UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended SeptemberJune 30, 20202021

OR

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

​​

For the transition period from________________________________from _________________ to _________________________________________________

ENB Financial Corp

(Exact name of registrant as specified in its charter)

Pennsylvania

000-53297

51-0661129

(State or Other Jurisdiction of Incorporation)

(Commission File Number)

(IRS Employer Identification No)

31 E. Main St., Ephrata, PA

          17522-0457           

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.

Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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.)

Yes ☒   No ☐

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

Act. ☐

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

Yes ☐          No☐No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of NovemberAugust 1, 2020,2021,the registrant had 5,556,4135,569,977shares of $0.10 (par) Common Stock outstanding.

ENB FINANCIAL CORP

INDEX TO FORM 10-Q

SeptemberJune 30, 20202021

Part I – FINANCIAL INFORMATION​​

Item 1.

Financial Statements​​

Consolidated Balance Sheets at SeptemberJune 30, 20202021 and 2019,2020, and December 31, 20192020 (Unaudited)​​

3

Consolidated Statements of Income for the Three and NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (Unaudited)​​

4

Consolidated Statements of Comprehensive Income for the Three and NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (Unaudited)​​

5

Consolidated Statements of Changes in Stockholders’ Equity for the Three and NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (Unaudited)​​

6

Consolidated Statements of Cash Flows for the NineSix Months Ended SeptemberJune 30, 2021 and 2020 and 2019 (Unaudited)​​

7

Notes to the Unaudited Consolidated Interim Financial Statements​​

8-34

8-33

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations​​

35-70

34-66

Item 3.

Quantitative and Qualitative Disclosures about Market Risk​​

71-76

67-72

Item 4.  Controls and Procedures​​

73

  

Part II.  OTHER INFORMATION​​

74

Item 4.1.  Legal Proceedings​​

Controls and Procedures77

74

Item 1A.  Risk Factors​​

74

Part II – OTHER INFORMATION78
Item 1.Legal Proceedings78
Item 1A.Risk Factors78

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds​​

79

74

Item 3.  Defaults upon Senior Securities​​

74

Item 4.  Mine Safety Disclosures​​

74

Item 5.  Other Information​​

74

Item 6.  Exhibits​​

75

  

SIGNATURE PAGE​​

76

Item 3.Defaults upon Senior Securities79
Item 4.Mine Safety Disclosures79
Item 5.Other Information79
Item 6.Exhibits80
  
  

SIGNATURE PAGE

81

 

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, 
  2020  2019  2019 
  $  $  $ 
ASSETS            
Cash and due from banks  19,979   24,304   23,856 
Interest-bearing deposits in other banks  24,347   16,749   17,334 
   Total cash and cash equivalents  44,326   41,053   41,190 
Securities available for sale (at fair value)  360,029   308,097   298,983 
Equity securities (at fair value)  6,854   6,708   6,108 
Loans held for sale  5,008   2,342   1,578 
Loans (net of unearned income)  843,177   753,618   738,104 
   Less: Allowance for loan losses  11,996   9,447   9,474 
   Net loans  831,181   744,171   728,630 
Premises and equipment  24,696   25,033   25,247 
Regulatory stock  6,525   7,291   7,200 
Bank owned life insurance  29,418   28,818   28,610 
Other assets  8,964   8,237   8,452 
       Total assets  1,317,001   1,171,750   1,145,998 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Liabilities:            
  Deposits:            
    Noninterest-bearing  465,247   363,857   347,929 
    Interest-bearing  661,574   610,231   599,062 
    Total deposits  1,126,821   974,088   946,991 
  Short-term borrowings  1,500   200   — 
  Long-term debt  60,010   77,872   79,989 
  Other liabilities  3,362   2,902   3,381 
       Total liabilities  1,191,693   1,055,062   1,030,361 
Stockholders' equity:            
  Common stock, par value $0.10            
Shares:  Authorized 24,000,000            
             Issued 5,739,114 and Outstanding 5,566,413 as of 9/30/20,            
             5,640,742 as of 12/31/19, and 5,677,161 as of 9/30/19  574   574   574 
  Capital surplus  4,456   4,482   4,471 
  Retained earnings  117,960   111,944   110,067 
  Accumulated other comprehensive income  5,756   1,600   1,685 
  Less: Treasury stock cost on 172,700 shares as of 9/30/20, 98,372 as of 12/31/19,            
   and 61,953 as of 9/30/19  (3,438)  (1,912)  (1,160)
       Total stockholders' equity  125,308   116,688   115,637 
       Total liabilities and stockholders' equity  1,317,001   1,171,750   1,145,998 

June 30,

December 31,

June 30,

2021

2020

2020

$

$

$

ASSETS

Cash and due from banks

19,033

21,665

21,320

 

Interest-bearing deposits in other banks

36,358

73,274

39,904

 

Total cash and cash equivalents

55,391

94,939

61,224

 

Securities available for sale (at fair value)

583,623

476,428

334,687

 

Equity securities (at fair value)

8,505

7,105

6,775

 

Loans held for sale

1,323

3,029

2,295

 

Loans (net of unearned income)

869,755

823,370

835,969

 

Less: Allowance for loan losses

12,703

12,327

10,770

 

Net loans

857,052

811,043

825,199

 

Premises and equipment

24,729

24,760

24,918

 

Regulatory stock

5,867

6,107

6,942

 

Bank owned life insurance

30,006

29,646

29,214

 

Other assets

12,288

9,256

8,222

 

Total assets

1,578,784

1,462,313

1,299,476

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

Liabilities:

 

 

  Deposits:

 

 

Noninterest-bearing

582,747

534,853

466,392

 

Interest-bearing

786,137

717,958

641,522

 

Total deposits

1,368,884

1,252,811

1,107,914

 

  Long-term debt

50,204

54,790

65,072

 

  Subordinated debt

19,640

19,601

—

 

  Other liabilities

4,115

4,895

4,328

 

Total liabilities

1,442,843

1,332,097

1,177,314

 

Stockholders' equity:

 

 

  Common stock, par value $0.10

 

 

Shares: Authorized 24,000,000

 

 

Issued 5,739,114 and Outstanding 5,569,978 as of 6/30/21, 5,566,230 as of 12/31/20, and 5,574,601 as of 6/30/20

574

574

574

 

  Capital surplus

4,480

4,444

4,466

 

  Retained earnings

126,891

120,670

115,914

 

  Accumulated other comprehensive income

7,362

7,958

4,522

 

  Less: Treasury stock cost on 169,137 shares as of 6/30/21, 172,884 as of 12/31/20, and 164,513 as of 6/30/20

(3,366

)

(3,430

)

(3,314

)

Total stockholders' equity

135,941

130,216

122,162

 

Total liabilities and stockholders' equity

1,578,784

1,462,313

1,299,476

 

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 June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

$

$

$

Interest and dividend income:

Interest and fees on loans

8,170

8,636

16,555

17,088

Interest on securities available for sale

Taxable

1,231

1,065

2,311

2,286

Tax-exempt

1,010

644

1,962

1,210

Interest on deposits at other banks

20

21

42

81

Dividend income

106

102

197

290

 

Total interest and dividend income

10,537

10,468

21,067

20,955

 

Interest expense:

Interest on deposits

285

543

599

1,352

Interest on borrowings

521

456

1,058

918

 

Total interest expense

806

999

1,657

2,270

 

Net interest income

9,731

9,469

19,410

18,685

 

Provision for loan losses

0-

975

375

1,325

 

Net interest income after provision for loan losses

9,731

8,494

19,035

17,360

 

Other income:

Trust and investment services income

537

416

1,207

1,038

Service fees

684

635

1,298

1,314

Commissions

952

649

1,816

1,335

Gains on the sale of debt securities, net

274

367

362

649

Gains (losses) on equity securities, net

(24

)

5

223

(225

)

Gains on sale of mortgages

1,245

1,690

3,175

2,231

Earnings on bank-owned life insurance

202

205

418

411

Other income

207

101

896

82

 

Total other income

4,077

4,068

9,395

6,835

 

Operating expenses:

Salaries and employee benefits

5,959

4,966

11,658

10,662

Occupancy

635

616

1,318

1,207

Equipment

285

316

552

606

Advertising & marketing

245

218

435

492

Computer software & data processing

1,102

768

2,200

1,474

Shares tax

275

239

555

479

Professional services

598

507

1,036

1,130

Other expense

597

614

1,129

1,304

 

Total operating expenses

9,696

8,244

18,883

17,354

 

Income before income taxes

4,112

4,318

9,547

6,841

 

Provision for federal income taxes

561

719

1,492

1,077

 

Net income

3,551

3,599

8,055

5,764

 

Earnings per share of common stock

0.64

0.64

1.45

1.03

 

Cash dividends paid per share

0.17

0.16

0.33

0.32

 

Weighted average shares outstanding

5,564,712

5,581,961

5,563,420

5,604,609

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 June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

$

$

$

 

Net income

3,551

3,599

8,055

5,764

 

Other comprehensive income, net of tax:

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

 

Unrealized gains (losses) arising during the period

5,892

4,695

(391

)

4,346

Income tax effect

(1,238

)

(986

)

81

(911

)

4,654

3,709

(310

)

3,435

 

Gains recognized in earnings

(274

)

(367

)

(362

)

(649

)

Income tax effect

58

77

76

136

(216

)

(290

)

(286

)

(513

)

 

Other comprehensive income (loss), net of tax

4,438

3,419

(596

)

2,922

 

Comprehensive Income

7,989

7,018

7,459

8,686

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, 
  2020  2019  2020  2019 
  $  $  $  $ 
Interest and dividend income:                
Interest and fees on loans  8,617   8,501   25,705   24,833 
Interest on securities available for sale                
Taxable  920   1,179   3,207   3,696 
Tax-exempt  690   605   1,899   1,860 
Interest on deposits at other banks  31   128   112   294 
Dividend income  129   177   419   531 
                 
Total interest and dividend income  10,387   10,590   31,342   31,214 
                 
Interest expense:                
Interest on deposits  430   889   1,782   2,626 
Interest on borrowings  415   412   1,333   1,158 
                 
Total interest expense  845   1,301   3,115   3,784 
                 
Net interest income  9,542   9,289   28,227   27,430 
                 
Provision for loan losses  1,250   630   2,575   840 
                 
Net interest income after provision for loan losses  8,292   8,659   25,652   26,590 
                 
Other income:                
Trust and investment services income  442   538   1,480   1,580 
Service fees  701   701   2,015   2,024 
Commissions  781   734   2,116   2,145 
Gains on the sale of debt securities, net  55   42   704   229 
Gains (losses) on equity securities, net  (54)  7   (279)  51 
Gains on sale of mortgages  2,081   606   4,312   1,370 
Earnings on bank-owned life insurance  209   186   620   543 
Other income  159   129   241   307 
                 
Total other income  4,374   2,943   11,209   8,249 
                 
Operating expenses:                
Salaries and employee benefits  5,860   5,227   16,522   15,520 
Occupancy  598   605   1,805   1,825 
Equipment  298   297   904   871 
Advertising & marketing  184   205   676   621 
Computer software & data processing  835   620   2,309   1,886 
Shares tax  239   233   718   698 
Professional services  549   448   1,679   1,479 
Other expense  635   493   1,939   1,727 
                 
Total operating expenses  9,198   8,128   26,552   24,627 
                 
Income before income taxes  3,468   3,474   10,309   10,212 
                 
Provision for federal income taxes  533   550   1,610   1,596 
                 
Net income  2,935   2,924   8,699   8,616 
                 
Earnings per share of common stock  0.53   0.51   1.56   1.51 
                 
Cash dividends paid per share  0.160   0.155   0.480   0.460 
                 
Weighted average shares outstanding  5,564,158   5,685,679   5,591,027   5,690,788 

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 - 9,066 shares

—

(10

)

—

—

167

157

Cash dividends paid, $0.16 per share

—

—

(892

)

—

—

(892

)

Balances, June 30, 2020

574

4,466

115,914

4,522

(3,314

)

122,162

 

 

 

 

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 - 7,600shares

—

—

—

—

(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 - 7,200shares

—

—

—

—

(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

 

See Notes to the Unaudited Consolidated Interim Financial Statements

46

IndexTable of Contents

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

Six Months Ended June 30,

2021

2020

$

$

Cash flows from operating activities:

Net income

8,055

5,764

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

Net amortization of securities premiums and discounts and loan fees

2,095

1,496

Amortization of operating leases right-of-use assets

92

89

Increase in interest receivable

(1,058

)

(396

)

Decrease in interest payable

(43

)

(111

)

Provision for loan losses

375

1,325

Gains on the sale of debt securities, net

(362

)

(649

)

(Gain) loss on equity securities, net

(223

)

225

Gains on sale of mortgages

(3,175

)

(2,231

)

Loans originated for sale

(50,168

)

(58,228

)

Proceeds from sales of loans

55,049

60,506

Earnings on bank-owned life insurance

(418

)

(411

)

Depreciation of premises and equipment and amortization of software

765

767

Deferred income tax

(2

)

(373

)

Amortization of deferred fees on subordinated debt

39

0—

Other assets and other liabilities, net

(2,519

)

1,438

Net cash provided by operating activities

8,502

9,211

 

Cash flows from investing activities:

Securities available for sale:

Proceeds from maturities, calls, and repayments

39,554

34,427

Proceeds from sales

59,303

43,818

Purchases

(208,913

)

(102,034

)

Equity securities

Proceeds from sales

428

0—

Purchases

(1,605

)

(292

)

Purchase of regulatory bank stock

(512

)

(1,128

)

Redemptions of regulatory bank stock

752

1,477

Net increase in loans

(46,010

)

(82,304

)

Purchases of premises and equipment, net

(639

)

(589

)

Purchase of computer software

(161

)

(29

)

Net cash used for investing activities

(157,803

)

(106,654

)

 

Cash flows from financing activities:

Net increase in demand, NOW, and savings accounts

118,093

143,139

Net decrease increase in time deposits

(2,020

)

(9,313

)

Net decrease in short-term borrowings

0—

(200

)

Proceeds from long-term debt

0—

12,984

Repayments of long-term debt

(4,586

)

(25,784

)

Dividends paid

(1,834

)

(1,794

)

Proceeds from sale of treasury stock

404

307

Treasury stock purchased

(304

)

(1,725

)

Net cash provided by financing activities

109,753

117,614

(Decrease) Increase in cash and cash equivalents

(39,548

)

20,171

Cash and cash equivalents at beginning of period

94,939

41,053

Cash and cash equivalents at end of period

55,391

61,224

 

Supplemental disclosures of cash flow information:

Interest paid

1,700

2,381

Income taxes paid

2,000

0—

Supplemental disclosure of non-cash investing and financing activities:

Fair value adjustments for securities available for sale

753

(3,697

)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS)

  Three Months ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
  $ $ $ $
         
Net income  2,935   2,924   8,699   8,616 
                 
Other comprehensive income, net of tax:                
Securities available for sale not other-than-temporarily impaired:                
                 
   Unrealized gains arising during the period  1,616   1,798   5,962   9,549 
   Income tax effect  (339)  (378)  (1,250)  (2,005)
   1,277   1,420   4,712   7,544 
                 
   Gains recognized in earnings  (55)  (42)  (704)  (229)
   Income tax effect  12   9   148   48 
   (43)  (33)  (556)  (181)
                 
Other comprehensive income, net of tax  1,234   1,387   4,156   7,363 
                 
Comprehensive Income  4,169   4,311   12,855   15,979 

See Notes to the Unaudited Consolidated Interim Financial Statements

57

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ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

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

        Accumulated    
        Other   Total
  Common Capital Retained Comprehensive Treasury Stockholders'
  Stock Surplus Earnings Income (Loss) Stock Equity
  $ $ $ $ $ $
Balances, December 31, 2018  574   4,435   104,067   (5,678)  (596)  102,802 
Net income  —   —   2,603   —   —   2,603 
Other comprehensive income net of tax  —   —   —   2,489   —   2,489 
Treasury stock purchased - 18,800 shares  —   —   —   —   (330)  (330)
Treasury stock issued - 8,188 shares  —   3   —   —   143   146 
Cash dividends paid, $0.15 per share  —   —   (852)  —   —   (852)
Balances, March 31, 2019  574   4,438   105,818   (3,189)  (783)  106,858 
Net income  —   —   3,089   —   —   3,089 
Other comprehensive income net of tax  —   —   —   3,487   —   3,487 
Treasury stock purchased - 29,366 shares  —   —   —   —   (204)  (204)
Treasury stock issued - 16,686 shares  —   16   —   —   151   167 
Cash dividends paid, $0.155 per share  —   —   (883)  —   —   (883)
Balances, June 30, 2019  574   4,454   108,024   298   (836)  112,514 
Net income  —   —   2,924   —   —   2,924 
Other comprehensive income net of tax  —   —   —   1,387   —   1,387 
Treasury stock purchased - 22,400 shares  —   —   —   —   (457)  (457)
Treasury stock issued - 7,177 shares  —   17   —   —   133   150 
Cash dividends paid, $0.155 per share  —   —   (881)  —   —   (881)
Balances, September 30, 2019  574   4,471   110,067   1,685   (1,160)  115,637 
                         
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 

See Notes to the Unaudited Consolidated Interim Financial Statements

6

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS) Nine Months Ended September 30, 
  2020  2019 
  $  $ 
Cash flows from operating activities:        
Net income  8,699   8,616 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Net amortization of securities premiums and discounts and loan fees  2,173   2,592 
Amortization of operating leases right-of-use assets  134   131 
Increase in interest receivable  (586)  (76)
(Decrease) increase in interest payable  (162)  119 
Provision for loan losses  2,575   840 
Gains on the sale of debt securities, net  (704)  (229)
Loss (gain) on equity securities, net  279   (51)
Gains on sale of mortgages  (4,312)  (1,370)
Loans originated for sale  (101,044)  (35,657)
Proceeds from sales of loans  102,690   36,878 
Earnings on bank-owned life insurance  (620)  (543)
Depreciation of premises and equipment and amortization of software  1,137   1,171 
Deferred income tax  (586)  (416)
Other assets and other liabilities, net  (111)  828 
Net cash provided by operating activities  9,562   12,833 
         
Cash flows from investing activities:        
Securities available for sale:        
   Proceeds from maturities, calls, and repayments  51,451   20,908 
   Proceeds from sales  50,819   35,818 
   Purchases  (150,728)  (54,437)
Equity securities        
    Proceeds from sales  —   168 
    Purchases  (425)  (163)
Purchase of regulatory bank stock  (1,225)  (2,749)
Redemptions of regulatory bank stock  1,991   1,897 
Net increase in loans  (89,270)  (44,441)
Purchases of premises and equipment, net  (705)  (787)
Purchase of computer software  (133)  (68)
Net cash used for investing activities  (138,225)  (43,854)
         
Cash flows from financing activities:        
Net increase in demand, NOW, and savings accounts  165,296   23,701 
Net (decrease) increase in time deposits  (12,563)  3,556 
Net increase (decrease) in short-term borrowings  1,300   (7,870)
Proceeds from long-term debt  12,984   24,723 
Repayments of long-term debt  (30,846)  (10,120)
Dividends paid  (2,683)  (2,616)
Proceeds from sale of treasury stock  477   463 
Treasury stock purchased  (2,029)  (991)
Net cash provided by financing activities  131,936   30,846 
Increase in cash and cash equivalents  3,273   (175)
Cash and cash equivalents at beginning of period  41,053   41,365 
Cash and cash equivalents at end of period  44,326   41,190 
         
Supplemental disclosures of cash flow information:        
    Interest paid  3,277   3,664 
    Income taxes paid  2,225   1,300 
         
Supplemental disclosure of non-cash investing and financing activities:        
Fair value adjustments for securities available for sale  (5,258)  (9,320)
Initial recognition of operating right-of-use assets  —   1,075 
Initial recognition of operating lease liabilities  —   1,075 

See Notes to the Unaudited Consolidated Interim Financial Statements

7

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.Summary of Significant Accounting Policies

Basis of Presentation

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

ENB Financial Corp (“the Corporation”) is the bank holding company for its wholly-owned subsidiary Ephrata National Bank (the “Bank”). This Form 10-Q, for the thirdsecond quarter of 2020,2021, 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 ninesix months ended SeptemberJune 30, 2020,2021, are not necessarily indicative of the results that may be expected for the year endedending December 31, 2020.2021. 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, 2019.2020.

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

IndexTable 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 SeptemberJune 30, 2020,2021, and December 31, 2019,2020, are as follows:

    Gross Gross  
(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair
  Cost Gains Losses Value
  $ $ $ $
September 30, 2020                
U.S. government agencies  8,216   157   —   8,373 
U.S. agency mortgage-backed securities  64,263   1,492   (91)  65,664 
U.S. agency collateralized mortgage obligations  40,236   758   (89)  40,905 
Asset-backed securities  41,892   82   (921)  41,053 
Corporate bonds  59,436   1,308   (30)  60,714 
Obligations of states and political subdivisions  138,701   4,889   (270)  143,320 
Total securities available for sale  352,744   8,686   (1,401)  360,029 
                 
December 31, 2019                
U.S. government agencies  32,621   31   (28)  32,624 
U.S. agency mortgage-backed securities  48,859   215   (448)  48,626 
U.S. agency collateralized mortgage obligations  60,124   323   (194)  60,253 
Asset-backed securities  23,646   7   (391)  23,262 
Corporate bonds  54,604   316   (40)  54,880 
Obligations of states and political subdivisions  86,216   2,245   (9)  88,452 
Total securities available for sale  306,070   3,137   (1,110)  308,097 

Gross

Gross

(DOLLARS IN THOUSANDS)

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

$

$

$

$

June 30, 2021

U.S. treasuries

4,981

43

0—

5,024

U.S. government agencies

29,620

102

(363

)

29,359

U.S. agency mortgage-backed securities

62,258

971

(322

)

62,907

U.S. agency collateralized mortgage obligations

36,911

635

(18

)

37,528

Asset-backed securities

100,202

889

(88

)

101,003

Corporate bonds

84,052

1,045

(30

)

85,067

Obligations of states and political subdivisions

256,280

7,029

(574

)

262,735

Total securities available for sale

574,304

10,714

(1,395

)

583,623

 

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 securities available for sale at SeptemberJune 30, 2020,2021, 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  47,256   47,804 
Due after one year through five years  103,969   106,143 
Due after five years through ten years  49,683   50,428 
Due after ten years  151,836   155,654 
Total debt securities  352,744   360,029 

(DOLLARS IN THOUSANDS)

Amortized

Cost

Fair Value

$

$

Due in one year or less

40,966

41,493

Due after one year through five years

106,249

108,301

Due after five years through ten years

132,029

132,886

Due after ten years

295,060

300,943

Total debt securities

574,304

583,623

Securities available for sale with a par value of $80,235,000$85,114,000 and $66,712,000$86,849,000 at SeptemberJune 30, 2020,2021, and December 31, 2019,2020, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $85,331,000$88,177,000 at SeptemberJune 30, 2020,2021, and $68,732,000$91,666,000 at December 31, 2019.2020.

9

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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

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE  
(DOLLARS IN THOUSANDS)        
         
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
  $ $ $ $
Proceeds from sales  7,001   7,169   50,819   35,818 
Gross realized gains  64   43   730   261 
Gross realized losses  (9)  (1)  (26)  (32)

(DOLLARS IN THOUSANDS)

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

$

$

$

Proceeds from sales

8,962

16,409

59,303

43,818

Gross realized gains

280

369

422

666

Gross realized losses

(6

)

(2

)

(60

)

(17

)

Management evaluates all of the Corporation’s securities for other-than-temporary impairment (OTTI) on a periodic basis. No securities in the portfolio had other-than-temporary impairment recorded in the first ninesix months of 20202021 or 2019.

2020.

Information pertaining to securities with gross unrealized losses at SeptemberJune 30, 2020,2021, and December 31, 2019,2020, 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)

  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, 2020                        
U.S. government agencies  —   —   —   —   —   — 
U.S. agency mortgage-backed securities  10,586   (75)  2,561   (16)  13,147   (91)
U.S. agency collateralized mortgage obligations  14,940   (89)  —   —   14,940   (89)
Asset-backed securities  13,031   (257)  16,749   (664)  29,780   (921)
Corporate bonds  —   —   3,001   (30)  3,001   (30)
Obligations of states & political subdivisions  22,673   (270)  —   —   22,673   (270)
                         
Total temporarily impaired securities  61,230   (691)  22,311   (710)  83,541   (1,401)
                         
                         
As of December 31, 2019                        
U.S. government agencies  1,222   (3)  15,971   (25)  17,193   (28)
U.S. agency mortgage-backed securities  5,040   (32)  24,027   (416)  29,067   (448)
U.S. agency collateralized mortgage obligations  17,457   (50)  17,512   (144)  34,969   (194)
Asset-backed securities  10,278   (169)  9,126   (222)  19,404   (391)
Corporate bonds  2,562   (4)  13,041   (36)  15,603   (40)
Obligations of states & political subdivisions  2,642   (9)  —   —   2,642   (9)
                         
Total temporarily impaired securities  39,201   (267)  79,677   (843)  118,878   (1,110)

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 June 30, 2021

U.S. government agencies

24,045

(363

)

0—

0—

24,045

(363

)

U.S. agency mortgage-backed securities

25,828

(317

)

462

(5

)

26,290

(322

)

U.S. agency collateralized mortgage obligations

275

(1

)

4,560

(17

)

4,835

(18

)

Asset-backed securities

16,382

(60

)

7,673

(28

)

24,055

(88

)

Corporate bonds

9,413

(30

)

0—

0—

9,413

(30

)

Obligations of states & political subdivisions

49,465

(574

)

0—

0—

49,465

(574

)

 

Total temporarily impaired securities

125,408

(1,345

)

12,695

(50

)

138,103

(1,395

)

 

 

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

)

In the debt security portfolio there were 4964 positions from 44 different issuers that were carrying unrealized losses as of SeptemberJune 30, 2020.2021. There were no instruments considered to be other-than-temporarily impaired at SeptemberJune 30, 2020.2021.

10

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ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation evaluates 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

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at SeptemberJune 30, 20202021 and December 31, 2019.2020.

   Gross Gross  

Gross

Gross

(DOLLARS IN THOUSANDS) Amortized Unrealized Unrealized Fair

Amortized

Unrealized

Unrealized

Fair

 Cost Gains Losses Value

Cost

Gains

Losses

Value

 $ $ $ $

$

$

$

$

September 30, 2020                

June 30, 2021

CRA-qualified mutual funds  6,162   —   —   6,162 

7,205

0—

0—

7,205

Bank stocks  947   —   (255)  692 

1,225

90

(15

)

1,300

Total equity securities  7,109   —   (255)  6,854 

8,430

90

(15

)

8,505

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

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 net gains and losses on the Corporation’s equity investments recognized in earnings during the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, and the portion of unrealized gains and losses for the period that relates to equity investments held as of SeptemberJune 30, 20202021 and 2019.

2020.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2020 2019 2020 2019
  $ $ $ $
         
Net gains (losses) recognized in equity securities during the period  (54)  (9)  (279)  35 
                 
Less:  Net gains realized on the sale of equity securities during the period  —   16   —   16 
                 
Unrealized gains (losses) recognized in equity securities held at reporting date  (54)  7   (279)  51 

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

$

$

$

 

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

(24

)

5

223

(225

)

 

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

0—

0—

95

0—

 

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

(24

)

5

128

(225

)

11

IndexTable of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4.Loans and Allowance for LoanCredit Losses

The following table presents the Corporation’s loan portfolio by category of loans as of SeptemberJune 30, 2020,2021, and December 31, 2019:2020:

LOAN PORTFOLIO

LOAN PORTFOLIO    
(DOLLARS IN THOUSANDS)    
  September 30, December 31,
  2020 2019
  $ $
Commercial real estate        
Commercial mortgages  136,125   120,212 
Agriculture mortgages  174,150   175,367 
Construction  22,380   16,209 
Total commercial real estate  332,655   311,788 
         
Consumer real estate (a)        
1-4 family residential mortgages  260,465   258,676 
Home equity loans  10,788   9,770 
Home equity lines of credit  68,368   70,809 
Total consumer real estate  339,621   339,255 
         
Commercial and industrial        
Commercial and industrial  128,414   58,019 
Tax-free loans  16,423   16,388 
Agriculture loans  20,494   20,804 
Total commercial and industrial  165,331   95,211 
         
Consumer  5,190   5,416 
         
Gross loans prior to deferred fees  842,797   751,670 
         
Deferred loan costs, net  380   1,948 
Allowance for loan losses  (11,996)  (9,447)
Total net loans  831,181   744,171 

(DOLLARS IN THOUSANDS)

June 30,

December 31,

2021

2020

$

$

Commercial real estate

Commercial mortgages

156,022

142,698

Agriculture mortgages

178,573

176,005

Construction

21,347

23,441

Total commercial real estate

355,942

342,144

 

Consumer real estate (a)

1-4 family residential mortgages

288,301

263,569

Home equity loans

11,525

10,708

Home equity lines of credit

71,694

71,290

Total consumer real estate

371,520

345,567

 

Commercial and industrial

Commercial and industrial

102,533

97,896

Tax-free loans

16,268

10,949

Agriculture loans

17,824

20,365

Total commercial and industrial

136,625

129,210

 

Consumer

5,133

5,155

 

Gross loans prior to deferred fees

869,220

822,076

 

Deferred loan costs, net

535

1,294

Allowance for credit losses

(12,703

)

(12,327

)

Total net loans

857,052

811,043

 

(a)

Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled $217,812,000$263,005,000 and $154,577,000$235,437,000 as of SeptemberJune 30, 2020,2021, and December 31, 2019,2020, respectively.

The largest movement within the Corporation’s loan portfolio since December 31, 20192020 was the sharp growth in the commercial and industrialconsumer real estate loan loan sector, which experienced a $70.1$26.0 million, or 73.6%7.5% increase. This was primarily a direct result of an increase in 1-4 family residential mortgages as the Small Business Administration’shousing market reacted to the low interest rate environment and many consumers refinanced their mortgages or purchased homes or new Paycheck Protection Program (PPP) established as partconstruction. While many 1-4 family mortgages were refinanced and sold on the secondary market, the Corporation did retain approximately $10 million of the CARES Act passed in March 2020, to provide relief to small businesses from the impact of COVID-19. The Corporation began making these loans in early April 2020,the portfolio as of June 30, 2021, to assist with loan growth and by September 30, 2020 had $77.7 million in PPP loan balances. The majority of these loans have been written with a two-year term, however management expectsto improve the vast majority of these loans to be forgiven by the SBA, or paid off by the borrower, prior to maturity of the loan. As a result, management expects the commercial and industrial loan balances to decline by December 31, 2020 with further declines during 2021.

yield on earning assets.

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 SeptemberJune 30, 20202021 and December 31, 2019.2020. 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.

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.

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, 2020 Commercial
Mortgages		 Agriculture
Mortgages		 Construction Commercial
and
Industrial		 Tax-free
Loans		 Agriculture
Loans		 Total

Commercial

Commercial

Agriculture

and

Tax-free

Agriculture

June 30, 2021

Mortgages

Mortgages

Construction

Industrial

Loans

Loans

Total

 $ $ $ $ $ $ $

$

$

$

$

$

$

$

Grade:                            

Pass  126,713   160,772   20,884   117,506   16,423   18,646   460,944 

145,457

168,811

15,227

93,320

16,268

17,131

456,214

Special Mention  3,500   2,630   1,496   5,779   —   826   14,231 

5,427

0—

6,120

5,497

0—

76

17,120

Substandard  5,912   10,748   —   5,129   —   1,022   22,811 

5,138

9,762

0—

3,716

0—

617

19,233

Doubtful  —   —   —   —   —   —   — 

0—

0—

0—

0—

0—

0—

0—

Loss  —   —   —   —   —   —   — 

0—

0—

0—

0—

0—

0—

0—

                            

Total  136,125   174,150   22,380   128,414   16,423   20,494   497,986 

156,022

178,573

21,347

102,533

16,268

17,824

492,567

December 31, 2019 Commercial
Mortgages		 Agriculture
Mortgages		 Construction Commercial
and
Industrial		 Tax-free
Loans		 Agriculture
Loans		 Total
  $ $ $ $ $ $ $
Grade:                            
Pass  117,875   158,896   16,209   52,028   16,388   18,530   379,926 
Special Mention  827   4,546   —   618   —   939   6,930 
Substandard  1,510   11,925   —   5,293   —   1,335   20,063 
Doubtful  —   —   —   80   —   —   80 
Loss  —   —   —   —   —   —   — 
                             
    Total  120,212   175,367   16,209   58,019   16,388   20,804   406,999 

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

Substandard loans increased by $2,748,000,$277,000, or 13.7%1.5%, while special mention loans have increased by $7,301,000,$3,121,000, or 105.4%22.3%, from December 31, 20192020 to SeptemberJune 30, 2020.2021. Substandard loans increased from $20.1$19.0 million to $22.8$19.2 million from December 31, 2019,2020, to SeptemberJune 30, 20202021 while special mention loans increased from $6.9$14.0 million to $14.2$17.1 million during this same period. The loan areas that experienced material changes in special mention and substandard loans were commercial mortgages and industrial and commercial mortgages.construction loans. Under commercial and industrial loans,mortgages, one $3.5 million non-profit loan and another $1.5 million hotel loan to unrelated borrowers werewas transferred to special mention along with a number ofdue to COVID-19 negatively impacting business operations. This was the primary reason for the increase in special mention loans as well as other smaller loan relationships. During the third quarter of 2020, a bowling alley with a $3.6 million mortgage was downgraded from special mention to substandard. A total of sixteen loansrelationships that were downgraded to substandard induring the third quarterfirst half of 2020, twelve of which were downgraded from special mention.2021.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Special mention loans within agriculture declined from $5.5 million to $3.5 million; one farm customer with $1.8 million in outstanding loans was upgraded from special mention to a pass rating, while another customer with $754,000 in outstanding balances was downgraded from a pass rating to special mention.

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 SeptemberJune 30, 20202021 and December 31, 2019:2020:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

September 30, 2020 1-4 Family
Residential
Mortgages		 Home Equity
Loans		 Home Equity
Lines of
Credit		 Consumer Total

1-4 Family

Home Equity

Residential

Home Equity

Lines of

June 30, 2021

Mortgages

Loans

Credit

Consumer

Total

Payment performance: $ $ $ $ $

$

$

$

$

$

          

Performing  259,710   10,696   68,358   5,182   343,946 

287,978

11,525

71,694

5,126

376,323

Non-performing  755   92   10   8   865 

323

0—

0—

7

330

                    

Total  260,465   10,788   68,368   5,190   344,811 

288,301

11,525

71,694

5,133

376,653

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

December 31, 2019 1-4 Family
Residentia
l Mortgages		 Home Equity
Loans		 Home Equity
Lines of
Credit		 Consumer Total
Payment performance: $ $ $ $ $
           
Performing  257,374   9,678   70,799   5,412   343,263 
Non-performing  1,302   92   10   4   1,408 
                     
   Total  258,676   9,770   70,809   5,416   344,671 

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present an age analysis of the Corporation’s past due loans, segregated by loan portfolio class, as of SeptemberJune 30, 20202021 and December 31, 2019:2020:

AGING OF LOANS RECEIVABLE

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, 2020 Past Due Past Due Days Due Current Receivable Accruing
  $ $ $ $ $ $ $
Commercial real estate                            
   Commercial mortgages  —   —   210   210   135,915   136,125   — 
   Agriculture mortgages  532   —   —   532   173,618   174,150   — 
   Construction  —   —   —   —   22,380   22,380   — 
Consumer real estate                            
   1-4 family residential mortgages  1,080   —   755   1,835   258,630   260,465   266 
   Home equity loans  —   —   92   92   10,696   10,788   — 
   Home equity lines of credit  68   —   10   78   68,290   68,368   10 
Commercial and industrial                            
   Commercial and industrial  102   —   495   597   127,817   128,414   — 
   Tax-free loans  —   —   —   —   16,423   16,423   ��� 
   Agriculture loans  32   —   —   32   20,462   20,494   — 
Consumer  14   9   8   31   5,159   5,190   8 
       Total  1,828   9   1,570   3,407   839,390   842,797   284 

(DOLLARS IN THOUSANDS)

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

Loans

Greater

Receivable > 90 Days

30-59 Days

60-89 Days

than 90

Total Past

Total Loans

and

June 30, 2021

Past Due

Past Due

Days

Due

Current

Receivable

Accruing

$

$

$

$

$

$

$

Commercial real estate

Commercial mortgages

0—

0—

190

190

155,832

156,022

0—

Agriculture mortgages

0—

0—

0—

0—

178,573

178,573

0—

Construction

0—

0—

0—

0—

21,347

21,347

0—

Consumer real estate

1-4 family residential mortgages

286

15

323

624

287,677

288,301

280

Home equity loans

40

0—

0—

40

11,485

11,525

0—

Home equity lines of credit

0—

0—

0—

0—

71,694

71,694

0—

Commercial and industrial

Commercial and industrial

0—

0—

418

418

102,115

102,533

0—

Tax-free loans

0—

0—

0—

0—

16,268

16,268

0—

Agriculture loans

0—

0—

0—

0—

17,824

17,824

0—

Consumer

1

11

7

19

5,114

5,133

7

Total

327

26

937

1,290

867,930

869,220

287

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

023

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

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents nonaccrual loans by classes of the loan portfolio as of SeptemberJune 30, 20202021 and December 31, 2019:2020:

NONACCRUAL LOANS BY LOAN CLASS

NONACCRUAL LOANS BY LOAN CLASS  
(DOLLARS IN THOUSANDS)  
  September 30, December 31,
  2020 2019
  $ $
     
Commercial real estate        
  Commercial mortgages  210   228 
  Agriculture mortgages  —   1,070 
  Construction  —   — 
Consumer real estate        
  1-4 family residential mortgages  489   495 
  Home equity loans  92   92 
  Home equity lines of credit  —   — 
Commercial and industrial        
  Commercial and industrial  495   538 
  Tax-free loans  —   — 
  Agriculture loans  —   — 
Consumer  —   — 
             Total  1,286   2,423 

(DOLLARS IN THOUSANDS)

June 30,

December 31,

2021

2020

$

$

 

Commercial real estate

Commercial mortgages

190

208

Agriculture mortgages

0—

0—

Construction

0—

0—

Consumer real estate

1-4 family residential mortgages

43

48

Home equity loans

0—

0—

Home equity lines of credit

0—

0—

Commercial and industrial

Commercial and industrial

418

469

Tax-free loans

0—

0—

Agriculture loans

0—

0—

Consumer

0—

0—

Total

651

725

As of SeptemberJune 30, 20202021 and December 31, 2019,2020, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the three and ninesix months ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019,2020, is as follows:

  Three Months Ended September 30, Nine months ended September 30,
  2020 2019 2020 2019
  $ $ $ $
         
Average recorded balance of impaired loans  5,060   3,721   4,062   3,278 
Interest income recognized on impaired loans  31   11   72   32 

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

$

$

$

$

 

Average recorded balance of impaired loans

5,457

3,178

5,597

3,557

Interest income recognized on impaired loans

80

18

138

43

No loan modifications were made during the first six months of 2021 that would be considered a troubled debt restructuring (TDR). There was one loan modification made during the third quarter of 2020 that would bewas considered a troubled debt restructuring (TDR).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. 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. There was one loan modification that occurred during the first quarter of 2019, constituting a TDR. A modification of the payment terms to a loan customer are considered a TDR if a concession was made to a borrower that is experiencing financial difficulty. A concession is generally defined as more favorable payment or credit terms granted to a borrower in an effort to improve the likelihood of the lender collecting principal in its entirety. Concessions usually are in the form of interest only for a period of time, or a lower interest rate offered in an effort to enable the borrower to continue to make normally scheduled payments.

In the first quarter of 2019, a loan modification was made on a $718,000 agricultural mortgage which moved the timing of the annual principal payment and changed interest payments from monthly to annually. The farmer had suffered a fire loss in late 2018 impacting one year’s harvest. The principal and interest payment due date was reset to November 15, 2019, when it was paid. No other loans were modified during 2019 or 2020.

Included in the impaired loan portfolio are threetwo loans to unrelated borrowers that are being reported as TDRs. The balance of these threetwo TDR loans was $1,932,000$4,341,000 as of SeptemberJune 30, 2020. One2021. None of these TDR loans with a balance of $439,000 is also on nonaccrual and is included under 1-4 family residential mortgages shown in the nonaccrual table above. For both of these TDR loans the borrowers have a history of being delinquent. Management will continue to report these loans as TDR loans until they have been paid off or charged off.are non-accrual.

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables summarize information regarding impaired loans by loan portfolio class as of SeptemberJune 30, 2021 and December 31, 2020, and for the ninesix months ended SeptemberJune 30, 2020,2021, and as ofthe twelve months ended December 31, 2019:2020:

IMPAIRED LOAN ANALYSIS

IMPAIRED LOAN ANALYSIS          
(DOLLARS IN THOUSANDS)          
September 30, 2020 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Average
Recorded
Investment		 Interest
Income
Recognized
  $ $ $ $ $
           
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  699   752   —   716   — 
    Agriculture mortgages  1,492   1,521   —   1,972   41 
    Construction  —   —   —   —   — 
Total commercial real estate  2,191   2,273   —   2,688   41 
                     
Commercial and industrial                    
    Commercial and industrial  495   523   —   524   17 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial  495   523   —   524   17 
                     
Total with no related allowance  2,686   2,796   —   3,212   58 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  3,673   3,681   1,138   850   15 
    Agriculture mortgages  —   —   —   —   — 
    Construction  —   —   —   —   — 
Total commercial real estate  3,673   3,681   1,138   850   15 
                     
Commercial and industrial                    
    Commercial and industrial  —   —   —   —   — 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial  —   —   —   —   — 
                     
Total with a related allowance  3,673   3,681   1,138   850   15 
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  4,372   4,433   1,138   1,566   15 
    Agriculture mortgages  1,492   1,521   —   1,972   41 
    Construction  —   —   —   —   — 
Total commercial real estate  5,864   5,954   1,138   3,538   56 
                     
Commercial and industrial                    
    Commercial and industrial  495   523   —   524   17 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial�� 495   523   —   524   17 
                     
Total  6,359   6,477   1,138   4,062   73 

(DOLLARS IN THOUSANDS)

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income

June 30, 2021

Investment

Balance

Allowance

Investment

Recognized

$

$

$

$

$

 

With no related allowance recorded:

Commercial real estate

Commercial mortgages

233

269

0—

244

9

Agriculture mortgages

787

787

0—

1,340

35

Construction

0—

0—

0—

0—

0—

Total commercial real estate

1,020

1,056

0—

1,584

44

 

Commercial and industrial

Commercial and industrial

418

464

0—

443

10

Tax-free loans

0—

0—

0—

0—

0—

Agriculture loans

0—

0—

0—

0—

0—

Total commercial and industrial

418

464

0—

443

10

 

Total with no related allowance

1,438

1,520

0—

2,027

54

 

With an allowance recorded:

Commercial real estate

Commercial mortgages

3,554

3,554

1,083

3,570

84

Agriculture mortgages

0—

0—

0—

0—

0—

Construction

0—

0—

0—

0—

0—

Total commercial real estate

3,554

3,554

1,083

3,570

84

 

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

3,554

3,554

1,083

3,570

84

 

Total by loan class:

Commercial real estate

Commercial mortgages

3,787

3,823

1,083

3,814

93

Agriculture mortgages

787

787

0—

1,340

35

Construction

0—

0—

0—

0—

0—

Total commercial real estate

4,574

4,610

1,083

5,154

128

 

Commercial and industrial

Commercial and industrial

418

464

0—

443

10

Tax-free loans

0—

0—

0—

0—

0—

Agriculture loans

0—

0—

0—

0—

0—

Total commercial and industrial

418

464

0—

443

10

 

Total

4,992

5,074

1,083

5,597

138

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

IMPAIRED LOAN ANALYSIS

IMPAIRED LOAN ANALYSIS          
(DOLLARS IN THOUSANDS)          
December 31, 2019 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Average
Recorded
Investment		 Interest
Income
Recognized
  $ $ $ $ $
           
With no related allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  724   765   —   859   — 
    Agriculture mortgages  1,912   1,928   —   1,903   43 
    Construction  —   —   —   —   — 
Total commercial real estate  2,636   2,693   —   2,762   43 
                     
Commercial and industrial                    
    Commercial and industrial  —   —   —   —   — 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial  —   —   —   —   — 
                     
Total with no related allowance  2,636   2,693   —   2,762   43 
                     
With an allowance recorded:                    
Commercial real estate                    
    Commercial mortgages  92   100   49   93   — 
    Agriculture mortgages  718   718   60   760   — 
    Construction  —   —   —   —   — 
Total commercial real estate  810   818   109   853   — 
                     
Commercial and industrial                    
    Commercial and industrial  538   549   80   261   — 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial  538   549   80   261   — 
                     
Total with a related allowance  1,348   1,367   189   1,114   — 
                     
Total by loan class:                    
Commercial real estate                    
    Commercial mortgages  816   865   49   952   — 
    Agriculture mortgages  2,630   2,646   60   2,663   43 
    Construction  —   —   —   —   — 
Total commercial real estate  3,446   3,511   109   3,615   43 
                     
Commercial and industrial                    
    Commercial and industrial  538   549   80   261   — 
    Tax-free loans  —   —   —   —   — 
    Agriculture loans  —   —   —   —   — 
Total commercial and industrial  538   549   80   261   — 
                     
Total  3,984   4,060   189   3,876   43 

(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

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 ninesix months ended SeptemberJune 30, 2020:

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, 2019  4,319   2,855   1,784   41   448   9,447 
                         
    Charge-offs  —   —   —   (6)  —   (6)
    Recoveries  11   —   1   —   —   12 
    Provision  252   296   171   21   (390)  350 
                         
Balance - March 31, 2020  4,582   3,151   1,956   56   58   9,803 
                         
    Charge-offs  —   —   —   (10)  —   (10)
    Recoveries  —   —   1   1   —   2 
    Provision  356   146   175   5   293   975 
                         
Ending Balance - June 30, 2020  4,938   3,297   2,132   52   351   10,770 
                         
    Charge-offs  —   —   (23)  (3)  —   (26)
    Recoveries  —   —   1   1   —   2 
    Provision  1,289   75   (18)  4   (100)  1,250 
                         
Balance - September 30, 2020  6,227   3,372   2,092   54   251   11,996 

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

During the ninesix months ended SeptemberJune 30, 2020,2021, management charged off $42,000$23,000 in loans while recovering $16,000$24,000 and added $2,575,000$375,000 to the provision. The unallocated portion of the allowance decreasedincreased from 4.7%4.3% of total reserves as of December 31, 2019,2020, to 2.1%4.7% as of SeptemberJune 30, 2020.2021. 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 ninesix months ended SeptemberJune 30, 2020,2021, net provision expense was recorded for all loan sectors. The higher provision in the commercial real estate sector was due to a specific allocationgrowth in this portfolio of $1.1 million for a customer with ongoing business concerns. The higher provisions across the other categories were primarily caused by increasingloans since December 31, 2020, as well as an increase in the qualitative factors across all industry linesfactor related to various degrees as a resultthe trends in the nature and volume of the impact and effect from COVID-19 and the declining economic conditions.this sector. There were minimal charge-offs and recoveries recorded during the ninesix months ended SeptemberJune 30, 2020,2021, so the provision expense was primarily related to the specific allocationan increase in loan balances as well as the change in economic conditions and potential for credit declines moving forward. The total amount of substandard loans at the endslightly higher unallocated portion of the third quarter of 2020 was slightly higher resulting in slightly more provision expense.

allowance.

As of SeptemberJune 30, 2020,2021, the Corporation’s total delinquencies were 0.40%0.15%, a decline from 0.91%0.34% at December 31, 2019.2020. The Corporation’s total delinquencies continue to compare favorably to the national uniform bank performance group, which was at 1.05% as of December 31, 2019.

group.

Outside of the above measurements and indicators, management continues to utilize nine qualitative factors to continually refine the potential credit risks across the Corporation’s various loan types. In addition, the loan portfolio is sectored out into nine different categories to evaluate these qualitative factors. A total score of the qualitative factors for each loan sector is calculated to utilize in the allowance for loan loss calculation. The agricultural dairy sector carries the highest level of qualitative factors due to the long-term weakness in milk prices. While the dairy market has improved recently, COVID-19 initially caused 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 ninethree and six months ended SeptemberJune 30, 2019:

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, 2018  4,296   2,408   1,428   102   432   8,666 
                         
    Charge-offs  —   —   —   (17)  —   (17)
    Recoveries  44   —   13   —   —   57 
    Provision  148   (140)  128   16   28   180 
                         
Balance - March 31, 2019  4,488   2,268   1,569   101   460   8,886 
                         
    Charge-offs  —   —   —   (6)  —   (6)
    Recoveries  43   —   1   3   —   47 
    Provision  (114)  122   (204)  (22)  248   30 
                         
Balance - June 30, 2019  4,417   2,390   1,366   76   708   8,957 
                         
    Charge-offs  (122)  —   (63)  (3)  —   (188)
    Recoveries  41   1   33   —   —   75 
    Provision  229   156   740   (19)  (476)  630 
                         
Ending Balance - September 30, 2019  4,565   2,547   2,076   54   232   9,474 

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

During the ninesix months ended SeptemberJune 30, 2019,2020, management charged off $211,000$16,000 in loans while recovering $179,000$14,000 and added $840,000$1,325,000 to the provision. The unallocated portion of the allowance decreased from 5.3%4.7% of total reserves as of December 31, 2018,2019, to 2.5%3.3% as of SeptemberJune 30, 2019, after being higher at the end of the first and second quarters.2020. Management monitors the unallocated portion of the allowance with a desire to maintain it at approximately 5% or less,over the long term, with a requirement of it not exceedingto exceed 10%.

During the ninesix months ended SeptemberJune 30, 2019,2020, net provision expense was recorded for all sectors except consumer, which hadsectors. The higher provision was primarily caused by increasing the qualitative factors across all industry lines to various degrees as a net credit provision. Inresult of the third quarter of 2019, management recorded charge-offs in commercial real estateimpact and effect from COVID-19 and the C&I sector, unlikedeclining economic conditions. A qualitative factor was increased for business loans specifically related to the special federal governmental lending programs developed as a result of COVID-19. There were minimal charge-offs and recoveries recorded during the six months ended June 30, 2020, so the provision expense was primarily related to this change in the first two quarters of 2019. This also pushed up the historic loss rateeconomic conditions and caused higher allocations in the third quarterpotential for those sectors.credit declines moving forward. The total amount of substandard and special mention loans at the end of the second and third quartersquarter of 20192020 was slightly higher resulting in slightly more provision expense.

As of June 30, 2020, the Corporation’s total delinquencies were similar for commercial mortgages, but agricultural mortgages increased for both special mention and substandard loans, requiring more provision.0.41%, a decline from 0.91% at December 31, 2019. The Corporation’s commercial and industrial allocation for credit losses was increased by $740,000 in the third quarter of 2019, primarily duetotal delinquencies continue to compare favorably to the classificationnational uniform bank performance group.

20

Table of one $547,000 loan to doubtful status, which caused a specific provision for the same amount. This C&I loan customer is current as to payment of interest on a commercial line of credit but the line has not revolved for several years. The Corporation does have a general UCC filing against all business assets but the majority of their inventory assets are already covered by a purchase money security interest of the manufacturer. Management will continue to classify the loan as doubtful until it can be determined that sufficient collateral exists to cover the loan, or sustainable principal payments can be made on the line.

20 Contents

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following tables present the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of SeptemberJune 30, 20202021 and December 31, 2019:

2020:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

As of September 30, 2020: Commercial Real
Estate		 Consumer
Real Estate		 Commercial
and
Industrial		 Consumer Unallocated Total
  $ $ $ $ $ $
Allowance for credit losses:                        
Ending balance: individually evaluated                        
  for impairment  1,138   —   —   —   —   1,138 
Ending balance: collectively evaluated                        
  for impairment  5,089   3,372   2,092   54   251   10,858 
                         
Loans receivable:                        
Ending balance  332,655   339,621   165,331   5,190       842,797 
Ending balance: individually evaluated                        
  for impairment  5,864   —   495   —       6,359 
Ending balance: collectively evaluated                        
  for impairment  326,791   339,621   164,836   5,190       836,438 

Commercial

Consumer

Commercial

As of June 30, 2021:

Real Estate

Real Estate

and Industrial

Consumer

Unallocated

Total

$

$

$

$

$

$

Allowance for credit losses:

Ending balance: individually evaluated for impairment

1,083

0—

0—

0—

0—

1,083

Ending balance: collectively evaluated for impairment

5,467

3,491

1,993

66

603

11,620

 

Loans receivable:

Ending balance

355,942

371,520

136,625

5,133

869,220

Ending balance: individually evaluated for impairment

4,574

0—

418

0—

4,992

Ending balance: collectively evaluated for impairment

351,368

371,520

136,207

5,133

864,228

As of December 31, 2019: Commercial Real
Estate		 Consumer
Real Estate		 Commercial
and
Industrial		 Consumer Unallocated Total
  $ $ $ $ $ $
Allowance for credit losses:                        
Ending balance: individually evaluated                        
  for impairment  109   —   80   —   —   189 
Ending balance: collectively evaluated                        
  for impairment  4,210   2,855   1,704   41   448   9,258 
                         
Loans receivable:                        
Ending balance  311,788   339,255   95,211   5,416       751,670 
Ending balance: individually evaluated                        
  for impairment  3,446   —   538   —       3,984 
Ending balance: collectively evaluated                        
  for impairment  308,342   339,255   94,673   5,416       747,686 

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

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 provide the fair market value for assets required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets as of SeptemberJune 30, 2020,2021, and December 31, 2019,2020, 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)

  September 30, 2020
  Level I Level II Level III Total
  $ $ $ $
         
U.S. government agencies  —   8,373   —   8,373 
U.S. agency mortgage-backed securities  —   65,664   —   65,664 
U.S. agency collateralized mortgage obligations  —   40,905   —   40,905 
Asset-backed securities  —   41,053   —   41,053 
Corporate bonds  —   60,714   —   60,714 
Obligations of states & political subdivisions  —   143,320   —   143,320 
Equity securities  6,854   —   —   6,854 
                 
Total securities  6,854   360,029   —   366,883 

June 30, 2021

Level I

Level II

Level III

Total

$

$

$

$

 

U.S. treasuries

0—

5,024

0—

5,024

U.S. government agencies

0—

29,359

0—

29,359

U.S. agency mortgage-backed securities

0—

62,907

0—

62,907

U.S. agency collateralized mortgage obligations

0—

37,528

0—

37,528

Asset-backed securities

0—

101,003

0—

101,003

Corporate bonds

0—

85,067

0—

85,067

Obligations of states & political subdivisions

0—

262,735

0—

262,735

Equity securities

8,505

0—

0—

8,505

 

Total securities

8,505

583,623

0—

592,128

On SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020,2021, the CRA fund investments had a $6,162,000$7,205,000 book and fair market value and the bank stock portfolio had a book value of $947,000,$1,225,000, and fair market value of $692,000.

$1,300,000.

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.

ASSETS MEASURED ON A RECURRING BASIS

(DOLLARS IN THOUSANDS)

  December 31, 2019
  Level I Level II Level III Total
  $ $ $ $
         
U.S. government agencies  —   32,624   —   32,624 
U.S. agency mortgage-backed securities  —   48,626   —   48,626 
U.S. agency collateralized mortgage obligations  —   60,253   —   60,253 
Asset-backed securities  —   23,262   —   23,262 
Corporate bonds  —   54,880   —   54,880 
Obligations of states & political subdivisions  —   88,452   —   88,452 
Equity securities  6,708   —   —   6,708 
                 
Total securities  6,708   308,097   —   314,805 

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

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

On December 31, 2019,2020, the Corporation held no securities valued using level III inputs. All of the Corporation’s debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation’s CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2019,2020, the CRA fund investments had a $6,071,000$6,176,000 book and market value and the bank stocks had a book value of $614,000$982,000 and a market value of $637,000.

$929,000.

The following tables provide the fair value for each class of assets required to be measured and reported at fair value on a nonrecurring basis on the Consolidated Balance Sheets as of SeptemberJune 30, 20202021 and December 31, 2019,2020, by level within the fair value hierarchy:

ASSETS MEASURED ON A NONRECURRING BASIS

(Dollars in Thousands)DOLLARS IN THOUSANDS)

June 30, 2021

Level I

Level II

Level III

Total

$

$

$

$

Assets:

Impaired Loans

$

0—

$

0—

$

3,909

$

3,909

Total

$

0—

$

0—

$

3,909

$

3,909

 

             
  September 30, 2020 
  Level I  Level II  Level III  Total 
  $  $  $  $ 
Assets:                
Impaired Loans $—  $—  $5,221  $5,221 
Total $—  $—  $5,221  $5,221 
                 

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

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 $6,359,000$4,992,000 of impaired loans as of SeptemberJune 30, 2020,2021, with $1,138,000$1,083,000 of specific allocation against these loans and $3,984,000$5,763,000 of impaired loans as of December 31, 2019,2020, with $189,000$1,131,000 of specific allocation against these loans. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

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:

23 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)

September

June 30, 2020

2021

Fair Value

Valuation

Unobservable

Valuation

Range

Unobservable

Range

Estimate

Techniques

Estimate

Input

Techniques

Input

(Weighted Avg)

Impaired loans

3,909

Appraisal of collateral (1)

Appraisal

adjustments (2)

-20% (-20%)

Impaired loans

5,221

Appraisal of

Appraisal

-20% (-20%)

collateral (1)

adjustments

Liquidation

expenses (2)

Liquidation

-10% (-10%)

expenses (2)

December 31, 2019
 Fair Value ValuationUnobservable Range
EstimateTechniquesInput(Weighted Avg)
Impaired loans 3,795Appraisal ofAppraisal-20% (-20%)
collateral (1)adjustments (2)
Liquidation -10% (-10%)
expenses (2)

 

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%)

Liquidation

expenses (2)

-10% (-10%)

(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

The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets as of SeptemberJune 30, 20202021 and December 31, 2019:

2020:

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

(DOLLARS IN THOUSANDS)

  September 30, 2020
      Quoted Prices in    
      Active Markets Significant Other Significant
      for Identical Observable Unobservable
  Carrying   Assets Inputs Inputs
  Amount Fair Value (Level 1) (Level II) (Level III)
  $ $ $ $ $
Financial Assets:                    
Cash and cash equivalents  44,326   44,326   44,326   —   — 
Regulatory stock  6,525   6,525   6,525   —   — 
Loans held for sale  5,008   5,008   5,008   —   — 
Loans, net of allowance  831,181   839,427   —   —   839,427 
Mortgage servicing assets  1,041   1,058   —   —   1,058 
Accrued interest receivable  4,354   4,354   4,354   —   — 
Bank owned life insurance  29,418   29,418   29,418   —   — 
                     
Financial Liabilities:                    
Demand deposits  465,247   465,247   465,247   —   — 
Interest-bearing demand deposits  45,503   45,503   45,503   —   — 
NOW accounts  111,849   111,849   111,849   —   — 
Money market deposit accounts  125,665   125,665   125,665   —   — 
Savings accounts  255,936   255,936   255,936   —   — 
Time deposits  122,621   125,225   —   —   125,225 
     Total deposits  1,126,821   1,129,425   1,004,200   —   125,225 
                     
Short-term borrowings  1,500   1,500   1,500   —   — 
Long-term debt  60,010   56,759   —   —   56,759 
Accrued interest payable  359   359   359   —   — 

June 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

55,391

55,391

55,391

0—

0—

Regulatory stock

5,867

5,867

5,867

0—

0—

Loans held for sale

1,323

1,323

1,323

0—

0—

Loans, net of allowance

857,052

870,929

0—

0—

870,929

Mortgage servicing assets

1,437

1,785

0—

0—

1,785

Accrued interest receivable

5,604

5,604

5,604

0—

0—

Bank owned life insurance

30,006

30,006

30,006

0—

0—

 

Financial Liabilities:

Demand deposits

582,747

582,747

582,747

0—

0—

Interest-bearing demand deposits

55,419

55,419

55,419

0—

0—

NOW accounts

131,151

131,151

131,151

0—

0—

Money market deposit accounts

162,248

162,248

162,248

0—

0—

Savings accounts

320,251

320,251

320,251

0—

0—

Time deposits

117,068

117,926

0—

0—

117,926

Total deposits

1,368,884

1,369,742

1,251,816

0—

117,926

 

Long-term debt

50,204

48,144

0—

0—

48,144

Subordinated debt

19,640

19,272

0—

0—

19,272

Accrued interest payable

282

282

282

0—

0—

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

(DOLLARS IN THOUSANDS)

  December 31, 2019
      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  41,053   41,053   41,053   —   — 
Regulatory stock  7,291   7,291   7,291   —   — 
Loans held for sale  2,342   2,342   2,342   —   — 
Loans, net of allowance  744,171   759,011   —   —   759,011 
Mortgage servicing assets  892   1,049   —   —   1,049 
Accrued interest receivable  3,768   3,768   3,768   —   — 
Bank owned life insurance  28,818   28,818   28,818   —   — 
                     
Financial Liabilities:                    
Demand deposits  363,857   363,857   363,857   —   — 
Interest-bearing demand deposits  25,171   25,171   25,171   —   — 
NOW accounts  96,941   96,941   96,941   —   — 
Money market deposit accounts  141,649   141,649   141,649   —   — 
Savings accounts  211,285   211,285   211,285   —   — 
Time deposits  135,185   136,781   —   —   136,781 
     Total deposits  974,088   975,684   838,903   —   136,781 
                     
Short-term borrowings  200   200   200   —   — 
Long-term debt  77,872   76,825   —   —   76,825 
Accrued interest payable  521   521   521   —   — 

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—

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 SeptemberJune 30, 2020,2021, firm loan commitments were $60.9$99.1 million, unused lines of credit were $319.0$358.4 million, and open letters of credit were $9.1$11.2 million. The total of these commitments was $389.0$468.7 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

8.Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the ninethree and six months ended SeptemberJune 30, 20202021 and 20192020 is as follows:

ACCUMULATED OTHER COMPREHENSIVE INCOME (1) (2)

(DOLLARS IN THOUSANDS)

Unrealized

Gains (Losses)

on Securities

Available-for-Sale

$

Balance at December 31, 20192020

1,600

7,958

Other comprehensive loss before reclassifications

(2744,964

)

Amount reclassified from accumulated other comprehensive income (loss)

(22370

)

Period change

(4975,034

)

Balance at March 31, 20202021

1,103

2,924

Other comprehensive incomeloss before reclassifications

3,709

4,654

Amount reclassified from accumulated other comprehensive income (loss)

(290216

)

Period change

3,419

4,438

Balance at June 30, 20202021

4,522

7,362

Balance at December 31, 2019

1,600

Other comprehensive incomeloss before reclassifications

1,277

(274

)

Amount reclassified from accumulated other comprehensive income (loss)

(43223

)

Period change

1,234

(497

)

Balance at September 30,March 31, 2020

5,756

1,103

Other comprehensive loss before reclassifications

3,709

Balance at December 31, 2018(5,678)
  Other comprehensive income before reclassifications2,553

Amount reclassified from accumulated other comprehensive income (loss)

(64290

)

Period change

2,489

3,419

Balance at March 31, 2019(3,189)
  Other comprehensive income before reclassifications3,571
  Amount reclassified from accumulated other comprehensive income(84)
Period change3,487

Balance at June 30, 20192020

298

4,522

  Other comprehensive income before reclassifications1,420
  Amount reclassified from accumulated other comprehensive income(33)
Period change1,387
Balance at September 30, 20191,685

 

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

(2) Amounts in parentheses indicate debits.

27

IndexTable of Contents

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,  
  2020 2019 Affected Line Item in the
  $ $ Consolidated Statements of Income
Securities available-for-sale:          
  Net securities gains,  55   42  Gains on the sale of
           reclassified into earnings                debt securities, net
     Related income tax expense  (12)  (9) Provision for federal income taxes
  Net effect on accumulated other comprehensive          
     income (loss) for the period  43   33   

Amount Reclassified from

Accumulated Other Comprehensive

Income (Loss)

For the Three Months

Ended June 30,

2021

2020

Affected Line Item in the

$

$

Consolidated Statements of Income

Securities available-for-sale:

Net securities gains, reclassified into earnings

274

367

Gains on the sale of debt securities, net

Related income tax expense

(58

)

(77

)

Provision for federal income taxes

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

216

290

(1) Amounts in parentheses indicate debits.

  Amount Reclassified from  
  Accumulated Other Comprehensive  
  Income (Loss)  
  For the Nine Months  
  Ended September 30,  
  2020 2019 Affected Line Item in the
  $ $ Consolidated Statements of Income
Securities available-for-sale:          
  Net securities gains,  704   229  Gains on the sale of
           reclassified into earnings                debt securities, net
     Related income tax expense  (148)  (48) Provision for federal income taxes
  Net effect on accumulated other comprehensive          
     income (loss) for the period  556   181   

Amount Reclassified from

Accumulated Other Comprehensive

Income (Loss)

For the Six Months

Ended June 30,

2021

2020

Affected Line Item in the

$

$

Consolidated Statements of Income

Securities available-for-sale:

Net securities gains (losses), reclassified into earnings

362

649

Gains on the sale of debt securities, net

Related income tax expense

(76

)

(136

)

Provision for federal income taxes

Net effect on accumulated other comprehensive income for the period

286

513

(1) Amounts in parentheses indicate debits.

9. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Corporation adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Corporation, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Corporation is the lessee.

All of these leases in which the Corporation is the lessee are comprised of real estate property for branches and office space with terms extending through 2026. All of the Corporation’s leases are classified as operating leases, and therefore, were previously not recognized on the Corporation’s Consolidated Balance Sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance Sheets as a right-of use (“ROU”) asset and a corresponding lease liability.

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

28

IndexTable of Contents

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Lease Consolidated Balance Sheets Classification      
(Dollars in Thousands) Classification September 30, 2020 December 31, 2019
 Lease Right-of-Use Assets          
    Operating lease right-of use assets Other Assets $774   908 
           
 Lease Liabilities          
    Operating lease liabilties Other Liabilities $784   916 

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to determine the present value of the minimum lease payments. The Corporation’s lease agreements often include one or more options to renew at the Corporation’s discretion. If at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As the rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.

   September 30, 2020 December 31, 2019
Weighted-average remaining lease term         
    Operating leases     4.6 years  5.3 years
 Weighted-average discount rate         
    Operating leases     3.10%  3.09%

The following table represents lease costs and other lease information. As the Corporation elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 were as follows:

Lease Payment Schedule  
(Dollars in Thousands) Operating Leases
Twelve Months Ended:    
    September 30, 2021 $203 
    September 30, 2022  183 
    September 30, 2023  151 
    September 30, 2024  155 
    September 30, 2025  124 
Thereafter  28 
Total Future Minimum Lease Payments  844 
Amounts Representing Interests  (60)
Present Value of Net Future Minimum Lease Payments $784 

29 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

10. Change in Capital Structure

On April 17, 2019 ENB Financial Corp announced the Board of Directors declared a two-for-one stock split of the Corporation’s issued and outstanding common stock pursuant to which one (1) additional share of common stock was issued for each share of common stock held by shareholders of record as of the close of business on May 31, 2019. The additional shares were issued on June 28, 2019. The stock split was effected pursuant to articles of amendment to the articles of incorporation to reduce the par value of the common stock from $0.20 to $0.10 and increase the authorized shares of common stock proportionately from 12,000,000 to 24,000,000. Per share data reflected on the Corporation’s consolidated statements of income are restated as if the stock split had occurred at the beginning of the earliest period presented.

11. 9.Risks and Uncertainties

COVID-19 Update

The following table provides information with respect to concentrations within our commercial loansloan portfolio that may be more significantly impacted by typethe effects of the COVID-19 pandemic at SeptemberJune 30, 2020.2021.

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  155   72,952   67,269   7.98% 
  Lessors of Residential Buildings  236   43,984   39,139   4.64% 
  Specialized Freight  30   15,404   11,088   1.32% 
  Residential Remodelers  103   11,338   4,324   0.51% 
  New Single Family Housing Construction  57   8,621   4,276   0.51% 
  Passenger Car Leasing  136   9,105   9,100   1.08% 
  Hotels  14   8,260   4,679   0.55% 
  Religious Organizations  59   7,324   6,189   0.73% 
  Car Washes  10   6,820   6,215   0.74% 
  Concrete & Structural Contrators  24   6,528   4,488   0.53% 
  Other  85   25,611   12,390   1.47% 
                 
Totals  909   215,947   169,157   20.06% 

(Dollars in Thousands)

#

$

$

%

Number

Total

Principal

of Total

of

Loan

Balance

Loan

Loan Type

Loans

Exposure

of Loans

Balance

Lessors of Nonresidential Buildings

169

87,761

77,001

8.85%

Lessors of Residential Buildings

215

44,670

40,456

4.65%

Specialized Freight

29

14,142

9,844

1.13%

Residential Remodelers

96

9,580

3,753

0.43%

New Single Family Housing Construction

51

10,372

4,701

0.54%

Passenger Car Leasing

160

9,787

9,627

1.11%

Hotels

14

8,507

8,174

0.94%

Religious Organizations

32

7,005

5,905

0.68%

Car Washes

7

6,158

5,997

0.69%

Concrete & Structural Contrators

21

5,253

3,520

0.40%

Other

68

14,395

7,825

0.90%

 

Totals

862

217,630

176,803

20.33%

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 20192020 to 2020.2021. 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.

30 

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

In the initial CARES Act, $349 billion of funds were made available for PPP loans. This amount was fully exhausted prior to the end of April.April 2020. Congress then passed an additional allocation of funds for the PPP loans, allowing a second round of applications to begin. AsThe Corporation generated PPP loans under this initial plan in the amount of September 30, 2020,approximately $78 million. In the first quarter of 2021, the SBA made another round of PPP funding available and the Corporation hadmade additional loans to qualifying small businesses. Additionally, some of the original PPP loans outstanding withbecame eligible for forgiveness. As a currentresult of the forgiveness of some of the original PPP loans and the initiation of additional PPP loans, the total balance of $77.7PPP loans at June 30, 2021, was $48.9 million. Management’s focus has been to serve the customers and market area that the Corporation serves.

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Notes to the Unaudited Consolidated Interim Financial Statements

In accordance with the SBA terms and conditions on these PPP loans, as of June 30, 2021, the Corporation received approximately $3.25$5.5 million in fees associated with the processing of these loans. All fee income is being deferred over the expected life of each PPP loan. The initial batch of the PPP loans carried a stated maturity of two years. In later batches of PPP loans the maturity can be five years, however the vast majority of the Corporation’s PPP loans carry a two-year maturity. When a PPP loan is paid off or forgiven, the remaining fee amount is taken into income. A numberThis income amounted to $1,275,000 during the first six months of PPP borrowers have provided2021, and $923,000 during the necessary support and application to the Corporation in order to start the forgiveness process with the SBA. It is expected that between $25 - $30 millionfirst six months of loan balances will be forgiven by December 31, 2020, with the majority of the remaining balances forgiven in 2021.2020. The Corporation expects there to be few loans that are on the books until the stated maturity dates.

COVID-19 Loan Forbearance Programs

As of SeptemberJune 30, 2020,2021, over 320330 of the Corporation’s customers had previously requested payment deferrals, or payments of interest only, on loans originally totaling over $64$65 million at the time of deferment. These loans now have a current balance of $57.1$50.4 million, or 6.8%5.8% of the total loan portfolio as of SeptemberJune 30, 2020.2021. The current balance of these loans was $61.7$54.6 million as of June 30,December 31, 2020. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (TDRs) unless the borrower was previously experiencing financial difficulty. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Of the $57.1$50.4 million of current loan balances with payments being deferred, $45.6$40.6 million, or 79.8%80.6%, were in the form of commercial or agricultural loan deferments, with the vast majority of these commercial loan deferrals. The remaining loan deferments consisted of $11.3$9.6 million of residential mortgage deferrals and $212,000$142,000 of consumer loan deferrals. The vast majority of the COVID-19 loan payment deferrals were for a 90-day period.

As of June 30, 2021, there were no commercial loans remaining on deferment.

As of SeptemberJune 30, 2020,2021, the Corporation’s delinquent and non-performing levels were not yet materially impacted by the weaker economic conditions brought on by COVID-19. However, the Corporation did experience a sharp increase in the amount of impaired loans during the third quartersecond half of 2020. Impaired loans grew from $2.8 million as of June 30, 2020 to $6.4 million as of September 30, 2020, a $3.6 million increase. This increase was solely due to a $3.6 million loan to one commercial borrower being classified as both impaired and a troubled debt restructuring. This borrower continues to perform according to restructured terms.

Partially offsetting this additional impaired loan, other impaired loans paid off or paid down resulting in a lower level of increase.

Due to the severity and length of this economic interruption, management does anticipate that the levels of delinquencies and non-performing loans willcould rise in the final quarter of 2020 and into 2021. The significance of the credit deterioration will depend on the length of time local business operations are curtailed, or limited, and the amount of time it takes for consumer confidence to rebuild and engage into increased purchasing activities. Management has already significantly increased the Corporation’s provision for loan losses in the second and third quarters of 2020, as qualitative factors have been increased based on predicted prolonged economic weakness, which is expectedweakness. In 2021, a number of qualitative factors were reduced reflecting improved economic conditions resulting in a lower provision compared to impact more and more borrowers.prior year.

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Notes to the Unaudited Consolidated Interim Financial Statements

12. 10.Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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-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 AugustNovember 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes2018-19, Codification Improvements to Topic 326, Financial Instruments ‒ Credit Losses, which, in addition to addressing other matters, ASU 2018-19 clarifies that receivables arising from operating leases are not within the Disclosure Requirementsscope of Subtopic 326-20. The effective date and transition requirements for Fair Value Measurements. The Update removesASU 2018-19 are the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changessame as those in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.ASU 2016-13. This Update is not expected to have a significant impact on the Corporation’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses, amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging, amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments, amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. 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. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses Topic 326(Topic 326), which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted the credit losses standard, the ASU 2016-13,is effective when they implement the effective dates and transition requirements are the same as those in ASU 2016-13.credit losses standard. For entities that already have adopted the credit losses standard, the ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, forThe Corporation qualifies as a smaller reporting companiescompany and does not expect to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The finalearly adopt ASU is expected to be issued in mid-November. 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 July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

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

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

In March 2020, the FASB issued ASU 2020-03, 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 fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted 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, 2019, including interim periods within those years. Other amendments are effective upon issuance of this 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.

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Notes to the Unaudited Consolidated Interim Financial Statements

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.

In August 2020, the FASB issued ASU 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), which 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 U.S. GAAP the separation models for (1) convertible debt with 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., 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 features 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 assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not 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.

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Notes to the Unaudited Consolidated Interim 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 and 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 early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities 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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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 20192020 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 economic conditions 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
·Possible changes to the capital and liquidity requirements and other regulatory pronouncements, regulations and rules
·Large scale global disruptions such as pandemics, terrorism, trade wars, and armed conflict.
·Local disruptions due to flooding, severe weather, or other natural disasters
·The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful

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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 first nine monthshalf of 2020 were2021 was positively impacted by a number of unprecedented items caused by the onsetresulting in very strong financial results. The COVID-19 pandemic continues to impact customer behavior and balance sheet growth, but as of the COVID-19 pandemic. The spreaddate of COVID-19 quickly became globalthis report there has not been significant negative impacts on earnings or credit. Customers have adapted to changes in behavior and impacted the global economy. This impact was felt rather quickly dueCorporation continues to China’s large role inseek ways to manage the world economy, second in GDP but first in terms of supply chain impact for basic goods. The immediate impact and forward risk posed by the pandemic caused the Federal Reserve to take the unusual step of reducing the Federal Funds rate by 50 basis points to 1.25% on March 3, 2020, at a special Fed meeting aheadstructure of the regularly scheduled March 18, 2020 meeting. On March 11, 2020, the World Health Organization (WHO) recognized COVID-19 as a pandemic. The quick further expansion of the pandemic then caused the Federal Reservebalance sheet to take an unprecedented step of a second special meeting on Sunday afternoon of March 15, 2020, to further reduce the Federal Funds rate 100 basis points to 0.25%. This move took the Federal Funds rate to the same historic low of 0.25% that occurred due to the Financial Crisis of 2008. On March 15, 2020, the Fed also reduced the Discount Window rate by 150 basis points, which took this rate down to 0.25%. This move importantly gave all banks easy access to very low cost funds. On March 16, 2020, the Fed also announced action to inject more liquidity into theachieve positive financial system by purchasing up to $500 billion of U.S. Treasuriesresults now and $200 billion of mortgage-backed securities. All major stock exchanges experienced dramatic sell-offs. The DOW which had peaked at 29,568 in February, closed on Friday, March 20, 2020 at 19,174, down 10,394 points, or 35%. NASDAQ was down 30%, while the S&P 500 was down 32%. Even with a significant equity market recovery since the initial impact of COVID-19, economic conditions remain uncertain. With the closing of non-essential businesses throughout various parts of the country for several months and a continued impact to consumer spending, it is anticipated that the financial impact will be long-term. The U.S. Government passed a massive Coronavirus Relief Bill that included direct small business aid for employers with fewer than 500 employees; direct deposit stimulus payments to American households; enhanced unemployment compensation benefits; and direct aid to hospitals and health care providers. Additional federal and local government support has helped to sustain businesses and individuals in the short-term, but once these programs have ended, the financial impact will be felt more fully.future time periods.

 

The economic impact of COVID-19 had an effect the Corporation’s financial results for the first nine months of 2020, but is currently expected to have much more measurable results into the future. The Corporation recorded net income of $2,935,000 and $8,699,000$3,551,000 for the three and nine-month periodsthree-month period ended SeptemberJune 30, 2020,2021, a 0.4% and 1.0% increase$48,000, or 1.3% decrease from the $2,924,000 and $8,616,000 earned duringthree months ended June 30, 2020. Net income for the same periodssix-month period was $8,055,000, a $2,291,000, or 39.7% increase over earnings in 2019.the six-month period ended June 30, 2020. The earnings per share, (EPS), basic and diluted, were $0.53$0.64 for the three months ended SeptemberJune 30, 2020, and $1.56 for the nine months ended September 30, 2020,2021, compared to $0.51 and $1.51$0.64 for the same periodsperiod in 2019,2020, and for the year-to-date period, earnings per share were $1.45 compared to $1.03 in 2020, a 3.9% and 3.3% increase, respectively.40.8% increase. The increase in the Corporation’s 20202021 earnings was caused primarily by an increasegrowth in mortgage gains partially offset byon mortgages sold, other income, and net interest income coupled with a significantly higherdecline in the provision for loan losses.

The larger percentage increases in EPSgains from the sale of mortgages were $1,245,000 for the three months ended June 30, 2021, compared to gains of $1,690,000 for the three months ended June 30, 2020, a decrease of $445,000, or 26.3%. However, for the six-month period, gains were $3,175,000, an increase of $944,000, or 42.3%, over the percentagesix months ended June 30, 2020. This year-to-date increase in netgains can be attributed to higher volume in the first half of 2021 compared to the first half of 2020, driven by low market rates, which has caused an increase in refinancing activity over the course of the past year. Additionally, margins received on sold mortgages have been at higher levels supporting this higher level of gains. Gains on securities in total decreased by $122,000, or 32.8%, for the three months ended June 30, 2021, and increased by $161,000, or 38.0%, for the six months ended June 30, 2021, compared to the same periods in the prior year. Outside of mortgage and security gains, other non-interest income areincreased by $576,000, or 28.7%, and $1,455,000, or 34.8%, for the result of a reduction in average shares outstanding.three and six months ended June 30, 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 NII increased by $253,000,$262,000, or 2.7%2.8%, and $797,000,$725,000, or 2.9%3.9%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. The increase in NII primarily resulted from an increase in interest on securities in the available for sale category of $532,000, or 31.1%, for the three-month period ended June 30, 2021, and fees$777,000, or 22.2%, for the six-month period ended June 30, 2021, compared to the three and six months ended June 30, 2020. In addition, interest expense on loans of $116,000,deposits and borrowings decreased by $193,000, or 1.4%19.3%, and $872,000,$613,000, or 3.5%27.0%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in the prior year. The increase in interest and fees on loans was partially offset by decreases of $174,000, or 9.8%, and $450,000, or 8.1%, on interest earned on securities for the three and nine months ended September 30, 2020. The Corporation’s interest expense on deposits and borrowings decreased by $456,000, or 35.0%, and $669,000, or 17.7%, for the three and nine-month periods ended September 30, 2020, compared to the same periods in 2019.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation recorded provision expense of $1,250,000 for the third quarter of 2020, and $2,575,000 for the year-to-date period, compared to $630,000 and $840,000 for the three and nine-month periods in 2019. This represents an increase in quarterly expense of $620,000 and an increase in year-to-date expense of $1,735,000. The provision was impacted by a $1.1 million specific allocation on one business customer with ongoing concerns as well as a continued impact across the loan portfolio of economic factors caused by COVID-19, which could have a longer-term impact on asset quality moving into the future. The gains from the sale of debt securities were $55,000 for the three months ended September 30, 2020, and $704,000 for the nine months ended September 30, 2020, compared to gains of $42,000 and $229,000 for the three and nine months ended September 30, 2019. Market interest rates were lower in 2020, making it more conducive to achieving gains from the sale of securities. For the nine months ended September 30, 2020, there were unrealized losses of $279,000 on the Corporation’s portfolio of equity securities that consists of stocks held in other banks. This loss flows through the income statement and was the result of the devaluation of bank stocks given the current economic environment during the period that began with the COVID-19 pandemic. For the nine months ended September 30, 2019, there was an unrealized gain of $51,000 on this portfolio, resulting in a negative impact to income of $330,000 for the first nine months of 2020 compared to the prior year. The gain on the sale of mortgages increased by $1,475,000, or 243.4%, and $2,942,000, or 214.7%, for the three and nine-month periods ended September 30, 2020, compared to the prior year’s periods. The volume of mortgages sold was significantly higher during the first nine months of 2020 compared to the same period in the prior year due to the very low interest rate environment whichhas caused a surgerapid decline in refinancing activty. Total operating expenses increased by $1,070,000, or 13.2%, and $1,925,000, or 7.8%, forasset yield, but also a decline in the three and nine months ended September 30, 2020, compared to the same periodscost of funds, which has resulted in 2019. The increase in operating expenses for both time periods was driven by higher salary costs related primarily to higher commissions paid out on mortgage volume.these much lower levels of interest expense.

 

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 decreased for the quarter andquarter-to-date period ended June 30, 2021, but increased for the year-to-date periods ended September 30, 2020,period compared to the same periods in the prior year, due to comparablelower quarterly earnings in each year but muchand higher balance sheet growth in 2020 compared to 2019.year-to-date earnings as of June 30, 2021.

 

Key Ratios Three Months Ended Nine Months Ended
  September 30, September 30,
  2020 2019 2020 2019
         
Return on Average Assets  0.89%     1.02%   0.93%     1.03% 
Return on Average Equity  9.46%   10.22%   9.72%   10.64% 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Key Ratios Three Months Ended Six Months Ended
  June 30, June 30,  
  2021 2020 2021 2020
         
Return on Average Assets  0.92%   1.14%   1.07%   0.95% 
Return on Average Equity  10.86%   12.31%   12.43%   9.86% 

 

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

 

NII represents the largest portion of the Corporation’s operating income. In the first ninesix months of 2020,2021, NII generated 71.6%67.4% of the Corporation’s revenue stream, which consists of net interest income and non-interest income, compared to 76.9%73.2% in the first ninesix months of 2019. The2020. This significant decrease is a result of much higher levels of non-interest income primarily driven by mortgage gains in the first six months of 2021 which made up 11.0% of the Corporation’s revenue stream, compared to 8.7% in the first six months of 2020. However, the overall performance of the Corporation is highly dependent on the changes in net interest income since it comprises such a significant portion of operating income.

 

The following table shows a summary analysis of net interest income on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE net interest income shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled $209,000 and $579,000$289,000 for the three and nine months ended SeptemberJune 30, 2020,2021, and $556,000 for the six months ended June 30, 2021, compared to $182,000$197,000 and $575,000$370,000 for the same periods in 2019.2020.

 

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Management’s Discussion and Analysis

NET INTEREST INCOME

(DOLLARS IN THOUSANDS)  

 Three Months Ended Nine Months Ended  Three Months Ended Six Months Ended 
 September 30, September 30,  June 30, June 30, 
 2020 2019 2020 2019  2021 2020 2021 2020 
 $ $ $ $  $ $ $ $ 
Total interest income  10,387   10,590   31,342   31,214   10,537   10,468   21,067   20,955 
Total interest expense  845   1,301   3,115   3,784   806   999   1,657   2,270 
                                
Net interest income  9,542   9,289   28,227   27,430   9,731   9,469   19,410   18,685 
Tax equivalent adjustment  209   182   579   575   289   197   556   370 
                                
Net interest income (fully taxable equivalent)  9,751   9,471   28,806   28,005   10,020   9,666   19,966   19,055 

 

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

 

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

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Federal funds rate, the Prime rate, the shape of the U.S. Treasury curve, and other wholesale funding curves, all affect NII. The Federal Reserve controls the Federal funds rate, which is one of a number of tools available to the Federal Reserve to conduct monetary policy. The Federal funds rate, and guidance on when the rate might be changed, is often the focal point of discussion regarding the direction of interest rates. For the first half of 2019During 2020, the Federal funds rate remained at 2.50%, however,was decreased by 150 basis points in March taking the rate to 0.25% by March 31, 2020. With the declines in the second halfFederal funds rate, the U.S. Treasury yield curve became flatter. Long-term rates like the ten-year U.S. Treasury were 232 basis points under the 3.25% Prime rate as of 2019December 31, 2020. Long-term Treasury rates remained low throughout 2020, and with the decreases in the Federal Reserve decreasedshort-term rates, three times, by 25 basis points each, beginning in July of 2019. By December 31, 2019, the Fed funds rate stood at 1.75%. On March 3, 2020, the Federal Reserve dropped the Fed funds rate by 50 basis points to 1.25%, and on March 15, 2020, the Fed dropped the rate by 100 basis points to 0.25%. These rate drops were in response to the COVID-19 global pandemic.

The expectations for the remainder of the year are that there will be no further rate drops or increases. Management anticipates a reduction in interest income in the remaining quarter of 2020 as a result of the significant Federal Reserve rate decreases. All of the Corporation’s Prime-based floating rate loans reset lower in March, while floating rate securities reset when the quarterly reset dates were reached. Asset yields are much lower going into the last quarter of 2020 and interest income will become harder to grow without significant growth in earning assets.

The shape of the U.S. Treasury curve also directly impacts the Corporation’s net interest income. The U.S. Treasury curve was flat coming into 2020, and after the rapid decline in short and long-term rates driven by the COVID-19 environment and the Federal Reserve rate drops, the yield curve remained essentially flat but rates also reached historic lows. This is detrimental to banks as funding sources are typically shorter terms thanthroughout the assets invested in and asset yields are much lower than they were even a year ago. A sharper yield curve is beneficial to financial institutions as a larger spread can be made onyear. Management had not anticipated the asset versus the liability utilized. For the first two months of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged around 21 basis points. In March, when the full impact of COVID-19 was felt on interest rates, this spread averaged 42 basis points but the Treasury rates had decreased to much lower levels. For the third quarter of 2020, the spread between the 2-year and 10-year U.S. Treasury averaged 51 basis points. The present level of interest rates, the flatness of the yield curve and present spreads are all very low from a historical perspective.

The combination of lower rates, and a generally flat yield curve out to longer rates, makes it more difficult for the Corporation to generate higher net interest income. The Corporation’s net interest margin declined slightlyFed rate decreases in the first quarter of 2020. During the first half of 2021, longer-term U.S. Treasury rates did increase adding some slope to the yield curve. The ten-year Treasury rate was 1.45% as of June 30, 2021, which was 180 basis points under the Prime rate. This Treasury rate movement makes it a little easier to get asset yield on the longer end of the curve, but yields are still compressed compared to years prior to 2020, and declinedmaking increasing asset yield much more significantly in the seconddifficult, which adds strain to NII and third quarters of 2020. It is likely the net interest margin will continue to decline through the remainder of 2020. Any increase in net interest income will need to come from growth of interest earning assets.(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 was 5.00% asdecreased to 3.25% in March of September 30, 2019, 4.75% as of December 31, 2019, and 3.25% as of September 30, 2020 after the 150 basis points of Federal Reservepoint Fed rate drops in March of 2020.decline. The Corporation’s Prime-based loans including home equity lines of credit and some variable rate commercial loans,generally reprice a day after the Federal Reserve rate movement.

 

As a result of a larger balance sheet in the significant growthfirst half of the loan portfolio and savings on the interest expense side,2021, even with much lower asset yields, the Corporation’s NII on a tax equivalent basis has been increasing slightly. Despite a lower net interestincreased while the Corporation’s margin decreased to 2.72% for the Corporation still achieved a slightly higher NIIquarter and 2.79% for the six months ended June 30, 2021, compared to 3.24% in the thirdsecond quarter of 2020 and 3.32% for the nineyear-to-date period. Loan yields were lower in the first half of 2021 due to the 150 basis point Fed rate decline during the first quarter of 2020. The Corporation’s NII for the three and six months ended SeptemberJune 30, 2020, compared to2021, increased over the same periods in the prior year. The net interest margin began decreasing on a quarterly basis in the latter part of 2019 after the Federal Reserve dropped rates by 75 basis points. This margin decreased slightly in the first quarter of 2020 and more significantly in the second and third quarters of 2020 with the drastic rate drops in March. The Corporation’s NII on a tax-equivalent basis increased for the three months ended September 30, 2020, by $280,000,$354,000, or 3.0%3.7%, over the same period in 2019. For the nine months ended September 30, 2020, NII increased $801,000,and $911,000, or 2.9%4.8%, compared to the first nine months of 2019.respectively. Management’s asset liability sensitivity measurements continue to showshows a small benefit to both margin and NII given Federal Reserve rate increases. Actual results over the past two years have confirmed the asset sensitivity of the Corporation’s balance sheet. Management expects that any improvementssheet, however there was some decline in NII will be driven primarily by loan growth sincethis asset yields will continue to decline.

The Corporation has maintained a low average cost of funds over the past few years but funding costs had increased slightly throughoutsensitivity in the first parthalf of 2019 before2021. In a down-rate environment, the Fed rate drops. Deposit rates had been increasing slightlymargin and the cost of borrowings was up due to a higher rate environment. However, with the recent steep drops in market rates, funding costs are once again declining and the CorporationNII would suffer unless balance sheet growth is achieving savings on both the deposit and borrowings side. With a very low Prime rate projected throughout the remainder of 2020, the Corporation’s asset yields will see a decrease, but helpingenough to offset this decline will be a reduction of costs on the interest expense side. The recent sharp Federal Reserve rate decreases have already reduced the Corporation’s NII and net interest margin (NIM), primarily because of the variable rate portion of the loan portfolio, which resets every time the Prime rate changes. Variable rate loans have averaged between 17% and 20% of the loan portfolio for the first nine months of 2020.lower asset 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 the first nine months of 2020, compared to the same period in 2019, security reinvestment hashad generally been occurring at lower yield levels. Because of the lower market interestyields. With slightly higher Treasury rates and very flat yield curve, it is difficult to achieve substantially higher yields in the securities portfoliofirst half of 2021, security yields have increased slightly, but there have been some pockets of opportunitiesstill remain compressed compared to reposition the portfolio by selling securities at gains and reinvesting in slightly higher yielding instrumentsyears prior to benefit the Corporation’s earnings going forward.2020.

 

The Corporation’s loan portfolio yield has decreased from the prior years’ period as the variable rate portion of the loan portfolio repriced lower with eachthe two Federal Reserve rate movementdecreases in March 2020 and some fixed rate borrowers requested loan modifications to reset their rates lower in the current record low market rate environment. The vast majority of the Corporation’s commercial Prime-based loans were priced at the Prime rate, which was 4.75% to start 2020, and then 4.25% as of March 4, 2020, and 3.25% as of March 16, 2020 through SeptemberJune 30, 2020.2021. The pricing for the most typical five-year fixed rate commercial loans is currently slightly higher thanin line with the Prime rate. With the significant March2020 Federal Reserve rate reductions, adding variable rate loans to the portfolio means they will be priced at very low rates to start but can reprice lower if the Federal Reserve lowers rates any further and would reprice higher if the Federal Reserve would increase rates. There are elements of the Corporation’s Prime-based commercial loans 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 influenced by local competition.

 

Mid-term and long-term interest rates on average were much lowerhigher in 2020the first half of 2021 compared to 2019.the first half of 2020. The average rate of the 10-year U.S. Treasury was 0.90%1.47% in the first nine monthshalf of 20202021 compared to 2.26%1.02% in the first nine monthshalf of 2019,2020, and it stood at 0.69%1.45% on SeptemberJune 30, 2020,2021, compared to 1.68%0.66% on SeptemberJune 30, 2019.2020. The slope of the yield curve has been compressed throughout 20192020 and 2020.2021 with a little more slope in the first half of 2021. As of MarchDecember 31, 2019, the U.S. Treasury curve was inverted with the 10-year U.S. Treasury rate 50 basis points lower than the Fed funds rate. As of September 30, 2020, the 10-year U.S. Treasury rate was only 4468 basis points higher than the Fed funds rate and as of June 30, 2021, it was 120 basis points higher than the Fed funds rate. The slope of the yield curve has fluctuated many times in the past two years with the 10-year U.S. Treasury yield as high as 1.88% in the first nine monthshalf of 2020 and 2.79%1.74% in the first nine monthshalf of 2019,2021, and as low as 0.52%0.54% in the first half of 2020, and 1.47%0.93% in 2019.the first half of 2021.

 

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Management’s Discussion and Analysis

The Corporation’s overall cost of funds, including non-interest bearing funds, remained low and stable through the first quarterhalf of 20202021 between 22 and then decreased through the second and third quarters influenced by lower costs on deposits, but offset partially by elevated costs on borrowings with $234,000 of prepayment penalties recorded on FHLB long-term advances.16 basis points. Management expects the cost of funds will decline slightly during the remainder of 2020and then stabilize throughout 2021 as limited deposits continue to reprice to lower rates but this decline should level out as continued savings become more difficult to achieve.rates. Core deposit interest rates were reduced eightnine times throughout the first nine months of 2020 and time deposit rates have also decreased resulting in maturing time deposits repricing at lower levels or moving into core deposit products. Management does not anticipate significant deposit rate movements in the remainder of the year2021 as deposits are now priced at very low rates. Typically, financial institutions will make small systematic moves on core interest bearing accounts while making larger rate movements in the pricing of new or reissued time deposits. BorrowingThe Corporation’s costs on borrowings included $94,000 of prepayment penalties recorded on Federal Home Loan Bank (FHLB) long-term advances paid off early during the first half of 2021, and the wholesale borrowing curves that they are based on, generally follow the direction and slope$154,000 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 prepaid a number of FHLB advancesprepayment penalties recorded in the first nine monthshalf of 2020, accelerating the interest expense, but achieving savings in future time periods.

Management currently anticipates While the average balance of borrowings was lower in the first half of 2021 than the first half of 2020, the interest expense was higher, as the new $20 million sub debt issue beginning on December 30, 2020, carried a higher rate of interest than FHLB long-term advances that were paid off. As a result, the overnight interest rate and Prime rate will stay attotal cost of borrowings increased from the current level forfirst half of 2020 to the remainderfirst half of 2020. It is likely that mid and long-term U.S. Treasury rates will remain relatively suppressed throughout the remainder of the year. This very low and flat yield curve makes it more difficult for management to lend or reinvest at higher interest rates out further on the yield curve. However, the recent decline in rates provides the ability to hold deposit rates at current levels to help to mitigate the lower interest income.2021 by $140,000.

 

The following table provides an analysis of year-to-date changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)

 

 Nine Months Ended September 30, Nine Months Ended September 30, Six Months Ended June 30, Six Months Ended June 30,
 2020 vs. 2019 2019 vs. 2018 2021 vs. 2020 2020 vs. 2019
 Increase (Decrease) Increase (Decrease) Increase (Decrease) Increase (Decrease)
 Due To Change In Due To Change In Due To Change In Due To Change In
     Net     Net     Net     Net
 Average Interest Increase Average Interest Increase Average Interest Increase Average Interest Increase
 Balances Rates (Decrease) Balances Rates (Decrease) Balances Rates (Decrease) Balances Rates (Decrease)
 $ $ $ $ $ $ $ $ $ $ $ $
INTEREST INCOME                                    
                                                
Interest on deposits at other banks  98   (280)  (182)  (13)  (81)  (94)  50   (89)  (39)  59   (144)  (85)
                                                
Securities available for sale:                                                
Taxable  382   (928)  (546)  (54)  285   231   957   (943)  14   217   (477)  (260)
Tax-exempt  149   (92)  57   (414)  (19)  (433)  1,237   (289)  948   (3)  (49)  (52)
Total securities  531   (1,020)  (489)  (468)  266   (202)  2,194   (1,232)  962   214   (526)  (312)
                                                
Loans  2,989   (2,131)  858   3,254   1,322   4,576   1,141   (1,683)  (542)  1,779   (1,039)  740 
Regulatory stock  21   (76)  (55)  37   33   70   (39)  (44)  (83)  28   (62)  (34)
                                                
Total interest income  3,639   (3,507)  132   2,810   1,540   4,350   3,346   (3,048)  298   2,080   (1,771)  309 
                                                
INTEREST EXPENSE                                                
                                                
Deposits:                                                
Demand deposits  82   (874)  (792)  84   818   902   77   (415)  (338)  51   (514)  (463)
Savings deposits  11   (40)  (29)  3   —     3   9   (14)  (5)  6   (22)  (16)
Time deposits  (71)  48   (23)  (63)  281   218   (78)  (332)  (410)  (31)  125   94 
Total deposits  22   (866)  (844)  24   1,099   1,123   8   (761)  (753)  26   (411)  (385)
                                                
Borrowings:                                                
Total borrowings  (13)  188   175   16   157   173   (64)  204   140   62   110   172 
                                                
Total interest expense  9   (678)  (669)  40   1,256   1,296   (56)  (557)  (613)  88   (301)  (213)
                                                
NET INTEREST INCOME  3,630   (2,829)  801   2,770   284   3,054   3,402   (2,491)  911   1,992   (1,470)  522 

 

During the first ninesix months of 2020,2021, the Corporation’s NII on an FTE basis increased by $801,000,$911,000, or 2.9%4.8%, over the same period in 2019.2020. Total interest income on an FTE basis for the ninesix months ended SeptemberJune 30, 2020,2021, increased $132,000,$298,000, or 0.4%1.4%, from 2019,2020, while interest expense decreased $669,000,$613,000, or 17.7%27.0%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same period in 2019.2020. The FTE interest income from the securities portfolio decreasedincreased by $489,000,$962,000, or 8.0%25.0%, while loan interest income increased $858,000,decreased $542,000, or 3.4%3.2%. During the first nine monthshalf of 2020,2021, additional loan volume caused by loan growth added $2,989,000$1,141,000 to net interest income, but the lower yields caused a $2,131,000$1,683,000 decrease, resulting in a total increasedecrease of $858,000.$542,000. Higher balances in the securities portfolio caused an increase of $531,000$2,194,000 in NII, while lower yields on securities caused a $1,020,000$1,232,000 decrease, resulting in a net decreaseincrease of $489,000.$962,000.

 

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The average balance of interest bearing liabilities increased by 6.2%16.4% during the ninesix months ended SeptemberJune 30, 2020,2021, compared to the prior year driven by growth in deposit balances. The lower cost on deposit accounts resulted in a decrease in interest expense. Lower rates on demand and savings deposits partially offset by higher rates on time depositsall deposit types caused a $866,000$761,000 decrease in interest expense while higher balances of demand and savings deposits caused an increase in expense of $22,000$8,000 resulting in a total decrease of $844,000.$753,000.

 

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 $71,000$78,000 reduction to expense, and time deposits repricing to higherlower interest rates increaseddecreased interest expense by $48,000,$332,000, causing a net total decrease of $23,000$410,000 in time deposit interest expense. Even with the low rate environment, the Corporation was successful in increasing balances of other deposit types.

 

The average balance of outstanding borrowings decreased by 1.4%7.3% from the prior year, whichdue to early payoff of FHLB advances that occurred during 2020 and the first half of 2021. This resulted in a decrease in interest expense of $13,000.$64,000. Although interest rates were lower in the first nine monthshalf of 20202021 compared to the prior year, the Corporation paidincurred interest prepayment penalites of $94,000 to pay off two long-term FHLB advances. The Corporation also issued subordinated debt at the end of 2020, which was at a number of long-term advances with prepayment penalties, whichhigher interest rate than the FHLB advances. These two events increased interest expense by $188,000.$204,000. The aggregatecombination of these amounts waslower overall levels of borrowings at a materially higher weighted average interest rate caused an increase in interest expense of $175,000 related to$140,000 on total borrowings. The sub debt issue was pursued because of the benefit of being treated as Tier 1 capital at the bank level and Tier II capital at the bank holding company level.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The following tables show a more detailed analysis of net interest income on an FTE basis with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net yield on interest earning assets, also referred to as the NIM. The NIM is calculated by dividing net interest income on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently a bank generates NII.

 

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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 June 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  49,710   20   0.16   31,764   21   0.26 
                         
Securities available for sale:                        
Taxable  373,610   1,259   1.35   229,341   1,085   1.89 
Tax-exempt  188,390   1,262   2.68   97,514   802   3.29 
Total securities (d)  562,000   2,521   1.79   326,855   1,887   2.31 
                         
Loans (a)  858,183   8,207   3.83   827,386   8,674   4.20 
                         
Regulatory stock  6,054   78   5.15   7,429   83   4.47 
                         
Total interest earning assets  1,475,947   10,826   2.94   1,193,434   10,665   3.58 
                         
Non-interest earning assets (d)  80,235           71,016         
                         
Total assets  1,556,182           1,264,450         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  338,060   40   0.05   274,419   110   0.16 
Savings deposits  312,504   15   0.02   238,056   12   0.02 
Time deposits  117,887   230   0.78   128,109   421   1.32 
Borrowed funds  72,235   521   2.89   76,051   456   2.41 
Total interest bearing liabilities  840,686   806   0.39   716,635   999   0.56 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  579,007           425,773         
Other  5,379           4,429         
                         
Total liabilities  1,425,072           1,146,837         
                         
Stockholders' equity  131,110           117,613         
                         
Total liabilities & stockholders' equity  1,556,182           1,264,450         
                         
Net interest income (FTE)      10,020           9,666     
                         
Net interest spread (b)          2.55           3.02 
Effect of non-interest                        
     bearing deposits          0.17           0.22 
Net yield on interest earning assets (c)          2.72           3.24 

 

  For the Three Months Ended September 30,
  2020 2019
      (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  33,928   31   0.36   23,790   128   2.13 
                         
Securities available for sale:                        
Taxable  243,765   941   1.54   212,921   1,227   2.31 
Tax-exempt  109,198   859   3.15   90,824   750   3.30 
Total securities (d)  352,963   1,800   2.04   303,745   1,977   2.60 
                         
Loans (a)  840,252   8,656   4.11   729,674   8,538   4.67 
                         
Regulatory stock  6,871   109   6.33   7,270   129   7.12 
                         
Total interest earning assets  1,234,014   10,596   3.43   1,064,479   10,772   4.04 
                         
Non-interest earning assets (d)  77,629           71,738         
                         
Total assets  1,311,643           1,136,217         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  275,279   59   0.09   253,706   387   0.61 
Savings deposits  251,130   13   0.02   205,331   26   0.05 
Time deposits  124,479   359   1.15   136,249   476   1.39 
Borrowed funds  64,877   415   2.54   79,151   412   2.07 
Total interest bearing liabilities  715,765   846   0.48   674,437   1,301   0.77 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  467,030           344,179         
Other  5,377           4,043         
                         
Total liabilities  1,188,172           1,022,659         
                         
Stockholders' equity  123,471           113,558         
                         
Total liabilities & stockholders' equity  1,311,643           1,136,217         
                         
Net interest income (FTE)      9,750           9,471     
                         
Net interest spread (b)          2.95           3.27 
Effect of non-interest                        
     bearing deposits          0.21           0.28 
Net yield on interest earning assets (c)          3.16           3.55 

(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 $171,000$435,000 as of SeptemberJune 30, 2020,2021, and $1,821,000$2,129,000 as of SeptemberJune 30, 2019.2020.  Such fees and costs recognized through income and included in the interest amounts totaled $265,000$36,000 in 2020,2021, and ($128,000)$168,000 in 2019.2020.

(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 income (FTE) by total interest earning assets.

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

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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,
  2020 2019
      (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  28,205   112   0.53   19,186   294   2.05 
                         
Securities available for sale:                        
Taxable  234,121   3,289   1.87   211,397   3,835   2.42 
Tax-exempt  97,843   2,362   3.22   91,782   2,305   3.35 
Total securities (d)  331,964   5,651   2.27   303,179   6,140   2.70 
                         
Loans (a)  809,325   25,821   4.26   718,780   24,963   4.64 
                         
Regulatory stock  7,255   337   6.19   6,879   392   7.60 
                         
Total interest earning assets  1,176,749   31,921   3.62   1,048,024   31,789   4.05 
                         
Non-interest earning assets (d)  73,691           68,328         
                         
Total assets  1,250,440           1,116,352         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  271,836   473   0.23   254,256   1,265   0.67 
Savings deposits  235,084   48   0.03   203,104   77   0.05 
Time deposits  128,749   1,261   1.31   136,083   1,284   1.26 
Borrowed funds  74,314   1,333   2.40   75,396   1,158   2.05 
Total interest bearing liabilities  709,983   3,115   0.59   668,839   3,784   0.76 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  416,379           335,653         
Other  4,570           3,585         
                         
Total liabilities  1,130,932           1,008,077         
                         
Stockholders' equity  119,508           108,275         
                         
Total liabilities & stockholders' equity  1,250,440           1,116,352         
                         
Net interest income (FTE)      28,806           28,005     
                         
Net interest spread (b)          3.03           3.29 
Effect of non-interest                        
     bearing deposits          0.23           0.27 
Net yield on interest earning assets (c)          3.26           3.56 

  For the Six Months Ended June 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  53,820   42   0.16   25,312   81   0.64 
                         
Securities available for sale:                        
Taxable  346,417   2,362   1.36   229,245   2,348   2.05 
Tax-exempt  180,622   2,451   2.72   92,105   1,503   3.26 
Total securities (d)  527,039   4,813   1.82   321,350   3,851   2.40 
                         
Loans (a)  848,622   16,623   3.93   793,692   17,165   4.33 
                         
Regulatory stock  6,043   145   4.80   7,449   228   6.13 
                         
Total interest earning assets  1,435,524   21,623   3.02   1,147,803   21,325   3.72 
                         
Non-interest earning assets (d)  80,066           71,700         
                         
Total assets  1,515,590           1,219,503         
                         
LIABILITIES &                        
STOCKHOLDERS' EQUITY                        
Interest bearing liabilities:                        
Demand deposits  331,207   77   0.05   270,095   415   0.31 
Savings deposits  299,719   30   0.02   226,973   35   0.03 
Time deposits  118,594   492   0.84   130,907   902   1.39 
Borrowed funds  73,317   1,058   2.91   79,085   918   2.33 
Total interest bearing liabilities  822,837   1,657   0.41   707,060   2,270   0.65 
                         
Non-interest bearing liabilities:                        
                         
Demand deposits  556,878           390,775         
Other  5,204           4,163         
                         
Total liabilities  1,384,919           1,101,998         
                         
Stockholders' equity  130,671           117,505         
                         
Total liabilities & stockholders' equity  1,515,590           1,219,503         
                         
Net interest income (FTE)      19,966           19,055     
                         
Net interest spread (b)          2.61           3.07 
Effect of non-interest                        
     bearing deposits          0.18           0.25 
Net yield on interest earning assets (c)          2.79           3.32 

 

(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 $1,424,000$815,000 as of SeptemberJune 30, 2020,2021, and $1,706,000$2,057,000 as of SeptemberJune 30, 2019.2020.  Such fees and costs recognized through income and included in the interest amounts totaled $315,000$374,000 in 2020,2021, and ($378,000)$49,000 in 2019.2020.

(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 income (FTE) by total interest earning assets.

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

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s interest income increased primarily due to increased interest income on loans,securities, but the increase in income was the result of loan growth in the securities portfolio, not an increase in asset yield, resulting in a lower NIM of 3.16%2.72% for the thirdsecond quarter of 2021, compared to 3.24% for the second quarter of 2020, compared to 3.55% for the third quarter of 2019, and 3.26%2.79% for the year-to-date period in 2020,2021, compared to 3.56% in 2019.3.32% for the prior year. The yield earned on assets decreased by 4364 basis points during the ninethree months ended SeptemberJune 30, 2020,2021, and 70 basis points during the six months ended June 30, 2021, while the rate paid on liabilities decreased by 17 basis points and 24 basis points, respectively, when comparing both years. This resulted in a 2647 basis point decrease in interest spread for the three-month period, and a 46 basis point decrease in spread for the six-month period, and the effect of non-interest bearing deposits decreased by fourfive basis points during the ninethree months ended SeptemberJune 30, 2020,2021, and seven basis points during the six months ended June 30, 2021, compared to the same periods in the prior year, resulting in the decrease in NIM of 3052 basis points.points and 53 basis points, respectively. Management anticipates further declines ina levelling out of NIM during the remainder of 20202021 as the Federal Reserve has decreasedTreasury rates by 150 basis points in March of 2020, putting pressure on the Corporation’s assethave increased a little assisting with achieving higher yields which was first fully felt in the second halfsecurities portfolio and loan yields will benefit some by the remainder of 2020.the Paycheck Protection Program (PPP) fees that are accretive to loan interest income as PPP loans pay off or are forgiven. Loan yields decreased in the first nine monthshalf of 20202021 compared to the prior year primarily as a result of the 75 basis points of Prime decline experienced in the second half of 2019 and the 150 basis points of Prime decline in the first quarter of 2020 that did not fully impact the loan yields until the second quarter of 2020. Growth in the loan portfolio will help to offset a declining asset yield moving through 2020.2021. The Corporation’s loan yield decreased 3837 basis points in the first nine monthssecond quarter of 20202021 compared to the first nine monthssecond quarter of 2019.2020, and decreased by 40 basis points for the year-to-date period. Loan interest income increased $858,000,decreased $467,000, or 3.4%5.4%, and $1,009,000, or 5.9%, for this time periodthe three and six-month periods as a result of the growthdecline in balances.yields.

 

Loan pricing was challenging in the first nine monthshalf of 20202021 as a result of the very low rate environment and competition resulting in fixed-rate loans being priced at very low levels and variable-rate loans priced at the Prime rate or below. The Prime rate was 5.00% as of September 30, 2019, and was moderately higher than the typical business or commercial five-year fixed rates being extended at that time. The Prime rate decreased by 0.25% in October of 2019 and 1.50% in March of 2020 to 3.25%, which is now just belowcomparable to the typical rate of a five-year fixed-rate loan. The commercial or business fixed rates do increase with longer fixed terms or lower credit quality. In terms of the variable rate pricing, nearly all variable rate loans offered are Prime-based. Management is able to price loan customers with higher levels of credit risk at Prime plus pricing, such as Prime plus 0.75%, which amounted to 4.00% at SeptemberJune 30, 2020,2021, still a relatively low rate. However, only a small minority of the loans in the commercial and agricultural portfolios are at these higher rates due to the strong credit quality of the Corporation’s borrowers and market competition. CompetitionCompetitors in the immediate market area hashave been pricing select shorter-term fixed-rate commercial and agricultural lending rates below 3.50%3.25% for the strongest loan credits.

 

Tax equivalent yields on the Corporation’s securities decreased by 4352 basis points for the ninethree months ended SeptemberJune 30, 2020,2021, and 58 basis points for the six months ended June 30, 2021, compared to the same periodperiods in 2019.2020. The Corporation’s securities portfolio consists of approximately 78%76% fixed income debt instruments and 22%24% variable rate product as of SeptemberJune 30, 2020.2021. The Corporation’s taxable securities experienced a 5554 basis-point decrease in yield for the ninethree months ended SeptemberJune 30, 2020,2021, and a 69 basis point decrease in yield for the six months ended June 30, 2021, compared to the same period in 2019.2020. Security reinvestment in the first nine months of 20202021 has been occurring at lowerslightly higher rates due to the significant declineincrease in U.S. Treasury rates.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. The sharpest growth in the securities portfolio occurred in the fourth quarter of 2020 and the first quarter of 2021. In addition to these negative influences, the Corporation’s U.S. agency mortgage-backed securities and collateralized mortgage obligations experience faster principal prepayments as market rates decrease, causing the amortization of premium to increase, effectively decreasing the yield.

 

The yield on tax-exempt securities decreased by 1361 basis points in the second quarter of 2021, and 54 basis points for the nine months ended September 30,year-to-date period, compared to 2020. For the Corporation, these bonds consist entirely of tax-free municipal bonds. While the tax-exempt yields on municipal bonds declined with the tax rate change at the end of 2017, yields became more attractive again during the latter part of 20192020 and the first nine months of 2020. After selling out of many of these instruments to shorten the duration of the Corporation’s portfolio and provide a better interest rate risk profile, management2021. Management began investing in more of these bonds in 2020 as yields stood out and provided better returns than other sectors of the portfolio.

 

The interest rate paid on deposits decreased for the three and six months ended June 30, 2021, from the same periods in 2020. Management follows a disciplined pricing strategy on core deposit products that are not rate sensitive, meaning that the balances do not fluctuate significantly when interest rates change. Rates on interest-bearing checking accounts and money market accounts were decreased in 2020, resulting in a decrease in the cost of funds on these accounts of 11 basis points for the three-month period and 26 basis points for the six-month period. The cost of funds on time deposits decreased by 54 basis points during the second quarter of 2021, and 55 basis points for the six-month period, compared to the same periods in the prior year. Typically, the Corporation sees increases in core deposit products during periods when consumers are not confident in the stock market or economic conditions deteriorate. During these periods, there is a “flight to safety” to federally insured deposits. This trend occurred again in early 2020 as the federal, state and local governmental bodies began rapidly instituting social distancing measures in an effort to control the spread of the coronavirus. These measures had an immediate signicant negative impact to the economy, which also resulted in the Federal Reserve quickly dropping interest rates back to historic lows. This in turn resulted in market interest rates declining again to historic lows, with the Corporation reducing offering rates on deposit products. As the rate difference between time deposits and core deposits narrowed, many customers chose to transfer funds from maturing time deposits into checking and savings accounts.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

The Corporation’s average deposits increased $123.0$281.1 million, or 13.2%26.4%, for the three-month period, and $287.6 million, or 28.2%, for the six-month period, with all types of interest-bearing deposits increasing $42.2$127.9 million, or 7.1%20.0%, and $121.5 million, or 19.4%, for the three and six-month periods ended June 30, 2021, compared to the same periods in the prior year, while non-interest bearing demand deposits increased $80.7$153.2 million, or 24.1%.36.9%, and $166.1 million, or 42.5%, respectively. In the current rate environment, with short-term rates low and with small rate differences for longer-term deposits, the consumer generally elected to stay short and maintain funds in accessible deposit instruments. 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 non-interest checking, NOW, and savings accounts. The average balance of time deposits declined during the first ninesix months of 20202021 compared to 2019,2020, 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.increase significantly. Time deposit balances had been growing throughout 2018 and 2019 due to the odd-month CD promotions available at those times, but with the recent sharp decline in rates, time deposits declined throughout 2020 and management expects these time deposit balances to decrease throughout the remainder of 20202021 as a result of customers electing to allow maturing time deposit balances to roll off and hold them in a liquid account until there is some sign of rate increases.

 

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Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

Interest expense on deposits decreased by $844,000,$258,000, or 32.1%47.5%, and $753,000, or 55.7%, for the ninethree and six months ended SeptemberJune 30, 2020,2021, compared to the same periodperiods in 2019.2020. Demand and savings deposits reprice in their entirety whenever the offering rates are changed, so with each successive rate drop in the first nine months of 2020, these deposits repriced lower. Interest rates on interest checking and money market accounts were decreased eightnine times in 2020. For the ninethree and six months ended SeptemberJune 30, 2020,2021, the average balances of interest bearing demand deposits increased by $17.6$63.6 million, or 6.9%23.2%, and $61.1 million, or 22.6%, over the same periodperiods in 2019,2020, while the average balance of savings accounts increased by $32.0$74.4 million, or 15.7%.31.3%, and $72.7 million, or 32.1%, respectively.

 

Time deposits reprice over time according to their maturity schedule. This enables management to both reduce and increase rates slowly over time. During the ninesix months ended SeptemberJune 30, 2020,2021, time deposit balances decreased compared to balances at SeptemberJune 30, 2019.2020. The decrease can be attributed to the low rates paid on time deposits, which has caused the differential between time deposit rates and rates on non-maturity deposits to be minimal, as well as more competitive time deposit rates being offered by other financial institutions in the local market area.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 more balanced deposit funding position and maintain a lower cost of funds. The Corporation’s interest expense on time deposits decreased by $23,000,$191,000, or 1.8%45.4%, and $410,000, or 45.5%, for the first ninethree and six months of 2020,ended June 30, 2021, compared to the same periodperiods in 2019. The average annualized interest rate paid on time deposits increased by 5 basis points for the nine-month period when comparing both years.2020. Management anticipates the interest expense on time deposits and annualized rate paid will decline throughout the remainder of 20202021 as these higher-priced time deposits mature and reprice at much lower levels or convert to non-maturity deposits.

The Corporation’s average rate on borrowed funds increased by 48 basis points from the second quarter of 2021 compared to the second quarter of 2020, and increased by 58 basis points for the year-to-date period. The Corporation’s subordinated debt issued on December 30, 2020, is included in this total borrowed funds amount and is at a rate of 4.00% for 5 years, so the increase in rate paid on borrowed funds is a direct result of this.

 

The Corporation historically uses both short-term and long-term borrowings to supplement liquidity generated by deposit growth. Average short-term advances of $3,126,000only $44,000 were utilized in the ninesix months ended SeptemberJune 30, 2020,2021, while average short-term advances of $2,340,000$4,638,000 were utilized in the ninesix months ended SeptemberJune 30, 2019.2020. Management has used FHLB long-term borrowings as part of an asset liability strategy to lengthen liabilities rather than as a source of liquidity. Average total long-term FHLB borrowings decreased by $1,082,000,$21,646,000, or 1.4%29.1%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same period in 2019.2020. The average balance of subordinated debt increased by $19,620,000, as subordinated debt was issued at the end of 2020 as a vehicle to support capital growth for the Corporation. This growth in debt balances contributed to an increase in interest expense for the three and six months ended June 30, 2021, compared to the same period in the prior year. Interest expense on borrowed funds increased $175,000,$65,000, or 15.1%14.3%, for the nine-monththree-month period and $140,000, or 15.3%, for the six-month period when comparing 20202021 to 2019,2020, driven higher by $234,000interest expense accrued on subordinated debt.

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Table of FHLB interest prepayment penalties on the early payoff of several advances.Contents

ENB FINANCIAL CORP

Management’s Discussion and Analysis

For the ninethree months ended SeptemberJune 30, 2020,2021, the net interest spread decreased by 2647 basis points to 3.03%2.55%, compared to 3.29%3.02% for the ninethree months ended SeptemberJune 30, 2019.2020. For the six months ended June 30, 2021, the net interest spread decreased by 46 basis points to 2.61%, compared to 3.07% for the six months ended June 30, 2020. The effect of non-interest bearing funds decreased to 2317 basis points from 2722 basis points for the ninethree months ended SeptemberJune 30, 2019.2021, and decreased to 18 basis points from 25 basis points for the six months ended June 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. 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 increased to 1.50%, then the benefit of the non-interest bearing funds is $150. This assumes dollar-for-dollar replacement, which is not realistic, but demonstrates the way the higher cost of funds affects the benefit to non-interest bearing deposits.

 

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

Provision for Loan Losses

 

The allowance for 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 ano provision expense for the second quarter of 2021, and provision expense of $1,250,000$375,000 for the threesix months ended SeptemberJune 30, 2020, and $2,575,000 for the nine months ended September 30, 2020,2021, compared to $630,000$975,000 and $840,000$1,325,000, respectively, for the three and ninesix months ended SeptemberJune 30, 2019, respectively.2020. The analysis of the ALLLACL takes into consideration, among other things, the following factors:

 

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Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

·levels and trends in delinquencies, nonaccruals, charge-offs and recoveries,
·trends within the loan portfolio,
·changes in lending policies and procedures,
·experience of lending personnel and management oversight,
·national and local economic trends,
·concentrations of credit,
·external factors such as legal and regulatory requirements,
·changes in the quality of loan review and board oversight, and
·changes in the value of underlying collateral.

 

During the nine months ended September 30, 2020, the Corporation recorded provision expense of $2,575,000 primarily due to a specific allocation related to a commercial customer with ongoing business concerns as well as a decline in economic and business conditions related to COVID-19, which caused an increase in the qualitative factors regarding outside market conditions for the entire loan portfolio. This increase in qualitative factors caused a higher required provision as credit losses may be incurred as businesses deal with the challenges presented by COVID-19 and the change in business practice.

As of SeptemberJune 30, 2020,2021, total delinquencies represented 0.40%0.15% of total loans, compared to 0.56%0.41% as of SeptemberJune 30, 2019.2020. These ratios are very low compared to local and national peer groups. The vast majority of the Corporation’s loan customers have remained 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 level of classified loans has increaseddecreased from September 30, 2019 to SeptemberJune 30, 2020, to June 30, 2021, from 16.2%19.7% of regulatory capital to 20.0%14.3% of regulatory capital. The delinquency and classified loan information is utilized in the quarterly ALLLACL 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 minimal charge-offs and recoveries in the first ninesix months of 2020.2021.

 

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Management’s Discussion and Analysis

Generally, management will evaluate and adjust, if necessary, the provision expense each quarter based upon completion of the quarterly ALLLACL 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.ACL. 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. Second, management provides for estimated losses on pools of similar loans based on historical loss experience. Finally, management utilizes qualitative factors every quarter to adjust historical loss experience to take into consideration the current trends in loan volume, delinquencies, charge-offs, changes in lending practices, and the quality of the Corporation’s underwriting, credit analysis, lending staff, and Board oversight. National and local economic trends and conditions are also helpful to determine the amount of loan loss allowance the Corporation should be carrying on the various types of loans. Management evaluates and adjusts, if necessary, the qualitative factors on a quarterly basis.

 

In the first ninesix months of 2020,2021, qualitative factors were adjusted by management based on current internal information regarding trends in the nature and volume of the loan portfolio and delinquency. IncreasesSince December 31, 2020, an increase in qualitative factors werewas made across twofour loan pools related to trendschanges in the naturelending policies and volume of the loan portfolio,procedures and a decline was made across two separateall loan pools related to levels ofan improvement in national and trends in delinquency, non-accruals, and charge-offs.local economic trends. These factorsfactor changes were increased bygenerally only 5 basis points since June 30, 2020.points. Other factors changed minimallyremained unchanged in 2020.the first six months of 2021.

 

Management also monitors the allowance as a percentage of total loans. The percentage of the allowance to total loans has increased since SeptemberJune 30, 2019,2020, and remains higher than the Bank’s national peer group from the Uniform Bank Performance Reports. As of SeptemberJune 30, 2020,2021, the allowance as a percentage of total loans was 1.42%1.46%, up from 1.28%1.29% at SeptemberJune 30, 2019, and 1.25% at December 31, 2019.2020. Management continues to evaluate the ALLLACL 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 ALLLACL is adequate to provide for future loan losses based on the current portfolio and the current economic environment. More detail is provided under Allowance for LoanCredit Losses in the Financial Condition section that follows.

Other Income

Other income for the second quarter of 2021 was $4,077,000, an increase of $9,000, or 0.2%, compared to the $4,068,000 earned during the second quarter of 2020. For the year-to-date period ended June 30, 2021, other income totaled $9,395,000, an increase of $2,560,000, or 37.5%, compared to the same period in 2020. The following tables detail the categories that comprise other income.

OTHER INCOME

(DOLLARS IN THOUSANDS)  

  Three Months Ended June 30,  Increase (Decrease) 
  2021  2020       
  $  $  $  % 
             
Trust and investment services  537   416   121   29.1 
Service charges on deposit accounts  246   205   41   20.0 
Other service charges and fees  438   430   8   1.9 
Commissions  952   649   303   46.7 
Gains on securities transactions, net  274   367   (93)  (25.3)
Gains (losses) on equity securities, net  (24)  5   (29)  >100% 
Gains on sale of mortgages  1,245   1,690   (445)  (26.3)
Earnings on bank owned life insurance  202   205   (3)  (1.5)
Other miscellaneous income  207   101   106   >100% 
                 
Total other income  4,077   4,068   9   0.2 

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Management’s Discussion and Analysis

Other Income

Other income for the third quarter of 2020 was $4,374,000, an increase of $1,431,000, or 48.6%, compared to the $2,943,000 earned during the third quarter of 2019. For the year-to-date period ended September 30, 2020, other income totaled $11,209,000, an increase of $2,960,000, or 35.9%, compared to the same period in 2019. The following tables detail the categories that comprise other income. As illustrated in the tables below the primary contributor to the increase was the gains on the sales of mortgages.

OTHER INCOME

(DOLLARS IN THOUSANDS)

  Three Months Ended September 30,  Increase (Decrease) 
  2020  2019       
  $  $  $  % 
             
Trust and investment services  442   538   (96)  (17.8)
Service charges on deposit accounts  250   349   (99)  (28.4)
Other service charges and fees  451   352   99   28.1 
Commissions  781   734   47   6.4 
Gains on securities transactions, net  55   42   13   31.0 
Gains on equity securities, net  (54)  7   (61)  (871.4)
Gains on sale of mortgages  2,081   606   1,475   243.4 
Earnings on bank owned life insurance  209   186   23   12.4 
Other miscellaneous income  159   129   30   23.3 
                 
Total other income  4,374   2,943   1,431   48.6 

 

OTHER INCOME

(DOLLARS IN THOUSANDS)

 Nine Months Ended September 30, Increase (Decrease)  Six Months Ended June 30, Increase (Decrease) 
 2020 2019      2021 2020     
 $ $ $ %  $ $ $ % 
                      
Trust and investment services  1,480   1,580   (100)  (6.3)  1,207   1,038   169   16.3 
Service charges on deposit accounts  770   1,026   (256)  (25.0)  494   520   (26)  (5.0)
Other service charges and fees  1,245   998   247   24.7   804   794   10   1.3 
Commissions  2,116   2,145   (29)  (1.4)  1,816   1,335   481   36.0 
Gains on securities transactions, net  704   229   475   207.4   362   649   (287)  (44.2)
Gains (losses) on equity securities, net  (279)  51   (330)  (647.1)  223   (225)  448   >100% 
Gains on sale of mortgages  4,312   1,370   2,942   214.7   3,175   2,231   944   42.3 
Earnings on bank owned life insurance  620   543   77   14.2   418   411   7   1.7 
Other miscellaneous income  241   307   (66)  (21.5)  896   82   814   >100% 
                                
Total other income  11,209   8,249   2,960   35.9   9,395   6,835   2,560   37.5 

 

Trust and investment services income decreased $96,000,increased $121,000, or 17.8%29.1%, and $100,000,$169,000, or 6.3%16.3%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods last year. This revenue consists of income from traditional trust services and income from alternative investment services provided through a third party. In the thirdsecond quarter of 2020,2021, traditional trust income decreasedincreased by $29,000,$4,000, or 9.8%1.5%, while income from alternative investments decreasedincreased by $67,000,$116,000, or 28.5%81.8%, compared to the thirdsecond quarter of 2019.2020. For the ninesix months ended SeptemberJune 30, 2020,2021, traditional trust services income decreasedincreased by $23,000,$65,000, or 2.5%9.9%, while income from alternative investment services decreasedincreased by $77,000,$104,000, or 12.2%27.0%, compared to the same period in 2019.2020. The declineincrease in income from the investment services area for both time periods can be partially attributed to lesstransfer fees received from a new business, which was impacted by COVID-19 andbroker dealer that resulted in additional income of $60,000 in the branch lobby closures during the second quarter. Management would expect activity to increase again going into the remainderfirst six months of 2020 and into 2021. The trust and investment services area continues to be an area of strategic focus for the Corporation. Management believes there continues to be great need for retirement, estate, small business succession planning, and personal investment services in the Corporation’s service area. Management also sees these services as being a necessary part of a comprehensive line of financial solutions across the organization.

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Management’s Discussion and Analysis

Service charges on deposit accounts increased by $41,000, or 20.0%, and decreased by $99,000,$26,000, or 28.4%, and $256,000, or 25.0%5.0%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. The quarter-to-date increase and the year-to-date decrease is primarily due to a decrease in overdraft fees that were lower by $95,000, or 33.3%, and $214,000, or 25.9%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. This decline can both be primarily attributed to the current economic environment, which has necessitated changes in customer behaviors. Various other fee income categories increased or decreased to lesser degrees making upoverdraft fees. With the remainderonset of the varianceCOVID-19 pandemic in early 2020, overdraft fees declined significantly as customers were provided with government stimulus funds and were sitting on more cash and spending less. This caused overdraft fees to decline significantly in the second quarter of 2020. While the level of overdraft fees has increased by $28,000, or 17.4% for the second quarter of 2021 compared to 2020, the prior year.

Other service charges andyear-to-date fees increasedare still lower by $99,000,$44,000, or 28.1%, and $247,000, or 24.7%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The increase is primarily due to an increase in loan administration fees that were higher by $84,000, or 107.7%, and $200,000, or 95.8%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. This was a result of increased secondary market mortgage activity due to the very low interest rate environment. Additionally, loan modification fees were higher by $87,000 and $161,000, for the three and nine months ended September 30, 2020, compared to the same periods in the prior year. Partially offsetting these increases, fees on an off-balance sheet cash management product decreased by $108,000, or 96.4%, and $156,000, or 52.2%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019.10.4%. 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 $47,000,$303,000, or 6.4%46.7%, and decreased by $29,000,$481,000, or 1.4%36.0%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. The quarterly increase was primarily caused by commissions from Banker’s Settlement Services which increased by $31,000, or 145.1%, and commissions on merchant services which increased by $12,000, or 42.2%. The year-to-date decrease was primarily caused by a decreasean increase in debit card interchange income of $71,000,$241,000, or 3.8%.40.8%, for the three months ended June 30, 2021, and $404,000, or 34.7%, for the six months ended June 30, 2021, compared to the same periods in the prior year. The interchange income is a direct result of the volume of debit card transactions processed and this income decreased during the second quarter of 2020 as customer spending changed with lower levels of purchases impacted by COVID-19.COVID-19, but increased again in late 2020 and throughout the first half of 2021.

 

For the three and ninesix months ended SeptemberJune 30, 2020, $1,0002021, $274,000 and $425,000$362,000 of gains on securities transactions were recorded, respectively, compared to gains of $49,000$367,000 and $280,000,$649,000, respectively, for the same periods in 2019.2020. 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 ninesix months of 2021 and 2020 provided better opportunities to take gains out of the portfolio thanportfolio.

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Management’s Discussion and Analysis

Gains or losses on equity securities amounted to a loss of $24,000 during the second quarter of 2021, compared to a gain of $5,000 for the same period in the prior year. For the year-to-date period, gains on equity securities amounted to $223,000 in 2021, compared to a loss of $225,000 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 ninesix months of 2019.2021, $95,000 of gains were recorded on the sale of bank stocks and $128,000 was recorded as an unrealized gain due to the increase in market value of the bank stock portfolio. During the first six months of 2020, unrealized losses of $225,000 were recorded due to the decline in bank stock prices as the COVID-19 pandemic began and negatively impacted the market.

 

Gains on the sale of mortgages were $2,081,000$1,245,000 for the three-month period ended SeptemberJune 30, 2020,2021, compared to $606,000$1,690,000 for the same period in 2019,2020, a $1,475,000,$445,000, or 243.4% increase.26.3% decrease. For the nine-monthsix-month period ended SeptemberJune 30, 2020,2021, mortgage gains amounted to $4,312,000,$3,175,000, compared to $1,370,000$2,231,000 for the same period in 2019,2020, a $2,942,000,$944,000, or 214.7%42.3% increase. MortgageWhile mortgage activity was significantlyslightly slower for the second quarter of 2021 compared to 2020, year-to-date activity was still higher resulting in the first nine months of 2020 compared toyear-to-date increase in mortgage gains. The increased mortgage activity is the prior year as a result of historically low interest rates and a surge in mortgage refinancing activity. Management currently anticipates that gains throughout the remainder of 2020 may continue at a higher level2021 will decrease compared to the prior year but a lower level compared to the first nine months of 2020, due to the favorable rate environment and reasonable margins received on the mortgages that are being sold.as refinance activity slows down.

 

For the three months ended September 30, 2020, earnings on bank-owned life insurance (BOLI) increased by $23,000, or 12.4%, and for the nine months ended September 30, 2020, earnings on BOLI increased by $77,000, or 14.2%, compared to the same periods in 2019. The amount of BOLI income is generally dependent upon the actual return of the policies, the insurance cost components, and any benefits paid upon death that exceed the policy’s cash surrender value. Increases in cash surrender value are a function of the return of the policy net of all expenses.

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Management’s Discussion and Analysis

The miscellaneous income category increased by $30,000, or 23.3%,$106,000 for the three months ended SeptemberJune 30, 2020,2021, and decreased by $66,000, or 21.5%,$814,000 for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019. The quarterly increase can be attributed to an increase of $20,000 in net2020. Net mortgage servicing income whileincreased by $92,000 for the year-to-date decrease can be attributedthree months ended June 30, 2021, and $355,000 for the six months ended June 30, 2021, compared to a declinethe same periods in the prior year. This was due to much lower levels of mortgage servicing asset amortization in 2021. The slightly higher interest rate environment resulted in this lower level of amortization. Other miscellaneous income categories increased as well making up the remainder of $87,000. Amortization on mortgage servicing assets was very highthe variance in the first quarter of 2020 and then came down significantly in the second and third quarters resulting in these variances.this category.

 

 

Operating Expenses

 

Operating expenses for the thirdsecond quarter of 20202021 were $9,198,000,$9,696,000, an increase of $1,070,000,$1,452,000, or 13.2%17.6%, compared to the $8,128,000$8,244,000 for the thirdsecond quarter of 2019.2020. For the year-to-date period ended SeptemberJune 30, 2020,2021, operating expenses totaled $26,552,000,$18,883,000, an increase of $1,925,000,$1,529,000, or 7.8%8.8%, compared to the same period in 2019.2020. The following tables provide details of the Corporation’s operating expenses for the three and nine-monthsix-month periods ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020.

 

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

  Three Months Ended September 30,       
  2020  2019  Increase (Decrease) 
  $  $  $  % 
Salaries and employee benefits  5,860   5,227   633   12.1 
Occupancy expenses  598   605   (7)  (1.2)
Equipment expenses  298   297   1   0.3 
Advertising & marketing expenses  184   205   (21)  (10.2)
Computer software & data processing expenses  835   620   215   34.7 
Bank shares tax  239   233   6   2.6 
Professional services  549   448   101   22.5 
Other operating expenses  635   493   142   28.8 
     Total Operating Expenses  9,198   8,128   1,070   13.2 

 

  Three Months Ended June 30,       
  2021  2020  Increase (Decrease) 
  $  $  $  % 
Salaries and employee benefits  5,959   4,966   993   20.0 
Occupancy expenses  635   616   19   3.1 
Equipment expenses  285   316   (31)  (9.8)
Advertising & marketing expenses  245   218   27   12.4 
Computer software & data processing expenses  1,102   768   334   43.5 
Bank shares tax  275   239   36   15.1 
Professional services  598   507   91   17.9 
Other operating expenses  597   614   (17)  (2.8)
     Total Operating Expenses  9,696   8,244   1,452   17.6 

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Management’s Discussion and Analysis

OPERATING EXPENSES

(DOLLARS IN THOUSANDS)

  Nine Months Ended September 30,       
  2020  2019  Increase (Decrease) 
  $  $  $  % 
Salaries and employee benefits  16,522   15,520   1,002   6.5 
Occupancy expenses  1,805   1,825   (20)  (1.1)
Equipment expenses  904   871   33   3.8 
Advertising & marketing expenses  676   621   55   8.9 
Computer software & data processing expenses  2,309   1,886   423   22.4 
Bank shares tax  718   698   20   2.9 
Professional services  1,679   1,479   200   13.5 
Other operating expenses  1,939   1,727   212   12.3 
     Total Operating Expenses  26,552   24,627   1,925   7.8 

  Six Months Ended June 30,       
  2021  2020  Increase (Decrease) 
  $  $  $  % 
Salaries and employee benefits  11,658   10,662   996   9.3 
Occupancy expenses  1,318   1,207   111   9.2 
Equipment expenses  552   606   (54)  (8.9)
Advertising & marketing expenses  435   492   (57)  (11.6)
Computer software & data processing expenses  2,200   1,474   726   49.3 
Bank shares tax  555   479   76   15.9 
Professional services  1,036   1,130   (94)  (8.3)
Other operating expenses  1,129   1,304   (175)  (13.4)
     Total Operating Expenses  18,883   17,354   1,529   8.8 

 

Salaries and employee benefits are the largest category of operating expenses. In general, they comprise approximately 63%62% of the Corporation’s total operating expenses. For the three months ended SeptemberJune 30, 2020,2021, salaries and benefit costs increased by $993,000, or 20.0%, from the second quarter of 2020. For the six months ended June 30, 2021, salaries and benefits increased $633,000,by $996,000, or 12.1%9.3%, from the sameyear-to-date period in 2019. For the nine months ended September 30, 2020,prior year. The growth in salaries and benefits increased $1,002,000, or 6.5%, compared to the nine months ended September 30, 2019. Salaries increased by $448,000, or 11.6%, and employee benefits increased by $185,000, or 13.6%, for the three months ended September 30, 2020, compared to the same period in 2019. For the nine months ended September 30, 2020, salary expense increased by $544,000, or 4.8%, while employee benefits increased by $458,000, or 10.9%, compared to the nine months ended September 30, 2019. Salary costs were higher for both the quarter and year-to-date periods duecan primarily be attributed to higher mortgage commissions paid out on mortgage production which were partially offset bystemming from higher volume, merit and cost of living increases, additions to staff, and higher deferred salaries costs on loan originations, which are recorded as a contra salary expense. Additionally, for the year-to-date period, salary costs were higher due to a performance bonus paid out in the firstsecond quarter of 2020. Employee benefits expense was at a2020 stemming from higher level for the quarter and year-to-date periods in 2020 due to higher health insurance costs, which increased by $157,000, or 23.5%, and $468,000, or 23.0%, for the three and nine months ended September 30, 2020, compared to the same periods in 2019.levels of PPP loan production.

 

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Management’s Discussion and Analysis

Occupancy expenses consist of the following:

·Depreciation of bank buildings
·Real estate taxes and property insurance
·Building lease expense
·Utilities
·Building repair and maintenance

 

AdvertisingOccupancy expenses increased $19,000, or 3.1%, and marketing$111,000, or 9.2%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. Utilities costs increased by $22,000, or 13.4%, and $42,000, or 12.1%, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. For the year-to-date period, snow removal costs increased by $46,000, or 321.7%, and building repair and maintenance costs increased by $22,000, or 20.5%, compared to the year-to-date period in 2020. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.

Equipment expenses decreased by $21,000,$31,000, or 10.2%9.8%, and increased by $55,000,$54,000, or 8.9%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.the prior year. Equipment depreciation costs decreased by $12,000, or 6.6%, and $40,000, or 10.8%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. Additionally, equipment repair and maintenance costs decreased by $22,000, or 59.5%, and $22,000, or 37.8%, for the same time periods. Various other occupancy expense categories increased or decreased by smaller amounts making up the remainder of the quarter and year-to-date variance.

Advertising and marketing expenses increased by $27,000, or 12.4%, and decreased by $57,000, or 11.6%, for the three and six months ended June 30, 2021, compared to the same periods in 2020. These expenses can be further broken down into two categories, marketing expenses and public relations. The marketing expenses increaseddecreased by $12,000,$17,000, or 8.9%9.1%, for the quarter-to-date period, and $100,000,$78,000, or 24.2%21.4%, for the year-to-date period ended SeptemberJune 30, 2020,2021, compared to the same periods in the prior year. Public relations expenses decreasedincreased by $33,000,$45,000, or 49.3%169.0%, and $45,000,$20,000, or 21.8%15.8%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. 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.

 

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Management’s Discussion and Analysis

Computer software and data processing expenses increased by $215,000,$334,000, or 34.7%43.5%, for the thirdsecond quarter of 20202021 compared to 2019,2020, and $423,000,$726,000, or 22.4%49.3%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. Software-related expenses were up by $146,000,$320,000, or 44.3%71.8%, for the three months ended SeptemberJune 30, 2020,2021, and by $287,000,$656,000, or 27.4%76.4%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in the prior year. The increases were primarily as a result of of increased amortization due toon existing software as well as purchases of new software platforms to support the strategic initiatives of the Corporation. Software expenses are likely to continue to increase in 2020,2021, but the actual increase will be dependent on how quickly new software platforms are identified, analyzed, approved and placed into service. Data processing fees were up $14,000, or 4.4%, and $70,000, or 24.0%, and $136,000, or 16.2%11.4%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020.

 

Bank shares tax expense was $239,000$275,000 for the thirdsecond quarter of 2020,2021, an increase of $6,000,$36,000, or 2.6%15.1%, from the thirdsecond quarter of 2019.2020. For the year-to-date period, shares tax increased by $20,000,$76,000, or 2.9%15.9%, compared to the prior year. Two main factors determine the amount of bank shares tax: the ending value of shareholders’ equity and the ending value of tax-exempt U.S. obligations. The shares tax calculation uses a period-end balance of shareholders’ equity and a tax rate of 0.95%. The increase in 20202021 can be primarily attributed to the Corporation’s growing value of shareholders’ equity.

 

Professional services expense increased by $101,000,$91,000, or 22.5%17.9%, and $200,000,decreased by $94,000, or 13.5%8.3%, for the three and nine-monthsix-month periods ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. These services include accounting and auditing fees, legal fees, and fees for other third-party services. Trust departmentPayroll-related processing costs as well as contract employee expenses increased in total by $ 74,000 for the quarter-to-date period; accounting and auditing fees were higher by $29,000, or 39.2%; and legal fees for the quarter increased by $29,000 for the three months ended September 30, 2020, and other outside services increased$24,000, or 356.3%. The year-to-date decrease was caused by $39,000, or 17.8%, for the third quarter of 2020 compared to the prior year. For the year-to-date period,a decline in other outside service fees by $260,000, or 47.2%, for the six months ended June 30, 2021, compared to the same period in 2020. Partially offsetting this decrease, payroll-related processing costs as well as contract employee expenses increased by $169,000, or 26.4%, in 2020 compared to 2019.$105,000 for the year-to-date period. Several other professional services expenses increased or decreased slightly making up the remainder of the variance.

 

Other operating expenses increaseddecreased by $142,000,$17,000, or 28.8%2.8%, and $212,000,$175,000, or 12.3%13.4%, for the three and nine-month periodssix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2019.2020. Contributing to these increase, loan-related expenses increasedthis decrease, operating supplies costs declined by $82,000,$66,000, or 88.8%54.3%, for the quarter-to-date periodquarter and $102,000,$110,000, or 31.0%49.5% for the year-to-date period. Additionally, FDIC insurance costs increasedperiod when comparing both years. Loan related expenses decreased by $80,000 for the three months ended September 30, 2020, compared to the third quarter of the prior year. Operating supplies and fraud-related charge-offs increased by $88,000,$56,000, or 43.1%35.8%, and $53,000,$91,000, or 710.0% respectively, for the nine months ended September 30, 2020, compared to the prior year. Partially offsetting these increases, travel-related costs were down $29,000, or 61.3%, and $103,000, or 61.1%35.8%, for the three and ninesix months ended SeptemberJune 30, 2020,2021, compared to the same periods in 2020. Partially offsetting these declines, FDIC and OCC assessment charges increased by $61,000, or 53.1%, and $147,000, or 85.4% for the quarter and year-to-date periods. Fraud-related charge-offs decreased by $25,000 for the quarter, and $63,000 for the year-to-date period ended June 30, 2021, compared to the same periods in the prior year. Several other operating expense categories increased or decreased by smaller amounts making up the remainder of this variance.

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Management’s Discussion and Analysis

Income Taxes

 

For the ninesix months ended SeptemberJune 30, 2020,2021, the Corporation recorded Federal income tax expense of $1,610,000,$1,492,000, compared to $1,596,000$1,077,000 for the ninesix months ended SeptemberJune 30, 2019.2020. The effective tax rate for the Corporation was 15.6% for the ninesix months ended SeptemberJune 30, 20202021, and 2019.15.7% for the six months ended June 30, 2020. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and BOLI income; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation’s provision for Federal income taxes on the Consolidated Statements of Income by the income before income taxes for the applicable period.

 

The Corporation’s effective tax rate has historically been maintained at low levels primarily due to a relatively high level of tax-free municipal bonds held in the securities portfolio. The fluctuation of the effective tax rate will occur as a result of total tax-free revenue as a percentage of total revenue.

 

The 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 $718,000$555,000 in the first ninesix months of 20202021 compared to $698,000$479,000 in 2019.2020. 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

 

The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of SeptemberJune 30, 2020,2021, the Corporation had $366.9$592.1 million of securities available for sale, which accounted for 27.9%37.5% of assets, compared to 26.9%33.1% as of December 31, 2019,2020, and 26.6%26.3% as of SeptemberJune 30, 2019.2020. Based on ending balances, the securities portfolio increased 20.3%73.4% from SeptemberJune 30, 2019,2020, and 16.5%22.5% from December 31, 2019.2020.

 

The debt securities portfolio was showing a net unrealized gain of $7,285,000$9,319,000 as of SeptemberJune 30, 2020,2021, compared to an unrealized gain of $2,027,000$10,072,000 as of December 31, 2019,2020, and an unrealized gain of $2,133,000$5,724,000 as of SeptemberJune 30, 2019.2020. 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 1.68%0.66% as of SeptemberJune 30, 2019, 1.92%2020, 0.93% as of December 31, 2019,2020, and 0.69%1.45% as of SeptemberJune 30, 2020.2021. The lower Treasury rates have caused an increase in market valuation, which has resulted in the higher unrealized gains recorded at Septemberin all time periods. Gains were lower as of June 30, 20202021, compared to the end of 2020 due to the increase in Treasury rates experienced in the first and second quarters of 2021. Additionally, with the Federal Reserve’s sudden overnight rate decreases in March of 2020, the variable rate portion of the Corporation’s security portfolio lost market value due to the market’s recognition that these instruments would yield materially less going forward which resulted in the lower levels of unrealized gains at December 31, 2019 and SeptemberJune 30, 2019.2020.

 

The table below summarizes the Corporation’s amortized cost, unrealized gain or loss position, and fair value for each sector of the securities portfolio for the periods ended SeptemberJune 30, 2020,2021, December 31, 2019,2020, and SeptemberJune 30, 2019.2020.

 

AMORTIZED COST AND FAIR VALUE OF SECURITIES HELD

(DOLLARS IN THOUSANDS)  

    Net  
  Amortized Unrealized Fair
  Cost Gains (Losses) Value
  $ $ $
September 30, 2020      
U.S. government agencies  8,216   157   8,373 
U.S. agency mortgage-backed securities  64,263   1,401   65,664 
U.S. agency collateralized mortgage obligations  40,236   669   40,905 
Asset-backed securities  41,892   (839)  41,053 
Corporate bonds  59,436   1,278   60,714 
Obligations of states and political subdivisions  138,701   4,619   143,320 
Total debt securities, available for sale  352,744   7,285   360,029 
Equity securities  7,109   (255)  6,854 
Total securities  359,853   7,030   366,883 
             
December 31, 2019            
U.S. government agencies  32,621   3   32,624 
U.S. agency mortgage-backed securities  48,859   (233)  48,626 
U.S. agency collateralized mortgage obligations  60,124   129   60,253 
Asset-backed securities  23,646   (384)  23,262 
Corporate bonds  54,604   276   54,880 
Obligations of states and political subdivisions  86,216   2,236   88,452 
Total debt securities  306,070   2,027   308,097 
Equity securities  6,685   23   6,708 
Total securities  312,755   2,050   314,805 

    Net  
  Amortized Unrealized Fair
  Cost Gains (Losses) Value
  $ $ $
June 30, 2021            
U.S. treasuries  4,981   43   5,024 
U.S. government agencies  29,620   (261)  29,359 
U.S. agency mortgage-backed securities  62,258   649   62,907 
U.S. agency collateralized mortgage obligations  36,911   617   37,528 
Asset-backed securities  100,202   801   101,003 
Corporate bonds  84,052   1,015   85,067 
Obligations of states and political subdivisions  256,280   6,455   262,735 
Total debt securities, available for sale  574,304   9,319   583,623 
Equity securities  8,430   75   8,505 
Total securities  582,734   9,394   592,128 
             
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 

 

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Management’s Discussion and Analysis

    Net  
  Amortized Unrealized Fair
  Cost Gains (Losses) Value
  $ $ $
September 30, 2019            
U.S. government agencies  35,398   (82)  35,316 
U.S. agency mortgage-backed securities  46,354   (443)  45,911 
U.S. agency collateralized mortgage obligations  54,510   150   54,660 
Asset-backed securities  19,787   (219)  19,568 
Corporate bonds  54,672   —   54,672 
Obligations of states and political subdivisions  86,129   2,727   88,856 
Total debt securities  296,850   2,133   298,983 
Equity securities  6,130   (22)  6,108 
Total securities available for sale  302,980   2,111   305,091 

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

 

Interest rate changes and the perceived forward direction of interest rates generally have a close relationshipcorrelation to the valuation of the Corporation’s fixed income securities portfolio. There are also a number of other market factors that impact bond prices. During the second half of 2019, the Federal Reserve decreased short-term rates three times for a total of 75 basis points, and during the first quarter of 2020, the Federal Reserve decreased short-term rates two times for a total of 150 basis points. Market conditions forin the first nine monthsquarter of 2020 were very unpredictable and fast changing due to the start of and continuing impact of COVID-19 and the declaration of a global pandemic on March 11, 2020. The Fed’s reduction of interest rates was in response to this pandemic and caused short-term and long-term Treasury rates to decline at a rapid pace to reach all-time lows. This pandemic continued to have far-reaching impactsDuring the first and second quarters of 2021, rates on local, national, and global economies and supply chains and negatively affected market pricing resultingthe longer end of the yield curve did increase causing slight declines in lowerthe unrealized gains on the securities portfolio despite lower Treasury rates at September 30, 2020, compared to December 31, 2019. However, unrealized gains on the debt securities portfolio increased during the second and third quarters ending at $7,285,000 as of September 30, 2020. The 10-year U.S. Treasury reached a low of 0.51% on August 4, 2020, compared to a 2020 high of 1.88% to start the year.investment portfolio. The COVID-19 pandemic continues to have significant impacts on rates and the economy and management believes this will continue throughout 2020 resulting in these very low2021, but the absolute value and direction of Treasury rates forcould fluctuate as the remainder of the year.pandemic recovery reaches new levels. 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 ratingsrating of insurers of bonds, changes in market perception of certain classes of securities, and many more. Management monitors the changes in interest rates and other market influences to assist in management of the securities portfolio.

 

Any material increase in market interest rates would have a negative impact on the market value of the Corporation’s fixed income debt securities. As of SeptemberJune 30, 2020,2021, approximately 78%76% of the Corporation’s debt securities were fixed rate securities with the other 22%24% variable rate. The variable rate instruments generally experience very little impact to valuation based on a change in rates because they trade on a spread over overnight rates such as LIBOR. However, with the Federal Reserve drastically reducing the Federal fundsFunds rate by 1.50% in March of 2020 to 0.25% it, caused the market to view floating rate bonds differently, as the new effective yields on those securities would be significantly reduced upon the next rate reset; whereas fixedreset. Fixed rate securities without call options could maintain their effective yield in a new bond market with sharply lower yields. Therefore, the valuation of the fixed rate securities held up better when the securities portfolio was valued for SeptemberJune 30, 2020. Since that time, the pricing of variable rate instruments has become more rational and most bonds have experienced an increase in unrealized gain since March of 2020. Generally the longer the bond and the longer the call protection, the better the bond did in terms of valuation. The municipal bond sector is the largest of the portfolio and, as a result, management will closely monitor the 10-year U.S. Treasury yield due to its impact on these securities. The other sectors of the portfolio have shorter lives and duration and would be more influenced by the 2-year and 5-year U.S. Treasury rates. It is anticipated that the currentThe change in value of unrealized gains and losses for the remainder of 2021 will be impacted by movements in U.S. Treasury rates and could improve even further if market rates remain stagnant orincrease and decrease duringthroughout the remainder of the year.year as Treasury rates fluctuate.

 

The Corporation’s effective duration of the Corporation’s portfolio continues to be at historic lows but increased slightly in the thirdsecond quarter of 2020,2021 to 2.5,3.8, from 2.2 as of2.7 at December 31, 2019.2020, and 2.4 at June 30, 2020. 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 2.2 as of September 30, 2019. Duration is expected to remain stable or increase slightly throughout the remainder of 2020.2021. The Corporation was able to reduceincreased effective duration by purchasing more variable ratelonger municipal securities throughout 2018in the first and 2019.second quarters of 2021. Additionally, with decliningincreasing rates, pass-through structures of MBSmortgage backed securities (MBS) and CMOcollateralized mortgage obligations (CMO) instruments typically shortenlengthen in duration as principal payments increase.decrease.

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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 declining rapidly in the first nine months of 2020, there was some opportunity to realize gains from the sales of securities. As a result, gains from the sales of debt securities were up forhigher in the nine months ended September 30,second quarter of 2020 compared tothan the prior year’s period.second quarter of 2021.

 

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 and variable rate bonds, the Corporation’s equity holdings consist of a small CRA-qualified mutual fund with a book and fair market value of $6.2$7.2 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 $947,000$1,225,000 and fair market value of $692,000$1,300,000 as of SeptemberJune 30, 2020.2021. The fair value of the bank stocks was significantly impacted by the COVID-19 pandemic and the drastic devaluation of bank stocks during this time. The2020 but has rebounded as of June 30, 2021, and is responsible for the increase in gains on equity holdings make up 1.9%securities reported as of the Corporation’s securities available for sale.June 30, 2021.

 

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

 

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

 

·ALCO positions as to liquidity, credit risk, interest rate risk, and fair value risk
·Growth of the loan portfolio
·Slope of the U.S. Treasury curve
·Relative performance of the various instruments, including spread to U.S. Treasuries
·Duration and average length of the portfolio
·Volatility of the portfolio
·Direction of interest rates
·Economic factors impacting debt securities

 

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

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Management’s Discussion and Analysis

SECURITIES PORTFOLIO            
(DOLLARS IN THOUSANDS)            
  Period Ending
  September 30, 2020 December 31, 2019 September 30, 2019
  $ % $ % $ %
             
U.S. government agencies  8,373   2.3   32,624   10.5   35,316   11.6 
U.S. agency mortgage-backed securities  65,664   17.9   48,626   15.4   45,911   15.1 
U.S. agency collateralized mortgage obligations  40,905   11.1   60,253   19.1   54,660   17.9 
Asset-backed securities  41,053   11.2   23,262   7.4   19,568   6.4 
Corporate debt securities  60,714   16.5   54,880   17.4   54,672   17.9 
Obligations of states and political subdivisions  143,320   39.1   88,452   28.1   88,856   29.1 
Total debt securities, available for sale  360,029   98.1   308,097   97.9   298,983   98.0 
                         
Marketable equity securities (a)  6,854   1.9   6,708   2.1   6,108   2.0 
                         
Total securities  366,883   100.0   314,805   100.0   305,091   100.0 

SECURITIES PORTFOLIO

(DOLLARS IN THOUSANDS)            

 

  Period Ending
  June 30, 2021 December 31, 2020 June 30, 2020
  $ % $ % $ %
             
U.S. treasuries  5,024   0.8   —   —   —   — 
U.S. government agencies  29,359   5.0   54,361   11.2   8,379   2.5 
U.S. agency mortgage-backed securities  62,907   10.6   71,052   14.7   72,553   21.2 
U.S. agency collateralized mortgage obligations  37,528   6.3   35,035   7.2   46,562   13.6 
Asset-backed securities  101,003   17.1   60,475   12.5   31,951   9.4 
Corporate debt securities  85,067   14.4   61,723   12.8   63,431   18.6 
Obligations of states and political subdivisions  262,735   44.4   193,782   40.1   111,811   32.7 
Total debt securities, available for sale  583,623   98.6   476,428   98.5   334,687   98.0 
                         
Marketable equity securities  8,505   1.4   7,105   1.5   6,775   2.0 
                         
Total securities  592,128   100.0   483,533   100.0   341,462   100.0 

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

 

·slope of the U.S. Treasury curve and projected forward rates
·interest spread versus U.S. Treasury rates on the various securities
·pricing of the instruments, including supply and demand for the product
·structure of the instruments, including duration and average life
·portfolio weightings versus policy guidelines
·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.

 

The Corporation purchased $5.0 million of U.S. treasuries during the second quarter of 2021 and held no treasuries in 2020, resulting in the increase in this sector which represents a safe credit at a market appropriate yield which added some diversity to the portfolio. The Corporation’s U.S. government agency sector decreased by $26.9$25.0 million, or 76.3%46.0%, since September 30, 2019,December 31, 2020, with the weighting decreased from 11.6%11.2% of the portfolio to 2.3%5.0%. Management had purchased $35.5 million of short-term discount notes at the end of 2020 to offset 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. In the past, management’s goal was to maintain agency securities at approximately 10% of the securities portfolio. In the current rate environment, management is comfortable maintaining agencies below this level. With the drastic decline in market rates throughout the first nine months of 2020, many U.S. agency securities were called and a number of others were sold during the nine months ended September 30, 2020. In the past, this sector was important in maintaining adequate risk weightings of the portfolio and to ensure sufficient U.S. government securities for pledging purposes, but management has beenthe Corporation is also utilizing mortgage-backed securities (MBS)both MBS and collateralized mortgage obligations (CMOs)CMOs to do the same. Instead, Management has increased the allocations of both asset-backed securities (ABS) and obligations of states and political subdivisions (municipals) since June 30, 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 June 30, 2020, with ABS increasing $69.1 million, or 216.1%, and municipals increasing $150.9 million, or 135.0%. 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 MBS sectors sincepolitical subdivisions, or municipal bonds, are tax-free and taxable securities that generally provide the highest yield in the securities portfolio. They also carry the longest duration on average of any instrument in the securities portfolio. 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 the first half of 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 44.5% of the securities portfolio as of June 30, 2021, compared to 32.7% as of June 30, 2020. The Corporation’s investment policy limits municipal holdings to 150% of Tier 2 capital. As of June 30, 2021, municipal holdings amounted to 165% of Tier 2 capital, above this limit. The Corporation plans to sell some municipal bonds to be back within policy guidelines by September 30, 2019. Next to U.S. Treasuries, U.S. agencies are viewed as the safest securities2021.

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Management’s Discussion and are considered by management as a smaller foundational component of the portfolio.Analysis

The Corporation’s U.S. agency MBS and CMO sectors have changedfluctuated since SeptemberJune 30, 2019,2020, with MBS increasing $19.8decreasing $9.6 million, or 43.0%13.3%, and CMOs decreasing $13.8$9.0 million, or 25.2%19.4%. 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 reasonably stable base cash flow of approximately $3.0$2.5 - $4.0$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 material, and helps to soften or smooth out the Corporation’s total monthly cash flow from all securities.

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Management’s Discussion and Analysis

Asset-backed securities increased by $21.5 million, or 109.8%, from September 30, 2019 to September 30, 2020. These securities are floating rate student loan pools which are instruments that will perform well in a rates-up environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flow.

 

As of SeptemberJune 30, 2020,2021, the fair value of the Corporation’s corporate bonds increased by $6.0$21.6 million, or 11.1%34.1%, from balances at SeptemberJune 30, 2019.2020. 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 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. However, due to the decrease in the Federal tax rate as enacted by the Tax Cuts and Jobs Act, municipal yields do not outperform the other segments of the securities portfolio to the same degree as years prior to 2018. Municipal securities were purchased throughout the first nine months of 2020 due to market conditions that led to favorable yields on some instruments. The Corporation also began purchasing some taxable municipal securities that added to the value of this sector. Due to these purchases, the fair market value of municipal holdings has increased by $54.5 million, or 61.3%, from September 30, 2019 to September 30, 2020. Municipal bonds represented 39.1% of the securities portfolio as of September 30, 2020, compared to 29.1% as of September 30, 2019. The Corporation’s investment policy limits municipal holdings to 125% of Tier 2 capital at the Bank level. As of September 30, 2020, municipal holdings amounted to 109.7% of Tier 2 capital.

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

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

By policy, management is to identify and recommend whether to hold or sell securities with credit ratings that have fallen below minimum policy credit ratings required at the time of purchase, or below investment grade. Management monitors the security ratings on a monthly basis and reviews quarterly with the Board of Directors. Management, with Board approval, determines whether it is in the Corporation’s best interest to continue to hold any security that has fallen below policy guidelines or below investment grade based on the expectation of recovery of market value or improved performance. At this time management has elected, and the Board has approved, holding all securities that have fallen below initial policy guidelines. As of SeptemberJune 30, 2020,2021, no securities have fallen below investment grade.

 

As of SeptemberJune 30, 2020, two2021, five of the 3344 corporate securities held by the Corporation showed an unrealized holding loss. These securities with unrealized holding losses were valued at 99.0%99.7% of book value, with these unrealized losses on variable rate corporate bonds where valuation was impacted by the sudden March 2020 overnight rate decreases.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 SeptemberJune 30, 2020,2021, all but two of the corporate bonds had at least one A3 or A- rating by one of the two predominate credit rating services, Moody’s and S&P. These twoTwo corporate bonds were from the same issuer and had a total book value of $3.0$4.6 million, and did not have an A3 or A- rating as of SeptemberJune 30, 2020.2021. These bonds were 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 bondssecurities and has chosen to continue to hold thesethe bonds with Board approval. In addition, there are fifteen 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 fifteen bonds have a book value of $24.4 million with a $556,000$391,000 unrealized gain as of SeptemberJune 30, 2020.2021. Management conducts ongoing monitoring of these bonds with the Board approving holding these securities on a quarterly basis. In addition, the Corporation purchased $4,900,000 of subordinated debt notes from six different entities during late 2020 and into 2021, all of which are unrated. These are considered corporate bonds as they each are subordinated debt of a domestic community bank but are unrated because they are not a typical corporate issuance. Currently, there are no indications that any of these bonds would discontinue contractual payments.

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Management’s Discussion and Analysis

The Corporation’s investment policy requires that municipal bonds not carrying any insurance coverage have a minimum credit rating of A3 by Moody’s or A- by S&P or Fitch at the time of purchase. As of June 30, 2021, one municipal bond with a par value of $500,000 was unrated, and no other municipal bonds carried a credit rating under these levels.

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

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 continues to closely monitor all corporate and municipal securities.

 

Loans

 

Net loans outstanding increased by 14.1%3.9%, to $831.2$857.1 million at SeptemberJune 30, 2020,2021, from $728.6$825.2 million at SeptemberJune 30, 2019.2020. Net loans increased by 11.7%5.7%, an annualized rate of 15.6%11.4%, from $744.2$811.0 million at December 31, 2019.2020. The following table shows the composition of the loan portfolio as of SeptemberJune 30, 2020,2021, December 31, 2019,2020, and SeptemberJune 30, 2019.2020.

 

LOANS BY MAJOR CATEGORY            
(DOLLARS IN THOUSANDS)          
  September 30 December 31, September 30
  2020 2019 2019
  $ % $ % $ %
             
Commercial real estate                        
Commercial mortgages  136,125   16.2   120,212   16.0   113,744   15.4 
Agriculture mortgages  174,150   20.7   175,367   23.3   173,697   23.6 
Construction  22,380   2.7   16,209   2.2   17,661   2.4 
Total commercial real estate  332,655   39.6   311,788   41.5   305,102   41.4 
                         
Consumer real estate (a)                        
1-4 family residential mortgages  260,465   30.9   258,676   34.4   250,898   34.1 
Home equity loans  10,788   1.3   9,770   1.3   11,366   1.5 
Home equity lines of credit  68,368   8.1   70,809   9.4   69,113   9.4 
Total consumer real estate  339,621   40.3   339,255   45.1   331,377   45.0 
                         
Commercial and industrial                        
Commercial and industrial  128,414   15.2   58,019   7.7   56,690   7.7 
Tax-free loans  16,423   1.9   16,388   2.2   16,575   2.3 
Agriculture loans  20,494   2.4   20,804   2.8   20,918   2.8 
Total commercial and industrial  165,331   19.5   95,211   12.7   94,183   12.8 
                         
Consumer  5,190   0.6   5,416   0.7   5,651   0.8 
                         
Total loans  842,797   100.0   751,670   100.0   736,313   100.0 
Less:                        
Deferred loan costs, net  (380)      (1,948)      (1,791)    
Allowance for loan losses  11,996       9,447       9,474     
Total net loans  831,181       744,171       728,630     

LOANS BY MAJOR CATEGORY

(DOLLARS IN THOUSANDS)

 

  June 30, December 31, June 30,
  2021 2020 2020
  $ % $ % $ %
             
Commercial real estate                        
Commercial mortgages  156,022   17.9   142,698   17.4   125,925   15.1 
Agriculture mortgages  178,573   20.5   176,005   21.4   175,108   20.9 
Construction  21,347   2.5   23,441   2.9   20,285   2.4 
Total commercial real estate  355,942   40.9   342,144   41.7   321,318   38.4 
                         
Consumer real estate (a)                        
1-4 family residential mortgages  288,301   33.2   263,569   32.0   261,772   31.3 
Home equity loans  11,525   1.3   10,708   1.3   10,688   1.3 
Home equity lines of credit  71,694   8.2   71,290   8.7   69,507   8.3 
Total consumer real estate  371,520   42.7   345,567   42.0   341,967   40.9 
                         
Commercial and industrial                        
Commercial and industrial  102,533   11.8   97,896   11.9   129,459   15.5 
Tax-free loans  16,268   1.9   10,949   1.3   16,607   2.0 
Agriculture loans  17,824   2.1   20,365   2.5   21,581   2.6 
Total commercial and industrial  136,625   15.8   129,210   15.7   167,647   20.1 
                         
Consumer  5,133   0.6   5,155   0.6   5,061   0.6 
                         
Total loans  869,220   100.0   822,076   100.0   835,993   100.0 
Less:                        
Deferred loan fees (costs), net  (535)      (1,294)      24     
Allowance for credit losses  12,703       12,327       10,770     
Total net loans  857,052       811,043       825,199     

(a) Residential real estate loans do not include mortgage loans serviced for others which totaled $217,812,000 as of September 30, 2020, $154,577,000 as of December 31, 2019, and $138,468,000 as of September 30, 2019.

(a)Residential real estate loans do not include mortgage loans serviced for others which totaled $263,005,000 as of June 30, 2021, $235,437,000 as of December 31, 2020, and $187,258,000 as of June 30, 2020.

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Management’s Discussion and Analysis

There was significantmoderate growth in the loan portfolio since SeptemberJune 30, 2019,2020, and December 31, 2019 respectively.2020. Most major loan categories showed an increase in balances from both time periods. Loan growth was significant in 2019periods with the exception of the commercial and continued with growth inindustrial loans which showed a decline due to the first nine monthsforgiveness of 2020 driven primarily by the funding of Payroll Protection Program (PPP)PPP loans to local businesses.since June 30, 2020.

 

The consumer residential real estate category represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from $331.4$342.0 million on SeptemberJune 30, 2019,2020, to $339.6$371.5 million on SeptemberJune 30, 2020,2021, a 2.5%8.6% 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 SeptemberJune 30, 2019,2020, this percentage was 45.0%40.9%, and as of SeptemberJune 30, 2020,2021, it decreasedincreased to 40.3% with the growth of PPP loans in the commercial and industrial sector.42.7%. Management expects the consumer residential real estate category to increase slightlystabilize throughout the remainder of 2020 due2021. The strategic decision was made in the first half of 2021 to keep some shorter-term mortgages on the books as opposed to selling them on the secondary market, which resulted in an increase in 1-4 family portfolio mortgages. With a continued effortnumber of these long-term assets now on the balance sheet, management has backed off of this strategy in order to increase mortgage volume, aided by lowerprotect against rising interest rates which should continue to motivate home buyers and those refinancing. The consumer residential real estate sector should also grow as a percentage ofin the total loan portfolio as PPP loans are forgiven or pay off.future. Although economic conditions for consumers have deteriorated with the COVID-19 pandemic, increased unemployment, and decreased consumer spending, the mortgage market continues to remain relatively strong as consumers refinance existing debt to lower rates. Market conditions have been changing rapidly throughout the first nine monthshalf of 20202021 and the rest of the year is unpredictable, but management would expect mortgage volume to continue at fairly high levels.levels from a historic perspective.

 

The first lien 1-4 family mortgages increased by $9.6$26.5 million, or 3.8%10.1%, from SeptemberJune 30, 2019,2020, to SeptemberJune 30, 2020.2021. These first lien 1-4 family loans made up 75.7%76.5% of the residential real estate total as of SeptemberJune 30, 2019,2020, and 76.7%77.6% as of SeptemberJune 30, 2020.2021. 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 thirdsecond quarter of 2020,2021, mortgage production increased 6%22% over the previous quarter and was up 74%16% over the thirdsecond quarter of 2019.  This brought year-to-date mortgage originations to $166.7 million, a 65% increase over the same period last year.2020.  Purchase money origination constituted 46%70% of the Corporation’s mortgage originations for the nine months ended September 30, 2020,quarter, with construction-only and construction-permanent loans making up 33%50% of that mix.  With continued heavier than normala decrease in refinance activity as a percentage of overall volume, the percentage of mortgage originations going in the Corporation’s held-for-investment mortgage portfolio declinedincreased quarter-over-quarter, particularly with more customers opting for held-for-sale fixed rate products.  Through September 30, 2020, 40%respect to a higher volume of new construction business.  In the second quarter of 2021, 70% of all mortgage originations were held in the mortgage portfolio, 56%55% of which were adjustable rate mortgages.  As of SeptemberJune 30, 2020,2021, ARM balances were $129.9 million, representing 50%45.1% of the 1-4 family residential loan portfolio of the Corporation.  The ARM product is beneficial to the Corporation as it limits the interest rate risk to a much shorter time period. With a small increase in interest rates, a decrease in volume being delivered into the secondary market, and a decision by management to move loans originally earmarked for sale on the secondary market into the bank’s own portfolio, the gains on the sale of mortgages decreased by 35% quarter-over-quarter. 

 

As of SeptemberJune 30, 2020,2021, the remainder of the residential real estate loans consisted of $10.8$11.5 million of fixed rate junior lien home equity loans, and $68.4$71.7 million of variable rate home equity lines of credit (HELOCs). This compares to $11.4$10.7 million of fixed rate junior lien home equity loans, and $69.1$69.5 million of HELOCs as of SeptemberJune 30, 2019.2020. Therefore, combined, these two types of home equity loans decreasedincreased from $80.5$80.2 million to $79.2$83.2 million, a decreasean increase of 1.6%3.7%. The majority of borrowers hadhave been choosing variable rate HELOC loans throughout 2019 particularly afterin the historically low rate environment. With no sign of the Federal Reserve loweredmoving to increase rates, three times in the second half of the year. With the further rate declines in the first quarter of 2020, management expects HELOC activity to increase with customers choosing variable rate product over fixed rate product until rates begin to increase again.

 

Commercial real estate makes up of 39.6%40.9% of total loans as of SeptemberJune 30, 2020,2021, compared to 41.4%38.4% of total loans as of SeptemberJune 30, 2019.2020. Within the commercial real estate segment, the increase has primarily been in commercial mortgages, with agriculture mortgages and construction loans remaining fairly stable. Agricultural mortgages increased by $3.5 million, or 2.0%, from $175.1 million as of June 30, 2020, to $178.6 million as of June 30, 2021. Dairy lending is showing signs of improvement. Locally, 2021 milk prices are trending positively. Nationally, prices have seen some normality return which is reflected in the futures price. Over the past 12 months, there has been an increase in agricultural mortgages, commercial mortgages, and construction based mortgages over the past year. Agricultural mortgages increased $500,000, or 0.3%, from $173.7 million asa small percentage of September 30, 2019, to $174.2 million as of September 30, 2020. The increase in agricultural mortgages was caused by an increase in the pipeline of agricultural projects throughout 2019. These loans are now closing as somedairy farmers are moving ahead with projects that may have been on hold for a period of time. Dairy lending remains constrained with milk prices at three-year lows and it does not appear pricing will improve materially in the immediate future. There have been overcapacity issues with some consolidation of the area’s larger milk producers. Several dairy farmers have left the industry conventional dairy operation and have switched to organic and/or arespecialty products. This has opened up new financing opportunities. While dairy remains the largest agricultural loan concentration, management believes dairy loans will decline as a percentage of total agricultural loans with other non-dairy agricultural areas growing.  Currently, management is experiencing more growth in the processspecialty crops and other areas outside of doing so. Approximately 42% of the Corporation’s agricultural purpose loans support dairy operations while another 26% are either broiler or egg producers.like poultry and layers.  Management believes the level ofanticipates that agricultural mortgages will steadilymay increase aided bythrough the Corporation’s heavy focus onremainder of 2021 as the agricultural communityeconomy stabilizes and a full staff ready to meet agriculture lending needs, but challenged by the declining economic conditions formore farmers in the local market area.move forward with capital improvements or expansion of current operations.

 

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Management’s Discussion and Analysis

Commercial mortgages increased $22.4$30.1 million, or 19.7%23.9%, from balances at SeptemberJune 30, 2019.2020. Commercial mortgages as a percentage of the total loan portfolio increased to 16.2%17.9% as of SeptemberJune 30, 2020,2021, compared to 15.4%15.1% at SeptemberJune 30, 2019.2020. New loan production in this segment is currently outpacing normal principal payments, pay downs, and payoffs. The commercialCommercial real estate market environment is showing slowloans have shown solid growth in the Corporation’s market area but more competition is vying for this business.as a number of businesses move ahead on commercial projects. Management expects commercial real estate loans to remain stable as a percentage of the Corporation’s loans for the remainder of 2020.2021.

 

The Corporation’s commercial construction loan balances increased by $4.7$1.1 million, or 26.7%5.2%, from SeptemberJune 30, 20192020 to SeptemberJune 30, 2020.2021. Management was experiencing some demand for smaller residential builds like construction on existing lots but no new large scale projects. Commercial construction loans were 2.4%2.5% of the total loan portfolio as of SeptemberJune 30, 2019, compared to 2.7%2021 and 2.4% as of SeptemberJune 30, 2020.

 

The other area of commercial lending is non-real estate secured commercial lending, referred to as commercial and industrial lending. Commercial and industrial loans not secured by real estate accounted for 19.5%15.8% of total loans as of SeptemberJune 30, 2020,2021, compared to 12.8%20.1% as of September 30, 2019. The significant increase in this loan category is due solely to the PPP loans which amounted to $77.7 million as of September 30, 2020. Outside of this loan growth, commercial and industrial loans would have decreased from September 30, 2019 to SeptemberJune 30, 2020. In scope, the commercial and industrial loan sector, at 19.5%15.8% of total loans, is significantly smaller than the commercial real estate sector at 39.6%40.9% of total loans. This is consistent with management’s credit preference for obtaining real estate collateral when making commercial loans. The balance of total commercial and industrial loans increaseddecreased from $94.2$167.6 million at SeptemberJune 30, 2019,2020, to $165.3$136.6 million at SeptemberJune 30, 2020,2021, a 75.5% increase.18.5% decrease. This category of loans generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities. The balance at SeptemberJune 30, 2021 and June 30, 2020, also includes the PPP loans, which will declinehas declined rapidly beginning in the fourth quarter of 2020 as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. Management anticipates that these loans will experience a significant decline in the remainder of 2020 and into 2021.

 

The Corporation provides credit to many small and medium-sized businesses. Much of this credit is in the form of Prime-based lines of credit to local businesses where the line may not be secured by real estate, but is based on the health of the borrower with other security interests on accounts receivable, inventory, equipment, or through personal guarantees. Commercial and industrial loans, including PPP loans, increaseddecreased to $128.4$102.5 million at SeptemberJune 30, 2020,2021, a $71.7$27.0 million, or 126.5% increase,20.8% decrease, from the $56.7$129.5 million at SeptemberJune 30, 2019.2020. This decrease was driven primarily by the forgiveness of some of the first round of PPP loans during the fourth quarter of 2020 and the first quarter of 2021, but new loan generation during the first half of 2021 offset some of the forgiven balances. The tax-free loans declined by $152,000,$0.3 million, or 0.9%2.0%, from balances at SeptemberJune 30, 2019,2020, and the commercial and industrial agricultural loans decreaseddeclined by $424,000,$3.8 million, or 2.0%17.4%.

 

The consumer loan portfolio decreased to $5.2 million at Septemberremained the same from June 30, 2020, from $5.7 millionto June 30, 2021, at September 30, 2019.$5.1 million. Consumer loans made up 0.6% of total loans on September 30, 2020, and 0.8% at September 30, 2019.for both time periods. 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 that are generally unsecured. Slightly higher demand for unsecured credit is being outpaced by principal payments on existing loans resulting in the decrease in balances. Management anticipates that the Corporation’s level of consumer loans will likely remain stable as a percentage of the portfolio, as the need for additional unsecured credit is generally offset by those borrowers wishing to reduce debt levels and move away from the higher cost of unsecured financing relative to other forms of real estate secured financing.

 

 

Non-Performing Assets

 

Non-performing assets include:

 

·Nonaccrual loans
·Loans past due 90 days or more and still accruing
·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,
  2020 2019 2019
  $ $ $
       
Nonaccrual loans  846   1,984   2,466 
Loans past due 90 days or more and still accruing  284   821   322 
Troubled debt restructurings  5,513   1,157   1,157 
Total non-performing loans  6,643   3,962   3,945 
             
Other real estate owned  —   —   — 
             
Total non-performing assets  6,643   3,962   3,945 
             
Non-performing assets to net loans  0.80%   0.53%   0.54% 

NON-PERFORMING ASSETS

(DOLLARS IN THOUSANDS)  

  June 30, December 31, June 30,
  2021 2020 2020
  $ $ $
       
Nonaccrual loans  651   725   886 
Loans past due 90 days or more and still accruing  287   1,373   309 
Troubled debt restructurings, non-performing  —   —   439 
Total non-performing loans  938   2,098   1,634 
             
Other real estate owned  —   —   — 
             
Total non-performing assets  938   2,098   1,634 
             
Non-performing assets to net loans  0.11%  0.25%  0.38%

 

The total balance of non-performing assets increaseddecreased by $2.7$0.7 million, or 68.4%42.7%, from September 30, 2019 to September 30, 2020, and increased by $2.7$1.2 million, or 67.7%55.3%, from balances at June 30, 2020 and December 31, 2019.2020, respectively. The increasedecrease from the prior yearperiods was primarily due to higherlower levels of loans past due 90 days or more as well as a decrease in non-performing troubled debt restructurings (TDRs). Non-accrual loans decreased by $1.6 million, or 65.7%, since September 30, 2019, when three loans to one borrowerThere were paid off.

As of September 30, 2020 there were fourno non-performing TDR loans that totaled $5.5 million. TDRs increased by $4.4 million fromas of June 30, 2021 or December 31, 2019, as a $3.6 million loan was added to TDR in the third quarter of 2020, while another TDR on a $824,000 loan to a farmer was added in the second quarter of 2020. The large $3.6 million loan was restructured with a rate modification and interest only payments until December 2020. These concessions went beyond what was permitted as part of the government’s COVID-19 relief provisions. The remaining two TDRs existed as of September 30, 2019 and December 31, 2019. They were an agriculture mortgage of $677,000 that had cash flow difficulties and a modification in payment terms was made to allow annual interest and principal payments, and a $439,000 1–4 family real estate secured loan with a payment modification made in the form of granting a nine-month interest-only payment. This second TDR loan was both non-accrual and TDR. For this above non-performing chart, the $439,000 real estate loan is listed under TDR loans.

A TDR is a loan where the borrower is experiencing financial difficulty and management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender. There was one non-performing TDR as of June 30, 2020; a $439,000 real estate secured loan with a payment modification to allow annual interest and principal payments. Non-accrual loans decreased, by $0.2 million, or 26.5%, since June 30, 2020, and loans past due 90 days or more and still accruing were down slightly from the prior year period, and down more significantly, by $1.1 million, or 79.2% since December 31, 2020. The $1.1 million of non-accrual reduction that occurred between June 30, 2020 and December 31, 2020 was due to two commercial borrowers paying off their loans during the remainder of 2020. One commercial borrower with three non-accrual loans totaling over $1.0 million paid them off in the second quarter of 2020, while another commercial borrower with a $92,000 non-accrual loan was paid off in December 2020.

 

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 increasingdecreasing with the level of special mentiondelinquencies and substandardnon-performing loans being up moderately over both December 31, 2019 and September 30, 2019.lower than what was experienced throughout 2020.

 

There was no other real estate owned (OREO) as of SeptemberJune 30, 2020,2021, December 31, 2019,2020, or SeptemberJune 30, 2019.2020.

 

 

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

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Management’s Discussion and Analysis

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Allowance for LoanCredit Losses table below shows the activity in the allowance for loancredit losses for the nine-monthsix-month periods ended SeptemberJune 30, 20202021 and SeptemberJune 30, 2019.2020. 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.

 

ALLOWANCE FOR LOAN LOSSES      
(DOLLARS IN THOUSANDS)      
  Nine Months Ended 
  September 30 
  2020  2019 
  $  $ 
       
Balance at January 1,  9,447   8,666 
Loans charged off:        
Real estate  —   122 
Commercial and industrial  23   63 
Consumer  19   26 
Total charged off  42   211 
         
Recoveries of loans previously charged off:        
Real estate  (11)  (129)
Commercial and industrial  (3)  (47)
Consumer  (2)  (3)
Total recovered  (16)  (179)
Net loans charged off  26   32 
         
Provision charged to operating expense  2,575   840 
         
Balance at September 30,  11,996   9,474 
         
Net charge-offs as a % of average total loans outstanding  0.00%   0.00%
         
Allowance at end of period as a % of total loans  1.42%   1.28% 

ALLOWANCE FOR CREDIT LOSSES

(DOLLARS IN THOUSANDS)

  Six Months Ended 
  June 30 
  2021  2020 
  $  $ 
       
Balance at January 1,  12,327   9,447 
Loans charged off:        
Real estate  —   — 
Commercial and industrial  —   — 
Consumer  23   16 
Total charged off  23   16 
         
Recoveries of loans previously charged off:        
Real estate  —   (11)
Commercial and industrial  (17)  (2)
Consumer  (7)  (1)
Total recovered  (24)  (14)
Net loans charged off (recovered)  (1)  2 
         
Provision charged to operating expense  375   1,325 
         
Balance at June 30,  12,703   10,770 
         
Net charge-offs as a % of average total loans outstanding  0.00%  0.00%
         
Allowance at end of period as a % of total loans  1.46%  1.29%

 

Charge-offs for the ninesix months ended SeptemberJune 30, 2020,2021, were $42,000,$23,000, compared to $211,000$16,000 for the same period in 2019.2020. Management typically charges off unsecured debt over 90 days delinquent with little likelihood of recovery. In the first nine monthshalf of 2021 and 2020, the Corporation charged off a small amount related to a commercial and industrial loan and several smaller amounts related to consumer loans. In the first nine months of 2019, the Corporation charged off a business relationship totaling $164,000 and several smaller amounts related to consumer loans. Recoveries were loweralso low in the first nine monthshalf of 2020 asand 2021with total recoveries of $24,000 in the Corporation recovered only small amountsfirst half of 2021 and $14,000 in 2020 compared to a larger amount related to a real estate borrower in 2019.the first quarter 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 $26.1$22.2 million on SeptemberJune 30, 2020,2021, compared to $19.9$25.1 million on SeptemberJune 30, 2019.2020. Total classified loans increased during 20192020 but then decreased by December 31, 2020, and throughinto the first nine monthshalf of 2020 primarily related to the downgrade of several unrelated agricultural customers.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 $1.1 million of specifically allocated allowance against the classified loans as of SeptemberJune 30, 2020, $189,0002021, $1.1 million of specific allocation as of December 31, 2019,2020, and $596,000$64,000 of specific allocation as of SeptemberJune 30, 2019.2020. The higher specific allocation at June 30, 2021 and December 31, 2020, is related to a customer with ongoing business concerns. Typically, 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 low net charge-off percentages due to strong credit practices. Management continually monitors delinquencies, classified loans, and non-performing loans closely in regard to how they may impact charge-offs in the future. The actual charge-offs have been running at low levels, and management expects this to continue through the remainder of 2020.2021. Management practices are in place to reduce the number and severity of losses. In regard to severely delinquent loans, management attempts to improve the Corporation’s collateral or credit position and, in the case of a loan workout, intervene to minimize additional charge-offs.

 

The allowance as a percentage of total loans was 1.42%1.46% as of SeptemberJune 30, 2020, 1.25%2021, 1.50% as of December 31, 2019,2020, and 1.28% September1.29% as of June 30, 2019.2020. Management anticipates that the allowance percentage will increaseremain fairly stable during the remainder of 2020,2021, as the allowance balance is increased with additional provision expense andto account for loan growth throughout the total loan balance decreases with the payoff of PPP loans.year. It is typical for the allowance for loancredit losses to contain a small amount of excess reserves. Over the long term, management targets anand excess reserve underat approximately 5% knowing that the reserve can fluctuate. The excess reserve stood at 2.1%4.7% as of SeptemberJune 30, 2020.2021. Management would anticipate that this unallocated portion of the allowance could increasewill remain stable throughout the remainder of 2020.2021.

 

 

Premises and Equipment

 

Premises and equipment, net of accumulated depreciation, decreased by $0.5$0.2 million, or 2.0%0.8%, to $24.7 million as of SeptemberJune 30, 2020,2021, from $25.2$24.9 million as of SeptemberJune 30, 2019.2020. As of SeptemberJune 30, 2020, $220,0002021, $379,000 was classified as construction in process compared to $202,000$178,000 as of SeptemberJune 30, 2019.2020. Fixed assets declined as a result of depreciation outpacing new purchases in 2020.2021.

 

 

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 $6.5$5.9 million of regulatory stock holdings as of SeptemberJune 30, 2020,2021, consisted of $6.3$5.3 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 $6.3$5.2 million on SeptemberJune 30, 2020, $7.12021, $5.9 million on December 31, 2019,2020, and $7.0$6.8 million on SeptemberJune 30, 2019,2020, 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 2020 third2021 second quarter dividend declaration made on FHLB stock by FHLB of Pittsburgh was at a 6.25%5.75% annualized yield on activity stock and 3.00%2.50% 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.

 

 

Deposits

 

The Corporation’s total ending deposits at SeptemberJune 30, 2020,2021, increased by $152.7$116.1 million, or 15.7%9.3%, and by $179.8$261.0 million, or 19.0%23.6%, from December 31, 2019,2020, and SeptemberJune 30, 2019,2020, 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 depositinvest money, despite historically low interest rates. The mix of the Corporation’s deposit categories has changed moderately since SeptemberJune 30, 2019,2020, with the changes being a $117.3$116.4 million, or 33.7%24.9% increase in non-interest bearing demand deposit accounts, a $26.2$14.3 million, or 136.1%34.9% increase in interest bearing demand balances, a $21.4$26.6 million, or 23.7%25.4% increase in NOW balances, a $23.2$39.0 million, or 15.6% decrease31.7% increase in money market account balances, a $52.2$73.5 million, or 25.6%29.8% increase in savings account balances, and a $14.2$8.8 million, or 10.3%7.0% decrease in time deposit balances.

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Management’s Discussion and Analysis

The growth across most categories of core deposit accounts is a direct result of the PPP loan funding, process as manygovernment stimulus payments, and the change in customer’s spending habits during the uncertain economic conditions brought on by COVID-19. Due to limited safe investment options outside of banks, the Corporation saw customers applied for PPP loans with the approvedbring deposit funds deposited directly into their ENB deposit accounts. In addition, customer spending patterns have changed throughout the COVID-19 pandemic with government aid helpingback to financially support individualsregular core checking and businessessavings accounts in an effort to provide safety and customers spending less and saving more.financial flexibility. With the decrease in rates that occurred during the first nine months of 2020, customer deposits increased with few options in the market to earn anya higher return. Customers view demand deposit, money market and savings accounts as the safest, most convenient place to maintain funds for maximum flexibility. Management believes deposit balances may continue to increase, but at a slower pace, through the remainder of 2020.2021.

 

The Deposits by Major Classification table, shown below, provides the balances of each category for SeptemberJune 30, 2020,2021, December 31, 2019,2020, and SeptemberJune 30, 2019.2020.

 

DEPOSITS BY MAJOR CLASSIFICATION         
(DOLLARS IN THOUSANDS)         
          
  September 30,  December 31,  September 30, 
  2020  2019  2019 
  $  $  $ 
             
Non-interest bearing demand  465,247   363,857   347,929 
Interest bearing demand  45,502   25,171   19,275 
NOW accounts  111,849   96,941   90,444 
Money market deposit accounts  125,665   141,649   148,863 
Savings accounts  255,936   211,285   203,706 
Time deposits  122,622   135,185   136,774 
Total deposits  1,126,821   974,088   946,991 

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

  June 30,  December 31,  June 30, 
  2021  2020  2020 
  $  $  $ 
          
Non-interest bearing demand  582,747   534,853   466,392 
Interest bearing demand  55,419   47,092   41,083 
NOW accounts  131,151   137,279   104,593 
Money market deposit accounts  162,247   140,113   123,212 
Savings accounts  320,252   274,386   246,762 
Time deposits  117,068   119,088   125,872 
Total deposits  1,368,884   1,252,811   1,107,914 

 

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

 

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

 

Time deposits are typically a more rate-sensitive product, making them a source of funding that is prone to balance variations depending on the interest rate environment and how the Corporation’s time deposit rates compare with the local market rates. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. As of SeptemberJune 30, 2020,2021, time deposit balances had decreased $14.2$8.8 million, or 10.3%7.0%, from SeptemberJune 30 2019,2020, and $12.6decreased $2.0 million, or 9.3%,1.7% from December 31, 2019.2020. 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 2019 and the first quarter of 2020, there is minimal differences between shorter term CD rates and interest bearing non-maturity deposits, influencing customers 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.

 

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Management’s Discussion and Analysis

Borrowings

 

Total borrowings were $61.5$69.8 million, $78.1$74.4 million, and $80.0$65.1 million as of SeptemberJune 30, 2020,2021, December 31, 2019,2020, and SeptemberJune 30, 2019,2020, respectively. Of these amounts, $1.5 million and $0.2 million reflect short-term funds as of September 30, 2020 and December 31, 2019, withthere were no short-term funds outstanding as of SeptemberJune 30, 2019.2021, December 31, 2020 or June 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 $60.0$50.2 million as of SeptemberJune 30, 2020, $77.92021, $54.8 million as of December 31, 2019,2020, and $80.0$65.1 million as of SeptemberJune 30, 2019.2020. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances at SeptemberJune 30, 2020,2021, December 31, 2019,2020, and SeptemberJune 30, 2019.2020. 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 by replacing maturing advances with new long-term advances, typically at rate savings. With thesince June 30, 2020, can be attributed to management taking advantage of declining rates throughout the first nine months of 2020, management took advantage of the environment and prepaid $35.6 million ofby prepaying FHLB advances for a total penalty amount of $234,000. Management will continueand incurring penalties in order to analyze and compare the costs and benefits of borrowing versus obtaining funding from deposits.save on interest expense in future years.

 

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 SeptemberJune 30, 2020,2021, the Corporation was significantly under this policy guideline at 4.6%3.2% of asset size with $60$50.2 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 SeptemberJune 30, 2020,2021, the Corporation was significantly under this policy guideline at 49.1%51.4% of capital with $61.5$69.8 million total borrowings from all sources. The Corporation has maintained FHLB borrowings and total borrowings well within these policy guidelines throughout all of 20192020 and through the first ninesix months of 2020.2021.

 

The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently $466.9$440.6 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 June 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.

 

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Management’s Discussion and Analysis

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

REGULATORY CAPITAL RATIOS:

    Regulatory Requirements
    Adequately Well
As of June 30, 2021 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets            
Consolidated  16.1%  8.0%  10.0%
Bank  15.6%  8.0%  10.0%
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.9%  6.0%  8.0%
Bank  14.3%  6.0%  8.0%
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.9%  4.5%  6.5%
Bank  14.3%  4.5%  6.5%
             
Tier 1 Capital to Average Assets            
Consolidated  8.3%  4.0%  5.0%
Bank  9.2%  4.0%  5.0%
             
As of December 31, 2020            
Total Capital to Risk-Weighted Assets            
Consolidated  16.1%  8.0%  10.0%
Bank  15.3%  8.0%  10.0%
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  12.8%  6.0%  8.0%
Bank  14.0%  6.0%  8.0%
             
Common Equity Tier I Capital to Risk-Weighted Assets            
Consolidated  12.8%  4.5%  6.5%
Bank  14.0%  4.5%  6.5%
             
Tier I Capital to Average Assets            
Consolidated  9.0%  4.0%  5.0%
Bank  9.8%  4.0%  5.0%
             
             
As of June 30, 2020            
Total Capital to Risk-Weighted Assets            
Consolidated  13.4%  8.0%  10.0%
Bank  13.3%  8.0%  10.0%
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.3%  6.0%  8.0%
Bank  12.1%  6.0%  8.0%
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.3%  4.5%  6.5%
Bank  12.1%  4.5%  6.5%
             
Tier 1 Capital to Average Assets            
Consolidated  9.3%  4.0%  5.0%
Bank  9.2%  4.0%  5.0%

On December 30, 2020, the Corporation issued $20 million of subordinated debt in order to support capital levels which had declined due to the dramatic balance sheet growth that had occurred during 2020. The $20 million of subordinated debt qualifies as Tier 2 capital at the Holding Company level. Amounts of the subordinated debt can be transferred to the Bank where it qualifies as Tier 1 Capital. As of June 30, 2021, $15.0 million of this subordinated debt funding was transferred down to the Bank to rebuild the Bank’s capital levels. As of June 30, 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 level were not impacted by the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at the Corporate level. As such, in terms of the Corporation’s regulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of the $20 million subordinated debt issue. Most of the marked improvement in capital ratios occurred at the Bank level.

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Management’s Discussion and Analysis

REGULATORY CAPITAL RATIOS:      
    Regulatory Requirements
    Adequately Well
As of September 30, 2020 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets            
Consolidated  13.4%   8.0%   10.0% 
Bank  13.3%   8.0%   10.0% 
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.2%   6.0%   8.0% 
Bank  12.1%   6.0%   8.0% 
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  12.2%   4.5%   6.5% 
Bank  12.1%   4.5%   6.5% 
             
Tier 1 Capital to Average Assets            
Consolidated  9.2%   4.0%   5.0% 
Bank  9.1%   4.0%   5.0% 
             
As of December 31, 2019            
Total Capital to Risk-Weighted Assets            
Consolidated  14.5%   8.0%   10.0% 
Bank  14.4%   8.0%   10.0% 
             
Tier I Capital to Risk-Weighted Assets            
Consolidated  13.4%   6.0%   8.0% 
Bank  13.2%   6.0%   8.0% 
             
Common Equity Tier I Capital to Risk-Weighted Assets            
Consolidated  13.4%   4.5%   6.5% 
Bank  13.2%   4.5%   6.5% 
             
Tier I Capital to Average Assets            
Consolidated  9.9%   4.0%   5.0% 
Bank  9.8%   4.0%   5.0% 
             
             
As of September 30, 2019            
Total Capital to Risk-Weighted Assets            
Consolidated  14.7%   8.0%   10.0% 
Bank  14.6%   8.0%   10.0% 
             
Tier 1 Capital to Risk-Weighted Assets            
Consolidated  13.5%   6.0%   8.0% 
Bank  13.4%   6.0%   8.0% 
             
Common Equity Tier 1 Capital to Risk-Weighted Assets            
Consolidated  13.5%   4.5%   6.5% 
Bank  13.4%   4.5%   6.5% 
             
Tier 1 Capital to Average Assets            
Consolidated  10.0%   4.0%   5.0% 
Bank  10.0%   4.0%   5.0% 

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

 

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Management’s Discussion and Analysis

The Corporation’s dividends per share for the ninesix months ended SeptemberJune 30, 2021, were $0.33, and the dividends per share for the six months ended June 30, 2020, were $0.48, a 4.3% increase from the $0.46 paid out in the first nine months of 2019.$0.32. 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 9.5%8.0% and 12.0%. The Corporation’s current tier IAs a secondary measurement, the capital ratio is 9.2%. This ratio has fallen below the lower 9.5% guideline due to the significant balance sheet growth during the first nine months of 2020. This asset growth was driven by historic deposit growth. The surge of deposit growth throughout 2020 was well in excess of any additional deposits attributed to PPP loan funding. During this period of unprecedented growth, management took action to control the amount of balance sheet growth to prevent capital from declining further. Management anticipates the Corporation’s tier 1 capital ratio will be back within minimum guidelines by the end of 2021, as the balance sheet should decline due to a combination of deposit roll off and the payoff of PPP loans. The Corporation’s dividend policy is an important part of management’s capital management plan. The capital plan also targets a long-term dividend payout ratio in the range of 30% to 35%45%. This ratio will vary according to income, but over the long term, the Corporation’s goal is to maintain and target a payout ratio within this range. For the ninesix months ended SeptemberJune 30, 2020,2021, the payout ratio was 30.8%22.8%. Management desires to maintain theThis dividend payout ratio closeris low as a result of the higher earnings in the first half of 2021, some of which are non-recurring. Management currently anticipates that the payout ratio may return to 30%more normal levels as part of its plan2021 progresses. Management’s goal is to restore the Corporation’s tier Imaintain all regulatory capital ratio to 9.5% over time. However, futureratios at current levels. Future dividend payout ratios remainare dependent on the future level of earnings and other factors that impact the level of capital.

 

Historically the Corporation has held regulatory ratios that were in excess of the Corporation’s national peer group. More recently, very fast asset growth rates, caused by very rapid deposit increases, have driven the Corporation’s regulatory capital levels lower than desired, and under the national peer group average. It should be noted that the Corporation, and its solely operating affiliate Ephrata National Bank, are both deemed “well capitalized” based on the regulatory definitions. However, management has discussed ways to restore regulatory capital above minimum internal capital policy guidelines, and above the peer group average, over a shorter period of time and also provide some cushion against the impact of significant credit losses, should they occur in a prolonged period of economic weakness.

The amount of unrealized gain or loss on the debt 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 debt securities portfolio at the end of each period, the current unrealized gain or loss on the debt securities portfolio would directly impact the Corporation’s capital. As of SeptemberJune 30, 2020,2021, the Corporation showed an accumulated other comprehensive income,unrealized gain, net of tax, of $5,756,000,$7,362,000, compared to $1,600,000an unrealized gain of $7,958,000 at December 31, 2020, and an unrealized gain of $4,522,000 as of December 31, 2019, and $1,685,000 as of SeptemberJune 30, 2019. The accumulated other comprehensive income or loss,2020. These unrealized gains, net of tax isare excluded from capital when calculating the tier I capital to average assets numbers above. The amount of accumulated other comprehensive incomeunrealized gain or loss on the debt securities portfolio, shown net of tax, as an adjustment to capital, does not include any actual impairment taken on securities, which is shown as a reduction to income on the Corporation’s Consolidated Statements of Income. No impairment was recorded in the ninesix months ended SeptemberJune 30, 2020,2021, or in the same prior year period. The changes in accumulated other comprehensive incomeunrealized gains and losslosses are due to normal changes in market valuations of the Corporation’s debt securities as a result of interest rate movements.

 

 

Regulatory Capital Changes

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

0 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:

·A minimum ratio of common equity tier I capital to risk-weighted assets of 4.5%.
·A minimum ratio of tier I capital to risk-weighted assets of 6%.
·A minimum ratio of total capital to risk-weighted assets of 8%.
·A minimum leverage ratio of 4%.

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

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

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.

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Management’s Discussion and Analysis

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

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

Under the 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 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 SeptemberJune 30, 2020.2021.

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Management’s Discussion and Analysis

OFF-BALANCE SHEET ARRANGEMENTS

(DOLLARS IN THOUSANDS)

 

OFF-BALANCE SHEET ARRANGEMENTS
(DOLLARS IN THOUSANDS)
  
SeptemberJune 30,
  20202021
  $
Commitments to extend credit:    
Revolving home equity  119,185139,733 
Construction loans  35,5913,258 
Real estate loans  63,075133,014 
Business loans  155,902175,129 
Consumer loans  1,2401,279 
Other  4,8645,022 
Standby letters of credit  9,09711,295 
     
Total  388,954468,730 

 

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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.

 

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.

 

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Management’s Discussion and Analysis

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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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:

 

·Deposits
·Loan repayments
·Maturities and sales of securities
·Borrowings from correspondent and member banks
·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. As of SeptemberJune 30, 2020,2021, all maturity gap ratios were higher than corporate policy guidelines, due to a larger amount of loans and securities now maturing in less than five years, influenced very directly by the PPP loans that will mature in the next one to twofive years. The six-month gap ratio was 231.7%243.2%, compared to an upper policy guideline of 155%; the one-year gap ratio was 195.5%206.8%, compared to an upper policy guideline of 140%; the three-year gap ratio was 179.1%188.8%, compared to an upper guideline of 125%; and the five-year gap ratio was 151.6%172.3%, compared to an upper policy guideline of 115%. The results show asset sensitivity. In a rising interest rate cycle higher gap ratios would be more beneficial to the Corporation. However, in a declining rate environment, being asset sensitive is unfavorable. Even though the Corporation shows asset sensitivity above policy guidelines for the longer-term gap measurements, it is likely we would be back in a rising rate environment for those longer three and five-year periods and having asset sensitivity would be beneficial in that case. The current asset sensitivity of the Corporation’s balance sheet does negatively impact performance in the current rates-down interest rate scenario as there are more assets repricing to lower rates than liabilities. This asset sensitivity will be beneficial in the next rates-up cycle. Management will continue to monitor and 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.

 

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Gap ratios have been increasingdecreased for the Corporation throughout 2019since the first quarter of 2021. Although the Corporation still shows as significantly asset sensitive, the measurements are heavily influenced by the very high levels of core deposits on the Corporation’s balance sheet. There are higher amounts of longer-term assets in the second quarter of 2021 compared to prior years and 2020.quarters, however the large increases in deposits have helped to offset this asset length. The Corporation’s assets are moderately long, but the length of the securities portfolio and the loan portfolio is more than offset by the length of the Corporation’s core deposit liabilities in conjunction with holding high levels of cash and cash equivalents. Beyond the non-maturity deposits, management is able to utilize the length of wholesale funding instruments to offset the declining length of the CD portfolio. Management believes that the Federal Reserve rate decreases early in 2020 will negatively impact net interest income for the remainder of 20202021 as assets continue to reprice to lower levels. However, some savings can be achieved through deposits, primarily the CD portfolio, as the maturing CDs reprice to significantly lower levels.

 

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

 

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

 

Higher gap ratios are beneficial in providing financial flexibility for the Corporation. Higher gap ratios often are an indication that there are more short-term assets on the balance sheet, providing more available liquidity. The quickest way to elevate gap ratios is to retain higher levels of cash on the balance sheet. Management may desire to have higher gap ratios when factoring in future loan growth or other funding changes to the balance sheet. Since late 2018, managementManagement has been actively working to increase the Corporation’s loan-to-deposit ratio. As the loan-to-deposit ratio increases and more loans go on to the Corporation’s balance sheet, the asset mix will generally lengthen and the gap ratios will decline. However, in 2020 and 2021, the Corporation’s deposits have experienced very strong growth attributedattributable to the very low interest rates and a desire by consumers to safeguard more cash during uncertain times. This has caused the loan-to-deposit ratio to decline during 2020 and 2021 even with moderate loan growth. As of SeptemberJune 30, 2020,2021, the loan-to-deposit ratio was 74.8%63.5%, compared to 77.4%65.7%, at December 31, 2019,2020, and 77.9%75.5% at SeptemberJune 30, 2019. Management anticipates that the loan-to-deposit ratio could decline further in the fourth quarter of 2020 as loan balances decline with PPP forgiveness and as deposit balances continue to grow.2020.

 

Management’s desired gap levels will also change due to the direction of interest rates. In March 2020, the Federal Reserve cut the overnight interest rate by 150 basis points at two separate special Federal Reserve Board meetings. Cash and other short term assets were directly impacted by this change in overnight rates. If the Corporation’s liquid assets cannot be deployed into higher yielding longer term assets, then management will reduce the amount of cash and short-term assets to reduce the exposure to future decreases in the overnight rate. Management believes the overnight Federal funds rate will not decline further in 2020,2021, but the economic environment is unpredictable and future rate changes will be dependent on the national and global economic conditions.

 

The risk of liabilities repricing at higher interest rates is decreasinglow in the present environment as the Corporation does not foresee the need to raise deposit interest rates withany time in the recent Federal Reserve rate decreases.near future. A number of the Corporation’s maturing time deposits have already repriced to lower rates due to the rapid rate declines during March of 2020. However, a large portion of the Corporation’s deposits are core deposits with little repricing expected to occur in the near future. The Corporation’s maturing time deposits and borrowings are generally repricing to lower interest rates and will continue to do so throughout 2020.2021. The Corporation’s average cost of funds was 3319 basis points as of SeptemberJune 30, 2020,2021, which is low from an historic perspective. The Corporation’s average cost of funds was 4920 basis points as of December 31, 2019,2020, and 5232 basis points as of SeptemberJune 30, 2019.2020. This cost of funds will likely decline furtherremain around the current level throughout the remainder of 2020.2021. The average cost of funds includes the benefit of non-interest bearing demand deposit accounts.

 

Deposits had not been very rate sensitive for a number of years as a result of the limited desirable rates available to the deposit customers. The Corporation had experienced a steady growth in both non-interest bearing and interest bearing funds during this last prolonged and historically low interest rate cycle, but in 2018 and through 2019, deposit growth had been slower than in prior years. With the Federal Reserve rate declines in the first quarter of 2020, deposit growth has once again been strong with customers choosing to keep their funds in banks as opposed to investing in other instruments that are more susceptible to market fluctuations. Additionally, with the government aid direct deposits and checks sent out in April of 2020 and 2021, the Corporation has experienced significant deposit growth throughout the secondlatter part of 2020 and third quarters.the first half of 2021.

 

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The performance of the equity markets also has a bearing on how much of the current deposits will remain at the Corporation. It is management’s observation that since the financial crisis, an element of the Corporation’s deposit customers has been reluctant to redeploy funds presently at banks back into the equity market. This became even more apparent with the COVID-19 pandemic and the volatility in the equity markets caused by this event. Investors have grown weary of the fluctuations in the equity markets. In 2019, the equity markets had very strong gains, which did not adversely impact the Corporation’s deposit growth. In March 2020, with the outbreak of COVID-19, the equity markets recorded their biggest decline in recent history with the market down between 30% and 35% after huge sell-offs. The equity market has fluctuated upsince recovered and down since then, but thishas steadily grown to new historic highs, well ahead of the expected continued COVID-19 recovery. But the previous history of unprecedented decline causedequity declines following a fueled bull market is causing many customers to keep a large percentage of their excess funds in banks and certainly contributed towhich has caused the increase in the Corporation’s deposits through 2020 and the first nine monthshalf of 2020.2021.

 

The Corporation’s net interest margin is down materially from levels in the previous quarter.quarter and 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 or decreases. Management expects that the gap ratios will remain above the established guidelines throughout the remainder of 2020.2021, but will continue to decline slowly.

 

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.

 

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 SeptemberJune 30, 2020,2021, the Corporation was within guidelines for all of the above measurements with the exception of the investment portfolio liquidity as a percent of total assets and the investment portfolio liquidity plus cash as a percent of total assets which were 3.7% and 5.5%, respectively, as of September 30, 2020, compared to policy ranges of 4% - 8% and 6%-10%, respectively. This was primarily due to a much higher balance sheet at September 30, 2020. Investment liquidity is strong in the current low-rate environment and having higher levels of liquidity is not necessarily a good thing because it then gets reinvested at lower rates. When the PPP loans begin to decline and deposit balances come down, the investment portfolio liquidity will once again be a higher percentage of the total balance sheet.measurements.

 

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.

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Interest Rate Risk

Interest rate risk is measured using two analytical tools:

 

·Changes in net interest income
·Changes in net portfolio value

 

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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, or 300 basis points, or decrease 25, 50, or 75 basis points. Currently, the flat-rate scenario seems more likely for the remainder of 2020,2021, with the Federal funds rate at 0.25% as of SeptemberJune 30, 2020, compared to 2.00% as of September 30, 2019.2021. The rates-down scenarios are much less likely now with the Federal Reserve rate cuts that already occurred in 2019 and 2020. For that reason, management believes it appropriate to model rates down 25, 50, and 75 basis points to most adequately cover all the reasonably possible declining rate scenarios that the Corporation could face, while continuing to model rates up scenarios of 100, 200, and 300 basis points. WhilePrevious to the onset of COVID-19, management had previously turned its focus tomore concerns about rates-down scenarios, with eachbut after the two large Federal Reserve rate reduction,reductions in March of 2020 the ability of the Federal Reserve to further reduce interest rates diminishesgreatly diminished, and the exposure to higher interest rates increases.became more of a focus. The overnight Federal funds rate and the current U.S. Treasury rates are presently at low historical levels. Because of this historical perspective, if management would take a neutral position in terms of the direction of forward interest rates, there is clearly more long term risk of rates going up than down. So while in the near term it is likely we may see no Federal Reserve rate increases or decreases, management remains guarded about the impact of higher interest rates and continues to prepare for rate increases on 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

 

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 SeptemberJune 30, 2020.2021. 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 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 rising rate scenarios, but a decline in net interest income in the declining rate scenarios.

 

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The thirdsecond quarter 20202021 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of SeptemberJune 30, 2020,2021, the Corporation was 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. The increase in net interest income in the up-rate scenarios is largely due to the increase in variable rate loans and the recent purchases of variable rate securities and the cash balances held on the Corporation’s balance sheet. On the liability side, when interest rates do increase, it is typical for management to react more slowly in increasing deposit rates. Loans that are Prime-based will increase by the full amount of the market rate movement while deposit rates will only increase at a fraction of the market rate increase. Additionally, deposit rates may level off more when market rates increase by 200 or 300 basis points where variable loan rates will still increase by the same amount as the Prime rate. With the Federal Reserve acting to decrease interest rates by 225 basis points over five meetings held since June 30, 2019, the Corporation has had more exposure to all maturing fixed-rate loans and securities. These assets have been maturing and repricing to lower market rates, while most of the Corporation’s interest-bearing deposits could not be repriced any lower. This would result in a decline in net interest income in any down-rate scenario.

 

For the rates-up 100 basis point scenario, net interest income increases by 1.9%0.7% compared to the rates unchanged scenario. In the remaining rates-up scenarios, the net interest income increases slightly more substantially reflecting the sizable amount of the Corporation’s interest-earning assets that reprice immediately by the full amount of the Fed increase versus the limited amount of deposit increases that management would approve on the Corporation’s interest-bearing deposits. The higher interest rates go, the greater the likelihood that the proportionality of the Corporation’s deposit rate changes decreases as a percentage of the Federal Reserve’s action. For the rates-up 200 and 300 basis point scenarios, net interest income increases by 3.5%0.8% and 5.1%1.1%, respectively, compared to the rates unchanged scenario. The Corporation’s asset sensitivity diminished from the prior quarter when the interest rate sensitivity analysis showed increases of 1.3%, 1.9% and 2.7%. Management was active in investing available cash into term securities in order to improve margin. Management was also active in adding longer loans carrying higher yields than equivalent investments in an effort to prevent the loan-to-deposit ratio from declining. Management desires to maintain an asset sensitivity position and has an initial goal of increasing the asset sensitivity back to March 31, 2021 levels. Management’s maximum permitted net interest income declines by policy are -5%, -10%, and -15%, for the rates-up 100, 200, and 300 basis point scenarios, respectively.

 

The positive impact of 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, 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 SeptemberJune 30, 20202021, the Corporation only had $1.5no overnight or short term borrowings but had $50.2 million of overnight borrowings with the remaining $60 million of borrowings long-term fixed-rate advances. Additionally, total borrowings only make up approximately 5.2%4.9% of the total funding provided by deposits and borrowings. The more aggressive rates-up scenarios also benefit from known historical experience of deposit rate increases lagging and a slowing in the pace of the actual rate increase as interest rates continue to rise. This allows management the ability to benefit from higher rates by controlling the amount of the interest rate increases on large amounts of liabilities that could reprice. The increase in net interest income in the up-rate scenarios has declined since prior quarters due to the lengthening of the Corporation’s assets and the lower yields on these assets. The model still shows a benefit in the rates-up environment, it’s just less of a benefit than prior timeframes.

 

As of SeptemberJune 30, 2020, results2021, in the down scenarios of -25, -50, and -75 basis points, net interest income decreases by 0.3%0.8%, 1.6,2.1%, and 2.7%3.2%, 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 2020.2021.

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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 SeptemberJune 30, 2020,2021, the Corporation was within guidelines for all up-rate scenarios and out of policy guidelines for the down-rate scenarios. The Corporation shows a very favorable benefit to net portfolio value 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 SeptemberJune 30, 2020.2021. 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 SeptemberJune 30, 2020,2021, indicate that the Corporation’s net portfolio value would experience valuation gains of 20.1%10.7%, 30.9%14.7%, and 34.8%15.7% in the rates-up 100, 200, and 300 basis point scenarios. Management’s maximum permitted declines in net portfolio value by policy are -5% for rates-up 100 basis points, graduating up to -15% for rates-up 300 basis points. A valuation loss would indicate that the value of the Corporation’s assets is declining at a faster pace than the decrease in the value of the Corporation’s liabilities. The analysis does show a valuation loss in the down 25, 50, and 75 basis point scenarios of -10.1%-7.6%, -20.3%-16.8%, and -30.3%-26.6%, 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. With the significant declines in the overnight and Prime rate since 2019, the Corporation’s exposure to valuation changes based 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 a further rate reduction. Management also does not anticipate that market interest rates decline materially from the present levels. Currently the two-year US Treasury yield has been around 0.15%. This has been the case for much of 2020. While interest rates are unlikely to materially decline, thereductions. The behavior of the Corporation’s deposits will continue to have an impact on the Corporation’s net portfolio value. With the recent rapid increase in the Corporation’s core deposits, management is guarded against further valuation declines in the rates-down interest rate scenarios throughout the remainder of 2020,2021, even though the likelihood of lower interest rates 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 (PrincipalPrincipal Financial Officer),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 SeptemberJune 30, 2020,2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Treasurer (PrincipalPrincipal Financial Officer)Officer concluded that the Corporation’s disclosure controls and procedures as of SeptemberJune 30, 2020,2021, 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

SeptemberJune 30, 20202021

 

Item 1. Legal Proceedings

 

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position or results of operations of the Corporation or its subsidiaries taken as a whole. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation. In addition, no material proceedings are pending, are known to be threatened, or contemplated against the Corporation by governmental authorities.

 

Item 1A. Risk Factors

The COVID-19 Pandemic Has Adversely Impacted Our Business And Financial Results, And The Ultimate Impact Will Depend On Future Developments, Which Are Highly Uncertain And Cannot Be Predicted, Including The Scope And Duration Of The Pandemic And Actions Taken By Governmental Authorities In Response To The Pandemic.

The COVID-19 pandemic has negatively impacted the global, national and local economies, disrupted global and national supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for our products and services have been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed or are required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

We continue to closely monitor the COVID-19 pandemic and related risks as they evolve. The magnitude, duration and likelihood of the current outbreak of COVID-19, further outbreaks of COVID-19, future actions taken by governmental authorities and/or other third parties in response to the COVID-19 pandemic, and its future direct and indirect effects on the global, national and local economy and our business and results of operation are highly uncertain. The COVID-19 pandemic may cause prolonged global or national recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on our business, results of operations and financial condition.

Due to the Corporation’s participation in the U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP"), the Corporation is subject to additional risks of litigation from its clients or other parties regarding the processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders. The Corporation participated as a lender in the PPP. Because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP along with the continually evolving nature of SBA the rules, interpretations and guidelines concerning this program, which exposes us to risks relating to noncompliance with the PPP. Since the launch of the PPP, several large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. As such, we may be exposed to the risk of litigation, from both clients and non-clients that approached the Corporation regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

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The Corporation also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, underwritten, certified by the borrower, funded, or serviced by the Corporation, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, certified by the borrower, funded, or serviced by FNBPA, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

 

The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. Except for the risk factor above, managementManagement has not identified any new risk factors since the December 31, 20192020 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 SeptemberJune 30, 2020.2021.

 

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 2020  6,000   18.85   6,000   33,857 
August 2020  10,526   18.15   10,526   23,331 
September 2020  —   —   —    23,331 
                 
Total  16,526             

Issuer Purchase of Equity Securites

      Total Number of Maximum Number
  Total Number Average Shares Purchased of Shares that May
  of Shares Price Paid as Part of Publicly Yet be Purchased
Period Purchased Per Share Announced Plans * Under the Plan *
         
April 2021  —   —   —   182,400 
May 2021  4,000   21.70   4,000   178,400 
June 2021  3,200   21.66   3,200   175,200 
                 
Total  7,200             

 

*On February 20, 2019, the Board of Directors of the Corporation approved a plan to repurchase, in the open market and privately renegotiated transactions, up to 100,000 shares of its outstanding common stock. This plan replaced the 2015 plan. The first purchase of common stock under this plan occurred on May 13, 2019. The total number of shares authorized to be repurchased under the plan was increased to 200,000 pursuant to the 2-for-1 stock split, which became effective on June 28, 2019. By September 30, 2020, a total of 176,669 shares were repurchased at a total cost of $3,596,000 for an average cost per share of $20.35.

On October 21, 2020, the Board of Directors of the Corporation approved a plan to repurchase, in open market and privately negotiated transactions, up to 200,000 shares of its outstanding common stock. This currentThe first purchase of common stock under this plan replaces the 2019 plan.occurred on October 28, 2020. By June 30, 2021, a total of 24,800 shares were repurchased at a total cost of $492,000 for an average cost per share of $19.84.

 

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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Item 6. Exhibits:

 

 

 

Exhibit No.

 

 

Description

3(i)

Articles of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed with the SEC on 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

2020 Non-Employee Directors’ Stock Plan. (Incorporated herein by reference to Exhibit 99.1 of the Corporation’s Form S-8 filed with the SEC on June 3, 2020.)

10.4

2020 Nonqualified Employee Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 of the Corporation’s Form S-8 filed with the SEC on 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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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 13, 2020 August 12, 2021By:    /s//s/  Jeffrey S. Stauffer
  Jeffrey S. Stauffer
  Chairman of the Board
  Chief Executive Officer and President
  Principal Executive Officer
   
   
Dated: November 13, 2020August 12, 2021By:    /s/  Scott E. Lied/s/  Rachel G. Bitner
  Scott E. Lied, CPARachel G. Bitner
  Treasurer
Principal Financial Officer

 

 


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