increased ~~7.6%~~14.9% from ~~September~~June 30, ~~2016,~~2019, and ~~4.1%~~8.5% from December 31, ~~2016.~~2019.

The securities portfolio was showing a net unrealized ~~loss~~gain of ~~$3,381,000~~$5,724,000 as of ~~September~~June 30, ~~2017,~~2020, compared to an unrealized ~~loss~~gain of ~~$7,401,000~~$2,027,000 as of December 31, ~~2016,~~2019, and an unrealized gain of ~~$1,850,000~~$377,000 as of ~~September~~June 30, ~~2016.~~2019. The valuation of the Corporation’s securities portfolio, predominately debt securities, is impacted by both the U.S. Treasury rates and the perceived forward direction of interest rates. The 10-year U.S. Treasury yield was ~~1.60%~~2.00% as of ~~September~~June 30, ~~2016, 2.45%~~2019, 1.92% as of December 31, ~~2016,~~2019, and ~~2.33%~~0.66% as of ~~September~~June 30, ~~2017.~~2020. The lower Treasury rates ~~since December 31, 2016~~ have caused an ~~improvement~~increase in market valuation, which has resulted in the ~~smaller~~higher unrealized ~~loss~~gains recorded at ~~September~~June 30, ~~2017~~2020 compared to ~~the significant unrealized losses~~lower levels of gains at December 31, ~~2016.~~2019 and June 30, 2019.

The table below summarizes the Corporation’s amortized cost, unrealized gain or loss position, and fair value for each sector of the securities ~~available for sale~~ portfolio for the periods ended ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016.~~2019.

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)

			Net							Net
	Amortized		Unrealized			Fair		Amortized		Unrealized			Fair
	Cost		Gains (Losses)			Value		Cost		Gains (Losses)			Value
	$		$			$		$		$			$
September 30, 2017
June 30, 2020
U.S. government agencies		29,107		(460	)		28,647		8,217		162			8,379
U.S. agency mortgage-backed securities		54,181		(598	)		53,583		71,241		1,312			72,553
U.S. agency collateralized mortgage obligations		54,503		(465	)		54,038		45,854		708			46,562
Asset-backed securities									33,340		(1,389	)		31,951
Corporate bonds									62,426		1,005			63,431
Obligations of states and political subdivisions									107,885		3,926			111,811
Total debt securities, available for sale									328,963		5,724			334,687
Equity securities									6,977		(202	)		6,775
Total securities									335,940		5,522			341,462

December 31, 2019
U.S. government agencies									32,621		3			32,624
U.S. agency mortgage-backed securities									48,859		(233	)		48,626
U.S. agency collateralized mortgage obligations									60,124		129			60,253
Asset-backed securities									23,646		(384	)		23,262
Corporate bonds		57,384		(248	)		57,136		54,604		276			54,880
Obligations of states and political subdivisions		123,344		(1,671	)		121,673		86,216		2,236			88,452
Total debt securities		318,519		(3,442	)		315,077		306,070		2,027			308,097
Marketable equity securities		5,557		61			5,618
Total securities available for sale		324,076		(3,381	)		320,695

December 31, 2016
U.S. government agencies		33,124		(863	)		32,261
U.S. agency mortgage-backed securities		56,826		(957	)		55,869
U.S. agency collateralized mortgage obligations		38,737		(801	)		37,936
Corporate bonds		52,928		(837	)		52,091
Obligations of states and political subdivisions		128,428		(3,998	)		124,430
Total debt securities		310,043		(7,456	)		302,587
Marketable equity securities		5,469		55			5,524
Total securities available for sale		315,512		(7,401	)		308,111
Equity securities									6,685		23			6,708
Total securities									312,755		2,050			314,805

5254

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Net
Amortized Unrealized Fair
Cost Gains (Losses) Value
$ $ $
September 30, 2016
U.S. government agencies 33,088 (11 ) 33,077
U.S. agency mortgage-backed securities 50,160 31 50,191
U.S. agency collateralized mortgage obligations 34,940 98 35,038
Corporate bonds 53,751 158 53,909
Obligations of states and political subdivisions 118,515 1,452 119,967
Total debt securities 290,454 1,728 292,182
Marketable equity securities 5,835 122 5,957
Total securities available for sale 296,289 1,850 298,139

			Net
	Amortized		Unrealized			Fair
	Cost		Gains (Losses)			Value
	$		$			$
June 30, 2019
U.S. government agencies		31,186		(155	)		31,031
U.S. agency mortgage-backed securities		46,899		(807	)		46,092
U.S. agency collateralized mortgage obligations		54,906		2			54,908
Asset-backed securities		13,926		(67	)		13,859
Corporate bonds		52,680		(182	)		52,498
Obligations of states and political subdivisions		90,953		1,586			92,539
Total debt securities		290,550		377			290,927
Equity securities		6,242		(11	)		6,231
Total securities available for sale		296,792		366			297,158

Interest rate changes and the perceived forward direction of interest rates generally have a close relationship to the valuation of the Corporation’s fixed income securities portfolio. There are also a number of other market factors that impact bond prices. ~~It is likely~~During the second half of 2019, the Federal Reserve ~~will act~~decreased short-term rates three times for a total of 75 basis points, and during the first quarter of 2020, the Federal Reserve decreased short-term rates two times for a total of 150 basis points. Market conditions in the first half of 2020 were very unpredictable and fast changing due to ~~increase~~the start of and continuing impact of COVID-19 and the declaration of a global pandemic on March 11, 2020. The Fed’s reduction of interest rates ~~one more time~~was in response to this pandemic and caused short-term and long-term Treasury rates to decline at a rapid pace to reach all-time lows. This pandemic continued to have far-reaching impacts on local, national, and global economies and supply chains and negatively affected market pricing resulting in lower unrealized gains on the securities portfolio despite lower Treasury rates at March 31, 2020, compared to December 31, 2019. However, unrealized gains on the securities portfolio increased during 2017. During 2016, there was increased foreign market turmoil with several major European countries experiencing negative yields for mid and longer term notes. This resulted in foreign investors seekingthe second quarter ending at $5,522,000 as of June 30, 2020. The 10-year U.S. Treasury ~~debt as~~reached a ~~safe haven and drove U.S. Treasury yields to new record lows early in the third quarter~~low of ~~2016. Treasury rates increased significantly during the third and fourth quarters of 2016. The Treasury rates ran up~~0.54% on March 9, 2020, compared to a ~~2017~~2020 high of 1.88% to start the year. The COVID-19 pandemic continues to have significant impacts on rates and the economy and management believes this will continue throughout 2020 resulting in ~~March and then slowly retreated until hitting lows in early September. Since then Treasury~~these very low rates ~~have slowly increased and are likely to increase throughout~~for the ~~fourth quarter in anticipation~~remainder of ~~a December Federal Reserve rate increase. The trend of the U.S. leading economic indicators is more supportive of a Federal Reserve rate increase than they were earlier in~~ the year. Beyond interest rate movements, there are also a number of other factors that influence bond pricing including regulatory changes, financial performance of issuers, changes to credit rating of insurers of bonds, changes in market perception of certain classes of securities, and many more. Management monitors the changes in interest rates and other market influences to assist in management of the securities portfolio.

Any material increase in market interest rates would have a negative impact on the market value of the Corporation’s fixed income debt securities. As of June 30, 2020, approximately 78% of the Corporation’s debt securities were fixed rate securities with the other 22% variable rate. The variable rate instruments generally experience very little impact ~~will vary according~~ to valuation based on a change in rates because they trade on a spread over overnight rates such as LIBOR. However, with the ~~length and structure of each sector. The~~ Federal Reserve ~~increased~~drastically reducing the ~~Fed~~Federal funds rate by ~~25 basis points~~1.50% in ~~December~~March to 0.25% it caused the market to view floating rate bonds differently, as the new effective yields on those securities would be significantly reduced upon the next rate reset; whereas fixed rate securities without call options could maintain their effective yield in a new bond market with sharply lower yields. Therefore, the valuation of ~~2015, December of 2016,~~the fixed rate securities held up better when the securities portfolio was valued for March ~~of 2017,~~31, 2020 and June 30, 2020. Generally the longer the bond and the longer the call protection, the better the bond did in terms of 2017, with the likelihood of an additional increase in December of 2017. While management is planning for mid-term and long-term interest rates to increase throughout the remainder of 2017, it is possible they would not increase to the same magnitude that short-term rates will increase resulting in an even flatter yield curve.valuation. The municipal bond sector is the largest of the portfolio and, as a result, management will closely monitor the 10-year U.S. Treasury yield due to its impact on these securities. The other sectors of the portfolio have shorter lives and duration and would be more influenced by the 2-year and 5-year U.S. Treasury rates. It is anticipated that the current unrealized ~~losses~~gains could ~~grow~~improve even further if market rates ~~do increase~~remain stagnant or decrease during the remainder of the ~~year, either in anticipation of a Federal Reserve rate move, or after the next rate move.~~year.

~~After four consecutive quarters~~The effective duration of ~~declines ending on September 30, 2016,~~ the Corporation’s ~~effective duration~~portfolio continues to be at historic lows but increased in the final two quarters of 2016 and first quarter of 2017 due primarily to a higher level of municipal bonds in the securities portfolio. However, due to selective sales of longer duration securities, the duration did declineslightly in the second ~~and third quarters~~quarter of ~~2017.~~2020, to 2.4, from 2.2 as of December 31, 2019. Effective duration is a measurement of the length of the securities portfolio with a higher level indicating more length and more exposure to an increase in interest rates. The securities portfolio base case effective duration was ~~as low as 2.8~~2.3 as of ~~September~~June 30, ~~2016. Since then it has increased to 3.3 as of September 30, 2017.~~2019. Duration is expected to remain stable or ~~decline~~increase slightly throughout the remainder of ~~2017. It will be more difficult~~2020. The Corporation was able to reduce effective duration ~~materially since management has increased the percentage~~by purchasing more variable rate securities throughout 2018 and 2019. Additionally, with declining rates, pass-through structures of ~~municipal holdings~~MBS and CMO instruments typically shorten in ~~the portfolio. While the percentage of longer~~ duration municipal bonds has grown, the types of new municipal bond instruments being purchased generally have better rates-up performance than those municipal bonds being sold. Therefore, the same duration can be maintained despite a higher element of municipal securities. Management also continues to utilize a large cash position outside of the portfolio, as ~~well as lower duration corporate bonds to offset the duration of the longer municipal bonds.~~principal payments increase.

5355

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Management’s actions to maintain reasonable effective duration of the securities portfolio are part of a broader asset liability plan to continually work to mitigate future interest rate risk and fair value risk to the Corporation. Part of that strategy is to retain higher levels of cash and cash equivalents to increase liquidity and provide an immediate hedge against higher interest rates and fair value risk. However, despite taking actions to mitigate the Corporation’s future risk, these risks are inherent to the banking model. Unrealized gains and losses on securities will vary significantly according to market forces. Management’s focus will continue to be on the long-term performance of these securities. While management has and will continue to take gains from the portfolio when opportunities exist, the broader securities strategy remains to buy and hold debt securities until maturity. Because market interest rates were ~~generally rising since September 30, 2016,~~declining rapidly in the first six months of 2020, there was some opportunity to realize gains from the sales of securities. As a result, gains from the sales of debt securities ~~did decline significantly.~~were up for the six months ended June 30, 2020, compared to the prior year’s period.

The Corporation typically invests excess liquidity into securities, primarily fixed-income bonds. The securities portfolio provides interest and dividend income to supplement the interest income on loans. Additionally, the securities portfolio assists in the management of both liquidity risk and interest rate risk. In order to provide maximum flexibility for management of liquidity and interest rate risk, the securities portfolio is classified as available for sale and reported at fair value. Management adjusts the value of all the Corporation’s securities on a monthly basis to fair market value as determined in accordance with U.S. generally accepted accounting principles.Management has the ability and intent to hold all debt securities until maturity, and does not generally record impairment on bonds that are currently valued below book value. In addition to the ~~fixed-income~~fixed and variable rate bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book and fair market value of ~~$5.3~~$6.1 million. The CRA fund is a Small Business Association (SBA) variable rate fund with a stable dollar price. The Corporation also has a small portfolio of bank stocks with a book value of ~~$307,000~~$829,000 and fair market value of ~~$368,000~~$627,000 as of ~~September~~June 30, ~~2017.~~2020. The fair value of the bank stocks was significantly impacted by the COVID-19 pandemic and the drastic devaluation of bank stocks during this time. The equity holdings make up ~~1.8%~~2.0% of the Corporation’s securities available for sale.

All securities, bonds, and equity holdings are evaluated for impairment on a quarterly basis. Should any impairment occur, management would write down the security to a fair market value in accordance with U.S. generally accepted accounting principles, with the amount of the write down recorded as a loss on securities.

Each quarter, management sets portfolio allocation guidelines and adjusts the security portfolio strategy generally based on the following factors:

ALCO positions as to liquidity, credit risk, interest rate risk, and fair value risk

Growth of the loan portfolio

Slope of the U.S. Treasury curve

Relative performance of the various instruments, including spread to U.S. Treasuries

Duration and average length of the portfolio

Volatility of the portfolio

Direction of interest rates

Economic factors impacting debt securities

The investment policy of the Corporation imposes guidelines to ensure diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk. The composition of the securities portfolio based on fair market value is shown in the following table.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)

	Period Ending
	June 30, 2020				December 31, 2019				June 30, 2019
	$		%		$		%		$		%

U.S. government agencies		8,379		2.5		32,624		10.5		31,031		10.4
U.S. agency mortgage-backed securities		72,553		21.2		48,626		15.4		46,092		15.5
U.S. agency collateralized mortgage obligations		46,562		13.6		60,253		19.1		54,908		18.5
Asset-backed securities		31,951		9.4		23,262		7.4		13,859		4.7
Corporate debt securities		63,431		18.6		54,880		17.4		52,498		17.7
Obligations of states and political subdivisions		111,811		32.7		88,452		28.1		92,539		31.1
Total debt securities, available for sale		334,687		98.0		308,097		97.9		290,927		97.9

Marketable equity securities (a)		6,775		2.0		6,708		2.1		6,231		2.1

Total securities		341,462		100.0		314,805		100.0		297,158		100.0

Period Ending
September 30, 2017 December 31, 2016 September 30, 2016
$ % $ % $ %

U.S. government agencies 28,647 8.9 32,261 10.5 33,077 11.1
U.S. agency mortgage-backed securities 53,583 16.7 55,869 18.1 50,191 16.8
U.S. agency collateralized mortgage obligations 54,038 16.9 37,936 12.3 35,038 11.8
Corporate debt securities 57,136 17.8 52,091 16.9 53,909 18.1
Obligations of states and political subdivisions 121,673 37.9 124,430 40.4 119,967 40.2
Equity securities 5,618 1.8 5,524 1.8 5,957 2.0

Total securities 320,695 100.0 308,111 100.0 298,139 100.0

The largest movements within the securities portfolio were shaped by market factors, such as:

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

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

prepayment speeds on mortgage-backed securities and collateralized mortgage obligations

credit risk of each instrument and risk-based capital considerations

Federal income tax considerations with regard to obligations of tax-free states and political subdivisions.

Since September of 2016, the most significant change occurring within the Corporation’s securities portfolio was an increase in U.S. agency collateralized mortgage obligations (CMOs), and a decrease in U.S. government agency securities.

The Corporation’s U.S. government agency sector decreased by ~~$4.4~~$22.7 million, or ~~13.4%~~73.0%, since ~~September~~June 30, ~~2016,~~2019, with the weighting decreased from ~~11.1%~~10.4% of the portfolio to ~~8.9%~~2.5%. In the past, management’s goal was to maintain agency securities at approximately ~~15%~~10% of the securities portfolio. In the current rate environment, management is comfortable maintaining agencies atbelow this level. With the drastic decline in market rates throughout the first half of 2020, many U.S. agency securities were called and a ~~level~~number of ~~approximately 10% of~~others were sold during the ~~portfolio. This~~six months ended June 30, 2020. In the past, this sector ~~is also~~was important in maintaining adequate risk weightings of the portfolio and to ensure sufficient U.S. government securities for pledging purposes, but management has been utilizing both mortgage-backed securities (MBS) and ~~importantly~~collateralized mortgage obligations (CMOs) to ~~ladder out~~do the same. Management has increased the allocations of these two sectors as a ~~schedule of agency and corporate maturities over the next 5 years~~group since June 30, 2019, MBS to ~~avoid any concentration of maturities.~~a greater degree. Next to U.S. Treasuries, U.S. agencies are viewed as the safest ~~instruments~~securities and are considered by management as a foundational ~~portion~~component of the portfolio.

The Corporation’s U.S. agency MBS and CMO sectors have increased ~~in total~~ since ~~September~~June 30, ~~2016, and the weightings have changed~~2019, with ~~significantly more CMOs and only slightly more~~ MBS ~~as of September 30, 2017, compared to September 30, 2016. The Corporation’s CMO portfolio has increased by $19.0~~increasing $26.5 million, or ~~54.2%~~57.4%, ~~while MBS balances have only increased by $3.4~~and CMOs decreasing $8.3 million, or ~~6.8%, when comparing September 30, 2017, to balances at September 30, 2016.~~15.2%. These two security types both consist of mortgage instruments that pay monthly interest and principal, however the behavior of the two types vary according to the structure of the mortgage pool or CMO instrument. Management desires to maintain a substantial amount of MBS and CMOs in order to assist in adding to and maintaining a stable five-year ladder of cash flows, which is important in providing stable liquidity and interest rate risk positions. Unlike the typical U.S. agency paper, corporate bonds, and obligations of states and political subdivisions, which only pay principal at final maturity, the U.S. agency MBS and CMO securities pay contractual monthly principal and interest, but are also subject to additional prepayment of principal. The combined effect of all of these instruments paying monthly principal and interest provides the Corporation with a ~~significant and~~ reasonably stable base cash ~~flow.~~flow of approximately $2.0 - $3.0 million per month. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield. As interest rates decline, prepayment of principal on securities increases, the duration of the security shortens, and the yield declines as more amortization is required on premium bonds. When interest rates increase, the opposite of this occurs. Despite the fluctuations that occur in terms of monthly cash flow as a result of changing prepayment speeds, the monthly cash flow generated by U.S. agency MBS and CMO securities is reasonably stable and as a group is ~~significant,~~material, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Asset-backed securities increased by $18.1 million, or 130.5%, from June 30, 2019 to June 30, 2020. These securities are floating rate student loan pools which are instruments that will perform well in a rates-up environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flow.

As of ~~September~~June 30, ~~2017,~~2020, the fair value of the Corporation’s corporate bonds increased by ~~$3.2~~$10.9 million, or ~~6.0%~~20.8%, from balances at ~~September~~June 30, ~~2016.~~2019. Like any security, corporate bonds have both positive and negative qualities and management must evaluate these securities on a risk versus reward basis. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a high level of credit risk should the entity experience financial difficulties. Management stands to possibly lose the entire principal amount if the entity that issued the corporate paper fails. As a result of the higher level of credit risk taken by purchasing a corporate bond, management has in place procedures to closely analyze the financial health of the company as well as policy guidelines. The guidelines include both maximum investment by issuer and minimal credit ratings that must be met in order for management to purchase a corporate bond. Financial analysis is conducted prior to every corporate bond purchase with ongoing monitoring performed on all securities held.

Obligations of states and political subdivisions, or municipal bonds, are tax-free and taxable securities that generally provide the highest yield in the securities portfolio. They also carry the longest duration on average of any instrument in the securities ~~portfolio. In the prolonged period of historically low interest rates, the municipal bond sector has far outperformed all other sectors of the~~ portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. However, due to the decrease in the Federal tax rate as enacted by the Tax Cuts and Jobs Act, municipal yields do not outperform the other segments of the securities portfolio to the same degree as years prior to 2018. Municipal securities were purchased throughout the first half of 2020 due to market conditions that led to favorable yields on some instruments. The Corporation also began purchasing some taxable municipal securities that added to the value of this sector. Due to these purchases, the fair market value of municipal holdings has increased by ~~$1.7~~$19.3 million, or ~~1.4%~~20.8%, from ~~September~~June 30, ~~2016~~2019 to ~~September~~June 30, ~~2017.~~2020. Municipal bonds represented ~~37.9%~~32.7% of the securities portfolio as of ~~September~~June 30, ~~2017,~~2020, compared to ~~40.2%~~31.1% as of ~~September~~June 30, ~~2016.~~2019. The Corporation’s investment policy limits municipal holdings to 125% of Tier 2 capital. As of ~~September~~June 30, ~~2017,~~2020, municipal holdings amounted to ~~109%~~89% of Tier 2 capital.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~The Corporation’s investment policy requires that municipal bonds not carrying any insurance coverage have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of June 30, 2020, no municipal bonds carried a credit rating under these levels.

Management utilizes several municipal surveillance reports and engages an independent non-brokerage service third party to perform enhanced municipal credit evaluation. Management will typically sell municipal securities if negative trends in financial performance are found and/or ratings have declined to levels deemed unacceptable. As a result of the above monitoring and actions taken to proactively sell weaker municipal credits, the Corporation’s entire municipal bond portfolio consists of investment grade credits.

By policy, management is to identify and recommend whether to hold or sell securities with credit ratings that have fallen below minimum policy credit ratings required at the time of purchase, or below investment grade. Management monitors the security ratings on a monthly basis and reviews quarterly with the Board of Directors. Management, with Board approval, determines whether it is in the Corporation’s best interest to continue to hold any security that has fallen below policy guidelines or below investment grade based on the expectation of recovery of market value or improved performance. At this time management has elected, and the Board has approved, holding all securities that have fallen below initial policy guidelines. As of ~~September~~June 30, ~~2017,~~2020, no securities have fallen below investment grade.

As of ~~September~~June 30, ~~2017, nineteen~~2020, 8 of the ~~thirty-three~~35 corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at ~~99.1%~~98.6% of book ~~value.~~value, with the vast majority of these unrealized losses on variable rate corporate bonds where valuation was impacted by the sudden March 2020 overnight rate decreases. The Corporation’s investment policy requires that corporate bonds have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase, or an average or composite rating of A-. As of ~~September~~June 30, ~~2017,~~2020, all but ~~three~~two of the corporate bonds had at least one A3 or A- rating by one of the two predominate credit rating services, Moody’s and S&P. ~~The three unrelated~~These two corporate bonds ~~with~~were from the same issuer and had a total book value of ~~$6.7~~$3.0 million, and did not have an A3 or A- rating as of ~~September~~June 30, ~~2017.~~2020. These bonds were ~~all~~ rated Moody’s Baa1 and S&P BBB+, which are two levels above the minimum required to be considered investment grade. Management conducts ongoing monitoring of these bonds and has chosen to continue to hold these bonds with Board approval. In addition, there are ~~twelve~~fourteen corporate bond instruments that have split ratings with the highest rating within the Corporation’s initial purchase policy guidelines and the lower rating outside of management guidelines, but all are still investment grade. The ~~twelve~~fourteen bonds have a book value of ~~$20.0~~$22.5 million with a ~~$57,000~~$341,000 unrealized ~~loss~~gain as of ~~September~~June 30, ~~2017.~~2020. Management conducts ongoing monitoring of these bonds with the Board approving holding these securities on a quarterly basis. Currently, there are no indications that any of these bonds would discontinue contractual payments.

The Corporation’s investment policy requires that municipal bonds not carrying insurance have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of September 30, 2017, no municipal bonds carried a credit rating under these levels.58

Index

~~As a result of the fallout of the financial crisis, the major rating services have tightened their credit underwriting standards~~ENB FINANCIAL CORP
Management’s Discussion and are quicker to downgrade municipalities when financial conditions deteriorate. Additionally, the prolonged weak economy has reduced revenue streams for many municipalities and has called into question the basic premise that municipalities have unlimited power to tax, i.e. the ability to raise taxes to compensate for revenue shortfalls. As a result of this environment, management utilizes several municipal surveillance reports and engages an independent non-brokerage service third party to perform enhanced municipal credit evaluation. Management will typically sell municipal securities if negative trends in financial performance are found and/or ratings have declined to levels deemed unacceptable. As a result of the above monitoring and actions taken to proactively sell weaker municipal credits, the Corporation’s entire municipal bond portfolio consists of investment grade credits.Analysis

The entire securities portfolio is reviewed monthly for credit risk and evaluated quarterly for possible impairment. The Corporation’s municipal and corporate bonds present the largest credit risk and highest likelihood for any possible impairment. Due to the ability for corporate credit situations to change rapidly and ongoing nationwide concerns of pension obligations impacting municipalities, management iscontinues to closely ~~monitoring~~monitor all corporate and municipal securities.

Loans

Net loans outstanding increased by ~~3.1%~~16.3%, to ~~$576.0~~$825.2 million at ~~September~~June 30, ~~2017,~~2020, from ~~$558.5~~$709.4 million at ~~September~~June 30, ~~2016.~~2019. Net loans increased by ~~2.1%~~10.9%, an annualized rate of ~~2.8%~~21.8%, from ~~$564.0~~$744.2 million at December 31, ~~2016.~~2019. The following table shows the composition of the loan portfolio as of ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~2019.

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

	June 30,				December 31,					June 30,
	2020				2019					2019
	$		%		$			%		$			%

Commercial real estate
Commercial mortgages		125,925		15.1		120,212			16.0		104,418			14.6
Agriculture mortgages		175,108		20.9		175,367			23.3		168,726			23.5
Construction		20,285		2.4		16,209			2.2		18,151			2.5
Total commercial real estate		321,318		38.4		311,788			41.5		291,295			40.6

Consumer real estate (a)
1-4 family residential mortgages		261,772		31.3		258,676			34.4		241,134			33.6
Home equity loans		10,688		1.3		9,770			1.3		10,536			1.5
Home equity lines of credit		69,507		8.3		70,809			9.4		66,535			9.3
Total consumer real estate		341,967		40.9		339,255			45.1		318,205			44.4

Commercial and industrial
Commercial and industrial		129,459		15.5		58,019			7.7		61,298			8.6
Tax-free loans		16,607		2.0		16,388			2.2		16,815			2.3
Agriculture loans		21,581		2.6		20,804			2.8		20,641			2.9
Total commercial and industrial		167,647		20.1		95,211			12.7		98,754			13.8

Consumer		5,061		0.6		5,416			0.7		8,397			1.2

Total loans		835,993		100.0		751,670			100.0		716,651			100.0
Less:
Deferred loan fees (costs), net		24				(1,948	)				(1,705	)
Allowance for loan losses		10,770				9,447					8,957
Total net loans		825,199				744,171					709,399

September 30, December 31, September 30,
2017 2016 2016
$ % $ % $ %

Commercial real estate
Commercial mortgages 90,468 15.5 86,434 15.2 87,676 15.5
Agriculture mortgages 150,269 25.8 163,753 28.7 167,531 29.7
Construction 18,762 3.2 24,880 4.4 28,796 5.1
Total commercial real estate 259,499 44.5 275,067 48.3 284,003 50.3

Consumer real estate (a)
1-4 family residential mortgages 168,984 29.0 150,253 26.3 143,066 25.3
Home equity loans 11,457 2.0 10,391 1.8 10,537 1.9
Home equity lines of credit 57,991 9.9 53,127 9.3 50,251 8.9
Total consumer real estate 238,432 40.9 213,771 37.4 203,854 36.1

Commercial and industrial
Commercial and industrial 41,724 7.1 42,471 7.4 41,705 7.4
Tax-free loans 19,632 3.4 13,091 2.3 11,485 2.0
Agriculture loans 18,487 3.2 21,630 3.8 19,363 3.4
Total commercial and industrial 79,843 13.7 77,192 13.5 72,553 12.8

Consumer 5,166 0.9 4,537 0.8 4,663 0.8

Total loans 582,940 100.0 570,567 100.0 565,073 100.0
Less:
Deferred loan fees (costs), net (1,137 ) (1,000 ) (895 )
Allowance for loan losses 8,028 7,562 7,435
Total net loans 576,049 564,005 558,533

~~(a)~~

Residential real estate loans do not include mortgage loans serviced for others which totaled $90,123,000 as of September 30, 2017, $66,767,000 as of December 31, 2016, and $59,506,000 as of September 30, 2016.

(a) Residential real estate loans do not include mortgage loans serviced for others which totaled $187,258,000

There was ~~moderate~~significant growth in the loan portfolio since ~~September~~June 30, ~~2016,~~2019, and December 31, ~~2016. A decline~~2019, respectively. Most major loan categories showed an increase in ~~agricultural mortgages~~balances from both time periods. Loan growth was significant in 2019 and ~~construction lending secured~~continued with growth in the first six months of 2020 driven primarily by ~~commercial~~the funding of Payroll Protection Program (PPP) loans to local businesses.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The consumer residential real estate ~~between December 31, 2016 and September~~category represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from $318.2 million on June 30, ~~2017 offset~~2019, to $342.0 million on June 30, 2020, a ~~large portion of the growth occurring in other areas of the portfolio, resulting in somewhat slower growth. Commercial~~7.5% increase. This category includes closed-end fixed rate or adjustable-rate residential real estate loans ~~saw a decline in balances with increases in consumer real estate loans~~secured by 1-4 family residential properties, including first and ~~commercial~~junior liens, and ~~industrial loans more than offsetting this decrease.~~floating rate home equity loans. The biggest decline in the commercial real estate sector has been in agricultural mortgages, which declined due to a reorganization of the Bank’s agricultural lending team, increased competitive pressures, including new market entrants, and headwinds in the agricultural marketplace impacting dairy farmers and poultry producers. In the consumer real estate sector, 1-4 family residential mortgages ~~increased~~account for the vast majority of residential real estate loans with fixed and floating home equity loans making up the remainder. Historically, the entire consumer residential real estate component of the loan portfolio has averaged close to 40% of total loans. As of June 30, 2019, this percentage was 44.4%, and as of June 30, 2020, it decreased to 40.9%. Management expects the consumer residential real estate category to increase at a similar pace throughout the remainder of 2020 due to a continued effort to increase mortgage volume, aided by lower interest rates, which should continue to motivate home buyers and those refinancing. Although economic conditions for consumers have deteriorated with the ~~expansion~~COVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continues to remain relatively strong as consumers refinance existing debt to lower rates. Market conditions have been changing rapidly throughout the first six months of 2020 and the rest of the year is unpredictable, but management would expect mortgage volume to continue at fairly high levels.

The first lien 1-4 family mortgages increased by $20.6 million, or 8.6%, from June 30, 2019, to June 30, 2020. These first lien 1-4 family loans made up 76% of the residential real estate total as of June 30, 2019, and 77% as of June 30, 2020. The vast majority of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans, with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. In the second quarter of 2020, mortgage production increased 86% over the previous quarter, and was up 93% over the second quarter of 2019. This brought year-to-date mortgage originations to $98.5 million, a 59% increase over the same period last year. Purchase money origination constituted 45% of the Corporation’s mortgage ~~division~~originations for the six months ended June 30, 2020, with construction-only and ~~successful efforts to expand~~construction-permanent loans making up 40% of that mix. With continued heavier than normal refinance activity, the ~~product line and increase~~percentage of mortgage originations going in the ~~sales force to capture a greater share~~Corporation’s held-for-investment mortgage portfolio declined with more customers opting for held-for-sale fixed rate products. Through June 30, 2020, 41% of all mortgage originations were held in the mortgage portfolio, 65% of which were adjustable rate mortgages. As of June 30, 2020, ARM balances were $131.9 million, representing 50% of the ~~local mortgage market. Home~~1-4 family residential loan portfolio of the Corporation. The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period.

As of June 30, 2020, the remainder of the residential real estate loans consisted of $10.7 million of fixed rate junior lien home equity loans, and $69.5 million of variable rate home equity lines of credit ~~have grown in response~~(HELOCs). This compares to ~~the low interest~~$10.5 million of fixed rate ~~environment encouraging customers~~junior lien home equity loans, and $66.5 million of HELOCs as of June 30, 2019. Therefore, combined, these two types of home equity loans increased from $77.0 million to ~~utilize~~$80.2 million, an increase of 4.2%. The majority of borrowers had been choosing variable rate ~~consumer borrowings~~HELOC loans throughout 2019 particularly after the Federal Reserve lowered rates three times in ~~conjunction with an attractive six-month introductory~~the second half of the year. With the further rate ~~of 1.99%, which the Corporation has offered for all of 2016 and during~~declines in the first ~~nine months~~quarter of ~~2017.~~2020, management expects HELOC activity to increase with customers choosing variable rate product over fixed rate product until rates begin to increase again.

~~In terms of all loans secured by~~Commercial real estate ~~the total~~makes up of ~~all categories of real estate loans comprises 85.4%~~38.3% of total loans as of ~~September~~June 30, ~~2017. At $259.5 million,~~2020, compared to 40.6% of total loans as of June 30, 2019. Within the commercial real estate ~~is the largest category of the loan portfolio, consisting of 44.5% of total loans. This category includes~~segment there has been an increase in agricultural mortgages and commercial mortgages ~~agriculture~~over the past year, with construction based mortgages ~~and construction loans. Commercial real estate loans decreased~~remaining stable. Agricultural mortgages increased $6.4 million, or 3.8%, from ~~$284.0~~$168.7 million as of ~~September~~June 30, ~~2016,~~2019, to ~~$259.5~~$175.1 million as of ~~September~~June 30, ~~2017, a $24.5 million, or 8.6% decrease.~~

2020. The ~~decline in commercial real estate loans has primarily been in those secured by farmland as well as a decline in construction loans partially offset by a small~~ increase ~~in commercial mortgages. Agricultural mortgages decreased $17.2 million, or 10.3% from $167.5 million as of September 30, 2016, to $150.3 million as of September 30, 2017. The decline~~ in agricultural mortgages was caused by an increase in the pipeline of agricultural projects throughout 2019. These loans are now closing as some farmers are moving ahead with projects that may have been on hold for a ~~combination~~period of ~~new agricultural~~time. Dairy lending ~~competition~~remains constrained with milk prices at three-year lows and it does not appear pricing will improve materially in ~~Lancaster County and weaker~~the immediate future. There have been overcapacity issues with some consolidation of the area’s larger milk ~~and egg pricing for farmers. Low~~producers. Several dairy ~~egg, and poultry prices~~farmers have left the industry or are ~~constraining local farmers from expanding operations presently.~~in the process of doing so. Approximately 45% of the Corporation’s agricultural purpose loans support dairy operations while another 25% are either broiler or egg producers. ~~The pipeline for new agricultural mortgages slowed in the second half of 2016 and did not pick up over the winter months leading into the spring of 2017.~~ Management believes the ~~present~~ level of agricultural mortgages will ~~remain flat until~~steadily increase aided by the Corporation’s heavy focus on the agricultural community and a full staff ready to meet agriculture lending needs, but challenged by the declining economic conditions ~~improve~~ for farmers in the local market ~~area and pricing pressures from additional market entrants subside.~~area.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

Commercial mortgages ~~were the most stable sector within the commercial real estate area with a small percentage increase~~increased $21.5 million, or 20.6%, from ~~the prior year period.~~balances at June 30, 2019. Commercial mortgages as a percentage of the total loan portfolio increased ~~by $2.8 million, or 3.2%, from September~~to 15.0% as of June 30, ~~2016~~2020, compared to ~~September~~14.6% at June 30, ~~2017, with new~~2019. New loan production in this segment is currently outpacing normal principal payments, ~~and paydowns~~pay downs, and payoffs. The commercial real estate market environment is showing slow growth in the Corporation’s market area but more competition is vying for this business. Management ~~would expect~~expects commercial real estate loans to remain stable as a percentage of the Corporation’s loans ~~as we move through~~for the ~~last quarter~~remainder of ~~2017.~~2020.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The ~~Corporation experienced declines in~~Corporation’s commercial construction ~~as a number of construction projects completed and were converted into permanent financing. The Corporation did not originate any new large construction contracts~~loan balances increased by $2.1 million, or 11.8%, from June 30, 2019 to ~~replace those that rolled off.~~June 30, 2020. Management was experiencing some demand for smaller residential builds like construction on existing lots but no new large scale projects. Commercial construction loans ~~decreased by $10.0 million, or 34.8%, from September 30, 2016 to September 30, 2017.~~

~~Consumer real estate loans make up 40.9%~~were 2.5% of the total loan portfolio ~~with balances of $238.4 million~~ as of ~~September~~June 30, ~~2017, a marked increase from 36.1% of the portfolio~~2019, compared to 2.4% as of ~~September~~June 30, 2017. These loans include 1-4 family residential mortgages, home equity term loans, and home equity lines of credit. Personal residential mortgages account for 70.9% of total residential real estate loans and 29.0% of total loans, up from 70.2% and 25.3% respectively, as of September 30, 2016. Traditional 10 to 20-year personal mortgages originated from and held by the Corporation have consistently been the largest single product of the Corporation’s loan portfolio. During 2016 and through the first nine months of 2017, the Corporation experienced significant increases in both portfolio and secondary market production. The volume of residential mortgage production since September 30, 2016, led to an 18.1% increase in 1-4 family residential mortgage balances along with a significant shift from fixed rate loans to interim adjustable rate mortgages (ARMs), climbing from 26% of the residential loan portfolio as of September 30, 2016, to 36% at September 30, 2017. This shift in production has decreased the Bank’s interest rate risk profile and this trend is expected to continue throughout the remainder of 2017. Total personal residential mortgage balances increased by $25.9 million, or 18.1%, from September 30, 2016 to September 30, 2017, and $18.7 million, or 12.5%, from December 31, 2016 to September 30, 2017.2020.

The Corporation generally only holds 10 to 20-year fixed rate mortgages, or mortgages with an initial fixed rate period of 10 years or less (adjustable rate mortgages), and will sell any mortgage originated over a 20-year fixed rate term. The majority of the fixed rate mortgages are sold with servicing retained. In the first nine months of 2017, purchase money origination constituted 66% of the Corporation’s mortgage originations with construction-only and construction-permanent loans making up 34% of that. The growth of the Corporation’s held-for-investment portfolio continued to be concentrated in its ARM products; ARM balances were $18.0 million, or 42.2% higher compared to December 31, 2016, while the fixed rate balances dropped by $5.7 million, or 7.5%, during the same time period for net growth of $12.3 million in the residential portfolio. Similar in nature to 2016 trends, 68% of all ARMs booked were 7/1 ARMs, 28% were 5/1 ARMs, and 4% were 3/1 ARMs. The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period. The ARM loans have continued to grow rapidly as a percentage of the portfolio, amounting to over 46% of the total personal mortgages held by the Corporation as of September 30, 2017. As of September 30, 2017, the Corporation had $60.5 million of ARMs held in the portfolio. Management expects internal mortgage loan production to continue to develop throughout the remainder of 2017 as the Corporation focuses on strategically growing thisother area of ~~the portfolio.~~

~~Second mortgages~~commercial lending is non-real estate secured commercial lending, referred to as commercial and ~~home equity loans, fixed or variable rate, make up the remainder of the Corporation’s residential real estate loans. The purposes of these loans can vary but for this analysis the loan type~~industrial lending. Commercial and form of lien and collateral govern the placement of these loans under home equity loans. Requests for fixed-rate home equity loans have been very light during this prolonged period of historically low rates, while home equity lines of credit, which float on the Prime rate, have been the preferred home equity financing. The growth of the Corporation’s home equity lines of credit accelerated during 2016 and in the first nine months of 2017 as a result of an attractive HomeLine product with a low introductory rate of 1.99% for six months. After that period, the home equity line would revert to Prime or Prime plus a margin depending on the strength of the borrower. Home equity lines of credit increased from $50.3 million on September 30, 2016, to $58.0 million on September 30, 2017, a $7.7 million, or 15.3% increase.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The Corporation continues to offer the low 1.99% six-month introductory rate on the HomeLine product and expects similar growth to occur throughout the remainder of 2017. This trend is likely to slow down if the Prime rate continues to increase over time. It is expected that when the Federal Reserve acts to increase the overnight rate again, and the Prime rate increases, the reaction will be that floating rate loans will become less attractive to borrowers who will act to protect themselves against further rate increases by converting to a fixed rate loan. Since September 30, 2016, the fixed rate home equity loans have increased by $0.9 million, or 8.7%, and are expected to increase slightly throughout the remainder of 2017 given the likelihood of one more Federal Reserve rate increase. Management anticipates moderate growth in the residential real estate area throughout the remainder of 2017 as longer term rates have remained lower than anticipated and management continues to add resources in an effort to further expand the mortgage department, which remains an area of strategic focus for the Corporation.

~~Commercial~~industrial loans not secured by real estate ~~are~~accounted for 20.1% of total loans as of June 30, 2020, compared to 13.8% as of June 30, 2019. The significant increase in this loan category is due solely to the PPP loans which amounted to $76.0 million as of June 30, 2020. Outside of this loan growth, commercial and industrial loans would have decreased from June 30, 2019 to June 30, 2020. In scope, the commercial and industrial loan sector, at 20.1% of total loans, is significantly smaller than the ~~Corporation’s~~ commercial real estate sector at 38.3% of total loans. This is consistent with management’s credit preference for obtaining real estate collateral when making commercial loans. The balance of total commercial and industrial loans increased from $98.8 million at June 30, 2019, to $167.6 million at June 30, 2020, a 69.6% increase. This category of loans generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. The balance at June 30, 2020, also includes the PPP loans, which will likely decline rapidly beginning in the fourth quarter of 2020 as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. Management anticipates that these loans will experience a significant decline in the remainder of 2020 and into 2021.

The Corporation provides credit to many small and medium-sized businesses. Much of this credit is in the form of Prime-based lines of credit to local businesses where the line may not be secured by real estate, ~~portfolio. These commercial and industrial loans, referred to as C&I loans, are generally extended~~but is based on the health of the ~~commercial borrower. They include both fixed rate~~borrower with other security interests on accounts receivable, inventory, equipment, or through personal guarantees. Commercial and industrial loans, ~~and Prime-based variable rate loans.~~including PPP loans, increased to $129.5 million at June 30, 2020, a $68.2 million, or 111.3% increase, from the $61.3 million at June 30, 2019. The ~~variable rate~~tax-free loans ~~are generally in the form of a business line of credit. The Corporation’s security position as to these loans can be further strengthened~~declined by ~~obtaining the personal guarantees of the owners. This is a preferred approach to commercial accounts as it allows the Corporation to pursue assets of the owner in addition to assets of~~$0.2 million, or 1.2%, from balances at June 30, 2019, and the commercial ~~entity. Management can also obtain additional collateral by securing the inventory of the business. The portfolio of all types of C&I~~and industrial agricultural loans showed an increase of $7.3 million, or 10.0%, from September 30, 2016 to September 30, 2017. As of September 30, 2017, this category of commercial loans was made up of $41.7 million of C&I loans (outside of tax-free and agricultural loans), $19.6 million of tax-free loans, and $18.5 million of agriculture loans. In the case of the Corporation, all of the $19.6 million of tax-free loans are to local municipalities. C&I loans remained unchanged since September 30, 2016, tax-free loans increased ~~by $8.1 million, or 70.9%, and agriculture loans decreased~~ by $0.9 million, or ~~4.5%, compared to balances at September 30, 2016. The increase in tax-free loans occurred as a result of scheduled draws on tax-free loans to several municipalities originated in 2016.~~4.6%.

The consumer loan portfolio ~~increased~~decreased to ~~$5.2~~$5.1 million at ~~September~~June 30, ~~2017,~~2020, from ~~$4.7~~$8.4 million at ~~September~~June 30, ~~2016.~~2019. Consumer loans made up ~~0.9%~~0.6% of total loans on ~~September~~June 30, ~~2017,~~2020, and ~~0.8%~~1.2% on June 30, 2019. The decrease in consumer loans since June 30, 2019, was primarily due to a large-balance consumer purpose loan made to a high net worth customer that was paid off in the third quarter of ~~loans on September 30, 2016.~~2019. The long-term trend over the past decade has seen homeowners turning to the equity in their homes to finance cars and education rather than traditional consumer loans ~~for those expenditures.~~that are generally unsecured. Slightly higher demand for unsecured credit is ~~just slightly outpacing~~being outpaced by principal payments on existing loans resulting in the ~~small increase~~decrease in balances. Management anticipates that the Corporation’s level of consumer loans will likely remain stable as a percentage of the portfolio, as the need for additional unsecured credit is generally offset by those borrowers wishing to reduce debt levels and move away from the higher cost of unsecured financing relative to other forms of real estate secured financing.

Non-Performing Assets

Non-performing assets include:

Nonaccrual loans

Loans past due 90 days or more and still accruing

Troubled debt restructurings

Other real estate owned

5961

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)

September 30, December 31, September 30,
2017 2016 2016
$ $ $

Nonaccrual loans 687 721 805
Loans past due 90 days or more and still accruing 254 384 666
Troubled debt restructurings 263 — —
Total non-performing loans 1,204 1,105 1,471

Other real estate owned — — —

Total non-performing assets 1,204 1,105 1,471

Non-performing assets to net loans 0.21% 0.20% 0.26%

	June 30,			December 31,			June 30,
	2020			2019			2019
	$			$			$

Nonaccrual loans		886			1,984			1,809
Loans past due 90 days or more and still accruing		309			821			242
Troubled debt restructurings		1,941			1,157			—
Total non-performing loans		3,136			3,962			2,051

Other real estate owned		—			—			—

Total non-performing assets		3,136			3,962			2,051

Non-performing assets to net loans		0.38	%		0.53	%		0.29	%

The total balance of non-performing assets ~~decreased~~increased by ~~$267,000,~~$1.1 million, or ~~18.2%~~52.9%, from ~~September~~June 30, ~~2016~~2019 to ~~September~~June 30, ~~2017, and increased~~2020, but declined by ~~$99,000,~~$0.8 million, or ~~9.0%~~20.8%, from balances at December 31, ~~2016 to September 30, 2017.~~2019. The ~~decrease~~increase from the prior year was primarily due to ~~lower~~higher levels of ~~non-accrual loans and loans past due 90 days or more partially offset by the addition of one agriculture loan restructured in the second quarter of 2017 that is now considered a~~ troubled debt ~~restructuring (TDR)~~restructurings (TDRs). ~~The loan is considered a TDR because the borrower was granted a six-month interest-only period on this loan. The decrease in non-accrual~~Non-accrual loans ~~was due to pay downs received on a business mortgage causing a reduction in outstanding balance on this loan. Additionally,~~decreased by $923,000, or 51.0%, since June 30, 2019, and loans past due 90 days or more and still accruing ~~decreased~~were up slightly from the prior year period, but down by ~~$412,000 primarily due~~$512,000, or 62.4% since December 31, 2019. There were two non-performing TDR loans and one performing TDR loan as of June 30, 2020. The first, an agriculture mortgage of $677,000 had cash flow difficulties and a modification in payment terms was made to ~~loans that were previously past due being brought current due~~allow annual interest and principal payments. The second TDR loan was a $439,000 1–4 family real estate secured loan with a payment modification made in the form of granting a nine-month interest-only payment. This second TDR loan was both non-accrual and TDR. For this above non-performing chart, the $439,000 real estate loan is listed under TDR loans. An additional $824,000 loan to ~~payments received.~~ a farmer was classified as TDR as of December 31, 2019.

A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender.

Management continues to monitor delinquency trends and the level of non-performing loans closely. At this time, management believes that the potential for material losses related to non-performing loans is increasing with the level of ~~classified loans increasing from the lower levels~~delinquencies slightly higher than those experienced in ~~2016.~~2019.

There was no other real estate owned (OREO) as of ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, or ~~September~~June 30, ~~2016.~~2019.

Allowance for Loan Losses

The allowance for loan 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 loan losses. This calculation is based upon a systematic methodology for determining the allowance for loan losses in accordance with generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in the loan portfolio. The allowance calculation includes specific provisions for under-performing loans and general allocations to cover anticipated losses on all loan types based on historical losses. The calculation is also influenced by nine qualitative factors that are adjusted on a quarterly basis as needed. Based on the quarterly loan loss calculation, management will adjust the allowance for loan losses through the provision as necessary. Changes to the allowance for loan losses during the year are primarily affected by five main factors:

Historical loan losses

Qualitative factor adjustments including levels of delinquent and non-performing loans

Growth trends of the loan portfolio

Recovery of loans previously charged off

Provision for loan losses

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Allowance for Loan Losses table below shows the activity in the allowance for loan losses for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2020 and ~~September~~June 30, ~~2016.~~2019. At the bottom of the table, two benchmark percentages are shown. The first is net charge-offs as a percentage of average loans outstanding for the year. The second is the total allowance for loan losses as a percentage of total loans.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

ALLOWANCE FOR LOAN LOSSES

(DOLLARS IN THOUSANDS)

	Nine Months Ended						Six Months Ended
	September 30,						June 30
	2017			2016		��	2020			2019
	$			$			$			$

Balance at January 1,		7,562			7,078			9,447			8,666
Loans charged off:
Real estate		—			—			—			—
Commercial and industrial		14			23			—			—
Consumer		16			24			16			23
Total charged off		30			47			16			23

Recoveries of loans previously charged off:
Real estate		(20	)		(10	)		(11	)		(87	)
Commercial and industrial		(21	)		(185	)		(2	)		(14	)
Consumer		(5	)		(9	)		(1	)		(3	)
Total recovered		(46	)		(204	)		(14	)		(104	)
Net loans recovered		(16	)		(157	)
Net loans charged off (recovered)								2			(81	)

Provision charged to operating expense		450			200			1,325			210

Balance at September 30,		8,028			7,435
Balance at June 30,								10,770			8,957

Net recoveries as a % of average total loans outstanding		(0.00%	)		(0.03%	)
Net charge-offs as a % of average total loans outstanding								0.00	%		(0.01	%)

Allowance at end of period as a % of total loans		1.37%			1.31%			1.29	%		1.25	%

Charge-offs for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, were ~~$30,000,~~$16,000, compared to ~~$47,000~~$23,000 for the same period in ~~2016.~~2019. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first ~~nine~~six months of ~~2017~~2020 and ~~2016,~~2019, the Corporation charged off several smaller amounts related to consumer loans. Recoveries were lower in the first six months of 2020 as the Corporation recovered a larger amount related to a real estate borrower in 2019 with only small ~~loans classified as commercial and industrial loans as well as several small consumer loans were charged off. Recoveries exceeded charge-offs~~amounts recovered in the ~~nine~~first six months ended September 30, 2017, as well as 2016. In 2017, several recoveries on commercial and industrial loans as well as consumer loans were received and in the nine months ended September 30, 2016, a large commercial and industrial recovery was received as well as small real estate and consumer recoveries resulting in the net recovery position for the year-to-date periods.of 2020.

The allowance as a percentage of total loans represents the portion of the total loan portfolio for which an allowance has been provided. Management regularly reviews the overall risk profile of the loan portfolio and the impact that current economic trends have on the Corporation’s loans. The financial industry typically evaluates the quality of loans on a scale with “unclassified” representing healthy loans, “special mention” being the first indication of credit concern, and several successive classified ratings indicating further credit declines of “substandard,” “doubtful,” and, ultimately, “loss.”

The Corporation’s level of classified loans was $25.1 million on ~~September~~June 30, ~~2017, was up $7.1~~2020, compared to $17.8 million ~~or 51.1%, from the balance as of September~~on June 30, 2016. The Corporation’s total classified loans based on outstanding balances were $21.0 million as of September 30, 2017, $14.2 million as of December 31, 2016, and $13.9 million as of September 30, 2016.2019. Total classified loans ~~did not materially increase until~~increased during 2019 and through the first ~~quarter~~six months of ~~2017 when a large business relationship with over $5 million~~2020 primarily related to the downgrade of ~~loan balances was classified as substandard. In addition, a $2 million~~several unrelated agricultural relationship was also placed on substandard in March 2017. These two reclassifications were responsible for a $7 million increase in classified loans from December 31, 2016 to March 31, 2017. In April of 2017, the Corporation received a $1.7 million payoff on the $2 million substandard agricultural relationship. Classified loans grew further in the second quarter as two agricultural relationships with balances of $3.3 million were classified as substandard, along with two business customers with $2 million of loan balances. During the third quarter of 2017, payoffs were received on two classified loan relationships resulting in a decline in classified loans between June 30, 2017, and September 30, 2017.

customers. Having more loans in a classified status could result in a larger allowance as higher amounts of projected historical losses and qualitative factors are attached to these loans. In addition to this impact, management performs a specific allocation test on these classified loans. There was ~~$98,000~~$64,000 of specifically allocated allowance against the classified loans as of ~~September~~June 30, ~~2017, and no~~2020, $189,000 of specific allocation as of December 31, ~~2016, or September~~2019, and $105,000 of specific allocation as of June 30, ~~2016. Classified loans could require larger provision amounts due to a higher potential risk of loss, so~~2019. Typically, as the classified loan balances fluctuate, the associated specific allowance applied to them fluctuates, resulting in a lower or higher required allowance.

6163

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The net charge-offs as a percentage of average total loans outstanding indicates the percentage of the Corporation’s total loan portfolio that has been charged off during the period, after reducing charge-offs by recoveries. The Corporation continues to experience ~~very~~ low net charge-off percentages due to strong credit practices. ~~For the first nine months of 2017 and 2016, there were more recoveries than charge-offs resulting in a net recovery position.~~ Management continually monitors delinquencies, classified loans, and non-performing loans closely in regard to how they may impact charge-offs in the future. ~~Management does anticipate charging off one commercial loan in~~The actual charge-offs have been running at low levels, and management expects this to continue through the ~~fourth quarter~~remainder of 2017 that was on non-accrual status as of September 30, 2017. Management anticipates that charge-off to be approximately $275,000. The particular business has not been operating since 2016 and the property is expected to go to sheriff sale in the first quarter of 2018. Management is not aware of any other significant charge-offs that could occur in the fourth quarter of 2017.2020. Management practices are in place to reduce the number and severity of losses. In regard to severely delinquent loans, management attempts to improve the Corporation’s collateral or credit position and, in the case of a loan workout, intervene to minimize additional charge-offs.

The allowance as a percentage of total loans was ~~1.37%~~1.29% as of ~~September~~June 30, ~~2017, 1.32%~~2020, and 1.25% as of December 31, ~~2016,~~2019, and ~~1.31% as of September~~June 30, ~~2016.~~2019. Management anticipates that the allowance percentage will ~~remain fairly stable~~increase during the remainder of ~~2017,~~2020, as the allowance balance is increased with additional provision expense ~~to account for~~and the total loan ~~growth throughout~~balance decreases with the ~~year.~~payoff of PPP loans. It is typical for the allowance for loan losses to contain a small amount of excess reserves. ~~Management desires~~Over the long term, management targets and excess reserve at approximately 5% knowing that the ~~amount of excess~~ reserve ~~in the allowance for loan losses be maintained between 5% and 10%.~~can fluctuate. The excess reserve stood at ~~5.8%~~3.3% as of ~~September~~June 30, ~~2017.~~2020. Management would anticipate that this unallocated portion of the allowance could increase throughout the remainder of 2020.

Premises and Equipment

Premises and equipment, net of accumulated depreciation, ~~increased~~decreased by ~~$1.6~~$0.4 million, or ~~7.0%~~1.6%, to ~~$24.4~~$24.9 million as of ~~September~~June 30, ~~2017,~~2020, from ~~$22.8~~$25.3 million as of ~~September~~June 30, ~~2016.~~2019. As of ~~September~~June 30, ~~2017, $1,285,000~~2020, $178,000 was classified as construction in process compared to ~~$156,000~~$104,000 as of ~~September~~June 30, ~~2016.~~2019. Fixed assets ~~increased~~declined as a result of ~~the Corporation’s eleventh full-service branch office opened~~depreciation outpacing new purchases in Morgantown, PA and the limited-service location opened in Georgetown, PA, both in the third quarter of 2016. Additionally, fixed assets increased due to assets deployed at a temporary location opened in Strasburg, PA, and the land purchased to build the permanent location also in Strasburg, PA, both in the first quarter of 2017. Premises and equipment, specifically construction in process, will continue to grow during 2017 as construction proceeds on the Corporation’s new Strasburg, PA branch office.2020.

Regulatory Stock

The Corporation owns multiple forms of regulatory stock that is required in order to be a member of the Federal Reserve Bank (FRB) and members of banks such as the Federal Home Loan Bank (FHLB) and Atlantic Community Bankers Bank (ACBB). The Corporation’s ~~$6.1~~$6.9 million of regulatory stock holdings as of ~~September~~June 30, ~~2017,~~2020, consisted of ~~$5.9~~$6.7 million of FHLB of Pittsburgh stock, $151,000 of FRB stock, and $37,000 of Atlantic Community Bancshares, Inc. stock, the Bank Holding Company of ACBB. All of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the investment is carried at book value and there is no fair market value adjustment.

The Corporation’s investment in FHLB stock is required for membership in the organization. The amount of stock required is dependent upon the relative size of outstanding FHLB borrowings and mortgage activity. Excess stock is typically repurchased from the Corporation at par if the borrowings decline to a predetermined level. The Corporation’s FHLB stock position was ~~$5.9~~$6.7 million on ~~September~~June 30, ~~2017, $5.2~~2020, $7.1 million on December 31, ~~2016,~~2019, and ~~$5.0~~$6.8 million on ~~September~~June 30, ~~2016,~~2019, with no excess capital stock position. Any future stock repurchases would be the result of lower borrowing balances. Stock repurchases by the FHLB occur every quarter.

The 2020 second quarter dividend declaration made on FHLB ~~of Pittsburgh has paid a quarterly dividend since the resumption of their dividend in the first quarter of 2012. In the first two quarters of 2016, FHLB dividend yield was 5.00% annualized on activity~~ stock ~~and 3.00% annualized on membership stock. The stock declarations made~~ by FHLB of Pittsburgh ~~in the third and fourth quarters of 2016 and the first, second, and third quarters of 2017, is~~was at a ~~5.00%~~6.25% annualized yield on activity stock and ~~2.00%~~3.00% annualized yield on membership stock. Most of the Corporation’s dividend is based on the activity stock, which is based on the amount of borrowings and mortgage activity with FHLB. ~~Management continues to monitor the financial condition of the FHLB quarterly to assess its ability to continue to regularly repurchase excess capital stock and pay a dividend.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

Management believes that the FHLB will continue to be a primary source of wholesale liquidity for both short-term and long-term funding. Management’s strategy in terms of future use of FHLB borrowings is addressed under the Borrowings section of this Management’s Discussion and Analysis.

Deposits

The Corporation’s total ending deposits at June 30, 2020, increased by ~~$21.3~~$133.8 million, or ~~2.6%~~13.7%, and ~~$46.2~~by $166.3 million, or ~~5.8%~~17.7%, from December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016,~~2019, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks for safe places to ~~invest~~deposit money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since ~~September~~June 30, ~~2016,~~2019, with the changes being a ~~$41.1~~$120.9 million, or ~~15.8%~~35.0% increase in non-interest bearing demand deposit accounts, a ~~$2.5~~$19.1 million, or ~~11.6% decrease~~86.9% increase in interest bearing demand ~~accounts,~~balances, a ~~$13.7~~$12.0 million, or ~~14.9% decrease~~13.0% increase in NOW balances, a ~~$13.1~~$15.6 million, or ~~15.3% increase~~11.2% decrease in money market account balances, a ~~$21.1~~$40.9 million, or ~~12.6%~~19.8% increase in savings account balances, and a ~~$9.8~~$11.0 million, or ~~6.2%~~8.0% decrease in time deposit balances.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The ~~significant~~ growth across most categories of core deposit accounts is a direct result of the ~~local~~PPP loan funding process as many customers applied for PPP loans with the approved funds deposited directly into their ENB deposit accounts. In addition, customer spending patterns have changed throughout the COVID-19 pandemic with government aid helping to financially support individuals and businesses and customers spending less and saving more. With the decrease in rates that occurred during the first half of 2020, customer deposits increased with few options in the market ~~disruption caused by two large mergers, which impacted the three counties the Corporation primarily serves. The Corporation has gained many new customers as~~to earn a result of being a long-standing safe community bank known for offering understandable financial products and services with lower fees. The prolonged historically low interest rates also continue to aid the Corporation in growing core deposits as a result of very little difference between the core deposit rates and short-term time deposit rates.return. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility. Management believes ~~these~~ deposit ~~account types will continue~~balances may decrease through the remainder of 2020 with many variables impacting economic activity and with PPP loans being forgiven and funds being utilized to ~~hold higher balances until short-term interest rates increase further.~~support ongoing business operations.

The Deposits by Major Classification table, shown below, provides the balances of each category for ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016.~~2019.

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

September 30, December 31, September 30,
2017 2016 2016
$ $ $

Non-interest bearing demand 301,978 280,543 260,873
Interest bearing demand 19,279 20,108 21,799
NOW accounts 78,061 85,540 91,719
Money market deposit accounts 99,235 93,943 86,096
Savings accounts 188,015 175,753 166,904
Time deposits 148,513 156,381 158,300
Brokered time deposits 3,744 5,223 6,969
Total deposits 838,825 817,491 792,660

	June 30,		December 31,		June 30,
	2020		2019		2019
	$		$		$

Non-interest bearing demand		466,392		363,857		345,483
Interest bearing demand		41,083		25,171		21,982
NOW accounts		104,593		96,941		92,578
Money market deposit accounts		123,212		141,649		138,793
Savings accounts		246,762		211,285		205,902
Time deposits		125,872		135,185		136,868
Total deposits		1,107,914		974,088		941,606

The growth and mix of deposits is often driven by several factors including:

Convenience and service provided

Current rates paid on deposits relative to competitor rates

Level of and perceived direction of interest rates

Financial condition and perceived safety of the institution

Possible risks associated with other investment opportunities

Level of fees on deposit products

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The Corporation has been a stable presence in the local market area that has experienced several large bank ~~mergers.~~mergers over the past several years. Three new convenient locations were added since 2016, significantly expanding the Corporation’s footprint, with a presence in three counties with a total of thirteen branch locations. The Corporation has a history of offering ~~very~~ competitive interest rates and fair and understandable service fees ~~as well as attractive interest rates~~ because of a strong commitment to the customers and the communities that it serves. Management has always priced products and services in a manner that makes them affordable for all customers. This in turn creates a high degree of customer loyalty and a stable deposit base. Additionally, as financial institutions have come under increased scrutiny from both regulators and customers, the Corporation has maintained an outstanding reputation. Management believes the Corporation’s deposit base has benefited as a result of a growing desire by customers to seek a longstanding, reliable financial institution as a partner to meet their financial needs.

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of ~~September~~June 30, ~~2017,~~2020, time deposit balances ~~excluding brokered deposits,~~ had decreased ~~$7.9~~$11.0 million, or ~~5.0%~~8.0%, from June 30, 2019, and ~~$9.8~~$9.3 million, or ~~6.2%~~6.9%, from December 31, ~~2016 and September 30, 2016, respectively.~~2019. The Corporation has experienced a slow and steady shift in deposit trends over the past five years as customers have moved money from time deposits into core checking and savings accounts. With the Federal Reserve rate decreases in 2019 and the first quarter of 2020, there is minimal differences between shorter term CD rates and interest bearing non-maturity deposits, influencing customers ~~are more inclined~~ to accumulate their funds in a liquid account that can be accessed at any time. This has resulted in declining time deposit balances and more significant growth in the core deposit areas. ~~Management anticipates that the recent declines in time deposits will likely continue until interest rates increase and cause more of a separation between longer-term rates and overnight rates.~~

Index

~~Time deposits have FDIC insurance coverage insuring no loss of principal up to $250,000 per account, based on certain account structures. As a result of the Dodd-Frank Wall Street Reform~~ENB FINANCIAL CORP
Management’s Discussion and Consumer Protection Act of 2010, the $250,000 FDIC insurance coverage on all deposit accounts was made permanent. This has caused an increase in the percentage of time deposits over $100,000 held by the Corporation. While total time deposits continue to decline in the present environment, the percentage of time deposits over $100,000 compared to total time deposits has increased and is expected to remain at these higher percentages due to the FDIC coverage.Analysis

Borrowings

Total borrowings were ~~$68.4~~$65.1 million, ~~$69.6~~$78.1 million, and ~~$75.8~~$74.6 million as of ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016,~~2019, respectively. Of these amounts, ~~$8.3 million, and $12.1~~$0.2 million reflect short-term funds ~~for~~as of December 31, ~~2016, and September 30, 2016, respectively,~~2019, with no short-term funds outstanding as of ~~September~~June 30, ~~2017.~~2020 or 2019. Short-term funds are used for immediate liquidity needs and are not typically part of an ongoing liquidity or interest rate risk strategy; therefore, they fluctuate more rapidly. When short-term funds are used, they are purchased through correspondent and member bank relationships as overnight borrowings or through the FHLB for terms less than one year.

Total long-term borrowings, borrowings initiated for terms longer than one year, were ~~$68.4~~$65.1 million as of ~~September~~June 30, ~~2017, $61.3~~2020, $77.9 million as of December 31, ~~2016,~~2019, and ~~$63.8~~$74.6 million as of ~~September~~June 30, ~~2016.~~2019. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances at ~~September~~June 30, ~~2017,~~2020, December 31, ~~2016,~~2019, and ~~September~~June 30, ~~2016.~~2019. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. Over the course of the past few years, the Corporation has minimally changed the ladder of long-term FHLB borrowings, by replacing maturing advances with new long-term advances typically at rate savings. ~~More recently, with interest~~With the declining rates ~~rising, it is becoming increasingly difficult to fund new borrowings~~throughout the first six months of 2020, management took advantage of the environment and prepaid $30.5 million of FHLB advances for a total penalty amount of $154,000 and initiated a select number of newer advances at ~~rates~~ lower ~~than the maturing borrowings.~~rates. Management will continue to analyze and compare the costs and benefits of borrowing versus obtaining funding from deposits.

In order to limit the Corporation’s exposure and reliance to a single funding source, the Corporation’s Asset Liability Policy sets a goal of maintaining the amount of borrowings from the FHLB to 15% of asset size. As of ~~September~~June 30, ~~2017,~~2020, the Corporation was significantly under this policy guideline at ~~6.8%~~5.0% of asset size with ~~$68.4~~$65.1 million of total FHLB borrowings. The Corporation also has a policy that limits total borrowings from all sources to 150% of the Corporation’s capital. As of ~~September~~June 30, ~~2017,~~2020, the Corporation was significantly under this policy guideline at ~~67.8%~~53.3% of capital with ~~$68.4~~$65.1 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of ~~2016~~2019 and through the first ~~nine~~six months of ~~2017.~~2020.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently ~~$349.8~~$471.7 million. The Corporation’s two internal policy limits mentioned above are far more restrictive than the FHLB MBC, which is calculated and set quarterly by FHLB.

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 loan losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio.

The following tables reflect the capital ratios for the Corporation and Bank compared to the regulatory capital requirements.

6566

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

REGULATORY CAPITAL RATIOS:
Regulatory Requirements
Adequately Well
As of September 30, 2017 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets
Consolidated 15.4% 8.0% 10.0%
Bank 15.2% 8.0% 10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated 14.2% 6.0% 8.0%
Bank 14.0% 6.0% 8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 14.2% 4.5% 6.5%
Bank 14.0% 4.5% 6.5%

Tier 1 Capital to Average Assets
Consolidated 10.2% 4.0% 5.0%
Bank 10.1% 4.0% 5.0%

As of December 31, 2016
Total Capital to Risk-Weighted Assets
Consolidated 15.2% 8.0% 10.0%
Bank 15.0% 8.0% 10.0%

Tier I Capital to Risk-Weighted Assets
Consolidated 14.1% 6.0% 8.0%
Bank 13.9% 6.0% 8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated 14.1% 4.5% 6.5%
Bank 13.9% 4.5% 6.5%

Tier I Capital to Average Assets
Consolidated 10.2% 4.0% 5.0%
Bank 10.1% 4.0% 5.0%

As of September 30, 2016
Total Capital to Risk-Weighted Assets
Consolidated 15.3% 8.0% 10.0%
Bank 15.1% 8.0% 10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated 14.2% 6.0% 8.0%
Bank 14.0% 6.0% 8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 14.2% 4.5% 6.5%
Bank 14.0% 4.5% 6.5%

Tier 1 Capital to Average Assets
Consolidated 10.4% 4.0% 5.0%
Bank 10.2% 4.0% 5.0%

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~REGULATORY CAPITAL RATIOS:

			Regulatory Requirements
			Adequately	Well
As of June 30, 2020		Capital Ratios	Capitalized	Capitalized
Total Capital to Risk-Weighted Assets
	Consolidated	13.4%	8.0%	10.0%
	Bank	13.3%	8.0%	10.0%

Tier 1 Capital to Risk-Weighted Assets
	Consolidated	12.3%	6.0%	8.0%
	Bank	12.1%	6.0%	8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
	Consolidated	12.3%	4.5%	6.5%
	Bank	12.1%	4.5%	6.5%

Tier 1 Capital to Average Assets
	Consolidated	9.3%	4.0%	5.0%
	Bank	9.2%	4.0%	5.0%

As of December 31, 2019
Total Capital to Risk-Weighted Assets
	Consolidated	14.5%	8.0%	10.0%
	Bank	14.4%	8.0%	10.0%

Tier I Capital to Risk-Weighted Assets
	Consolidated	13.4%	6.0%	8.0%
	Bank	13.2%	6.0%	8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
	Consolidated	13.4%	4.5%	6.5%
	Bank	13.2%	4.5%	6.5%

Tier I Capital to Average Assets
	Consolidated	9.9%	4.0%	5.0%
	Bank	9.8%	4.0%	5.0%


As of June 30, 2019
Total Capital to Risk-Weighted Assets
	Consolidated	14.7%	8.0%	10.0%
	Bank	14.6%	8.0%	10.0%

Tier 1 Capital to Risk-Weighted Assets
	Consolidated	13.6%	6.0%	8.0%
	Bank	13.4%	6.0%	8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
	Consolidated	13.6%	4.5%	6.5%
	Bank	13.4%	4.5%	6.5%

Tier 1 Capital to Average Assets
	Consolidated	10.0%	4.0%	5.0%
	Bank	9.9%	4.0%	5.0%

Dividends play a vital role in the management of capital levels of the Corporation. Management seeks a balance between maintaining a sufficient cushion of excess capital above regulatory limits versus the payment of dividends to the shareholders as a direct return of their investment. Due to a constant stream of stable earnings, the payment of a dividend is needed to maintain capital at acceptable levels in order to provide an adequate return of equity to the shareholders.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The Corporation’s dividends per share for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, were ~~$0.84, 3.7% higher than~~$0.32, a 4.9% increase from the ~~$0.81 per share dividend~~$0.305 paid out in the first ~~nine~~six months of ~~2016.~~2019. Dividends are paid from current earnings and available retained earnings. The Corporation’s current capital plan calls for management to maintain tier I capital to average assets between ~~10.0%~~9.5% and 12.0%. The Corporation’s current tier I capital ratio is ~~10.2%~~9.3%. This ratio has fallen below the lower limit in the Corporation’s capital plan primarily as a result of the significant balance sheet growth during the first half of 2020. Management anticipates this ratio will be back within guidelines by the end of 2020 as the balance sheet should decline with the payoff of PPP loans. As a secondary measurement, the capital plan also targets a long-term dividend payout ratio in the range of ~~35%~~30% to ~~40%~~45%. This ratio will vary according to income, but over the long term, the Corporation’s goal is to maintain and target a payout ratio within this range. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the payout ratio was ~~41.8%~~31.1%. Management’s goal is to maintain all regulatory capital ratios at current levels. Future dividend payout ratios are dependent on the future level of earnings and other factors that impact the level of capital.

The amount of unrealized gain or loss on the securities portfolio is reflected, net of tax, as an adjustment to capital, as required by U.S. generally accepted accounting principles. This is recorded as accumulated other comprehensive income or loss in the capital section of the consolidated balance sheet. An unrealized gain increases capital, while an unrealized loss reduces capital. This requirement takes the position that, if the Corporation liquidated the securities portfolio at the end of each period, the current unrealized gain or loss on the securities portfolio would directly impact the Corporation’s capital. As of ~~September~~June 30, ~~2017,~~2020, the Corporation showed an unrealized ~~loss,~~gain, net of tax, of ~~$2,232,000,~~$4,522,000, compared to an unrealized ~~loss~~gain of ~~$4,885,000~~$1,600,000 at December 31, ~~2016,~~2019, and an unrealized gain of ~~$1,221,000~~$298,000 as of ~~September~~June 30, ~~2016.~~2019. These unrealized gains, ~~and losses,~~ net of tax are excluded from capital when calculating the tier I capital to average assets numbers above. The amount of unrealized gain or loss on the securities portfolio, shown net of tax, as an adjustment to capital, does not include any actual impairment taken on securities, which is shown as a reduction to income on the Corporation’s Consolidated Statements of Income. No impairment was recorded in the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, or in the same prior year period. The changes in unrealized gains and losses are due to normal changes in market valuations of the Corporation’s securities as a result of interest rate movements.

Regulatory Capital Changes

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:

A minimum ratio of common equity tier I capital to risk-weighted assets of 4.5%.

A minimum ratio of tier I capital to risk-weighted assets of 6%.

A minimum ratio of total capital to risk-weighted assets of 8%.

A minimum leverage ratio of 4%.

In addition, the final rules established a common equity tier I capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016.

Under the initially proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier I capital. The final rule allows community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election was made by the Corporation with the filing of the first quarter Call Report as of March 31, 2015.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier I capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009, and banking organizations that were mutual holding companies as of May 19, 2010. The Corporation does not have trust preferred securities or cumulative perpetual preferred stock with no plans to add these to the capital structure.

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

The proposed rules would have also modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which was based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. The Corporation does not securitize assets and has no plans to do so.

Under the ~~new~~ rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the previous general risk-based capital rule. The ~~new~~ rules also increased the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and made selected other changes in risk weights and credit conversion factors.

Management has evaluated the impact of the above rules on levels of the Corporation’s capital. The final rulings were more favorable in terms of the items that would have a more significant impact to the Corporation and community banks in general. Specifically, the AOCI final ruling, which would have had the greatest negative impact to capital, provided the Corporation with an opt-out provision. The final ruling on the risk weightings of mortgages was favorable and did not have a material negative impact. The rulings as to trust preferred securities, preferred stock, and securitization of assets are not applicable to the Corporation, and presently the revised treatment of MSAs is not material to capital. The remaining changes to risk weightings on several items mentioned above such as past-due loans and certain commercial real estate loans do not have a material impact to capital presently, but could change as these levels change.

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation’s financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as of ~~September~~June 30, ~~2017.~~2020.

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

	~~September~~June 30,
	~~2017~~2020
	$
Commitments to extend credit:
Revolving home equity		~~75,381~~112,830
Construction loans		~~16,283~~30,834
Real estate loans		~~51,194~~70,043
Business loans		~~101,488~~149,913
Consumer loans		~~1,080~~1,344
Other		~~4,404~~4,889
Standby letters of credit		~~11,086~~8,834

Total		~~260,916~~378,687

6869

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Significant Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to affect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant impact on the Corporation’s business operations as its provisions take effect. It is difficult to predict at this time what specific cumulative impact Dodd-Frank and the yet-to-be-written implementing rules and regulations will have on community banks. However, it is expected that, at a minimum, they will increase the Corporation’s operating and compliance costs and could increase interest expense. Among the provisions that have already or are likely to affect the Corporation are the following:

Holding Company Capital Requirements

Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from tier I capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, are consistent with safety and soundness.

Deposit Insurance

Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions, and credit unions to $250,000 per depositor. Additionally, on February 7, 2011, the Board of Directors of the FDIC approved a final rule based on the Dodd-Frank Act that revises the assessment base from one based on domestic deposits to one based on assets. This change, which was effective in April 2011, saved the Corporation a significant amount of FDIC insurance premiums from the significantly higher FDIC insurance premiums placed into effect after the financial crisis.

Corporate Governance

Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. The Corporation was exempt from these requirements until January 21, 2013, due to its status as a smaller reporting company. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Consumer Financial Protection Bureau

Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy Provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

6970

Index

ENB FINANCIAL CORP
Management’s Discussion and Analysis

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.

Limits on Interstate Acquisitions and Mergers

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition – the acquisition of a bank outside its home state – unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

7071

Index

ENB FINANCIAL CORP
~~Management’s Discussion and Analysis~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a financial institution, the Corporation is subject to three primary risks:

Credit risk

Liquidity risk

Interest rate risk

The Board of Directors has established an Asset Liability Management Committee (ALCO) to measure, monitor, and manage these primary market risks. The Asset Liability Policy has instituted guidelines for all of these primary risks, as well as other financial performance measurements with target ranges. The Asset Liability goals and guidelines are consistent with the Strategic Plan goals related to financial performance.

Credit Risk

For discussion on credit risk refer to the sections in Item 2. Management’s Discussion and Analysis, on securities, non-performing assets, and allowance for loan losses.

Liquidity Risk

Liquidity refers to having an adequate supply of cash available to meet business needs. Financial institutions must ensure that there is adequate liquidity to meet a variety of funding needs, at a minimal cost. Minimal cost is an important component of liquidity. If a financial institution is required to take significant action to obtain funding, and is forced to utilize an expensive source, it has not properly planned for its liquidity needs. Funding new loans and covering deposit withdrawals are the primary liquidity needs of the Corporation. The Corporation uses a variety of funding sources to meet liquidity needs, such as:

Deposits

Loan repayments

Maturities and sales of securities

Borrowings from correspondent and member banks

~~Brokered deposits~~

Current earnings

As noted in the discussion on deposits, customers have historically provided the Corporation with a reliable and steadily increasing source of funds liquidity. The Corporation also has in place relationships with other banking institutions for the purpose of buying and selling Federal funds. The lines of credit with these institutions provide immediate sources of additional liquidity. The Corporation currently has unsecured lines of credit totaling $32 million. This does not include amounts available from member banks such as the Federal Reserve Discount Window or the FHLB of Pittsburgh.

Management uses a cumulative maturity gap analysis to measure the amount of assets maturing within various periods versus liabilities maturing in those same periods. A gap ratio of 100% represents an equal amount of assets and liabilities maturing in the same stated period. Management monitors six-month, one-year, three-year, and five-year cumulative gaps to assist in determining liquidity risk. ~~The six-month and one-year gap ratios were within guidelines at September~~As of June 30, ~~2017, and the three and five-year~~2020, all maturity gap ratios were higher than corporate policy guidelines, due ~~primarily~~ to ~~higher cash levels~~a larger amount of loans and ~~faster loan prepayment speeds resulting~~securities now maturing in ~~more assets maturing within~~less than five years, influenced very directly by the ~~stated timeframes.~~PPP loans that will mature in the next one to two years. The ~~three-year~~six-month gap ratio was ~~143.1%, and five-year was 142.1%~~211.1%, compared to an upper policy ~~guidelines~~guideline of 155%; the one-year gap ratio was also 211.1%, compared to an upper policy guideline of 140%; the three-year gap ratio was 177.2%, compared to an upper guideline of 125%; and ~~115%~~the five-year gap ratio was 147.8%, ~~respectively. All~~compared to an upper policy guideline of ~~the gap ratios are higher than the ratios as of December 31, 2016. Given the fact that we are already in~~115%. The results show asset sensitivity. In a rising interest rate cycle with the likelihood of higher rates, ~~in both the near and long term forecasts, the elevated~~higher gap ratios would be more beneficial to the Corporation. ~~Management believes~~However, in a declining rate environment, being asset sensitive is unfavorable. Even though the Corporation shows asset sensitivity above policy guidelines for the longer-term gap measurements, it is likely we would be back in a rising rate environment for those longer three and five-year periods and having asset sensitivity would be beneficial in that case. The current asset sensitivity of the Corporation’s balance sheet does negatively impact performance in the current ~~gap ratios~~rates-down interest rate scenario as there are ~~appropriate and~~more assets repricing to lower rates than liabilities. This asset sensitivity will be beneficial in the next rates-up cycle. Management will continue to monitor ~~all gap ratios~~and manage the length of the balance sheet in order to ~~ensure proper~~sustain reasonable asset yields in a declining rate environment while still positioning for ~~future interest~~a likely rising rate ~~cycles.~~environment out in the future.

Index

~~Management has~~ENB FINANCIAL CORP

Gap ratios have been ~~maintaining higher~~increasing for the Corporation throughout 2019 and into 2020. The Corporation’s assets are moderately long, but the length of the securities portfolio and the loan portfolio is more than offset by the length of the Corporation’s core deposit liabilities in conjunction with holding high levels of cash and cash ~~equivalents~~equivalents. Beyond the non-maturity deposits, management is able to ~~assist in offsetting~~utilize the length of wholesale funding instruments to offset the declining length of the CD portfolio. Management believes that the Federal Reserve rate decreases will negatively impact net interest income for the remainder of 2020 as assets continue to reprice to lower levels. However, some savings can be achieved through deposits, primarily the CD portfolio, as the maturing CDs reprice to significantly lower levels.

The size and length of the Corporation’s ~~relatively long~~core deposit liabilities provide the most extension in terms of lengthening the liabilities on the balance sheet. The length of the core deposits is significantly longer than the Corporation’s longest term time deposits and wholesale borrowings. The mix of the Corporation’s liabilities alone would be sufficient to offset the Corporation’s longer assets and to maintain gap ratios within management’s guidelines.

Management desires to show reductions to the cost of funds and improve the loan-to-deposit ratio and does have a large securities portfolio ~~which~~to draw liquidity from in the event deposit growth slows down. Initially in February and March management was selling some securities to fund loan growth that was occurring. However, as deposit growth strengthened in April and May any security sales were related to repositioning the portfolio or taking gains as there was already more than sufficient liquidity available on the balance sheet. With gap ratios that are already sufficiently high, management can put more of the available cash to work earning higher returns than overnight funds earn.

Higher gap ratios are beneficial in providing financial flexibility for the Corporation. Higher gap ratios often are an indication that there are more short-term assets on the balance sheet, providing more available liquidity. The quickest way to elevate gap ratios is to retain higher levels of cash on the balance sheet. Management may desire to have higher gap ratios when factoring in future loan growth or other funding changes to the balance sheet. Since late 2018, management has ~~helped~~been actively working to increase the ~~gap ratios. The strategy of maintaining higher cash levels~~Corporation’s loan-to-deposit ratio. As the loan-to-deposit ratio increases and more loans go on to ~~improve~~the Corporation’s balance sheet, the asset mix will generally lengthen and the gap ratios will decline. As of June 30, 2020, the loan-to-deposit ratio was 75.5%, compared to 77.4%, at December 31, 2019, and ~~act~~76.3% at June 30, 2019. Management anticipates that the loan-to-deposit ratio will remain stable throughout 2020 as ~~an immediate hedge against liquidity risk and interest~~loan growth should remain moderate but deposits have been growing at a fast rate risk is expected to continue until the securities portfolio is materially shorter in duration. The Corporation’s securities portfolio measurements of duration and price volatility had been increasing between the third quarter of 2016 and the first quarter of 2017as well.

Management’s desired gap levels will also change due to the ~~natural extension~~direction of ~~MBS~~interest rates. In March 2020, the Federal Reserve cut the overnight interest rate by 150 basis points at two separate special Federal Reserve Board meetings. Cash and ~~CMO securities as interest rates rise,~~other short term assets were directly impacted by this change in overnight rates. If the Corporation’s liquid assets cannot be deployed into higher yielding longer term assets, then management will reduce the amount of cash and short-term assets to reduce the ~~higher levels of long municipal securities held~~exposure to future decreases in the ~~portfolio. However,~~overnight rate. Management believes the ~~securities duration and price volatility did decline during the second and third quarters of 2017, and are expected to~~overnight Federal funds rate will not decline further ~~due to selective sales of longer duration securities~~in 2020, but the economic environment is unpredictable and ~~natural aging of~~future rate changes will be dependent on the ~~portfolio. Since June 30, 2017 management has been selling longer duration municipal bonds~~national and ~~U.S. agencies, while purchasing shorter duration taxable securities including some floating rate instruments to better position the Corporation for higher rates.~~

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

It is likely that short term rates will increase further during the remainder of 2017, so management’s current position is to maintain high maturity gap percentages in preparation for higher rates, with a goal of reducing the 3 year and 5 year gap ratios once several additional Federal Reserve rate increases occur. Ideally, management would like to have all gap ratios back within guidelines when the approximate midpoint of the rates up cycle is reached. While higher gap ratios help the Corporation when interest rates do rise, the risk in maintaining high gap percentages is that, should interest rates not rise, management will have excess liquidity at lower short term rates. This is referred to as opportunity risk, whereby lower levels of income are being achieved than desired. Carrying high gap ratios in the current environment could also bring on an increased level of repricing risk should interest rates decrease, which could negatively impact the Corporation’s interest income and margin.global economic conditions.

The risk of liabilities repricing at higher interest rates is ~~increasing slightly~~decreasing in the present environment as the Corporation ~~has begun~~does not foresee the need to ~~increase some~~raise deposit interest rates ~~minimally.~~with the recent Federal Reserve rate decreases. A number of the Corporation’s maturing time deposits have already repriced to lower rates due to the rapid rate declines during March of 2020. However, a large portion of the Corporation’s deposits are core deposits with little ~~or no~~ repricing expected to occur in the near future. The ~~remainder of the~~ Corporation’s maturing ~~liabilities made up of~~ time deposits and borrowings are generally repricing to ~~slightly higher~~lower interest ~~rates.~~rates and will continue to do so throughout 2020. The Corporation’s average cost of funds was 3432 basis points as of ~~September~~June 30, ~~2017,~~2020, which is ~~very~~ low from an historic perspective. ~~However, this~~The Corporation’s average cost of funds was 49 basis points as of December 31, 2019, and 53 basis points as of June 30, 2019. This cost of funds will likely ~~begin to increase slightly~~decline further throughout the remainder of ~~2017.~~2020. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts. The Corporation’s cost of funds was 33 basis points as of December 31, 2016, and 35 basis points as of September 30, 2016. The cost of funds savings slowed during 2017, with the low of 31 basis points reached in March 2017. Since then the cost of funds has increased 3 basis points to 34 basis points. Given a higher level of liabilities repricing now management would expect the cost of funds to increase at a slightly faster pace going forward.

Deposits ~~have~~had not been very rate sensitive for a number of years as a result of the limited desirable rates available to the deposit customer. However, should market interest rates rise further in the remainder of 2017 and during 2018, customer behavior patterns would change and deposits would be more rate sensitive with a portion potentially leaving the Corporation.customers. The Corporation ~~has~~had experienced a steady growth in both non-interest bearing and interest bearing funds during this last prolonged and historically low interest rate ~~environment~~cycle, but in 2018 and ~~this trend continued throughout~~through 2019, deposit growth had been slower than in prior years. With the Federal Reserve rate declines in the first ~~nine months~~quarter of ~~2017. This trend can partially be attributed~~2020, deposit growth has once again been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations. Additionally, with the ~~market disruption that occurred~~government aid direct deposits and checks sent out in ~~2016 as a result~~April of ~~recent large local bank mergers that greatly impacted~~2020, the ~~Corporation’s market area.~~Corporation has experienced significant deposit growth since June 30, 2020.

Index

ENB FINANCIAL CORP

The performance of the equity markets also has a bearing on how much of the current deposits will remain at the Corporation. It is management’s observation that since the financial crisis, an element of the Corporation’s deposit customers has been reluctant to redeploy funds presently at banks back into the equity market. This became even more apparent with the COVID-19 pandemic and the volatility in the equity markets caused by this event. Investors have grown weary of the volatility of the equity markets. Negative events, primarily overseas, have caused multiple cycles of sharp equity declines followed by recoveries. With equity markets beginning to improve in 2017, there has been a resurgence of customers pulling funds from deposit accounts to reinvestfluctuations in the equity markets. ~~This trend could cause~~In 2019, the equity markets had very strong gains, which did not adversely impact the Corporation’s deposit ~~growth~~growth. In March 2020, with the outbreak of COVID-19, the equity markets recorded their biggest decline in recent history with the market down between 30% and 35% after huge sell-offs. The equity market has fluctuated up and down since then, but this unprecedented decline caused many customers to ~~slow or decline throughout~~keep their funds in banks and certainly contributed to the ~~remainder~~increase in the Corporation’s deposits through the first half of ~~2017.~~2020.

The Corporation’s net interest margin is ~~improving~~down from levels in the previous ~~quarter, primarily as a result of the Federal Reserve rate increase in March and June of 2017.~~quarter. Management’s future asset liability decisions will be dependent upon improvements in asset yield as well as the expected timing of further short-term rate ~~increases.~~increases or decreases. Management expects that the gap ratios will remain ~~within or~~ above the established guidelines throughout the remainder of ~~2017.~~2020.

It is important to stress that the gap ratios are a static measurement of the Corporation’s asset liability position. It is only one of many asset liability analysis tools management utilizes to measure, monitor, and manage both liquidity and interest rate risk. The deficiencies with the gap analysis are that it makes no provision for changes to the balance sheet out into the future and would not factor in changes that management would very likely make to mitigate future interest rate risk.

In addition to the cumulative maturity gap analysis discussed above, management utilizes a number of liquidity measurements that management believes has advantages over and gives better clarity to the Corporation’s present and projected liquidity than the static gap analysis offers.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The Corporation analyzes the following additional liquidity measurements in an effort to monitor and mitigate liquidity risk:

Core Deposit Ratio – Core deposits as a percentage of assets

Funding Concentration Analysis – Alternative funding sources outside of core deposits as a percentage of assets

Short-term Funds Availability – Readily available short-term funds as a percentage of assets

Securities Portfolio Liquidity – Cash flows maturing in one year or less as a percentage of assets and securities

Readily Available Unencumbered Securities and Cash – Unencumbered securities as a percentage of the securities portfolio and as a percentage of total assets

Borrowing Limits – Internal borrowing limits in terms of both FHLB and total borrowings

Three, Six, and Twelve-month Projected Sources and Uses of Funds – Projection of future liquidity positions

These measurements are designed to prevent undue reliance on outside sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available liquidity sources. As of ~~September~~June 30, ~~2017,~~2020, the Corporation was within guidelines for all of the above measurements ~~except~~with the ~~securities~~exception of the investment portfolio liquidity as a percent of total assets which was 3.47% as of June 30, 2020, compared to a policy range of 4% - 8%. This was primarily due to a much higher balance sheet at June 30, 2020. Investment liquidity is strong in the current low-rate environment and having higher levels of liquidity is not necessarily a good thing because it then gets reinvested at lower rates. When the PPP loans begin to decline and deposit balances come down, the investment portfolio liquidity will once again be a higher percentage of the ~~portfolio and as a percentage of~~ total assets. The policy calls for the Corporation to maintain securities portfolio cash flows maturing in one year or less between 15% and 25% of the total portfolio and between 4% and 8% of total assets and as of September 30, 2017, these cash flows represented 5.7% of the portfolio, and 1.8% of total assets, under the lower guidelines. When factoring in available overnight cash, the Corporation’s securities portfolio liquidity represented 13.5% of the portfolio, slightly under the policy guideline of 15% - 25%, and 4.3% of total assets, also below the policy guideline of 6% - 10%.balance sheet.

It is important for the Corporation to prepare for a rates-up environment and having more liquidity is advantageous as funds can be reinvested in higher yielding assets faster when sufficient liquidity exists. Management carried an average of approximately $40 million of cash and cash equivalents on a daily basis throughout the first nine months of 2017, with an ending balance of $44.2 million on September 30, 2017, and expects this will continue in the near future. AllThe Corporation’s liquidity measurements are tracked and reported quarterly by management to both observe trends and ensure the measurements stay within desired ranges. Management is confident that a sufficient amount of internal and external liquidity exists to provide for significant unanticipated liquidity needs.

Index

ENB FINANCIAL CORP

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

Changes in net interest income

Changes in net portfolio value

Financial modeling is used to forecast net interest income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under seven different interest rate scenarios. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, ~~300,~~ or ~~400~~300 basis points, or decrease 25, 50, or ~~100~~75 basis points. ~~Rates-down~~Currently, the flat-rate scenario seems more likely for the remainder of 2020, with the Federal funds rate at 0.25% as of June 30, 2020, compared to 2.50% as of June 30, 2019. The rates-down scenarios are ~~unlikely~~much less likely now with the Federal Reserve rate cuts that already occurred in 2019 and 2020. For that reason, management believes it appropriate to model rates down 25, 50, and 75 basis points to most adequately cover all the reasonably possible declining rate scenarios that the Corporation could face, while continuing to model rates up scenarios of 100, 200, and 300 basis points. While management had previously turned its focus to rates-down scenarios, with each Federal Reserve rate reduction, the ability to further reduce interest rates diminishes and the exposure to higher interest rates increases. The overnight Federal funds rate and the current U.S. Treasury rates are presently at low historical levels. Because of this ~~point so~~historical perspective, if management would take a neutral position in terms of the direction of forward interest rates, there is clearly more ~~focused~~long term risk of rates going up than down. So while in the near term it is likely we may see no Federal Reserve rate increases or decreases, management remains guarded about the impact of higher interest rates and continues to prepare for rate increases on ~~the rates-up scenarios.~~ a larger scale than decreases.

The results obtained through the use of forecasting models are based on a variety of factors. Both the net interest income and fair value forecasts make use of the maturity and repricing schedules to determine the changes to the balance sheet over the course of time. Additionally, there are many assumptions that factor into the results. These assumptions include, but are not limited to, the following:

Projected forward interest rates

Slope of the U.S. Treasury curve

Spreads available on securities over the U.S. Treasury curve

Prepayment speeds on loans held and mortgage-backed securities

Anticipated calls on securities with call options

Deposit and loan balance fluctuations

Competitive pressures affecting loan and deposit rates

Economic conditions

Consumer reaction to interest rate changes

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

For the interest rate sensitivity analysis and net portfolio value analysis discussed below, results are based on a static balance sheet reflecting no projected growth from balances as of ~~September~~June 30, ~~2017.~~2020. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis to be the most conservative and most accurate means to evaluate fair value and future interest rate risk. The static balance sheet approach is used to reduce the number of variables in calculating the model’s accuracy in predicting future net interest income. It is appropriate to pull out various balance sheet growth scenarios which could be utilized to compensate for a declining margin. By testing the model using a base model assuming no growth, this variable is eliminated and management can focus on predicted net interest income based on the current existing balance sheet. Management does run additional scenarios with expected growth rates through the asset liability model to most accurately predict future financial performance. This is done separately and apart from the static balance sheet approach discussed above to test fair value and future interest rate risk.

As a result of the many assumptions, this information should not be relied upon to predict future results. Additionally, both of the analyses discussed below do not consider any action that management could take to minimize or offset the negative effect of changes in interest rates. These tools are used to assist management in identifying possible areas of risk in order to address them before a greater risk is posed. Personnel perform an in-depth annual validation and a quarterly review of the settings and assumptions used in the model to ensure reliability of the forecast results. In addition to the annual validation review, management also engages a third party every three years to obtain a complete external review of the model. That review was last completed in the third quarter of ~~2017.~~2017 and management is currently in the process of conducting the 2020 review. The purpose was to conduct a comprehensive evaluation of the model input, assumptions, and output and this study concluded that the model is managed appropriately and generating acceptable results. Back testing of the model to actual results is performed quarterly to ensure the validity of the assumptions in the model. The internal and external validations as well as the back testing indicate that the model assumptions are reliable.

Index

ENB FINANCIAL CORP

Changes in Net Interest Income

The change in net interest income measures the amount of net interest income fluctuation that would be experienced over one year, assuming interest rates change immediately and remain the same for one year. This is considered to be a short-term view of interest rate risk. The analysis of changes in net interest income due to changes in interest rates is commonly referred to as interest rate sensitivity. The Corporation’s interest rate sensitivity analysis indicates that if interest rates were to go up immediately, the Corporation would realize more net interest income. This is due to the ability of the Corporation to immediately achieve higher interest earnings on interest-earning assets while having the ability to limit the amount of increase in interest-bearing liabilities based on the timing of deposit rate changes. This results in an increase in net interest income in the ~~up-rate~~rising rate scenarios, but a decline in net interest income in the ~~down-rate~~declining rate scenarios.

The ~~third~~second quarter ~~2017~~2020 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of ~~September~~June 30, ~~2017,~~2020, the Corporation was ~~well~~ within guidelines for the maximum amount of net interest income change in all rate scenarios. All up-rate scenarios show a positive impact to net interest ~~income although significant improvements are not reflected until rates increase 200, 300, or 400 basis points.~~income. The increase in net interest income in the up-rate scenarios is largely due to the increase in variable rate loans ~~that has occurred during the past several years~~ and the ~~higher~~recent purchases of variable rate securities and the cash balances held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates. Loans that are Prime-based will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by ~~300~~200 or ~~400~~300 basis points where variable loan rates will still increase by the same amount as the Prime rate. ~~The increases in net interest income in~~With the ~~up-rate scenarios are very similar~~Federal Reserve acting to ~~the increases reflected at December 31, 2016. It is unlikely that~~decrease interest rates ~~will go down, but in the event that they would go lower,~~by 225 basis points over five meetings held since June 30, 2019, the Corporation ~~would have~~has had more exposure to all maturing fixed-rate loans and ~~securities, which would reprice~~securities. These assets have been maturing and repricing to lower market rates, while most of the Corporation’s interest-bearing deposits could not be repriced any lower. This would result in a decline in net interest income in any down-rate scenario. ~~However, even in the highly unlikely down-rate scenarios, the Corporation’s exposure to declining net interest income is still within policy guidelines.~~

~~Management’s primary focus remains on the most likely scenario of higher interest rates.~~ For the rates-up 100 basis point scenario, net interest income increases by ~~2.7%~~3.2% compared to the rates unchanged scenario. In the remaining rates-up scenarios, the net interest income increases slightly more substantially reflecting the sizable amount of the Corporation’s interest-earning assets that reprice immediately by the full amount of the Fed increase versus the limited amount of deposit increases that management would approve on the Corporation’s interest-bearing deposits. The higher interest rates go, the greater the likelihood that the proportionality of the Corporation’s deposit rate changes decreases as a percentage of the Federal Reserve’s action. For the rates-up 200 ~~300,~~ and ~~400~~300 basis point scenarios, net interest income increases by ~~7.6%, 13.6%,~~7.9% and ~~19.6%~~13.9%, respectively, compared to the rates unchanged scenario. Management’s maximum permitted net interest income declines by policy are -5%, -10%, and -15%, ~~and -20%~~ for the ~~rates up~~rates-up 100, 200, ~~300,~~ and ~~400~~300 basis point scenarios, respectively.

~~Index~~

~~ENB FINANCIAL CORP~~
~~Management’s Discussion and Analysis~~

The positive impact of ~~significantly~~ higher rates is primarily due to the favorable impact of all of the Corporation’s variable rate loans repricing by the full amount of the Federal rate change, assisted by the Corporation’s relatively high interest earning cash balances and that component of the loans and securities portfolios that reprice in less than one year. This more than offsets the increase in interest expense caused by repricing deposits, ~~and borrowings,~~ where they are only repricing by a fraction of the rate change. The Corporation’s borrowings do price up faster than deposits, generally equivalent to the U.S. Treasury market. However, borrowings only make up approximately 5.5% of the total funding provided by deposits and borrowings. The more aggressive rates-up scenarios also benefit from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. This allows management the ability to benefit from higher rates by controlling the amount of the increase on large amounts of liabilities that ~~are repricing.~~could reprice.

As of June 30, 2020, results in the down-25 basis point scenario show a net interest income increase of 0.9% compared to the rates unchanged scenario and compared to a policy guideline of -1.25%. In the rates-down scenarios of -50 and -75 basis points, net interest income decreases by 0.5% and 2.2%, respectively, compared to policy guidelines of -2.5% and -3.75%. Management does not expect the Corporation’s exposure to interest rate changes to increase or change significantly during the remainder of ~~2017.~~2020.

Index

ENB FINANCIAL CORP

The assumptions and analysis of interest rate risk are based on historical experience during varied economic cycles. Management believes these assumptions to be appropriate; however, actual results could vary significantly. Management uses this analysis to identify trends in interest rate sensitivity and determine if action is necessary to mitigate asset liability risk.

Changes in Net Portfolio Value

The change in net portfolio value is considered a tool to measure long-term interest rate risk. The analysis measures the exposure of the balance sheet to valuation changes due to changes in interest rates. The calculation of net portfolio value discounts future cash flows to the present value based on current market rates. The change in net portfolio value estimates the gain or loss in value that would occur on market sensitive instruments given an interest rate increase or decrease in the same seven scenarios mentioned above. As of ~~September~~June 30, ~~2017,~~2020, the Corporation was within guidelines for all ~~rate~~up-rate scenarios and out of policy guidelines for the down-rate scenarios. The ~~trend over the past year has been lessening risk in the up-rate scenarios with increasing cash balances and core deposit balances with the current quarter showing~~Corporation shows a ~~slightly smaller~~very favorable benefit ~~in all up-rate scenarios than the quarter ended June 30, 2017. The strong GAP ratios played a large role in improving the Corporation’s~~to net portfolio value ~~profile.~~in the rising rate scenario, due primarily to the very low market rates and the elevated amount of core deposits on the Corporation’s balance sheet as of June 30, 2020. The non-interest bearing demand deposit accounts and low-interest bearing checking, NOW, and money market accounts provide more benefit to the Corporation when interest rates are higher and the difference between the overnight funding costs compared to the average interest bearing core deposit rates are greater. As interest rates increase, the discount rate used to value the Corporation’s interest bearing accounts increases, causing a lower net present value for these interest-bearing deposits. This improves the modeling of the Corporation’s fair value risk to higher interest rates as the liability amounts decrease causing a higher net portfolio value of the Corporation’s balance sheet. However, as interest rates decrease, the discount rate used to value the Corporation’s interest bearing accounts decreases, causing a higher net present value for these interest-bearing deposits.

The results as of ~~September~~June 30, ~~2017,~~2020, indicate that the Corporation’s net portfolio value would experience valuation gains of ~~8.3%~~21.7%, ~~8.4%, 7.5%~~35.1%, and ~~5.2%,~~42.0% in the rates-up 100, 200, ~~300,~~ and ~~400~~300 basis point scenarios. Management’s maximum permitted declines in net portfolio value by policy are -5% for rates-up 100 basis points, graduating up to ~~-20%~~-15% for rates-up ~~400~~300 basis points. A valuation loss would indicate that the value of the Corporation’s assets is declining at a faster pace than the decrease in the value of the Corporation’s liabilities. ~~While the down-rate scenarios that are modeled are unlikely, the~~The analysis does show a valuation loss in the down 25, 50, and ~~down 100~~75 basis point scenarios of -4.2%, -15.5%, and -27.9%, respectively, compared to policy guidelines of -3.75%, -7.5%, and -11.25%. The Corporation’s expected valuation loss was outside of guidelines for all down-rate scenarios. ~~The~~With the significant declines in the overnight and Prime rate since 2019, the exposure to valuation changes could change going forward if the behavior of the Corporation’s deposits changes due to ~~higher~~lower interest rates. ~~Based on five past decay rate studies on~~With the rapid increase in the Corporation’s core deposits, management would expect a possible decline throughout the remainder of 2020 which would help to limit the exposure to fair value loss in the down-rate scenarios. Management also does not ~~expect~~anticipate any further Federal Reserve rate reductions as another 0.25% move down would cause the Federal funds rate range to be -0.25% to 0.00%. The Federal Reserve has signaled that their preferred course of action would be to use other tools available to support the economy before resorting to a material decline in core deposit accounts, including the non-interest bearing accounts, when short term interest rates do increase. The Corporation’s core deposits have been stable through a number offurther rate ~~cycles.~~reduction.

The weakness with the net portfolio value analysis is that it assumes liquidation of the Corporation rather than as a going concern. For that reason, it is considered a secondary measurement of interest rate risk to “Changes in Net Interest Income” discussed above. However, the net portfolio value analysis is a more important tool to measure the impact of interest rate changes to capital. In the current regulatory climate, the focus is on ensuring adequate asset liability modeling is being done to project the impact of very large interest rate increases on capital. The asset liability modeling currently in place measures the impact of such a rate change on the valuation of the Corporation’s loans, securities, deposits, and borrowings, and the resulting impact to capital. Management continues to analyze additional scenario testing to model “worst case” scenarios to adequately plan for the possible severe impact of such events.

7577

Index

ENB FINANCIAL CORP

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Treasurer (Principal Financial Officer), of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2017,~~2020, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure controls and procedures as of ~~September~~June 30, ~~2017,~~2020, are effective to ensure that information required to be disclosed in the reports that the company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

(b) Changes in Internal Controls.

There have been no changes in the Corporation’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

7678

Index

ENB FINANCIAL CORP

PART II – OTHER INFORMATION

~~September~~June 30, ~~2017~~2020

Item 1. Legal Proceedings

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position or results of operations of the Corporation or its subsidiaries taken as a whole. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation. In addition, no material proceedings are pending, are known to be threatened, or contemplated against the Corporation by governmental authorities.

Item 1A. Risk Factors

The COVID-19 Pandemic Has Adversely Impacted Our Business And Financial Results, And The Ultimate Impact Will Depend On Future Developments, Which Are Highly Uncertain And Cannot Be Predicted, Including The Scope And Duration Of The Pandemic And Actions Taken By Governmental Authorities In Response To The Pandemic.

The COVID-19 pandemic has negatively impacted the global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed or are required to operate at diminished capacities, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

We continue to closely monitor the COVID-19 pandemic and related risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and indirect effects on the global, national and local economy and our business and results of operation are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. ~~Management~~Except for the risk factor above, management has not identified any new risk factors since the December 31, ~~2016~~2019 Form 10-K filing.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases

The following table details the Corporation’s purchase of its own common stock during the three months ended ~~September~~June 30, ~~2017.~~2020.

Index

ENB FINANCIAL CORP

Issuer Purchase of Equity Securites

Total Number of Maximum Number
Total Number Average Shares Purchased of Shares that May
of Shares Price Paid as Part of Publicly Yet be Purchased
Period Purchased Per Share Announced Plans * Under the Plan *

July 2017 — — — 108,865
August 2017 8,500 $ 34.14 8,500 100,365
September 2017 — — — 100,365

Total 8,500

Issuer Purchase of Equity Securites

Total Number of

Maximum Number

Total Number

Average

Shares Purchased

of Shares that May

of Shares

Price Paid

as Part of Publicly

Yet be Purchased

Period

Purchased

Per Share

Announced Plans *

Under the Plan *

April 2020

6,400

18.65

6,400

66,423

May 2020

21,566

19.17

21,566

44,857

June 2020

5,000

18.80

5,000

39,857

Total

32,966

* On ~~June 17, 2015,~~February 20, 2019, the Board of Directors of ~~ENB Financial Corp announced~~ the ~~approval of~~Corporation approved a plan to ~~purchase,~~repurchase, in the open market and privately ~~negotiated~~renegotiated transactions, up to ~~140,000~~100,000 shares of its outstanding common stock. ~~Shares repurchased are being held as treasury shares to be utilized in connection with~~This plan replaced the ~~Corporation’s three stock purchase plans.~~2015 plan. The first purchase of common stock under this plan occurred on ~~July 31, 2015.~~May 13, 2019. By ~~September~~June 30, ~~2017,~~2020, a total of ~~39,635~~160,143 shares were repurchased at a total cost of ~~$1,330,000,~~$3,291,000 for an average cost per share of ~~$33.56. Management may choose~~$20.55. The total number of shares authorized to ~~repurchase additional shares in 2017~~be repurchased under ~~this plan.~~the plan was increased to 200,000 pursuant to the 2-for-1 stock split, which became effective on June 28, 2019.

Item 3. Defaults Upon Senior Securities – Nothing to Report

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – Nothing to Report

7780

Index

ENB FINANCIAL CORP

Item 6. Exhibits:

Exhibit
No.

Description

3(i)

Articles of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit ~~3(i)~~3.1 of the Corporation’s Form ~~10-Q~~8-K filed with the SEC on ~~August 11, 2016.)~~June 7, 2019)

3 (ii)

By-Laws of the Registrant, as amended. (Incorporated herein by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on January 15, 2010.)

10.1

Form of Deferred Income Agreement. (Incorporated herein by reference to Exhibit 10.1 of the Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August 13, 2008.)

10.2

2011 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 10.2 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 29, 2012.)

10.3

~~2010~~2020 Non-Employee Directors’ Stock Plan. (Incorporated herein by reference to Exhibit 1099.1 of the Corporation’s Form S-8 filed with the SEC on June ~~4, 2010.~~3, 2020.)

1131.1

~~Statement re: Computation of Earnings Per Share as found on page 4 of Form 10-Q, which is included herein.~~

~~31.1~~

Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)).

~~31.2~~

31.2

Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)).

~~32.1~~

32.1

Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)).

~~32.2~~

32.2

Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)).

7881

Index

ENB FINANCIAL CORP

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ENB Financial Corp
	(Registrant)


Dated: ~~November~~August 14, ~~2017~~2020	By:	~~/s/ Aaron L. Groff, Jr.~~/s/ Jeffrey S. Stauffer
		~~Aaron L. Groff, Jr.~~Jeffrey S. Stauffer
		Chairman of the Board
		Chief Executive Officer and President
		Principal Executive Officer


Dated: ~~November~~August 14, ~~2017~~2020	By:	~~/s/~~/s/ Scott E. Lied
		Scott E. Lied, CPA
		Treasurer
		Principal Financial Officer

7982

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
September 30, 2016	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	$		$		$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		730		827		—		561		—
Agriculture mortgages		1,267		1,267		—		1,295		42
Construction		—		—		—		—		—
Total commercial real estate		1,997		2,094		—		1,856		42

Commercial and industrial
Commercial and industrial		75		75		—		38		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		75		75		—		38		—
						��
Total with no related allowance		2,072		2,169		—		1,894		42

With an allowance recorded:
Commercial real estate
Commercial mortgages		—		—		—		—		—
Agriculture mortgages		—		—		—		—		—
Construction		—		—		—		—		—
Total commercial real estate		—		—		—		—		—

Commercial and industrial
Commercial and industrial		—		—		—		—		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		—		—		—		—		—

Total with a related allowance		—		—		—		—		—

Total by loan class:
Commercial real estate
Commercial mortgages		730		827		—		561		—
Agriculture mortgages		1,267		1,267		—		1,295		42
Construction		—		—		—		—		—
Total commercial real estate		1,997		2,094		—		1,856		42

Commercial and industrial
Commercial and industrial		75		75		—		38		—
Tax-free loans		—		—		—		—		—
Agriculture loans		—		—		—		—		—
Total commercial and industrial		75		75		—		38		—

Total		2,072		2,169		—		1,894		42


As of September 30, 2017:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment		98		—		—		—		—		98
Ending balance: collectively evaluated
for impairment		3,661		1,902		1,813		92		462		7,930

Loans receivable:
Ending balance		259,499		238,432		79,843		5,166				582,940
Ending balance: individually evaluated
for impairment		1,806		—		338		—				2,144
Ending balance: collectively evaluated
for impairment		257,693		238,432		79,505		5,166				580,796

As of December 31, 2016:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated
for impairment		—		—		—		—		—		—
Ending balance: collectively evaluated
for impairment		3,795		1,652		1,552		82		481		7,562

Loans receivable:
Ending balance		275,067		213,771		77,192		4,537				570,567
Ending balance: individually evaluated
for impairment		1,894		—		75		—				1,969
Ending balance: collectively evaluated
for impairment		273,173		213,771		77,117		4,537				568,598

REGULATORY CAPITAL RATIOS:
			Regulatory Requirements
			Adequately		Well
As of September 30, 2017	Capital Ratios		Capitalized		Capitalized
Total Capital to Risk-Weighted Assets
Consolidated		15.4%		8.0%		10.0%
Bank		15.2%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		14.2%		6.0%		8.0%
Bank		14.0%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		14.2%		4.5%		6.5%
Bank		14.0%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		10.2%		4.0%		5.0%
Bank		10.1%		4.0%		5.0%

As of December 31, 2016
Total Capital to Risk-Weighted Assets
Consolidated		15.2%		8.0%		10.0%
Bank		15.0%		8.0%		10.0%

Tier I Capital to Risk-Weighted Assets
Consolidated		14.1%		6.0%		8.0%
Bank		13.9%		6.0%		8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated		14.1%		4.5%		6.5%
Bank		13.9%		4.5%		6.5%

Tier I Capital to Average Assets
Consolidated		10.2%		4.0%		5.0%
Bank		10.1%		4.0%		5.0%


As of September 30, 2016
Total Capital to Risk-Weighted Assets
Consolidated		15.3%		8.0%		10.0%
Bank		15.1%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		14.2%		6.0%		8.0%
Bank		14.0%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		14.2%		4.5%		6.5%
Bank		14.0%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		10.4%		4.0%		5.0%
Bank		10.2%		4.0%		5.0%