September 30,
December 31,
September 30,
2022
2021
2021
$
$
$
ASSETS
Cash and due from banks
27,623
19,930
16,100

Interest-bearing deposits in other banks
22,953
138,519
62,720

Total cash and cash equivalents
50,576
158,449
78,820

Securities available for sale (at fair value)
559,646
558,093
561,587

Equity securities (at fair value)
8,951
8,982
8,844

Loans held for sale
5,131
3,194
3,174

Loans (net of unearned income)
1,114,504
920,904
880,261

Less: Allowance for loan losses
14,150
12,931
12,454

Net loans
1,100,354
907,973
867,807

Premises and equipment
24,598
24,476
24,507

Regulatory stock
5,897
5,380
5,635

Bank owned life insurance
35,995
35,414
35,200

Other assets
33,156
15,269
12,478

Total assets
1,824,304
1,717,230
1,598,052

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Deposits:

Noninterest-bearing
670,563
686,278
591,333

Interest-bearing
961,286
825,935
800,169

Total deposits
1,631,849
1,512,213
1,391,502

Short-term borrowings
15,000
-
-
Long-term debt
44,206
44,206
46,706

Subordinated debt
39,356
19,680
19,660

Other liabilities
7,738
3,843
3,967

Total liabilities
1,738,149
1,579,942
1,461,835

Stockholders' equity:

Common stock, par value $0.10

Shares: Authorized 24,000,000

Issued 5,739,114 and Outstanding 5,625,146 as of 9/30/22, 5,583,956 as of 12/31/21, and 5,575,452 as of 9/30/21
574
574
574

Capital surplus
4,475
4,520
4,498

Retained earnings
138,760
131,856
130,082

Accumulated other comprehensive (loss) income
(55,381
)
3,441
4,326

Less: Treasury stock cost on 113,969 shares as of 9/30/22, 155,158 as of 12/31/21, and 163,663 as of 9/30/21
(2,273
)
(3,103
)
(3,263
)
Total stockholders' equity
86,155
137,288
136,217

Total liabilities and stockholders' equity
1,824,304
1,717,230
1,598,052

Three Months ended
September 30,
Nine Months ended
September 30,
2022
2021
2022
2021
$
$
$
$
Interest and dividend income:
Interest and fees on loans
11,022
8,986
29,357
25,541
Interest on securities available for sale
Taxable
2,654
1,301
6,090
3,611
Tax-exempt
1,074
1,015
3,182
2,977
Interest on deposits at other banks
55
17
139
59
Dividend income
167
98
367
295

Total interest and dividend income
14,972
11,417
39,135
32,483

Interest expense:
Interest on deposits
608
278
1,168
877
Interest on borrowings
775
511
1,683
1,569

Total interest expense
1,383
789
2,851
2,446

Net interest income
13,589
10,628
36,284
30,037

Provision (credit) for loan losses
550
(250
)
1,300
125

Net interest income after provision (credit) for loan losses
13,039
10,878
34,984
29,912

Other income:
Trust and investment services income
680
540
1,979
1,746
Service fees
791
618
2,063
1,917
Commissions
941
945
2,762
2,761
Gains on the sale of debt securities, net
-
350
139
711
Gains (losses) on equity securities, net
9
32
(129
)
256
Gains on sale of mortgages
186
1,206
1,249
4,381
Earnings on bank-owned life insurance
242
218
667
636
Other income
331
230
1,145
1,126

Total other income
3,180
4,139
9,875
13,534

Operating expenses:
Salaries and employee benefits
6,607
6,142
19,826
17,800
Occupancy
713
654
2,125
1,972
Equipment
312
255
913
806
Advertising & marketing
259
282
833
717
Computer software & data processing
1,727
1,097
4,251
3,297
Shares tax
351
322
1,053
876
Professional services
720
535
1,983
1,572
Other expense
824
831
2,614
1,961

Total operating expenses
11,513
10,118
33,598
29,001

Income before income taxes
4,706
4,899
11,261
14,445

Provision for federal income taxes
697
760
1,503
2,251

Net income
4,009
4,139
9,758
12,194

Earnings per share of common stock
0.71
0.74
1.74
2.19

Cash dividends paid per share
0.17
0.17
0.51
0.50

Weighted average shares outstanding
5,611,279
5,570,416
5,597,301
5,565,777

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

Balances, December 31, 2020
574
4,444
120,670
7,958
(3,430
)
130,216

Net income
-
-
4,504
-
-
4,504

Other comprehensive loss net of tax
-
-
-
(5,034
)
-
(5,034
)
Treasury stock purchased - 7,600 shares
-
-
-
-
(149
)
(149
)
Treasury stock issued - 7,936 shares
-
16
-
-
157
173

Cash dividends paid, $0.16 per share
-
-
(889
)
-
-
(889
)
Balances, March 31, 2021
574
4,460
124,285
2,924
(3,422
)
128,821

Net income
-
-
3,551
-
-
3,551
Other comprehensive income net of tax
-
-
-
4,438
-
4,438
Treasury stock purchased - 7,200 shares
-
-
-
-
(155
)
(155
)
Treasury stock issued - 10,611 shares
-
20
-
-
211
231
Cash dividends paid, $0.17 per share
-
-
(945
)
-
-
(945
)
Balances, June 30, 2021
574
4,480
126,891
7,362
(3,366
)
135,941
Net income
-
-
4,139
-
-
4,139
Other comprehensive loss net of tax
-
-
-
(3,036
)
-
(3,036
)
Treasury stock purchased - 3,100 shares
-
-
-
-
(68
)
(68
)
Treasury stock issued - 8,574 shares
-
18
-

-
171

189
Cash dividends paid, $0.17 per share
-
-
(948
)
-
-

(948
)
Balances, September 30, 2021
574
4,498

130,082

4,326
(3,263
)
136,217

Balances, December 31, 2021
574
4,520
131,856
3,441
(3,103
)
137,288

Net income
-
-
3,191
-
-
3,191

Other comprehensive loss net of tax
-
-
-
(23,739
)
-
(23,739
)
Treasury stock issued - 11,196 shares
-
24
-
-
224
248

Cash dividends paid, $0.17 per share
-
-
(949
)
-
-
(949
)
Balances, March 31, 2022
574
4,544
134,098
(20,298
)
(2,879
)
116,039
Net income
-
-
2,558
-
-
2,558

Other comprehensive loss net of tax
-
-
-
(16,518
)
-
(16,518
)
Treasury stock purchased - 3,000shares
-
-
-
-
(53
)
(53
)
Treasury stock issued - 18,418 shares
-
(42
)
-
-
368
326

Cash dividends paid, $0.17 per share
-
-
(951
)
-
-
(951
)
Balances, June 30, 2022
574
4,502
135,705
(36,816
)
(2,564
)
101,401

Net income
-
-
4,009
-
-
4,009

Other comprehensive loss net of tax
-
-
-
(18,565
)
-
(18,565
)
Treasury stock issued - 14,575 shares
-
(27
)
-
-
291
264

Cash dividends paid, $0.17 per share
-
-
(954
)
-
-
(954
)
Balances, September 30, 2022
574
4,475
138,760
(55,381
)
(2,273
)
86,155

									Accumulated
									Other						Total
	Common		Capital			Retained			Comprehensive			Treasury			Stockholders'
	Stock		Surplus			Earnings			Income (Loss)			Stock			Equity
	$		$			$			$			$			$
Balances, December 31, 2021		574		4,520			131,856			3,441			(3,103	)		137,288
Net income		—		—			3,191			—			—			3,191
Other comprehensive loss net of tax		—		—			—			(23,739	)		—			(23,739	)
Treasury stock issued - 11,196 shares		—		24			—			—			224			248
Cash dividends paid, $0.17 per share		—		—			(949	)		—			—			(949	)
Balances, March 31, 2022		574		4,544			134,098			(20,298	)		(2,879	)		116,039
Net income		—		—			2,558			—			—			2,558
Other comprehensive loss net of tax		—		—			—			(16,518	)		—			(16,518	)
Treasury stock purchased - 3,000 shares		—		—			—			—			(53	)		(53	)
Treasury stock issued - 18,418 shares		—		(42	)		—			—			368			326
Cash dividends paid, $0.17 per share		—		—			(951	)		—			—			(951	)
Balances, June 30, 2022		574		4,502			135,705			(36,816	)		(2,564	)		101,401

Balances, December 31, 2022		574		4,437			142,677			(48,292	)		(2,061	)		97,335
Cumulative effect of adoption of ASU 2016-13		—		—			(619	)		—			—			(619	)
Net income		—		—			2,441			—			—			2,441
Other comprehensive income net of tax		—		—			—			7,659			—			7,659
Stock-based compensation expense		—		14			—			—			—			14
Treasury stock purchased - 8,903 shares		—		—			—			—			(147	)		(147	)
Treasury stock issued - 19,523 shares		—		(110	)		—			—			383			273
Cash dividends paid, $0.17 per share		—		—			(957	)		—			—			(957	)
Balances, March 31, 2023		574		4,341			143,542			(40,633	)		(1,825	)		105,999
Net income		—		—			1,797			—			—			1,797
Other comprehensive loss net of tax		—		—			—			(611	)		—			(611	)
Stock-based compensation expense		—		15			—			—			—			15
Treasury stock purchased - 12,431 shares		—		—			—			—			(168	)		(168	)
Treasury stock issued - 20,692 shares		—		(97	)		—			—			358			261
Cash dividends paid, $0.17 per share		—		—			(959	)		—			—			(959	)
Balances, June 30, 2023		574		4,259			144,380			(41,244	)		(1,635	)		106,334

~~ENB FINANCIAL CORP~~

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended September 30,
2022
2021
$
$
Cash flows from operating activities:
Net income
9,758
12,194
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities premiums and discounts and loan fees
3,854
2,851
Amortization of operating leases right-of-use assets
132
60
Increase in interest receivable
(1,254
)
(958
)
Increase in interest payable
526
146
Provision for loan losses
1,300
125
Gains on the sale of debt securities, net
(139
)
(711
)
Losses (gains) on equity securities, net
129
(256
)
Gains on sale of mortgages
(1,249
)
(4,381
)
Loans originated for sale
(28,164
)
(71,607
)
Proceeds from sales of loans
27,476
75,843
Earnings on bank-owned life insurance
(667
)
(636
)
Depreciation of premises and equipment and amortization of software
1,207
1,164
Deferred income tax
(83
)
164
Amortization of deferred fees on subordinated debt
76
59
Other assets and other liabilities, net
2,327
(2,292
)
Net cash provided by operating activities
15,229
11,765

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments
35,605
58,837
Proceeds from sales
8,575
77,259
Purchases
(123,852
)
(228,981
)
Equity securities
Proceeds from sales
151
460
Purchases
(249
)
(1,945
)
Purchase of regulatory bank stock
(974
)
(524
)
Redemptions of regulatory bank stock
457
996
Purchase of bank-owned life insurance
-
(4,918
)
Net increase in loans
(193,735
)
(55,899
)
Purchases of premises and equipment, net
(1,106
)
(745
)
Purchase of computer software
(141
)
(471
)
Net cash used for investing activities
(275,269
)
(155,930
)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts
123,598
141,428
Net decrease in time deposits
(3,962
)
(2,737
)
Net increase in short-term borrowings
15,000
-
Repayments of long-term debt
-
(8,084
)
Proceeds from issuance of subordinated debt
19,600
-
Dividends paid
(2,854
)
(2,782
)
Proceeds from sale of treasury stock
838
593
Treasury stock purchased
(53
)
(372
)
Net cash provided by financing activities
152,167
128,046
Decrease in cash and cash equivalents
(107,873
)
(16,119
)
Cash and cash equivalents at beginning of period
158,449
94,939
Cash and cash equivalents at end of period
50,576
78,820

Supplemental disclosures of cash flow information:
Interest paid
2,325
2,300
Income taxes paid
1,200
2,200
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale
(74,458
)
4,595
Recognition of lease operating right-of-use assets
2,811
80
Recognition of operating lease liabilities
2,811
80

See Notes to the Unaudited Consolidated Interim Financial Statements

Index

ENB FINANCIAL CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
		2023			2022
		$			$
Cash flows from operating activities:
Net income			4,238			5,749
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities premiums and discounts and loan fees			2,346			2,539
Decrease (increase) in interest receivable			307			(1,066	)
Increase in interest payable			571			61
Provision for credit losses			2,072			750
Losses (gains) on the sale of debt securities, net			1,364			(139	)
Losses on equity securities, net			302			138
Gains on sale of mortgages			(326	)		(1,063	)
Loans originated for sale			(11,928	)		(23,563	)
Proceeds from sales of loans			17,529			23,057
Earnings on bank-owned life insurance			(463	)		(425	)
Depreciation of premises and equipment and amortization of software			973			791
Deferred income tax			(254	)		(117	)
Amortization of deferred fees on subordinated debt			80			40
Stock-based compensation expense			29			—
Other assets and other liabilities, net			1,353			1,066
Net cash provided by operating activities			18,193			7,818

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments			20,457			24,816
Proceeds from sales			61,089			8,576
Purchases			(3,030	)		(107,711	)
Equity securities
Proceeds from sales			—			150
Purchases			(202	)		(201	)
Purchase of regulatory bank stock			(1,821	)		(974	)
Redemptions of regulatory bank stock			648			209
Proceeds from bank-owned life insurance			2,083			—
Net increase in loans			(105,562	)		(120,573	)
Purchases of premises and equipment, net			(826	)		(512	)
Purchase of computer software			(494	)		(123	)
Net cash used for investing activities			(27,658	)		(196,343	)
Cash flows from financing activities:
Net (decrease) increase in demand, NOW, and savings accounts			(33,709	)		66,369
Net increase (decrease) in time deposits			50,702			(302	)
Proceeds from short-term borrowings			—			20,000
Repayments of short-term debt			(16,000	)		—
Proceeds from long-term debt			37,678			—
Repayments of long-term debt			(4,000	)		—
Dividends paid			(1,916	)		(1,900	)
Proceeds from sale of treasury stock			534			574
Treasury stock purchased			(315	)		(53	)
Net cash provided by financing activities			32,974			84,688
Decrease in cash and cash equivalents			23,509			(103,837	)
Cash and cash equivalents at beginning of period			37,572			158,449
Cash and cash equivalents at end of period			61,081			54,612
Supplemental disclosures of cash flow information:
Interest paid			8,764			1,408
Income taxes paid			1,375			950
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale			8,921			(50,958	)
Recognition of lease operating right-of-use assets			—			2,811
Recognition of operating lease liabilities			—			2,811

See Notes to the Unaudited Consolidated Interim Financial Statements

~~Table of Contents~~Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

1.~~Summary of Significant Accounting Policies~~

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”). Ephrata National Bank has one wholly-owned subsidiary, ENB Insurance, LLC which is consolidated into its financial statements. This Form 10-Q, for the ~~third~~second quarter of ~~2022,~~2023, is reporting on the results of operations and financial condition of ENB Financial Corp on a consolidated basis.

Operating results for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. 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, ~~2021.~~2022.

~~Revenue from Contracts~~Accounting Pronouncements Adopted in 2023

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investments in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the Corporation. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with ~~Customers~~previously applicable accounting standards.

The ~~Company~~Corporation adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Corporation recorded a cumulative effect decrease to retained earnings of $619,000, net of tax, of which $537,000 related to loans, $82,000 related to unfunded commitments, and $0 related to available-for-sale securities.

The Corporation has elected to exclude accrued interest receivable from the measurement of its allowance for credit losses (ACL). When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

The Corporation adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023, using the prospective transition approach, though no such charges had been recorded on the securities held by the Corporation as of the date of adoption.

In connection with the adoption of ASU 2016-13, the Corporation made changes to the loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 5 Loans and Allowance for Credit Losses for further discussion of these portfolio segments. The new segmentation consists of: Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied Commercial Real Estate, and Residential Real Estate.

The impact of the change from the incurred loss model to the current expected credit loss model and the reclassification of loans for the identification of new portfolio loan segments under CECL is detailed below (in thousands).

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

	January 1, 2023
	Pre-adoption		Adoption Impact			As Reported
	$		$			$
Assets
ACL on debt securities available for sale		—		—			—
ACL on loans
Commercial Real Estate		6,074		(6,074	)		—
Consumer Real Estate		5,442		(5,442	)		—
Commercial and Industrial		2,151		(2,151	)		—
Consumer		67		183			250
Agriculture		—		3,537			3,537
Business Loans		—		3,382			3,382
Home Equity		—		2,129			2,129
Non-Owner Occupied CRE		—		875			875
Residential Real Estate		—		4,658			4,658
Unallocated		417		(417	)		—
		14,151		680			14,831
Liabilities
ACL for unfunded commitments		1,017		103			1,120
	$	15,168	$	783		$	15,951

Investment Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Investment securities classified as available for sale are those securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Unrealized gains or losses are reported as increases or decreases in other comprehensive income (loss), net of the deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. The Corporation classifies all of its securities as available for sale. Equity securities are measured at fair value with changes in fair value recognized in net income.

Allowance for Credit Losses – Available for Sale Securities

The Corporation measures expected credit losses on available-for-sale debt securities when the Corporation does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Corporation considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Economic forecast data is utilized to calculate the present value of expected cash flows. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

The allowance for credit losses on available-for-sale debt securities is included within investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within the provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Corporation believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

Accrued interest receivable on available-for-sale debt securities totaled $3,560,000 at June 30, 2023, and is included within Other Assets on the consolidated balance sheet. This amount is excluded from the estimate of expected credit losses. Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for credit losses and any deferred fees or costs. Accrued interest receivable totaled $2,689,000 at June 30, 2023, and was reported in Other Assets on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation is amortizing these amounts over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

The loans receivable portfolio is segmented into Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied Commercial Real Estate (CRE), and Residential Real Estate.

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for credit losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income on a cash basis, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months), and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Allowance for Credit Losses - Loans

The allowance for credit losses (ACL) is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions, and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Corporation measures the ACL using the following methods. Historical credit loss experience is the basis for the estimation of expected credit losses. The Corporation applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Reasonable and supportable forecast adjustment is based on the unemployment forecast, BBB Rated Corporate Bond Spread, GDP Growth, Retail Sales, Asset Prices, and Management Judgement. The reasonable and supportable period is the life of the loan as credit loss models used produce reasonable estimates of losses over the life of the loan. The qualitative adjustments for current conditions are based upon changes in lending policies and procedures, loan portfolio trends, lending management experience, asset quality, loan review, underlying collateral, credit concentrations, and external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The Corporation has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on nonaccrual status, any outstanding accrued interest is reversed against interest income.

The ACL for individual loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore should be individually assessed. Commercial loans are evaluated if they meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) when it is determined by management that a loan does not share similar risk characteristics with other loans.Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Individual loan evaluations consist primarily of the fair value of collateral method because most of the Corporation’s loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance is carried as a liability and is included in other liabilities on the Corporation’s Consolidated Balance Sheets. The liability was $1,262,000 as of June 30, 2023, and $1,017,000 as of December 31, 2022. As the unadvanced portion of lines of credit increases, this allowance will increase.

2.	Revenue from Contracts with Customers

The Corporation 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.

~~Table of Contents~~Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

3.	Securities Available for Sale

2.~~Securities Available~~The amortized cost, gross unrealized gains and losses, approximate fair value, and allowance for ~~Sale~~credit losses of investment securities held at June 30, 2023, are as follows:

			Gross		Gross			Allowance
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			for Credit		Fair
	Cost		Gains		Losses			Losses		Value
	$		$		$			$		$
June 30, 2023
U.S. treasuries		19,854		—		(2,089	)		—		17,765
U.S. government agencies		19,400		—		(2,412	)		—		16,988
U.S. agency mortgage-backed securities		46,834		—		(4,328	)		—		42,506
U.S. agency collateralized mortgage obligations		23,090		—		(2,446	)		—		20,644
Non-agency MBS/CMO		54,138		18		(4,004	)		—		50,152
Asset-backed securities		70,355		21		(1,835	)		—		68,541
Corporate bonds		61,401		—		(7,325	)		—		54,076
Obligations of states and political subdivisions		213,140		—		(27,808	)		—		185,332
Total securities available for sale		508,212		39		(52,247	)		—		456,004

The amortized cost, gross unrealized gains and losses, and approximate fair value of investment securities held at ~~September 30, 2022, and~~ December 31, ~~2021,~~2022, are as follows:

			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, 2022
U.S. treasuries		35,719		-		(3,287	)		32,432
December 31, 2022
U.S. Treasuries											35,737		—		(3,080	)		32,657
U.S. government agencies		27,606		1		(2,972	)		24,635		27,605		—		(2,818	)		24,787
U.S. agency mortgage-backed securities		51,655		-		(5,354	)		46,301		49,939		—		(4,632	)		45,307
U.S. agency collateralized mortgage obligations		32,309		-		(2,855	)		29,454		30,193		—		(2,703	)		27,490
Non-agency MBS/CMO		55,370		-		(3,496	)		51,874		53,900		—		(3,650	)		50,250
Asset-backed securities		84,110		-		(2,362	)		81,748		76,110		16		(2,892	)		73,234
Corporate bonds		81,829		6		(7,479	)		74,356		76,685		10		(7,064	)		69,631
Obligations of states and political subdivisions		261,150		1		(42,305	)		218,846		240,102		10		(34,326	)		205,786
Total securities available for sale		629,748		8		(70,110	)		559,646		590,271		36		(61,165	)		529,142

December 31, 2021
U.S. Treasuries		14,821		14		(22	)		14,813
U.S. government agencies		29,613		50		(642	)		29,021
U.S. agency mortgage-backed securities		51,964		502		(478	)		51,988
U.S. agency collateralized mortgage obligations		30,917		241		(81	)		31,077
Asset-backed securities		100,998		605		(384	)		101,219
Corporate bonds		82,617		420		(528	)		82,509
Obligations of states and political subdivisions		242,807		5,848		(1,189	)		247,466
Total securities available for sale		553,737		7,680		(3,324	)		558,093

The amortized cost and fair value of securities available for sale at ~~September~~June 30, ~~2022,~~2023, 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		—		—
Due after one year through five years		96,888		87,463
Due after five years through ten years		75,828		64,408
Due after ten years		335,496		304,133
Total debt securities		508,212		456,004

~~(DOLLARS IN THOUSANDS)~~

Amortized
Cost
Fair Value
$
$
Due in one year or less
11,209
11,201
Due after one year through five years
106,611
98,455
Due after five years through ten years
112,689
98,684
Due after ten years
399,239
351,306
Total debt securities
629,748
559,646

~~Table of Contents~~

~~ENB FINANCIAL CORP~~

~~Notes to the Unaudited Consolidated Interim Financial Statements~~

Securities available for sale with a par value of $~~108,799,000~~$119,952,000 and $~~94,283,000~~$116,179,000 at ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $~~99,284,000~~$110,159,000 at ~~September~~June 30, ~~2022,~~2023, and $~~96,521,000~~$107,071,000 at December 31, ~~2021.~~2022.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

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

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	$		$		$		$
Proceeds from sales		32,972		—		61,089		8,576

Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
$
$
$
$
Proceeds from sales
-
17,957
8,575
77,259
Gross realized gains
-
369
139
791
Gross realized losses
-
(19
)
-
(80
)

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 nine months of 2022 or 2021.

Information pertaining to securities with gross unrealized losses at ~~September~~June 30, ~~2022, and December 31, 2021,~~2023, for which an allowance for credit losses has not been recorded, 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 June 30, 2023
U.S. Treasuries		—		—			17,765		(2,089	)		17,765		(2,089	)
U.S. government agencies		—		—			16,988		(2,412	)		16,988		(2,412	)
U.S. agency mortgage-backed securities		—		—			42,506		(4,328	)		42,506		(4,328	)
U.S. agency collateralized mortgage obligations		527		(25	)		20,117		(2,421	)		20,644		(2,446	)
Non-Agency MBS/CMO		7,410		(669	)		39,711		(3,335	)		47,121		(4,004	)
Asset-backed securities		2,898		(43	)		64,123		(1,792	)		67,021		(1,835	)
Corporate bonds		1,711		(289	)		52,365		(7,036	)		54,076		(7,325	)
Obligations of states & political subdivisions		532		(5	)		184,770		(27,803	)		185,302		(27,808	)

Total temporarily impaired securities		13,078		(1,031	)		438,345		(51,216	)		451,423		(52,247	)

Information pertaining to securities with gross unrealized losses at December 31, 2022, 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 December 31, 2022
U.S. Treasuries		19,721		(1,169	)		12,936		(1,911	)		32,657		(3,080	)
U.S. government agencies		1,953		(52	)		21,634		(2,766	)		23,587		(2,818	)
U.S. agency mortgage-backed securities		24,667		(1,653	)		20,640		(2,979	)		45,307		(4,632	)
U.S. agency collateralized mortgage obligations		9,984		(500	)		17,453		(2,203	)		27,437		(2,703	)
Non-Agency MBS/CMO		50,250		(3,650	)		—		—			50,250		(3,650	)
Asset-backed securities		29,283		(1,028	)		42,032		(1,864	)		71,315		(2,892	)
Corporate bonds		15,197		(1,230	)		43,417		(5,834	)		58,614		(7,064	)
Obligations of states & political subdivisions		103,200		(10,949	)		100,575		(23,377	)		203,775		(34,326	)

Total temporarily impaired securities		254,255		(20,231	)		258,687		(40,934	)		512,942		(61,165	)

10Index

~~Table of Contents~~

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

~~TEMPORARY IMPAIRMENTS OF SECURITIES~~

~~(DOLLARS IN THOUSANDS)~~

Less than 12 months
More than 12 months
Total
Gross
Gross
Gross
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Losses
Value
Losses
Value
Losses
$
$
$
$
$
$
As of September 30, 2022
U.S. Treasuries
28,119
(2,616
)
4,313
(671
)
32,432
(3,287
)
U.S. government agencies
1,954
(53
)
21,480
(2,919
)
23,434
(2,972
)
U.S. agency mortgage-backed securities
26,500
(2,248
)
19,801
(3,106
)
46,301
(5,354
)
U.S. agency collateralized mortgage obligations
18,841
(1,433
)
10,553
(1,422
)
29,394
(2,855
)
Non-Agency MBS/CMO
51,874
(3,496
)
-
-
51,874
(3,496
)
Asset-backed securities
55,024
(1,414
)
26,724
(948
)
81,748
(2,362
)
Corporate bonds
39,611
(2,961
)
28,734
(4,518
)
68,345
(7,479
)
Obligations of states & political subdivisions
161,641
(25,872
)
56,674
(16,433
)
218,315
(42,305
)

Total temporarily impaired securities
383,564
(40,093
)
168,279
(30,017
)
551,843
(70,110
)

As of December 31, 2021
U.S. Treasuries
4,959
(22
)
-
-
4,959
(22
)
U.S. government agencies
16,386
(519
)
7,375
(123
)
23,761
(642
)
U.S. agency mortgage-backed securities
24,090
(468
)
2,458
(10
)
26,548
(478
)
U.S. agency collateralized mortgage obligations
14,206
(66
)
2,965
(15
)
17,171
(81
)
Asset-backed securities
50,466
(338
)
2,826
(46
)
53,292
(384
)
Corporate bonds
44,907
(528
)
-
-
44,907
(528
)
Obligations of states & political subdivisions
70,021
(1,043
)
6,023
(146
)
76,044
(1,189
)

Total temporarily impaired securities
225,035
(2,984
)
21,647
(340
)
246,682
(3,324
)

In the debt security portfolio there were ~~396~~325 positions carrying unrealized losses as of ~~September~~June 30, ~~2022. There were no instruments considered~~2023.

Management evaluates all of the Corporation’s securities for expected credit losses. No securities in the portfolio required an allowance for credit losses to be ~~other-than-temporarily impaired at September 30, 2022.~~

~~The Corporation evaluates fixed maturity positions for~~recorded in the first half of 2023 or other-than-temporary impairment ~~at least~~in 2022.

Unrealized losses on ~~a quarterly basis,~~the Corporation’s available-for-sale debt securities have not been recognized into income because the bonds are of high credit quality, management does not intend to sell and ~~more frequently when economic~~it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is solely due to changes in interest rates and other market ~~concerns warrant such evaluation. U.S. generally accepted accounting principles provide for~~conditions. The issuers continue to make timely principal and interest payments on the ~~bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows~~bonds. The fair value is expected to ~~be collected from~~recover as 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. bonds approach maturity.

~~Table of Contents~~

4.	Equity Securities

~~ENB FINANCIAL CORP~~

~~Notes to the Unaudited Consolidated Interim Financial Statements~~

3.~~Equity Securities~~

The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of equity securities held at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

			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, 2022
June 30, 2023
CRA-qualified mutual funds		7,299		-		-			7,299		7,516		—		—			7,516
Bank stocks		1,660		73		(81	)		1,652		1,716		46		(259	)		1,503
Total equity securities		8,959		73		(81	)		8,951		9,232		46		(259	)		9,019

			Gross		Gross							Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	$		$		$			$		$		$		$			$
December 31, 2021
December 31, 2022
CRA-qualified mutual funds		7,240		-		-			7,240		7,345		—		—			7,345
Bank stocks		1,570		184		(12	)		1,742		1,685		162		(74	)		1,773
Total equity securities		8,810		184		(12	)		8,982		9,030		162		(74	)		9,118

The following table presents the net gains and losses on the Corporation’s equity investments recognized in earnings during the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and the portion of unrealized gains and losses for the period that relates to equity investments held as of ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

NET GAINS AND LOSSES ON EQUITY INVESTMENTS RECOGNIZED IN EARNINGS

(DOLLARS IN THOUSANDS)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2022
2021
2022
2021
$
$
$
$

Net (losses) gains recognized in equity securities during the period
9
32
(129
)
256

Less: Net gains realized on the sale of equity securities during the period
-
3
51
99

Unrealized gains (losses) recognized in equity securities held at reporting date
9
29
(180
)
157

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
	$			$			$			$

Net losses recognized in equity securities during the period		(106	)		(130	)		(302	)		(138	)

Less: Net gains realized on the sale of equity securities during the period		—			—			—			51

Unrealized losses recognized in equity securities held at reporting date		(106	)		(130	)		(302	)		(189	)

~~Table of Contents~~Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

4.~~Loans and Allowance for Credit Losses~~

5.	Loans and Allowance for Credit Losses

The following table presents the Corporation’s loan portfolio by category of loans as of ~~September~~June 30, ~~2022, and December 31, 2021:~~2023 (in thousands):

~~LOAN PORTFOLIO~~

~~(DOLLARS IN THOUSANDS)~~

September 30,
December 31,
2022
2021
$
$
Commercial real estate
Commercial mortgages
207,480
177,396
Agriculture mortgages
212,351
203,725
Construction
80,008
19,639
Total commercial real estate
499,839
400,760

Consumer real estate (a)
1-4 family residential mortgages
366,534
317,037
Home equity loans
13,268
11,181
Home equity lines of credit
93,704
75,698
Total consumer real estate
473,506
403,916

Commercial and industrial
Commercial and industrial
80,964
65,615
Tax-free loans
26,398
23,009
Agriculture loans
25,520
20,717
Total commercial and industrial
132,882
109,341

Consumer
5,755
5,132

Gross loans prior to deferred fees
1,111,982
919,149

Deferred loan costs, net
2,522
1,755
Allowance for credit losses
(14,150
)
(12,931
)
Total net loans
1,100,354
907,973

	June 30,
~~(a)~~	2023
	$

Agriculture		245,971
Business Loans		350,740
Consumer		6,310
Home Equity		102,108
Non-Owner Occupied Commercial Real Estate		125,894
Residential Real Estate (a)		462,942

Gross loans prior to deferred costs		1,293,965

Deferred loan costs, net		2,537
Allowance for credit losses		(16,833	)
Total net loans (b)		1,279,669

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets, totaled ~~$304,479,000 and $289,263,000~~$295,406,000 as of ~~September~~June 30, ~~2022~~2023.

(b)	Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The following table presents the Corporation’s loan portfolio, prior to the adoption of ASC 326, by category of loans and the impact of the change from the adoption of the standard (in thousands):

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

							Post Adoption
	December 31,			Adoption			January, 1
	2022			Impact			2023
	$			$			$
Agriculture		—			238,734			238,734
Business Loans		—			336,340			336,340
Home Equity		—			98,854			98,854
Non-Owner Occupied CRE		—			111,333			111,333
Residential Real Estate (a)		—			397,260			397,260
Commercial real estate
Commercial mortgages		210,823			(210,823	)		—
Agriculture mortgages		221,167			(221,167	)		—
Construction		86,793			(86,793	)		—
Total commercial real estate		518,783			(518,783	)		—

Consumer real estate (a)
1-4 family residential mortgages		410,301			(410,301	)		—
Home equity loans		11,937			(11,937	)		—
Home equity lines of credit		98,349			(98,349	)		—
Total consumer real estate		520,587			(520,587	)		—

Commercial and industrial
Commercial and industrial		87,528			(87,528	)		—
Tax-free loans		28,664			(28,664	)		—
Agriculture loans		27,122			(27,122	)		—
Total commercial and industrial		143,314			(143,314	)		—

Consumer		5,769			163			5,932

Gross loans prior to deferred fees		1,188,453			—			1,188,453

Deferred loan costs, net		2,664
Allowance for credit losses		(14,151	)
Total net loans		1,176,966

(a)	Real estate loans serviced for others, which are not included in the Consolidated Balance Sheets totaled $298,375,000 as of December 31, ~~2021, respectively.~~2022.

Age Analysis of Past-Due Loans Receivable

The performance and credit quality of the loan portfolio is monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status as of June 30, 2023 (in thousands):

	June 30, 2023
			31-60		61-90		Greater Than
			Days		Days		90 Days		Total		Total
	Current		Past Due		Past Due		Past Due		Past Due		Loans

Agriculture	$	245,702	$	—	$	—	$	269	$	269	$	245,971
Business Loans		350,599		—		—		141		141		350,740
Consumer		6,261		12		14		23		49		6,310
Home Equity		101,984		19		105		—		124		102,108
Non-Owner Occupied CRE		125,894		—		—		—		—		125,894
Residential Real Estate		462,213		614		—		115		729		462,942
Total (a)	$	1,292,653	$	645	$	119	$	548	$	1,312	$	1,293,965

(a)	Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents the classes of the loan portfolio summarized by the past-due status as of December 31, 2022 (in thousands):

	December 31, 2022
													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		—		—		554		554		210,269		210,823		—
Agriculture mortgages		—		—		2,787		2,787		218,380		221,167		—
Construction		—		—		—		—		86,793		86,793		—
Consumer real estate
1-4 family residential mortgages		905		—		447		1,352		408,949		410,301		139
Home equity loans		17		—		339		356		11,581		11,937		—
Home equity lines of credit		165		16		—		181		98,168		98,349		—
Commercial and industrial
Commercial and industrial		—		—		190		190		87,338		87,528		—
Tax-free loans		—		—		—		—		28,664		28,664		—
Agriculture loans		—		—		—		—		27,122		27,122		—
Consumer		9		5		30		44		5,725		5,769		30
Total		1,096		21		4,347		5,464		1,182,989		1,188,453		169

Nonperforming Loans

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of June 30, 2023, (in thousands):


	Nonaccrual		Nonaccrual				Loans Past
	with no		with		Total		Due Over 90 Days		Total
	ACL		ACL		Nonaccrual		Still Accruing		Nonperforming

Agriculture	$	2,106	$	—	$	2,106	$	269	$	2,375
Business Loans		797		—		797		—		797
Consumer Loans		—		—		—		23		23
Home Equity		—		—		—		—		—
Non-Owner Occupied CRE		—		—		—		—		—
Residential Real Esate		—		—		—		115		115
Total (a)	$	2,903	$	—	$	2,903	$	407	$	3,310

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments

related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on

Financial Instruments.

Index

ENB FINANCIAL CORP

Notes to the Unaudited Consolidated Interim Financial Statements

The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2022 (in thousands):

Nonaccrual Loans

	December 31,
	2022
	$

Commercial real estate
Commercial mortgages		554
Agriculture mortgages		2,787
Construction		—
Consumer real estate
1-4 family residential mortgages		308
Home equity loans		339
Home equity lines of credit		—
Commercial and industrial
Commercial and industrial		190
Tax-free loans		—
Agriculture loans		—
Consumer		—
Total		4,178

Credit Quality Indicators

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation’s commercial credit exposures by internally assigned grades as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. 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.

~~Table of Contents~~

~~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.

•

●

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

•

~~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)~~

Commercial
Commercial
Agriculture
and
Tax-free
Agriculture
September 30, 2022
Mortgages
Mortgages
Construction
Industrial
Loans
Loans
Total
$
$
$
$
$
$
$
Grade:
Pass
205,221
202,861
76,962
72,960
26,398
25,222
609,624
Special Mention
-
4,576
3,046
5,328
-
43
12,993
Substandard
2,259
4,914
-
2,676
-
255
10,104
Doubtful
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-

Total
207,480
212,351
80,008
80,964
26,398
25,520
632,721

Commercial
Commercial
Agriculture
and
Tax-free
Agriculture
December 31, 2021
Mortgages
Mortgages
Construction
Industrial
Loans
Loans
Total
$
$
$
$
$
$
$
Grade:
Pass
172,540
192,943
13,544
57,214
23,009
19,980
479,230
Special Mention
2,443
2,542
6,095
4,657
-
90
15,827
Substandard
2,413
8,240
-
3,744
-
647
15,044
Doubtful
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-

Total
177,396
203,725
19,639
65,615
23,009
20,717
510,101

14Index

~~Table of Contents~~

Based on the most recent analysis performed, the following table presents the recorded investment by internal risk rating system for Commercial Credit exposure as of June 30, 2023 (in thousands):

(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the portfolio segments related to adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The following table presents the recorded investment in loans by internal risk rating system for Commercial Credit Exposure as of December 31, 2022 in accordance with ASC 310 (in thousands):

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~~table presents the balances of consumer loans by classes of the loan portfolio based on payment performance as of ~~September~~June 30, ~~2022 and December 31, 2021:~~2023 (in thousands):

~~The following tables present an age analysis~~(a) Refer to Note 1, Accounting Pronouncements Adopted in 2023 for details of reclassification of the ~~Corporation’s past due loans, segregated by loan~~ portfolio ~~class, as~~segments related to adoption of ~~September 30, 2022 and December 31, 2021:~~ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

Loans
Greater
Receivable > 90 Days
30-59 Days
60-89 Days
than 90
Total Past
Total Loans
and
September 30, 2022
Past Due
Past Due
Days
Due
Current
Receivable
Accruing
$
$
$
$
$
$
$
Commercial real estate
Commercial mortgages
-
-
1,087
1,087
206,914
208,001
140
Agriculture mortgages
-
22
3,355
3,377
208,974
212,351
-
Construction
-
-
-
-
80,008
80,008
-
Consumer real estate
1-4 family residential mortgages
502
-
-
502
365,861
366,363
-
Home equity loans
17
12
-
29
12,889
12,918
-
Home equity lines of credit
73
-
-
73
93,631
93,704
-
Commercial and industrial
Commercial and industrial
7
6
203
216
80,748
80,964
-
Tax-free loans
-
-
-
-
26,398
26,398
-
Agriculture loans
-
-
-
-
25,520
25,520
-
Consumer
29
1
8
38
5,717
5,755
8
Total
628
41
4,653
5,322
1,106,660
1,111,982
148

Loans
Receivable
Greater
> 90 Days
30-59 Days
60-89 Days
than 90
Total Past
Total Loans
and
December 31, 2021
Past Due
Past Due
Days
Due
Current
Receivable
Accruing
$
$
$
$
$
$
$
Commercial real estate
Commercial mortgages
22
-
184
206
177,190
177,396
-
Agriculture mortgages
232
-
1,838
2,070
201,655
203,725
-
Construction
-
-
-
-
19,639
19,639
-
Consumer real estate
1-4 family residential mortgages
1,464
68
315
1,847
315,190
317,037
276
Home equity loans
19
-
-
19
11,162
11,181
-
Home equity lines of credit
-
-
39
39
75,659
75,698
39
Commercial and industrial
Commercial and industrial
43
-
395
438
65,177
65,615
10
Tax-free loans
-
-
-
-
23,009
23,009
-
Agriculture loans
-
9
110
119
20,598
20,717
-
Consumer
22
-
-
22
5,110
5,132
-
Total
1,802
77
2,881
4,760
914,389
919,149
325

The following table presents ~~nonaccrual~~the balances of consumer loans by classes of the loan portfolio based on payment performance as of ~~September 30, 2022 and~~ December 31, ~~2021:~~2022 in accordance with ASC 310 (in thousands):

As of ~~September 30, 2022 and~~ December 31, ~~2021,~~2022, all of the Corporation’s commercial loans on nonaccrual status were also considered impaired.

Information with respect to impaired loans for the three and ~~nine~~six months ended ~~September~~June 30, 2022, ~~and September 30, 2021,~~in accordance with ASC 310 is as follows:

No loan modifications were made during the first nine months of 2022 or 2021 that would be considered a troubled debt restructuring (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. Included in the impaired loan portfolio is one loan to a commercial borrower that is being reported as a TDR. The balance of this TDR loan was $~~456,000~~ ~~as of September 30, 2022. This TDR is not non-accrual.~~

The following ~~tables summarize~~table summarizes information regarding impaired loans by loan portfolio class as of ~~September 30, 2022 and~~ December 31, ~~2021:~~2022, in accordance with ASC 310:

Unpaid
Recorded
Principal
Related
September 30, 2022
Investment
Balance
Allowance
$
$
$

With no related allowance recorded:
Commercial real estate
Commercial mortgages
948
1,006
-
Agriculture mortgages
3,811
3,923
-
Construction
-
-
-
Total commercial real estate
4,759
4,929
-

Commercial and industrial
Commercial and industrial
194
199
-
Tax-free loans
-
-
-
Agriculture loans
-
-
-
Total commercial and industrial
194
199
-

Total with no related allowance
4,953
5,128
-

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

Commercial and industrial
Commercial and industrial
9
9
9
Tax-free loans
-
-
-
Agriculture loans
-
-
-
Total commercial and industrial
9
9
9

Total with a related allowance
9
9
9

Total by loan class:
Commercial real estate
Commercial mortgages
948
1,006
-
Agriculture mortgages
3,811
3,923
-
Construction
-
-
-
Total commercial real estate
4,759
4,929
-

Commercial and industrial
Commercial and industrial
203
208
9
Tax-free loans
-
-
-
Agriculture loans
-
-
-
Total commercial and industrial
203
208
9

Total
4,962
5,137
9

Unpaid
Recorded
Principal
Related
December 31, 2021
Investment
Balance
Allowance
$
$
$

With no related allowance recorded:
Commercial real estate
Commercial mortgages
223
263
-
Agriculture mortgages
2,055
2,066
-
Construction
-
-
-
Total commercial real estate
2,278
2,329
-

Commercial and industrial
Commercial and industrial
385
438
-
Tax-free loans
-
-
-
Agriculture loans
-
-
-
Total commercial and industrial
385
438
-

Total with no related allowance
2,663
2,767
-

With an allowance recorded:
Commercial real estate
Commercial mortgages
-
-
-
Agriculture mortgages
551
559
37
Construction
-
-
-
Total commercial real estate
551
559
37

Commercial and industrial
Commercial and industrial
-
-
-
Tax-free loans
-
-
-
Agriculture loans
110
111
110
Total commercial and industrial
110
111
110

Total with a related allowance
661
670
147

Total by loan class:
Commercial real estate
Commercial mortgages
223
263
-
Agriculture mortgages
2,606
2,625
37
Construction
-
-
-
Total commercial real estate
2,829
2,888
37

Commercial and industrial
Commercial and industrial
385
438
-
Tax-free loans
-
-
-
Agriculture loans
110
111
110
Total commercial and industrial
495
549
110

Total
3,324
3,437
147

The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended June 30, 2023 (in thousands):

The following table presents the activity in the allowance for credit losses by portfolio segment for the six months ended June 30, 2023 (in thousands):

During the six months ended June 30, 2023, management charged off $15,000 in loans while recovering $87,000 and added $1,930,000 to the provision for credit losses related to loans and added $142,000 to the provision for off-balance sheet credit exposure for a combined provision of $2,072,000.

The ACL is maintained at a level determined to be adequate to absorb estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers historical loss experience, current conditions, and forecasts of future economic conditions as of the balance sheet date. The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: Agriculture, Business Loans, Consumer Loans, Home Equity, Non-Owner Occupied CRE, and Residential Real Estate. The following are key risks within each portfolio segment:

Agriculture – Loans made to individuals or operating companies within the Agricultural industry. These loans are generally secured by a first lien mortgage on agricultural land. The primary source of repayment is the income and assets of the borrower. The condition of the agriculture industry as well as the condition of the national economy is an important indicator of risk for this segment.

Business Loans —Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. The primary source of repayment for these loans is cash flow from the operations of the company. The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. This segment also includes loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer - Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes personal loans and lines of credit that may be secured or unsecured. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

Home Equity– This segment generally includes lines of credit and term loans secured by the equity in the borrower’s residence.The primary source of repayment for these facilities is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the national housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Non-Owner Occupied CRE - Loans secured by commercial purpose real estate for various purposes such as hotels, retail, multifamily and health care. The primary sources of repayment for these loans are the operations of the individual projects and global cash flows of the debtors. The condition of the national economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and the business prospects of the lessee.

Residential Real Estate—Loans secured by first liens on 1-4 family residential mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the national economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the national housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

The following table details activity in the allowance for credit losses by portfolio segment for the ~~nine~~six months ended ~~September~~June 30, 2022:


	Commercial			Consumer		Commercial
	Real Estate			Real Estate		and Industrial			Consumer			Unallocated			Total			Commercial Real Estate			Consumer Real Estate		Commercial and Industrial			Consumer			Unallocated			Total
	$			$		$			$			$			$			$			$		$			$			$			$
Allowance for credit losses:
Beginning balance - December 31, 2021		6,263			3,834		2,112			87			635			12,931			6,263			3,834		2,112			87			635			12,931

Charge-offs		(65	)		-		-			(1	)		-			(66	)		(65	)		—		—			(1	)		—			(66	)
Recoveries		-			3		10			1			-			14			—			3		10			1			—			14
Provision		(90	)		41		193			(16	)		(28	)		100			(90	)		41		193			(16	)		(28	)		100

Balance - March 31, 2022		6,108			3,878		2,315			71			607			12,979			6,108			3,878		2,315			71			607			12,979

Charge-offs		-			-		(41	)		-			-			(41	)		—			—		(41	)		—			—			(41	)
Recoveries		2			3		12			1			-			18			2			3		12			1			—			18
Provision		(239	)		834		255			(28	)		(172	)		650			(239	)		834		255			(28	)		(172	)		650

Balance - June 30, 2022		5,871			4,715		2,541			44			435			13,606			5,871			4,715		2,541			44			435			13,606

Charge-offs		-			-		(18	)		(15	)		-			(33	)
Recoveries		10			3		13			1			-			27
Provision		529			108		(109	)		34			(12	)		550

Balance - September 30, 2022		6,410			4,826		2,427			64			423			14,150

During the ~~nine~~six months ended ~~September~~June 30, 2022, management charged off $~~140,000~~$107,000 in loans while recovering $~~59,000~~$32,000 and added $~~1,300,000~~$750,000 to the provision. The unallocated portion of the allowance decreased from ~~4.9~~%4.9% of total reserves as of December 31, 2021, to ~~3.0~~%3.2% as of ~~September~~June 30, 2022.

During the ~~nine~~six months ended ~~September~~June 30, 2022, net provision expense was recorded for ~~all sectors except~~ the ~~consumer sector where a small credit provision was recorded. The provision expense for the commercial real estate,~~ consumer real estate and commercial and industrial sectors while the commercial real estate and consumer sectors recorded a credit provision. The provision expense recorded for consumer real estate and commercial and industrial loans was primarily related to growth in those sectors of the loan portfolio through ~~September~~June 30, 2022 while the credit provision in ~~the~~commercial real estate and consumer ~~sector~~ was primarily related to declining qualitative factors in several areas ~~since September~~at June 30, ~~2021.~~2022.

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 following table ~~details activity~~presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment ~~for the nine months ended September 30, 2021:~~

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
-
-
-
(14
)
-
(14
)
Recoveries
-
-
1
1
-
2
Provision
173
(41
)
(15
)
20
238
375

Balance - March 31, 2021
6,502
3,408
1,958
59
763
12,690

Charge-offs
-
-
-
(9
)
-
(9
)
Recoveries
-
-
16
6
-
22
Provision
48
83
19
10
(160
)
-

Balance - June 30, 2021
6,550
3,491
1,993
66
603
12,703

Charge-offs
-
-
-
(7
)
-
(7
)
Recoveries
-
-
2
6
-
8
Provision
(909
)
216
81
(3
)
365
(250
)

Balance - September 30, 2021
5,641
3,707
2,076
62
968
12,454

~~During the nine months ended September 30, 2021, management charged off $30,000~~ ~~in loans while recovering $32,000~~ ~~and added $125,000~~ ~~to the provision. The unallocated portion of the allowance increased from~~ ~~4.3% of total reserves~~based on estimation method as of ~~December 31, 2020, to~~ ~~7.8% as of September~~June 30, 2021. Net provision expense was recorded for all loan sectors. The higher provision in the commercial real estate sector was due to growth in this portfolio of loans since December 31, 2020, as well as an increase in the qualitative factor related to the trends in the nature and volume of this sector. There were minimal charge-offs and recoveries recorded during the nine months ended September 30, 2021, so the provision expense was primarily related to an increase in loan balances as well as slightly higher unallocated portion of the allowance.2023:

~~ENB FINANCIAL CORP~~ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

~~Notes to the Unaudited Consolidated Interim Financial Statements~~(DOLLARS IN THOUSANDS)

The following ~~tables present~~table presents the balance in the allowance for credit losses and the recorded investment in loans receivable by portfolio segment based on impairment method as of ~~September 30, 2022 and~~ December 31, ~~2021:~~2022:

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:

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 ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, 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.

On ~~September~~June 30, ~~2022,~~2023, the Corporation held no securities valued using level III inputs. ~~All~~Most of the Corporation’s debt instruments ~~excluding U. S. Treasuries~~ 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 U.S. ~~Treasuries,~~Treasury bonds, CRA fund investments, and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of ~~September~~June 30, ~~2022,~~2023, the CRA fund investments had a $~~7,299,000~~$7,516,000 book and fair market value and the bank stock portfolio had a book value of $~~1,660,000~~,$1,716,000, and fair market value of $~~1,652,000~~.$1,503,000.

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.

On December 31, ~~2021,~~2022, the Corporation held no securities valued using level III inputs. ~~All~~Most of the Corporation’s debt instruments were valued ~~excluding U.S. Treasuries~~ using level II inputs, except for Treasuries, 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 ~~U.S. Treasuries,~~ 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, ~~2021,~~2022, the CRA fund investments had a $~~7,240,000~~$7,345,000 book and market value and the bank stocks had a book value of $~~1,570,000~~$1,685,000 and a market value of $~~1,742,000~~.$1,773,000.

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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, by level within the fair value hierarchy:

The Corporation had a total of $~~4,962,000~~$3,318,000 of ~~impaired~~individually analyzed loans as of ~~September~~June 30, ~~2022, with $9,000~~ ~~of specific allocation against these loans~~2023 and $~~3,324,000~~$4,620,000 of impaired loans as of December 31, ~~2021, with $147,000~~ ~~of specific allocation against these loans.~~2022. The value of impaired loans is generally determined through independent appraisals of the underlying collateral.

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:

(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.

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 June 30, 2023 and December 31, 2022:

September 30, 2022
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
50,576
50,576
50,576
-
-
Regulatory stock
5,897
5,897
5,897
-
-
Loans held for sale
5,131
5,131
5,131
-
-
Loans, net of allowance
1,100,354
1,040,658
-
-
1,040,658
Mortgage servicing assets
2,043
2,828
-
-
2,828
Accrued interest receivable
6,407
6,407
6,407
-
-
Bank owned life insurance
35,995
35,995
35,995
-
-

Financial Liabilities:
Demand deposits
670,563
670,563
670,563
-
-
Interest-bearing demand deposits
81,855
81,855
81,855
-
-
NOW accounts
129,390
129,390
129,390
-
-
Money market deposit accounts
260,141
260,141
260,141
-
-
Savings accounts
369,230
369,230
369,230
-
-
Time deposits
120,670
116,598
-
-
116,598
Total deposits
1,631,849
1,627,777
1,511,179
-
116,598

Long-term debt
44,206
44,206
-
-
44,206
Short-term borrowings
15,000
15,000
Subordinated debt
39,356
36,745
-
-
36,745
Accrued interest payable
781
781
781
-
-

December 31, 2021
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
158,449
158,449
158,449
-
-
Regulatory stock
5,380
5,380
5,380
-
-
Loans held for sale
3,194
3,194
3,194
-
-
Loans, net of allowance
907,973
914,251
-
-
914,251
Mortgage servicing assets
1,768
2,129
-
-
2,129
Accrued interest receivable
5,152
5,152
5,152
-
-
Bank owned life insurance
35,414
35,414
35,414
-
-

Financial Liabilities:
Demand deposits
686,278
686,278
686,278
-
-
Interest-bearing demand deposits
63,015
63,015
63,015
-
-
NOW accounts
139,366
139,366
139,366
-
-
Money market deposit accounts
168,327
168,327
168,327
-
-
Savings accounts
341,291
341,291
341,291
-
-
Time deposits
113,936
113,919
-
-
113,919
Total deposits
1,512,213
1,512,196
1,398,277
-
113,919

Long-term debt
44,206
43,060
-
-
43,060
Subordinated debt
19,680
19,088
-
-
19,680
Accrued interest payable
255
255
255
-
-

In order to meet the financing needs of its customers in the normal course of business, the Corporation makes various commitments that are not reflected in the accompanying consolidated financial statements. These commitments include firm commitments to extend credit, unused lines of credit, and open letters of credit. As of ~~September~~June 30, ~~2022,~~2023, firm loan commitments were $~~98.1~~$90.9 million, unused lines of credit were $~~449.5~~$494.1 million, and open letters of credit were $~~10.4~~$13.8 million. The total of these commitments was $~~558.0~~$598.8 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.

The activity in accumulated other comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 is as follows:

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

In ~~June 2016,~~March 2023, the FASB issued ASU ~~2016-13,~~ ~~Financial Instruments –~~No. 2023-02, "Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit ~~Losses: Measurement of Credit Losses on Financial Instruments, which changes~~Structures Using 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 premiseProportional Amortization Method (a consensus of the ~~Update~~Emerging Issues Task Force)". The ASU allows entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria in Accounting Standards Codification (ASC) 323-740-25-1. While the ASU does not significantly alter the existing eligibility criteria, it does provide clarifications to address existing interpretive issues. It also prescribes specific information reporting entities must disclose about tax credit investments each period. This ASU is ~~that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance~~effective 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~~periods 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~~2023, for ~~credit 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~~public business entities, or ~~the overall impact of the new guidance on the consolidated financial statements.~~

~~In November 2018, the FASB issued ASU 2018-19,~~ ~~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 scope of Subtopic 326-20. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13. This Update is not expected to have a significant impact on the Corporation’s financial statements.

~~In May 2019, the FASB issued ASU 2019-05,~~ ~~Financial Instruments – Credit Losses (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~~January 1, 2024 for the ~~transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3.~~Corporation. 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 is effective when they implement the credit losses standard. For entities that already have adopted the credit losses standard, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Corporation ~~qualifies as a smaller reporting company and~~ does not expect ~~to early adopt ASU 2016-13.~~

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

~~In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments.~~ This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the 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.~~

~~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~~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 March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (ASC 815): Fair Value Hedging - Portfolio Layer Method~~. ASC 815 currently permits only prepayable financial assets and one or more beneficial interests secured by a portfolio of prepayable financial instruments to be included in a last-of-layer closed portfolio. The amendments in this Update allow non-prepayable financial assets to also be included in a closed portfolio hedged using the portfolio layer method. That expanded scope permits an entity to apply the same portfolio hedging method to both prepayable and non-prepayable financial assets, thereby allowing consistent accounting for similar hedges. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. This Update is not expected to have a significant impact on the Corporation’s financial statements.

~~In March 2022, the FASB issued ASU 2022-02,~~ ~~Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures~~. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption using prospective application, including adoption in an interim period where the guidance should be applied as of the beginning of the fiscal year. This Update is not expected to have a significant impact on the Corporation’s financial statements.

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 ~~2021~~2022 Annual Report to Shareholders of the Corporation. The financial condition and results of operations presented are not indicative of future performance.

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:

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.

See Note 1, "Basis of Presentation" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and investment securities, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

The first nine months of 2022 were positively impacted by a number of items resulting in solid financial results, but in comparison to the prior year, the results were not as strong due to a number of non-recurring income items in the first nine months of 2021. The prior year was positively impacted by greater amounts of Paycheck Protection Program (PPP) fees on forgiven loans as well as record mortgage gains due to increased refinance activity stemming from the low interest rate environment. The first nine months of 2022 experienced a sharp increase in market interest rates, less income earned from PPP fees, and a slowing of mortgage gains.

The Corporation recorded net income of ~~$4,009,000~~$1,797,000 for the three-month period ended ~~September~~June 30, ~~2022,~~2023, a ~~$130,000,~~$761,000, or ~~3.1%~~29.7% decrease from the three months ended ~~September~~June 30, ~~2021.~~2022. Net income for the ~~nine-month~~six-month period was ~~$9,758,000,~~$4,238,000, a ~~$2,436,000,~~$1,511,000, or ~~20.0%~~26.3% decrease from earnings in the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2021.~~2022. The earnings per share, basic and diluted, were ~~$0.71~~$0.32 for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$0.74~~$0.46 for the same period in ~~2021,~~2022, and for the year-to-date period, earnings per share were ~~$1.74~~$0.75 compared to ~~$2.19~~$1.03 in ~~2021.~~2022.

The Corporation’s net interest income (NII) increased by ~~$2,961,000,~~$1,683,000, or ~~27.9%~~14.1%, and ~~$6,247,000,~~$4,766,000, or ~~20.8%~~21.0%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022. The increase in NII primarily resulted from an increase in interest and fees on loans of ~~$2,036,000,~~$5,431,000, or ~~22.7%~~57.0%, and ~~$3,816,000,~~$10,313,000, or ~~14.9%~~56.2%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, compared to the same periods in ~~2021.~~2022. Additionally, interest on securities available for sale increased by ~~$1,412,000,~~$465,000, or ~~61.0%~~15.1%, for the three-month period ended ~~September~~June 30, ~~2022,~~2023, and ~~$2,684,000,~~$1,838,000, or ~~40.7%~~33.2%, for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2022,~~2023, compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2021. In addition,~~2022. Offsetting these increases, interest expense on deposits and borrowings increased by ~~$594,000,~~$4,539,000, or ~~75.3%~~578.2%, and ~~$405,000,~~$7,869,000, or ~~16.6%~~536.0%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in the prior year.

The Corporation recorded a ~~$550,000~~$815,000 provision for ~~loan~~credit losses in the ~~third~~second quarter of ~~2022,~~2023, and ~~$1,300,000~~$2,072,000 for the year-to-date period, compared to ~~a credit provision of $250,000~~$650,000 in the ~~third~~second quarter of ~~2021,~~2022 and a year-to-date provision of ~~$125,000~~$750,000 through ~~September~~June 30, ~~2021.~~2022. The Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments as of January 1, 2023. This standard implements a methodology that reflects credit losses that are expected to occur over the remaining life of the financial asset. This new current expected credit loss model (CECL) is based on possible economic scenarios as well as qualitative factors specific to the Corporation. During the first half of 2023, there was a significant change in the forward credit outlook due to a high interest rate environment and due to the Corporation downgrading a $5 million loan relationship to substandard requiring a higher provision related to this relationship. Due to the more subjective methodology of the CECL standard, provision expense in subsequent quarters is expected to be much more volatile than historical experience. The allowance as a percentage of total loans was 1.30% as of June 30, 2023, 1.19% as of December 31, 2022, ~~was primarily caused by a significantly greater amount~~and 1.31% as of ~~loan growth.~~June 30, 2022.

Other income was lower in ~~2022~~2023 compared to the prior year ~~primarily~~primarly as a result of lower levels of mortgage gains and ~~security gains.~~strategic losses recognized on the sale of securities. The gains from the sale of mortgages were ~~$186,000~~$204,000 for the three months ended ~~September~~June 30, ~~2022,~~2023, compared to gains of ~~$1,206,000~~$328,000 for the three months ended ~~September~~June 30, ~~2021,~~2022, a decrease of ~~$1,020,000,~~$124,000, or ~~84.6%~~37.8%. For the ~~nine-month~~six-month period, gains were ~~$1,249,000, compared to $4,381,000 for the nine months ended September 30, 2021,~~$326,000, a decrease of ~~$3,132,000,~~$737,000, or ~~71.5%.~~69.3%, from the six months ended June 30, 2022. The decrease in mortgage gains can be ~~primarily~~primiarly attributed to the rapid rise in mortgage rates during the first ~~nine months~~half of ~~2022~~2023 which has caused customer activity to shift from fixed-rate mortgages that were sold on the secondary market, to adjustable rate mortgages held on the Corporation’s balance sheet. ~~Similarly, gains~~The Corporation recorded $1,060,000 of losses on securities ~~in total decreased by $373,000, or 97.6%,~~transactions for the three months ended ~~September~~June 30, 2023, and $1,666,000 for the six months ended June 30, 2023, compared to losses of $130,000 and gains of $1,000 for the three and six months ended June 30, 2022, respectively. The losses recorded in 2023 were primarily losses related to strategic sales of investments in order to fund more profitable loan growth. The lower yields on the securities portfolio provided opportunities to sell at losses and ~~$957,000, or 99.0%, for~~still recover the ~~nine months ended September 30, 2022, compared~~loss within a twelve-month period due to the ~~same periods~~ability to reinvest in ~~the prior year.~~much higher yielding assets. Outside of mortgage and security gains and losses, other non-interest income increased by ~~$434,000,~~$457,000, or ~~17.0%~~16.2%, and ~~$430,000,~~$785,000, or ~~5.3%~~13.9%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022.~~2023. Operating expenses increased by ~~$1,395,000,~~$1,725,000, or ~~13.8%~~15.0%, and ~~$4,597,000,~~$3,481,000, or ~~15.9%~~15.8%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in the prior year. This increase can be primarily attributed to the rising cost of salaries and employee benefits as well as ~~higher computer software~~increased investments in technology and ~~data processing expenses.~~software.

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-to-date period and the year-to-date ~~periods~~period ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in the prior year, due to lower earnings in 2022 and higher average assets in 2022. The ROE increased for the quarter-to-quarter period due to the decline in average equity as a result of the fair value adjustment on debt securities. The ROE for the year-to-date period declined slightly due to lower income in 2022.2023.

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:

NII represents the largest portion of the Corporation’s operating income. ~~During~~In the ~~nine~~first six months ~~ended September 30, 2022,~~of 2023, NII generated ~~78.6%~~84.4% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared to ~~68.8%~~77.2% in the first ~~nine~~six months of ~~2021.~~2022. This increase is a result of higher levels of NII in the first ~~nine~~six months of ~~2022~~2023 as well as lower non-interest income compared to ~~2021.~~2022. The overall performance of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.

The following table shows a summary analysis of NII on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis. The amount of FTE adjustment totaled ~~$314,000~~$160,000 for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~$934,000~~$356,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~$291,000~~$317,000 and ~~$848,000~~$621,000 for the same periods in ~~2021.~~2022.

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

NII is impacted by yields earned on assets and rates paid on liabilities. During ~~2021, longer-term U.S. Treasury rates~~2022, asset yields increased ~~adding some slope~~with the Federal Reserve rate movements, but liability costs were still low due to the ~~yield curve, but asset yields were still constrained.~~ability to slowly raise deposit rates. In the first ~~nine months~~half of ~~2022,~~2023, interest rates on deposits increased ~~much~~ more dramatically as a result of competitive pressure and the desire to retain existing deposits and attract new ones to add to the Corporation’s liquidity position. While higher market rates have helped the Corporation’s NIM, the higher cost of funds has put pressure on the NIM. Management believes that compression will accelerate with the continued higher cost of liabilities without a similar-sized increase in anticipation of the first Federal Reserve rate movement which happened in mid-March. The Fed subsequently increased rates four additional times through September 30, 2022. The overnight rate started the year at 0.25% and stood at 3.25% as of September 30, 2022.asset yield.

As a result of a larger balance sheet and improved asset yields in the first ~~nine months~~half of ~~2022, even with low asset yields,~~2023, the Corporation’s NII and net interest margin on a tax equivalent basis ~~increased and the~~increased. The Corporation’s margin increased to ~~3.19%~~3.00% for the quarter ended June 30, 2023, and ~~2.96% for the nine months ended September 30, 2022, compared to 2.89% in the third quarter of 2021 and 2.82%~~3.04% for the year-to-date period ended ~~September~~June 30, ~~2021.~~2023, compared to 2.96% in the second quarter of 2022, and 2.85% for the year-to-date period. The Corporation’s NII on a fully-taxable equivalent basis for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, increased over the same periods in ~~2021~~2022 by ~~$2,985,000,~~$1,526,000, or ~~27.3%~~12.4%, and ~~$6,333,000,~~$4,501,000, or ~~20.5%~~19.3%, respectively. Management’s asset liability sensitivity shows a decline to both margin and NII given Federal Reserve rate increases. Actual results over the past two years have shown higher NII with interest rate increases, but the current cost of funds would increase dramatically should the Federal Reserve rate increases continue at the same levels. In a down-rate environment, the margin and NII would also suffer unless balance sheet growth is enough to offset 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 2021, security reinvestment had generally been occurring at lower yields. With~~ higher Treasury rates in 2022 ~~variable-rate~~and 2023, security yields have increased and ~~the increase in balances has~~have helped to increase NII during the first ~~nine~~half of 2023.

The Corporation’s overall cost of funds has risen significantly through the first half of 2023. Core deposit interest rates have risen over the past year; however, time deposit rates have risen to higher levels and more quickly than core deposit rates. The change in deposit rates has resulted in some movement from low interest bearing core deposits to time deposits or other higher yielding money market deposits. This resulted in the total cost of deposits increasing by $3,807,000 for the quarter and $6,398,000 for the six months ended June 30, 2023, compared to the same periods in the prior year. The average balance of borrowings was higher in the first six months of 2023 compared to 2022, and interest rates were also higer, resulting in the total cost of borrowings increasing by $732,000, or 153.5%, and $1,471,000, or 162.0%, for the three and six months ended June 30, 2023, compared to the same periods in 2022.

The following table provides an analysis of year-to-date changes in NII on a FTE basis 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.

The following tables show a more detailed analysis of NII on a 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.

(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 ~~$2,360,000~~ $2,546,000 as of ~~September~~June 30, ~~2022,~~2023, and ~~$872,000~~$2,111,000 as of ~~September~~June 30, ~~2021.~~2022. Such fees and costs recognized through income and included in the interest amounts totaled ~~$92,000~~ ($57,000) in ~~2022,~~2023, and ~~$617,000~~$52,000 in ~~2021.~~2022.

(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 NII (FTE) by total interest earning assets.

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

(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 ~~$2,238,000~~$2,600,000 as of ~~September~~June 30, ~~2022,~~2023, and ~~$834,000~~$1,972,000 as of ~~September~~June 30, ~~2021.~~2022. Such fees and costs recognized through income and included in the interest amounts totaled ~~$54,000~~$(21,000) in ~~2022,~~2023, and ~~$990,000~~$38,000 in ~~2021.~~2022.

(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.

The Corporation’s average balances on securities ~~increased~~decreased by ~~$63.4~~$102.3 million, or ~~11.0%~~16.2%, for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~$77.3~~$59.8 million, or ~~14.2%~~9.8%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022. The tax equivalent yield on investments increased by 7370 basis points for the quarter-to-date period and 3783 basis points for the year-to-date period when comparing both years. ~~Interest~~As a result of the higher yields, interest income on securities increased ~~due to this yield increase as well as volume growth which was caused~~ by ~~an excess of liquidity in 2021~~$379,000, or 11.2%, and ~~early 2022 as a result of the low-rate environment that caused a large influx of deposits.~~

~~Average balances on loans increased by $199.1 million,~~$1,704,000, or ~~22.6%~~27.8%, for the three and six months ended ~~September~~June 30, ~~2022, and $143.5 million, or 16.7%, for the nine months ended September 30, 2022,~~2023, compared to the same periods in the prior year. ~~This loan growth was primarily driven~~

Average balances on loans increased by ~~a strategic desire~~$282.5 million, or 28.4%, for the three months ended June 30, 2023, and $289.2 million, or 30.0%, for the six months ended June 30, 2023, compared to ~~increase earning assets with a renewed focus on internal sales culture.~~the same periods in the prior year. Loan yields increased by ~~one~~84 basis ~~point~~points for the quarter, ~~but declined by five~~and 78 basis points for the year-to-date period and loan interest income increased by $5,449,000, or 57.0%, and $10,349,000, or 56.2%, for both time frames due to the increase in loan ~~balances. The quarter-to-date increase in loan interest income was $2,051,000, or 22.7%,~~balances and ~~the year-to-date increase was $3,852,000, or 15.0%.~~higher yields.

The average balance of interest-bearing deposit accounts increased by ~~$120.7~~$134.8 million, or ~~15.2%~~15.5%, and ~~$110.9~~$137.4 million, or ~~14.5%~~16.1%, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, compared to the same periods in the prior year. ~~While~~Interest-bearing deposits increased as rates increased due to funds shifting from non-interest earning accounts to interest earning accounts due to the rapid increase in market rates. The average balance of ~~time deposits did decrease for both the quarter and year-to-date time periods, the average balance on demand and~~ savings accounts ~~increased significantly and more than offset the decline in time deposits.~~decreased as funds moved into higher-yielding accounts. The interest rate paid on ~~demand~~all interest-bearing deposits increased significantly for both ~~of these~~ time ~~periods, while the interest~~periods. The combined rate on ~~savings accounts remained~~interest-bearing deposits increased by 431 basis points for the quarter ended June 30, 2023, and 370 basis points for the year-to-date period, compared to the same ~~and~~periods in the ~~rate on time deposits declined.~~prior year. The combination of these changes resulted in an increase in interest expense on deposits of ~~$330,000, or 118.7%,~~$3,806,000, for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~an increase in interest expense of $291,000, or 33.2%,~~$6,398,000, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022.

The Corporation’s average balance on borrowed funds increased by ~~$32.2~~$58.7 million, or ~~46.5%~~79.3%, for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~$8.0~~$63.1 million, or ~~11.1%~~91.4%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022. The Corporation’s borrowed funds consist of ~~Federal Home Loan Bank (FHLB)~~FHLB advances ~~and~~as well as subordinated debt issued in December of 2020 and July of 2022 which was used to support capital growth for the Bank. The increase in borrowed funds for the quarter-to-date period is due to $20.0 million of short-term advances initiated in the second quarter of 2022 to support loan growth. Additionally, the Corporation issued $20.0 million of subordinated debt in July of 2022.Corporation. The rate paid on borrowed funds increased by 10105 basis points for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~decreased 10~~97 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in the prior year. This increase in rate can be attributed to initiating higher-rate FHLB advances in late 2022 and early 2023 as well as the ~~new~~ issuance of subordinated ~~debt.~~debt in July of 2022.

For the three months ended ~~September~~June 30, ~~2022,~~2023, the net interest spread ~~increased~~decreased by ~~twenty-six~~52 basis points to ~~2.97%~~2.29%, compared to 2.81% for the three months ended June 30, 2022. For the six months ended June 30, 2023, the net interest spread decreased by 31 basis points to 2.40%, compared to 2.71% for the ~~three~~six months ended ~~September 30, 2021. For the nine months ended September 30, 2022, the net interest spread increased by 16 basis points to 2.79%, compared to 2.63% for the nine months ended September~~June 30, 2022. The effect of non-interest bearing funds increased to 2271 basis points from 1815 basis points for the three months ended ~~September~~June 30, ~~2022,~~2023, and ~~decreased~~increased to 1764 basis points from 1914 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s ~~net interest margin (NIM)~~NIM for the ~~third~~second quarter of ~~2022~~2023 was ~~3.19%~~3.00%, compared to ~~2.89%~~2.96% for the ~~third~~second quarter of ~~2021.~~2022. For the year-to-date period, the Corporation’s NIM was ~~2.96%~~3.04%, compared to ~~2.82%~~2.85% for the same period in ~~2021.~~2022.

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

The ~~allowance~~provision for credit losses ~~(ACL)~~includes a provision for losses on loans, available-for-sale debt securities, and unfunded loan commitments. The provision provides for losses inherent in the ~~loan portfolio~~financial assets as determined by a quarterly analysis and calculation of various factors related to the ~~loan portfolio.~~financial assets. The amount of the provision reflects the adjustment management determines necessary to ensure the ~~ACL~~Allowance for Credit Losses (ACL) is adequate to cover any losses inherent in the ~~loan portfolio.~~financial assets. The Corporation recorded a provision expense of ~~$550,000~~$1,930,000 for credit losses related to loans, $142,000 for unfunded commitments and $0 related to available-for-sale securities for the ~~third quarter~~first six months of ~~2022,~~2023, compared to ~~a $250,000 credit provision recorded~~$750,000 related to loans for the ~~third quarter of 2021. For the year-to-date period, the Corporation recorded provision expense of $1,300,000 compared to $125,000 in 2021.~~six months ended June 30, 2022. The provision expense was higher in ~~both time periods~~the first half of 2023 due to ~~loan growth partially offset by~~the Corporation’s adoption of ASU 2016-13 which requires a ~~lower~~reliance on forward economic indicators to project expected credit losses as well as a higher balance of classified loans. As of ~~September~~June 30, ~~2022,~~2023, the allowance as a percentage of total loans was ~~1.27%~~1.30%, compared to ~~1.41%~~1.31% at ~~September~~June 30, ~~2021.~~2022. More detail is provided under Allowance for Credit Losses in the Financial Condition section that follows.

Other income for the ~~third~~second quarter of ~~2022~~2023 was ~~$3,180,000,~~$2,422,000, a decrease of ~~$959,000,~~$597,000, or ~~23.2%~~19.8%, compared to the ~~$4,139,000~~$3,019,000 earned during the ~~third~~second quarter of ~~2021.~~2022. For the year-to-date period ended ~~September~~June 30, ~~2022,~~2023, other income totaled ~~$9,875,000,~~$5,076,000, a decrease of ~~$3,659,000,~~$1,619,000, or ~~27.0%~~24.2%, compared to the same period in ~~2021.~~2022. The following ~~tables detail~~table details the categories that comprise other income.

Trust and investment services income increased for ~~both time periods primarily~~the quarter and year-to-date as a result of higher fees on trust accounts partially offset by lower income related to the investment services area. Service charges on deposit accounts increased by 28.0% for the quarter and 27.2% for the year-to-date period, primarily as a ~~result~~larger level of ~~higher overdraft charges~~assets under management and higher ~~excess transaction charges in both time periods.~~fees. Other fees increased for both time periods driven by ~~28.0% for the quarter and decreased by 5.7% for the year-to-date period. Gains and~~fees earned on an off-balance-sheet sweep product. The Corporation incurred $1,060,000 of losses on debt and equity securities ~~were lower~~ in ~~2022 driven by~~the second quareter of 2023, and $1,666,000 of losses for the year-to-date period as a result of strategic sales of debt securities to fund higher ~~interest rates which has resulted in fewer opportunities to sell investment securities at gains.~~yielding loan growth and depreciation of bank stock values causing an unrealized loss on equity securities. Mortgage gains declined by ~~$1,020,000,~~$124,000, or ~~84.6%, and $3,132,000, or 71.5%~~37.8%, in the ~~third~~second quarter of 2023, compared to the second quarter of 2022, and $737,000, or 69.3%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same ~~periods~~period in ~~the prior year.~~2022. This was ~~primarily~~primarly a result of the rapid increase in interest rates during the last three quarters of 2022 that resulted in very low margins on mortgages sold and ~~fewer~~a switch to mortgages held on the Corporation’s balance sheet as opposed to sold on the secondary ~~market as customers turned to adjustable rate mortgages in 2022. Earnings on bank-owned life insurance increased as a result of the purchase of additional BOLI policies.~~market. The miscellaneous income category was ~~higher~~lower for the ~~quarter and for the year-to-date period in 2022 primarily~~six months ended June 30, 2023, by 18.9% as a result of ~~higher mortgage servicing income.~~non-recurring income items that impacted the first half of 2022.

Operating expenses for the ~~third~~second quarter of ~~2022~~2023 were ~~$11,513,000,~~$13,202,000, an increase of ~~$1,395,000,~~$1,725,000, or ~~13.8%~~15.0%, compared to the ~~$10,118,000~~$11,477,000 for the ~~third~~second quarter of ~~2021.~~2022. For the year-to-date period ended ~~September~~June 30, ~~2022,~~2023, operating expenses totaled ~~$33,598,000,~~$25,566,000, an increase of ~~$4,597,000,~~$3,481,000, or ~~15.9%~~15.8%, compared to the same period in ~~2021.~~2022. The following ~~tables provide~~table provides details of the Corporation’s operating expenses for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2022,~~2023, compared to the same periods in ~~2021.~~2022.

Salaries and employee benefits are the largest category of operating expenses. For the ~~three months ended September 30, 2022,~~second quarter of 2023, salaries and benefits increased ~~$465,000,~~$1,194,000, or ~~7.6%~~17.8%, ~~compared to 2021. For~~and for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, salaries and benefits increased ~~$2,026,000,~~$2,137,000, or ~~11.4%~~16.2%, ~~from~~compared to the ~~year-to-date period~~same periods in ~~the prior year.~~2022. This was primarily due to a competitive labor market that resulted in higher costs to ~~replace~~attract and retain employees ~~who retired or left the organization due~~inclusive of costs related to ~~nationwide, regional,~~merit increases and ~~local staffing challenges, a realignment of salaries company-wide with market norms, and an accrual for the Corporation’s bank-wide incentive program.~~higher employee benefit expenses. Occupancy and equipment expenses ~~are higher than the prior year primarily due to the addition of a community lending office as well as a full service branch office. Advertising and marketing expenses~~in total increased by ~~16.2%,~~15.0% for the quarter, and 12.5% for the year-to-date period, ~~due~~compared to ~~promoting~~the same periods in the prior year as a result of new ~~market areas as well as new products~~branch and ~~services.~~leased office locations. Computer software and data processing expenses increased by $311,000, or 22.4%, and $954,00, or 37.8%, for the three and six months ended June 30, 2023, as a result of higher technology costs ~~as new systems are implemented~~caused primarily by a debit card conversion scheduled to ~~support the ongoing growth and efficiency of the Corporation and increased volumes due to a larger customer base.~~take place in 2023 that resulted in amortized contract costs. Shares tax expense is based on the Corporation’s level of ~~stockholders’~~shareholders’ equity and has ~~grown substantially, commensurate with~~decreased due to the ~~growth~~decline in ~~stockholders’~~the Corporation’s level of shareholders’ equity. Professional services expenses increased by 33.2% in the ~~third~~second quarter of 2023, and 19.3% for the ~~nine months ended September 30, 2022,~~year-to-date period compared to the prior year driven by higher ~~legal~~ fees ~~and other outside services. Other operating expenses increased over~~associated with the ~~prior year primarily as a result~~issuance of ~~higher FDIC and OCC assessment costs, higher fraud-related charges-offs, higher travel costs, and miscellaneous other operating costs that are increasing to a lesser degree.~~subordinated debt.

Federal income tax expense was ~~$697,000~~$265,000 for the ~~third~~second quarter of ~~2022~~2023 compared to ~~$760,000~~$308,000 for the same period in ~~2021.~~2022. For the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Corporation recorded Federal income tax expense of ~~$1,503,000,~~$661,000, compared to ~~$2,251,000~~$806,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The effective tax rate for the Corporation was ~~13.3%~~13.5% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, and ~~15.6%~~12.3% for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and Bank Owned Life Insurance (BOLI) income; therefore, the effective income tax rate for the Corporation is lower than the stated tax ~~rate and the effective tax rate for the first nine months of 2022 was lower than the prior year due to an increased level of tax-free assets.~~rate.

The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair value. As of ~~September~~June 30, ~~2022,~~2023, the Corporation had ~~$560~~$456.0 million of debt securities available for sale, which accounted for ~~30.7%~~24.0% of assets, compared to ~~32.5%~~28.5% as of December 31, ~~2021,~~2022, and ~~35.1%~~32.7% as of ~~September~~June 30, ~~2021.~~2022. Based on ending balances, the debt securities portfolio decreased ~~0.3%~~21.2% from ~~September~~June 30, ~~2021,~~2022, and ~~increased 0.3%~~13.8% from December 31, ~~2021.~~2022.

The debt securities portfolio was showing a net unrealized loss of ~~$70,102,000~~$52,208,000 as of ~~September~~June 30, ~~2022,~~2023, compared to ~~an unrealized gain of $4,356,000~~$61,129,000 as of December 31, ~~2021,~~2022, and ~~$5,477,000~~$46,602,000 as of ~~September~~June 30, ~~2021.~~2022. The valuation of the Corporation’s securities portfolio, predominately debt securities, ~~portfolio~~ is impacted by both the U.S. Treasury rates and the perceived forward direction of interest rates. With the dramatic increase in rates during the nine months ended September 30, 2022, the valuation of the bond portfolio decreased rapidly. Because the bonds are recorded at market value on the Corporation’s balance sheet, the unrealized losses, net of deferred taxes, are recorded as accumulated other comprehensive loss in the stockholders’ equity section of the balance sheet. Earnings, net of dividends paid, positively impacted the Corporation’s stockholders’ equity levels through September 30, 2022, but the accumulated other comprehensive loss on the bond portfolio had a negative impact.

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 September 30, 2022, December 31, 2021 and September 30, 2021.

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

The investment policy of the Corporation establishes guidelines to promote diversification within the portfolio. The diversity specifications provide opportunities to shorten or lengthen duration, maximize yield, and mitigate credit risk.

The Corporation’s U.S. Treasury sector ~~increased $17.6~~decreased $14.9 million during the first ~~nine months~~half of ~~2022,~~2023, resulting in a ~~119.0% increase~~45.6% decrease in this sector. This sector represents a safe credit, atbut carries a ~~market-appropriate~~low yield ~~which added some diversity~~due to the ~~portfolio.~~investments made in 2020 and 2021. As a result, some Treasuries were sold during the first half of the year to provide liquidity for much higher yielding loan growth. The Corporation’s U.S. government agency sector decreased by ~~$4.4~~$7.8 million, or ~~15.1%~~31.5%, since December 31, 2021. Management has purchased Non-agency mortgage backed securities (MBS) and collateralized mortgage obligation (CMO) securities since December 31, 2021 which has brought the portfolio to $51.9 million as of September 30, 2022, or 9.1% of the total portfolio. This sector will better structure the portfolio to achieve higher yields and shorten the duration while also protecting in a rates-up environment.2022.

The Corporation’s U.S. agency MBS and CMO sectors have decreased slightly since December 31, ~~2021,~~2022, with MBS decreasing ~~$5.7~~$2.8 million, or ~~10.9%~~6.2%, and CMOs decreasing ~~$1.6~~$6.8 million, or ~~5.2%~~24.9%. 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. 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 $2.0 - $3.0 million per month. Cash flows coming off of MBS and CMOs do slow down and speed up as interest rates increase or decrease, which has an impact on the portfolio’s length and yield.

The portfolio of non-agency MBS and CMO securities stood at $50.2 million as of June 30, 2023, or 10.8% of the total portfolio. This sector will better structure the portfolio to achieve higher yields and shorten the duration while also protecting in a rates-up environment. The non-agency portfolio stood at $50.3 million at December 31, 2022.

The Corporation’s asset-backed securities declined by ~~$19.5~~$4.7 million, or ~~19.2%~~6.4%, from December 31, ~~2021,~~2022, to ~~September~~June 30, ~~2022.~~2023. Many of the bonds in this sector receive regular monthly principal payments which caused the value to decline. ~~Additionally, some asset-backed securities were sold at gains~~These bonds are primarily floating rate instruments, so in the ~~first quarter of 2022~~current rates-up environment, they have added to ~~support~~ the ~~Corporation’s earnings and liquidity position.~~overall yield increase for the portfolio.

The combined effect of all of the amortizing bonds paying monthly principal and interest provides the Corporation with a reasonably stable base cash flow of approximately $2.0 - $3.0 million per month.

As of ~~September~~June 30, ~~2022,~~2023, the fair value of the Corporation’s corporate bonds decreased by ~~$8.2~~$15.6 million, or ~~9.9%~~22.3%, from balances at December 31, ~~2021.~~2022. During the first half of 2023, some Corporate bonds were sold to provide liquidity for loan growth. 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. 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, consist of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio. Municipal tax-equivalent yields generally start well above other taxable bonds. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. Municipal securities were purchased throughout 2020 and 2021 due to ~~market conditions that led~~the levels of excess liquidity experienced due to ~~favorable yields on some instruments.~~deposit inflows. Municipal bonds represented ~~38.5%~~39.9% of the securities portfolio as of ~~September~~June 30, ~~2022,~~2023, compared to ~~43.6%~~38.2% as of December 31, ~~2021.~~2022.

Net loans outstanding increased by ~~26.8%~~24.5%, to ~~$1.1 billion at September 30, 2022, from $867.8~~$1,279.7 million at ~~September~~June 30, ~~2021.~~2023, from $1,027.8 million at June 30, 2022. Net loans increased by ~~21.2%~~8.7%, an annualized rate of ~~28.3%~~17.5%, from ~~$908.0~~$1,177.0 million at December 31, ~~2021.~~2022. The following table shows the composition of the loan portfolio as of ~~September~~June 30, ~~2022,~~2023 and December 31, ~~2021, and September 30, 2021.~~2022.

(a) Residential real estate loans do not include mortgage loans serviced for others which totaled $304,479,000 as of September 30, 2022, $289,263,000 as of December 31, 2021, and $274,892,000 as of September 30, 2021.

There was ~~significant~~moderate growth in the loan portfolio since ~~September 30, 2021 and~~ December 31, ~~2021. This loan growth was primarily driven by a strategic desire to increase earning assets with a renewed focus on internal sales culture.~~2022. All ~~major~~of the loan categories showed an increase in balances ~~from both time periods.~~since December 31, 2022.

~~The commercial real estate category represents~~4.3%, the ~~largest group of loans for~~Consumer Loan segment increased $378,000, or 6.4%, the ~~Corporation. Commercial real estate makes up 44.9% of total loans as of September 30, 2022, compared to 42.5% of total loans as of September 30, 2021. Within~~Home Equity segment increased $3,254,000, or 3.3%, the ~~commercial real estate~~Non-Owner Occupied segment the increase has primarily been construction loans which was a direct result of reclassification from 1-4 family residential loans in the first nine months of 2022. The Corporation’s commercial construction loan balances increased ~~by $61.2 million,~~$14,561,000, or ~~325.9%, from September 30, 2021 to September 30, 2022. Commercial construction loans were 7.2% of the total loan portfolio as of September 30, 2022, and 2.1% as of September 30, 2021.~~

Commercial mortgages increased $40.7 million, or 24.4%, from balances at September 30, 2021. Commercial mortgages as a percentage of the total loan portfolio decreased to 18.6% as of September 30, 2022, compared to 19.0% at September 30, 2021. Agricultural mortgages increased by $23.9 million, or 12.7%, from $188.5 million as of September 30, 2021, to $212.4 million as of September 30, 2022. Agricultural mortgages were 19.1% of the portfolio as of September 30, 2022, compared to 21.4% as of September 30, 2021.

The consumer residential real estate category of total loans increased from $389.5 million on September 30, 2021, to $473.5 million on September 30, 2022, a 21.6% 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 September 30, 2021, this percentage was 44.3%13.1%, and ~~as of September 30, 2022, it decreased to 42.6%. Although economic conditions for consumers had deteriorated with~~ the ~~COVID-19 pandemic,~~Residential Real Estate segment increased unemployment, and decreased consumer spending, the mortgage market was relatively strong as consumers refinanced existing debt to lower rates throughout 2021. During the first nine months of 2022, mortgage activity remained strong with the majority of consumers choosing adjustable rate mortgages which remain in the Corporation’s loan portfolio as opposed to the 30-year fixed rate mortgages that were being generated in the past couple of years and sold on the secondary market.$65,682,000, or 16.5% from December 31, 2022.

The first lien 1-4 family mortgages increased by $63.9 million, or 21.1%, from September 30, 2021, to September 30, 2022. These first lien 1-4 family loans made up 77.7% of the residential real estate total as of September 30, 2021, and 77.4% as of September 30, 2022. The vast majority of the first lien 1-4 family closed end loans consist of single family personal first lien residential mortgages and home equity loans, with the remainder consisting of 1-4 family residential non-owner-occupied mortgages. In the ~~third~~second quarter of ~~2022,~~2023, mortgage production ~~decreased 11%~~increased 6% from the previous quarter ~~and~~but was down 7%9% from the ~~third~~second quarter of ~~2021.~~2022. Purchase money origination constituted ~~87%~~93% of the Corporation’s mortgage originations for the quarter, with construction-only and construction-permanent loans making up ~~41%~~56% of that mix. ~~The~~With the continued elevated fixed interest rate environment, the percentage of mortgage originations ~~being added into~~placed in the Corporation’s held-for-investment mortgage portfolio increased quarter-over-quarter driven primarily by the continued increase in agency-eligible secondary market fixed mortgage rates. In the third quarter of 2022, 90% of all mortgage originations were held in the mortgage portfolio, 82%remained high at 87%, 77% of which were adjustable rate mortgages. As of ~~September~~June 30, ~~2022,~~2023, ARM balances were ~~$187.1~~$279.8 million, representing ~~53.5%~~60.4% of the 1-4 family residential loan portfolio of the Corporation. With a continued decline in dollar volume of loans being delivered into the secondary market along with a continued increase in mortgage rates, the gains on the sale of mortgages declined quarter-over-quarter.

As of September 30, 2022, the remainder of the residential real estate loans consisted of $13.3 million of fixed rate junior lien home equity loans, and $93.7 million of variable rate home equity lines of credit (HELOCs). This compares to $11.9 million of fixed rate junior lien home equity loans, and $74.9 million of HELOCs as of September 30, 2021. Therefore, combined, these two types of home equity loans increased from $86.8 million to $107.0 million, an increase of 23.3%.

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 12.0% of total loans as of September 30, 2022, a decline from the 12.6% at September 30, 2021. The balance of total commercial and industrial loans increased by $22.7 million, or 20.6%, from September 30, 2021 to September 30, 2022. 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 September 30, 2022 and September 30, 2021, also includes the PPP loans, which have declined rapidly as these loans are forgiven by the SBA after businesses prove they used the funds for qualified expenses. The total balance of PPP loans declined by $22.7 million, or 97.9% from September 30, 2021, to September 30, 2022 and represents balances of only $486,000 as of September 30, 2022.

~~The consumer loan portfolio increased slightly from $5.2 million at September 30, 2021, to $5.8 million at September 30, 2022, an 11.5% increase.~~ The consumer loan portfolio represents 0.5% of total loans. The long-term trend over the past decade has seen homeowners turning to the equity in their homes to finance cars and education rather than traditional consumer loans that are generally unsecured. Demand for unsecured credit is being matched by principal payments on existing loans resulting in stable balances.

The total balance of non-performing assets ~~increased~~decreased by ~~$2.2 million,~~$2,169,000, or ~~92.3%~~39.6% from balances at ~~September~~June 30, ~~2021,~~2022, and ~~increased by $1.8 million,~~$1,037,000, or ~~61.5%~~23.9%, from balances at December 31, ~~2021. There were no non-performing troubled debt restructuring (TDR) loans in any of the periods presented.~~2022. Non-accrual loans ~~increased~~decreased by ~~$2.3 million,~~$1,763,000, or ~~101.5%~~37.8%, since ~~September~~June 30, ~~2021,~~2022, and ~~increased $1.9 million,~~$1,275,000, or ~~76.3%~~30.5% since December 31, 2021. The increase that occurred for both time periods was primarily due to three agricultural relationships, a business loan, a commercial real estate loan, and a business mortgage to unrelated borrowers which all added to non-accrual loans in the first nine months of 2022. Loans past due 90 days or more and still accruing ~~were down $36,000 from the prior year period,~~decreased $406,000, or 49.9%, since June 30, 2022, and ~~$178,000,~~increased $238,000, or 140.8%, since December 31, ~~2021.~~2022. This increase was primarily caused by the addition of one agriculture mortgage totaling $269,000.

There was no other real estate owned (OREO) as of ~~September~~June 30, ~~2022,~~2023, December 31, ~~2021,~~2022, or ~~September~~June 30, ~~2021.~~2022.

The allowance for credit losses (ACL) is ~~established~~a valuation account that is deducted from the loans' amortized cost basis to ~~cover any losses inherent in~~present the ~~loan portfolio.~~net amount expected to be collected on total loans. Management reviews the adequacy of the ~~allowance each quarter based upon~~ACL on a ~~detailed analysis and calculation~~quarterly basis. The ACL represents management’s estimate of ~~the allowance for~~lifetime credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses in accordance with generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in loans as of the ~~loan portfolio.~~balance sheet date. The ~~allowance~~ACL is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Additionally, the ACL calculation includes ~~specific provisions~~subjective adjustments 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 risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending policies and procedures, loan portfolio trends, lending management experience, asset quality, loan review, underlying collateral, credit concentrations, and external factors. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted ~~on a quarterly basis~~for selling costs as ~~needed.~~appropriate. Based on the quarterly ~~credit loss~~ calculation, management will adjust the ~~allowance~~ACL through the provision for credit losses ~~through the provision~~ as necessary. ~~Changes to the allowance for credit losses during the year are primarily affected by five main factors:~~

Strong credit and collateral policies have been instrumental in producing a favorable history of loan losses for the Corporation. The Net Charge-Off table below shows the net charge-offs ~~as a percentage of average loans outstanding~~ for each segment of the Corporation’s loan portfolio as of ~~September~~June 30, ~~2022~~2023.

The Net Charge-Off table below shows the net charge-offs for each segment of the Corporation’s loan portfolio as of June 30, 2022.

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. The Corporation has historically experienced very low net charge-off percentages due to conservative credit practices. As of ~~September~~June 30, ~~2022, net~~2023, there were $15,000 in charge-offs ~~were $81,000,~~and $87,000 of recoveries, representing a net ~~charge off~~recovery position of 0.01% of average loans outstanding as reflected above. As of ~~September~~June 30, ~~2021,~~2022, net ~~recoveries~~charge-offs were ~~$2,000,~~very low at $75,000, resulting in a net charge-off as a percentage of average loans of ~~0.00%~~0.01% for the ~~year-to-date period.~~quarter.

~~Table~~Management regularly reviews the overall risk profile of ~~Contents~~

~~ENB FINANCIAL CORP~~

~~Management’s Discussion~~the loan portfolio and ~~Analysis~~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 ~~$12.9~~$13.1 million on ~~September~~June 30, ~~2022,~~2023, compared to ~~$17.9~~$13.6 million on ~~September~~June 30, ~~2021.~~2022. Total classified loans have decreased from the prior year. 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 $9,000 of specifically allocated allowance against the classified loans as of September 30, 2022, $147,000 of specific allocation as of December 31, 2021, and $0.2 million of specific allocation as of September 30, 2021.

The allowance as a percentage of total loans was 1.27% as of September 30, 2022, and 1.41% as of September 30, 2021. It is typical for the allowance for credit losses to contain a small amount of excess reserves.

Premises and Equipment

Premises and equipment, net of accumulated depreciation, increased by ~~$0.1~~$1.1 million, or ~~0.4%~~4.5%, to ~~$24.6~~$25.4 million as of ~~September~~June 30, ~~2022,~~2023, from ~~$24.5~~$24.3 million as of ~~September~~June 30, ~~2021.~~2022. As of ~~September~~June 30, ~~2022, $664,000~~2023, $435,000 was classified as construction or improvement in process compared to ~~$261,000~~$380,000 as of ~~September~~June 30, ~~2021.~~2022. Fixed assets increased as a result of new purchases outpacing depreciation on existing assets year over year.

Index

ENB FINANCIAL CORP

Management’s Discussion and Analysis

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 ~~FHLB of Pittsburgh~~Federal Home Loan Bank (FHLB) and Atlantic Community Bankers Bank (ACBB). The Corporation’s ~~$5.9~~$7.8 million of regulatory stock holdings as of ~~September~~June 30, ~~2022,~~2023, consisted of ~~$5.2~~$6.7 million of FHLB of Pittsburgh stock, ~~$631,000~~$1.1 million 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 $6.7 million on June 30, 2023, $5.6 million on December 31, 2022, and $5.5 million on June 30, 2022, 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.

Deposits

The Corporation’s total ending deposits at ~~September~~June 30, ~~2022,~~2023, increased by ~~$119.6~~$17.0 million, or ~~7.9%~~1.0%, and by ~~$240.3~~$77.7 million, or ~~17.3%~~4.9%, from December 31, ~~2021,~~2022, and ~~September~~June 30, ~~2021,~~2022, respectively. Customer deposits are the Corporation’s primary source of funding for loans and securities. ~~In the past few years, the economic concerns and volatility of the equity markets continued to lead customers to banks for safe places to invest money, despite historically low interest rates.~~ The mix of the Corporation’s deposit categories has changed moderately since ~~September~~June 30, ~~2021,~~2022, with the changes being a ~~$79.2~~$44.1 million, or ~~13.4% increase~~6.5% decrease in non-interest bearing demand deposit accounts, a ~~$23.4~~$101.2 million, or ~~40.1%~~84.6% increase in interest bearing demand balances, a ~~$4.1~~$18.4 million, or ~~3.0%~~14.4% decrease in NOW balances, a ~~$98.1~~$1.3 million, or ~~60.5% increase~~0.8% decrease in money market account balances, a ~~$39.3~~$30.6 million, or ~~11.9% increase~~8.2% decrease in savings account balances, and a ~~$4.3~~$70.9 million, or ~~3.7%~~62.4% increase in time deposit balances.

The ~~Deposits by Major Classification table, shown below, provides~~growth in interest bearing demand balances was a result of participating in a reciprocal arrangement for the Corporation’s off balance sheet cash management sweep product as a strategic decision to fund loan growth. This product allows customers to sweep balances off the Corporation’s balance sheet, maintain a competitive yield, and receive full FDIC insurance coverage. The Corporation now fully receives reciprocal balances back on balance sheet for this product, resulting in the large increase in balances since June 30, 2022.

The significant increase in time deposit balances was a result of ~~each category for September~~issuing $20 million in brokered time deposits since June 30, 2022, ~~December 31, 2021,~~as well as increases in the Corporation’s customer time deposits as a result of the increased rate environment and ~~September 30, 2021.~~

DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)

September 30, December 31, September 30,
2022 2021 2021
$ $ $

Non-interest bearing demand 670,563 686,278 591,333
Interest bearing demand 81,855 63,015 58,425
NOW accounts 129,390 139,366 133,443
Money market deposit accounts 260,141 168,327 162,050
Savings accounts 369,229 341,291 329,900
Time deposits 120,671 113,936 116,351
Total deposits 1,631,849 1,512,213 1,391,502

~~Table of Contents~~

~~ENB FINANCIAL CORP~~

~~Management’s Discussion and Analysis~~

~~The growth and mix of deposits is often driven by~~offering 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~~

promotional rates on specific time deposit terms. 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 June 30, 2023 and 2022, the total uninsured deposits of the Corporation were approximately $228,159,000 and $333,476,000, respectively. Total uninsured deposits is calculated based on regulatory reporting requirements and reflects the portion of any deposit of a customer at an insured depository institution that exceeds the applicable FDIC insurance coverage for that depositor at that institution and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regime.

The ~~Corporation has experienced a slow and steady shift in deposit trends over~~Deposits by Major Classification table, shown below, provides the ~~past five years as customers have moved money from time deposits into core checking and savings accounts although with increased rates in the 2~~^nd ~~half~~balances of ~~2022, there is a shift back into time deposits resulting in the increase in balances since September~~each category for June 30, ~~2021, and~~2023, December 31, ~~2021.~~2022, and June 30, 2022.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

DEPOSITS BY MAJOR CLASSIFICATION

(DOLLARS IN THOUSANDS)

	June 30,		December 31,		June 30,
	2023		2022		2022
	$		$		$

Non-interest bearing demand		634,360		672,342		678,472
Interest bearing demand		220,949		164,208		119,711
NOW accounts		109,257		139,846		127,622
Money market deposit accounts		164,432		163,836		165,781
Savings accounts		342,422		364,897		373,060
Time deposits		184,531		133,829		113,634
Total deposits		1,655,951		1,638,958		1,578,280

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

Borrowings

Total borrowings were ~~$98.6~~$131.2 million, ~~$63.9~~$113.4 million, and ~~$66.4~~$83.9 million as of ~~September~~June 30, 2023, December 31, 2022, and June 30, 2022, respectively. There were no short-term borrowings as of June 30, 2023, but as of December 31, ~~2021,~~2022, there were $16.0 million, and ~~September~~$20.0 million at June 30, ~~2021, respectively. There was $15.0 million of short-term funds outstanding at September 30, 2022, and no short-term funds outstanding at December 31, 2021, or September 30, 2021.~~2022. 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. ~~The $15.0 million of short-term borrowings at September 30, 2022, consisted entirely of short-term FHLB advances.~~

Total long-term borrowings, borrowings initiated for terms longer than one year, were ~~$44.2~~$91.7 million as of ~~September~~June 30, ~~2022, $44.2~~2023, $58.0 million as of December 31, ~~2021,~~2022, and ~~$46.7~~$44.2 million as of ~~September~~June 30, ~~2021.~~2022, respectively. The long-term borrowings for the Corporation were made up entirely of FHLB long-term advances. FHLB advances are used as a secondary source of funding and to mitigate interest rate risk. These long-term funding instruments are typically a more effective funding instrument in terms of selecting the exact amount, rate, and term of funding rather than trying to source the same through deposits. In this manner, management can efficiently meet known liquidity and interest rate risk needs. The ~~decrease~~increase in long-term FHLB borrowings since ~~September~~June 30, ~~2021,~~2022, can be attributed to ~~management taking advantage of declining rates in 2021 by prepaying FHLB advances~~the changing interest rate environment and ~~incurring penalties in order~~the desire to ~~save on interest expense in~~ladder out some borrowings into future ~~years.~~

years to cover liquidity needs. The Corporation continues to be well under the FHLB maximum borrowing capacity (MBC), which is currently ~~$529.8~~$633.5 million. The Corporation’s internal policy limits 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, onon 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 ~~4.00%~~4% per year for 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of ~~September~~June 30, ~~2022,~~2023, $16.0 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.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

On July 22, 2022, the Corporation completed the sale of an additional subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt notes with a maturity date of September 30, 2032. These notes are all non-callable for 5 years and carry a fixed interest rate of 5.75% per year for the 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of ~~September~~June 30, ~~2022, $15.0~~2023, $17.0 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.

~~Table of Contents~~

~~ENB FINANCIAL CORP~~

~~Management’s Discussion and Analysis~~

Stockholders’ Equity

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

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

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

REGULATORY CAPITAL RATIOS:
Regulatory Requirements
Adequately Well
As of September 30, 2022 Capital Ratios Capitalized Capitalized
Total Capital to Risk-Weighted Assets
Consolidated 15.1% N/A N/A
Bank 14.4% 8.0% 10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.2% 6.0% 8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 10.9% N/A N/A
Bank 13.2% 4.5% 6.5%

Tier 1 Capital to Average Assets
Consolidated 7.7% N/A N/A
Bank 9.3% 4.0% 5.0%

As of December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated 15.6% N/A N/A
Bank 14.9% 8.0% 10.0%

Tier I Capital to Risk-Weighted Assets
Consolidated 12.5% N/A N/A
Bank 13.6% 6.0% 8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated 12.5% N/A N/A
Bank 13.6% 4.5% 6.5%

Tier I Capital to Average Assets
Consolidated 8.2% N/A N/A
Bank 9.1% 4.0% 5.0%

As of September 30, 2021
Total Capital to Risk-Weighted Assets
Consolidated 15.9% N/A N/A
Bank 15.4% 8.0% 10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated 12.8% N/A N/A
Bank 14.1% 6.0% 8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated 12.8% N/A N/A
Bank 14.1% 4.5% 6.5%

Tier 1 Capital to Average Assets
Consolidated 8.3% N/A N/A
Bank 9.2% 4.0% 5.0%

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

REGULATORY CAPITAL RATIOS:

			Regulatory Requirements
			Adequately		Well
As of June 30, 2023	Capital Ratios		Capitalized		Capitalized
Total Capital to Risk-Weighted Assets
Consolidated		14.9%		N/A		N/A
Bank		14.4%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		10.7%		N/A		N/A
Bank		13.2%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		10.7%		N/A		N/A
Bank		13.2%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		7.6%		N/A		N/A
Bank		9.3%		4.0%		5.0%

As of December 31, 2022
Total Capital to Risk-Weighted Assets
Consolidated		15.0%		N/A		N/A
Bank		14.5%		8.0%		10.0%

Tier I Capital to Risk-Weighted Assets
Consolidated		10.9%		N/A		N/A
Bank		13.4%		6.0%		8.0%

Common Equity Tier I Capital to Risk-Weighted Assets
Consolidated		10.9%		N/A		N/A
Bank		13.4%		4.5%		6.5%

Tier I Capital to Average Assets
Consolidated		7.6%		N/A		N/A
Bank		9.3%		4.0%		5.0%


As of June 30, 2022
Total Capital to Risk-Weighted Assets
Consolidated		13.8%		N/A		N/A
Bank		13.4%		8.0%		10.0%

Tier 1 Capital to Risk-Weighted Assets
Consolidated		11.0%		N/A		N/A
Bank		12.3%		6.0%		8.0%

Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated		11.0%		N/A		N/A
Bank		12.3%		4.5%		6.5%

Tier 1 Capital to Average Assets
Consolidated		7.8%		N/A		N/A
Bank		8.7%		4.0%		5.0%

As of ~~September~~June 30, ~~2022~~2023, the Bank’s Tier 1 Leverage Ratio stood at 9.3% while the Corporation’s Tier 1 Leverage Ratio was ~~7.7%~~7.6%. Tier 1 Capital levels at the Corporation level were not impacted by the subordinated debt issue since subordinated debt only qualifies as Tier 2 Capital at the corporate level. As such, in terms of the Corporation’s regulatory capital ratios, only the Total Capital to Risk-Weighted Assets ratio was enhanced as a result of the $40 million subordinated debt ~~issues.~~issue. Most of the marked improvement in capital ratios occurred at the Bank level. In 2022 and 2023, the Corporation’s earnings, net of dividends paid, positively impacted the level of stockholders’ equity, but a devaluation of the investment portfolio, resulted in a higher level of unrealized losses, and a negative impact.

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation typically has off-balance sheet arrangements related to loan funding commitments. These arrangements may impact the Corporation’s financial condition and liquidity if they were to be exercised within a short period of time. As discussed in the following liquidity section, the Corporation has in place sufficient liquidity alternatives to meet these obligations. The following table presents information on the commitments by the Corporation as of ~~September~~June 30, ~~2022.~~2023.

~~OFF-BALANCE SHEET ARRANGEMENTS~~
~~(DOLLARS IN THOUSANDS)~~

	~~September 30,~~
	~~2022~~2023
	$
Commitments to extend credit:
Revolving home equity		~~187,371~~210,804
Construction loans		~~46,585~~50,360
Real estate loans		~~92,296~~89,756
Business loans		~~214,489~~227,002
Consumer loans		~~1,250~~1,373
Other		~~5,657~~5,715
Standby letters of credit		~~10,411~~13,805

Total		~~558,059~~598,815

Market Risks

During March and April 2023, three significant bank failures occurred (Silicon Valley Bank, Signature Bank, and First Republic Bank). This was and continues to be accompanied by financial instability at certain additional banks. These bank failures and bank instabilities have created and may continue to create market and other risks, for all financial institutions and banks, including the Corporation. These risks include, but are not limited to:

Market risk and loss of confidence in the financial services sector, and/or specific banks;

Deterioration of securities and loan portfolios;

Deposit reductions with higher volumes and occurring over shorter periods of time;

Increased liquidity demand and utilization of sources of liquidity; and

Interest rate volatility and abrupt, sudden and greater than usual rate changes.

These factors individually, or in any combination, could materially and adversely affect:

Financial condition;

Operations and results thereof; and

Stock price.

In addition, the previously mentioned bank failures and instabilities may result in an increase of FDIC deposit insurance premiums and/or result in special FDIC deposit insurance assessments, which also may adversely affect the Corporation’s financial condition, operations, results thereof or stock price.

The Corporation cannot predict the impact, timing or duration of such events.

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. Among the provisions that have already or are likely to affect the Corporation are the following:

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ENB FINANCIAL CORP

Management’s Discussion and Analysis

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.

~~Table of Contents~~

~~ENB FINANCIAL CORP~~

~~Management’s Discussion and Analysis~~

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.

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.

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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ENB FINANCIAL CORP

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 credit 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. 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, cash flows from securities, borrowings, and 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.

The Corporation regularly reviews its liquidity position by measuring its projected net cash flows at a 30 and 90-day interval. The ~~Bank~~Corporation stresses the measurements by assuming a level of deposit out-flows that have not historically been realized. In addition to this forecast, other funding sources are reviewed as a method to provide emergency funding if necessary. The objective of this measurement is to identify the amount of cash that could be raised quickly without the need to liquidate assets. The ~~Bank~~Corporation also stresses its liquidity position utilizing different longer-term scenarios. The varying degrees of stress create pressure on deposit flows in its local market, reduce access to wholesale funding and limit access of funds available through brokered deposit channels. In addition to stressing cash flow, specific liquidity risk indicators are monitored to help identify risk areas. This analysis helps identify and quantify the potential cash surplus/deficit over a variety of time horizons to ensure the ~~Bank~~Corporation has adequate funding resources. Assumptions used for liquidity stress testing are subjective. Should an evolving liquidity situation or business cycle present new data, potential assumption changes will be considered. The Corporation believes it can meet all anticipated liquidity demands.

Historically, the Corporation has satisfied its liquidity needs from earnings, repayment of loans and amortizing investment securities, maturing investment securities, loan sales, deposit growth and its ability to access existing lines of credit. All investment securities are classified as available for sale; therefore, securities that are unencumbered can be used as collateral for borrowings and are an additional source of readily available liquidity.

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

·●

On-hand Liquidity/Total Liabilities – Net liquid assets as a percentage of total liabilities

·●

Non-Core Funding Dependence – Non-core liabilities minus short-term investments as a percentage of long-term assets

·●

Reliance on Wholesale Funding – Wholesale funding as a percentage of total funding

·●

Net Short-term Liabilities/Total Assets – Short-term liabilities minus short-term assets as a percentage of total assets

~~Table of Contents~~

~~ENB FINANCIAL CORP~~

·●

Loan to Deposit Ratio – Total loans as a percentage of total deposits

Index

ENB FINANCIAL CORP

These measurements are designed to prevent undue reliance on outside sources of funding and to ensure a steady stream of liquidity is available should events occur that would cause a sudden decrease in deposits or large increase in loans or both, which would in turn draw significantly from the Corporation’s available liquidity sources. As of ~~September~~June 30, ~~2022,~~2023, the Corporation was within guidelines for all of the above 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.

Interest Rate Risk

Interest rate risk is measured using two analytical tools:

·●

Changes in net interest income

·●

Changes in net portfolio value

Financial modeling is used to forecast net interest income and earnings, as well as net portfolio value, also referred to as fair value. The modeling is generally conducted under seven different interest rate scenarios that can vary according to the present level of interest rates. The scenarios consist of a projection of net interest income if rates remain flat, increase 100, 200, ~~300,~~ or ~~400~~300 basis points, or decrease 100, 200, or ~~200~~300 basis points.

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

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. Back testing of the model is completed to compare actual results to projections to ensure the validity of the assumptions in the model. The back testing analyses indicate that the model assumptions are reliable.

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~~change immediately, the Corporation would realize less net interest income in all up and down rate scenarios. In past ~~quarters,~~years, the Corporation was generally showing asset sensitivity meaning in a rates-up environment, assets would reprice faster than liabilities resulting in higher net interest income. ~~As of~~In the ~~third quarter 2022,~~past few quarters, this increase in net interest income shifted to a decline primarily due to the increased impact from a higher cost of funds as rates continue to rise. While the Corporation would recognize higher interest income on its variable-rate assets, it would also now be repricing liabilities at a much faster pace resulting in increased interest expense that would offset the rise in interest income.

Likewise, in the down-rate scenarios, asset yields would decline in conjunction with market rate moves, while deposit repricing would be slower to retain existing deposit balances.

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ENB FINANCIAL CORP

The ~~third~~second quarter of ~~2022~~2023 analysis projects net interest income expected in the seven rate scenarios over a one-year time horizon. As of ~~September~~June 30, ~~2022,~~2023, the Corporation was within guidelines for the maximum amount of net interest income change in all rate scenarios.

The assumptions and analysis of interest rate risk are based on historical experience during varied economic cycles. Management believes these assumptions to be appropriate; however, actual results could vary significantly. Management uses this analysis to identify trends in interest rate sensitivity and determine if action is necessary to mitigate asset liability risk.

Changes in Net Portfolio Value

The change in net portfolio value is considered a tool to measure long-term interest rate risk. The analysis measures the exposure of the balance sheet to valuation changes due to changes in interest rates. The calculation of net portfolio value discounts future cash flows to the present value based on current market rates. The change in net portfolio value estimates the gain or loss in value that would occur on market sensitive instruments given an interest rate increase or decrease in the same seven scenarios mentioned above. As of ~~September~~June 30, ~~2022,~~2023, the Corporation was within guidelines for all rate scenarios except the down-200 and down-300 basis point ~~scenario.~~scenarios. The Corporation shows a favorable benefit to net portfolio value in the rising rate scenarios, due primarily to the large amount of core deposits on the Corporation’s balance sheet. 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 analysis shows a valuation loss in the down rate scenarios. Policy allows for a valuation decline of 25% for the down-200 basis point scenario and actual projected results show a valuation decline of 27%. In the down-300 basis point scenario, policy allows for a valuation decline of 30% and actual projection results show a valuation decline of 51%. While ~~this loss is~~these losses are outside of policy guidelines, the Federal Reserve has signaled that their preferred course of action is to ~~have several additional rate hikes in 2022.~~increase rates until inflation retracts. The Corporation will continue to monitor these measurements in the down-rate scenarios and adjust balance sheet structure as necessary to prepare for future potential lower rates.

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.

~~Table of Contents~~Index

ENB FINANCIAL CORP

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer (Principal Executive Officer) and Treasurer (Principal Financial Officer), of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures (as such term as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2022,~~2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer (Principal Executive Officer) along with the Treasurer (Principal Financial Officer) concluded that the Corporation’s disclosure controls and procedures as of ~~September~~June 30, ~~2022,~~2023, 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.

~~Table of Contents~~Index

ENB FINANCIAL CORP

PART II – OTHER INFORMATION

~~September~~June 30, ~~2022~~2023

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The Corporation continually monitors the risks related to the Corporation’s business, other events, the Corporation’s Common Stock, and the Corporation’s industry. ~~Management has not identified any new~~Other than as noted below, there have been no material changes in risk factors ~~since~~applicable to the Corporation from those disclosed in "Risk Factors" in Item 1A of the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2021 Form 10-K filing.~~2022.

Recent negative developments affecting the banking industry, including recent bank failures or concerns regarding liquidity, have eroded customer confidence in the banking system and may have a material adverse effect on the Corporation.

Recent events impacting the banking industry, including the high-profile failure or instability of certain banking institutions, have resulted in general uncertainty and eroded confidence in the safety, soundness, and financial strength of the financial services sector. In particular, the bank failures highlighted the potential serious impact of a financial institution unable to meet withdrawal requests by depositors. This has resulted in a growing concern about liquidity in the banking industry, access to and volatile capital markets and reduced stock valuations for certain financial institutions. Similar future events, including additional bank failures or bank instability, could directly or indirectly adversely impact our own liquidity, access to capital markets, stock price, financial condition and results of operations. Further, these recent events may also result in: greater regulatory scrutiny and enforcement; additional and more stringent laws and regulations for the financial services industry; increased FDIC deposit insurance premiums or special FDIC assessments; and higher capital ratio requirements, which as a result could have a material negative impact and adverse effect on our business, financial condition and results of operations.

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

Purchases

The following table details the Corporation’s purchase of its own common stock during the three months ended ~~September~~June 30, ~~2022.~~2023.

~~Issuer Purchase of Equity Securities~~

~~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 2022~~

—

~~164,100~~

~~August 2022~~

—

~~164,100~~

~~September 2022~~

—

~~164,100~~

~~Total~~

—

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 2023

3,331

13.56

3,331

148,410

May 2023

5,000

13.30

5,000

143,410

June 2023

4,100

13.95

4,100

139,310

Total

12,431

* 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. The first purchase of common stock under this plan occurred on October 28, 2020. By ~~September~~June 30, ~~2022,~~2023, a total of ~~35,900~~60,690 shares were repurchased at a total cost of ~~$723,000~~$1,101,000 for an average cost per share of ~~$20.14.~~$18.14.

Index

ENB FINANCIAL CORP

Item 3. Defaults Upon Senior Securities – Nothing to Report

Item 4. Mine Safety Disclosures – Not Applicable

Item 5. Other Information – Nothing to Report

~~Table of Contents~~Index

ENB FINANCIAL CORP

Item 6. Exhibits:

Exhibit No.	Description
3(i)	Articles of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 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 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	2022 Employee Stock Purchase Plan (Incorporated herein by reference to Appendix A to the Corporation’s Definitive Proxy Statement filed with the SEC on April 4, 2022.)
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	Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Chad E. Neiss dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.1 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.5	Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Jeffrey S. Stauffer dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.2 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.6	Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Rachel G. Bitner dated as of October 28, 2022. (Incorporated herein by reference to Exhibit 10.4 of the Corporation's Form 8-K filed with the SEC on November 1, 2022.)
10.7	Employment Agreement by and among ENB Financial Corp, The Ephrata National Bank and Joselyn D. Strohm dated as of June 5, 2023. (Incorporated herein by reference to Exhibit 10.1 of the Corporation's Form 8-K filed with the SEC on June 7, 2023.)
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)).

~~Table of Contents~~Index

ENB FINANCIAL CORP

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ENB Financial Corp
	(Registrant)


Dated: ~~November~~August 14, ~~2022~~2023	By:	/s/ Jeffrey S. Stauffer
		Jeffrey S. Stauffer
		Chairman of the Board
		Chief Executive Officer and President
		Principal Executive Officer


Dated: ~~November~~August 14, ~~2022~~2023	By:	/s/ Rachel G. Bitner
		Rachel G. Bitner
		Treasurer
		Principal Financial Officer

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


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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐


Part I – FINANCIAL INFORMATION

	Item 1.	Financial Statements

	Consolidated Balance Sheets at ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, and December 31, ~~2021~~2022 (Unaudited)		3

	Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (unaudited)~~(Unaudited)~~		4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (unaudited)		5

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and ~~Nine~~Six Months Ended ~~September~~ June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)		6

	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)		7

	Notes to the Unaudited Consolidated Interim Financial Statements		~~8-30~~ 8-33


	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~31-52~~34-55

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	~~53-55~~56-58

	Item 4.	Controls and Procedures	5659



Part II – OTHER INFORMATION			5760

	Item 1.	Legal Proceedings	5760

	Item 1A.	Risk Factors	5760

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5760

	Item 3.	Defaults upon Senior Securities	5761

	Item 4.	Mine Safety Disclosures	5761

	Item 5.	Other Information	5761

	Item 6.	Exhibits	5862


SIGNATURE PAGE			5963

	September 30,			December 31,			September 30,
	2022			2021			2021
	$			$			$
ASSETS
Cash and due from banks		27,623			19,930			16,100
Interest-bearing deposits in other banks		22,953			138,519			62,720
Total cash and cash equivalents		50,576			158,449			78,820
Securities available for sale (at fair value)		559,646			558,093			561,587
Equity securities (at fair value)		8,951			8,982			8,844
Loans held for sale		5,131			3,194			3,174
Loans (net of unearned income)		1,114,504			920,904			880,261
Less: Allowance for loan losses		14,150			12,931			12,454
Net loans		1,100,354			907,973			867,807
Premises and equipment		24,598			24,476			24,507
Regulatory stock		5,897			5,380			5,635
Bank owned life insurance		35,995			35,414			35,200
Other assets		33,156			15,269			12,478
Total assets		1,824,304			1,717,230			1,598,052

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing		670,563			686,278			591,333
Interest-bearing		961,286			825,935			800,169
Total deposits		1,631,849			1,512,213			1,391,502
Short-term borrowings		15,000			-			-
Long-term debt		44,206			44,206			46,706
Subordinated debt		39,356			19,680			19,660
Other liabilities		7,738			3,843			3,967
Total liabilities		1,738,149			1,579,942			1,461,835
Stockholders' equity:
Common stock, par value $0.10
Shares: Authorized 24,000,000
Issued 5,739,114 and Outstanding 5,625,146 as of 9/30/22, 5,583,956 as of 12/31/21, and 5,575,452 as of 9/30/21		574			574			574
Capital surplus		4,475			4,520			4,498
Retained earnings		138,760			131,856			130,082
Accumulated other comprehensive (loss) income		(55,381	)		3,441			4,326
Less: Treasury stock cost on 113,969 shares as of 9/30/22, 155,158 as of 12/31/21, and 163,663 as of 9/30/21		(2,273	)		(3,103	)		(3,263	)
Total stockholders' equity		86,155			137,288			136,217

Total liabilities and stockholders' equity		1,824,304			1,717,230			1,598,052

	Three Months ended September 30,					Nine Months ended September 30,
	2022		2021			2022			2021
	$		$			$			$
Interest and dividend income:
Interest and fees on loans		11,022		8,986			29,357			25,541
Interest on securities available for sale
Taxable		2,654		1,301			6,090			3,611
Tax-exempt		1,074		1,015			3,182			2,977
Interest on deposits at other banks		55		17			139			59
Dividend income		167		98			367			295

Total interest and dividend income		14,972		11,417			39,135			32,483

Interest expense:
Interest on deposits		608		278			1,168			877
Interest on borrowings		775		511			1,683			1,569

Total interest expense		1,383		789			2,851			2,446

Net interest income		13,589		10,628			36,284			30,037

Provision (credit) for loan losses		550		(250	)		1,300			125

Net interest income after provision (credit) for loan losses		13,039		10,878			34,984			29,912

Other income:
Trust and investment services income		680		540			1,979			1,746
Service fees		791		618			2,063			1,917
Commissions		941		945			2,762			2,761
Gains on the sale of debt securities, net		-		350			139			711
Gains (losses) on equity securities, net		9		32			(129	)		256
Gains on sale of mortgages		186		1,206			1,249			4,381
Earnings on bank-owned life insurance		242		218			667			636
Other income		331		230			1,145			1,126

Total other income		3,180		4,139			9,875			13,534

Operating expenses:
Salaries and employee benefits		6,607		6,142			19,826			17,800
Occupancy		713		654			2,125			1,972
Equipment		312		255			913			806
Advertising & marketing		259		282			833			717
Computer software & data processing		1,727		1,097			4,251			3,297
Shares tax		351		322			1,053			876
Professional services		720		535			1,983			1,572
Other expense		824		831			2,614			1,961

Total operating expenses		11,513		10,118			33,598			29,001

Income before income taxes		4,706		4,899			11,261			14,445

Provision for federal income taxes		697		760			1,503			2,251

Net income		4,009		4,139			9,758			12,194

Earnings per share of common stock		0.71		0.74			1.74			2.19

Cash dividends paid per share		0.17		0.17			0.51			0.50

Weighted average shares outstanding		5,611,279		5,570,416			5,597,301			5,565,777

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)	Nine Months Ended September 30,
	2022			2021
	$			$
Cash flows from operating activities:
Net income		9,758			12,194
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities premiums and discounts and loan fees		3,854			2,851
Amortization of operating leases right-of-use assets		132			60
Increase in interest receivable		(1,254	)		(958	)
Increase in interest payable		526			146
Provision for loan losses		1,300			125
Gains on the sale of debt securities, net		(139	)		(711	)
Losses (gains) on equity securities, net		129			(256	)
Gains on sale of mortgages		(1,249	)		(4,381	)
Loans originated for sale		(28,164	)		(71,607	)
Proceeds from sales of loans		27,476			75,843
Earnings on bank-owned life insurance		(667	)		(636	)
Depreciation of premises and equipment and amortization of software		1,207			1,164
Deferred income tax		(83	)		164
Amortization of deferred fees on subordinated debt		76			59
Other assets and other liabilities, net		2,327			(2,292	)
Net cash provided by operating activities		15,229			11,765

Cash flows from investing activities:
Securities available for sale:
Proceeds from maturities, calls, and repayments		35,605			58,837
Proceeds from sales		8,575			77,259
Purchases		(123,852	)		(228,981	)
Equity securities
Proceeds from sales		151			460
Purchases		(249	)		(1,945	)
Purchase of regulatory bank stock		(974	)		(524	)
Redemptions of regulatory bank stock		457			996
Purchase of bank-owned life insurance		-			(4,918	)
Net increase in loans		(193,735	)		(55,899	)
Purchases of premises and equipment, net		(1,106	)		(745	)
Purchase of computer software		(141	)		(471	)
Net cash used for investing activities		(275,269	)		(155,930	)

Cash flows from financing activities:
Net increase in demand, NOW, and savings accounts		123,598			141,428
Net decrease in time deposits		(3,962	)		(2,737	)
Net increase in short-term borrowings		15,000			-
Repayments of long-term debt		-			(8,084	)
Proceeds from issuance of subordinated debt		19,600			-
Dividends paid		(2,854	)		(2,782	)
Proceeds from sale of treasury stock		838			593
Treasury stock purchased		(53	)		(372	)
Net cash provided by financing activities		152,167			128,046
Decrease in cash and cash equivalents		(107,873	)		(16,119	)
Cash and cash equivalents at beginning of period		158,449			94,939
Cash and cash equivalents at end of period		50,576			78,820

Supplemental disclosures of cash flow information:
Interest paid		2,325			2,300
Income taxes paid		1,200			2,200
Supplemental disclosure of non-cash investing and financing activities:
Fair value adjustments for securities available for sale		(74,458	)		4,595
Recognition of lease operating right-of-use assets		2,811			80
Recognition of operating lease liabilities		2,811			80


													Revolving		Revolving
	Term Loans Amortized Costs Basis by Origination Year												Loans		Loans
													Amortized		Converted
June 30, 2023	2023		2022		2021		2020		2019		Prior		Cost Basis		to Term		Total
Agriculture
Risk Rating
Pass	$	25,207	$	45,675	$	51,361	$	20,847	$	15,716	$	63,754	$	18,032	$	—	$	240,592
Special Mention		—		48		503		—		187		1,213		64		—		2,015
Substandard		—		—		—		747		306		2,311		—		—		3,364
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	25,207	$	45,723	$	51,864	$	21,594	$	16,209	$	67,278	$	18,096	$	—	$	245,971

Agriculture
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Business Loans
Risk Rating
Pass	$	22,826	$	105,175	$	71,059	$	39,252	$	16,901	$	51,583	$	37,670	$	—	$	344,466
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		3,172		1,539		—		299		—		932		332		—		6,274
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	25,998	$	106,714	$	71,059	$	39,551	$	16,901	$	52,515	$	38,002	$	—	$	350,740

Business Loans
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Non-Owner Occupied CRE
Risk Rating
Pass	$	14,099	$	42,236	$	27,143	$	13,186	$	7,964	$	13,647	$	4,260	$	—	$	122,535
Special Mention		—		647		—		—		—		—		—		—		647
Substandard		—		—		—		—		2,400		312		—		—		2,712
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	14,099	$	42,883	$	27,143	$	13,186	$	10,364	$	13,959	$	4,260	$	—	$	125,894

Non-Owner Occupied CRE
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total
Risk Rating
Pass	$	62,132	$	193,086	$	149,563	$	73,285	$	40,581	$	128,984	$	59,962	$	—	$	707,593
Special Mention		—		695		503		—		187		1,213		64		—		2,662
Substandard		3,172		1,539		—		1,046		2,706		3,555		332		—		12,350
Doubtful		—		—		—		—		—		—		—		—		—
Total (a)	$	65,304	$	195,320	$	150,066	$	74,331	$	43,474	$	133,752	$	60,358	$	—	$	722,605

December 31, 2022	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		209,534		214,905		83,240		85,977		28,664		26,749		649,069
Special Mention		—		1,966		3,553		893		—		132		6,544
Substandard		1,289		4,296		—		658		—		241		6,484
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—

Total		210,823		221,167		86,793		87,528		28,664		27,122		662,097

	1-4 Family				Home Equity
	Residential		Home Equity		Lines of
September 30, 2022	Mortgages		Loans		Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		366,363		12,918		93,704		5,747		478,732
Non-performing		-		-		-		8		8

Total		366,363		12,918		93,704		5,755		478,740


													Loans
					Greater								Receivable > 90 Days
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		and
September 30, 2022	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		-		-		1,087		1,087		206,914		208,001		140
Agriculture mortgages		-		22		3,355		3,377		208,974		212,351		-
Construction		-		-		-		-		80,008		80,008		-
Consumer real estate
1-4 family residential mortgages		502		-		-		502		365,861		366,363		-
Home equity loans		17		12		-		29		12,889		12,918		-
Home equity lines of credit		73		-		-		73		93,631		93,704		-
Commercial and industrial
Commercial and industrial		7		6		203		216		80,748		80,964		-
Tax-free loans		-		-		-		-		26,398		26,398		-
Agriculture loans		-		-		-		-		25,520		25,520		-
Consumer		29		1		8		38		5,717		5,755		8
Total		628		41		4,653		5,322		1,106,660		1,111,982		148

December 31, 2022	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		409,854		11,598		98,349		5,739		525,540
Non-performing		447		339		—		30		816

Total		410,301		11,937		98,349		5,769		526,356

	Three		Six
	Months		Months
	Ended		Ended
	June 30,		June 30,
	2022		2022
	$		$

Average recorded balance of impaired loans		4,179		3,533
Interest income recognized on impaired loans		5		13

IMPAIRED LOAN ANALYSIS
(DOLLARS IN THOUSANDS)
December 31, 2022	Recorded Investment		Unpaid Principal Balance		Related Allowance
	$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		1,201		1,271		—
Agriculture mortgages		3,229		3,348		—
Construction		—		—		—
Total commercial real estate		4,430		4,619		—

Commercial and industrial
Commercial and industrial		190		199		—
Tax-free loans		—		—		—
Agriculture loans		—		—		—
Total commercial and industrial		190		199		—

Total with no related allowance		4,620		4,818		—

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

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

Total with a related allowance		—		—		—

Total by loan class:
Commercial real estate
Commercial mortgages		1,201		1,271		—
Agriculture mortgages		3,229		3,348		—
Construction		—		—		—
Total commercial real estate		4,430		4,619		—

Commercial and industrial
Commercial and industrial		190		199		—
Tax-free loans		—		—		—
Agriculture loans		—		—		—
Total commercial and industrial		190		199		—

Total		4,620		4,818		—

			Unpaid
	Recorded		Principal		Related
September 30, 2022	Investment		Balance		Allowance
	$		$		$

With no related allowance recorded:
Commercial real estate
Commercial mortgages		948		1,006		-
Agriculture mortgages		3,811		3,923		-
Construction		-		-		-
Total commercial real estate		4,759		4,929		-

Commercial and industrial
Commercial and industrial		194		199		-
Tax-free loans		-		-		-
Agriculture loans		-		-		-
Total commercial and industrial		194		199		-

Total with no related allowance		4,953		5,128		-

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

Commercial and industrial
Commercial and industrial		9		9		9
Tax-free loans		-		-		-
Agriculture loans		-		-		-
Total commercial and industrial		9		9		9

Total with a related allowance		9		9		9

Total by loan class:
Commercial real estate
Commercial mortgages		948		1,006		-
Agriculture mortgages		3,811		3,923		-
Construction		-		-		-
Total commercial real estate		4,759		4,929		-

Commercial and industrial
Commercial and industrial		203		208		9
Tax-free loans		-		-		-
Agriculture loans		-		-		-
Total commercial and industrial		203		208		9

Total		4,962		5,137		9

	Beginning							Provisions			Ending
	Balance		Charge-offs			Recoveries		(Reductions)			Balance
Allowance for credit losses:
Agriculture		3,591		—			—		75			3,666
Business Loans		3,473		—			2		(26	)		3,449
Consumer Loans		270		(14	)		1		100			357
Home Equity		2,318		—			—		21			2,339
Non-Owner Occupied CRE		942		—			—		1			943
Residential Real Estate		5,460		—			7		612			6,079

Total (a)	$	16,054	$	(14	)	$	10	$	783		$	16,833

			Impact of
	Beginning		adopting								Provisions		Ending
	Balance		ASC 326			Charge-offs			Recoveries		(Reductions)		Balance
Allowance for credit losses:
Commercial Real Estate	$	6,074	$	(6,074	)	$	—		$	—	$	—	$	—
Consumer Real Estate		5,442		(5,442	)		—			—		—		—
Commerical & Industrial		2,151		(2,151	)		—			—		—		—
Consumer		67		(67	)		—			—		—		—
Agriculture		—		3,537			—			71		58		3,666
Business Loans		—		3,382			—			7		60		3,449
Consumer Loans		—		250			(15	)		1		121		357
Home Equity		—		2,129			—			—		210		2,339
Non-Owner Occupied CRE		—		875			—			—		68		943
Residential Real Estate		—		4,658			—			8		1,413		6,079
Unallocated		417		(417	)		—			—		—		—

Total (a)	$	14,151	$	680		$	(15	)	$	87	$	1,930	$	16,833

As of June 30, 2023:	Agriculture		Business Loans		Consumer Loans		Home Equity		Non- Owner Occupied CRE		Residential Real Estate		Total
	$		$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated		—		—		—		—		—		—		—
Ending balance: collectively evaluated		3,666		3,449		357		2,339		943		6,079		16,833

Loans receivable:
Ending balance		245,971		350,740		6,310		102,108		125,894		462,942		1,293,965
Ending balance: individually evaluated		2,521		797		—		—		—		—		3,318
Ending balance: collectively evaluated		243,450		349,943		6,310		102,108		125,894		462,942		1,290,647

As of December 31, 2022:	Commercial Real Estate		Consumer Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	$		$		$		$		$		$
Allowance for credit losses:
Ending balance: individually evaluated for impairment		—		—		—		—		—		—
Ending balance: collectively evaluated for impairment		6,074		5,442		2,151		67		417		14,151

Loans receivable:
Ending balance		518,783		520,587		143,314		5,769				1,188,453
Ending balance: individually evaluated for impairment		4,430		—		190		—				4,620
Ending balance: collectively evaluated for impairment		514,353		520,587		143,124		5,769				1,183,833


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.

	June 30, 2023
	Level I		Level II		Level III		Total
	$		$		$		$

U.S. treasuries		17,765		—		—		17,765
U.S. government agencies		—		16,988		—		16,988
U.S. agency mortgage-backed securities		—		42,506		—		42,506
U.S. agency collateralized mortgage obligations		—		20,644		—		20,644
Non-agency MBS/CMO		—		50,152		—		50,152
Asset-backed securities		—		68,541		—		68,541
Corporate bonds		—		54,076		—		54,076
Obligations of states & political subdivisions		—		185,332		—		185,332
Equity securities		9,019		—		—		9,019

Total securities		26,784		438,239		—		465,023

					~~September~~June 30, ~~2022~~ 2023
		Fair Value			Valuation	~~Valuation~~ Unobservable		~~Unobservable~~			Range
	Estimate	~~Estimate~~ Techniques	Input	~~Techniques~~		~~Input~~			(Weighted Avg)

Individually analyzed loans	3,318
~~Impaired loans~~		$	~~4,953~~				Appraisal of collateral (1)			Appraisal adjustments (2)		0%0% to -20~~% (-~~20%-20% (-20%)
										Liquidation expenses (2)	0% to -10% (-10%)

		December 31, ~~2021~~ 2022
		Fair Value			Valuation	~~Valuation~~ Unobservable		~~Unobservable~~			Range
	Estimate	~~Estimate~~ Techniques	Input	~~Techniques~~		~~Input~~			(Weighted Avg)

Impaired loans	4,620	$	~~3,177~~				Appraisal of collateral (1)			Appraisal adjustments (2)		0%0% to -20~~% (-~~20%-20% (-20%)
										Liquidation expenses (2)		0%0% to -10~~% (-~~10%-10% (-10%)

	June 30, 2023
					Quoted Prices in
					Active Markets		Significant Other		Significant
					for Identical		Observable		Unobservable
	Carrying				Assets		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level II)		(Level III)
	$		$		$		$		$
Financial Assets:
Cash and cash equivalents		61,081		61,081		61,081		—		—
Regulatory stock		7,843		7,843		7,843		—		—
Loans held for sale		652		652		652		—		—
Loans, net of allowance		1,279,669		1,213,305		—		—		1,213,305
Mortgage servicing assets		2,052		2,880		—		—		2,880
Accrued interest receivable		6,249		6,249		6,249		—		—
Bank owned life insurance		35,197		35,197		35,197		—		—

Financial Liabilities:
Demand deposits		634,360		634,360		634,360		—		—
Interest-bearing demand deposits		220,949		220,949		220,949		—		—
NOW accounts		109,257		109,257		109,257		—		—
Money market deposit accounts		164,431		164,431		164,431		—		—
Savings accounts		342,422		342,422		342,422		—		—
Time deposits		184,532		180,390		—		—		180,390
Total deposits		1,655,951		1,651,809		1,471,419		—		180,390

Long-term debt		91,717		90,066		—		—		90,066
Subordinated debt		39,476		33,447		—		—		33,447
Accrued interest payable		1,169		1,169		1,169		—		—

	September 30, 2022
					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		50,576		50,576		50,576		-		-
Regulatory stock		5,897		5,897		5,897		-		-
Loans held for sale		5,131		5,131		5,131		-		-
Loans, net of allowance		1,100,354		1,040,658		-		-		1,040,658
Mortgage servicing assets		2,043		2,828		-		-		2,828
Accrued interest receivable		6,407		6,407		6,407		-		-
Bank owned life insurance		35,995		35,995		35,995		-		-

Financial Liabilities:
Demand deposits		670,563		670,563		670,563		-		-
Interest-bearing demand deposits		81,855		81,855		81,855		-		-
NOW accounts		129,390		129,390		129,390		-		-
Money market deposit accounts		260,141		260,141		260,141		-		-
Savings accounts		369,230		369,230		369,230		-		-
Time deposits		120,670		116,598		-		-		116,598
Total deposits		1,631,849		1,627,777		1,511,179		-		116,598

Long-term debt		44,206		44,206		-		-		44,206
Short-term borrowings		15,000		15,000
Subordinated debt		39,356		36,745		-		-		36,745
Accrued interest payable		781		781		781		-		-

	Unrealized
	Gains (Losses)
	on Securities
	Available-for-Sale
	$
Balance at December 31, ~~2021~~ 2022		~~3,441~~ (48,292	)
Other comprehensive loss before reclassifications		(~~23,629~~ 7,335	)
Amount reclassified from accumulated other comprehensive income (loss)		(~~110~~ 324	)
Period change		(~~23,739~~ 7,659	)

Balance at March 31, ~~2022~~ 2023		(~~20,298~~ 40,633	)

Other comprehensive loss before reclassifications		(~~16,518~~ 1,365	)
Amount reclassified from accumulated other comprehensive income (loss)		- 754
Period change		(~~16,518~~ 611	)

Balance at June 30, ~~2022~~ 2023		(~~36,816~~ 41,244	)


Balance at December 31, 2021		3,441
Other comprehensive loss before reclassifications		(~~18,565~~ 23,629	)
Amount reclassified from accumulated other comprehensive income (loss)		- (110	)
Period change		(~~18,565~~ 23,739	)

Balance at ~~September 30,~~March 31, 2022		(~~55,381~~ 20,298	)

~~Balance at December 31, 2020~~		~~7,958~~
Other comprehensive loss before reclassifications		(~~4,964~~ 16,518	)
Amount reclassified from accumulated other comprehensive income (loss)		(70 —	)
Period change		(~~5,034~~ 16,518	)

~~Balance at March 31, 2021~~		~~2,924~~

~~Other comprehensive loss before reclassifications~~		~~4,654~~
~~Amount reclassified from accumulated other comprehensive income (loss)~~		(~~216~~	)
~~Period change~~		~~4,438~~

Balance at June 30, ~~2021~~ 2022		~~7,362~~ (36,816	)

(2)	Amounts in parentheses indicate debits.
~~Other comprehensive loss before reclassifications~~	(~~2,759~~	)
~~Amount reclassified from accumulated other comprehensive income (loss)~~	(~~277~~	)
~~Period change~~	(~~3,036~~	)

	Amount Reclassified from
	Accumulated Other Comprehensive
	Income (Loss)
	For the Three Months
	Ended June 30,
	2023			2022		Affected Line Item in the
	$			$		Consolidated Statements of Income
Securities available-for-sale:
Net securities (losses) gains, reclassified into earnings		(954	)		—	(Losses) gains on the sale of debt securities, net
Related income tax benefit (expense)		200			—	Benefit/(Provision) for federal income taxes
Net effect on accumulated other comprehensive income (loss) for the period		(754	)		—

Key Ratios	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

Return on Average Assets		0.89%		1.03%		0.75%		1.06%
Return on Average Equity		15.63%		11.91%		11.49%		12.25%

	Three Months Ended September 30,									Nine Months Ended September 30,
	2022 vs. 2021									2022 vs. 2021
	Increase (Decrease)									Increase (Decrease)
	Due To Change In									Due To Change In
							Net									Net
	Average			Interest			Increase			Average			Interest			Increase
	Balances			Rates			(Decrease)			Balances			Rates			(Decrease)
	$			$			$			$			$			$
INTEREST INCOME

Interest on deposits at other banks		(18	)		56			38			(7	)		87			80

Securities available for sale:
Taxable		190			1,197			1,387			670			1,859			2,529
Tax-exempt		90			(23	)		67			374			(119	)		255
Total securities		280			1,174			1,454			1,044			1,740			2,784

Loans		2,044			7			2,051			4,226			(374	)		3,852
Regulatory stock		2			34			36			(8	)		30			22

Total interest income		2,308			1,271			3,579			5,255			1,483			6,738

INTEREST EXPENSE

Deposits:
Demand deposits		12			364			376			25			441			466
Savings deposits		3			—			3			9			—			9
Time deposits		(9	)		(40	)		(49	)		(28	)		(156	)		(184	)
Total deposits		6			324			330			6			285			291

Borrowings:
Total borrowings		246			18			264			170			(56	)		114

Total interest expense		252			342			594			176			229			405

NET INTEREST INCOME		2,056			929			2,985			5,079			1,254			6,333

	Three Months Ended June 30,									Six Months Ended June 30,
	2023 vs. 2022									2023 vs. 2022
	Increase (Decrease)									Increase (Decrease)
	Due To Change In									Due To Change In
							Net									Net
	Average			Interest			Increase			Average			Interest			Increase
	Balances			Rates			(Decrease)			Balances			Rates			(Decrease)
	$			$			$			$			$			$
INTEREST INCOME

Interest on deposits at other banks		(17	)		181			164			(100	)		262			162

Securities available for sale:
Taxable		(283	)		1,176			893			(177	)		2,761			2,584
Tax-exempt		(284	)		(230	)		(514	)		(474	)		(406	)		(880	)
Total securities		(567	)		946			379			(651	)		2,355			1,704

Loans		3,050			2,399			5,449			6,193			4,157			10,350
Regulatory stock		30			43			73			55			99			154

Total interest income		2,496			3,569			6,065			5,497			6,873			12,370

INTEREST EXPENSE

Deposits:
Demand deposits		39			2,792			2,831			57			4,826			4,883
Savings deposits		(1	)		69			68			(1	)		127			126
Time deposits		120			788			908			183			1,207			1,390
Total deposits		158			3,649			3,807			239			6,160			6,399

Borrowings:
Total borrowings		473			259			732			1,060			410			1,470

Total interest expense		631			3,908			4,539			1,299			6,570			7,869

NET INTEREST INCOME		1,865			(339	)		1,526			4,198			303			4,501

	For the Three Months Ended June 30,
	2023						2022
					(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		21,680		212		3.93		29,899		48		0.65

Securities available for sale:
Taxable		372,638		2,935		3.15		426,130		2,042		1.92
Tax-exempt		158,553		835		2.11		207,379		1,349		2.60
Total securities (d)		531,191		3,770		2.84		633,509		3,391		2.14

Loans (a)		1,278,552		15,015		4.70		996,100		9,566		3.86

Regulatory stock		7,808		144		7.37		5,776		71		4.90

Total interest earning assets		1,839,231		19,141		4.17		1,665,284		13,076		3.15

Non-interest earning assets (d)		45,260						57,983

Total assets		1,884,491						1,723,267

LIABILITIES & STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Demand deposits		490,767		2,947		2.41		388,334		117		0.12
Savings deposits		344,778		86		0.10		368,095		18		0.02
Time deposits		169,711		1,081		2.56		114,026		173		0.62
Borrowed funds		132,717		1,210		3.66		74,011		477		2.61
Total interest bearing liabilities		1,137,973		5,324		1.88		944,466		785		0.34

Non-interest bearing liabilities:

Demand deposits		629,778						664,435
Other		11,465						6,940

Total liabilities		1,779,216						1,615,841

Stockholders' equity		105,275						107,426

Total liabilities & stockholders' equity		1,884,491						1,723,267

Net interest income (FTE)				13,817						12,291

Net interest spread (b)						2.29						2.81
Effect of non-interest bearing deposits						0.71						0.15
Net yield on interest earning assets (c)						3.00						2.96