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 endedSeptember 30, 20172021

OR

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

​​

For the transition period 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      

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

Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DateData 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,”filer”, “smaller reporting company,”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. 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 ofNovember 5, 2017,1, 2021,the registrant had2,845,6795,575,451shares of $0.20$0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

September 30, 20172021

 

Part I – FINANCIAL INFORMATION 
    
 Item 1.Financial Statements 
    
  Consolidated Balance Sheets at September 30, 20172021 and 20162020, and December 31, 20162020 (Unaudited)3
    
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 20172021 and 20162020 (Unaudited)4
    
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 20172021 and 20162020  (Unaudited)5
    
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172021 and 20162020 (Unaudited)67
    
  Notes to the Unaudited Consolidated Interim Financial Statements7-338-33
    
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations34-7034-58
    
 Item 3.Quantitative and Qualitative Disclosures about Market Risk71-7559-63
    
 Item 4.Controls and Procedures7664
    
    
    
Part II – OTHER INFORMATION7765
    
 Item 1.Legal Proceedings7765
Item 1A.Risk Factors65
    
 Item 1A.2.Risk FactorsUnregistered Sales of Equity Securities and Use of Proceeds7765
    
 Item 2.3.Unregistered Sales of EquityDefaults upon Senior Securities and Use of Proceeds7765
    
 Item 3.4.Defaults Upon Senior SecuritiesMine Safety Disclosures7765
    
 Item 4.5.Mine Safety DisclosuresOther Information7765
    
 Item 5.Other Information77
Item 6.Exhibits7866
    
    
SIGNATURE PAGE79
67

2

IndexTable of Contents

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 

September 30,

December 31,

September 30,

2021

2020

2020

$

$

$

ASSETS

Cash and due from banks

16,100

21,665

19,979

 

Interest-bearing deposits in other banks

62,720

73,274

24,347

 

Total cash and cash equivalents

78,820

94,939

44,326

 

Securities available for sale (at fair value)

561,587

476,428

360,029

 

Equity securities (at fair value)

8,844

7,105

6,854

 

Loans held for sale

3,174

3,029

5,008

 

Loans (net of unearned income)

880,261

823,370

843,177

 

Less: Allowance for loan losses

12,454

12,327

11,996

 

Net loans

867,807

811,043

831,181

 

Premises and equipment

24,507

24,760

24,696

 

Regulatory stock

5,635

6,107

6,525

 

Bank owned life insurance

35,200

29,646

29,418

 

Other assets

12,478

9,256

8,964

 

Total assets

1,598,052

1,462,313

1,317,001

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

Liabilities:

 

 

Deposits:

 

 

Noninterest-bearing

591,333

534,853

465,247

 

Interest-bearing

800,169

717,958

661,574

 

Total deposits

1,391,502

1,252,811

1,126,821

 

Short-term borrowings

0-

0-

1,500

Long-term debt

46,706

54,790

60,010

 

Subordinated debt

19,660

19,601

0-

 

Other liabilities

3,967

4,895

3,362

 

Total liabilities

1,461,835

1,332,097

1,191,693

 

Stockholders' equity:

 

 

Common stock, par value $0.10

 

 

Shares: Authorized 24,000,000

 

 

Issued 5,739,114 and Outstanding 5,575,451 as of 9/30/21, 5,566,230 as of 12/31/20, and 5,566,413 as of 9/30/20

574

574

574

 

Capital surplus

4,498

4,444

4,456

 

Retained earnings

130,082

120,670

117,960

 

Accumulated other comprehensive income

4,326

7,958

5,756

 

Less: Treasury stock cost on 163,663 shares as of 9/30/21, 172,884 as of 12/31/20, and 172,701 as of 9/30/20

(3,263

)

(3,430

)

(3,438

)

Total stockholders' equity

136,217

130,216

125,308

 

 

Total liabilities and stockholders' equity

1,598,052

1,462,313

1,317,001

 

See Notes to the Unaudited Consolidated Interim Financial Statements

3

IndexTable of Contents

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,

2021

2020

2021

2020

$

$

$

$

Interest and dividend income:

Interest and fees on loans

8,986

8,617

25,541

25,705

Interest on securities available for sale

Taxable

1,301

920

3,611

3,207

Tax-exempt

1,015

690

2,977

1,899

Interest on deposits at other banks

17

31

59

112

Dividend income

98

129

295

419

 

Total interest and dividend income

11,417

10,387

32,483

31,342

 

Interest expense:

Interest on deposits

278

430

877

1,782

Interest on borrowings

511

415

1,569

1,333

 

Total interest expense

789

845

2,446

3,115

 

Net interest income

10,628

9,542

30,037

28,227

 

(Credit) provision for loan losses

(250

)

1,250

125

2,575

 

Net interest income after (credit) provision for loan losses

10,878

8,292

29,912

25,652

 

Other income:

Trust and investment services income

540

442

1,746

1,480

Service fees

618

701

1,917

2,015

Commissions

945

781

2,761

2,116

Gains on the sale of debt securities, net

350

55

711

704

Gains (losses) on equity securities, net

32

(54

)

256

(279

)

Gains on sale of mortgages

1,206

2,081

4,381

4,312

Earnings on bank-owned life insurance

218

209

636

620

Other income

230

159

1,126

241

 

Total other income

4,139

4,374

13,534

11,209

 

Operating expenses:

Salaries and employee benefits

6,142

5,860

17,800

16,522

Occupancy

654

598

1,972

1,805

Equipment

255

298

806

904

Advertising & marketing

282

184

717

676

Computer software & data processing

1,097

835

3,297

2,309

Shares tax

322

239

876

718

Professional services

535

549

1,572

1,679

Other expense

831

635

1,961

1,939

 

Total operating expenses

10,118

9,198

29,001

26,552

 

Income before income taxes

4,899

3,468

14,445

10,309

 

Provision for federal income taxes

760

533

2,251

1,610

 

Net income

4,139

2,935

12,194

8,699

 

Earnings per share of common stock

0.74

0.53

2.19

1.56

 

Cash dividends paid per share

0.17

0.16

0.50

0.48

 

Weighted average shares outstanding

5,570,416

5,564,158

5,565,777

5,591,027

See Notes to the Unaudited Consolidated Interim Financial Statements

4

Table of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2021

2020

2021

2020

$

$

$

$

 

Net income

4,139

2,935

12,194

8,699

 

Other comprehensive income, net of tax:

Securities available for sale not other-than-temporarily impaired:

 

Unrealized gains (losses) arising during the period

(3,492

)

1,616

(3,884

)

5,962

Income tax effect

733

(339

)

814

(1,250

)

(2,759

)

1,277

(3,070

)

4,712

 

Gains recognized in earnings

(350

)

(55

)

(711

)

(704

)

Income tax effect

73

12

149

148

(277

)

(43

)

(562

)

(556

)

 

Other comprehensive income (loss), net of tax

(3,036

)

1,234

(3,632

)

4,156

 

Comprehensive Income

1,103

 

4,169

8,562

 

12,855

See Notes to the Unaudited Consolidated Interim Financial Statements

5

Table of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

  Three Months ended September 30,  Nine Months ended September 30, 
  2017  2016  2017  2016 
  $  $  $  $ 
Interest and dividend income:                
Interest and fees on loans  6,180   5,721   17,996   16,716 
Interest on securities available for sale                
Taxable  997   581   2,818   729 
Tax-exempt  1,051   966   3,281   2,788 
Interest on deposits at other banks  111   38   257   94 
Dividend income  105   87   287   246 
                 
Total interest and dividend income  8,444   7,393   24,639   20,573 
                 
Interest expense:                
Interest on deposits  489   509   1,438   1,568 
Interest on borrowings  265   242   749   751 
                 
Total interest expense  754   751   2,187   2,319 
                 
Net interest income  7,690   6,642   22,452   18,254 
                 
Provision for loan losses  240   200   450   200 
                 
Net interest income after provision for loan losses  7,450   6,442   22,002   18,054 
                 
Other income:                
Trust and investment services income  427   344   1,335   1,104 
Service fees  648   589   1,894   1,644 
Commissions  583   552   1,714   1,611 
Gains on securities transactions, net  170   464   417   2,130 
Gains on sale of mortgages  510   557   1,302   1,109 
Earnings on bank-owned life insurance  170   210   514   604 
Other income  114   112   370   364 
                 
Total other income  2,622   2,828   7,546   8,566 
                 
Operating expenses:                
Salaries and employee benefits  4,840   4,219   14,370   12,230 
Occupancy  624   555   1,828   1,584 
Equipment  299   276   878   811 
Advertising & marketing  143   120   539   422 
Computer software & data processing  575   471   1,654   1,345 
Shares tax  215   227   644   680 
Professional services  377   380   1,260   1,207 
Other expense  574   500   1,707   1,663 
                 
Total operating expenses  7,647   6,748   22,880   19,942 
                 
Income before income taxes  2,425   2,522   6,668   6,678 
                 
Provision for federal income taxes  391   445   935   1,045 
                 
Net income  2,034   2,077   5,733   5,633 
                 
Earnings per share of common stock  0.71   0.73   2.01   1.98 
                 
Cash dividends paid per share  0.28   0.27   0.84   0.81 
                 
Weighted average shares outstanding  2,848,504   2,851,939   2,849,849   2,851,184 

See Notes to the Unaudited Consolidated Interim Financial Statements    

4 

Accumulated

Other

Total

Common

Capital

Retained

Comprehensive

Treasury

Stockholders'

Stock

Surplus

Earnings

Income (Loss)

Stock

Equity

$

$

$

$

$

$

 

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 - 8,354 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

Net income

-

-

2,935

-

-

2,935

Other comprehensive income net of tax

-

-

-

1,234

-

1,234

Treasury stock purchased - 16,526 shares

-

-

-

-

(304

)

(304

)

Treasury stock issued - 9,050 shares

-

(10

)

-

 

-

180

 

170

Cash dividends paid, $0.16 per share

-

-

(889

)

-

-

 

(889

)

Balances, September 30, 2020

574

4,456

 

117,960

 

5,756

(3,438

)

125,308

 

 

 

 

 

Balances, December 31, 2020

574

4,444

120,670

7,958

(3,430

)

130,216

 

Net income

-

-

4,504

-

-

4,504

 

Other comprehensive loss net of tax

-

-

-

(5,034

)

-

(5,034

)

Treasury stock purchased - 7,600 shares

-

-

-

-

(149

)

(149

)

Treasury stock issued - 7,936 shares

-

16

-

-

157

173

 

Cash dividends paid, $0.16 per share

-

-

(889

)

-

-

(889

)

Balances, March 31, 2021

574

4,460

124,285

2,924

(3,422

)

128,821

 

Net income

-

-

3,551

-

-

3,551

 

Other comprehensive income net of tax

-

-

-

4,438

-

4,438

Treasury stock purchased - 7,200 shares

-

-

-

-

(155

)

(155

)

Treasury stock issued - 10,611 shares

-

20

-

-

211

231

 

Cash dividends paid, $0.17 per share

-

-

(945

)

-

-

(945

)

Balances, June 30, 2021

574

4,480

126,891

7,362

(3,366

)

135,941

 

Net income

-

-

4,139

-

-

4,139

 

Other comprehensive loss net of tax

-

-

-

(3,036

)

-

(3,036

)

Treasury stock purchased - 3,100 shares

-

-

-

-

(68

)

(68

)

Treasury stock issued - 8,574 shares

-

18

-

-

171

189

 

Cash dividends paid, $0.17 per share

-

-

(948

)

-

-

(948

)

Balances, September 30, 2021

574

4,498

130,082

4,326

(3,263

)

136,217

 

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

  Three Months ended September 30,  Nine Months ended September 30, 
  2017  2016  2017  2016 
  $  $  $  $ 
             
Net income  2,034   2,077   5,733   5,633 
                 
Other comprehensive income (loss):                
                 
   Unrealized gains (losses) arising during the period  (406)  (650)  4,437   4,362 
   Income tax effect  138   221   (1,509)  (1,483)
   (268)  (429)  2,928   2,879 
                 
   Gains recognized in earnings  (170)  (464)  (417)  (2,130)
   Income tax effect  58   158   142   724 
   (112)  (306)  (275)  (1,406)
                 
Other comprehensive income (loss), net of tax  (380)  (735)  2,653   1,473 
                 
Comprehensive Income  1,654   1,342   8,386   7,106 

See Notes to the Unaudited Consolidated Interim Financial Statements

5 6

IndexTable of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

Nine Months Ended September 30,

2021

2020

$

$

Cash flows from operating activities:

Net income

12,194

8,699

Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization of securities premiums and discounts and loan fees

2,851

2,173

Amortization of operating leases right-of-use assets

60

134

Increase in interest receivable

(958

)

(586

)

Decrease in interest payable

146

(162

)

Provision for loan losses

125

2,575

Gains on the sale of debt securities, net

(711

)

(704

)

(Gain) loss on equity securities, net

(256

)

279

Gains on sale of mortgages

(4,381

)

(4,312

)

Loans originated for sale

(71,607

)

(101,044

)

Proceeds from sales of loans

75,843

102,690

Earnings on bank-owned life insurance

(636

)

(620

)

Depreciation of premises and equipment and amortization of software

1,164

1,137

Deferred income tax

164

(586

)

Amortization of deferred fees on subordinated debt

59

0-

Other assets and other liabilities, net

(2,291

)

(111

)

Net cash provided by operating activities

11,766

9,562

 

Cash flows from investing activities:

Securities available for sale:

Proceeds from maturities, calls, and repayments

58,837

51,451

Proceeds from sales

77,259

50,819

Purchases

(228,981

)

(150,728

)

Equity securities

Proceeds from sales

460

0-

Purchases

(1,945

)

(425

)

Purchase of regulatory bank stock

(524

)

(1,225

)

Redemptions of regulatory bank stock

996

1,991

Purchase of bank-owned life insurance

(4,918

)

0-

Net increase in loans

(55,899

)

(89,270

)

Purchases of premises and equipment, net

(745

)

(705

)

Purchase of computer software

(471

)

(133

)

Net cash used for investing activities

(155,931

)

(138,225

)

 

Cash flows from financing activities:

Net increase in demand, NOW, and savings accounts

141,428

165,296

Net decrease in time deposits

(2,737

)

(12,563

)

Net increase in short-term borrowings

0-

1,300

Proceeds from long-term debt

0-

12,984

Repayments of long-term debt

(8,084

)

(30,846

)

Dividends paid

(2,782

)

(2,683

)

Proceeds from sale of treasury stock

593

477

Treasury stock purchased

(372

)

(2,029

)

Net cash provided by financing activities

128,046

131,936

(Decrease) Increase in cash and cash equivalents

(16,119

)

3,273

Cash and cash equivalents at beginning of period

94,939

41,053

Cash and cash equivalents at end of period

78,820

44,326

 

Supplemental disclosures of cash flow information:

Interest paid

2,300

3,277

Income taxes paid

2,200

2,225

Supplemental disclosure of non-cash investing and financing activities:

Fair value adjustments for securities available for sale

4,595

(5,258

)

Recognition of lease operating right-of-use assets

80

0-

Recognition of operating lease liabilities

80

0-

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)

See Notes to the Unaudited Consolidated Interim Financial Statements

6 7

IndexTable of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.Summary of Significant Accounting Policies

1.       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 quarter of 2017,2021, is reporting on the results of operations and financial condition of ENB Financial Corp.

Corp on a consolidated basis.

Operating results for the three and nine months ended September 30, 2017,2021, are not necessarily indicative of the results that may be expected for the year endedending December 31, 2017.2021. 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, 2016.2020.

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.

8

Table of Contents

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 30, 2017,2021, and December 31, 2016,2020, are as follows:

    Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
  $ $ $ $
September 30, 2017        
U.S. government agencies  29,107   3   (463)  28,647 
U.S. agency mortgage-backed securities  54,181   36   (634)  53,583 
U.S. agency collateralized mortgage obligations  54,503   117   (582)  54,038 
Corporate bonds  57,384   64   (312)  57,136 
Obligations of states and political subdivisions  123,344   505   (2,176)  121,673 
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 
                 
December 31, 2016                
U.S. government agencies  33,124   —   (863)  32,261 
U.S. agency mortgage-backed securities  56,826   22   (979)  55,869 
U.S. agency collateralized mortgage obligations  38,737   41   (842)  37,936 
Corporate bonds  52,928   8   (845)  52,091 
Obligations of states and political subdivisions  128,428   346   (4,344)  124,430 
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 

7 

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

Gross

Gross

(DOLLARS IN THOUSANDS)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

$

$

$

$

September 30, 2021

U.S. treasuries

4,981

17

0-

4,998

U.S. government agencies

29,616

85

(420

)

29,281

U.S. agency mortgage-backed securities

56,941

857

(336

)

57,462

U.S. agency collateralized mortgage obligations

33,173

436

(16

)

33,593

Asset-backed securities

100,722

868

(147

)

101,443

Corporate bonds

84,264

854

(144

)

84,974

Obligations of states and political subdivisions

246,413

5,127

(1,704

)

249,836

Total securities available for sale

556,110

8,244

(2,767

)

561,587

 

December 31, 2020

U.S. government agencies

54,224

144

(7

)

54,361

U.S. agency mortgage-backed securities

69,777

1,441

(166

)

71,052

U.S. agency collateralized mortgage obligations

34,449

640

(54

)

35,035

Asset-backed securities

60,387

433

(345

)

60,475

Corporate bonds

60,387

1,348

(12

)

61,723

Obligations of states and political subdivisions

187,132

6,727

(77

)

193,782

Total securities available for sale

466,356

10,733

(661

)

476,428

The amortized cost and fair value of debt securities available for sale at September 30, 2017,2021, 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

CONTRACTUAL MATURITY OF DEBT SECURITIES    
(DOLLARS IN THOUSANDS)    
  Amortized  
  Cost Fair Value
  $ $
Due in one year or less  17,425   17,322 
Due after one year through five years  127,834   126,947 
Due after five years through ten years  54,502   53,703 
Due after ten years  118,758   117,105 
Total debt securities  318,519   315,077 

(DOLLARS IN THOUSANDS)

Amortized

Cost

Fair Value

$

$

Due in one year or less

35,395

35,774

Due after one year through five years

102,504

104,210

Due after five years through ten years

139,182

139,739

Due after ten years

279,029

281,864

Total debt securities

556,110

561,587

Securities available for sale with a par value of $63,286,000$91,079,000 and $63,726,000$86,849,000 at September 30, 2017,2021, and December 31, 2016,2020, 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$94,538,000 at September 30, 2017,2021, and $65,770,000$91,666,000 at December 31, 2016.2020.

9

Table of Contents

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 

Three Months Ended

September 30,

Nine Months Ended

September 30,

2021

2020

2021

2020

$

$

$

$

Proceeds from sales

17,957

7,001

77,259

50,819

Gross realized gains

369

64

791

730

Gross realized losses

(19

)

(9

)

(80

)

(26)

 

Management evaluates all of the Corporation’s securities for other than temporaryother-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first nine months of 20172021 or 2016.

2020.

Information pertaining to securities with gross unrealized losses at September 30, 2017,2021, and December 31, 2016,2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

8 

Less than 12 months

More than 12 months

Total

Gross

Gross

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

$

$

$

$

$

$

As of September 30, 2021

U.S. government agencies

23,985

(420

)

0-

0-

23,985

(420

)

U.S. agency mortgage-backed securities

24,270

(310

)

2,988

(26

)

27,258

(336

)

U.S. agency collateralized mortgage obligations

3,243

(1

)

3,569

(15

)

6,812

(16

)

Asset-backed securities

27,718

(123

)

4,919

(24

)

32,637

(147

)

Corporate bonds

18,381

(144

)

0-

0-

18,381

(144

)

Obligations of states & political subdivisions

97,126

(1,704

)

0-

0-

97,126

(1,704

)

 

Total temporarily impaired securities

194,723

(2,702

)

11,476

(65

)

206,199

(2,767

)

 

 

As of December 31, 2020

U.S. government agencies

42,988

(7

)

0-

0-

42,988

(7

)

U.S. agency mortgage-backed securities

15,995

(157

)

2,221

(9

)

18,216

(166

)

U.S. agency collateralized mortgage obligations

12,933

(54

)

0-

0-

12,933

(54

)

Asset-backed securities

8,465

(20

)

18,080

(325

)

26,545

(345

)

Corporate bonds

0-

0-

3,016

(12

)

3,016

(12

)

Obligations of states & political subdivisions

15,666

(77

)

0-

0-

15,666

(77

)

 

Total temporarily impaired securities

96,047

(315

)

23,317

(346

)

119,364

(661

)

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

TEMPORARY IMPAIRMENTS OF SECURITIES
(DOLLARS IN THOUSANDS)
  Less than 12 months More than 12 months Total
    Gross   Gross   Gross
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
  $ $ $ $ $ $
As of September 30, 2017            
U.S. government agencies  10,925   (111)  15,718   (352)  26,643   (463)
U.S. agency mortgage-backed securities  29,092   (267)  15,140   (367)  44,232   (634)
U.S. agency collateralized mortgage obligations  23,804   (277)  11,438   (305)  35,242   (582)
Corporate bonds  17,539   (69)  18,513   (243)  36,052   (312)
Obligations of states & political subdivisions  35,033   (595)  50,271   (1,581)  85,304   (2,176)
                         
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)
                         
As of December 31, 2016                        
U.S. government agencies  32,261   (863)  —   —   32,261   (863)
U.S. agency mortgage-backed securities  47,418   (856)  3,989   (123)  51,407   (979)
U.S. agency collateralized mortgage obligations  33,206   (842)  —   —   33,206   (842)
Corporate bonds  45,335   (830)  2,002   (15)  47,337   (845)
Obligations of states & political subdivisions  101,229   (4,063)  8,041   (281)  109,270   (4,344)
                         
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)

In the debt security portfolio there were 162101 positions from 78 different issuers that were carrying unrealized losses as of September 30, 2017.2021. There were no instruments considered to be other-than-temporarily impaired at September 30, 2017.2021.

10

Table of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

3.Equity Securities

As part of management’s normal monthly securities review, instruments are examined for known or expected calls that would impactThe following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at September 30, 2021 and December 31, 2020.

Gross

Gross

(DOLLARS IN THOUSANDS)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

$

$

$

$

September 30, 2021

CRA-qualified mutual funds

7,222

0-

0-

7,222

Bank stocks

1,518

119

(15

)

1,622

Total equity securities

8,740

119

(15

)

8,844

Gross

Gross

(DOLLARS IN THOUSANDS)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

$

$

$

$

December 31, 2020

CRA-qualified mutual funds

6,176

0-

0-

6,176

Bank stocks

982

53

(106

)

929

Total equity securities

7,158

53

(106

)

7,105

The following table presents 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 dependentnet gains and losses on the structure ofCorporation’s equity investments recognized in earnings during the instrument,three 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. agencynine months ended September 30, 2021 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 anticipated2020, and the high coupon bond was purchased at a high premium. The call required accelerated amortizationportion of unrealized gains and losses for the period that relates to the April 15, 2016 call date, resulting in an additional $479,000equity investments held as of amortization through September 30, 2016. This regulatory call specifically involved the CoBank issue maturing on April 16, 2018.2021 and 2020.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

Three Months Ended

September 30,

Nine Months Ended

September 30,

2021

2020

2021

2020

$

$

$

$

 

Net gains (losses) recognized in equity securities during the period

32

(54

)

256

(279

)

 

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

3

0-

99

0-

 

Unrealized gains (losses) recognized in equity securities held at reporting date

29

(54

)

157

(279

)

9 

11

IndexTable of Contents

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 the FCA. The Corporation owned $6.4 million par of the AgriBank issue maturing on July 15, 2019, with a book value of $6.6 million 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 April 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.

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.

10 

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

3.        4.Loans and Allowance for LoanCredit Losses

The following table presents the Corporation’s loan portfolio by category of loans as of September 30, 2017,2021, and December 31, 2016:2020:

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

  September 30, December 31,
  2017 2016
  $ $
Commercial real estate        
Commercial mortgages  90,468   86,434 
Agriculture mortgages  150,269   163,753 
Construction  18,762   24,880 
Total commercial real estate  259,499   275,067 
         
Consumer real estate (a)        
1-4 family residential mortgages  168,984   150,253 
Home equity loans  11,457   10,391 
Home equity lines of credit  57,991   53,127 
Total consumer real estate  238,432   213,771 
         
Commercial and industrial        
Commercial and industrial  41,724   42,471 
Tax-free loans  19,632   13,091 
Agriculture loans  18,487   21,630 
Total commercial and industrial  79,843   77,192 
         
Consumer  5,166   4,537 
         
Gross loans prior to deferred fees  582,940   570,567 
Less:        
Deferred loan costs, net  1,137   1,000 
Allowance for loan losses  (8,028)  (7,562)
Total net loans  576,049   564,005 

September 30,

December 31,

2021

2020

$

$

Commercial real estate

Commercial mortgages

166,741

142,698

Agriculture mortgages

188,455

176,005

Construction

18,786

23,441

Total commercial real estate

373,982

342,144

 

Consumer real estate (a)

1-4 family residential mortgages

302,670

263,569

Home equity loans

11,889

10,708

Home equity lines of credit

74,919

71,290

Total consumer real estate

389,478

345,567

 

Commercial and industrial

Commercial and industrial

73,695

97,896

Tax-free loans

17,279

10,949

Agriculture loans

19,180

20,365

Total commercial and industrial

110,154

129,210

 

Consumer

5,211

5,155

 

Gross loans prior to deferred fees

878,825

822,076

 

Deferred loan costs, net

1,436

1,294

Allowance for credit losses

(12,454

)

(12,327

)

Total net loans

867,807

811,043

 

(a)

Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $90,123,000$274,892,000 and $66,767,000$235,437,000 as of September 30, 2017,2021, and December 31, 2016,2020, respectively.

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 30, 20172021 and December 31, 2016.2020. 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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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.

11 

Index•

ENB FINANCIAL CORP
Notes toPass – loans which are protected by the Unaudited Consolidated Interim Financial Statementscurrent 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.

·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.

•

·

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.

•

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)

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
  $ $ $ $ $ $ $
Grade:                            
Pass  78,367   155,820   23,880   36,887   13,091   20,245   328,290 
Special Mention  4,860   5,360   —   1,955   —   653   12,828 
Substandard  3,207   2,573   1,000   3,629   —   732   11,141 
Doubtful  —   —   —   —   —   —   — 
Loss  —   —   —   —   —   —   — 
                             
    Total  86,434   163,753   24,880   42,471   13,091   21,630   352,259 

Commercial

Commercial

Agriculture

and

Tax-free

Agriculture

September 30, 2021

Mortgages

Mortgages

Construction

Industrial

Loans

Loans

Total

$

$

$

$

$

$

$

Grade:

Pass

162,806

179,880

12,648

64,457

17,279

18,657

455,727

Special Mention

2,458

0-

6,138

5,082

0-

0-

13,678

Substandard

1,477

8,575

0-

4,156

0-

523

14,731

Doubtful

0-

0-

0-

0-

0-

0-

0-

Loss

0-

0-

0-

0-

0-

0-

0-

 

Total

166,741

188,455

18,786

73,695

17,279

19,180

484,136

12 

Commercial

Commercial

Agriculture

and

Tax-free

Agriculture

December 31, 2020

Mortgages

Mortgages

Construction

Industrial

Loans

Loans

Total

$

$

$

$

$

$

$

Grade:

Pass

133,853

166,102

21,142

87,767

10,949

18,586

438,399

Special Mention

3,683

1,651

2,299

5,592

0-

774

13,999

Substandard

5,162

8,252

0-

4,537

0-

1,005

18,956

Doubtful

0-

0-

0-

0-

0-

0-

0-

Loss

0-

0-

0-

0-

0-

0-

0-

 

Total

142,698

176,005

23,441

97,896

10,949

20,365

471,354

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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 30, 20172021 and December 31, 2016:2020:

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
Payment performance: $ $ $ $ $
           
Performing  168,863   11,457   57,991   5,160   243,471 
Non-performing  121   —   —   6   127 
                     
   Total  168,984   11,457   57,991   5,166   243,598 
                     

December 31, 2016 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 
Non-performing  380   3   —   1   384 
                     
   Total  150,253   10,391   53,127   4,537   218,308 

1-4 Family

Home Equity

Residential

Home Equity

Lines of

September 30, 2021

Mortgages

Loans

Credit

Consumer

Total

Payment performance:

$

$

$

$

$

 

Performing

302,436

11,889

74,919

5,200

394,444

Non-performing

234

0-

0-

11

245

 

Total

302,670

11,889

74,919

5,211

394,689

13 

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

1-4 Family

Home Equity

Residential

Home Equity

Lines of

December 31, 2020

Mortgages

Loans

Credit

Consumer

Total

Payment performance:

$

$

$

$

$

 

Performing

262,185

10,708

71,267

5,141

349,301

Non-performing

1,384

0-

23

14

1,421

 

Total

263,569

10,708

71,290

5,155

350,722

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of September 30, 20172021 and December 31, 2016:

2020:

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

Loans

     Greater       Receivable >

Greater

Receivable > 90 Days

 30-59 Days 60-89 Days than 90 Total Past   Total Loans 90 Days and

30-59 Days

60-89 Days

than 90

Total Past

Total Loans

and

December 31, 2016 Past Due Past Due Days Due Current Receivable Accruing

September 30, 2021

Past Due

Past Due

Days

Due

Current

Receivable

Accruing

 $ $ $ $ $ $ $

$

$

$

$

$

$

$

Commercial real estate                            

Commercial mortgages  —   419   417   836   85,598   86,434   — 

0-

0-

186

186

166,555

166,741

0-

Agriculture mortgages  165   —   —   165   163,588   163,753   — 

756

0-

1,516

2,272

186,183

188,455

0-

Construction  —   —   —   —   24,880   24,880   — 

0-

0-

0-

0-

18,786

18,786

0-

Consumer real estate                            

1-4 family residential mortgages  565   662   380   1,607   148,646   150,253   380 

529

0-

234

763

301,907

302,670

172

Home equity loans  178   —   3   181   10,210   10,391   3 

19

0-

0-

19

11,870

11,889

0-

Home equity lines of credit  —   —   —   —   53,127   53,127   — 

47

0-

0-

47

74,872

74,919

0-

Commercial and industrial                            

Commercial and industrial  266   —   75   341   42,130   42,471   — 

0-

0-

377

377

73,318

73,695

0-

Tax-free loans  —   —   —   —   13,091   13,091   — 

0-

0-

0-

0-

17,279

17,279

0-

Agriculture loans  —   —   —   —   21,630   21,630   — 

24

0-

95

119

19,061

19,180

0-

Consumer  16   4   1   21   4,516   4,537   1 

5

0-

11

16

5,195

5,211

11

Total  1,190   1,085   876   3,151   567,416   570,567   384 

1,380

0-

2,419

3,799

875,026

878,825

183

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

Loans

Receivable

Greater

> 90 Days

30-59 Days

60-89 Days

than 90

Total Past

Total Loans

and

December 31, 2020

Past Due

Past Due

Days

Due

Current

Receivable

Accruing

$

$

$

$

$

$

$

Commercial real estate

Commercial mortgages

0-

0-

208

208

142,490

142,698

0-

Agriculture mortgages

0-

0-

0-

0-

176,005

176,005

0-

Construction

0-

0-

0-

0-

23,441

23,441

0-

Consumer real estate

1-4 family residential mortgages

618

0-

1,384

2,002

261,567

263,569

1,336

Home equity loans

1

0-

0-

1

10,707

10,708

0-

Home equity lines of credit

0-

0-

23

23

71,267

71,290

23

Commercial and industrial

Commercial and industrial

0-

0-

469

469

97,427

97,896

0-

Tax-free loans

0-

0-

0-

0-

10,949

10,949

0-

Agriculture loans

42

0-

0-

42

20,323

20,365

0-

Consumer

23

3

14

40

5,115

5,155

14

Total

684

3

2,098

2,785

819,291

822,076

1,373

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 20172021 and December 31, 2016:2020:

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)

September 30,

December 31,

2021

2020

$

$

 

Commercial real estate

Commercial mortgages

186

208

Agriculture mortgages

1,516

0-

Construction

0-

0-

Consumer real estate

1-4 family residential mortgages

62

48

Home equity loans

0-

0-

Home equity lines of credit

0-

0-

Commercial and industrial

Commercial and industrial

377

469

Tax-free loans

0-

0-

Agriculture loans

95

0-

Consumer

0-

0-

Total

2,236

725

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

As of September 30, 20172021 and December 31, 2016,2020, 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 months ended September 30, 20172021 and September 30, 2016,2020, 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

September 30,

Nine Months Ended

September 30,

2021

2020

2021

2020

$

$

$

$

 

Average recorded balance of impaired loans

2,012

5,060

4,391

4,062

Interest income recognized on impaired loans

38

31

176

72

DuringNo loan modifications were made during the first nine months ended September 30, 2017 there was one loan modification made causing a loan toof 2021 that would be considered a troubled debt restructuring (TDR). There was one loan modification made during the third quarter of 2020 that was considered a TDR. One $3.6 million loan was restructured to provide relief to the commercial borrower by reducing the interest rate, providing a six-month interest only period, and extending the amortization period by an additional nine years. This loan paid off in the third quarter of 2021. In addition to this 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. A TDR ismodification of the payment terms to a loan where management has grantedcustomer 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. TheIncluded in the impaired loan classified asportfolio is one loan to 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. The concession granted to thecommercial 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 loanis being reported as a TDR. The concession period ended June 30, 2017. Subsequent to June 30, 2017, the borrower resumed normal principal and interest paymentsbalance of this TDR loans was $776,000 as of July 2017. There were no loans classified as a TDR during the nine months ended September 30, 2016.2021. This TDR is not non-accrual.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information in regards toregarding impaired loans by loan portfolio class as of September 30, 2017,2021 and December 31, 2016,2020, and for the nine months ended September 30, 2016:2021, and the twelve months ended December 31, 2020:

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

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 

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

September 30, 2021

Investment

Balance

Allowance

Investment

Recognized

$

$

$

$

$

 

With no related allowance recorded:

Commercial real estate

Commercial mortgages

247

285

0-

2,802

116

Agriculture mortgages

1,720

1,721

0-

1,158

45

Construction

0-

0-

0-

0-

0-

Total commercial real estate

1,967

2,006

0-

3,960

161

 

Commercial and industrial

Commercial and industrial

377

428

0-

429

15

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

0-

0-

0-

0-

0-

Total commercial and industrial

377

428

0-

429

15

 

Total with no related allowance

2,344

2,434

0-

4,389

176

 

With an allowance recorded:

Commercial real estate

Commercial mortgages

0-

0-

0-

0-

0-

Agriculture mortgages

572

572

57

2

0-

Construction

0-

0-

0-

0-

0-

Total commercial real estate

572

572

57

2

0-

 

Commercial and industrial

Commercial and industrial

0-

0-

0-

0-

0-

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

95

95

95

0-

0-

Total commercial and industrial

95

95

95

0-

0-

 

Total with a related allowance

667

667

152

2

0-

 

Total by loan class:

Commercial real estate

Commercial mortgages

247

285

0-

2,802

116

Agriculture mortgages

2,292

2,293

57

1,160

45

Construction

0-

0-

0-

0-

0-

Total commercial real estate

2,539

2,578

57

3,962

161

 

Commercial and industrial

Commercial and industrial

377

428

0-

429

15

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

95

95

95

0-

0-

Total commercial and industrial

472

523

95

429

15

 

Total

3,011

3,101

152

4,391

176

16 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

(DOLLARS IN THOUSANDS)

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

December 31, 2020

Investment

Balance

Allowance

Investment

Recognized

$

$

$

$

$

 

With no related allowance recorded:

Commercial real estate

Commercial mortgages

256

318

0-

798

0-

Agriculture mortgages

806

835

0-

1,170

46

Construction

0-

0-

0-

0-

0-

Total commercial real estate

1,062

1,153

0-

1,968

46

 

Commercial and industrial

Commercial and industrial

469

504

0-

513

23

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

0-

0-

0-

0-

0-

Total commercial and industrial

469

504

0-

513

23

 

Total with no related allowance

1,531

1,657

0-

2,481

69

 

With an allowance recorded:

Commercial real estate

Commercial mortgages

3,581

3,581

1,110

1,468

57

Agriculture mortgages

651

651

21

679

34

Construction

0-

0-

0-

0-

0-

Total commercial real estate

4,232

4,232

1,131

2,147

91

 

Commercial and industrial

Commercial and industrial

0-

0-

0-

0-

0-

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

0-

0-

0-

0-

0-

Total commercial and industrial

0-

0-

0-

0-

0-

 

Total with a related allowance

4,232

4,232

1,131

2,147

91

 

Total by loan class:

Commercial real estate

Commercial mortgages

3,837

3,899

1,110

2,266

57

Agriculture mortgages

1,457

1,486

21

1,849

80

Construction

0-

0-

0-

0-

0-

Total commercial real estate

5,294

5,385

1,131

4,115

137

 

Commercial and industrial

Commercial and industrial

469

504

0-

513

23

Tax-free loans

0-

0-

0-

0-

0-

Agriculture loans

0-

0-

0-

0-

0-

Total commercial and industrial

469

504

0-

513

23

 

Total

5,763

5,889

1,131

4,628

160

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 

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 

18 

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

The following table details activity in the allowance for loancredit losses by portfolio segment for the three and nine months ended September 30, 2017:

2021:

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

Consumer

Commercial

Real Estate

Real Estate

and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

Allowance for credit losses:

Beginning balance - December 31, 2020

6,329

3,449

1,972

52

525

12,327

 

Charge-offs

0-

0-

0-

(14

)

0-

(14

)

Recoveries

0-

0-

1

1

0-

2

Provision

173

(41

)

(15

)

20

238

375

 

Balance - March 31, 2021

6,502

3,408

1,958

59

763

12,690

 

Charge-offs

0-

0-

0-

(9

)

0-

(9

)

Recoveries

0-

0-

16

6

0-

22

Provision

48

83

19

10

(160

)

0-

 

Balance - June 30, 2021

6,550

3,491

1,993

66

603

12,703

 

Charge-offs

0-

0-

0-

(7

)

0-

(7

)

Recoveries

0-

0-

2

6

0-

8

Provision

(909

)

216

81

(3

)

365

(250

)

 

Balance - September 30, 2021

5,641

3,707

2,076

62

968

12,454

During the nine months ended September 30, 2021, management charged off $30,000 in loans while recovering $32,000 and added $125,000 to the provision. The unallocated portion of the allowance increased from 4.3% of total reserves as of December 31, 2020, to 7.8% as of September 30, 2021. 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 months ended September 30, 2017,2021, net provision expenses wereexpense was recorded for all loan sectors except for the consumercommercial real estate commercial and industrial, and consumer loan segments, with a creditsector. The lower provision recorded in the commercial real estate loan category. The decrease in the amount of allowance for loan losses allocated to commercial real estatesector was primarily due to a material drop in commercial real estate loans over the first nine monthspay off of 2017. As of December 31, 2016, 50.2% of the Corporation’s allowance forone 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, to $25.6 million. This increase was primarily caused by four loan customers being classified as substandard, two being commercial and two agricultural-related. However, induring the third quarter of 2017, classified loans decreased by $4.6 million, bringing2021 that had a specific allocation. Due to this pay off, the outstanding balance to $21.0 million. Currently,specific allocation was reversed resulting in a credit provision for the agricultural lending sector remains under stressnine months ended September 30, 2021. There were minimal charge-offs and recoveries recorded during the nine months ended September 30, 2021, as well as minimal provision expense due to weak milkthe improving economic conditions and egg prices impacting farmers. the reversal of specific allocation from the previous time periods.

Outside of the commercial loan relationships noted above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the health ofpotential 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 increasedis sectored out into nine different categories to evaluate these qualitative factors. A total score of the qualitative factors for severaleach loan poolssector is calculated to utilize in the third quarterallowance 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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

TheThe following table details activity in the allowance for loancredit losses by portfolio segment for the three and nine months ended September 30, 2016:

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, 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

Consumer

Commercial

Real Estate

Real Estate

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

0-

0-

0-

(6

)

0-

(6

)

Recoveries

11

0-

1

0-

0-

12

Provision

252

296

171

21

(390

)

350

 

Balance - March 31, 2020

4,582

3,151

1,956

56

58

9,803

 

Charge-offs

0-

0-

0-

(10

)

0-

(10

)

Recoveries

0-

0-

1

1

0-

2

Provision

356

146

175

5

293

975

 

Balance - June 30, 2020

4,938

3,297

2,132

52

351

10,770

 

Charge-offs

0-

0-

(23

)

(3

)

0-

(26

)

Recoveries

0-

0-

1

1

0-

2

Provision

1,289

75

(18

)

4

(100

)

1,250

 

Balance - September 30, 2020

6,227

3,372

2,092

54

251

11,996

During the nine months ended September 30, 2020, management charged off $42,000 in loans while recovering $16,000 and added $2,575,000 to the provision. The unallocated portion of the allowance decreased from 4.7% of total reserves as of December 31, 2019, to 2.1% as of September 30, 2020.

During the nine months ended September 30, 2016, a credit2020, net provision expense was recorded for all sectors. The higher provision in the commercial real estate sector was due to a specific allocation of $1.1 million for a customer with ongoing business concerns. The higher provisions across the other categories were primarily caused by increasing the qualitative factors across all industry lines to various degrees as a result of the impact and industrial segment with provision expenseeffect from COVID-19 and the declining economic conditions. There were minimal charge-offs and recoveries recorded in all other loan categories. For the entire portfolio, $200,000 of additional provision expense was needed for the first nine months of 2016. Delinquency rates among most loan pools remained very low with the total amount of delinquent loans lower on September 30, 2016 than on December 31, 2015, even with larger loan balances. The Corporation received $157,000 more recoveries than charge-offs forduring the nine months ended September 30, 2016. These favorable results acted2020, so the provision expense was primarily related to offset higher levelsthe specific allocation as well as the change in economic conditions and potential for credit declines moving forward. The total amount of classifiedsubstandard loans and non-accruals resulting in $200,000at the end of additional provision being sufficient to cover the growth in the loan portfolio. Changes in qualitative factors were minimal during the third quarter and theof 2020 was slightly higher resulting in slightly more provision expense recorded was mostly to account for significant loan growth during the year-to-date period. expense.

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 30, 20172021 and December 31, 2016:

2020:

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 

Commercial

Consumer

Commercial

As of September 30, 2021:

Real Estate

Real Estate

and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

Allowance for credit losses:

Ending balance: individually evaluated for impairment

57

0-

95

0-

0-

152

Ending balance: collectively evaluated for impairment

5,584

3,707

1,981

62

968

12,302

 

Loans receivable:

Ending balance

373,982

389,478

110,154

5,211

878,825

Ending balance: individually evaluated for impairment

2,539

0-

472

0-

3,011

Ending balance: collectively evaluated for impairment

371,443

389,478

109,682

5,211

875,814

21 

Index forg

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

Commercial

Consumer

Commercial

As of December 31, 2020:

Real Estate

Real Estate

and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

Allowance for credit losses:

Ending balance: individually evaluated for impairment

1,131

0-

0-

0-

0-

1,131

Ending balance: collectively evaluated for impairment

5,198

3,449

1,972

52

525

11,196

 

Loans receivable:

Ending balance

342,144

345,567

129,210

5,155

822,076

Ending balance: individually evaluated for impairment

5,294

0-

469

0-

5,763

Ending balance: collectively evaluated for impairment

336,850

345,567

128,741

5,155

816,313

4. 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 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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables presentprovide 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 valueConsolidated Balance Sheets as of September 30, 2017,2021, and December 31, 2016,2020, 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)

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 

September 30, 2021

Level I

Level II

Level III

Total

$

$

$

$

 

U.S. treasuries

0-

4,998

0-

4,998

U.S. government agencies

0-

29,281

0-

29,281

U.S. agency mortgage-backed securities

0-

57,462

0-

57,462

U.S. agency collateralized mortgage obligations

0-

33,593

0-

33,593

Asset-backed securities

0-

101,443

0-

101,443

Corporate bonds

0-

84,974

0-

84,974

Obligations of states & political subdivisions

0-

249,836

0-

249,836

Equity securities

8,844

0-

0-

8,844

 

Total securities

8,844

561,587

0-

570,431

On September 30, 2017,2021, 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 30, 2017,2021, the CRA fund investments had a $5,250,000$7,222,000 book and fair market value and the bank stock portfolio had a book value of $307,000,$1,518,000, and fair market value of $368,000.

22 

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.

$1,622,000.

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

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

December 31, 2020

Level I

Level II

Level III

Total

$

$

$

$

 

U.S. government agencies

0-

54,361

0-

54,361

U.S. agency mortgage-backed securities

0-

71,052

0-

71,052

U.S. agency collateralized mortgage obligations

0-

35,035

0-

35,035

Asset-backed securities

0-

60,475

0-

60,475

Corporate bonds

0-

61,723

0-

61,723

Obligations of states & political subdivisions

0-

193,782

0-

193,782

Equity securities

7,105

0-

0-

7,105

 

Total securities

7,105

476,428

0-

483,533

On December 31, 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 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.

2020, the CRA fund investments had a $6,176,000 book and market value and the bank stocks had a book value of $982,000 and a market value of $929,000.

The following tables presentprovide 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 30, 20172021 and December 31, 2016,2020, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)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 

September 30, 2021

Level I

Level II

Level III

Total

$

$

$

$

Assets:

Impaired Loans

$

0-

$

0-

$

2,859

$

2,859

Total

$

0-

$

0-

$

2,859

$

2,859

 

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

December 31, 2020

Level I

Level II

Level III

Total

$

$

$

$

Assets:

Impaired Loans

$

0-

$

0-

$

4,632

$

4,632

Total

$

0-

$

0-

$

4,632

$

4,632

The Corporation had a total of $2,144,000$3,011,000 of impaired loans as of September 30, 2017,2021, with $98,000$152,000 of specific allocation against these loans and $1,969,000$5,763,000 of impaired loans as of December 31, 2016,2020, with no$1,131,000 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

23

Table of December 31, 2016 and September 30, 2017.

23 Contents

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:

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)

September 30, 2021

(DOLLARS IN THOUSANDS)

Fair Value

Valuation

Unobservable

Range

September 30, 2017

Estimate

Techniques

Input

(Weighted Avg)

Fair Value

Valuation

Unobservable

Range

Impaired loans

2,859

Appraisal of collateral (1)

Appraisal

adjustments (2)

-20% (-20%)

Estimate

Techniques

Input

Liquidation

expenses (2)

-10% (-10%)

December 31, 2020

Fair Value

Valuation

Unobservable

Range

Estimate

Techniques

Input

(Weighted Avg)

Impaired loans

4,632

Appraisal of collateral (1)

Appraisal

adjustments (2)

-20% (-20%)

Impaired loans

 2,046

Appraisal of

Appraisal

-20% (-20%)

collateral (1)

adjustments

Liquidation

expenses (2)

Liquidation

-10% (-10%)

expenses (2)

December 31, 2016
 Fair Value ValuationUnobservable Range
EstimateTechniquesInput(Weighted Avg)
Impaired loans1,969Appraisal ofAppraisal-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.

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 estimatetable provides the fair value ofcarrying amount for each class of financial instrument:

Cashassets 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 discountingfor certain financial instruments that are not required to be measured or reported at fair value on the remaining contractual fee over the termConsolidated 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 amountsSeptember 30, 2021 and December 31, 2020:

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

(DOLLARS IN THOUSANDS)

September 30, 2021

Quoted Prices in

Active Markets

Significant Other

Significant

for Identical

Observable

Unobservable

Carrying

Assets

Inputs

Inputs

Amount

Fair Value

(Level I)

(Level II)

(Level III)

$

$

$

$

$

Financial Assets:

Cash and cash equivalents

78,820

78,820

78,820

0-

0-

Regulatory stock

5,635

5,635

5,635

0-

0-

Loans held for sale

3,174

3,155

3,155

0-

0-

Loans, net of allowance

867,807

879,942

0-

0-

879,942

Mortgage servicing assets

1,591

2,003

0-

0-

2,003

Accrued interest receivable

5,504

5,504

5,504

0-

0-

Bank owned life insurance

35,200

35,200

35,200

0-

0-

 

Financial Liabilities:

Demand deposits

591,333

591,333

591,333

0-

0-

Interest-bearing demand deposits

58,425

58,425

58,425

0-

0-

NOW accounts

133,443

133,443

133,443

0-

0-

Money market deposit accounts

162,050

162,050

162,050

0-

0-

Savings accounts

329,900

329,900

329,900

0-

0-

Time deposits

116,351

117,050

0-

0-

117,050

Total deposits

1,391,502

1,392,201

1,275,151

0-

117,050

 

Long-term debt

46,706

44,912

0-

0-

44,912

Subordinated debt

19,660

19,227

0-

0-

19,227

Accrued interest payable

470

470

470

0-

0-

25

Table of unfunded commitments are presented in Note 6.

25 Contents

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   —   — 

26 

Index

ENB FINANCIAL CORP
Notes to the Unaudited Consolidated Interim Financial Statements

December 31, 2020

Quoted Prices in

Active Markets

Significant Other

Significant

for Identical

Observable

Unobservable

Carrying

Assets

Inputs

Inputs

Amount

Fair Value

(Level I)

(Level II)

(Level III)

$

$

$

$

$

Financial Assets:

Cash and cash equivalents

94,939

94,939

94,939

0-

0-

Regulatory stock

6,107

6,107

6,107

0-

0-

Loans held for sale

3,029

3,029

3,029

0-

0-

Loans, net of allowance

811,043

829,902

0-

0-

829,902

Mortgage servicing assets

1,076

1,083

0-

0-

1,083

Accrued interest receivable

4,546

4,546

4,546

0-

0-

Bank owned life insurance

29,646

29,646

29,646

0-

0-

 

Financial Liabilities:

Demand deposits

534,853

534,853

534,853

0-

0-

Interest-bearing demand deposits

47,092

47,092

47,092

0-

0-

NOW accounts

137,279

137,279

137,279

0-

0-

Money market deposit accounts

140,113

140,113

140,113

0-

0-

Savings accounts

274,386

274,386

274,386

0-

0-

Time deposits

119,088

121,470

0-

0-

121,470

Total deposits

1,252,811

1,255,193

1,133,723

0-

121,470

 

Long-term debt

54,790

51,800

0-

0-

51,800

Subordinated debt

19,601

19,601

0-

0-

19,601

Accrued interest payable

325

325

325

0-

0-

FAIR VALUE OF FINANCIAL INSTRUMENTS

(DOLLARS IN THOUSANDS)

  December 31, 2016
      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  45,632   45,632   45,632   —   — 
Securities available for sale  308,111   308,111   5,524   302,587   — 
Regulatory stock  5,372   5,372   5,372   —   — 
Loans held for sale  2,552   2,552   2,552   —   — 
Loans, net of allowance  564,005   563,418   —   —   563,418 
Mortgage servicing assets  410   531   —   —   531 
Accrued interest receivable  3,750   3,750   3,750   —   — 
Bank owned life insurance  24,687   24,687   24,687   —   — 
                     
Financial Liabilities:                    
Demand deposits  280,543   280,543   280,543   —   — 
Interest-bearing demand deposits  20,108   20,108   20,108   —   — 
NOW accounts  85,540   85,540   85,540   —   — 
Money market deposit accounts  93,943   93,943   93,943   —   — 
Savings accounts  175,753   175,753   175,753   —   — 
Time deposits  161,604   163,464   —   —   163,464 
     Total deposits  817,491   819,351   655,887   —   163,464 
                     
Short-term borrowings  8,329   8,329   8,329   —   — 
Long-term debt  61,257   61,372   —   —   61,372 
Accrued interest payable  384   384   384   —   — 

6.       7.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 30, 2017,2021, firm loan commitments were $40.5$103.9 million, unused lines of credit were $209.3$364.7 million, and open letters of credit were $11.1$13.1 million. The total of these commitments was $260.9$481.7 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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

7. 8.Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172021 and 20162020 is as follows:

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (1) (2)

Unrealized

(DOLLARS IN THOUSANDS)

Gains (Losses)

Unrealized

on Securities

Gains (Losses)

Available-for-Sale

on Securities

$

Available-for-Sale
$

Balance at December 31, 20162020

(4,885

7,958

)

Other comprehensive incomeloss before reclassifications

418

(4,964

)

Amount reclassified from accumulated other comprehensive income (loss)

(9270

)

Period change

326

(5,034

)

Balance at March 31, 20172021

(4,559

2,924

)

Other comprehensive income before reclassifications

2,778

4,654

Amount reclassified from accumulated other comprehensive income (loss)

(71216

)

Period change

2,707

4,438

Balance at June 30, 20172021

(1,852

7,362

)

Other comprehensive loss before reclassifications

(2682,759

)

  Amount reclassified from accumulated other comprehensive loss(112)
Period change(380)
Balance at September 30, 2017(2,232)
Balance at December 31, 2015(252)
  Other comprehensive income before reclassifications1,050

Amount reclassified from accumulated other comprehensive income (loss)

(480277

)

Period change

570

(3,036

)

Balance at March 31, 2016September 30, 2021

318

4,326

Balance at December 31, 2019

1,600

Other comprehensive incomeloss before reclassifications

2,258

(274

)

Amount reclassified from accumulated other comprehensive income (loss)

(620223

)

Period change

1,638

(497

)

Balance at June 30, 2016March 31, 2020

1,956

1,103

Other comprehensive loss before reclassifications

(429

3,709

)

Amount reclassified from accumulated other comprehensive lossincome (loss)

(306290

)

Period change

(735

3,419

)

Balance at June 30, 2020

4,522

Other comprehensive income before reclassifications

1,277

Amount reclassified from accumulated other comprehensive income

(43

)

Period change

1,234

Balance at September 30, 20162020

1,221

5,756

 

(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.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)

  Amount Reclassified from   
  Accumulated Other Comprehensive   
  Income (Loss)   
  For the Three Months   
  Ended September 30,   
  2017  2016  Affected Line Item in the
  $  $  Consolidated Statements of Income
Securities available-for-sale:          
  Net securities gains reclassified into earnings  170   464  Gains on securities transactions, net
     Related income tax expense  (58)  (158) Provision for federal income taxes
  Net effect on accumulated other comprehensive          
     income for the period  112   306   

Amount Reclassified from

Accumulated Other Comprehensive

Income (Loss)

For the Three Months

Ended September 30,

2021

2020

Affected Line Item in the

$

$

Consolidated Statements of Income

Securities available-for-sale:

Net securities gains, reclassified into earnings

350

55

Gains on the sale of debt securities, net

Related income tax expense

(73

)

(12

)

Provision for federal income taxes

Net effect on accumulated other comprehensive income (loss) for the period

277

43

(1) Amounts in parentheses indicate debits.

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

(DOLLARS IN THOUSANDS)      

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

Amount Reclassified from

Accumulated Other Comprehensive

Income (Loss)

For the Nine Months

Ended September 30,

2021

2020

Affected Line Item in the

$

$

Consolidated Statements of Income

Securities available-for-sale:

Net securities gains, reclassified into earnings

711

704

Gains on the sale of debt securities, net

Related income tax expense

(149

)

(148

)

Provision for federal income taxes

Net effect on accumulated other comprehensive income for the period

562

556

(1) Amounts in parentheses indicate debits.

28

8. Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transferTable of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract 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. 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 are not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

29 Contents

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

9.Risks and Uncertainties

COVID-19 Update

The following table provides information with respect to concentrations within our commercial loan portfolio that may be more significantly impacted by the effects of the COVID-19 pandemic at September 30, 2021.

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

177

104,261

85,142

9.67%

Lessors of Residential Buildings

227

48,681

44,558

5.06%

Specialized Freight

24

10,813

6,501

0.74%

Residential Remodelers

85

9,457

3,645

0.41%

New Single Family Housing Construction

45

9,596

5,281

0.60%

Passenger Car Leasing

172

9,496

9,256

1.05%

Hotels

12

8,274

8,039

0.91%

Religious Organizations

23

6,413

5,313

0.60%

Car Washes

7

6,030

5,869

0.67%

Concrete & Structural Contrators

19

4,879

3,039

0.35%

Other

59

9,850

3,209

0.36%

 

Totals

850

227,750

179,852

20.43%

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 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 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 2020 to 2021. 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.

In January 2016,terms of qualifying for a PPP loan, an eligible business could apply for a PPP loan up to the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognitiongreater 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 or five-year loan term to maturity; and Measurement(c) principal and interest payments deferred for six months from the date of Financial Assets and Financial Liabilities. This Update appliesdisbursement. The SBA will guarantee 100% of the PPP loans made to all entities that hold financial assets or owe financial liabilities andeligible borrowers. The entire principal amount of the PPP loan, including any accrued interest, is intendedeligible to provide more useful information onbe reduced by the recognition, measurement, presentation, and disclosureamount of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted forloan forgiveness available under the equity method of accounting or those that result in consolidationPPP, provided the employee and compensation levels 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 thatbusiness are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s)maintained 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 portion60% of the total change in the fair value 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 accordanceloan proceeds are used for payroll expenses, 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 asremaining 40% of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For allloan proceeds used for other entities, including not-for-profit entities and employee benefit plans within the scopequalifying expenses such as utilities.

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Table 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 or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective 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 permitted as of the beginning of an interim or annual reporting period. The Corporation is currently assessing 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 assets and liabilities. The Corporation also anticipates additional disclosures to be provided at adoption.

In March 2016, the FASB issued ASU 2016-06,Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of 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 payment 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.

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Notes to the Unaudited Consolidated Interim Financial Statements

In March 2016, the FASB issued ASU 2016-08,Revenue from Contracts with Customers (Topic 606).initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the end of April 2020. Congress then passed an additional allocation of funds for the PPP loans, allowing a second round of applications to begin. The amendmentsCorporation generated PPP loans under this initial plan in this Update affect entities with transactions included within the scopeamount of Topic 606, which includes entities that enter into contracts with customersapproximately $78 million. In the first quarter of 2021, the SBA made another round of PPP funding available and the Corporation made additional loans to transfer goods or services (that are an outputqualifying small businesses. Additionally, all rounds of PPP loans became eligible for forgiveness. As a result of the entity’s ordinary activities)forgiveness of some of the original PPP loans, the initiation of additional PPP loans, and the forgiveness of a portion of these loans, the total balance of PPP loans at September 30, 2021, was $23.2 million. Management’s focus has been to serve the customers and market area that the Corporation serves.

In accordance with the SBA terms and conditions on these PPP loans, as of September 30, 2021, the Corporation received approximately $5.5 million in exchange for consideration.fees associated with the processing of these loans. All fee income is being deferred over the expected life of each PPP loan. The amendmentsinitial 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 majority of the Corporation’s PPP loans carry a two-year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. This income amounted to $2,119,000 during the first nine months of 2021, and $1,442,000 during the first nine months of 2020. The Corporation expects there to be few loans that are on the books until the stated maturity dates.

COVID-19 Loan Forbearance Programs

Throughout 2020 and into 2021, 330 of the Corporation’s customers had requested payment deferrals, or payments of interest only, on loans originally totaling over $65 million at the time of deferment. These loans now have a current balance of $43.4 million, or 4.9% of the total loan portfolio as of September 30, 2021. The balance of these loans was $54.6 million as of December 31, 2020. In accordance with interagency guidance issued in this Update doMarch 2020, these short-term deferrals were 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 would not be considered past due until after the core principledeferral period ended and scheduled payments resumed. The vast majority of the guidance in Topic 606; they simply clarify the implementation guidanceCOVID-19 loan payment deferrals were for a 90-day period. As of September 30, 2021, there were no commercial loans remaining on principal versus agent considerations. The amendments in this Update are intended to improve the operabilitydeferment and understandability of the implementation guidance on principal versus agent considerations. 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 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 on the Corporation’s financial position or results of operations.delinquent and non-performing levels were not materially impacted by the weaker economic conditions brought on by COVID-19.

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 the scope 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) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree 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 for the amendments in this Update are the same as the effective date and transition requirements in 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. 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 May 2016, the FASB issued ASU 2016-12,Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, 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), 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 on the Corporation’s financial statements

10.Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13,Financial Instruments-CreditInstruments – Credit Losses: Measurement of Credit Losses on Financial Instruments(“ASU 2016-13”), which changes the impairment model for most financial assets. This ASUUpdate 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 ASUUpdate 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 effectcumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effectcumulative-effect adjustment to the allowance for loancredit 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.

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Notes to the Unaudited Consolidated Interim Financial Statements

In August 2016,November 2018, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments2018-19, Codification Improvements to Topic 326, Financial Instruments ‒ Credit Losses, which, addresses eight specific cash flow issues within addition to addressing other matters, ASU 2018-19 clarifies that receivables arising from operating leases are not within the objectivescope of reducing diversity in practice. Among these include recognizing cash paymentsSubtopic 326-20. The effective date and transition requirements for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should 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 investing and operating activities. The amendments in this UpdateASU 2018-19 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, 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 the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendmentsas those in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the 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 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.2016-13. This Update is not expected to have a significant impact on the Corporation’s financial statements.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In October 2016,May 2019, the FASB issued ASU 2016-18,Statement of Cash Flows2019-05, Financial Instruments – Credit Losses (Topic 230)326), which requiresallows 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 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 statementcumulative-effect adjustment to opening retained earnings as of cash flows explains the change duringdate 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 the period incredit losses standard, 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 equivalentsASU is effective when reconcilingthey implement the beginning-of-period and end-of-period total amounts shown oncredit losses standard. For entities that already have adopted the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities,credit losses standard, the amendments areASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted,2019, including adoption 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 this Update should be applied using a retrospective transition method to each period presented. The Corporation is currently evaluating the impact the adoption of the standard will have on the Corporation’s statement of cash flows.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. 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. Foryears. The Corporation qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – 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 extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the 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 March 2020, the FASB issued ASU 2020-03, 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 amendmentsfair 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, andincluding interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption 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, 2020. Early adoption is permitted,2019, including adoption in an interim period. If an entity early adopts theperiods within those years. Other amendments in an interim period, any adjustments should be reflected asare 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.

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the 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 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 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 the adoption of the ASU will have a material impact on the Corporation’s financial statements.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

In September 2017,August 2020, the FASB issued ASU 2017-13,Revenue Recognition (Topic 605)2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), Revenuewhich simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from ContractsU.S. GAAP the separation models for (1) convertible debt with Customers (Topic 606)a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., Leases (Topic 840)as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and Leases (Topic 842):Amendmentsfeatures of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to SEC Paragraphs Pursuantassess the amount or timing of an entity’s future cash flows related to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.those instruments. The SEC Observer said that the SEC staff would not object ifamendments in this ASU are effective for public business entities that are considerednot smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic 848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities only because their financial statements or financial information is requiredand certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to be includedearly adopt the amendments in another entity’s SEC filing useASU 2021-05. The amendments in ASU 2021-05 are effective as of the effective datessame date as the guidance in ASC 842 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 orentities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Corporation’s financial statements.

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Notes to the Unaudited Consolidated Interim Financial Statements

In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants (SEC Update), to amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU was effective upon issuance and did not have a significant impact on the Corporation’s financial statements.

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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 20162020 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, increase in taxes or regulations, or increasing debt balances
·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 ofchanges to the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules
·DisruptionsLarge 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

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Management’s Discussion and Analysis

 

·Business and competitive disruptions caused by new market and industry entrants

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 nine months ended September 30, 2021 were positively impacted by a number of items resulting in strong financial results. The COVID-19 pandemic and governmental and business responses thereto continues to impact customer behavior and balance sheet growth, but as of the date of this report there has not been significant negative impacts on earnings or credit. Customers have adapted to changes in behavior and the Corporation continues to seek ways to manage the structure of the balance sheet to achieve positive financial results now and in future time periods.

The Corporation recorded net income of $2,034,000$4,139,000 for the third quarter of 2017,three-month period ended September 30, 2021, a 2.1% decrease from$1,204,000, or 41.0% increase over the $2,077,000 earnedthree months ended September 30, 2020. Net income for the nine-month period was $12,194,000, a $3,495,000, or 40.2% increase over earnings 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 2016.2020. The Corporation experienced strong levels of growth in net interest income (NII) for both the three and nine month periods ended September 30, 2017, which were largely offset by decreases 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. Earningsearnings per share, basic and diluted, were $0.71 and $2.01$0.74 for the three months ended September 30, 2021, compared to $0.53 for the same period in 2020, and for the year-to-date period, earnings per share were $2.19 in 2021, compared to $1.56 in 2020, a 40.4% increase. The increase in the Corporation’s 2021 earnings was caused primarily by growth in gains on securities, other income, and net interest income, coupled with a decline in the provision for loan losses.

Gains on securities in total increased by $381,000, for the three months ended September 30, 2021, and increased by $542,000, or 127.5%, for the nine months ended September 30, 2017,2021, compared to $0.73 and $1.98 for the same periods in 2016.

The Corporation’s NII has grown each successive quarter since the third quarterprior year. Outside of 2016 due to three Federal Reserve interest rate increasesmortgage 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 NIIsecurity gains, other non-interest income increased by $1,048,000,$259,000, or 15.8%11.3%, and $4,198,000,$1,714,000, or 23.0%26.5%, for the three and nine months ended September 30, 2017,2021, due to many positive trends such as higher trust income, higher commissions on debit card interchange fees, and lower mortgage servicing asset amortization.

The Corporation’s net interest income (NII) increased by $1,086,000, or 11.4%, and $1,810,000, or 6.4%, for the three and nine months ended September 30, 2021, compared to the same periods in 2016.2020. The increase in NII primarily resulted from an increase in interest on securities and dividend incomeavailable for sale of $519,000,$706,000, or 31.8%43.9%, and $2,623,000, or 69.7%, for the three and nine-month periods ended September 30, 2017. 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 $459,000,2021, and $1,482,000, or 8.0%, and $1,280,000, or 7.7% increase in interest and fees on loans for the three and nine-month periods ended September 30, 2017, compared to 2016. The Corporation’s interest expense was relatively flat for the three months ended September 30, 2017, but declined by $132,000, or 5.7%29.0%, for the nine-month period ended September 30, 2017.

The Corporation recorded $240,000 of provision expense in the third quarter of 2017,2021, compared to $200,000 for the third quarter of 2016, and provision expense of $450,000 for the nine months ended September 30, 2017, compared to $200,000 for the same period in 2016, representing a $250,000 decrease in income in 2017 compared to 2016. The increase in provision expense was largely driven by higher levels of classified loans, which required more provision expense in 2017, as well as a specific allocation of $98,000 for an impaired loan in the third quarter of 2017. The gains from the sale of securities were $170,000 and $417,000 for the three and nine months ended September 30, 2017, compared to $464,0002020. In addition, interest expense on deposits and $2,130,000 for the same periods in 2016, representing decreases of $294,000,borrowings decreased by $56,000, or 63.4%6.6%, and $1,713,000,$669,000, or 80.4%, respectively. Market interest rates were lower in 2016, making it more conducive to achieving gains from the sale of securities. The gain on the sale of mortgages decreased by $47,000, or 8.4%, and increased by $193,000, or 17.4%, for the three and nine-month periods ended September 30, 2017, compared to the prior year’s periods. Both mortgage production and margins realized on sold mortgages were higher in the first nine months of 2017 compared to 2016. Total operating expenses increased $899,000, or 13.3%, and $2,938,000, or 14.7%21.5%, for the three and nine months ended September 30, 2017,2021, compared to the same periods in 2016.the prior year. The low interest rate environment has caused a rapid decline in asset yield, but also a decline in the cost of funds, which has resulted in these much lower levels of interest expense.

The Corporation recorded a $250,000 credit provision for loan losses in the third quarter of 2021, due to the reversal of a specific allocation assigned to a commercial loan that paid off during the quarter. Provision expense was $1,250,000 for the third quarter of 2020. For the year-to-date period ended September 30, 2021, provision expense was $125,000, a decrease of $2,450,000, compared to the $2,575,000 recorded for the nine months ended September 30, 2020. The higher provision in 2020 was primarily caused by increasing the qualitative factors across industry lines to various degrees as a result of potential forward credit concerns related to COVID-19 and a higher specific allocation related to one commercial borrower.

 

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 monthsboth periods ended September 30, 2017,2021, compared to the same periodperiods in the prior year, due primarily to higher earnings. The ROA decreased for the nine months ended September 30, 2017, compared to the prior year due to a faster asset growth rate that outpaced the increaseearnings in 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 
  September 30,  September 30, 
  2017  2016  2017  2016 
             
Return on Average Assets  0.80%   0.87%   0.77%   0.81% 
Return on Average Equity  8.06%   8.31%   7.86%   7.71% 

2021.

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Management’s Discussion and Analysis

 

Key Ratios Three Months Ended Nine Months Ended
  September 30, September 30,  
  2021 2020 2021 2020
         
Return on Average Assets  1.03%   0.89%   1.06%   0.93% 
Return on Average Equity  11.91%   9.46%   12.25%   9.72% 

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 months of 2017,2021, NII generated 74.8%68.9% of the Corporation’s gross revenue stream, which consists of net interest incomeNII and non-interest income, compared to 68.1%71.6% in the first nine months of 2016. The2020. This decrease is a result of much higher levels of NII as a percentagein the first nine months 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 2016.2021 compared to 2020. The overall performance of the Corporation is highly dependent on the changes in net interest incomeNII 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 incomeNII 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 incomeNII 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 and $1,793,000$291,000 for the three months ended September 30, 2021, and $848,000 for the nine months ended September 30, 2017,2021, compared to $524,000$209,000 and $1,570,000$579,000 for the same periods in 2016.2020.

 

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 

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2021  2020  2021  2020 
  $  $  $  $ 
Total interest income  11,417   10,387   32,483   31,342 
Total interest expense  789   845   2,446   3,115 
                 
Net interest income  10,628   9,542   30,037   28,227 
Tax equivalent adjustment  291   209   848   579 
                 
Net interest income (fully taxable equivalent)  10,919   9,751   30,885   28,806 

 

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

 

·The rates earned on interest earning assets and paid on interest bearing liabilities
·The average balance of interest earning assets and interest bearing liabilities

 

TheNII is impacted by yields earned on assets and rates paid on liabilities. With the decrease in the short-term Federal funds rate, the Prime rate, the shape ofReserve rates in 2020, asset yields have declined significantly and 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 availablehas been relatively flat. During 2021, longer-term U.S. Treasury rates did increase adding some slope to the Federal Reserveyield curve, but asset yields are still compressed, which adds strain to conduct monetary policy. The Federal funds rate,NII 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, the Federal funds rate had not changed since December 16, 2008. On December 16, 2015, the Federal funds rate was increased 25 basis points to 0.50%, from 0.25%. On December 14, 2016, the Federal funds rate was increased 25 basis points to 0.75%. On March 15, 2017 and on June 14, 2017, the Federal funds rate was again increased 25 basis points so the 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 in U.S. history. The impact has been a lower net interest margin to the Corporation and generally across the financial industry. 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 continue for the remainder of 2017. Management anticipates the next 0.25% Federal Reserve rate increase could occur in the fourth quarter of 2017. It remains to be seen whether mid and long-term U.S. Treasury rates will also increase to the same degree that the Federal Reserve will move the overnight Federal funds rate. If they do not, the yield curve would further flatten making it harder for the Corporation to increase asset yield.(NIM).

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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 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 March 15, 2017, and from 4.00% to 4.25% on June 14, 2017. 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.

As a result of the Federal Reserve rate increases,a larger balance sheet in 2021, even with much lower asset yields, the Corporation’s NII on a tax equivalent basis began to increase in 2017 withincreased while the Corporation’s margin increasingdecreased to 3.46%2.89% for the year-to-date period ended September 30, 2017, compared to 3.04%quarter and 2.82% for the nine months ended September 30, 2016.2021, compared to 3.16% in the third quarter of 2020 and 3.26% for the year-to-date period. Loan yields were lower in 2021 due to the 150 basis point Fed rate decline during the first quarter of 2020 as well as competitive pressure throughout 2020 and 2021. The Corporation’s NII for the firstthree and nine months of 2017ended September 30, 2021, increased substantially over the same periodperiods in 2016,2020, by $4,421,000,$1,168,000, or 22.3%12.0%, with the margin increasing to 3.46%. However, there was non-recurring security amortization of $1,681,000 recorded in the first nine months of 2016, which had a negative impact on NII and margin. Without this impact, NII would have increased by $2,740,000,$2,079,000, or 12.7%7.2%, in 2017 compared to 2016.respectively. Management’s asset liability sensitivity measurements continue to showshows a small benefit to both margin and NII given further Federal Reserve rate increases. Actual results over the past nine quarterstwo years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any additional Federal Reserve rate increasessheet, however there was some decline in 2017 would further improve boththis asset sensitivity in the first nine months of 2021. In a down-rate environment, the margin and NII althoughwould suffer unless balance sheet growth is enough 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.

The extended extremely low Federal funds rate has enabled management to reduce the cost of funds on overnight borrowings and allowedoffset lower interest 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 the Corporation raised some deposit rates minimally. While the 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 possible throughout the remainder of 2017. Due to the increasing number of variable rate loans in the Corporation’s loan portfolio, the 25 basis point increase in the Prime rate at 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 until the first quarter of 2018.yields.

 

Security yields will generally fluctuate more rapidly than loan yields based on changes to the U.S. Treasury rates and yield curve. With lower Treasury rates in 2020, security reinvestment had generally been occurring at lower yields. With slightly higher Treasury rates in 2021, security yields have increased slightly, but still remain compressed compared to years prior to 2020.

The Corporation’s overall cost of funds, including non-interest bearing funds, remained stable through the first nine months of 2021 between 22 and 16 basis points. Core deposit interest rates were reduced throughout 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. The Corporation’s costs on borrowings included $140,000 of prepayment penalties recorded on Federal Home Loan Bank (FHLB) long-term advances paid off early during the first nine months of 2021, and $234,000 of prepayment penalties recorded in the first nine months of 2017 compared to2020, accelerating the same periodinterest expense, but achieving savings in 2016, security reinvestment has been occurring at slightly higher yields and amortization has slowed resulting in higher yields. The Corporation’s loan yield has begun to increase asfuture periods. While the variable rate portionaverage balance of the loan portfolio is repricing higher with each Federal Reserve rate movement. The vast majority of the Corporation’s commercial Prime-based loans are priced at the Prime rate, currently at 4.25%. The pricing for the most typical five-year fixed rate commercial loans is currently very similar to the Prime rate. Previously, any increases in 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 to grow the variable rate loans in a period of rising rates. An element 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 by local competition.

Mid-term and long-term interest rates on average were higher in 2017 compared to 2016. The average rate of the 10-year U.S. Treasuryborrowings was 2.32%lower in the first nine months of 2017 compared to 1.74% in2021 than 2020, the first nine months of 2016, and it stood at 2.33%interest expense was higher, as the new $20 million sub debt issue beginning on SeptemberDecember 30, 2017, compared to 1.60% at September 30, 2016. The slope of the yield curve has been compressed throughout most of 2016 and through the first nine months of 2017, with2020, carried a difference of 108 basis points between the Fed Fundshigher rate of 1.25% and the 10-year U.S. Treasury as of September 30, 2017, compared to 110 basis points as of September 30, 2016. 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% in 2016 and 2.62% in 2017, and as low as 1.37% in 2016 and 2.05% 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 asinterest than FHLB long-term advances that were paid off. As a result, the total cost of slightly higher investment rates and lower amortization on existing bonds. The non-recurring sub-agency amortization of $1,681,000 forborrowings increased $236,000 when comparing the year-to-date periodnine months ended September 30, 2016, negatively affected security yield resulting2021, to the same period 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.prior year.

 

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Management’s Discussion and Analysis

 

While it is becoming increasingly difficult to achieve savings on the Corporation’s overall cost of funds, the Corporation has been able 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 to lower rates has caused a decrease in interest expense. Generally, it was the longer-term time deposits repricing at lower rates that helped to achieve interest expense reductions on total deposits, as the savings account 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 for the remainder of 2017. If the Federal Reserve does act to raise interest rates during the fourth quarter, deposit interest rate increases may need to be implemented beginning in 2018. Management selectively repriced some 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. 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 borrowings at lower rates in 2016 but lower-priced borrowings matured in 2017 with no ability to refinance at lower rates, so the yield on borrowings increased slightly during 2017 and will likely continue to do so moving into 2018.

Management currently anticipates that the overnight interest rate and Prime rate will remain at the current levels until December of 2017 with the possibility of one more 0.25% rate increase by year-end. It is likely that mid and long-term U.S. Treasury rates will increase slowly throughout the fourth quarter of 2017 as the market anticipates an additional Federal Reserve rate movement. This would allow management to achieve higher earnings on new higher yielding securities 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 yield curve could flatten, making 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 the repricing of the Corporation’s liabilities as 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.

The following table provides an analysis of year-to-date changes in net interest incomeNII 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.

 

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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,
  2017 vs. 2016 2016 vs. 2015
  Increase (Decrease) Increase (Decrease)
  Due To Change In Due To Change In
    Net     Net    
  Average Interest Increase Average Interest Increase
  Balances Rates (Decrease) Balances Rates (Decrease)
  $ $ $ $ $ $
INTEREST INCOME                        
                         
Interest on deposits at other banks  27   136   163   —   43   43 
                         
Securities available for sale:                        
Taxable  44   2,059   2,103   (212)  (1,610)  (1,822)
Tax-exempt  766   (49)  717   466   92   558 
Total securities  810   2,010   2,820   254   (1,518)  (1,264)
Loans  938   340   1,278   1,982   (292)  1,690 
Regulatory stock  31   (3)  28   44   (100)  (56)
                         
Total interest income  1,806   2,483   4,289   2,280   (1,867)  413 
                         
INTEREST EXPENSE                        
                         
Deposits:                        
Demand deposits  19   32   51   32   (41)  (9)
Savings deposits  10   (1)  9   8   (2)  6 
Time deposits  (93)  (97)  (190)  (204)  (123)  (327)
Total deposits  (64)  (66)  (130)  (164)  (166)  (330)
                         
Borrowings:                        
Total borrowings  (25)  23   (2)  17   (261)  (244)
                         
Total interest expense  (89)  (43)  (132)  (147)  (427)  (574)
                         
NET INTEREST INCOME  1,895   2,526   4,421   2,427   (1,440)  987 

During the first nine months of 2017, the Corporation’s NII on an FTE basis increased by $4,421,000, a 22.3% increase over the same period in 2016. Total interest income on an FTE basis for the nine months ended September 30, 2017, increased $4,289,000, or 19.4%, from 2016, while interest expense decreased $132,000, or 5.7%, for the nine months ended September 30, 2017, compared to the same period in 2016. The FTE interest income from the securities portfolio increased by $2,820,000, or 56.7%, while loan interest income increased $1,278,000, or 7.6%. During 2017, additional loan volume caused by loan growth added $938,000 to net interest income, and the slightly higher yields caused a $340,000 increase, resulting in a total increase of $1,278,000. Higher balances in the securities portfolio caused an increase of $810,000 in net interest income, while higher yields on securities caused a $2,010,000 increase, resulting in a total increase 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.

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

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 reduction to expense, and time deposits repricing to lower interest rates reduced interest expense by an additional $97,000, causing a total reduction of $190,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

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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.

  Nine Months Ended September 30, Nine Months Ended September 30,
  2021 vs. 2020 2020 vs. 2019
  Increase (Decrease) Increase (Decrease)
  Due To Change In Due To Change In
      Net     Net
  Average Interest Increase Average Interest Increase
  Balances Rates (Decrease) Balances Rates (Decrease)
  $ $ $ $ $ $
INTEREST INCOME                        
                         
Interest on deposits at other banks  55   (108)  (53)  98   (280)  (182)
                         
Securities available for sale:                        
Taxable  1,448   (1,041)  407   382   (928)  (546)
Tax-exempt  1,803   (445)  1,358   149   (92)  57 
Total securities  3,251   (1,486)  1,765   531   (1,020)  (489)
                         
Loans  1,539   (1,714)  (175)  2,989   (2,131)  858 
Regulatory stock  (54)  (73)  (127)  21   (76)  (55)
                         
Total interest income  4,791   (3,381)  1,410   3,639   (3,507)  132 
                         
INTEREST EXPENSE                        
                         
Deposits:                        
Demand deposits  94   (447)  (353)  82   (874)  (792)
Savings deposits  13   (15)  (2)  11   (40)  (29)
Time deposits  (97)  (453)  (550)  (71)  48   (23)
Total deposits  10   (915)  (905)  22   (866)  (844)
                         
Borrowings:                        
Total borrowings  (36)  272   236   (13)  188   175 
                         
Total interest expense  (26)  (643)  (669)  9   (678)  (669)
                         
NET INTEREST INCOME  4,817   (2,738)  2,079   3,630   (2,829)  801 

 

The following tables show a more detailed analysis of net interest incomeNII 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 incomeNII 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.

 

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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 September 30,
 2017 2016 2021 2020
     (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   44,259   17   0.15   33,928   31   0.36 
                                                
Securities available for sale:                                                
Taxable  200,043   1,030   2.06   183,607   608   1.32   385,330   1,333   1.38   243,765   941   1.54 
Tax-exempt  124,262   1,566   5.04   113,566   1,444   5.09   192,614   1,269   2.64   109,198   859   3.15 
Total securities (d)  324,305   2,596   3.20   297,173   2,052   2.76   577,944   2,602   1.80   352,963   1,800   2.04 
                                                
Loans (a)  583,592   6,246   4.28   560,576   5,766   4.11   879,836   9,023   4.09   840,252   8,656   4.11 
                                                
Regulatory stock  5,723   72   5.03   4,936   60   4.86   5,807   65   4.45   6,871   109   6.33 
                                                
Total interest earning assets  943,117   9,026   3.83   888,658   7,917   3.56   1,507,846   11,707   3.10   1,234,014   10,596   3.43 
                                                
Non-interest earning assets (d)  64,845           64,291           86,494           77,629         
                                                
Total assets  1,007,962           952,949           1,594,340           1,311,643         
                                                
LIABILITIES &                                                
STOCKHOLDERS' EQUITY                                                
Interest bearing liabilities:                                                
Demand deposits  199,001   93   0.19   192,147   72   0.15   352,448   43   0.05   275,279   59   0.09 
Savings deposits  189,863   24   0.05   166,111   21   0.05   325,018   16   0.02   251,130   13   0.02 
Time deposits  153,710   372   0.96   165,638   416   1.01   117,041   218   0.74   124,479   359   1.15 
Borrowed funds  69,629   265   1.51   73,411   242   1.32   69,247   511   2.93   64,877   415   2.54 
Total interest bearing liabilities  612,203   754   0.49   597,307   751   0.50   863,754   788   0.39   715,765   846   0.48 
                                                
Non-interest bearing liabilities:                                                
                                                
Demand deposits  293,124           253,527           588,125           467,030         
Other  2,570           2,683           4,616           5,377         
                                                
Total liabilities  907,897           853,517           1,456,495           1,188,172         
                                                
Stockholders' equity  100,065           99,432           137,845           123,471         
                                                
Total liabilities & stockholders' equity  1,007,962           952,949           1,594,340           1,311,643         
                                                
Net interest income (FTE)      8,272           7,166           10,919           9,750     
                                                
Net interest spread (b)          3.34           3.06           2.71           2.95 
Effect of non-interest                                                
bearing deposits          0.16           0.16           0.18           0.21 
Net yield on interest earning assets (c)          3.50           3.22           2.89           3.16 

 

(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$872,000 as of September 30, 2017,2021, and $863,000$171,000 as of September 30, 2016.2020.  Such fees and costs recognized through income and included in the interest amounts totaled ($112,000)$617,000 in 2017,2021, and ($99,000)$265,000 in 2016.2020.

(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 incomeNII (FTE) by total interest earning assets.

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

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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,
  2017 2016
      (c)     (c)
  Average   Annualized Average   Annualized
  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 
                         
Securities available for sale:                        
Taxable  195,093   2,904   1.98   185,399   802   0.58 
Tax-exempt  127,520   4,894   5.12   107,556   4,176   5.18 
Total securities (d)  322,613   7,798   3.22   292,955   4,978   2.27 
                         
Loans (a)  578,496   18,176   4.19   548,492   16,898   4.11 
                         
Regulatory stock  5,581   201   4.80   4,724   173   4.88 
                         
Total interest earning assets  934,776   26,432   3.77   868,806   22,143   3.40 
                         
Non-interest earning assets (d)  62,695           62,200         
                         
Total assets  997,471           931,006         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  200,471   256   0.17   183,852   204   0.15 
Savings deposits  186,339   71   0.05   160,506   62   0.05 
Time deposits  156,860   1,111   0.95   169,478   1,302   1.03 
Borrowed funds  71,973   749   1.39   75,090   751   1.34 
Total interest bearing liabilities  615,643   2,187   0.47   588,926   2,319   0.53 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  281,620           241,786         
Other  2,671           2,700         
                         
Total liabilities  899,934           833,412         
                         
Stockholders' equity  97,537           97,594         
                         
Total liabilities & stockholders' equity  997,471           931,006         
                         
Net interest income (FTE)      24,245           19,824     
                         
Net interest spread (b)          3.30           2.87 
Effect of non-interest                        
     bearing deposits          0.16           0.17 
Net yield on interest earning assets (c)          3.46           3.04 

  For the Nine Months Ended September 30,
  2021 2020
      (c)     (c)
  Average   Annualized Average   Annualized
  Balance Interest Yield/Rate Balance Interest Yield/Rate
  $ $ % $ $ %
ASSETS                        
Interest earning assets:                        
Federal funds sold and interest                        
on deposits at other banks  50,598   59   0.16   28,205   112   0.53 
                         
Securities available for sale:                        
Taxable  359,530   3,696   1.38   234,121   3,289   1.87 
Tax-exempt  184,663   3,720   2.69   97,843   2,362   3.22 
Total securities (d)  544,193   7,416   1.82   331,964   5,651   2.27 
                         
Loans (a)  859,141   25,646   3.98   809,325   25,821   4.26 
                         
Regulatory stock  5,964   210   4.69   7,255   337   6.19 
                         
Total interest earning assets  1,459,896   33,331   3.02   1,176,749   31,921   3.62 
                         
Non-interest earning assets (d)  82,233           73,691         
                         
Total assets  1,542,129           1,250,440         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  338,365   120   0.05   271,836   473   0.23 
Savings deposits  308,245   46   0.02   235,084   48   0.03 
Time deposits  118,071   711   0.81   128,749   1,261   1.31 
Borrowed funds  71,945   1,569   2.92   74,314   1,333   2.40 
Total interest bearing liabilities  836,626   2,446   0.39   709,983   3,115   0.59 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  567,408           416,379         
Other  5,006           4,570         
                         
Total liabilities  1,409,040           1,130,932         
                         
Stockholders' equity  133,089           119,508         
                         
Total liabilities & stockholders' equity  1,542,129           1,250,440         
                         
Net interest income (FTE)      30,885           28,806     
                         
Net interest spread (b)          2.63           3.03 
Effect of non-interest                        
     bearing deposits          0.19           0.23 
Net yield on interest earning assets (c)          2.82           3.26 

 

(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$834,000 as of September 30, 2017,2021, and $796,000$1,424,000 as of September 30, 2016.2020.  Such fees and costs recognized through income and included in the interest amounts totaled ($335,000)$990,000 in 2017,2021, and ($275,000)$315,000 in 2016.2020.

(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 incomeNII (FTE) by total interest earning assets.

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

The Corporation’s interest incomeaverage balance on securities increased at a faster pace primarily due to non-recurring security amortization in the first nine months of 2016, resulting in a higher NIM of 3.50%by $225.0 million, or 63.7%, for the third quarter of 2017, compared to 3.22% for the third quarter of 2016three months ended September 30, 2021, and 3.46%$212.2 million, or 63.9%, for the nine months ended September 30, 2017,2021, compared to 3.04% for the same periodperiods in 2016.2020. The tax equivalent yield earned on assets increasedinvestments declined by 2724 basis points for the quarterquarter-to-date period and 37 basis points for the year-to-date period while the rate paid on liabilities dropped one basis point for the quarter and six45 basis points for the year-to-date period when comparing both years. Management does anticipate further improvements in NIM during the remainder of 2017 with the possibility of another rate increase in the fourth quarter. Loan yields were at historically low levels during 2016 and the first nine months of 2017Interest income on securities increased due to the extended low-rate environment as well as extremely competitive pricingvolume growth which offset the declining yield due to lower market rates. Security reinvestment in 2021 has been occurring at slightly higher rates due to the increase in U.S. Treasury rates, but reinvestment throughout the majority of 2020 was at much lower yields. The sharp growth in the investment portfolio during a period of very low rates also contributed to the decline in average security yield. This large amount of new investment was caused by the significant influx of deposits, which caused excess liquidity.

Average balances on loans increased by $39.6 million, or 4.7%, for the loan opportunities inthree months ended September 30, 2021, and $49.8 million, or 6.2%, for the market. It is anticipated that these yields will remain relatively unchanged during the remainder 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. Growth in the loan portfolio coupled with better yields on variable rate loans caused loan interest income to increase. The Corporation’s loan yield increased 17 basis points in the third quarter of 2017nine months ended September 30, 2021, compared to the third quarter of 2016 and 8same periods in the prior year. Loan yields declined by two basis points when comparingfor the quarter and 28 basis points for the year-to-date periods inperiod when comparing both years. Loan interest income increased $480,000,$367,000, or 8.3%4.2%, for the three-month period as a result of the increase in loan balances. However, loan interest income decreased $175,000, or 0.7%, for the nine-month period as a result of the decline in yields.

The average balance of deposit accounts increased by $143.6 million, or 22.1%, and $1,278,000,$129.0 million, or 7.6%20.3%, for the three and nine months ended September 30, 2017,2021, respectively, compared to the same periods in 2016.the prior year. While the average balance of time deposits did decrease for both the quarter and year-to-date time periods, the average balance on demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest rate paid on deposits decreased for both of these time periods as well. This resulted in a decrease in interest expense on deposits of $154,000, or 35.7%, and $905,000, or 50.8%, for the three and nine months ended September 30, 2021, compared to the same periods in 2020.

 

Loan pricingThe Corporation’s average balance on borrowed funds increased by $4.4 million, or 6.7%, for the three months ended September 30, 2021, but decreased by $2.4 million, or 3.2%, for the nine months ended September 30, 2021, compared to the same periods in 2020. The Corporation’s borrowed funds consist of FHLB advances as well as subordinated debt issued in December of 2020 which was challengingused to support capital growth for the Corporation. The increase in 2016, and continues to be in 2017 asborrowed funds for the quarter-to-date period is a result of intense competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced atthis subordinated debt issuance. However, the Prime rate or below.decrease for the year-to-date period is a result of paying off FHLB advances. The current Prime rateCorporation paid off $35.6 million of 4.25% is generally lower than most fixed-rate business and commercial loans, which typically range between 4.00% and 6.00%, depending on term and credit risk. 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%. However, there are relatively few of these higher rate loansFHLB advances in the commercialnine months ended September 30, 2020, compared to $8.1 million for the year-to-date period in 2021. The rate paid on borrowed funds increased by 39 basis points for the three months ended September 30, 2021, and agricultural portfolios due52 basis points for the nine months ended September 30, 2021, compared to the strong credit qualitysame periods in the prior year. This increase in rate can be attributed to the issuance of subordinated debt which carries a 4.00% rate, significantly higher than the rate on FHLB advances.

For the three months ended September 30, 2021, the net interest spread decreased by 24 basis points to 2.71%, compared to 2.95% for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the net interest spread decreased by 40 basis points to 2.63%, compared to 3.03% for the nine months ended September 30, 2020. The effect of non-interest bearing funds decreased to 18 basis points from 21 basis points for the three months ended September 30, 2021, and decreased to 19 basis points from 23 basis points for the nine months ended September 30, 2021, compared to the same periods in 2020. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for the third quarter of 2021 was 2.89%, compared to 3.16% for the third quarter of 2020. For the year-to-date period, the Corporation’s borrowers. Competition in the immediate market area is pricing select shorter-term fixed-rate commercial and agricultural lending rates below 4.00%NIM was 2.82%, compared to 3.26% for the strongest loan credits. This current market environment has largely prevented the Corporation from gaining yield on fixed rate commercial and agricultural loans. same period in 2020.

The Asset Liability Committee (ALCO) carefully monitors the NIM because it indicates trends in net interest income,NII, 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 yields on the Corporation’s securities increased by 44 basis points for the three months ended September 30, 2017, and 95 basis points for the nine months ended September 30, 2017, compared to the same periodschanges in 2016. The Corporation’s securities portfolio consists of nearly all fixed income debt instruments. The Corporation’s taxable securities experienced a 74 basis-point increase in yield for the three months ended September 30, 2017, and a 140 basis-point increase in yield for the nine months ended September 30, 2017, compared to the same periods 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 reinvestment in the first nine months of 2017 has been occurring at higher rates and regular amortization has been lower due to the slightly higher interest rate environment. These variables have caused taxable security yields to increase significantly. The yield on tax-exempt securities decreased minimally by five basis points and six basis points for the three and nine months ended September 30, 2017, compared to the same periods in 2016.

Prior to 2017, 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 compared to 2016, 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, with more of the interest bearing funds in the form 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.

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ENB FINANCIAL CORP
Management’s Discussion and Analysis

Interest expense on deposits declined by $20,000, or 3.9%, and $130,000, or 8.3%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Demand and savings deposits reprice in entirety whenever the offering rates are changed. This allows management to reduce interest costs rapidly; however, it becomes difficult to continue to gain cost savings once offering rates decline to these historically low levels. For the third quarter of 2017 and the nine months ended September 30, 2017, the average balances of interest bearing demand deposits increased by $6.9 million, or 3.6%, and $16.6 million, or 9.0%, over the same periods in 2016, while the average balance of savings accounts increased by $23.8 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.

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 months ended September 30, 2017, time deposit balances decreased compared to balances at September 30, 2016. The decrease can be attributed to the lowest rates paid historically on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be minimal. 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. The Corporation was able to reduce interest expense on time deposits by $44,000, or 10.6%, for the third quarter of 2017, compared to the same period in 2016, and by $191,000, or 14.7%, for the nine months ended September 30, 2017, compared to the same period in the prior year. Average balances 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. The average annualized interest rate paid on time deposits decreased by five basis points for the three-month period and eight basis points for the nine-month period when comparing both years.

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 were utilized in the three and nine months ended September 30, 2017, respectively, while average short-term advances of $10,052,000 and $11,131,000 were utilized in the three and nine months ended September 30, 2016. 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 by $3,782,000, or 5.2%, and $3,117,000, or 4.2%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Interest expense on borrowed funds was $23,000, or 9.5% higher, and $2,000, or 0.3% lower, for the three and nine-month periods when comparing 2017 to 2016.

For the three months ended September 30, 2017, the net interest spread increased 28 basis points to 3.34%, from 3.06% for the three months ended September 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. The effect of non-interest bearing funds stayed the same 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. 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, the benefit of non-interest bearing deposits is reduced because there is less 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 to 0.20%, then the benefit of the non-interest bearing funds is only $20. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the lower 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.

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Table of Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

 

Provision for Loan Losses

 

The allowance for loancredit losses (ALLL)(ACL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ALLLACL is adequate to cover any losses inherent in the loan portfolio. The Corporation recorded a credit provision of $250,000 for the third quarter of 2021, and provision expense of $240,000 for the three months ended September 30, 2017, and $450,000$125,000 for the nine months ended September 30, 2017,2021, compared to a provision expense of $200,000$1,250,000 and $2,575,000, respectively, for the three months ended September 30, 2016, and $200,000 for the nine months ended September 30, 2016.2020. The analysis of the ALLL takes into consideration, among other things, the following factors:

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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,
·changes in the value of underlying collateral.

During the nine months ended September 30, 2017, the Corporation recorded provision expense of $450,000 primarilywas elevated in 2020 due to higher balancesthe onset of classified loansCOVID-19 and the deteriorating economic conditions that were expected to impact credit risk moving forward. The Corporation also provided $1.1 million in a specific allocation of $98,000 related to an impaired loan. During the first nine months of 2016, the Corporation recorded $200,000 of provision expense. Management closely tracks delinquent, non-performing, and classified loans as a percentage of capital and of theone commercial borrower in 2020. This loan portfolio.

As of September 30, 2017, total delinquencies represented 0.46% of total loans, compared to 0.45% as of September 30, 2016. These ratios are extremely 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 of residential and commercial real estate, had stressed these ratios in past periods and the addition of a commercial loan relationship in the first quarter 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. 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 charge-offs by $16,000 in the first nine months of 2017.

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, 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 months of 2017, qualitative factors were adjusted based on current information regarding delinquency, economic conditions, and other factors. Changes in qualitative factors were unchanged for two loan pools, while they increased for four pools and declined for three. Adjustments to the qualitative factors were minor in nature with most changes being only five or ten basis points of adjustment, 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 changes 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,2021 resulting in a higher concentrationreversal of residential mortgages.

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Management’s Discussionthat specific allocation and Analysis

Management also monitors the allowance as a percentage of total loans. The percentage ofcredit provision for the allowance to total loans has increased since September 30, 2016 and December 31, 2016, and remains comparable with the peer group.quarter. As of September 30, 2017,2021, the allowance as a percentage of total loans was 1.37%1.41%, up from 1.32% at December 31, 2016, and 1.31%compared to 1.42% at September 30, 2016. Management continues to evaluate the allowance for loan losses 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 is adequate to provide for future loan losses based on the current portfolio and the current economic environment.2020. More detail is provided under Allowance for LoanCredit Losses in the Financial Condition section that follows.

 

 

Other Income

 

Other income for the third quarter of 20172021 was $2,622,000,$4,139,000, a decrease of $206,000,$235,000, or 7.3%5.4%, compared to the $2,828,000$4,374,000 earned during the third quarter of 2016.2020. For the year-to-date period ended September 30, 2017,2021, other income totaled $7,546,000, a decrease$13,534,000, an increase of $1,020,000,$2,325,000, or 11.9%20.7%, compared to the same period in 2016.2020. The following tables detail the categories that comprise other income.

 

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)  

 

OTHER INCOME         
(DOLLARS IN THOUSANDS)         
 Nine Months Ended September 30, Increase (Decrease)  Three Months Ended September 30, Increase (Decrease) 
 2017 2016      2021 2020     
 $ $ $ %  $ $ $ % 
                    
Trust and investment services  1,335   1,104   231   20.9   540   442   98   22.2 
Service charges on deposit accounts  908   820   88   10.7   282   250   32   12.8 
Other service charges and fees  986   824   162   19.7   336   451   (115)  (25.5)
Commissions  1,714   1,611   103   6.4   945   781   164   21.0 
Gains on securities transactions, net  417   2,130   (1,713)  (80.4)  350   55   295   536.4 
Gains (losses) on equity securities, net  32   (54)  86   >100% 
Gains on sale of mortgages  1,302   1,109   193   17.4   1,206   2,081   (875)  (42.0)
Earnings on bank owned life insurance  514   604   (90)  (14.9)  218   209   9   4.3 
Other miscellaneous income  370   364   6   1.6   230   159   71   44.7 
                                
Total other income  7,546   8,566   (1,020)  (11.9)  4,139   4,374   (235)  (5.4)

 

OTHER INCOME

(DOLLARS IN THOUSANDS)

  Nine Months Ended September 30,  Increase (Decrease) 
  2021  2020       
  $  $  $  % 
             
Trust and investment services  1,746   1,480   266   18.0 
Service charges on deposit accounts  776   770   6   0.8 
Other service charges and fees  1,141   1,245   (104)  (8.4)
Commissions  2,761   2,116   645   30.5 
Gains on securities transactions, net  711   704   7   1.0 
Gains (losses) on equity securities, net  256   (279)  535   >100% 
Gains on sale of mortgages  4,381   4,312   69   1.6 
Earnings on bank owned life insurance  636   620   16   2.6 
Other miscellaneous income  1,126   241   885   >100% 
                 
Total other income  13,534   11,209   2,325   20.7 

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Management’s Discussion and Analysis

Trust and investment services income increased $83,000,$98,000, or 24.1%22.2%, and $231,000,$266,000, or 20.9%18.0%, for the three and nine months ended September 30, 2017,2021, compared to the same periods last year. This revenue consists of income from traditional trust services and income from alternativenon-deposit investment services provided through a third party. In the third quarter of 2017,2021, traditional trust income increased by $42,000,$17,000, or 17.5%6.3%, while income from alternativenon-deposit investments increased by $41,000,$81,000, or 39.7%48.0%, compared to the third quarter of 2016.2020. For the nine months ended September 30, 2017,2021, traditional trust services income increased by $158,000,$82,000, or 21.2%8.9%, while income from alternativenon-deposit investment services increased by $73,000,$185,000, or 20.4%33.4%, compared to the same period in 2016. Trust2020. The increase in income was upfrom the investment services area for both time periods ascan be partially attributed to transfer fees received from a resultnew broker dealer that resulted in additional income of new business, higher fees, and higher trust valuations. Several new trust accounts were opened$89,000 in the fourth quarterfirst nine months of 2016 adding revenue beginning in 2017. A new2021. The trust fee schedule was implemented in Marchand investment services area continues to be an area 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 andstrategic focus for the fees generated from their fair market values.

Corporation.

 

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Management’s DiscussionOther service charges and Analysis

Service charges on deposit accounts increasedfees decreased by $35,000,$115,000, or 12.3%25.5%, and $88,000,$104,000, or 10.7%8.4%, for the three and nine months ended September 30, 2017,2021, 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. Total overdraft2020. The decline can be primarily attributed to loan administration fees increasedwhich declined by $29,000,$76,000, or 12.8%46.8%, and $77,000,$95,000, or 11.8%23.3%, for the three and nine months ended September 30, 2017,2021, compared to the same periods in 2016. Management attributes higher overdraft fee income primarily to the growth in deposit accounts and new customers. No changes to Bank fees or policies have occurred. Most of the other service charge areas showed minimal increases or decreases from the prior year. Loan administration fees were higher in 2020 with higher levels of mortgage volume at that time.

 

Other service charges and feesCommissions increased by $24,000,$164,000, or 7.9%21.0%, and $162,000,$645,000, or 19.7%30.5%, for the three and nine months ended September 30, 2017,2021, compared to the same periods in 2016.2020. The quarterly and year-to-date increase iswas primarily due tocaused by an increase in loan administration fees that were higher by $40,000,debit card interchange income of $138,000, or 37.7%21.0%, for the three-month periodthree months ended September 30, 2017,2021, and $133,000,$543,000, or 47.8%29.7%, for the nine-month periodnine months ended September 30, 2017,2021, 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 these increased fees. Account analysis fees increased by $6,000, or 53.9%, and $23,000, or 86.3%, for the quarter and year-to-date periods ended September 30, 2017, 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. 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 by $31,000, or 5.6%, and $103,000, or 6.4%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. This was primarily caused by debit card interchange income, which increased by $23,000, or 4.8%, and $90,000, or 6.4%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. The interchange income is a direct result of the volume of debit card transactions processed and this income increasesdecreased 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 Servicesspending changed with lower levels of purchases impacted by COVID-19, but increased by $7,000, or 30.0%,again in late 2020 and $14,000, or 22.6%, forthroughout 2021.

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.

For the three months ended September 30, 2017, $170,0002021, $350,000 and $711,000 of gains on securities transactions were recorded, respectively, compared to $464,000gains of $55,000 and $704,000, respectively, for the same periodperiods 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.2020. 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 months of 20162021 and 2020 provided greater opportunities to take significant gains out of the portfolio thanportfolio.

Gains or losses on equity securities amounted to a gain of $32,000 during the third quarter of 2021, compared to a loss of $54,000 for the same period in the prior year. For the year-to-date period, gains on equity securities amounted to $256,000 in 2021, compared to a loss of $279,000 in 2020. Gains or losses on equity securities are impacted by actual sales of securities as well as changes in the market value of these securities since market value gains and losses are recorded through income. In the first nine months of 2017. Management also executed more2021, $99,000 of gains were recorded on the sale of bank stocks and $157,000 was recorded as an unrealized gain due to the increase in market value of the bank stock portfolio. During the first nine months of 20162020, unrealized losses of $279,000 were recorded due to offset the non-recurring Sub-U.S. Agency amortization of $1,681,000. Market timing was favorabledecline in bank stock prices as the bond market was strongerCOVID-19 pandemic began and loan growth was also strong so management did not have to reinvest a significant amount ofnegatively impacted the proceeds from the sale of securities.market.

 

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Management’s Discussion and Analysis

Gains on the sale of mortgages were $510,000$1,206,000 for the three-month period ended September 30, 2017,2021, compared to $557,000$2,081,000 for the same period in 2016,2020, a $47,000,$875,000, or 8.4%42.0% decrease. Gains onFor the salenine-month period ended September 30, 2021, mortgage gains amounted to $4,381,000, compared to $4,312,000 for the same period in 2020, a $69,000, or 1.6% increase. While mortgage activity was slower for the third quarter of mortgages2021 compared to 2020, year-to-date activity was still higher resulting in the year-to-date increase in mortgage gains. The increased mortgage activity is the result of historically low interest rates and a surge in mortgage refinancing activity.

The miscellaneous income category increased by $71,000 for the three months ended September 30, 2021, and $885,000 for the nine months ended September 30, 2017, increased by $193,000, or 17.4%,2021, compared to the same periodperiods in 2016. Secondary2020. Net mortgage financing activity drives the gains on the sale of mortgages, and the activity in the first nine months of 2017 was atservicing income increased levels due to the greater marketing efforts of the Corporation’s mortgage area, a slightly improved local economy, as well as attractive mortgage rates. Management anticipates that gains should continue at these higher levels throughout the remainder of 2017, with the continued increased focus to grow the Corporation’s mortgage origination activity, continued low mortgage rates, and expanded adjustable rate mortgage offerings. Most of the Corporation’s recent heldby $88,000 for investment mortgage growth has come in the form of 5/1 and 7/1 year adjustable rate mortgages.

For the three months ended September 30, 2017, earnings on bank-owned life insurance (BOLI) decreased by $40,000, or 19.0%,2021, and $443,000 for the nine months ended September 30, 2017, earnings on BOLI decreased by $90,000, or 14.9%,2021, compared to the same periods in 2016. The decreasethe prior year. This 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 throughoutmortgage servicing asset amortization in 2021. Other miscellaneous income categories increased as well making up the remainder of 2017 and into 2018. 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. Increasesvariance in cash surrender value are a function of the return of the policy net of all expenses.this category.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Operating Expenses

 

Operating expenses for the third quarter of 20172021 were $7,647,000,$10,118,000, an increase of $899,000,$920,000, or 13.3%10.0%, compared to the $6,748,000$9,198,000 for the third quarter of 2016.2020. For the year-to-date period ended September 30, 2017,2021, operating expenses totaled $22,880,000,$29,001,000, an increase of $2,938,000,$2,449,000, or 14.7%9.2%, compared to the same period in 2016.2020. The following tables provide details of the Corporation’s operating expenses for the three and nine-month periods ended September 30, 2017,2021, compared to the same periods in 2016.

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Management’s Discussion and Analysis2020.

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

OPERATING EXPENSES            
(DOLLARS IN THOUSANDS)            
             
  Three Months Ended September 30,  Increase (Decrease) 
  2017  2016       
  $  $  $  % 
Salaries and employee benefits  4,840   4,219   621   14.7 
Occupancy expenses  624   555   69   12.4 
Equipment expenses  299   276   23   8.3 
Advertising & marketing expenses  143   120   23   19.2 
Computer software & data processing expenses  575   471   104   22.1 
Bank shares tax  215   227   (12)  (5.3)
Professional services  377   380   (3)  (0.8)
Other operating expenses  574   500   74   14.8 
     Total Operating Expenses  7,647   6,748   899   13.3 
                 

 

OPERATING EXPENSES         
(DOLLARS IN THOUSANDS)         
         
 Nine Months Ended September 30, Increase (Decrease)  Three Months Ended September 30,     
 2017 2016      2021 2020 Increase (Decrease) 
 $ $ $ %  $ $ $ % 
Salaries and employee benefits  14,370   12,230   2,140   17.5   6,142   5,860   282   4.8 
Occupancy expenses  1,828   1,584   244   15.4   654   598   56   9.4 
Equipment expenses  878   811   67   8.3   255   298   (43)  (14.4)
Advertising & marketing expenses  539   422   117   27.7   282   184   98   53.3 
Computer software & data processing expenses  1,654   1,345   309   23.0   1,097   835   262   31.4 
Bank shares tax  644   680   (36)  (5.3)  322   239   83   34.7 
Professional services  1,260   1,207   53   4.4   535   549   (14)  (2.6)
Other operating expenses  1,707   1,663   44   2.6   831   635   196   30.9 
Total Operating Expenses  22,880   19,942   2,938   14.7   10,118   9,198   920   10.0 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

  Nine Months Ended September 30,       
  2021  2020  Increase (Decrease) 
  $  $  $  % 
Salaries and employee benefits  17,800   16,522   1,278   7.7 
Occupancy expenses  1,972   1,805   167   9.3 
Equipment expenses  806   904   (98)  (10.8)
Advertising & marketing expenses  717   676   41   6.1 
Computer software & data processing expenses  3,297   2,309   988   42.8 
Bank shares tax  876   718   158   22.0 
Professional services  1,572   1,679   (107)  (6.4)
Other operating expenses  1,961   1,939   22   1.1 
     Total Operating Expenses  29,001   26,552   2,449   9.2 

 

Salaries and employee benefits arebenefit costs increased by $282,000, or 4.8%, for the largest categorythird quarter of operating expenses. In general, they comprise 63% of2021, and $1,278,000, or 7.7%, for the Corporation’s total operating expenses. For the three monthsyear-to-date period ended September 30, 2017, salaries and benefits increased $621,000, or 14.7%, from the same period in 2016. For the nine months ended September 30, 2017, salaries and benefits increased $2,140,000, or 17.5%, compared to the nine months ended September 30, 2016. Salaries increased by $459,000, or 14.3%, and employee benefits increased by $162,000, or 15.9%, for the three months ended September 30, 2017, compared to the same period in 2016. For the nine months ended September 30, 2017, salary expense increased by $1,528,000, or 16.9%, while employee benefits increased by $611,000, or 19.3%, compared to the nine months ended September 30, 2016. Salary and benefit expenses have grown significantly primarily due to the three new branch locations added in 2016, but also as a result of additional operational positions to support the growth of the Corporation.

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, or 12.4%, and $244,000, or 15.4%, for the three and nine months ended September 30, 2017,2021, compared to the same periods in the prior year. Building repairThe growth in salaries can primarily be attributed to merit and maintenancecost of living increases, additions to staff, and higher deferred salaries costs increased by $18,000, or 41.8%, and $85,000, 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%, when comparing the three and nine months ended September 30, 2017, to the same periods in the prior year. Lease expense increased by $22,000, or 61.5%,second and $59,000, or 63.6%, 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 months ended September 30, 2017, compared to the same periods in the prior year. Occupancy expenses werethird quarters of 2020 stemming from higher for both the quarter and year-to-date periods as a resultlevels 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.

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Management’s Discussion and Analysis

Equipment expenses increased by $23,000, or 8.3%, and $67,000, or 8.3%, for the three and nine months ended September 30, 2017, compared 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 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 the three and nine-month periods in 2017 compared to 2016. In general, furniture and equipment expenses are increasing as a result of the expanded branch and office network.

Advertising and marketing expenses increased by $23,000, or 19.2%, for the three months ended September 30, 2017, compared to the same period 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. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses remained the same 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 increased by $84,000, or 31.7%, compared to the year-to-date period in 2016. Public relations expenses increased by $23,000, or 72.1%, for the three months ended September 30, 2017, and $34,000, or 21.7%, for the nine months ended September 30, 2017, compared to the same periods in 2016. 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.Paycheck Protection Program (PPP) loan production.

 

Computer software and data processing expenses increased by $104,000,$262,000, or 22.1%31.4%, for the third quarter of 2017,2021 compared to 2020, and $309,000,$988,000, or 23.0%42.8%, for the nine months ended September 30, 2017,2021, compared to the same periods in 2016.2020. Software-related expenses were up $78,000,by $285,000, or 30.3%, and $242,000, or 33.4%60.1%, for the three months ended September 30, 2021, and by $941,000, or 70.6%, for the nine months ended September 30, 2017,2021, 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. Data processing fees were up $27,000, or 12.3%, and $68,000, or 10.9%,

Bank shares tax expense was $322,000 for the three and nine months ended September 30, 2017,third quarter of 2021, an increase of $83,000, or 34.7%, from the third quarter of 2020. For the year-to-date period, shares tax increased by $158,000, or 22.0%, 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.

The Pennsylvania Bank Shares Tax expense decreased $12,000, or 5.3%, and $36,000, or 5.3%, for the three and nine months ended September 30, 2017, compared to the same periods in 2016. Threeprior 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 usinguses a year-endperiod-end balance of shareholders’ equity less tax-exempt U.S. obligations multiplied byand a tax rate of 0.89%0.95%. In 2016, as partThe increase in 2021 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.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Other operating expenses increased by $74,000,$196,000, or 14.8%30.9%, and by $44,000,$22,000, or 2.6%1.1%, for the three and nine months ended September 30, 2017 respectively,2021, compared to the same periods in 2016. Loan-related2020. The quarter-to-date increase can be primarily attributed to loan related expenses which increased 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,$111,000, or 63.4%, and $45,000, or 50.7%63.2%, for the three and nine-month periodsmonths ended September 30, 2017,2021, compared to the same periodsperiod in 2020. FDIC insurance charges increased by $27,000, or 33.6%, and travel-related costs increased by $25,000, or 133.5%, for the three months ended September 30, 2021, compared to the same period in the prior year.

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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.expense was $760,000 for the third quarter of 2021 compared to $533,000 for the same period in 2020. For the three and nine months ended September 30, 2017,2021, the Corporation recorded Federal income tax expense of $391,000 and $935,000,$2,251,000, compared to tax expense of $445,000 and $1,045,000$1,610,000 for the three and nine months ended September 30, 2016.2020. The effective tax rate for the Corporation was 16.1% for the three months ended September 30, 2017, and 14.0%15.6% for the nine months ended September 30, 2017, compared to 17.6%2021 and 15.6% 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.

2020. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and BOLIBank Owned Life Insurance (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 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 in the third quarter of 2017 and $644,000 for the nine months ended September 30, 2017, compared to $227,000 and $680,000 for the same periods in 2016. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income, under operating expenses.

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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 30, 2017,2021, the Corporation had $320.7$561.6 million of securities available for sale, which accounted for 31.7%35.1% of assets, compared to 31.3%32.6% as of December 31, 2016,2020, and 30.7%27.3% as of September 30, 2016.2020. Based on ending balances, the securities portfolio increased 7.6%56.0% from September 30, 2016,2020, and 4.1%17.9% from December 31, 2016.2020.

 

The debt securities portfolio was showing a net unrealized lossgain of $3,381,000$5,477,000 as of September 30, 2017,2021, compared to an unrealized lossgain of $7,401,000$10,072,000 as of December 31, 2016, and an unrealized gain of $1,850,000 as of September 30, 2016.2020. 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% as of September 30, 2016, 2.45% as of December 31, 2016, and 2.33% as of September 30, 2017. The lower Treasury rates since December 31, 2016 have caused an improvement in market valuation, which has resulted in the smaller unrealized loss recorded at September 30, 2017 compared to the significant unrealized losses at December 31, 2016.

 

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 30, 2017,2021 and December 31, 2016, and September 30, 2016.2020.

 

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)  

    Net  
  Amortized Unrealized Fair
  Cost Gains (Losses) Value
  $ $ $
September 30, 2017            
U.S. government agencies  29,107   (460)  28,647 
U.S. agency mortgage-backed securities  54,181   (598)  53,583 
U.S. agency collateralized mortgage obligations  54,503   (465)  54,038 
Corporate bonds  57,384   (248)  57,136 
Obligations of states and political subdivisions  123,344   (1,671)  121,673 
Total debt securities  318,519   (3,442)  315,077 
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 

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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 

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 the Federal Reserve will act to increase rates one more time 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 seeking U.S. Treasury debt as a safe haven and drove U.S. Treasury yields to new record lows early in the third quarter of 2016. Treasury rates increased significantly during the third and fourth quarters of 2016. The Treasury rates ran up to a 2017 high in March and then slowly retreated until hitting lows in early September. Since then Treasury rates have slowly increased and are likely to increase throughout the fourth quarter in anticipation 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 debt securities. The impact will vary according to the length and structure of each sector. The Federal Reserve increased the Fed funds rate by 25 basis points in December of 2015, December of 2016, March of 2017, and June 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. 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 could grow if market rates do increase during the remainder of the year, either in anticipation of a Federal Reserve rate move, or after the next rate move.

After four consecutive quarters of declines ending on September 30, 2016, the Corporation’s effective duration 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 decline in the second and third quarters of 2017. 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 as of September 30, 2016. Since then it has increased to 3.3 as of September 30, 2017. Duration is expected to remain stable or decline slightly throughout the remainder of 2017. It will be more difficult to reduce duration materially since management has increased the percentage of municipal holdings 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.

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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, gains from the sales of securities did decline significantly.

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 bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book value of $5.3 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 and fair market value of $368,000 as of September 30, 2017. The equity holdings make up 1.8% 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.

     Net    
  Amortized  Unrealized  Fair 
  Cost  Gains (Losses)  Value 
  $  $  $ 
September 30, 2021            
U.S. treasuries  4,981   17   4,998 
U.S. government agencies  29,616   (335)  29,281 
U.S. agency mortgage-backed securities  56,941   521   57,462 
U.S. agency collateralized mortgage obligations  33,173   420   33,593 
Asset-backed securities�� 100,722   721   101,443 
Corporate bonds  84,264   710   84,974 
Obligations of states and political subdivisions  246,413   3,423   249,836 
Total debt securities, available for sale  556,110   5,477   561,587 
Equity securities  8,740   104   8,844 
Total securities  564,850   5,581   570,431 
             
December 31, 2020            
U.S. government agencies  54,224   137   54,361 
U.S. agency mortgage-backed securities  69,777   1,275   71,052 
U.S. agency collateralized mortgage obligations  34,449   586   35,035 
Asset-backed securities  60,387   88   60,475 
Corporate bonds  60,387   1,336   61,723 
Obligations of states and political subdivisions  187,132   6,650   193,782 
Total debt securities  466,356   10,072   476,428 
Equity securities  7,158   (53)  7,105 
Total securities  473,514   10,019   483,533 

 

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

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Management’s Discussion and Analysis

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.

 

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)

 

 Period Ending Period Ending
 September 30, 2017 December 31, 2016 September 30, 2016 September 30, 2021 December 31, 2020
 $ % $ % $ % $ % $ %
                    
U.S. treasuries  4,998   0.9   —   — 
U.S. government agencies  28,647   8.9   32,261   10.5   33,077   11.1   29,281   5.1   54,361   11.2 
U.S. agency mortgage-backed securities  53,583   16.7   55,869   18.1   50,191   16.8   57,462   10.1   71,052   14.7 
U.S. agency collateralized mortgage obligations  54,038   16.9   37,936   12.3   35,038   11.8   33,593   5.9   35,035   7.2 
Asset-backed securities  101,443   17.8   60,475   12.5 
Corporate debt securities  57,136   17.8   52,091   16.9   53,909   18.1   84,974   14.9   61,723   12.8 
Obligations of states and political subdivisions  121,673   37.9   124,430   40.4   119,967   40.2   249,836   43.8   193,782   40.1 
Equity securities  5,618   1.8   5,524   1.8   5,957   2.0 
Total debt securities, available for sale  561,587   98.5   476,428   98.5 
                
Marketable equity securities  8,844   1.5   7,105   1.5 
                                        
Total securities  320,695   100.0   308,111   100.0   298,139   100.0   570,431   100.0   483,533   100.0 

 

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

 

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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 SeptemberThe Corporation purchased $5.0 million of 2016,U.S. treasuries during the most significant change occurring withinsecond quarter of 2021 and held no treasuries in 2020, resulting in the Corporation’s securities portfolio was an increase in U.S. agency collateralized mortgage obligations (CMOs), andthis sector which represents a decrease in U.S. government agency securities.

safe credit at a market appropriate yield which added some diversity to the portfolio. The Corporation’s U.S. government agency sector decreased by $4.4$25.1 million, or 13.4%46.1%, since September 30, 2016,December 31, 2020, with the weighting decreased from 11.1%11.2% of the portfolio to 8.9%5.1%. InManagement had purchased $35.5 million of short-term discount notes at the past, management’s goal wasend of 2020 to maintain agencyoffset the Corporation’s shares tax expense. These bonds were sold in the first quarter of 2021 and are responsible for the decline in this category. Management has increased the allocations of both asset-backed securities at approximately 15%(ABS) and obligations of states and political subdivisions (municipals) since December 31, 2020, in order to better structure the portfolio to achieve higher yields while also protecting in preparation for a rates-up environment.

The Corporation’s ABS and municipal sectors have increased significantly since December 31, 2020, with ABS increasing $41.0 million, or 67.7%, and municipals increasing $56.1 million, or 28.9%. ABS 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 flows. With liquidity and cash levels remaining high, management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in a rates-up environment.

Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities 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. 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. Municipal securities were purchased throughout 2020 and 2021 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. Municipal bonds represented 43.8% of the securities portfolio. In the current rate environment, management is comfortable maintaining agencies at a levelportfolio as of approximately 10%September 30, 2021, compared to 40.1% as of the portfolio. This sector is also important in maintaining adequate risk weightingsDecember 31, 2020. The Corporation’s investment policy limits municipal holdings to 150% of the portfolio,Tier 2 capital. As of September 30, 2021, municipal holdings amounted to ensure sufficient U.S. government securities for pledging purposes,155% of Tier 2 capital, above this limit. The Corporation plans to be back within policy guidelines by December 31, 2021.

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Management’s Discussion and importantly to ladder out a schedule of agency and corporate maturities over the next 5 years to avoid any concentration of maturities. Next to U.S. Treasuries, U.S. agencies are viewed as the safest instruments and are considered by management as a foundational portion of the portfolio.Analysis

 

The Corporation’s U.S. agency MBS and CMO sectors have increased in totalfluctuated since September 30, 2016, and the weightings have changedDecember 31, 2020, 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 $19.0decreasing $13.6 million, or 54.2%19.1%, while MBS balances have only increased by $3.4and CMOs decreasing $1.4 million, or 6.8%, when comparing September 30, 2017, to balances at September 30, 2016.4.1%. 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, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities.

 

As of September 30, 2017,2021, the fair value of the Corporation’s corporate bonds increased by $3.2$23.3 million, or 6.0%37.7%, from balances at September 30, 2016.December 31, 2020. 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 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. Due to purchases, the fair market value of municipal holdings has increased by $1.7 million, or 1.4%, from September 30, 2016 to September 30, 2017. Municipal bonds represented 37.9% of the securities portfolio as of September 30, 2017, compared to 40.2% as of September 30, 2016. The Corporation’s investment policy limits municipal holdings to 125% of Tier 2 capital. As of September 30, 2017, municipal holdings amounted to 109% of Tier 2 capital.

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Management’s Discussion and Analysis

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 30, 2017, no securities have fallen below investment grade.

As of September 30, 2017, nineteen of the thirty-three corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 99.1% of book value. 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 30, 2017, all but three 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 corporate bonds, with a total book value of $6.7 million, did not have an A3 or A- rating as of September 30, 2017. 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 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 bonds have a book value of $20.0 million with a $57,000 unrealized loss as of September 30, 2017. 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.

As a result of the fallout of the financial crisis, the major rating services have tightened their credit underwriting standards 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.

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 is closely monitoring all corporate and municipal securities.

Loans

 

Net loans outstanding increased by 3.1%4.4%, to $576.0$867.8 million at September 30, 2017,2021, from $558.5$831.2 million at September 30, 2016.2020. Net loans increased by 2.1%7.0%, an annualized rate of 2.8%9.3%, from $564.0$811.0 million at December 31, 2016.2020. The following table shows the composition of the loan portfolio as of September 30, 2017,2021, December 31, 2016,2020, and September 30, 2016.2020.

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Management’s Discussion and Analysis

 

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

 

 September 30, December 31, September 30, September 30, December 31, September 30,
 2017 2016 2016 2021 2020 2020
 $ % $ % $ % $ % $ % $ %
                        
Commercial real estate                                                
Commercial mortgages  90,468   15.5   86,434   15.2   87,676   15.5   166,741   19.0   142,698   17.4   136,125   16.2 
Agriculture mortgages  150,269   25.8   163,753   28.7   167,531   29.7   188,455   21.4   176,005   21.4   174,150   20.7 
Construction  18,762   3.2   24,880   4.4   28,796   5.1   18,786   2.1   23,441   2.9   22,380   2.7 
Total commercial real estate  259,499   44.5   275,067   48.3   284,003   50.3   373,982   42.5   342,144   41.7   332,655   39.6 
                                                
Consumer real estate (a)                                                
1-4 family residential mortgages  168,984   29.0   150,253   26.3   143,066   25.3   302,670   34.4   263,569   32.0   260,465   30.9 
Home equity loans  11,457   2.0   10,391   1.8   10,537   1.9   11,889   1.4   10,708   1.3   10,788   1.3 
Home equity lines of credit  57,991   9.9   53,127   9.3   50,251   8.9   74,919   8.5   71,290   8.7   68,368   8.1 
Total consumer real estate  238,432   40.9   213,771   37.4   203,854   36.1   389,478   44.3   345,567   42.0   339,621   40.3 
                                                
Commercial and industrial                             ��                  
Commercial and industrial  41,724   7.1   42,471   7.4   41,705   7.4   73,695   8.4   97,896   11.9   128,414   15.2 
Tax-free loans  19,632   3.4   13,091   2.3   11,485   2.0   17,279   2.0   10,949   1.3   16,423   1.9 
Agriculture loans  18,487   3.2   21,630   3.8   19,363   3.4   19,180   2.2   20,365   2.5   20,494   2.4 
Total commercial and industrial  79,843   13.7   77,192   13.5   72,553   12.8   110,154   12.6   129,210   15.7   165,331   19.5 
                                                
Consumer  5,166   0.9   4,537   0.8   4,663   0.8   5,211   0.6   5,155   0.6   5,190   0.6 
                                                
Total loans  582,940   100.0   570,567   100.0   565,073   100.0   878,825   100.0   822,076   100.0   842,797   100.0 
Less:                                                
Deferred loan fees (costs), net  (1,137)      (1,000)      (895)      (1,436)      (1,294)      (380)    
Allowance for loan losses  8,028       7,562       7,435     
Allowance for credit losses  12,454       12,327       11,996     
Total net loans  576,049       564,005       558,533       867,807       811,043       831,181     

 

(a)Residential real estate loans do not include mortgage loans serviced for others which totaled $90,123,000$274,892,000 as of September 30, 2017, $66,767,0002021, $235,437,000 as of December 31, 2016,2020, and $59,506,000$217,812,000 as of September 30, 2016.2020.

 

There was moderate growth in the loan portfolio since September 30, 2016,2020, and December 31, 2016. A decline in agricultural mortgages and construction lending secured by commercial real estate between December 31, 2016 and September 30, 2017 offset a large portion of the growth occurring in other areas of the portfolio, resulting in somewhat slower growth. Commercial real estate loans saw a decline2020. Most major loan categories showed an increase in balances from both time periods with increases in consumer real estate loans andthe exception of the commercial and industrial loans more than offsetting this decrease. which showed a decline due to the forgiveness of PPP loans since September 30, 2020.

The biggest decline in the commercialconsumer residential real estate sector has been in agricultural mortgages, which declined due to a reorganizationcategory represents the largest group of loans for 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 theCorporation. The consumer residential real estate sector,category of total loans increased from $339.6 million on September 30, 2020, to $389.5 million on September 30, 2021, a 14.7% increase. This category includes closed-end fixed rate or adjustable-rate residential real estate loans secured by 1-4 family residential properties, including first and junior liens, and floating rate home equity loans. The 1-4 family residential mortgages 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 September 30, 2020, this percentage was 40.3%, and as of September 30, 2021, it increased due to 44.3%. Although economic conditions for consumers had deteriorated with the expansionCOVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continued to remain relatively strong as consumers refinanced existing debt to lower rates.

The first lien 1-4 family mortgages increased by $42.2 million, or 16.2%, from September 30, 2020, to September 30, 2021. These first lien 1-4 family loans made up 76.7% of the residential real estate total as of September 30, 2020, and 77.7% as of September 30, 2021. 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 third quarter of 2021, mortgage production decreased 17% from the previous quarter and was down 10% from the third quarter of 2020.  Purchase money origination constituted 69% of the Corporation’s mortgage divisionoriginations for the quarter, with construction-only and successful efforts to expandconstruction-permanent loans making up 37% of that mix.  With a lower volume of new construction business, the product line and increasepercentage of mortgage originations being added into the sales force to capture a greater shareCorporation’s held-for-investment mortgage portfolio decreased quarter-over-quarter.  In the third quarter of 2021, 65% of all mortgage originations were held in the mortgage portfolio, 49% of which were adjustable rate mortgages.  As of September 30, 2021, ARM balances were $133.5 million, representing 44.1% of the local mortgage market. Home1-4 family residential loan portfolio of the Corporation.  With the dollar volume being delivered into the secondary market remaining stable, the gains on the sale of mortgages remained consistent quarter-over-quarter. 

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As of September 30, 2021, the remainder of the residential real estate loans consisted of $11.5 million of fixed rate junior lien home equity loans, and $71.7 million of variable rate home equity lines of credit have grown in response(HELOCs). This compares to the low interest$10.8 million of fixed rate environment encouraging customersjunior lien home equity loans, and $68.4 million of HELOCs as of September 30, 2020. Therefore, combined, these two types of home equity loans increased from $79.2 million to utilize variable rate consumer borrowings in conjunction with$83.2 million, an attractive six-month introductory rateincrease of 1.99%, which the Corporation has offered for all of 2016 and during the first nine months of 2017.5.1%.

 

In terms of all loans secured byCommercial real estate the total of all categories of real estate loans comprises 85.4%makes up 42.5% of total loans as of September 30, 2017. At $259.5 million,2021, compared to 39.6% of total loans as of September 30, 2020. Within the commercial real estate issegment, the largest categoryincrease has primarily been in commercial and agricultural mortgages. Commercial mortgages increased $30.6 million, or 22.5%, from balances at September 30, 2020. Commercial mortgages as a percentage of the total loan portfolio consistingincreased to 19.0% as of 44.5% of total loans. This category includes commercialSeptember 30, 2021, compared to 16.2% at September 30, 2020. Agricultural mortgages agriculture mortgages, and construction loans. Commercial real estate loans decreasedincreased by $14.3 million, or 8.2%, from $284.0$174.2 million as of September 30, 2016,2020, to $259.5$188.5 million as of September 30, 2017, a $24.5 million, or 8.6% decrease.

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.2021. Agricultural mortgages decreased $17.2 million, or 10.3% from $167.5 millionwere 21.4% of the portfolio as of September 30, 2016,2021, compared to $150.3 million20.7% as of September 30, 2017. The decline in agricultural mortgages was caused by a combination of new agricultural lending competition in Lancaster County and weaker milk and egg pricing for farmers. Low dairy, egg, and poultry prices are constraining local farmers from expanding operations presently. 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 conditions improve for farmers in the local market area and pricing pressures from additional market entrants subside.2020.

 

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Management’s Discussion and Analysis

Commercial mortgages were the most stable sector within theThe Corporation’s commercial real estate area with a small percentage increase from the prior year period. Commercial mortgages increasedconstruction loan balances decreased by $2.8$3.6 million, or 3.2%16.1%, from September 30, 20162020 to September 30, 2017, with new loan production outpacing normal principal payments and paydowns 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 commercial real estate loans to remain stable as a percentage of the Corporation’s loans as we move through the last quarter of 2017.

The Corporation experienced declines in 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 to replace those that rolled off.2021. 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 2.1% of the total loan portfolio with balances of $238.4 million as of September 30, 2017, a marked increase from 36.1% of the portfolio as of September 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 profile2021, 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.

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 Corporation2.7% 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 this2020.

The other area of the portfolio.

Second mortgagescommercial 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 typeindustrial 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.

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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.

Commercialindustrial loans not secured by real estate are significantly smaller than the Corporation’s commercialaccounted for 12.6% of total loans secured by real estate portfolio. Theseas of September 30, 2021, compared to 19.5% as of September 30, 2020. The balance of total commercial and industrial loans referreddecreased from $165.3 million at September 30, 2020, to as C&I$110.2 million at September 30, 2021, a 33.3% decrease. This category of loans are generally extended based on the healthincludes unsecured lines of the commercial borrower. They include both fixed ratecredit, truck, equipment, and receivable and inventory loans, and Prime-based variable rate loans. The variable rate 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 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 assetstax-free loans to municipalities. The balance at September 30, 2021 and September 30, 2020, also includes the PPP loans, which have declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. The total balance of the commercial entity. Management can also obtain additional collateralPPP loans declined by securing the inventory of the business. The portfolio of all types of C&I loans showed an increase of $7.3$54.5 million, or 10.0%,70.1% from September 30, 20162020, 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 2016.2021.

 

The consumer loan portfolio increasedremained the same from September 30, 2020, to September 30, 2021, at $5.2 million at September 30, 2017, from $4.7 million at September 30, 2016. Consumer loans made up 0.9%and 0.6% of total loans on September 30, 2017, and 0.8% of loans on September 30, 2016.loans. 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. Slightly higher demandthat are generally unsecured. Demand for unsecured credit is just slightly outpacingbeing matched by principal payments on existing loans resulting in the small increase instable 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
·TroubledNon-performing troubled debt restructurings
·Other real estate owned

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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% 

  September 30, December 31, September 30,
  2021 2020 2020
  $ $ $
       
Nonaccrual loans  2,236   725   846 
Loans past due 90 days or more and still accruing  183   1,373   284 
Troubled debt restructurings, non-performing  —   —   5,513 
Total non-performing loans  2,419   2,098   6,643 
             
Other real estate owned  —   —   — 
             
Total non-performing assets  2,419   2,098   6,643 
             
Non-performing assets to net loans  0.28%   0.25%   0.80% 

 

The total balance of non-performing assets decreased by $267,000,$4.2 million, or 18.2%63.6% from balances at September 30, 2020, and increased by $0.3 million, or 15.3%, from balances at December 31, 2020. The decrease from September 30, 2016 to September 30, 2017, and increased by $99,000, or 9.0%, from December 31, 2016 to September 30, 2017. The decrease from the prior year2020 was primarily due to lower levelsa decrease in non-performing troubled debt restructurings (TDRs) related to the payoff of non-accrualone commercial borrower. There were no non-performing TDR loans as of September 30, 2021 or December 31, 2020. As of September 30, 2020, there were four non-performing TDR loans that totaled $5.5 million. 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 loans past due 90 days or more partially offsetimprove the likelihood of full collection by the addition of one agriculture loan restructured in the second quarter of 2017lender. Non-accrual loans increased by $1.4 million, or 164.3%, since September 30, 2020, and increased $1.5 million, or 208.4% since December 31, 2020. The increase that is now considered a troubled debt restructuring (TDR). 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 loansoccurred between September 30, 2021 and December 31, 2020 was due to pay downs received on a business mortgage causing a reductionthree agricultural relationships that were added to non-accrual in outstanding balance on this loan. Additionally, loansthe third quarter of 2021. Loans past due 90 days or more and still accruing decreased by $412,000 primarily due to loans that were previously past due being brought current due to payments received. 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 increasingdown slightly from the lower levels experienced in 2016.prior year period, and down more significantly, by $1.2 million, or 86.7% since December 31, 2020.

 

There was no other real estate owned (OREO) as of September 30, 2017,2021, December 31, 2016,2020, or September 30, 2016.

2020.

 

Allowance for LoanCredit Losses

 

The allowance for loancredit 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 loancredit losses. This calculation is based upon a systematic methodology for determining the allowance for loancredit 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 loancredit loss calculation, management will adjust the allowance for loancredit losses through the provision as necessary. Changes to the allowance for loancredit 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

 

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Allowance for LoanCredit Losses table below shows the activity in the allowance for loancredit losses for the nine-month periods ended September 30, 20172021 and September 30, 2016.2020. 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 loancredit losses as a percentage of total loans.

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Management’s Discussion and Analysis

 

ALLOWANCE FOR LOANCREDIT LOSSES

(DOLLARS IN THOUSANDS)

 

 Nine Months Ended  Nine Months Ended 
 September 30,  September 30 
 2017 2016�� 2021 2020 
 $ $  $ $ 
           
Balance at January 1,  7,562   7,078   12,327   9,447 
Loans charged off:                
Real estate  —   —   —   — 
Commercial and industrial  14   23   —   23 
Consumer  16   24   30   19 
Total charged off  30   47   30   42 
                
Recoveries of loans previously charged off:                
Real estate  (20)  (10)  —   (11)
Commercial and industrial  (21)  (185)  (19)  (3)
Consumer  (5)  (9)  (13)  (2)
Total recovered  (46)  (204)  (32)  (16)
Net loans recovered  (16)  (157)
Net loans charged off (recovered)  (2)  26 
                
Provision charged to operating expense  450   200   125   2,575 
                
Balance at September 30,  8,028   7,435   12,454   11,996 
                
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%   0.00% 
                
Allowance at end of period as a % of total loans  1.37%   1.31%   1.41%   1.42% 

 

Charge-offs for the nine months ended September 30, 2017,2021, were $30,000, compared to $47,000$42,000 for the same period in 2016.2020. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first nine months of 20172021 and 2016, only small2020, the Corporation charged off several smaller amounts related to consumer loans classified asand a commercial and industrial loans as well as several small consumer loansloan in 2020. Recoveries were charged off. Recoveries exceeded charge-offsalso low in 2020 and 2021with total recoveries of $32,000 in the first nine months ended September 30, 2017, as well as 2016. In 2017, several recoveries on commercialof 2021 and industrial loans as well as consumer loans were received and$16,000 in the first 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 $17.9 million on September 30, 2017, was up $7.12021, compared to $26.1 million or 51.1%, from the balance as ofon September 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, 2016.2020. Total classified loans did not materially increase until the first quarter of 2017 when a large business relationship with over $5 million of loan balances was classified as substandard. In addition, a $2 million 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.

have decreased during 2021. 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$0.2 million of specifically allocated allowance against the classified loans as of September 30, 2017, and no2021, $1.1 million of specific allocation as of December 31, 2016, or September 30, 2016. Classified loans could require larger provision amounts due to a higher potential risk2020, and $1.1 million of loss, so as the classified loan balances fluctuate, the associated specific allowance applied to them fluctuates, resulting in a lower or higher required allowance.

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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 fourth quarter of 2017 that was on non-accrual statusallocation as of September 30, 2017. Management anticipates that charge-off2020. The higher specific allocation at December 30, 2020 and September 30, 2020, was related to be approximately $275,000. The particulara commercial customer with ongoing business has not been operating since 2016 andconcerns. This loan paid off during the property is expected to go to sheriff salethird quarter of 2021, resulting in a decline 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. Management practices are in place to reduce the number and severity ofprovision for loan 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%1.41% as of September 30, 2017, 1.32% as of December 31, 2016,2021, and 1.31%1.42% as of September 30, 2016. Management anticipates that the allowance percentage will remain fairly stable during the remainder of 2017, as the allowance balance is increased with additional provision expense to account for loan growth throughout the year.2020. It is typical for the allowance for loancredit losses to contain a small amount of excess reserves. Management desiresOver the long term, management targets an excess reserve at approximately 5%-10% 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%8.4% as of September 30, 2017.2021.

 

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Management’s Discussion and Analysis

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation, increaseddecreased by $1.6$0.2 million, or 7.0%0.8%, to $24.4$24.5 million as of September 30, 2017,2021, from $22.8$24.7 million as of September 30, 2016.2020. As of September 30, 2017, $1,285,0002021, $261,000 was classified as construction in process compared to $156,000$220,000 as of September 30, 2016.2020. Fixed assets increaseddeclined as a result of the Corporation’s eleventh full-service branch office openeddepreciation 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.

2021.

 

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$5.6 million of regulatory stock holdings as of September 30, 2017,2021, consisted of $5.9$5.0 million of FHLB of Pittsburgh stock, $151,000$601,000 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 million on September 30, 2017, $5.2 million on December 31, 2016, and $5.0 million on September 30, 2016,2021, $5.9 million on December 31, 2020, and $6.3 million on September 30, 2020, 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 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 at a 5.00% annualized yield on activity stock and 2.00% 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.

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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 September 30, 2021, increased by $21.3$138.7 million, or 2.6%11.1%, and $46.2by $264.7 million, or 5.8%23.5%, from December 31, 2016,2020, and September 30, 2016,2020, 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 money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since September 30, 2016,2020, with the changes being a $41.1$126.1 million, or 15.8%27.1% increase in non-interest bearing demand deposit accounts, a $2.5$12.9 million, or 11.6% decrease28.4% increase in interest bearing demand accounts,balances, a $13.7$21.6 million, or 14.9% decrease19.3% increase in NOW balances, a $13.1$36.4 million, or 15.3%29.0% increase in money market account balances, a $21.1$74.0 million, or 12.6%28.9% increase in savings account balances, and a $9.8$6.3 million, or 6.2%5.1% decrease in time deposit balances.

 

The significant growth across most categories of core deposit accounts is a direct result of the local market disruption causedPPP funding, government stimulus payments, and the change in customer’s spending habits during the uncertain economic conditions brought on by two large mergers, which impacted the three counties the Corporation primarily serves. The Corporation has gained many new customers as 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.COVID-19. 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 to hold higher balances until short-term interest rates increase further.

 

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Management’s Discussion and Analysis

The Deposits by Major Classification table, shown below, provides the balances of each category for September 30, 2017,2021, December 31, 2016,2020, and September 30, 2016.2020.

 

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 

  September 30,  December 31,  September 30, 
  2021  2020  2020 
  $  $  $ 
          
Non-interest bearing demand  591,333   534,853   465,247 
Interest bearing demand  58,425   47,092   45,502 
NOW accounts  133,443   137,279   111,849 
Money market deposit accounts  162,050   140,113   125,665 
Savings accounts  329,900   274,386   255,936 
Time deposits  116,351   119,088   122,622 
Total deposits  1,391,502   1,252,811   1,126,821 

 

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

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Management’s Discussion and Analysis

The Corporation has been a stable presence in the local market area that has experienced several large bank mergers. 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 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 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 30, 2017,2021, time deposit balances excluding brokered deposits, had decreased $7.9$6.3 million, or 5.0%5.1%, from September 30 2020, and $9.8$2.7 million, or 6.2%,2.3% from December 31, 2016 and September 30, 2016, respectively.2020. 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 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.

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 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.

 

Borrowings

 

Total borrowings were $68.4$66.4 million, $69.6$74.4 million, and $75.8$61.5 million as of September 30, 2017,2021, December 31, 2016,2020, and September 30, 2016,2020, respectively. Of these amounts, $8.3 million, and $12.1 million reflect short-term funds for December 31, 2016, and September 30, 2016, respectively, withthere were no short-term funds outstanding as of September 30, 2017.2021 and December 31, 2020 and $1.5 million outstanding as of September 30, 2020. 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$46.7 million as of September 30, 2017, $61.32021, $54.8 million as of December 31, 2016,2020, and $63.8$60.0 million as of September 30, 2016.2020. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances at September 30, 2017, December 31, 2016, and September 30, 2016.advances. 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-termThe decrease in FHLB borrowings since September 30, 2020, can be attributed to management taking advantage of declining rates by replacing maturingprepaying FHLB advances with new long-term advances typically at rate savings. More recently, with interest rates rising, it is becoming increasingly difficult to fund new borrowings at rates lower than the maturing borrowings. Management will continue to analyze and compare the costs and benefits of borrowing versus obtaining funding from deposits.

Inincurring penalties 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 30, 2017, the Corporation was significantly under this policy guideline at 6.8% of asset size with $68.4 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 30, 2017, the Corporation was significantly under this policy guideline at 67.8% of capital with $68.4 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of 2016 and through the first nine months of 2017.save on interest expense in future years.

 

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Management’s Discussion and Analysis

 

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $349.8$478.2 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.

 

In addition to the long-term advances funded through the FHLB, on December 30, 2020, the Corporation completed the sale of a subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt notes with a maturity date of December 30, 2030. These notes are non-callable for 5 years and carry a fixed interest rate of 4% per year for 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of September 30, 2021, $15.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% of the total issue that will be amortized to the call date on a pro-rata basis.

 

Stockholders’ Equity

 

Federal regulatory authorities require banks to meet minimum capital levels. The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, maintains capital ratios well above those minimum levels. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for loancredit losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio.

The consolidated asset limit on small bank holding companies is $3 billion and a company with assets under that limit is not subject to the consolidated capital rules but may disclose capital amounts and ratios. The Corporation has elected to disclose those amounts and ratios.

 

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

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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% 

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ENB FINANCIAL CORP
Management’s Discussion and AnalysisREGULATORY CAPITAL RATIOS:  

 

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.

     Regulatory Requirements 
     Adequately  Well 
As of September 30, 2021 Capital Ratios  Capitalized  Capitalized 
Total Capital to Risk-Weighted Assets            
Consolidated  15.9%   N/A   N/A 
Bank  15.4%   8.0%   10.0% 
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.8%   N/A   N/A 
Bank  14.1%   6.0%   8.0% 
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.8%   N/A   N/A 
Bank  14.1%   4.5%   6.5% 
             
Tier 1 Capital to Average Assets            
Consolidated  8.3%   N/A   N/A 
Bank  9.2%   4.0%   5.0% 
             
As of December 31, 2020            
Total Capital to Risk-Weighted Assets            
Consolidated  16.1%   N/A   N/A 
Bank  15.3%   8.0%   10.0% 
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  12.8%   N/A   N/A 
Bank  14.0%   6.0%   8.0% 
             
Common Equity Tier I Capital to Risk-Weighted Assets            
Consolidated  12.8%   N/A   N/A 
Bank  14.0%   4.5%   6.5% 
             
Tier I Capital to Average Assets            
Consolidated  9.0%   N/A   N/A 
Bank  9.8%   4.0%   5.0% 
             
             
As of September 30, 2020            
Total Capital to Risk-Weighted Assets            
Consolidated  13.4%   N/A   N/A 
Bank  13.3%   8.0%   10.0% 
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.2%   N/A   N/A 
Bank  12.1%   6.0%   8.0% 
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.2%   N/A   N/A 
Bank  12.1%   4.5%   6.5% 
             
Tier 1 Capital to Average Assets            
Consolidated  9.2%   N/A   N/A 
Bank  9.1%   4.0%   5.0% 

 

The Corporation’s dividends per share for the nine months ended September 30, 2017, were $0.84, 3.7% higher than the $0.81 per share dividend in the first nine months of 2016. 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% and 12.0%. The Corporation’s current tier I capital ratio is 10.2%. As a secondary measurement, the capital plan also targets a long-term dividend payout ratio in the range of 35% to 40%. 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 months ended September 30, 2017, the payout ratio was 41.8%. 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 30, 2017,2021 the Bank’s Tier 1 Leverage Ratio stood at 9.2% while the Corporation’s Tier 1 Leverage Ratio was 8.3%. The Bank’s Tier 1 Leverage Ratio policy range is 9.0% to 12.0% while the Corporation’s Tier 1 Leverage Ratio policy range is 8.0% - 12.0%. Tier 1 Capital levels at the Corporation showed an unrealized loss, net of tax, of $2,232,000, compared to an unrealized loss of $4,885,000level were not impacted by the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at December 31, 2016, and an unrealized gain of $1,221,000 as of September 30, 2016. 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 recordedcorporate level. As such, in the nine months ended September 30, 2017, or in the same prior year period. The changes in unrealized gains and losses are due to normal changes in market valuationsterms of the Corporation’s securitiesregulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of interest rate movements.

Regulatory Capital Changes

In July 2013, the federal banking agencies issued final rules to implement$20 million subordinated debt issue. Most of 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 minimummarked improvement in capital ratios andoccurred at 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.Bank level.

 

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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.

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 30, 2017.2021.

 

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

 

  September 30, 
  20172021 
  $ 
Commitments to extend credit:    
Revolving home equity  75,381144,709 
Construction loans  16,2831,534 
Real estate loans  51,194130,204 
Business loans  101,488185,596 
Consumer loans  1,0801,383 
Other  4,4045,154 
Standby letters of credit  11,08613,125 
     
Total  260,916481,705 

 

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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.

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Management’s Discussion and Analysis

 

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.

 

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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.

 

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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 loancredit 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:as deposits, loan repayments, cash flows from securities, borrowings, and current earnings.

·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 atAs of September 30, 2017, and the three and five-year2021, all maturity gap ratios were higher than corporate policy guidelines, due primarily to highera larger amount of loans, securities, and cash levels and faster loan prepayment speeds resultingbalances now maturing in more assets maturing within the stated timeframes.less than five years. The three-yearsix-month gap ratio was 143.1%, and five-year was 142.1%267.2%, compared to an upper policy guidelinesguideline of 155%; the one-year gap ratio was 241.0%, compared to an upper policy guideline of 140%; the three-year gap ratio was 196.9%, compared to an upper guideline of 125%; and 115%the five-year gap ratio was 177.5%, respectively. Allcompared 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 in115%. In a rising interest rate cycle with the likelihood of higher rates in both the near and long term forecasts, the elevated gap ratios would be more beneficial to the Corporation. Management believesHowever, 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 ratiosrates-down interest rate scenario as there are appropriate andmore assets repricing to lower rates than liabilities. This asset sensitivity will be beneficial in the next rates-up cycle. Management will continue to monitor alland manage the length of the balance sheet in order to sustain reasonable asset yields in a declining rate environment, while still positioning for a likely rising rate environment out in the future.

The size and length of the Corporation’s 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 to ensure proper positioning for future interest rate cycles.within management’s guidelines.

 

Management desires to show improvements to asset yields and improve the loan-to-deposit ratio and does have a large securities portfolio to draw liquidity from in the event deposit growth slows or reverses. With gap ratios that are already sufficiently high, management can put more of the available cash to work earning higher returns than overnight cash.

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Management may desire to have higher gap ratios when factoring in future loan growth or other funding changes to the balance sheet. Management has been maintaining higher levels of cash and cash equivalents to assist in offsetting the Corporation’s relatively long securities portfolio, which has helpedactively working to increase the gap ratios. The strategy of maintaining higher cash levelsCorporation’s loan-to-deposit ratio. As the loan-to-deposit ratio increases and more loans go on to improvethe Corporation’s balance sheet, the asset mix will generally lengthen and the gap ratios will decline. However, in 2020 and act as an immediate hedge against liquidity risk and interest rate risk is expected to continue until2021, 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 2017 duedeposits have experienced very strong growth attributable to the natural extension of MBS and CMO securities asvery low interest rates rise, and a desire by consumers to safeguard more cash during uncertain times. This has caused the higher levels of long municipal securities held in the portfolio. However, the securities duration and price volatility didloan-to-deposit ratio to decline during 2020 and 2021 even with moderate loan growth. As of September 30, 2021, the secondloan-to-deposit ratio was 63.3%, compared to 65.7%, at December 31, 2020, and third quarters of 2017, and are expected to decline further, due to selective sales of longer duration securities and natural aging of the portfolio. Since June74.8% at September 30, 2017 management has been selling longer duration municipal bonds and U.S. agencies, while purchasing shorter duration taxable securities including some floating rate instruments to better position the Corporation for higher rates.

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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.2020.

 

The risk of liabilities repricing at higher interest rates is increasing slightlylow in the present environment as the Corporation has begundoes not foresee the need to increase someraise deposit interest rates minimally. However, a large portion of the Corporation’s deposits are core deposits with little or no repricing expected to occurany time 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 interest rates. The Corporation’s average cost of funds was 3419 basis points as of September 30, 2017,2021, which is very low from an historic perspective. However, this cost of funds will likely begin to increase slightly throughout the remainder of 2017. 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 havehad not been very rate sensitive for a number of years as a result of the limited desirable rates available to deposit customers. With the deposit customer. However, should market interest rates rise furtherFederal Reserve rate declines in the remainderfirst quarter of 20172020, deposit growth has 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 government aid issued in 2020 and during 2018, customer behavior patterns would change and deposits would be more rate sensitive with a portion potentially leaving2021, the Corporation. The Corporation has experienced a steadysignificant deposit growth in both non-interest bearingthroughout the latter part of 2020 and interest bearing funds during this historically low interest rate environment and this trend continued throughout the first nine months of 2017. This trend can partially be attributed to the market disruption that occurred in 2016 as a result of recent large local bank mergers that greatly impacted the Corporation’s market area.

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. 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 reinvest in the equity markets. This trend could cause deposit growth to slow or decline throughout the remainder of 2017.2021.

 

The Corporation’s net interest margin is improvingdown materially from levels in the previous quarter primarily as a result of the Federal Reserve rate increase in March and June of 2017.previous year. 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 2017.2021.

 

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.

 

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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 30, 2017,2021, the Corporation was within guidelines for all of the above measurements except thefor securities portfolio liquidity as a 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 andThis ratio was 3.3% as of September 30, 2017, these cash flows represented 5.7%2021, compared to a policy range of 4% - 8%. This was primarily due to a much higher balance sheet at September 30, 2021. Investment liquidity is strong in 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%.

It is important for the Corporation to prepare for a rates-upcurrent low-rate environment and having morehigher levels of liquidity is advantageous as funds can benot necessarily a good thing because it then gets reinvested in higher yielding assets faster when sufficient liquidity exists. Management carried an averageat lower rates.

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The 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.

 

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.scenarios that can vary according to the present level of interest rates. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, 300, or 400300 basis points, or decrease 25, 50, or 10075 basis points. Rates-downThe rates-down scenarios are unlikely at this point somuch less likely now with the Federal Reserve rate cuts that already occurred in 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 in the near term it is more focusedlikely 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

 

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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 30, 2017.2021. 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 completed in the third quarter of 2017.2020. 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.

 

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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-raterising rate scenarios, but a decline in net interest income in the down-ratedeclining rate scenarios.

 

The third quarter 20172021 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of September 30, 2017,2021, 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 securities and loans that has occurred during the past several years and the higher 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.rates so deposit rates move at a fraction of the full overnight rate movement. 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 300200 or 400300 basis points where variable loan rates will still increase by the same amount as the Prime rate. The increases in net interest income in the up-rate scenarios are very similar to the increases reflected at December 31, 2016. It is unlikely that interest rates will go down, but in the event that they would go lower, the Corporation would have exposure to all maturing fixed-rate loans and securities, which would reprice lower 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%1.1% compared to the rates unchanged scenario. In the remaining rates-up scenarios, the net interest income increases 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 400300 basis point scenarios, net interest income increases by 7.6%, 13.6%,1.3% and 19.6%2.7%, 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 uprates-up 100, 200, 300, and 400300 basis point scenarios, respectively.

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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 short term borrowings do price up faster than deposits, generally equivalent to the U.S. Treasury market. However, as of September 30, 2021, the Corporation had no overnight or short term borrowings but had $46.7 million of long-term fixed-rate advances. Additionally, total borrowings only make up approximately 4.6% 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 managementThe increase in net interest income in the abilityup-rate scenarios has declined since prior quarters due to benefit from higher rates by controlling the amountlengthening of the increaseCorporation’s assets and the lower yields on large amountsthese assets. The model still shows a benefit in the rates-up environment, although less of liabilities that are repricing.a benefit than prior timeframes.

As of September 30, 2021, in the down scenarios of -25, -50, and -75 basis points, net interest income decreases by 0.8%, 2.0%, and 3.1%, respectively, compared to policy guidelines of -1.25%, -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 2017.2021.

 

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.

 

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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 30, 2017,2021, the Corporation was within guidelines for all rateup-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 showingCorporation shows a slightly smallervery 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’sto net portfolio value profile.in the rising rate scenarios, due primarily to the very low market rates and the elevated amount of core deposits on the Corporation’s balance sheet as of September 30, 2021. 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 30, 2017,2021, indicate that the Corporation’s net portfolio value would experience valuation gains of 8.3%14.1%, 8.4%, 7.5%19.3%, and 5.2%,24.1% in the rates-up 100, 200, 300, and 400300 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 400300 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, theThe analysis does show a valuation loss in the down 25, 50, and down 10075 basis point scenarios of -7.2%, -15.9%, and -25.1%, 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. TheWith the significant declines in the overnight and Prime rate since 2019, the Corporation’s exposure to valuation changes could change going forward ifbased on lower rates has also changed materially. Management does not anticipate any further Federal Reserve rate reductions as another 0.25% move down would cause the Federal funds rate range to be in negative territory at -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 further rate reductions. The behavior of the Corporation’s deposits changes duewill continue to higher interest rates. Basedhave an impact on five past decay rate studies onthe Corporation’s net portfolio value. With the recent rapid increase in the Corporation’s core deposits, management does not expect a material declineis guarded against further valuation declines in core deposit accounts, including the non-interest bearing accounts, when short termrates-down interest rate scenarios throughout the remainder of 2021, even though the likelihood of lower interest rates do increase. The Corporation’s core deposits have been stable through a number of rate cycles.is remote.

 

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.

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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 30, 2017,2021, 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 30, 2017,2021, 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.

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PART II – OTHER INFORMATION

September 30, 20172021

 

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 Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. Management has not identified any new risk factors since the December 31, 20162020 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 30, 2017.2021.

 

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 * 
             
July 2021  —   —   —   175,200 
August 2021  —   —   —   175,200 
September 2021  3,100   21.95   3,100   172,100 
                 
Total  3,100             

 

* On June 17, 2015,October 21, 2020, the Board of Directors of ENB Financial Corp announced the approval ofCorporation approved a plan to purchase,repurchase, in open market and privately negotiated transactions, up to 140,000200,000 shares of its outstanding common stock. Shares repurchased are being held as treasury shares to be utilized in connection with the Corporation’s three stock purchase plans. The first purchase of common stock under this plan occurred on July 31, 2015.October 28, 2020. By September 30, 2017,2021, a total of 39,63527,900 shares were repurchased at a total cost of $1,330,000,$560,000 for an average cost per share of $33.56. Management may choose to repurchase additional shares in 2017 under this plan.$20.07.

 

Item 3. Defaults Upon Senior Securities – Nothing to Report

 

Item 4. Mine Safety Disclosures – Not Applicable

 

Item 5. Other Information – Nothing to Report

 

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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-Q8-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.July 21, 2021.)

 

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

20112020 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 10.299.1 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011,S-8, filed with the SEC on March 29, 2012.October 1, 2020.)

 

10.3

20102020 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.)

 

1110.4

Statement re: Computation2020 Nonqualified Employee Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 of Earnings Per Share as foundthe Corporation’s Form S-8 filed with the SEC on page 4 of Form 10-Q, which is included herein.October 1, 2020.)

 

31.1

 

Section 302 Chief Executive Officer Certification (Required by Rule 13a-14(a)).

31.2

 

Section 302 Principal Financial Officer Certification (Required by Rule 13a-14(a)).

32.1

 

Section 1350 Chief Executive Officer Certification (Required by Rule 13a-14(b)).

32.2

 

Section 1350 Principal Financial Officer Certification (Required by Rule 13a-14(b)).

 

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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 14, 201712, 2021By:   /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 14, 201712, 2021By:  /s/  Scott E. Lied/s/  Rachel G. Bitner
  Scott E. Lied, CPARachel G. Bitner
  Treasurer
  Principal Financial Officer

 

 

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