UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ |
Commission
File Number
(Exact name of registrant as specified in its charter)
| State or other jurisdiction of incorporation or organization | (IRS Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, Par Value $0.10 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark if the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2022, was approximately $
The number of shares
of the registrant’s Common Stock outstanding as of March 13, 2023, was
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s Definitive Proxy Statement for its 2023 Annual Meeting of Shareholders to be held on May 9, 2023, is incorporated into Parts III and IV hereof.
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Table of Contents
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Part I
Forward-Looking Statements
The U.S. Private Securities Litigation Reform Act of 1995 provides safe harbor in regard 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 predictions, 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:
| ● | Economic conditions |
| ● | Monetary and interest rate policies of the Federal Reserve Board |
| ● | Inflation and monetary fluctuations and volatility |
| ● | Possible impacts of the capital and liquidity requirements of Basel III standards and other regulatory pronouncements |
| ● | Effects of short- and long-term federal budget and tax negotiations and their effects on economic and business conditions |
| ● | Effects of the failure of the Federal government to reach agreement to raise the debt ceiling and the negative effects on economic or business conditions as a result |
| ● | Effects of weak market conditions, specifically the effect on loan customers to repay loans |
| ● | Political changes and their impact on new laws and regulations |
| ● | Effects of war, acts of terrorism, and international and domestic instabilities |
| ● | Competitive forces |
| ● | Changes in deposit flows, loan demand, or real estate and investment securities values |
| ● | Changes in accounting principles, policies, or guidelines as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standards setters |
| ● | Ineffective business strategy due to current or future market and competitive conditions |
| ● | Management’s ability to manage credit risk, liquidity risk, interest rate risk, and fair value risk |
| ● | Operation, legal, and reputation risk |
| ● | The risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful |
| ● | The impact of new laws and regulations concerning taxes, banking, securities and insurance and their application with which the Corporation and its subsidiaries must comply |
| ● | Potential impacts from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses |
| ● | Effects of economic conditions particularly with regard to the lingering effects of coronavirus (COVID-19) and any other pandemic, epidemic, or health-related crisis and government and business responses thereto, specifically the effect on loan customers to repay loans |
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 ENB Financial Corp 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 ENB Financial Corp periodically with the Securities and Exchange Commission, including Item 1A. of this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
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Item 1. Business
General
ENB Financial Corp (“the Corporation”) is a bank holding company that was formed on July 1, 2008. The Corporation’s wholly owned subsidiary, Ephrata National Bank (“the Bank”), also referred to as ENB, is a full service commercial bank organized under the laws of the United States. Presently, no other subsidiaries exist under the bank holding company. The Bank has one subsidiary, ENB Insurance, which is a full-service insurance agency that offers a broad range of insurance products to commercial and personal clients. The Corporation and the Bank are both headquartered in Ephrata, Lancaster County, Pennsylvania. The Bank was incorporated on April 11, 1881, pursuant to The National Bank Act under a charter granted by the Office of the Comptroller of the Currency (OCC). The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts to the maximum extent provided by law. The Corporation’s retail, operational, and administrative offices are predominantly located in Lancaster County, southeastern Lebanon County, and southern Berks County, Pennsylvania, the “Market Area”. Eleven full service community banking offices are located in Lancaster County with one full service community banking office in Lebanon County and one full service community banking office in Berks County, Pennsylvania.
The basic business of the Corporation is to provide a broad range of financial services to individuals and small-to-medium-sized businesses in the Market Area. The Corporation utilizes funds gathered through deposits from the general public to originate loans. The Corporation offers a range of demand accounts, in addition to savings and time deposits. The Corporation also offers secured and unsecured commercial, real estate, and consumer loans. Ancillary services that provide added convenience to customers include direct deposit and direct payments of funds through Electronic Funds Transfer, ATMs linked to the Star® network, telephone banking, MasterCard® debit cards, Visa® or MasterCard credit cards, and safe deposit box facilities. In addition, the Corporation offers internet banking including bill pay and wire transfer capabilities, remote deposit capture, and an ENB Bank on the Go! app for iPhones or Android phones. The Corporation also offers a full complement of trust and investment advisory services through ENB’s Wealth Solutions.
As of December 31, 2022, the Corporation employed 298 persons, consisting of 286 full-time and 12 part-time employees. The number of full-time employees increased by 35 employees, and the number of part-time employees decreased by 9 from the previous year-end. The increase in the number of full-time employees is aligned to support the Corporation’s growth and the decrease in part-time employees is attributable to the Corporation converting part-time positions into full-time positions, allowing the Corporation to fully maximize staff. The Corporation expects to add additional personnel to support the initiatives within technology and customer experience in 2023. A collective bargaining agent does not represent the employees, and management believes it maintains good relationships with its employees.
Operating Segments
The Corporation’s business is providing financial products and services. These products and services are provided through the Corporation’s wholly owned subsidiary, the Bank. The Bank is presently the only subsidiary of the Corporation, and the Bank only has one reportable operating segment, community banking, as described in Note A of the Notes to the Consolidated Financial Statements included in this Report. The segment reporting information in Note A is incorporated by reference into this Part I, Item 1. The Bank has one subsidiary, ENB Insurance, which is a full-service insurance agency that offers a broad range of insurance products to commercial and personal clients. ENB Insurance is managed separately from the banking and related financial services that the Corporation offers.
Business Operations
Products and Services with Reputation Risk
The Corporation offers a diverse range of financial and banking products and services. In the event one or more customers and/or governmental agencies becomes dissatisfied with or objects to any product or service offered by the Corporation, negative publicity with respect to any such product or service, whether legally justified or not, could have a negative impact on the Corporation’s reputation. The discontinuance of any product or service, whether or not any customer or governmental agency has challenged any such product or service, could have a negative impact on the Corporation’s reputation.
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Market Area and Competition
The Corporation’s primary market area is Lancaster County, Pennsylvania, where eleven full service offices are located and areas of contiguous Lebanon and Berks Counties. The Corporation opened a full service office in southeastern Lebanon County (Myerstown) in 2013 and a full service office in southern Berks County (Morgantown) in 2016 to extend physical presence to those counties. The Corporation’s greater service area is considered to be Lancaster, Lebanon, and southern and western Berks Counties of Pennsylvania. The area served by the Corporation is a mix of rural communities and small to mid-sized towns.
The Corporation’s headquarters and main campus are located in downtown Ephrata, Pennsylvania. The Corporation’s main office and drive-up are located in downtown Ephrata, while the Cloister office is also located within Ephrata Borough. The Corporation ranks a commanding first in deposit market share in the Ephrata area with 43.9% of deposits as of June 30, 2022, based on data compiled annually by the Federal Deposit Insurance Corporation (FDIC). The Corporation’s deposit market share in the Ephrata area was 41.1% as of June 30, 2021. The Corporation’s very high market share in the Ephrata area has led to the expansion of the Corporation’s branch network outside of the Ephrata area but within the Corporation’s Market Area.
In the course of attracting and retaining deposits and originating loans, the Corporation faces considerable competition. The Corporation competes with other commercial banks, savings and loan institutions, and credit unions for traditional banking products, such as deposits and loans. The Corporation competes with consumer finance companies for loans, mutual funds, and other investment alternatives for deposits. The Corporation competes for deposits based on the ability to provide a range of products, low fees, quality service, competitive rates, and convenient locations and hours. The competition for loan origination generally relates to interest rates offered, products available, quality of service, and loan origination fees charged. Several competitors within the Corporation’s primary market have substantially higher legal lending limits that enable them to service larger loans and larger commercial customers.
The Corporation continues to assess the competition and market area to determine the best way to meet the financial needs of the communities it serves. Management also continues to pursue new market opportunities based on the strategic plan to efficiently grow the Corporation, improve earnings performance, and bring the Corporation’s products and services to customers currently not being reached. Management strategically addresses growth opportunities versus competitive issues by determining the new products and services to be offered, expansion of existing footprint with new locations, as well as investing in the expertise of staffing for expansion of these services.
Concentrations and Seasonality
The Corporation does not have any portion of its businesses dependent on a single or limited number of customers, the loss of which would have a material adverse effect on its businesses. No substantial portion of loans or investments is concentrated within a single industry or group of related industries, although a significant amount of loans are secured by real estate located in northern Lancaster County, Pennsylvania. The business activities of the Corporation are generally not seasonal in nature. However, the sizable agricultural portfolio has certain specific, limited elements that are predominately seasonal in nature due to typical farming operations. Financial instruments with concentrations of credit risk are described in Note P of the Notes to Consolidated Financial Statements included in this Report. The concentration of credit risk information in Note P is incorporated by reference into this Part I, Item 1.
Supervision and Regulation
Bank holding companies operate in a highly regulated environment and are routinely examined by federal and state regulatory authorities. The following discussion concerns various federal and state laws and regulations and the potential impact of such laws and regulations on the Corporation and the Bank.
To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves. Proposals to change laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies. The Corporation cannot determine the likelihood or timing of any such proposals or legislation, or the impact they may have on the Corporation and the Bank. A change in law, regulations, or regulatory policy may have a material effect on the Corporation and the Bank’s business.
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The operations of the Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose deposits are insured by the FDIC. Bank operations are subject to regulations of the OCC, the Consumer Financial Protection Bureau (CFPB), the Board of Governors of the Federal Reserve System, and the FDIC.
Bank Holding Company Supervision and Regulation
The Bank Holding Company Act of 1956
The Corporation is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and to supervision by the Federal Reserve Board. The following restrictions apply:
General Supervision by the Federal Reserve Board
As a bank holding company, the Corporation’s activities are limited to the business of banking and activities closely related or incidental to banking. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board. The Federal Reserve Board has adopted a risk-focused supervision program for small shell bank holding companies that is tied to the examination results of the subsidiary bank. The Federal Reserve Board has issued regulations under the Bank Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. As a result, the Federal Reserve Board may require that the Corporation stand ready to provide adequate capital funds to the Bank during periods of financial stress or adversity.
Restrictions on Acquiring Control of Other Banks and Companies
A bank holding company may not:
| ● | acquire direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of any bank, or |
| ● | merge or consolidate with another bank holding company, without prior approval of the Federal Reserve Board. |
In addition, a bank holding company may not:
| ● | engage in a non-banking business, or |
| ● | acquire ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business, |
unless the Federal Reserve Board determines the business to be so closely related to banking as to be a proper incident to banking. In making this determination, the Federal Reserve Board considers whether these activities offer benefits to the public that outweigh any possible adverse effects.
Anti-Tie-In Provisions
A bank holding company and its subsidiaries may not engage in tie-in arrangements in connection with any extension of credit or provision of any property or services. These anti-tie-in provisions state generally that a bank may not:
| ● | extend credit, |
| ● | lease or sell property, or |
| ● | furnish any service to a customer, |
on the condition that the customer provides additional credit or service to a bank or its affiliates, or on the condition that the customer not obtain other credit or service from a competitor of the bank.
Restrictions on Extensions of Credit by Banks to their Holding Companies
Subsidiary banks of a holding company are also subject to restrictions imposed by the Federal Reserve Act on:
| ● | any extensions of credit to the bank holding company or any of its subsidiaries, |
| ● | investments in the stock or other securities of the Corporation, and |
| ● | taking these stock or securities as collateral for loans to any borrower. |
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Risk-Based Capital Guidelines
Bank holding companies must comply with the Federal Reserve Board’s current risk-based capital guidelines, which are amended provisions of the Bank Holding Company Act of 1956. The required minimum ratio of total capital to risk-weighted assets, including some off-balance sheet activities, such as standby letters of credit, is 8%. At least half of the total capital is required to be Tier I Capital, consisting principally of common shareholders’ equity, less certain intangible assets. The remainder, Tier II Capital, may consist of:
| ● | some types of preferred stock, |
| ● | a limited amount of subordinated debt, |
| ● | some hybrid capital instruments, |
| ● | other debt securities, and |
| ● | a limited amount of the general loan loss allowance. |
The risk-based capital guidelines are required to take adequate account of interest rate risk, concentrations of credit risk, and risks of nontraditional activities.
Capital Leverage Ratio Requirements
The Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier I capital, as determined under the risk-based capital guidelines, equal to 3% of average total consolidated assets for those bank holding companies that have the highest regulatory examination rating and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum. The Bank is subject to similar capital requirements pursuant to the Federal Deposit Insurance Act.
In 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The CBLR framework was available for banks to use in their March 31, 2020, Call Report. The Corporation did not opt into the CBLR framework.
Restrictions on Control Changes
The Change in Bank Control Act of 1978 requires persons seeking control of a bank or bank holding company to obtain approval from the appropriate federal banking agency before completing the transaction. The law contains a presumption that the power to vote 10% or more of voting stock confers control of a bank or bank holding company. The Federal Reserve Board is responsible for reviewing changes in control of bank holding companies. In doing so, the Federal Reserve Board reviews the financial position, experience and integrity of the acquiring person, and the effect the change of control will have on the financial condition of the Corporation, relevant markets, and federal deposit insurance funds.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act (SOX), also known as the “Public Company Accounting Reform and Investor Protection Act,” was established in 2002 and introduced major changes to the regulation of financial practice. SOX was established as a reaction to the outbreak of corporate and accounting scandals, including Enron and WorldCom. SOX represents a comprehensive revision of laws affecting corporate governance, accounting obligations, and corporate reporting. SOX is applicable to all companies with equity or debt securities that are either registered, or file reports under the Securities Exchange Act of 1934 such as the Corporation. SOX includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has adopted extensive additional disclosures, corporate governance provisions, and other related rules pursuant to it. The Corporation has expended and will continue to expend, considerable time and money in complying with SOX.
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Bank Supervision and Regulation
Safety and Soundness
The primary regulator for the Bank is the OCC. The OCC has the authority under the Financial Institutions Supervisory Act and the Federal Deposit Insurance Act to prevent a national bank from engaging in any unsafe or unsound practice in conducting business or from otherwise conducting activities in violation of the law.
Federal and state banking laws and regulations govern, but are not limited to, the following:
| ● | Scope of a bank’s business |
| ● | Investments a bank may make |
| ● | Reserves that must be maintained against certain deposits |
| ● | Loans a bank makes and collateral it takes |
| ● | Merger and consolidation activities |
| ● | Establishment of branches |
The Corporation is a member of the Federal Reserve System. Therefore, the policies and regulations of the Federal Reserve Board have a significant impact on many elements of the Corporation’s operations, including:
| ● | Loan and deposit growth |
| ● | Rate of interest earned and paid |
| ● | Types of securities |
| ● | Breadth of financial services provided |
| ● | Levels of liquidity |
| ● | Levels of required capital |
Management cannot predict the effect of changes to such policies and regulations upon the Corporation’s business model and the corresponding impact they may have on future earnings.
FDIC Insurance Assessments
The FDIC imposes a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on the Bank’s capital and supervisory measures. Under the risk-related premium schedule, the FDIC assigns, on a semi-annual basis, each depository institution to one of three capital groups, the best of these being “Well Capitalized.” For purposes of calculating the insurance assessment, the Bank was considered “Well Capitalized” as of December 31, 2022, and December 31, 2021. This designation has benefited the Bank in the past and continues to benefit it in terms of a lower quarterly FDIC rate. The FDIC adjusts the insurance rates when necessary. The total FDIC assessments paid by the Bank in 2022 were $528,000, compared to $408,000 in 2021.
Community Reinvestment Act
Under the Community Reinvestment Act (CRA), as amended, the OCC is required to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the community that they serve. The Act focuses specifically on low and moderate income neighborhoods. The OCC takes an institution’s CRA record into account in its evaluation of any application made by any of such institutions for, among other things:
| ● | Approval of a new branch or other deposit facility |
| ● | Closing of a branch or other deposit facility |
| ● | An office relocation or a merger |
| ● | Any acquisition of bank shares |
The CRA, as amended, also requires that the OCC make publicly available the evaluation of a bank’s record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation includes a descriptive rating of either outstanding, satisfactory, needs to improve, or substantial noncompliance, along with a statement describing the basis for the rating. These ratings are publicly disclosed. The Bank received a satisfactory rating on the most recent CRA Performance Evaluation completed on July 12, 2021.
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The Federal Deposit Insurance Corporation Improvement Act of 1991
Capital Adequacy
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), institutions are classified in one of five defined categories as illustrated below:
| Tier I Capital | Common Equity Tier I | |||
| Capital Category | Total Capital Ratio | Ratio | Capital Ratio | Leverage Ratio |
| Well Capitalized | > 10.0 | > 8.0 | > 6.5 | > 5.0 |
| Adequately Capitalized | > 8.0 | > 6.0 | > 4.5 | > 4.0* |
| Undercapitalized | < 8.0 | < 6.0 | < 4.5 | < 4.0* |
| Significantly Undercapitalized | < 6.0 | < 4.0 | < 3.5 | < 3.0 |
| Critically Undercapitalized | < 2.0 | |||
| *3.0 for those banks having the highest available regulatory rating. | ||||
The Bank’s and Corporation’s capital ratios exceed the regulatory requirements to be considered well capitalized for Total Risk-Based Capital, Tier I Risk-Based Capital, Common Equity Tier I Capital, and Tier I Leverage Capital. The capital ratio table and Consolidated Financial Statement Note M – Regulatory Matters and Restrictions, are incorporated by reference herein, from Item 8, and made a part hereof. Note M discloses capital ratios for both the Bank and the Corporation, shown as Consolidated.
Regulatory Capital Changes
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:
| ● | A minimum ratio of common equity tier I capital to risk-weighted assets of 4.5% |
| ● | A minimum ratio of tier I capital to risk-weighted assets of 6% |
| ● | A minimum ratio of total capital to risk-weighted assets of 8% |
| ● | A minimum leverage ratio of 4% |
In addition, the final rules established a common equity tier I capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016.
Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. The Corporation does not securitize assets and has no plans to do so.
Under the new rules, mortgage servicing assets (MSAs) and certain deferred tax assets (DTAs) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.
Management has evaluated the impact of the above rules on levels of the Corporation’s capital. The final rulings were highly favorable in terms of the items that would have a more significant impact to the Corporation and community banks in general. Specifically, the AOCI final ruling, which would have had the greatest impact, now provides the Corporation with an opt-out provision. The final ruling on the risk weightings of mortgages was favorable and did not have a material negative impact. The rulings as to trust preferred securities, preferred stock, and securitization of
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assets are not applicable to the Corporation, and presently the revised treatment of MSAs is not material to capital. The remaining changes to risk weightings on several items mentioned above such as past-due loans and certain commercial real estate loans do not have a material impact to capital presently, but could change as these levels change.
Real Estate Lending Standards
Pursuant to the FDICIA, federal banking agencies adopted real estate lending guidelines which would set loan-to-value (“LTV”) ratios for different types of real estate loans. The LTV ratio is generally defined as the total loan amount divided by the appraised value of the property at the time the loan is originated. If the institution does not hold a first lien position, the total loan amount would be combined with the amount of all junior liens when calculating the ratio. In addition to establishing the LTV ratios, the guidelines require all real estate loans to be based upon proper loan documentation and a recent appraisal or certificate of inspection of the property.
Prompt Corrective Action
In the event that an institution’s capital deteriorates to the Undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including:
| ● | Implementation of a capital restoration plan and a guarantee of the plan by a parent institution |
| ● | Placement of a hold on increases in assets, number of branches, or lines of business |
If capital reaches the significantly or critically undercapitalized level, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management, and (in critically undercapitalized situations) appointment of a receiver. For well-capitalized institutions, FDICIA provides authority for regulatory intervention where they deem the institution to be engaging in unsafe or unsound practices, or if the institution receives a less than satisfactory examination report rating for asset quality, management, earnings, liquidity, or sensitivity to market risk.
Other FDICIA Provisions
Each depository institution must submit audited financial statements to its primary regulator and the FDIC, whose reports are made publicly available. In addition, the audit committee of each depository institution must consist of outside directors and the audit committee at “large institutions” (as defined by FDIC regulation) must include members with banking or financial management expertise. The audit committee at “large institutions” must also have access to independent outside counsel. In addition, an institution must notify the FDIC and the institution’s primary regulator of any change in the institution’s independent auditor, and annual management letters must be provided to the FDIC and the depository institution’s primary regulator. The regulations define a “large institution” as one with over $500 million in assets, which does include the Bank. Also, under the rule, an institution's independent public accountant must examine the institution's internal controls over financial reporting and perform agreed-upon procedures to test compliance with laws and regulations concerning safety and soundness.
Under the FDICIA, each federal banking agency must prescribe certain safety and soundness standards for depository institutions and their holding companies. Three types of standards must be prescribed:
| ● | asset quality and earnings |
| ● | operational and managerial, and |
| ● | compensation |
Such standards would include a ratio of classified assets to capital, minimum earnings, and, to the extent feasible, a minimum ratio of market value to book value for publicly traded securities of such institutions and holding companies. Operational and managerial standards must relate to:
| ● | internal controls, information systems and internal audit systems |
| ● | loan documentation |
| ● | credit underwriting |
| ● | interest rate exposure |
| ● | asset growth, and |
| ● | compensation, fees and benefits |
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The FDICIA also sets forth Truth in Savings disclosure and advertising requirements applicable to all depository institutions.
USA PATRIOT Act of 2001/Bank Secrecy Act
In October 2001, the USA Patriot Act of 2001 (Patriot Act) was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Under the Bank Secrecy Act (BSA), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which a bank is aware in any one day that aggregate in excess of $10,000 and to report suspicious transactions under specified criteria. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA, or for filing a false or fraudulent report.
Loans to Insiders/Regulation O
Regulation O, also known as Loans to Insiders, governs the permissible lending relationships between a bank and its executive officers, directors, and principal shareholders and their related interests. The primary restriction of Regulation O is that loan terms and conditions, including interest rates and collateral coverage, can be no more favorable to the insider than loans made in comparable transactions to non-covered parties. Additionally, the loan may not involve more than normal risk. The regulation requires quarterly reporting to regulators of the total amount of credit extended to insiders.
Under Regulation O, a bank is not required to obtain approval from the bank’s Board of Directors prior to making a loan to an executive officer or Board of Director member as long as a first lien on the executive officer’s residence secures the loan. The Corporation’s policy requires prior Board of Director approval of any Executive Officer or Director loan that when aggregated with other outstanding extensions of credit to the Insider and their related interests exceeds $500,000. Loans to any Executive Officer or Director with aggregate exposure of under $500,000 must be reported at the next scheduled Board of Director meeting. Further amendments allow bank insiders to take advantage of preferential loan terms that are available to substantially all employees. Regulation O does permit an insider to participate in a plan that provides more favorable credit terms than the bank provides to non-employee customers provided that the plan:
| ● | Is widely available to employees |
| ● | Does not give preference to any insider over other employees |
The Bank has a policy in place that offers general employees more favorable loan terms than those offered to non-employee customers. The Bank’s policy on loans to insiders allows insiders to participate in the same favorable rate and terms offered to all other employees; however, any loan to an insider that does not fall within permissible regulatory exceptions must receive the prior approval of the Bank’s Board of Directors.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dodd-Frank Act, was the culmination of the legislative efforts in response to the financial crisis of 2007 - 2008. The act reshaped Wall Street and the American banking industry by bringing the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. The Act’s numerous provisions were to be implemented over a period of several years and were intended to decrease various risks in the U.S. financial system. Dodd-Frank created a new Financial Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank was expected to and did have an impact on the Corporation’s business operations as its provisions began to take effect. To date the provisions that did go into effect, or began to phase in, did at a minimum increase the Corporation’s operating and compliance costs.
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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.
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. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Consumer Financial Protection Bureau (CFPB)
Dodd-Frank created a new, independent federal agency called 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 are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorized 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 allows 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.
Ability-to-Repay and Qualified Mortgage Rule
Pursuant to the Dodd-Frank Act, the CFPB amended Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages, and as a result generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. Prime loans) are given a safe harbor of compliance. The final rule, as issued, is not expected to have a material impact on the Corporation’s lending activities and on the Corporation’s Consolidated Financial Statements.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for processing such transactions.
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Interchange fees or “swipe” fees, are charges that merchants pay to the Corporation and other card-issuing banks for processing electronic payment transactions. The Federal Reserve Board has ruled that for financial institutions with assets of $10 billion or more the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The Federal Reserve Board also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product. While the Corporation’s asset size is presently under $10 billion, there is concern that these requirements impacting financial institutions over $10 billion in assets will eventually be pushed down to either financial institutions over $1 billion or to all financial institutions. This would negatively impact the Corporation’s non-interest income.
TILA/RESPA Integrated Disclosure (TRID) Rules
The TRID rules were mandated by Dodd-Frank to address the problem of the sometimes duplicative and overlapping disclosures required by the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) involving consumer purpose, closed end loans secured by real property. The CFPB was tasked with developing the new disclosures, defining the regulatory compliance parameters, and implementation. The timing elements built around these new disclosures were established to provide the consumer with ample time to consider the credit transaction and its associated costs. The final rules were implemented by amending the Truth in Lending Act; however implementation proved to be difficult as this marked the first time in thirty years that these standard disclosures were changed. Much reliance was placed on third party providers to the financial institutions to make all the necessary changes to the disclosures. After one delay, the rules became effective October 3, 2015. The Corporation partnered with its loan document software providers to ensure timely, compliant implementation.
Department of Defense Military Lending Rule
In 2015, the U.S. Department of Defense issued a final rule which restricts pricing and terms of certain credit extended to active duty military personnel and their families. This rule, which was implemented effective October 3, 2016, caps the interest rate on certain credit extensions to an annual percentage rate of 36% and restricts other fees. The rule requires financial institutions to verify whether customers are military personnel subject to the rule. The impact of this final rule, and any subsequent amendments thereto, on the Corporation’s lending activities and the Corporation’s statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential side effects on the Corporation’s business.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement instructed financial institutions to design multiple layers of security controls to establish lines of defense and to ensure that their risk management practices cover the risk of compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving malware. Financial institutions are expected to develop appropriate processes to enable recovery of data and business operations and address the rebuilding of network capabilities and restoring data if the institution or its critical service providers are victim to a cyber-attack. The Corporation could be subject to fines or penalties if it fails to observe this regulatory guidance. See Item 1A. Risk Factors for further discussion of risks related to cybersecurity.
Ongoing Legislation
As a consequence of the extensive regulation of the financial services industry and specifically commercial banking activities in the United States, the Corporation’s business is particularly susceptible to changes in federal and state legislation and regulations. Over the course of time, various federal and state proposals for legislation could result in additional regulatory and legal requirements for the Corporation. Management cannot predict if any such legislation will be adopted, or if adopted, how it would affect the business of the Corporation. Past history has demonstrated that new legislation or changes to existing legislation usually results in a heavier compliance burden and generally increases the cost of doing business.
Management believes that the effect of any current legislative proposals on the liquidity, capital resources and the results of operations of the Corporation and the Bank will be minimal. It is possible that there will be regulatory
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proposals which, if implemented, could have a material effect upon our liquidity, capital resources and results of operations. In addition, the general cost of compliance with numerous federal and state laws does have, and in the future may have, a negative impact on our results of operations. As with other banks, the status of the financial services industry can affect the Bank. Consolidations of institutions are expected to continue as the financial services industry seeks greater efficiencies and market share. Bank management believes that such consolidations may enhance the Bank’s competitive position as a community bank. See Item 1A. Risk Factors for more information.
Statistical Data
The statistical disclosures required by this item are incorporated by reference herein from the Consolidated Statements of Income on page 57 as found in this Form 10-K filing.
Available Information
The Corporation maintains a website on the Internet at www.enbfc.com. The Corporation makes available free of charge, on or through its website, its proxy statements, annual reports on From 10-K, quarterly reports on From 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). This reference to the Corporation’s Internet address shall not, under any circumstances, be deemed to incorporate the information available at such Internet address into this Form 10-K or other SEC filings. The information available at the Corporation’s Internet address is not part of this Form 10-K or any other report filed by the Corporation with the SEC. The Corporation’s SEC filings can also be obtained on the SEC’s website on the Internet at http://www.sec.gov.
Item 1A. Risk Factors
An investment in the Corporation’s common stock is subject to risks inherent to the banking industry and the equity markets. The material risks and uncertainties that management believes affect the Corporation are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or is not focused on, or currently deems immaterial, may also impair the Corporation’s business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Corporation’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Corporation’s common stock could decline significantly, and you could lose all or part of your investment.
Risks Related To The Corporation’s Business
The Corporation Is Subject To Interest Rate Risk
The Corporation’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest earning assets, such as loans and securities, and interest expense paid on interest bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions and policies of various governmental and regulatory agencies, particularly, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives on loans and securities, but also the amount of interest it pays on deposits and borrowings. Changes in interest rates could also affect:
| ● | The Corporation’s ability to originate loans and obtain deposits |
| ● | The fair value of the Corporation’s financial assets and liabilities |
| ● | The average duration of the Corporation’s assets and liabilities |
| ● | The future liquidity of the Corporation |
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other securities, the Corporation’s net interest income, and therefore earnings, could be adversely affected.
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Earnings could also be adversely affected if the interest rates received on loans and other securities fall more quickly than the interest rates paid on deposits and other borrowings.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Corporation’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Is Subject To Lending Risk
There are inherent risks associated with the Corporation’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates, as well as those across the Commonwealth of Pennsylvania and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Corporation.
As of December 31, 2022, 43.7% of the Corporation’s loan portfolio consisted of commercial, industrial, and construction loans secured by real estate. Another 12.1% of the Corporation’s loan portfolio consisted of commercial loans not secured by real estate. These types of loans are generally viewed as having more risk of default than consumer real estate loans or other consumer loans. These types of loans are also typically larger than consumer real estate loans and other consumer loans. Because the Corporation’s loan portfolio contains a significant number of commercial and industrial, construction, and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation’s Allowance For Possible Loan Losses May Be Insufficient
The Corporation maintains an allowance for possible loan losses, which is a reserve established through a provision for loan losses, charged to expense. The allowance represents management’s best estimate of expected losses inherent in the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Determining the appropriate level of the allowance for possible loan losses understandably involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible loan losses, the Corporation will need additional provisions to increase the allowance for possible loan losses. Any increases in the allowance for possible loan losses will result in a decrease in net income, and may have a material adverse effect on the Corporation’s financial condition and results of operations.
The Basel III Capital Requirements May Require Us To Maintain Higher Levels Of Capital, Which Could Reduce Our Profitability
Basel III targets higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over the next decade, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. As Basel III is implemented, regulatory viewpoints could change and require additional capital to support our business risk profile. If the Corporation and the Bank are required to maintain higher levels of capital, the Corporation and the Bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to the Corporation and the Bank and adversely impact our financial condition and results of operations.
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Future Credit Downgrades Of The United States Government Due To Issues Relating To Debt And The Deficit May Adversely Affect The Corporation
As a result of past difficulties of the federal government to reach agreement over federal debt and issues connected with the debt ceiling, certain rating agencies placed the United States Government’s long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade. The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises in which the Corporation invests and receives lines of credit on negative watch and a downgrade of the United States credit rating would trigger a similar downgrade in the credit rating of these government-sponsored enterprises. Furthermore, the credit rating of other entities, such as state and local governments, may also be downgraded should the United States credit rating be downgraded. Credit downgrades often cause a lower valuation of the Corporation’s securities.
The Corporation Is Subject To Environmental Liability Risk Associated With Lending Activities
A significant portion of the Corporation’s loan portfolio is secured by real property. During the ordinary course of business, the Corporation may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Corporation may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Corporation to incur substantial expenses and may materially reduce the affected property’s value or limit the Corporation’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws, may increase the Corporation’s exposure to environmental liability. Although the Corporation has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s financial condition and results of operations.
If The Corporation Concludes That The Decline In Value Of Any Of Its Investment Securities Is Other Than Temporary, The Corporation is Required To Write Down The Value Of That Security Through A Charge To Earnings
The Corporation reviews the investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of the investment securities has declined below its carrying value, the Corporation is required to assess whether the decline is other than temporary. If it concludes that the decline is other than temporary, it is required to write down the value of that security through a charge to earnings. Changes in the expected cash flows of these securities and/or prolonged price declines have resulted and may result in concluding in future periods that there is additional impairment of these securities that is other than temporary, which would require a charge to earnings to write down these securities to their fair value. Due to the complexity of the calculations and assumptions used in determining whether an asset is impaired, the impairment disclosed may not accurately reflect the actual impairment in the future.
The Corporation’s Profitability Depends Significantly On Economic Conditions In The Commonwealth Of Pennsylvania And Its Market Area
The Corporation’s success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania, and more specifically, the local markets in which the Corporation operates. Unlike larger national or other regional banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily located in Lancaster County, as well as Berks, Chester, and Lebanon Counties. The local economic conditions in these areas have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans, and the stability of the Corporation’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations.
The Earnings Of Financial Services Companies Are Significantly Affected By General Business And Economic Conditions
The Corporation’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends
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in industry and finance, and the strength of the U.S. economy and the local economies in which the Corporation operates, all of which are beyond the Corporation’s control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for the Corporation’s products and services, among other things, any of which could have a material adverse impact on the Corporation’s financial condition and results of operations.
The Corporation Operates In A Highly Competitive Industry And Market Area
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets in which the Corporation operates. Additionally, various out-of-state banks have begun to enter or have announced plans to enter the market areas in which the Corporation currently operates. The Corporation also faces competition from many other types of financial institutions, including, without limitation, online banks, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes, and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can offer.
The Corporation’s ability to compete successfully depends on a number of factors, including, among other things:
| ● | The ability to develop, maintain, and build upon long-term customer relationships based on quality service, high ethical standards, and safe, sound management practices |
| ● | The ability to expand the Corporation’s market position |
| ● | The scope, relevance, and pricing of products and services offered to meet customer needs and demands |
| ● | The rate at which the Corporation introduces new products and services relative to its competitors |
| ● | Customer satisfaction with the Corporation’s level of service |
| ● | Industry and general economic trends |
Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability and have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Is Subject To Extensive Government Regulation And Supervision
The Corporation is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.
While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
Future Governmental Regulation And Legislation Could Limit The Corporation’s Future Growth
The Corporation is a registered bank holding company, and its subsidiary bank is a depository institution whose deposits are insured by the FDIC. As a result, the Corporation is subject to various regulations and examinations by various regulatory authorities. In general, statutes establish the corporate governance and eligible business activities for the Corporation, certain acquisition and merger restrictions, limitations on inter-company transactions
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such as loans and dividends, capital adequacy requirements, requirements for anti-money laundering programs and other compliance matters, among other regulations. The Corporation is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. Compliance with these statutes and regulations is important to the Corporation’s ability to engage in new activities and consummate additional acquisitions. In addition, the Corporation is subject to changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles and governmental economic and monetary policies. The Corporation cannot predict whether any of these changes may adversely and materially affect it. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on the Corporation’s activities that could have a material adverse effect on its business and profitability. While these statutes are generally designed to minimize potential loss to depositors and the FDIC insurance funds, they do not eliminate risk, and compliance with such statutes increases the Corporation’s expense, requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors.
The Regulatory Environment For The Financial Services Industry Is Being Significantly Impacted By Financial Regulatory Reform Initiatives In The United States And Elsewhere, Including Dodd-Frank And Regulations Promulgated To Implement It
Dodd-Frank comprehensively reforms the regulation of financial institutions, products and services. Dodd-Frank requires various federal regulatory agencies to implement numerous rules and regulations. Because the federal agencies are granted broad discretion in drafting these rules and regulations, many of the details and the impact of Dodd-Frank may not be known for many months or years. While much of how the Dodd-Frank and other financial industry reforms will change our current business operations depends on the specific regulatory reforms and interpretations, Dodd-Frank has had and will continue to have a significant impact on our business operations as its provisions have taken effect. We believe compliance with Dodd-Frank and implementing its regulations and initiatives will negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and it may also limit our ability to pursue certain business opportunities.
The Corporation’s Banking Subsidiary May Be Required To Pay Higher FDIC Insurance Premiums Or Special Assessments Which May Adversely Affect Its Earnings
Future bank failures may prompt the FDIC to increase its premiums above the current levels or to issue special assessments. The Corporation generally is unable to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on the Corporation’s results of operations, financial condition, and the ability to continue to pay dividends on common stock at the current rate or at all.
The Corporation’s Controls And Procedures May Fail Or Be Circumvented
Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations, and financial condition.
New Lines Of Business Or New Products And Services May Subject The Corporation To Additional Risks
From time to time, the Corporation may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Corporation may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Corporation’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Corporation’s business, results of operations, and financial condition.
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The Corporation’s Ability To Pay Dividends Depends On Earnings And Is Subject To Regulatory Limits
The Corporation’s ability to pay dividends is also subject to its profitability, financial condition, capital expenditures, and other cash flow requirements. Dividend payments are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. There is no assurance that the Corporation will have sufficient earnings to be able to pay dividends or generate adequate cash flow to pay dividends in the future. The Corporation’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.
Future Acquisitions May Disrupt The Corporation’s Business And Dilute Stockholder Value
The Corporation may use its common stock to acquire other companies or make investments in corporations and other complementary businesses. The Corporation may issue additional shares of common stock to pay for future acquisitions, which would dilute the ownership interest of current shareholders of the Corporation. Future business acquisitions could be material to the Corporation, and the degree of success achieved in acquiring and integrating these businesses into the Corporation could have a material effect on the value of the Corporation’s common stock. In addition, any acquisition could require the Corporation to use substantial cash or other liquid assets or to incur debt. In those events, the Corporation could become more susceptible to economic downturns and competitive pressures.
The Corporation May Need To Or Be Required To Raise Additional Capital In The Future, And Capital May Not Be Available When Needed And On Terms Favorable To Current Shareholders
Federal banking regulators require the Corporation and its subsidiary bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation, and banking regulatory agencies. In addition, capital levels are also determined by the Corporation’s management and board of directors based on capital levels that they believe are necessary to support the Corporation’s business operations.
If the Corporation raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of its common stock. Furthermore, a capital raise through issuance of additional shares may have an adverse impact on the Corporation’s stock price. New investors also may have rights, preferences and privileges senior to the Corporation’s current shareholders, which may adversely impact its current shareholders. The Corporation’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, the Corporation cannot be certain of its ability to raise additional capital on acceptable terms and acceptable time frames or to raise additional capital at all. If the Corporation cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect the Corporation’s financial condition and results of operations.
The Corporation May Not Be Able To Attract And Retain Skilled People
The Corporation’s success highly depends on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business because of their skills, knowledge of the Corporation’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
The Corporation’s Information Systems May Experience An Interruption Or Breach In Security
The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan, and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of its information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. Further, while the Corporation maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. The occurrence of any failures, interruptions, or security breaches of the Corporation’s information systems could damage the Corporation’s reputation, adversely affecting customer or consumer confidence, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny and possible regulatory penalties, or expose the
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ENB FINANCIAL CORP
Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations.
The Corporation Continually Encounters Technological Change
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations. Many of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation’s business, financial condition, and results of operations.
The Corporation’s Operations Of Its Business, Including Its Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Its Risks Related To Cyber Security
The Corporation is exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. The Corporation has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect on the possible security breach of its information systems. While the Corporation maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. While the Corporation has not incurred any material losses related to cyber-attacks, nor is it aware of any specific or threatened cyber-incidents as of the date of this report, it may incur substantial costs and suffer other negative consequences if it falls victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; disruption or failures of physical infrastructure, operating systems or networks that support our business and customers resulting in the loss of customers and business opportunities; additional regulatory scrutiny and possible regulatory penalties; litigation; and reputational damage adversely affecting customer or investor confidence.
The Increasing Use Of Social Media Platforms Presents New Risks And Challenges And Our Inability Or Failure To Recognize, Respond To And Effectively Manage The Accelerated Impact Of Social Media Could Materially Adversely Impact Our Business
There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to our business. Consumers value readily available information concerning businesses and their goods and services and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests and/or may be inaccurate. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction.
Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about our business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by our customers or employees could result in negative consequences including remediation costs including training for employees, additional regulatory scrutiny and possible regulatory penalties, litigation or negative publicity that could damage our reputation adversely affecting customer or investor confidence.
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ENB FINANCIAL CORP
The Corporation Is Subject To Claims And Litigation Pertaining To Fiduciary Responsibility
From time to time, customers make claims and take legal action pertaining to the Corporation’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to the Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Corporation, they may result in significant financial liability and/or adversely affect the market perception of the Corporation and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.
Financial Services Companies Depend On The Accuracy And Completeness Of Information About Customers And Counterparties
In deciding whether to extend credit or enter into other transactions, the Corporation may rely on information furnished by, or on behalf of, customers and counterparties, including financial statements, credit reports, and other financial information. The Corporation may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.
Consumers May Decide Not To Use Banks To Complete Their Financial Transactions
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Corporation’s financial condition and results of operations.
A Change In Control Of The United States Government And Issues Relating To Debt And The Deficit May Adversely Affect The Corporation
The outcome of future elections could result in changes in control of the federal government and bring significant changes (or uncertainty) in governmental policies, regulatory environments, spending sentiment and many other factors and conditions, some of which could adversely impact the Corporation’s business, financial condition and results of operations.
Other Events
Natural Disasters, Acts Of War Or Terrorism, Domestic and International Instability, Pandemics, and Other External Events Could Significantly Impact The Corporation’s Business
Severe weather, natural disasters, acts of war or terrorism, domestic and international instability, pandemics, and other adverse external events could have a significant impact on the Corporation’s ability to conduct business. Such events could affect the stability of the Corporation’s deposit base; impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause the Corporation to incur additional expenses. Severe weather or natural disasters, acts of war or terrorism, pandemics, or other adverse external events, may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Corporation’s business, financial condition, and results of operations.
Risks Associated With The Corporation’s Common Stock
The Corporation’s Stock Price Can Be Volatile
Stock price volatility may make it more difficult for shareholders to resell their shares of common stock when they desire and at prices they find attractive. The Corporation’s stock price can fluctuate significantly in response to a variety of factors including, among other things:
| • | Actual or anticipated variations in quarterly results of operations |
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ENB FINANCIAL CORP
| • | Recommendations by securities analysts | ||
| • | Operating and stock price performance of other companies that investors deem comparable to the Corporation | ||
| • | News reports relating to trends, concerns, and other issues in the financial services industry | ||
| • | Perceptions in the marketplace regarding the Corporation and/or its competitors | ||
| • | New technology used, or services offered, by competitors | ||
| • | Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by, or involving, the Corporation or its competitors | ||
| • | Changes in government regulations | ||
| • |
Geopolitical conditions such as acts or threats of terrorism or military conflicts
|
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Corporation’s stock price to decrease regardless of operating results.
The Trading Volume In The Corporation’s Common Stock Is Less Than That Of Other Larger Financial Services Companies
The Corporation’s common stock is listed for trading on the OTCQX Best Market (OTCQX) under the symbol ENBP. The trading volume in its common stock is a fraction of that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Corporation’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Corporation has no control. Given the lower trading volume of the Corporation’s common stock, significant sales of the Corporation’s common stock, or the expectation of these sales, could cause the Corporation’s stock price to fall.
An Investment In The Corporation’s Common Stock Is Not An Insured Deposit
The Corporation’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in the Corporation’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, an investor in the Corporation’s common stock may lose some or all of their investment.
The Corporation’s Articles Of Incorporation And Bylaws, As Well As Certain Banking Laws, May Have An Anti-Takeover Effect
Provisions of the Corporation’s articles of incorporation and bylaws, federal banking laws, including regulatory approval requirements, and the Corporation’s stock purchase rights plan, could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination that could adversely affect the market price of the Corporation’s common stock.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
As of December 31, 2022, ENB Financial Corp and Ephrata National Bank owned and leased buildings in the normal course of business. The headquarters of ENB Financial Corp and main office of Ephrata National Bank is at 31 East Main Street, Ephrata, Pennsylvania. As of December 31, 2022, the Bank owned 18 properties and leased five properties. These properties are adequate for their intended and present utilization.
For more information concerning the amounts recorded for premises and equipment and commitments under current leasing agreements, see Notes D and Q of the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this report on Form 10-K.
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ENB FINANCIAL CORP
Item 3. Legal Proceedings
The nature of the Corporation’s business generates a certain amount of litigation involving matters arising in the ordinary course of business; however, in the opinion of management, there are no material proceedings pending to which the Corporation is a party to, or which would be material in relation to the Corporation’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation. In addition, no material proceedings are pending, known to be threatened, or contemplated against the Corporation by governmental authorities.
Item 4. Mine Safety Disclosures – Not Applicable
Part II
| Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities |
The Corporation has only one class of stock authorized, issued, and outstanding, which consists of common stock with a par value of $0.10 per share. As of December 31, 2022, there were 24,000,000 shares of common stock authorized with 5,739,114 shares issued, and 5,635,533 shares outstanding to approximately 847 shareholders. The Corporation’s common stock is traded on a limited basis on the OTCQX Best Market under the symbol “ENBP.” Prices presented in the table below reflect high and low prices of actual transactions known to management. Prices and dividends per share are adjusted for stock splits. Market quotations reflect inter-dealer prices, without retail mark up, mark down, or commission and may not reflect actual transactions.
| 2022 | 2021 | |||||||||||||||||||||||
| High | Low | Dividend | High | Low | Dividend | |||||||||||||||||||
| First quarter | $ | 22.40 | $ | 21.15 | $ | 0.17 | $ | 22.00 | $ | 18.60 | $ | 0.16 | ||||||||||||
| Second quarter | 22.40 | 17.67 | $ | 0.17 | 22.00 | 20.70 | $ | 0.17 | ||||||||||||||||
| Third quarter | 18.55 | 16.10 | $ | 0.17 | 23.75 | 21.13 | $ | 0.17 | ||||||||||||||||
| Fourth quarter | 18.03 | 16.00 | $ | 0.17 | 22.23 | 21.15 | $ | 0.17 | ||||||||||||||||
Dividends
The Corporation, and before it the Bank, since 1973 has generally paid quarterly cash dividends on or around March 15, June 15, September 15, and December 15 of each year. The Corporation currently expects to continue the practice of paying regular quarterly cash dividends to its shareholders for the foreseeable future. However, future dividends are dependent upon future earnings and legal restrictions. The dividend payments reflected above amount to a dividend payout ratio between 25.0% and 26.0% for 2021 and 2022, respectively. The dividend payout ratio is only one element of management’s plan for managing capital. Certain laws restrict the amount of dividends that may be paid to shareholders in any given year. In addition, under Pennsylvania corporate law, the Corporation may not pay a dividend if, after issuing the dividend (1) the Corporation would be unable to pay its debts as they become due, or (2) the Corporation’s total assets would be less than its total liabilities plus the amount needed to satisfy any preferential rights of shareholders. In addition, as declared by the Board of Directors, Ephrata National Bank’s dividend restrictions apply indirectly to ENB Financial Corp because cash available for dividend distributions will initially come from dividends Ephrata National Bank pays to ENB Financial Corp. See Note M to the consolidated financial statements in this Form 10-K filing, for information that discusses and quantifies this regulatory restriction.
ENB Financial Corp offers its shareholders the convenience of a Dividend Reinvestment Plan (DRP) and the direct deposit of cash dividends. The DRP gives shareholders registered with the Corporation the opportunity to have their quarterly dividends invested automatically in additional shares of the Corporation’s common stock. Shareholders who prefer a cash dividend may have their quarterly dividends deposited directly into a checking or savings account at their financial institution. For additional information on either program, contact the Corporation’s stock registrar and dividend paying agent, Computershare Shareholder Services, P.O. Box 505000, Louisville, KY 40233-5000.
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ENB FINANCIAL CORP
Purchases
The following table details the Corporation’s purchase of its own common stock during the three months ended December 31, 2022.
| 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 * | ||||||||||||
| October 2022 | — | — | — | 164,100 | ||||||||||||
| November 2022 | 3,456 | $ | 18.06 | 3,456 | 160,644 | |||||||||||
| December 2022 | — | — | — | 160,644 | ||||||||||||
| Total | 3,456 | |||||||||||||||
* On October 21, 2020, the Board of Directors of the Corporation approved a plan to repurchase, in the open market and privately renegotiated transactions, up to 200,000 shares of its outstanding common stock. This plan replaces the 2019 plan. The first purchase of common stock under this plan occurred on October 28, 2020. By December 31, 2022, a total of 39,356 shares were repurchased at a total cost of $785,020, for an average cost per share of $19.95.
Recent Sales of Unregistered Securities and Equity Compensation Plan
The Corporation does not have an equity compensation plan and has not sold any unregistered securities.
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents management’s view of the financial condition and results of operations of the Corporation. This discussion and analysis should be read in conjunction with the consolidated financial statements and other financial schedules included in this annual report. The financial condition and results of operations presented are not indicative of future performance.
Strategic Overview
ENB Financial Corp and its wholly owned subsidiary, Ephrata National Bank, are committed to remaining an independent community bank serving its market area. The Corporation’s roots date back to the April 11, 1881 charter granted to Ephrata National Bank by the Office of the Comptroller of the Currency. The Bank’s growth has been entirely organic over 141 years of existence. The Board and Management are committed to the principles and values that have served the company well over its history and the desire is to produce strong financial results that will ensure trust from the Bank’s customers and favorable returns to the shareholders.
Results of Operations
Overview
The year ended December 31, 2022 was positively impacted by a number of items resulting in solid financial results. The Corporation grew interest-earning assets rapidly during 2022 resulting in significantly higher levels of net interest income. The growth in net interest income was also supported by the rapid increase in the Federal Funds rate and concurrently the Prime rate as the Federal Reserve moved to combat inflation by increasing overnight rates dramatically. While years prior to 2022 were marked by significant balance sheet growth because of growth in the deposit portfolio, 2022 was marked by significant loan growth.
The Corporation recorded net income of $14,631,000 for the year ended December 31, 2022, a $285,000, or 1.9% decrease from the year ended December 31, 2021. The earnings per share, basic and diluted, were $2.62 in 2022, compared to $2.68 in 2021, a 2.2% decrease. The decrease in the Corporation’s 2022 earnings was caused primarily by a decline in non-interest income in addition to an increase in operating expenses and provision expense that was partially offset by the increase in net interest income.
The Corporation’s net interest income (NII) increased by $10,012,000, or 24.7%, in 2022, compared to 2021. The increase in NII primarily resulted from an increase in interest and fees on loans of $7,698,000, or 22.5%, and interest on securities available for sale of $4,406,000, or 49.8%. Interest expense on deposits and borrowings increased by $2,356,000, or 78.0%, in 2022 compared to the prior year. The increasing interest rate environment has caused an increase in asset yield, but also an increase in the cost of funds, which has resulted in these much higher levels of net interest income.
The Corporation recorded a $1,300,000 provision for loan losses in 2022, compared to $475,000 in 2021. The higher provision in 2022 was primarily caused by the rapid volume growth in the loan portfolio. The increase in the provision was constrained by a decline in classified loan balances throughout the year and a decrease in several qualitative factors as a result of improved conditions.
Non-interest income excluding security and mortgage gains increased by $951,000, or 8.4%, for the year ended December 31, 2022, compared to the prior year, due to many positive trends such as higher trust income, higher service fees, and higher earnings on bank-owned life insurance from two death benefit payouts. Mortgage gains decreased in 2022 to $1,302,000, compared to $5,526,000 in 2021. Mortgage production was stable in 2022 compared to 2021, but the rapid market rate increases affected the margin that the Corporation was able to obtain on the sale of mortgages. The majority of mortgage production during 2022 were adjustable rate mortgages that were generated and retained on the Corporation’s balance sheet. Additionally, gains on debt and equity securities were $1,044,000, or 99.1% lower in 2022 compared to the prior year due to higher interest rates which resulted in fewer security sales.
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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.
| Key Performance Ratios | ||||||||
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Return on Average Assets | 0.83% | 0.95% | ||||||
| Return on Average Equity | 13.63% | 11.16% | ||||||
The results of the Corporation’s operations are best explained by addressing in further detail the five major sections of the income statement, which are as follows:
| ● | Net interest income |
| ● | Provision for loan losses |
| ● | Other income |
| ● | Operating expenses |
| ● | Income taxes |
The following discussion analyzes each of these five components.
Net Interest Income
NII represents the largest portion of the Corporation’s operating income. In 2022, NII generated 78.9% of the Corporation’s revenue stream, which consists of NII and non-interest income, compared to 69.4% in 2021. This increase is a result of much higher levels of interest-earning assets in 2022 compared to 2021 with lower non-interest income as a result of the changes in mortgage activity. The overall performance of the Corporation is highly dependent on the changes in NII since it comprises such a significant portion of operating income.
The following table shows a summary analysis of NII on a fully taxable equivalent (FTE) basis. For analytical purposes and throughout this discussion, yields, rates, and measurements such as NII, net interest spread, and net yield on interest earning assets are presented on an FTE basis. The FTE NII shown in both tables below will exceed the NII reported on the consolidated statements of income, which is not shown on an FTE basis.
| Net Interest Income | ||||||||
| (DOLLARS IN THOUSANDS) | ||||||||
| Year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Total interest income | 55,959 | 43,591 | ||||||
| Total interest expense | 5,376 | 3,020 | ||||||
| Net interest income | 50,583 | 40,571 | ||||||
| Tax equivalent adjustment | 1,210 | 1,141 | ||||||
| Net interest income | ||||||||
| (fully taxable equivalent) | 51,793 | 41,712 | ||||||
NII is the difference between interest income earned on assets and interest expense incurred on liabilities. Accordingly, two factors affect NII:
27
| ● | The rates charged on interest earning assets and paid on interest bearing liabilities |
| ● | The average balance of interest earning assets and interest bearing liabilities |
NII is impacted by yields earned on assets and rates paid on liabilities. With the rapid increase in the short-term Federal Reserve rates in 2022, asset yields have increased and the U.S. Treasury curve increased dramatically on the short end but has been relatively flat on the long end.
As a result of a larger balance sheet in 2022, with higher asset yields, the Corporation’s NII on a tax equivalent basis increased significantly and the Corporation’s margin increased to 3.03% for year ended December 31, 2022, compared to 2.81% in 2021. Loan and investment yields were higher in 2022 due to the 425 basis point Fed rate increases during the year positively impacting yields on variable rate instruments and increasing the yields on new volume. The Corporation’s NII on a tax equivalent basis in 2022 increased over 2021, by $10,081,000, or 24.2%.
The Corporation’s overall cost of funds on a monthly annualized basis, including non-interest bearing funds, remained stable through the first half of 2022 between 18 and 22 basis points. In the second half of the year, core deposit interest rates as well as time deposit rates were increased resulting in a much higher cost of funds for the second half of 2022 ranging between 25 and 67 basis points. The average balance and interest rates of borrowings was higher in 2022 compared to 2021, resulting in higher interest expense of $509,000, or 39.9%. The Corporation now carries a total of $40 million of subordinated debt that was issued at the holding company; $20 million beginning on December 30, 2020, at a rate of 4.00%, and $20 million beginning on July 22, 2022, at a rate of 5.75%. The additional subordinated debt resulted in an increase in interest expense of $511,000, or 63.9%, when comparing 2022 to 2021.
The following table provides an analysis of year-to-year changes in net interest income by distinguishing what changes were a result of average balance increases or decreases and what changes were a result of interest rate increases or decreases.
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
| 2022 vs. 2021 | 2021 vs. 2020 | |||||||||||||||||||||||
| 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 | (48 | ) | 129 | 81 | 65 | (114 | ) | (49 | ) | |||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| Taxable | 855 | 3,419 | 4,274 | 1,844 | (987 | ) | 857 | |||||||||||||||||
| Tax-exempt | 440 | (187 | ) | 253 | 2,139 | (548 | ) | 1,591 | ||||||||||||||||
| Total securities | 1,295 | 3,232 | 4,527 | 3,983 | (1,535 | ) | 2,448 | |||||||||||||||||
| Loans | 7,041 | 713 | 7,754 | 2,180 | (2,597 | ) | (417 | ) | ||||||||||||||||
| Regulatory stock | 1 | 74 | 75 | (64 | ) | (94 | ) | (158 | ) | |||||||||||||||
| Total interest income | 8,289 | 4,148 | 12,437 | 6,164 | (4,340 | ) | 1,824 | |||||||||||||||||
| INTEREST EXPENSE | ||||||||||||||||||||||||
| Deposits: | ||||||||||||||||||||||||
| Demand deposits | 42 | 1,572 | 1,614 | 99 | (441 | ) | (342 | ) | ||||||||||||||||
| Savings deposits | 11 | 18 | 29 | 16 | (14 | ) | 2 | |||||||||||||||||
| Time deposits | (5 | ) | (31 | ) | (36 | ) | (109 | ) | (547 | ) | (656 | ) | ||||||||||||
| Total deposits | 48 | 1,559 | 1,607 | 6 | (1,002 | ) | (996 | ) | ||||||||||||||||
| Borrowings: | ||||||||||||||||||||||||
| Total borrowings | 509 | 240 | 749 | 25 | 145 | 170 | ||||||||||||||||||
| Total interest expense | 557 | 1,799 | 2,356 | 31 | (857 | ) | (826 | ) | ||||||||||||||||
| NET INTEREST INCOME | 7,732 | 2,349 | 10,081 | 6,133 | (3,483 | ) | 2,650 | |||||||||||||||||
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In 2022, the Corporation’s NII on an FTE basis increased by $10,081,000, a 24.2% increase over 2021. Total interest income increased $12,437,000, or 27.8%, while interest expense increased $2,356,000, or 78.0%, from 2021 to 2022. The FTE interest income from the securities portfolio increased by $4,527,000, or 45.4%, while loan interest income increased $7,754,000, or 22.5%. During 2022, additional loan volume added $7,041,000 to net interest income, and higher yields primarily due to the Prime rate increases in 2022, caused a $713,000 increase. Higher balances in the securities portfolio caused an increase of $1,295,000 in net interest income, while higher yields on securities caused a $3,232,000 increase, resulting in a net increase of $4,527,000.
The average balance of interest bearing liabilities increased by 16.3% during 2022, driven by the growth in deposit and borrowings balances. Deposit rates increased in 2022 causing a significant increase in interest expense. Higher interest rates contributed to $1,559,000 of increased interest expense while higher deposit balances caused $48,000 of increased expense, resulting in a total increase in interest expense of $1,607,000.
Interest-bearing demand deposits repriced causing a large increase in interest expense due to the large quantity of accounts that were adjusted. Demand deposit interest expense increased a total of $1,614,000 in 2022, with $1,572,000 due to higher rates, while higher balances caused an increase of $42,000. Higher balances in savings accounts caused an increase of $11,000, while higher rates caused an increase of $18,000, resulting in the net increase in interest expense of $29,000 on savings deposits. Time deposit balances declined throughout 2022, resulting in lower interest expense of $5,000, while lower rates caused a decline of $31,000, resulting in a net decrease of $36,000. While some time deposit rates increased towards the end of 2022, time deposits were still repricing to lower levels throughout the majority of the year.
The average balance of total borrowings increased by $17,295,000, or 24.5%, from December 31, 2021, to December 31, 2022. The increase in total borrowings increased interest expense by $509,000. Higher rates on borrowings, affected by the Fed rate increases and the subordinated debt issued in July 2022, resulted in higher interest expense of $240,000. The aggregate of these amounts was an increase in interest expense of $749,000 related to total borrowings.
The following table shows a more detailed analysis of net interest income on an FTE basis shown with all the major elements of the Corporation’s balance sheet, which consists of interest earning and non-interest earning assets and interest bearing and non-interest bearing liabilities. Additionally, the analysis provides the net interest spread and the net yield on interest earning assets. The net interest spread is the difference between the yield on interest earning assets and the interest rate paid on interest bearing liabilities. The net interest spread has the deficiency of not giving credit for the non-interest bearing funds and capital used to fund a portion of the total interest earning assets. For this reason, management emphasizes the net yield on interest earning assets, also referred to as the net interest margin (NIM). The NIM is calculated by dividing net interest income on an FTE basis into total average interest earning assets. The NIM is generally the benchmark used by analysts to measure how efficiently a bank generates NII.
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COMPARATIVE AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS, DOLLARS IN THOUSANDS)
| December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
| $ | $ | % | $ | $ | % | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||||||
| Federal funds sold and | ||||||||||||||||||||||||
| deposits at other banks | 35,710 | 172 | 0.48 | 59,199 | 91 | 0.15 | ||||||||||||||||||
| Securities available for sale: | ||||||||||||||||||||||||
| Taxable | 419,323 | 9,275 | 2.21 | 363,883 | 5,001 | 1.37 | ||||||||||||||||||
| Tax-exempt | 202,868 | 5,226 | 2.58 | 185,972 | 4,973 | 2.67 | ||||||||||||||||||
| Total securities (d) | 622,191 | 14,501 | 2.33 | 549,855 | 9,974 | 1.81 | ||||||||||||||||||
| Loans (a) | 1,043,065 | 42,142 | 4.04 | 868,460 | 34,388 | 3.96 | ||||||||||||||||||
| Regulatory stock | 5,894 | 354 | 6.01 | 5,870 | 279 | 4.75 | ||||||||||||||||||
| Total interest earning assets | 1,706,860 | 57,169 | 3.35 | 1,483,384 | 44,732 | 3.02 | ||||||||||||||||||
| Non-interest earning assets (d) | 57,510 | 82,827 | ||||||||||||||||||||||
| Total assets | 1,764,370 | 1,566,211 | ||||||||||||||||||||||
| LIABILITIES & | ||||||||||||||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | 415,749 | 1,784 | 0.43 | 344,783 | 170 | 0.05 | ||||||||||||||||||
| Savings accounts | 365,460 | 92 | 0.03 | 315,161 | 63 | 0.02 | ||||||||||||||||||
| Time deposits | 116,615 | 874 | 0.75 | 117,320 | 910 | 0.78 | ||||||||||||||||||
| Borrowed funds | 87,768 | 2,626 | 2.99 | 70,473 | 1,877 | 2.66 | ||||||||||||||||||
| Total interest bearing liabilities | 985,592 | 5,376 | 0.55 | 847,737 | 3,020 | 0.36 | ||||||||||||||||||
| Non-interest bearing liabilities: | ||||||||||||||||||||||||
| Demand deposits | 664,116 | 579,996 | ||||||||||||||||||||||
| Other | 7,305 | 4,867 | ||||||||||||||||||||||
| Total liabilities | 1,657,013 | 1,432,600 | ||||||||||||||||||||||
| Stockholders' equity | 107,357 | 133,611 | ||||||||||||||||||||||
| Total liabilities & stockholders' equity | 1,764,370 | 1,566,211 | ||||||||||||||||||||||
| Net interest income (FTE) | 51,793 | 41,712 | ||||||||||||||||||||||
| Net interest spread (b) | 2.80 | 2.66 | ||||||||||||||||||||||
| Effect of non-interest bearing funds | 0.23 | 0.15 | ||||||||||||||||||||||
| Net yield on interest earning assets (c) | 3.03 | 2.81 | ||||||||||||||||||||||
(a) Includes balances of non-accrual loans and the recognition of any related interest income. Average balances also include net deferred loan costs of $2,239,000 in 2022 and $1,755,000 in 2021. Such fees recognized through income and included in the interest amounts totaled ($175,000) in 2022 and $1,201,000 in 2021.
(b) Net interest spread is the arithmetic difference between the yield on interest earning assets and the rate paid on interest bearing liabilities.
(c) Net yield, also referred to as net interest margin, is computed by dividing net interest income (FTE) by total interest earning assets.
(d) Securities recorded at amortized cost. Unrealized holding gains and losses are included in non-interest earning assets.
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The Corporation’s average balance on securities increased by $72.3 million, or 13.2%, in 2022 compared to 2021 and the tax equivalent yield on investments increased by 52 basis points. Interest income on securities increased due to the volume growth and increasing yield due to higher market rates. The growth in the investment portfolio during a period of rising rates contributed to the increase in average security yield.
Average balances on loans increased by $174.6 million, or 20.1%, for the year ended December 31, 2022, compared to the prior year. Loan yields increased by 8 basis points for the year and loan interest income increased $7,754,000, or 22.5% as a result of the significantly higher balances and slightly higher yields.
The average balance of interest-bearing deposit accounts increased by $120.6 million, or 15.5%, in 2022 compared to 2021. While the average balance of time deposits did decrease minimally for the year-to-date time periods, the average balance of demand and savings accounts increased significantly and more than offset the decline in time deposits. The interest rate paid on deposits increased as well. This resulted in an increase in interest expense on deposits of $1,607,000, or 140.6%, for the year ended December 31, 2022, compared to 2021 mostly due to the participation in the fully-reciprocal demand deposit marketplace program.
The Corporation’s average balance on borrowed funds increased by $17.3 million in 2022. The Corporation’s borrowed funds consist of overnight borrowings, short and long-term FHLB advances, as well as subordinated debt issued in December of 2020 and July of 2022, which was used to support capital growth for the Corporation. The subordinated debt issuances and additional FHLB advances used to fund loan growth caused average borrowings to increase year-over-year. The rate paid on borrowed funds increased by 33 basis points for 2022, compared to 2021 as a result of the second issuance of subordinated debt in July of 2022 which carries a 5.75% rate, and additional FHLB advances which carried higher rates due to the Fed Funds rate increases throughout 2022.
For the year ended December 31, 2022, the net interest spread increased by 14 basis points to 2.80%, compared to 2.66% for 2021. The effect of non-interest bearing funds increased to 23 basis points from 15 basis points when comparing both years. The effect of non-interest bearing funds refers to the benefit gained from deposits on which the Corporation does not pay interest. As rates go higher, the benefit of non-interest bearing deposits increases because there is more difference between non-interest bearing funds and interest bearing liabilities. The Corporation’s NIM for 2022 was 3.03%, compared to 2.81% for 2021.
Provision for Loan Losses
The allowance for credit losses (ACL) provides for losses inherent in the loan portfolio as determined by a quarterly analysis and calculation of various factors related to the loan portfolio. The amount of the provision reflects the adjustment management determines necessary to ensure the ACL is adequate to cover any losses inherent in the loan portfolio. The Corporation gives special attention to the level of underperforming loans when calculating the necessary provision for loan losses. The analysis of the credit loss allowance takes into consideration, among other things, the following factors:
| ● | levels and trends in delinquencies, non-accruals, and charge-offs, |
| ● | levels of classified loans, |
| ● | trends within the loan portfolio, |
| ● | changes in lending policies and procedures, |
| ● | experience of lending personnel and management oversight, |
| ● | national and local economic trends, |
| ● | concentrations of credit, |
| ● | external factors such as legal and regulatory requirements, |
| ● | changes in the quality of loan review and Board oversight, and |
| ● | changes in the value of underlying collateral. |
The Corporation recorded a provision of $1,300,000 in 2022, compared to $475,000 in 2021. The provision expense was higher in 2022 due primarily to increased loan growth. As of December 31, 2022, the allowance as a percentage of total loans was 1.19%, compared to 1.40% at December 31, 2021.
Management continues to evaluate the allowance for credit losses in relation to the growth or decline of the loan portfolio and its associated credit risk, and believes the provision and the allowance for credit losses are adequate to provide for future losses. For further discussion of the calculation, see the “Allowance for Credit Losses” section.
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Other Income
Other income for 2022 was $13,564,000, a decrease of $4,317,000, or 24.1%, compared to the $17,881,000 earned in 2021. The following table details the categories that comprise other income.
OTHER INCOME
(DOLLARS IN THOUSANDS)
| 2022 vs. 2021 | ||||||||||||||||
| 2022 | 2021 | Increase (Decrease) | ||||||||||||||
| $ | $ | $ | % | |||||||||||||
| Trust and investment services | 2,643 | 2,362 | 281 | 11.9 | ||||||||||||
| Service charges on deposit accounts | 1,348 | 1,069 | 279 | 26.1 | ||||||||||||
| Other fees | 1,590 | 1,443 | 147 | 10.2 | ||||||||||||
| Commissions | 3,663 | 3,702 | (39 | ) | (1.1 | ) | ||||||||||
| Net gains on debt and equity securities | 10 | 1,054 | (1,044 | ) | (99.1 | ) | ||||||||||
| Gains on sale of mortgages | 1,302 | 5,526 | (4,224 | ) | (76.4 | ) | ||||||||||
| Earnings on bank-owned life insurance | 1,583 | 880 | 703 | 79.9 | ||||||||||||
| Other miscellaneous income | 1,425 | 1,845 | (420 | ) | (22.8 | ) | ||||||||||
| Total other income | 13,564 | 17,881 | (4,317 | ) | (24.1 | ) | ||||||||||
Trust and investment services income increased by 11.9% from 2021 to 2022 primarily as a result of higher income on the trust services side which increased by $336,000, or 24.8%. Service charges on deposit accounts increased by $279,000, or 26.1% compared to the prior year and other fees have increased by $147,000, or 10.2% as a result of higher fees on a third party sweep product in 2022 slightly offset by lower loan administration fees. Commissions remained stable for the year ended December 31, 2022, compared to 2021. Gains on debt and equity securities were lower in 2022 driven by higher market interest rates which resulted in fewer sales. Mortgage gains were lower in 2022 due to rapid increase in interest rates which negatively impacted the margins on mortgages sold. Additionally, more mortgage originations in 2022 were in the form of adjustable-rate mortgages held on the Corporation’s balance sheet as opposed to 2021 when most mortgage originations were fixed-rate and sold on the secondary market. Holding mortgages on balance sheet results in interest income as opposed to an immediate gain on sale when mortgages are sold in the secondary market. Earnings on bank-owned life insurance increased year-over-year primarily attributed to two Bank Owned Life Insurance (BOLI) payouts. The Corporation purchased and is the beneficiary of all BOLI life insurance policies taken out on a group of its former directors and current and former officers. Due to the death of two participants during 2022, the Corporation recorded BOLI income of $678,000. Other miscellaneous income decreased $420,000, or 22.8% in 2022 compared to 2021 due to non-recurring income items in 2021.
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Operating Expenses
Operating expenses for 2022 were $45,929,000, an increase of $5,488,000, or 13.6%, compared to $40,441,000 in 2021. The following table provides details of the Corporation’s operating expenses for the last two years along with the percentage increase or decrease compared to the previous year.
OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
| 2022 vs. 2021 | ||||||||||||||||
| 2022 | 2021 | Increase (Decrease) | ||||||||||||||
| $ | $ | $ | % | |||||||||||||
| Salaries and employee benefits | 27,324 | 24,465 | 2,859 | 11.7 | ||||||||||||
| Occupancy expenses | 2,846 | 2,621 | 225 | 8.6 | ||||||||||||
| Equipment expenses | 1,240 | 1,053 | 187 | 17.8 | ||||||||||||
| Advertising & marketing expenses | 1,083 | 992 | 91 | 9.2 | ||||||||||||
| Computer software & data processing expenses | 5,591 | 4,420 | 1,171 | 26.5 | ||||||||||||
| Shares tax | 1,380 | 1,282 | 98 | 7.6 | ||||||||||||
| Professional services | 2,743 | 2,099 | 644 | 30.7 | ||||||||||||
| Other operating expenses | 3,722 | 3,509 | 213 | 6.1 | ||||||||||||
| Total operating expenses | 45,929 | 40,441 | 5,488 | 13.6 | ||||||||||||
Salaries and employee benefits are the largest category of operating expenses. For the year 2022, salaries and benefits increased $2,859,000, or 11.7%, compared to 2021. The increase in salary costs was primarily due to additions to staff as well as increasing costs to fill empty positions due to the competitive job market. Additionally, a bank-wide incentive plan was implemented during 2022, resulting in an accrual for the year-to-date period based on achievements of annual performance metrics. Occupancy and equipment expenses increased 8.6% from the prior year mostly due to two additional leases that were entered into in 2022. Advertising and marketing expenses increased by 9.2%, which is typical as the Corporation grows and promotes new market areas and new products and services. Computer software and data processing expenses are growing at a rapid pace, 26.5% year-over year, as a result of higher technology costs and new bank-wide initiatives that rely heavily on software platforms and additional costs related to the core conversion the Corporation will be undergoing in the 3rd quarter of 2023. Shares tax expense is based on the Corporation’s level of shareholders’ equity and has grown slightly year-over-year commensurate with the change in shareholders’ equity. Professional services expenses increased by 30.7% in 2022, compared to the prior year driven higher by an increase in outside services costs primarily related to the core conversion. Other operating expenses increased by 6.1% year-over-year primarily as a result of higher general insurance and FDIC insurance costs.
Income Taxes
Nearly all of the Corporation’s income is taxed at a corporate rate of 21% for Federal income tax purposes. The Corporation is also subject to Pennsylvania Corporate Net Income Tax; however, very limited taxable activity is conducted at the corporate level. The Corporation’s wholly owned subsidiary, Ephrata National Bank, is not subject to state income tax, but does pay Pennsylvania Bank Shares Tax. The Bank Shares Tax expense appears on the Corporation’s Consolidated Statements of Income under operating expenses.
Certain items of income are not subject to Federal income tax, such as tax-exempt interest income on loans and securities, and increases in the cash surrender value of bank-owned life insurance; therefore, the effective income tax rate for the Corporation is lower than the stated tax rate. The effective tax rate is calculated by dividing the Corporation’s provision for income tax by the pre-tax income for the applicable period.
For the year ended December 31, 2022, the Corporation recorded a tax provision of $2,287,000, compared to $2,620,000 for 2021. This decrease in tax expense can be attributed to lower pretax earnings and a higher level of tax-free income. The effective tax rate for the Corporation was 13.5% for 2022 and 14.9% for 2021. The Corporation’s effective tax rate is lower than the 21% corporate rate as a result of tax-free assets that the Corporation holds on its balance sheet. The majority of the Corporation’s tax-free assets are in the form of obligations of states and political subdivisions, referred to as municipal bonds. The Corporation also has a relatively small component of tax-free municipal loans.
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Financial Condition
Balance Sheet Overview and Liquidity
We maintain liquid assets at adequate levels in order to meet the needs of our balance sheet. Our primary source of liquidity is core deposits and our available-for-sale investment portfolio both of which provide more than enough liquidity to fund loans to customers and any other funding needs.
A portion of our liquidity consists of cash and cash equivalents and borrowings. At December 31, 2022, cash and equivalents amounted to $37.6 million, a decrease of $120.8 million, or 76.3%, from balances at December 31, 2021. Our primary sources of cash are principal repayments on loans, proceeds from the sales, calls, and maturities of investment securities, principal repayments of mortgage-backed securities and asset-backed, and increases in deposit accounts. As of December 31, 2022, we had borrowings outstanding from the FHLB of $74.0 million and subordinated debt of $39.4 million.
At December 31, 2022, we had $596.4 million in loan commitments outstanding, which included $117.5 million in firm loan commitments, $467.8 million in unused lines of credit, and open letters of credit of $11.1 million. Certificates of deposit due within one year totaled $55.6 million, or 41.6% of certificates of deposit. We believe, based on past experience that a significant portion of our certificates of deposit will remain with us upon maturity and we have ample liquidity outside of these funds. We have the ability to attract and retain deposits by adjusting the interest rates offered.
As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $21.6 million and $13.3 million for the years ended December 31, 2022 and 2021, respectively. Net cash used for investing activities was $315.8 million and $195.2 million in fiscal years 2022 and 2021, respectively, reflecting our loan and investment security activities in the respective periods. Cash provided by financing activities amounted to $173.3 million and $245.5 million for years ended December 31, 2022 and 2021, respectively primarily representing increases in our core deposits through the year.
Investment Securities
The Corporation classifies all of its debt securities as available for sale and reports the portfolio at fair market value. As of December 31, 2022, the Corporation had $538.3 million of debt and equity securities, compared to $567.1 million at December 31, 2021, a decrease of $28.8 million, or 5.1%.
The largest movements within the securities portfolio were shaped by market factors, such as:
| ● | slope of the U.S. Treasury curve and projected forward rates |
| ● | interest spread versus U.S. Treasury rates on the various securities |
| ● | pricing of the instruments, including supply and demand for the product |
| ● | structure of the instruments, including duration and average life |
| ● | portfolio weightings versus policy guidelines |
| ● | prepayment speeds on mortgage-backed securities and collateralized mortgage obligations |
| ● | credit risk of each instrument and risk-based capital considerations |
| ● | Federal income tax considerations with regard to obligations of tax-free states and political subdivisions. |
The Corporation’s U.S. Treasury sector increased by $17.8 million, or 120.5%, since December 31, 2021. U.S. Treasuries represent a safe credit at a market appropriate yield which added some diversity to the portfolio. The Corporation’s U.S. government agency sector decreased by $4.2 million, or 14.6%, since December 31, 2021. Agency MBS and CMO investments in total have declined by $10.3 million, or 12.4%. These bonds pay monthly principal and interest and the Corporation has not reinvested into this sector, so the fair value has been declining. The Corporation began investing in non-agency MBS and CMO instruments in 2022 as a way to achieve a higher yield with bonds that are well protected from a credit standpoint. As of December 31, 2022, this sector stood at $50.3 million.
The Corporation’s asset-backed securities (ABS) decreased significantly since December 31, 2021, by $28.0 million, or 27.6%. ABS securities are floating rate student loan pools which are instruments that perform well in a rates-up
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environment and offset the interest rate risk of the longer fixed-rate municipal bonds. These securities provide a variable rate return materially above the overnight Federal funds rate in a safe investment with a risk rating very similar to that of U.S. Agency bonds. The asset-backed securities generally provide monthly principal and interest payments to complement the Corporation’s ongoing cash flows. Management views the ABS sector as a safe, higher yielding option than cash, with the qualities of cash in a rates-up environment.
Obligations of states and political subdivisions, or municipal bonds, consist of both tax-free and taxable securities. They carry the longest duration on average of any instrument in the securities portfolio but have a higher yield because of the longer interest rate risk. These instruments also experience significant fair market value gains and losses when interest rates decrease and increase. The Corporation sold some municipal bonds during 2022 and the rapid increase in market interest rates caused the unrealized losses on these bonds to increase dramatically. As a result, the fair value of this sector declined by $41.7 million, or 16.8% from December 31, 2021, to December 31, 2022. Municipal bonds represented 38.9% of the debt securities portfolio as of December 31, 2022, compared to 44.3% as of December 31, 2021.
As of December 31, 2022, the fair value of the Corporation’s corporate bonds decreased by $12.9 million, or 15.6%, from balances at December 31, 2021. Corporate bonds add diversity to the portfolio and provide strong yields for short maturities; however, by their very nature, corporate bonds carry a higher level of credit risk should the entity experience financial difficulties. The fair value of corporate bonds decreased primarily as a result of maturing bonds as well as a significant increase in the level of unrealized losses within this portfolio.
The following table shows the weighted-average life and yield on the Corporation’s debt securities by maturity intervals as of December 31, 2022, based on amortized cost. All of the Corporation’s securities are classified as available for sale and are reported at fair value; however, for purposes of this schedule they are shown at amortized cost. Securities are assigned to categories based on stated contractual maturity except for MBS and CMOs, which are based on anticipated payment periods.
SECURITIES PORTFOLIO MATURITY ANALYSIS
(DOLLARS IN THOUSANDS)
| Within | 1 - 5 | 5 - 10 | Over 10 | |||||||||||||||||||||||||||||||||||||
| 1 Year | Years | Years | Years | Total | ||||||||||||||||||||||||||||||||||||
| % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
| $ | Yield | $ | Yield | $ | Yield | $ | Yield | $ | Yield | |||||||||||||||||||||||||||||||
| U.S. Treasuries | — | — | 20,890 | 1.62 | 14,847 | 1.40 | — | — | 35,737 | 1.53 | ||||||||||||||||||||||||||||||
| U.S. government agencies | 8,205 | 1.28 | 19,400 | 0.78 | — | 0.00 | — | — | 27,605 | 0.93 | ||||||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | 177 | 1.64 | 34,832 | 2.53 | 14,520 | 1.78 | 410 | 2.96 | 49,939 | 2.31 | ||||||||||||||||||||||||||||||
| U.S. agency collateralized mortgage obligations | 2,099 | 1.37 | 14,226 | 2.93 | 13,868 | 1.61 | — | 0.00 | 30,193 | 2.22 | ||||||||||||||||||||||||||||||
| Non Agency MBS/CMO | 2,823 | 2.96 | 29,346 | 4.89 | 17,872 | 3.60 | 3,859 | 5.19 | 53,900 | 4.38 | ||||||||||||||||||||||||||||||
| Corporate bonds | 12,007 | 4.93 | 40,287 | 2.11 | 24,391 | 3.13 | — | — | 76,685 | 2.88 | ||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | — | — | 1,202 | 1.30 | 27,579 | 2.26 | 211,321 | 2.02 | 240,102 | 2.04 | ||||||||||||||||||||||||||||||
| Asset-backed securities | — | — | 20,370 | 4.98 | 55,740 | 5.05 | — | — | 76,110 | 5.03 | ||||||||||||||||||||||||||||||
| Total securities available for sale | 25,311 | 3.21 | 180,553 | 2.83 | 168,817 | 3.28 | 215,590 | 2.08 | 590,271 | 2.70 | ||||||||||||||||||||||||||||||
Loans
Net loans outstanding increased $269.0 million, or 29.6%, from $908.0 million at December 31, 2021, to $1.2 billion at December 31, 2022. Most major loan categories showed an increase in balances over the prior year but the majority of loan growth came from the commercial and consumer real estate categories. The Corporation’s strategic plan specifically focused on loan growth while maintaining quality of credit standards. This focus resulted in significant loan growth across most loan segments in 2022.
Commercial real estate loans increased to $518.8 million at December 31, 2022, from $400.8 million at December 31, 2021, a 29.4% increase. Commercial mortgages increased by $33.4 million, or 18.8%, agriculture mortgages increased
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by $17.4 million, or 8.6%, and commercial construction loans increased by $67.2 million, or 341.9% from December 31, 2021, to December 31, 2022. The increase in the commercial construction loans was a direct result of reclassification of 1-4 family residential loans, representing loans now properly coded as construction that were previously included in the consumer real estate sector.
The consumer real estate category represents the largest group of loans for the Corporation. The consumer residential real estate category of total loans increased from $403.9 million on December 31, 2021, to $520.6 million on December 31, 2022, a 28.9% 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 first lien 1-4 family mortgages increased by $93.3 million, or 29.4%, from December 31, 2021, to December 31, 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. During 2022, mortgage production decreased 11% from the prior year. The decrease in overall production was caused largely by an increasing interest rate environment, which resulted in a reduction in refinance activity, and a shift in consumer demand from secondary market fixed-rate products to portfolio adjustable-rate products. The percentage of mortgage originations that went into the Corporation’s held-for-investment mortgage portfolio increased to 85% compared to 63% in 2021. The change in the interest rate environment created a dramatic shift in overall mix: 39% of volume in 2022 was purchase, 44% was residential construction lending, and only 17% was refinance activity. The volume of mortgage production in 2022 led to a 43% increase in growth of the held-for-investment residential loan portfolio but only a 3% increase in the servicing on behalf of others portfolio, with mortgage servicing rights growing to over $2.0 million.
As of December 31, 2022, the remainder of the residential real estate loans consisted of $11.9 million of fixed rate junior lien home equity loans, and $98.3 million of variable rate home equity lines of credit (HELOCs). This compares to $11.2 million of fixed rate junior lien home equity loans, and $75.7 million of HELOCs as of December 31, 2021. Therefore, combined, these two types of home equity loans increased from $86.9 million to $110.3 million, an increase of 26.9%.
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 loans increased from $109.3 million at December 31, 2021, to $143.3 million at December 31, 2022, a 31.1% increase. The commercial and industrial category generally includes unsecured lines of credit, truck, equipment, and receivable and inventory loans, in addition to tax-free loans to municipalities.
Consumer loans not secured by real estate represent a very small portion of the Corporation’s loan portfolio, at $5.8 million as of December 31, 2022 and $5.1 million as of December 31, 2021. These loans consist of personal loans, automobile loans, and other consumer-related loans.
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The following tables show the maturities for the loan portfolio as of December 31, 2022, by time frame for the major categories, and also the loans, which are floating or fixed, maturing after one year.
LOAN MATURITIES
(DOLLARS IN THOUSANDS)
| Due After | Due After | |||||||||||||||||||
| One Year | Five Years | |||||||||||||||||||
| Due in One | Through | Through | Due After | |||||||||||||||||
| Year or Less | Five Years | 15 Years | 15 Years | Total | ||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Commercial mortgages | 8,866 | 16,154 | 84,154 | 101,649 | 210,823 | |||||||||||||||
| Agriculture mortgages | 11,734 | 3,446 | 59,535 | 146,452 | 221,167 | |||||||||||||||
| Construction | 15,510 | 7,753 | 8,761 | 54,769 | 86,793 | |||||||||||||||
| Total commercial real estate | 36,110 | 27,353 | 152,450 | 302,870 | 518,783 | |||||||||||||||
| Consumer real estate | ||||||||||||||||||||
| 1-4 family residential mortgages | 5,551 | 12,276 | 67,577 | 324,897 | 410,301 | |||||||||||||||
| Home equity loans | 5,754 | 2,087 | 3,069 | 1,027 | 11,937 | |||||||||||||||
| Home equity lines of credit | 156 | 4,314 | 23,851 | 70,028 | 98,349 | |||||||||||||||
| Total consumer real estate | 11,461 | 18,677 | 94,497 | 395,952 | 520,587 | |||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Commercial and industrial | 24,948 | 34,681 | 27,399 | 500 | 87,528 | |||||||||||||||
| Tax-free loans | 9 | 6,187 | 6,335 | 16,133 | 28,664 | |||||||||||||||
| Agriculture loans | 18,094 | 5,271 | 3,757 | — | 27,122 | |||||||||||||||
| Total commercial and industrial | 43,051 | 46,139 | 37,491 | 16,633 | 143,314 | |||||||||||||||
| Consumer | 2,369 | 3,305 | 95 | — | 5,769 | |||||||||||||||
| Total amount due | 92,991 | 95,474 | 284,533 | 715,455 | 1,188,453 | |||||||||||||||
FIXED AND FLOATING RATE LOANS DUE AFTER ONE YEAR
(DOLLARS IN THOUSANDS)
| Floating or | ||||||||||||
| Fixed Rates | Adjustable Rates | Total | ||||||||||
| $ | $ | $ | ||||||||||
| Commercial real estate | ||||||||||||
| Commercial mortgages | 61,606 | 140,351 | 201,957 | |||||||||
| Agriculture mortgages | 15,580 | 193,853 | 209,433 | |||||||||
| Construction | 22,299 | 48,984 | 71,283 | |||||||||
| Total commercial real estate | 99,485 | 383,188 | 482,673 | |||||||||
| Consumer real estate | ||||||||||||
| 1-4 family residential mortgages | 167,132 | 237,618 | 404,750 | |||||||||
| Home equity loans | 3,595 | 2,588 | 6,183 | |||||||||
| Home equity lines of credit | 26,128 | 72,065 | 98,193 | |||||||||
| Total consumer real estate | 196,855 | 312,271 | 509,126 | |||||||||
| Commercial and industrial | ||||||||||||
| Commercial and industrial | 53,268 | 9,312 | 62,580 | |||||||||
| Tax-free loans | 7,728 | 20,927 | 28,655 | |||||||||
| Agriculture loans | 8,612 | 416 | 9,028 | |||||||||
| Total commercial and industrial | 69,608 | 30,655 | 100,263 | |||||||||
| Consumer | 3,400 | — | 3,400 | |||||||||
| Total amount due | 369,348 | 726,114 | 1,095,462 | |||||||||
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The majority of the Corporation’s fixed-rate loans have a maturity date longer than five years. The primary reason for the longevity of the portfolio is the high percentage of real estate loans, which typically have maturities of 15 or 20 years. Out of all the loans due after one year, $369.3 million, or 33.7%, are fixed-rate loans as of December 31, 2022. These loans will not reprice to a higher or lower interest rate unless they mature or are refinanced by the borrower. The remaining $726.1 million, or 66.3% of loans due after one year, are made up of loans that are true floating loans and loans that will reprice at a predetermined time in the amortization of the loan. True floating rate loans that would immediately reprice according to changes in the Prime rate are favorable in reducing the Corporation’s total exposure to interest rate risk and fair value risk should interest rates increase.
For more details regarding how the length of the loan portfolio and its repricing affects interest rate risk, please see Item 7A Quantitative and Qualitative Disclosures about Market Risk.
Non-Performing Assets
Non-performing assets include:
| ● | Non-accrual loans |
| ● | Loans past due 90 days or more and still accruing |
| ● | Troubled debt restructurings |
| ● | Other real estate owned |
NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Non-accrual loans | 4,178 | 2,556 | ||||||
| Loans past due 90 days or more and still accruing | 169 | 325 | ||||||
| Troubled debt restructurings, non-performing | — | — | ||||||
| Total non-performing loans | 4,347 | 2,881 | ||||||
| Other real estate owned | — | — | ||||||
| Total non-performing assets | 4,347 | 2,881 | ||||||
| Non-accrual loans to total loans | 0.35% | 0.28% | ||||||
| Non-performing loans to total loans | 0.36% | 0.31% | ||||||
| Allowance for credit losses to total loans | 1.19% | 1.40% | ||||||
| Allowance for credit losses to non-accrual loans | 338.70% | 505.91% | ||||||
| Allowance for credit losses to non-performing loans | 325.53% | 448.84% | ||||||
Non-performing assets increased by $1,466,000, or 50.9%, from December 31, 2021, to December 31, 2022, primarily
as a result of increases in non-accrual loans and partially offset by a decline in loans past due 90 days or more and still accruing. Several customer relationships were added to non-accrual during 2022 resulting in an increase of $1,622,000 in the total balance of non-accrual loans. As of December 31, 2022, there were twelve loans to ten unrelated borrowers totaling $4,178,000 on non-accrual compared to fifteen loans to seven unrelated borrowers totaling $2,556,000 as of December 31, 2021. The largest non-accrual relationship at December 31, 2022, was a commercial mortgage to a single borrower with a balance of $931,000.
Loans past due 90 days or more and still accruing declined by $156,000 during 2022 partially offsetting the increases in non-accrual loans. There were no loans considered non-performing troubled debt restructurings (TDR) as of December 31, 2022 or 2021. A TDR is a loan where management has granted a concession to the borrower from the original terms. A concession is generally granted in order to improve the financial position of the borrower and improve the likelihood of full collection by the lender.
Management continues to monitor delinquency trends and the level of non-performing loans as a leading indicator of future credit risk. At this time, management believes that the potential for material losses related to non-performing loans remains low but is likely to trend higher in recessionary periods. It is far more likely the level of non-performing
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assets would increase than decline to lower levels. The level of the Corporation’s non-performing loans remains very low relative to the size of the portfolio and relative to peers.
As of December 31, 2022 and 2021, the Corporation had no properties classified as other real estate owned (OREO). Expenses related to OREO are included in other operating expenses and gains or losses on the sale of OREO are included in other income on the Consolidated Statements of Income.
Allowance for Credit Losses
The allowance for credit losses is established to cover any losses inherent in the loan portfolio. Management reviews the adequacy of the allowance each quarter based upon a detailed analysis and calculation of the allowance for credit losses. This calculation is based upon a systematic methodology for determining the allowance for credit losses in accordance with U.S. generally accepted accounting principles. The calculation includes estimates and is based upon losses inherent in the loan portfolio. The calculation, and detailed analysis supporting it, emphasizes the level of delinquent, non-performing and classified loans. The allowance calculation includes specific provisions for non-performing loans and general allocations to cover anticipated losses on all loan types based on historical losses. Based on the quarterly loan loss calculation, management will adjust the allowance for credit losses through the provision as necessary. Changes to the allowance for credit losses during the year are primarily affected by three events:
| ● | Charge off of loans considered not recoverable |
| ● | Recovery of loans previously charged off |
| ● | Provision or credit for loan losses |
The Corporation’s strong credit and collateral policies have been instrumental in producing a favorable history of loan losses. In recent years, the Corporation has primarily recorded provision expenses in order to account for the growth in the loan portfolio as well as make adjustments for increasing levels of delinquencies and classified loans.
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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 December 31, 2022 and 2021.
Net Charge-Offs
(DOLLARS IN THOUSANDS)
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Loans charged-off: | ||||||||
| Commercial real estate | 84 | — | ||||||
| Consumer real estate | — | 20 | ||||||
| Commercial and industrial | 44 | — | ||||||
| Consumer | 19 | 35 | ||||||
| Total loans charged-off | 147 | 55 | ||||||
| Recoveries of loans previously charged-off | ||||||||
| Commercial real estate | 10 | 109 | ||||||
| Consumer real estate | 10 | 2 | ||||||
| Commercial and industrial | 42 | 56 | ||||||
| Consumer | 5 | 17 | ||||||
| Total recoveries | 67 | 184 | ||||||
| Net charge-offs (recoveries) | ||||||||
| Commercial real estate | 74 | (109 | ) | |||||
| Consumer real estate | (10 | ) | 18 | |||||
| Commercial and industrial | 2 | (56 | ) | |||||
| Consumer | 14 | 18 | ||||||
| Total net charge-offs (recoveries) | 80 | (129 | ) | |||||
| Average loans outstanding | ||||||||
| Commercial real estate | 435,738 | 357,727 | ||||||
| Consumer real estate | 416,824 | 328,969 | ||||||
| Commercial and industrial | 184,483 | 176,212 | ||||||
| Consumer | 6,020 | 5,552 | ||||||
| Total average loans outstanding | 1,043,065 | 868,460 | ||||||
| Net charge-offs (recoveries) as a % of average loans outstanding | ||||||||
| Commercial real estate | 0.02% | (0.03% | ) | |||||
| Consumer real estate | 0.00% | 0.01% | ||||||
| Commercial and industrial | 0.00% | (0.03% | ) | |||||
| Consumer | 0.23% | 0.32% | ||||||
| Total net charge-offs (recoveries) as a % of average loans outstanding | 0.01% | (0.01% | ) | |||||
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. During 2022, charge-offs exceeded recoveries by $80,000, representing a net charge-off position of 0.01% of average loans outstanding as reflected above.
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The following table provides the allocation of the Corporation’s allowance for credit losses by major loan classifications. The percentage of loans indicates the percentage of the loan portfolio represented by the indicated loan type.
ALLOCATION OF RESERVE
(DOLLARS IN THOUSANDS)
| December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| % of | % of | |||||||||||||||
| $ | Loans | $ | Loans | |||||||||||||
| Real estate | 11,516 | 87.5 | 10,097 | 87.5 | ||||||||||||
| Commercial and industrial | 2,151 | 12.0 | 2,112 | 11.9 | ||||||||||||
| Consumer | 67 | 0.5 | 87 | 0.6 | ||||||||||||
| Unallocated | 417 | — | 635 | — | ||||||||||||
| Total allowance for loan losses | 14,151 | 100.0 | 12,931 | 100.0 | ||||||||||||
Real estate loans represent 87.5% of total loans with 81.4% of the allowance covering these loans. Real estate secured loans have historically experienced lower losses than non-real estate secured loans, accounting for the difference. Commercial and industrial loans not secured by real estate have historically experienced higher loan losses as a percentage of balances and therefore require a larger relative percentage of the reserve. The reserve allocated to these loans has increased and decreased in recent years, but has not changed significantly as a percentage of total loans. For 2022, the dollar amount of allocation for commercial and industrial loans increased by $39,000, or 1.8%, with this allocation accounting for 15.2% of the total allowance as of December 31, 2022. As of December 31, 2022, commercial and industrial loans make up 12.0% of all loans. The amount of allowance allocated to consumer loans has always been very small as generally consumer loans more than 90 days delinquent are charged off. The amount of allowance allocated to consumer loans and personal loans is based on historical losses and qualitative factors.
The $417,000 unallocated portion of the allowance as of December 31, 2022, decreased from the balance at the end of 2021, and the unallocated portion as a percentage of the total allowance decreased from 4.9% at December 31, 2021, to 2.9% at December 31, 2022.
Premises and Equipment
Premises and equipment, net of accumulated depreciation, increased by $857,000, or 3.5%, from December 31, 2021, to December 31, 2022. During 2022, capital investments were made by the Corporation in various projects including the improvements at the leased Quarryville office as well as normal ongoing capital needs. The Corporation had $1,298,000 in construction in process at the end of 2022 compared to $369,000 at the end of 2021. These balances consisted of amounts for projects or equipment not yet placed in service as of each year-end. For further information on fixed assets refer to Note D to the Consolidated Financial Statements.
Regulatory Stock
The Corporation owns multiple forms of regulatory stock that is required to be a member of the Federal Reserve Bank (FRB) and members of banks such as the Federal Home Loan Bank (FHLB) of Pittsburgh and Atlantic Community Bankers Bank (ACBB). The Corporation’s $6,670,000 of regulatory stock holdings as of December 31, 2022, consisted of $5,552,000 of FHLB of Pittsburgh stock, $1,081,000 of FRB stock, and $37,000 of Atlantic Community Bancshares, Inc. stock, the Bank Holding Company of ACBB. All of these stocks are valued at a stable dollar price, which is the price used to purchase or liquidate shares; therefore, the investment is carried at book value and there is no fair market value adjustment.
Bank-Owned Life Insurance (BOLI)
The Corporation owned life insurance with a total recorded cash surrender value (CSV) of $34,805,000 on December 31, 2022, compared to $35,414,000 on December 31, 2021. The Corporation holds two distinct BOLI programs. The first, with a CSV of $4,771,000, was the result of insurance policies taken out on directors of the Corporation electing to participate in a directors’ deferred compensation plan. This CSV declined by $499,000 in 2022 due to the death of a participant which resulted in a death benefit payout and a decrease in the total policy value. The program was designed
41
to use the insurance policies to fund future annuity payments as part of a directors’ deferred compensation plan that permitted deferral of Board pay from 1979 through 1999. The second BOLI plan was originated in 2006 when life insurance was first taken out on a select group of the Corporation’s officers. The additional income generated from this BOLI plan is to assist in offsetting the rising cost of benefits currently being provided to all employees. The CSV of this plan was $30,034,000, a decrease of $110,000 from the prior year-end. There was also a participant death in this plan during 2022 which resulted in the decline in balance.
Deposits
The Corporation’s total ending deposits at December 31, 2022, increased by $126.7 million, or 8.4%, from December 31, 2021. Customer deposits are the Corporation’s primary source of funding for loans and securities. Deposit balances grew rapidly in 2021 and prior years due to the very low interest rate environment and the few options available for customers to earn a return on their investment. During 2022, the Corporation grew deposits at a slower pace due to the rapidly rising rate environment and the options available to customers.
The Deposits by Major Classification table, shown below, provides the average balances of each category for December 31, 2022 and December 31, 2021.
DEPOSITS BY MAJOR CLASSIFICATION
(DOLLARS IN THOUSANDS)
Average balances and average rates paid on deposits by major category are summarized as follows:
| December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Non-interest bearing demand | 664,116 | — | 579,996 | — | ||||||||||||
| Interest-bearing demand | 117,123 | 1.24 | 55,819 | 0.10 | ||||||||||||
| NOW accounts | 131,613 | 0.05 | 130,328 | 0.03 | ||||||||||||
| Money market deposit accounts | 167,013 | 0.16 | 158,635 | 0.05 | ||||||||||||
| Savings accounts | 365,460 | 0.03 | 315,161 | 0.02 | ||||||||||||
| Time deposits | 116,615 | 0.75 | 117,320 | 0.78 | ||||||||||||
| Total deposits | 1,561,940 | 1,357,259 | ||||||||||||||
The average balance of the Corporation’s core deposits increased by $204.7 million, or 15.1%, from December 31, 2021, to December 31, 2022. Non-interest bearing demand accounts grew by $84.1 million, or 14.5%, and are the Corporation’s cheapest source of funding for balance sheet growth. Interest-bearing demand accounts grew by $61.3 million, or 109.8%, as a result of participating in the reciprocal program for an off-balance sheet sweep product. Money market account average balances increased by $8.4 million, or 5.3%, and savings accounts increased by $50.3 million, or 16.0%, from December 31, 2021, to December 31, 2022. Time deposits are typically a more rate-sensitive product making them a less reliable source of funding. Time deposits fluctuate as consumers search for the best rates in the market, with less allegiance to any particular financial institution. In 2022, time deposits declined very slightly, by $705,000, or 0.6%, compared to average balances at December 31, 2021.
As of December 31, 2022, time deposits over $250,000 made up 7.2% of the total time deposits. This compares to 7.3% on December 31, 2021. The total dollar amount of time deposits over $250,000 increased $1,364,000, or 16.4%, from December 31, 2021 to December 31, 2022. Since time deposits over $250,000 are made up of relatively few customers with large dollar accounts, management monitors these accounts closely due to the potential for these deposits to rapidly increase or decrease. The following table provides the total amount of time deposits of $250,000 or more for the past two years by maturity distribution.
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MATURITY OF TIME DEPOSITS OF $250,000 OR MORE
(DOLLARS IN THOUSANDS)
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Three months or less | 1,940 | 1,592 | ||||||
| Over three months through six months | 517 | 575 | ||||||
| Over six months through twelve months | 877 | 1,655 | ||||||
| Over twelve months | 6,351 | 4,499 | ||||||
| Total | 9,685 | 8,321 | ||||||
As of December 31, 2022 and 2021, the total uninsured deposits of the Corporation were approximately $380,064,000 and $313,122,000, 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.
Borrowings
Total borrowings were $113.4 million as of December 31, 2022, and $63.9 million as of December 31, 2021. The Corporation had $16.0 million in short-term borrowings at December 31, 2022, and no short-term borrowings the prior year-end. Long-term borrowings with the Federal Home Loan Bank (FHLB) increased to $58.0 million as of December 31, 2022, from $44.2 million as of December 31, 2021. These borrowings are used as a secondary source of funding and to mitigate interest rate risk. The increase in long-term FHLB borrowing balances during the year related to strong loan growth and a desire to hedge against potential deposit runoff as a result of the challenging economic environment. As of December 31, 2022, all the borrowings of FHLB were fixed-rate loans. The Corporation continues to be well under the FHLB maximum borrowing capacity which is $575.7 million as of December 31, 2022.
In addition to the long-term advances funded through the FHLB, the Corporation completed two sales of a subordinated debt note offering. The Corporation sold $20.0 million of subordinated debt notes in December 2020 with a maturity date of December 30, 2030 and another $20.0 million in July 2022 with a maturity date of September 30, 2032. These notes are non-callable for 5 years and carry a fixed interest rate of 4.00% and 5.75%, respectively, for 5 years and then convert to a floating rate for the remainder of the term. The notes can be redeemed at par beginning 5 years prior to maturity. The notes are structured to qualify as Tier 2 capital for the Corporation and any funds it invests in the Bank qualify as Tier 1 capital at the Bank. As of December 31, 2022, $33.0 million of funds were invested in the Bank. The Corporation paid an issuance fee of 2% that will be amortized to the call date on a pro-rata basis.
Stockholders’ Equity
Federal regulatory authorities require banks to meet minimum capital levels. The Corporation, as well as the Bank, as the solely owned subsidiary of the Corporation, maintains capital ratios well above those minimum levels. The risk-weighted capital ratios are calculated by dividing capital by total risk-weighted assets. Regulatory guidelines determine the risk-weighted assets by assigning assets to specific risk-weighted categories. The calculation of tier I capital to risk-weighted average assets does not include an add-back to capital for the amount of the allowance for credit losses, thereby making this ratio lower than the total capital to risk-weighted assets ratio.
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.
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The following tables reflect the capital ratios for the Corporation and Bank compared to the regulatory capital requirements.
REGULATORY CAPITAL RATIOS:
| Regulatory Requirements | ||||||||||||
| Adequately | Well | |||||||||||
| As of December 31, 2022 | Capital Ratios | Capitalized | Capitalized | |||||||||
| Total Capital to Risk-Weighted Assets | ||||||||||||
| Consolidated | 15.0% | N/A | N/A | |||||||||
| Bank | 14.5% | 8.0% | 10.0% | |||||||||
| Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
| Consolidated | 10.9% | N/A | N/A | |||||||||
| Bank | 13.4% | 6.0% | 8.0% | |||||||||
| Common Equity Tier 1 Capital to Risk-Weighted Assets | ||||||||||||
| Consolidated | 10.9% | N/A | N/A | |||||||||
| Bank | 13.4% | 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, 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 December 31, 2022 the Bank’s Tier 1 Leverage Ratio stood at 9.3% while the Corporation’s Tier 1 Leverage Ratio was 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 issue. Most of the marked improvement in capital ratios occurred at the Bank level.
Since the Corporation elected to opt-out of the requirement to include most components of accumulated other comprehensive income in calculating regulatory capital, the significant devaluation of the investment portfolio that resulted in a higher level of unrealized losses, has not affected the regulatory capital. But the changes in investment unrealized gains and losses impact tangible capital on the balance sheet on an ongoing basis and were adversely impacted by the dramatic increase in market interest rates during 2022.
Contractual Cash Obligations
The Corporation has a number of contractual obligations that arise from the normal course of business. The following table summarizes the contractual cash obligations of the Corporation as of December 31, 2022, and shows the future periods in which settlement of the obligations is expected. The contractual obligation numbers below do not include accrued interest. Refer to Note O to the Consolidated Financial Statements referenced in the table for additional details regarding these obligations.
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CONTRACTUAL OBLIGATIONS
(DOLLARS IN THOUSANDS)
| Less than | 1-3 | 4-5 | More than | |||||||||||||||||
| 1 year | years | years | 5 years | Total | ||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| Time deposits (Note F) | 55,614 | 57,304 | 20,911 | — | 133,829 | |||||||||||||||
| Borrowings (Notes G and H) | 29,816 | 50,150 | 33,469 | — | 113,435 | |||||||||||||||
| Operating Leases (Note Q) | 450 | 800 | 467 | 1,428 | 3,145 | |||||||||||||||
| Total contractual obligations | 85,880 | 108,254 | 54,847 | 1,428 | 250,409 | |||||||||||||||
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 liquidity section to follow, 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 December 31, 2022. For further details regarding off-balance sheet arrangements, refer to Note O to the Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS
(DOLLARS IN THOUSANDS)
| December 31, | ||||
| 2022 | ||||
| $ | ||||
| Commitments to extend credit: | ||||
| Revolving home equity loans | 195,327 | |||
| Construction loans | 71,093 | |||
| Real estate loans | 112,335 | |||
| Business loans | 199,367 | |||
| Consumer loans | 1,386 | |||
| Other | 5,823 | |||
| Standby letters of credit | 11,084 | |||
| Total | 596,415 | |||
Critical Accounting Policies
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.
Allowance for Credit Losses
A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses. Management believes that the allowance for credit losses is adequate and reasonable. The Corporation’s methodology for determining the allowance for credit losses is described in an earlier section of Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing credit losses, it is likely that well-informed individuals could make materially different assumptions and, therefore, calculate a materially different allowance amount. Management uses available information to recognize losses on loans; however, changes in economic conditions may necessitate revisions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for credit losses. Such agencies may require the Corporation
45
to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Fair Values of Assets and Liabilities
ASC Topic 820 defines fair value as the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. See Note R to the Consolidated Financial Statements for a complete discussion and summary of the Corporation’s use of fair valuation of assets and liabilities and the related measurement techniques.
Other than Temporary Impairment of Securities
Securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent. It indicates that the prospect of a near-term recovery of value is not necessarily favorable or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
Deferred Tax Assets
The Corporation uses an estimate of future earnings to support the position that the benefit of deferred tax assets will be realized. If future income should prove non-existent or less than the amount of the deferred tax assets within the tax years to which they may be applied, the asset may not be realized and the Corporation’s net income will be reduced. Deferred tax assets are described further in Note L to the Consolidated Financial Statements.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a financial institution, the Corporation is subject to four primary market risks: Credit risk, liquidity risk, interest rate risk, and fair value risk. The Board of Directors has established an Asset Liability Management Committee (ALCO) to measure, monitor, and manage these four 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 Corporation’s Strategic Plan goals.
For discussion on credit risk, refer to the sections on non-performing assets, allowance for credit losses, Note C, and Note P to the Consolidated Financial Statements.
Liquidity
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, paydowns, maturities, and sales of investment securities, borrowings, and current earnings.
One of the measurements used in liquidity planning is the Maturity Gap Analysis. The Maturity Gap Analysis below measures the amount of assets maturing within various time frames versus liabilities maturing in those same periods. These time frames are referred to as gaps and are reported on a cumulative basis. For instance, the one-year gap shows all assets maturing one year or less from a specific date versus the total liabilities maturing in the same time period. The gap is then expressed as a percentage of assets over liabilities. Mismatches between assets and liabilities maturing are identified and assist management in determining potential liquidity issues.
The maturity gap analysis does not include non-interest earning assets and non-interest bearing liabilities, with the exception of non-interest bearing demand deposit accounts. The non-interest bearing demand deposits are considered additional deposit liabilities with no associated interest expense, which acts to lower the overall interest rate paid on total deposits.
Gap ratios have been decreasing for the Corporation throughout 2022. The Corporation’s assets are getting longer, with very low levels of cash and cash equivalents. Meanwhile the Corporation’s core deposit liabilities continue to model as long liabilities, while the complement of shorter term time deposits continue to decline.
The size and length of the Corporation’s core deposit liabilities provide the most extension in terms of lengthening the liabilities on the balance sheet. The length of the core deposits is significantly longer than the Corporation’s longest term deposits and wholesale borrowings. As of December 31, 2022, the Corporation had low cash levels due to loan growth. This has caused a decline in the short-term gap ratios resulting in the six-month ratio of 41.7% and the one-year ratio of 107.5%. In a rising rate environment, having more assets maturing than liabilities is beneficial because those assets can be reinvested at higher yields.
The table below shows the six-month, one-year, three-year, and five-year cumulative gaps as of December 31, 2022, for the Bank, along with the cumulative maturity gap guidelines monitored by management. For the purposes of this analysis, core deposits without a specific maturity date are spread across all time periods based on historical behavior.
MATURITY GAP ANALYSIS
(DOLLARS IN THOUSANDS)
| More than | More than | More than | ||||||||||||||||||
| Less than | 6 months | 1 year | 3 years | More than | ||||||||||||||||
| Maturity Gap | 6 months | to 1 year | to 3 years | to 5 years | 5 years | |||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| Assets maturing | 135,546 | 110,752 | 377,791 | 306,298 | 897,418 | |||||||||||||||
| Liabilities maturing | 325,021 | 103,028 | 168,340 | 174,781 | 955,558 | |||||||||||||||
| Maturity gap | (189,475 | ) | 7,724 | 209,451 | 131,517 | (58,140 | ) | |||||||||||||
| Cumulative maturity gap | (189,475 | ) | (181,751 | ) | 27,700 | 159,217 | 101,077 | |||||||||||||
| Maturity gap % | 41.7% | 107.5% | 224.4% | 175.2% | 93.9% | |||||||||||||||
| Cumulative maturity gap % | 41.7% | 57.5% | 104.6% | 120.6% | 105.9% | |||||||||||||||
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As of December 31, 2022, cumulative maturity gap ratios were on the low side for up to a year and less indicating that there are more liabilities maturing in the short time frames than assets. For the six-month time frame, the gap ratio was 41.7% and for the 1-year cumulative gap, the ratio was 57.5%. For the 1 year to 3 years, the cumulative gap was 104.6%, representing a higher level of asset maturities versus liabilities. For the 3 to 5 year time frame, the cumulative gap was 120.6%, and for the over 5 year time frame, the cumulative gap was 105.9%. In a rising rate environment, higher gap ratios are beneficial as assets can reprice to the higher rates; however, lower gap ratios are harmful in a rising rate environment as liabilities would potentially be repricing to higher rates. Management anticipates higher deposit and borrowings costs with limited savings on the liability side in 2023. Management will continue to monitor all gap ratios to ensure proper positioning for future interest rate cycles.
It is likely that with some competition pricing and talk of a recession in 2023, customer behavior patterns would change and deposits would become more rate sensitive with a greater portion potentially leaving the Corporation. These maturity gaps are closely monitored along with additional liquidity measurements discussed below. Management believes the probability of future Federal Reserve rate increases is good in the beginning of 2023, driven by concerns of inflation.
In addition to the cumulative maturity gap analysis discussed above, management utilizes a number of other important liquidity measurements that management believes have advantages over, and give better clarity to, the Corporation’s present and projected liquidity. These measurements are evaluated quarterly through the ALCO process. There are a number of key ratios measured that involve liquidity, non-core funding sources, and contingency funding with each ratio assigned a risk level of low, moderate, or high.
As of December 31, 2022, the Corporation was within guidelines for all of the above measurements except for two that fell in the moderate range: long term assets to total assets and tangible equity to total assets. The long term assets to total assets is slightly elevated due to holding more mortgages on the balance sheet as well as a large amount of longer municipal securities in the investment portfolio. The tangible equity to total assets is lower due to the unrealized losses experienced on the investment portfolio due to the rapid increase in interest rates in 2022.
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 and Fair Value Risk
Identifying the interest rate risk of the Corporation’s interest earning assets and interest bearing liabilities is essential to managing net interest margin and net interest income. In addition to the impact on earnings, management is also concerned about how much the value of the Corporation’s assets might fall or rise given an increasing or decreasing interest rate environment. Interest rate sensitivity analysis (IRSA) measures the impact of a change in interest rates on the net interest income and net interest margin of the Corporation, while net portfolio value (NPV) analysis measures the change in the Corporation’s capital fair value, given interest rate fluctuations. Therefore, the two primary approaches to measuring the impact of interest rate changes on the Corporation’s earnings and fair value are referred to as:
48
| ● | Changes in net interest income |
| ● | Changes in net portfolio value |
The Corporation’s asset liability model is able to perform dynamic forecasting based on a wide range of assumptions provided. The model is flexible and can be used for many types of financial projections. The Corporation uses financial modeling to forecast balance sheet growth and earnings. The results obtained through the use of forecasting models are based on a variety of factors. Both earnings and balance sheet forecasts make use of maturity and repricing schedules to determine the changes to the Corporation’s 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:
| ● | Projected interest rates |
| ● | Timing of interest rate changes |
| ● | Slope of the U.S. Treasury curve |
| ● | Spreads available on securities over the U.S. Treasury curve |
| ● | Prepayment speeds on loans held and mortgage-backed securities |
| ● | Anticipated calls on securities with call options |
| ● | Deposit and loan balance fluctuations |
| ● | Competitive pressures affecting loan and deposit rates |
| ● | Economic conditions |
| ● | Consumer reaction to interest rate changes |
For the interest rate sensitivity analysis and net portfolio value analysis shown below, results are based on a static balance sheet reflecting no projected growth from balances as of December 31, 2022, and December 31, 2021. While it is unlikely that the balance sheet will not grow at all, management considers a static analysis of this sort to be the most conservative and most accurate means to evaluate fair value and future interest rate risk. The static balance sheet approach is used to reduce the number of variables in calculating the model’s accuracy in predicting future net interest income. It is appropriate to pull out various balance sheet growth scenarios, which could be utilized to compensate for a declining margin. By testing the model using a base model assuming no growth, this variable is eliminated and management can focus on predicted net interest income based on the current existing balance sheet.
As a result of the many assumptions, this information should not be relied upon to predict future results. Additionally, both of the analyses shown 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.
Changes in Net Interest Income
The changes in net interest income reflect how much the Corporation’s net interest income would be expected to increase or decrease given a change in market interest rates. The changes in net interest income shown are measured over a one-year time horizon and assume an immediate rate change on the rate sensitive assets and liabilities. This is considered the more important measure of interest rate sensitivity due to the immediate effect that rate changes may have on the overall performance of the Corporation. The following table takes into consideration when financial instruments would most likely reprice and the duration of the pricing change. It is important to emphasize that the information shown in the table is an estimate based on hypothetical changes in market interest rates.
49
CHANGES IN NET INTEREST INCOME
| 2022 | 2021 | Policy | ||||||||||
| Percentage | Percentage | Guidelines | ||||||||||
| Change | Change | % | ||||||||||
| 400 basis point rise | (9.6 | ) | — | (24.00 | ) | |||||||
| 300 basis point rise | (6.8 | ) | 1.6 | (20.00 | ) | |||||||
| 200 basis point rise | (4.1 | ) | 0.3 | (16.00 | ) | |||||||
| 100 basis point rise | (1.6 | ) | 0.5 | (12.00 | ) | |||||||
| Base rate scenario | — | — | — | |||||||||
| 25 basis point decline | — | (0.7 | ) | (3.00 | ) | |||||||
| 50 basis point decline | — | (1.8 | ) | (6.00 | ) | |||||||
| 75 basis point decline | — | (3.1 | ) | (9.00 | ) | |||||||
| 100 basis point decline | 0.4 | — | (12.00 | ) | ||||||||
| 200 basis point decline | (2.6 | ) | — | (16.00 | ) | |||||||
This table shows the effect of an immediate interest rate shock over a one-year period on the Corporation's net interest income.
Base rate is the Prime rate.
As of December 31, 2022, the above analysis shows a negative impact to the Corporation’s net interest income in all the scenarios, except the down 100 basis points. In the past year, the Federal funds rate has increased rapidly. The Corporation is now experiencing a rising cost of funds on the liability side in pricing its deposits. Once deposit pricing has stabilized, net interest income would increase with the repricing of variable rate loans and securities moving immediately as Prime moves. The pressure on the cost of funds side is currently resulting in the Corporation being liability sensitive in the short-term, but asset sensitive in the long-term. The analysis above focuses on immediate rate movements, referred to as rate shocks, and measured over the course of one year.
In all rates-up scenarios, modeled net interest income decreases with less benefit compared to the results as of December 31, 2021. When rates do go up, most assets with the ability to reprice off a key benchmark rate will generally reprice by the full amount of the Federal Reserve’s rate movement. In the current environment, deposit rate changes have been more significant and happening faster than in 2021 when market rates were not moving. This has resulted in the pressure on net interest income shown above. In past years, financial institutions have benefited from a larger level of deposit balances as a result of the historically long and very low interest rate cycle. The analysis above assumes no growth of the Corporation’s balance sheet and no change in the mix of earning assets.
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 NPV gives a long-term view of the exposure to changes in interest rates. The NPV is calculated by discounting the future cash flows to the present value based on current market rates. The NPV is the mathematical equivalent of the present value of assets minus the present value of liabilities.
The table below indicates the changes in the Corporation’s NPV as of December 31, 2022 and December 31, 2021. As part of the Asset Liability Policy, the Board of Directors has established risk measurement guidelines to protect the Corporation against decreases in the NPV and net interest income in the event of the interest rate changes described below.
As of December 31, 2022, the Corporation was within guidelines for all up-rate scenarios but was outside of guidelines for the down-200 basis point rate scenario. The positive impact of higher rates on both loans and securities was down from December 31, 2021. On the liability side of the Corporation’s balance sheet, the value of non-interest bearing deposit accounts only becomes more and more valuable as interest rates rise, which is reflected in NPV as a decrease in liabilities. These deposits have always been highly favorable in a rising rate environment as these balances are more valuable to the Corporation, representing a decrease in liabilities as interest rates rise.
50
However, with higher rates on interest bearing checking, NOW, and money market accounts, the benefit of these deposits in a rising rate environment has declined. As interest rates increase, the discount rate used to value the Corporation’s interest bearing accounts increases, causing a lower net present value. This improves the modeling of the Corporation’s fair value risk as the liability amounts decrease, causing the net present value or fair value of the Corporation’s balance sheet to increase. This was especially apparent throughout 2021 when rates were extremely low and the Corporatin’s deposits grew at a very fast pace. In 2022, deposit growth was slower and deposit pricing increased resulting in a decline in the benefit in the rising rate scenarios. The much higher complement of long modeling deposits caused the changes in net portfolio value to be more exaggerated in both the up and down-rate scnenarios as of December 31, 2022 and 2021.
CHANGES IN NET PORTFOLIO VALUE
| 2022 | 2021 | Policy | ||||||||||
| Percentage | Percentage | Guidelines | ||||||||||
| Change | Change | % | ||||||||||
| 400 basis point rise | 11.0 | — | (35.00 | ) | ||||||||
| 300 basis point rise | 11.0 | 28.5 | (30.00 | ) | ||||||||
| 200 basis point rise | 10.0 | 21.7 | (25.00 | ) | ||||||||
| 100 basis point rise | 7.0 | 14.7 | (20.00 | ) | ||||||||
| Base rate scenario | — | — | — | |||||||||
| 25 basis point decline | — | (6.3 | ) | (5.00 | ) | |||||||
| 50 basis point decline | — | (14.1 | ) | (10.00 | ) | |||||||
| 75 basis point decline | — | (22.5 | ) | (15.00 | ) | |||||||
| 100 basis point decline | (11.0 | ) | — | (20.00 | ) | |||||||
| 200 basis point decline | (29.0 | ) | — | (25.00 | ) | |||||||
This table shows the effect of an immediate interest rate shock on the net portfolio value of the Corporation's
assets and liabilities. Base rate is the Prime rate.
The results as of December 31, 2022, indicate that the Corporation’s net portfolio value would experience valuation
gains in all up-rate scenarios with a gain of 11.0% in the rates-up 400 and 300 basis point scenario, and gains of 10.0% and 7.0%, in the rates-up 200 and 100 basis point scenarios, respectively. A valuation gain indicates that the value of the Corporation’s assets is declining at a slower pace than the decrease in the value of the Corporation’s liabilities. Even though the Corporation has some longer-term assets such as residential mortgages and municipal securities which show declines in value as interest rates increase further, the large balances of core deposits more than offsets this fair value exposure of the longer-term assets.
The changes in net portfolio value do show exposure in the down-rate scenarios with the 200 rate scenario that is outside of policy guidelines. A valuation loss indicates that the value of the Corporation’s assets is declining at a faster pace than the decrease in the value of the Corporation’s liabilities. Even outside of the interest rate environment, the Corporation’s exposure to valuation changes could change going forward if the mix of the Corporation’s deposits change, which would impact the average life of those deposits.
51
ENB FINANCIAL CORP
Item 8. Financial Statements and Supplementary Data
The following audited consolidated financial statements are set forth in this Annual Report of Form 10-K on the following pages:
| Index to Consolidated Financial Statements | Page |
| Report of Independent Registered Public Accounting Firm (PCAOB ID | 53 |
| Consolidated Balance Sheets | 56 |
| Consolidated Statements of Income | 57 |
| Consolidated Statements of Comprehensive Income | 58 |
| Consolidated Statements of Changes in Stockholders’ Equity | 59 |
| Consolidated Statements of Cash Flows | 60 |
| Notes to Consolidated Financial Statements | 61 |
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of ENB Financial Corp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ENB Financial Corp and subsidiaries (the “Company”) as of December 31, 2022 and 2021; the related consolidated statements of income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
53
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses (ALL)
Description of the Matter
The Company’s loan portfolio totaled $1.2 billion as of December 31, 2022, and the associated ALL was $14.2 million. As discussed in Notes A and C to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, national and local economic trends and conditions, trends in the nature and volume of the loan portfolio, experience, ability, and depth of lending staff and management, levels of and trends in delinquency, non-accruals, and charge- offs, changes in quality of credit risk and oversight of Board of Directors, changes in underlying value of collateral, concentrations of credit, and external factors such as competition, law, and regulations.
We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.
How We Addressed the Matter in Our Audit
We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.
To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments.
54
Allowance for Loan Losses (ALL)
How We Addressed the Matter in Our Audit
Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data and third-party macroeconomic data. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports.
We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.
We have served as the Company’s auditor since 2005.
March 20, 2023
55
ENB FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| ASSETS | ||||||||
| Cash and due from banks | ||||||||
| Interest-bearing deposits in other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Securities available for sale (at fair value) | ||||||||
| Equity securities (at fair value) | ||||||||
| Loans held for sale | ||||||||
| Loans (net of unearned income) | ||||||||
| Less: Allowance for credit losses | ||||||||
| Net loans | ||||||||
| Premises and equipment | ||||||||
| Regulatory stock | ||||||||
| Bank owned life insurance | ||||||||
| Other assets | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing | ||||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Short-term debt | — | |||||||
| Long-term debt | ||||||||
| Subordinated debt | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, par value $0.10 | ||||||||
| Shares: Authorized 24,000,000 | ||||||||
| Capital surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive (loss) income net of tax | ( | ) | ||||||
| Less: Treasury stock cost on | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | ||||||||
See Notes to the Consolidated Financial Statements
56
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Interest and dividend income: | ||||||||
| Interest and fees on loans | ||||||||
| Interest on securities available for sale | ||||||||
| Taxable | ||||||||
| Tax-exempt | ||||||||
| Interest on deposits at other banks | ||||||||
| Dividend income | ||||||||
| Total interest and dividend income | ||||||||
| Interest expense: | ||||||||
| Interest on deposits | ||||||||
| Interest on borrowings | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for loan losses | ||||||||
| Net interest income after provision for loan losses | ||||||||
| Other income: | ||||||||
| Trust and investment services income | ||||||||
| Service fees | ||||||||
| Commissions | ||||||||
| Gains on sale of debt securities, net | ||||||||
| (Losses) gains on equity securities, net | ( | ) | ||||||
| Gains on sale of mortgages | ||||||||
| Earnings on bank-owned life insurance | ||||||||
| Other income | ||||||||
| Total other income | ||||||||
| Operating expenses: | ||||||||
| Salaries and employee benefits | ||||||||
| Occupancy | ||||||||
| Equipment | ||||||||
| Advertising & marketing | ||||||||
| Computer software & data processing | ||||||||
| Shares tax | ||||||||
| Professional services | ||||||||
| Other expense | ||||||||
| Total operating expenses | ||||||||
| Income before income taxes | ||||||||
| Provision for federal income taxes | ||||||||
| Net income | ||||||||
| Earnings per share of common stock | ||||||||
| Cash dividends paid per share | ||||||||
| Weighted average shares outstanding | ||||||||
See Notes to the Consolidated Financial Statements
57
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(DOLLARS IN THOUSANDS)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Net income | ||||||||
| Other comprehensive (loss) income , net of tax: | ||||||||
| Net change in unrealized (losses) gains: | ||||||||
| Securities available for sale not other-than-temporarily impaired: | ||||||||
| Unrealized losses arising during the period | ( | ) | ( | ) | ||||
| Income tax effect | ||||||||
| ( | ) | ( | ) | |||||
| Gains recognized in earnings | ( | ) | ( | ) | ||||
| Income tax effect | ||||||||
| ( | ) | ( | ) | |||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||
| Comprehensive (Loss) Income | ( | ) | ||||||
See Notes to the Consolidated Financial Statements
58
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
| Accumulated | ||||||||||||||||||||||||
| Other | Total | |||||||||||||||||||||||
| Common | Capital | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||
| Stock | Surplus | Earnings | Income (Loss) | Stock | Equity | |||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Balances, December 31, 2020 | ( | ) | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| — | ||||||||||||||||||||||||
| Treasury stock purchased - | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock issued - | ||||||||||||||||||||||||
| Cash dividends paid, $ | ( | ) | ( | ) | ||||||||||||||||||||
| Balances, December 31, 2021 | ( | ) | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||||||
| — | ||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Treasury stock purchased - | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock issued - | ( | ) | ||||||||||||||||||||||
| Cash dividends paid, $ | ( | ) | ( | ) | ||||||||||||||||||||
| Balances, December 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
See Notes to the Consolidated Financial Statements
59
ENB FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| $ | $ | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Net amortization of securities premiums and discounts and loan fees | ||||||||
| Increase in interest receivable | ( | ) | ( | ) | ||||
| Increase (decrease) in interest payable | ( | ) | ||||||
| Provision for loan losses | ||||||||
| Gain on sale of debt securities, net | ( | ) | ( | ) | ||||
| Loss (gain) on equity securities, net | ( | ) | ||||||
| Gains on sale of mortgages | ( | ) | ( | ) | ||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Proceeds from sales of loans | ||||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| Depreciation of premises and equipment and amortization of software | ||||||||
| Deferred income tax | ( | ) | ( | ) | ||||
| Amortization of deferred fees on subordinated debt | ||||||||
| Stock-based compensation expense | — | |||||||
| Other assets and other liabilities, net | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Securities avaiable for sale: | ||||||||
| Proceeds from maturities, calls, and repayments | ||||||||