ENB Financial Corp: Unpacking Q1 Strength and Strategic Balance in a Shifting Rate Landscape (ENBP) - ENBP Stock Research Report

## Executive Summary / Key Takeaways * ENB Financial Corp ($ENBP) reported a solid 9.5% increase in Q1 2025 net income, primarily fueled by robust Net Interest Income (NII) growth and an expanding Net Interest Margin (NIM). * A strategic decision in late 2024 to leverage the balance sheet through investment securities purchases funded by brokered CDs and hedged with interest rate swaps significantly boosted NII and NIM in Q1 2025. * While asset quality metrics saw an increase in non-performing and classified loans year-over-year, management notes a decrease in non-performing assets since year-end 2024 and states overall levels are in line with peers, maintaining disciplined credit practices. * The company's liquidity position is deemed sufficient, though the leverage strategy placed certain wholesale funding and investment-to-asset ratios in the moderate-risk range, a measured outcome of the strategic initiative. * ENBP faces competition from larger, more technologically advanced regional banks, but relies on its deep community ties and personalized service as key differentiators, alongside strategic balance sheet management tools like derivatives. ## A Community Bank's Foundation Meets a Dynamic Market ENB Financial Corp, rooted in the founding of Ephrata National Bank in 1881, operates as a community-focused financial institution serving individuals and small-to-medium-sized businesses across Lancaster, Lebanon, and Berks Counties in Pennsylvania. Its business model centers on traditional banking services: gathering deposits through a local branch network and deploying capital via a diversified loan portfolio spanning commercial, agricultural, residential, and consumer segments. This long history and local presence form the bedrock of its competitive strategy, fostering deep customer relationships and loyalty in its specific geographic footprint. The broader banking industry currently faces a complex environment marked by fluctuating interest rates, evolving regulatory landscapes, and increasing pressure from larger, more technologically sophisticated competitors and fintech disruptors. ENBP, while maintaining its community identity, has strategically adapted to these dynamics. Management evaluates performance and allocates resources based on the consolidated results of its single reportable segment, Community Banking. ENBP's operational capabilities include a network of physical branches complemented by essential digital banking services. These include ATM access, telephone banking, debit and credit cards, remote deposit capture, and internet banking with features like bill pay and wire transfers. While not at the cutting edge of fintech, these services provide necessary convenience for its customer base. A significant operational undertaking in the prior year was a core system conversion, aimed at enhancing its technological infrastructure. Beyond customer-facing technology, ENBP employs financial technology for balance sheet management. Specifically, the company utilizes derivative financial instruments, such as interest rate swaps, to manage exposure to interest rate changes. These swaps are designated as fair value and cash flow hedges, primarily linked to fixed-rate investment securities and variable-rate FHLB advances. This strategic use of derivatives aims to add stability to interest income and expense and mitigate interest rate risk, a crucial function in the current volatile rate environment. In the competitive arena, ENBP contends with larger regional players like Fulton Financial Corporation (TICKER:FULT) and Franklin Financial Services Corporation (TICKER:FRAF), as well as smaller community banks like Peoples Financial Services Corp. (TICKER:PFIS). Larger rivals often possess greater scale, enabling higher lending limits and potentially more advanced technological platforms for efficiency. For instance, FULT's broader geographic reach and digital investments likely offer faster transaction processing compared to ENBP's more traditional setup. While ENBP's digital offerings are functional, they may lack the speed or breadth of services offered by larger or purely online competitors, potentially leading to higher operating costs per unit compared to more efficient rivals. However, ENBP's strength lies in its localized approach and personalized service, which can foster stronger customer retention and loyalty, particularly in its niche agricultural and small business segments. This community-centric model provides a degree of pricing power on fees and helps maintain a stable deposit base, acting as a moat against competitors focused solely on rate or digital efficiency. The company's regulatory licenses also provide a stable operating framework, though larger banks can leverage these more broadly. ## Financial Performance: Riding the Rate Wave ENBP's financial results for the first quarter of 2025 demonstrate the impact of its strategic decisions and the prevailing interest rate environment. Net income rose to $4.32 million, a 9.5% increase from $3.94 million in the first quarter of 2024. This growth was predominantly driven by a substantial 21.1% increase in Net Interest Income (NII), which reached $16.19 million compared to $13.37 million in the prior year period. NII constituted a larger portion of total revenue in Q1 2025 (80.3%) than in Q1 2024 (75.5%). The expansion in NII was a direct result of higher interest income, which increased by $3.99 million. Interest and fees on loans grew by 11.4% to $19.29 million, reflecting both loan growth and higher yields. Interest income on securities saw a significant 59.4% jump to $5.75 million, benefiting from the strategic addition of investments in late 2024 at higher prevailing rates. This positive trend in asset yields outpaced the increase in interest expense, which rose by 14.4% to $9.38 million, driven by higher costs on deposits and borrowings as customers migrated to higher-yielding products and the company utilized wholesale funding. Consequently, the net interest margin improved to 3.02% in Q1 2025 from 2.81% in Q1 2024.

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Other income, however, experienced an 8.8% decrease, falling to $3.96 million from $4.35 million. This decline was primarily attributed to lower trust and investment services income, which benefited from a gain on the sale of trust assets in Q1 2024, and reduced gains on the sale of mortgages due to compressed margins and timing differences in recording construction loan income. Operating expenses increased by 5.7% to $14.37 million, impacted by higher checking account and fraud-related charge-offs, as well as increased spending on advertising, technology (computer software and data processing), and professional services. Salaries and employee benefits, the largest expense category, saw a slight decrease due to lower health insurance costs.

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Profitability ratios showed mixed results. Return on Average Assets (ROA) remained stable at 0.80% year-over-year. Return on Average Equity (ROE) saw a slight decrease to 13.03% from 13.40%, reflecting higher capital levels in 2025. ## Balance Sheet Dynamics and Credit Quality ENBP's balance sheet reflects modest growth and strategic shifts. Total assets stood at $2.22 billion at March 31, 2025, up from $1.99 billion a year prior. Net loans increased by 4.5% year-over-year to $1.43 billion, showing annualized growth of 4.4% from December 31, 2024. Growth was noted in agriculture, home equity, and non-owner occupied CRE segments, while others remained stable or decreased slightly. The loan portfolio remains diversified, though the agriculture segment has concentrations in dairy, poultry, and crop farming. The investment securities portfolio, classified as available for sale, grew significantly year-over-year (up 33.3%) to $595.6 million, representing 26.8% of assets, before decreasing slightly from year-end 2024. This growth was part of the strategic decision to add investments, funded in part by brokered CDs. The portfolio held a net unrealized loss of $42.5 million at March 31, 2025, primarily due to interest rate changes, which management does not expect to realize as they intend and are likely able to hold these securities to recovery. Credit quality metrics showed some deterioration year-over-year but improvement from the previous quarter-end. Non-performing assets totaled $10.73 million at March 31, 2025, a significant increase from $4.33 million a year prior, primarily due to payment defaults in several unrelated commercial, residential, and agriculture relationships. However, this represented a decrease of $1.16 million from $11.89 million at December 31, 2024, largely due to a residential loan payoff. Management notes that the current level of non-performing assets is in line with its peer group and reflects a more disciplined approach to classifying loans as non-accrual at 90 days past due. Classified loans increased to $28.9 million at March 31, 2025, from $14.8 million a year earlier, due to downgrades in agriculture and business relationships. This increase in classified loans could necessitate a larger allowance for credit losses. The Allowance for Credit Losses (ACL) stood at $16.54 million, or 1.15% of total loans, at March 31, 2025, up from 1.06% a year prior. The company recorded a provision for credit losses of $486 thousand in Q1 2025, compared to a release of $644 thousand in Q1 2024, reflecting the change in portfolio risk profile. Historically, ENBP has maintained very low net charge-off percentages due to disciplined credit practices, with net charge-offs of $11 thousand in Q1 2025. ## Funding, Liquidity, and Capital Strength Customer deposits remain ENBP's primary funding source. Total deposits grew by 10.0% year-over-year to $1.89 billion. The deposit mix has shifted, with customers moving funds from lower-yielding accounts to higher-yielding interest-bearing demand deposits and time deposits. Time deposits increased significantly, partly due to the issuance of $97 million in brokered CDs (up $58 million year-over-year) to fund the investment leverage strategy. Uninsured deposits totaled approximately $225 million, or 11.9% of total deposits, at March 31, 2025. Borrowings serve as a secondary funding source. Total borrowings were $179.1 million, including $60 million in short-term FHLB advances (none a year prior) and $79.3 million in long-term FHLB advances. The company also has $40 million in subordinated debt ($20 million issued in 2020 at 4% fixed for 5 years, then floating; $20 million issued in 2022 at 5.75% fixed for 5 years, then floating), which supports capital growth. ENBP has significant unused borrowing capacity with the FHLB ($722.7 million).

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Liquidity is managed through diverse sources and monitoring. While most liquidity risk indicators remain in the low-risk range, the strategic use of wholesale funding (brokered CDs, FHLB advances) and the increased investment portfolio size placed the reliance on wholesale funding and investment securities to assets ratios in the moderate-risk range. Management views this as a measured outcome of the leverage strategy. Off-balance sheet loan commitments totaled $601.5 million at March 31, 2025, which could impact liquidity needs, but the company believes it has sufficient resources. ENBP maintains strong capital levels, with regulatory ratios well above minimum requirements. At March 31, 2025, the consolidated Total Capital to Risk-Weighted Assets ratio was 14.80%, and the Tier 1 Leverage Ratio was 7.60%. The subordinated debt issuances enhance the Total Capital ratio at the corporate level and Tier 1 capital at the Bank level, contributing to the Bank's higher Tier 1 Leverage Ratio of 9.20%. ## Risks and Outlook Several risks could impact ENBP's future performance. Interest rate risk remains significant; modeling indicates the company is now less asset sensitive, potentially realizing less NII in both rising and falling rate scenarios compared to prior years, primarily due to the increased cost of funds. While the Net Portfolio Value analysis shows a benefit in rising rates due to core deposits, it projects a valuation loss in significant down-rate scenarios, though management deems such immediate large drops unlikely. The use of derivatives helps mitigate some of this risk. Credit risk is elevated by the increase in classified and non-performing loans, particularly in agriculture and business segments. While non-performing assets decreased from year-end, continued economic or industry-specific stress could lead to further deterioration and higher provision expenses. The new risk factor highlighted is the potential adverse impact of changes to trade policies and tariffs on local businesses, which could impair borrowers' ability to repay loans. Competitive pressures, particularly from larger banks with greater scale and technological resources, could challenge ENBP's ability to attract and retain customers and maintain margins. The shift in deposit mix towards higher-cost accounts underscores the rate sensitivity of funding in a competitive market. Management's outlook is tied to the interest rate environment. They believe continued improvement in the net interest margin will depend on the pace of future changes in overnight interest rates throughout the remainder of 2025. The company will continue to monitor interest rate risk metrics, particularly in down-rate scenarios, and adjust its balance sheet structure as needed. While specific quantitative guidance beyond this was not provided, the focus remains on managing the balance sheet strategically to optimize NII while maintaining strong credit quality and liquidity. ## Conclusion ENB Financial Corp's first quarter 2025 results demonstrate the benefits of its strategic balance sheet management in the current interest rate environment, driving strong NII growth and NIM expansion. The company leverages its deep community roots and essential digital services to serve its local market, while employing financial derivatives to manage interest rate risk. Despite an increase in classified and non-performing assets year-over-year, credit quality metrics showed improvement from the prior quarter-end, and management emphasizes disciplined practices and peer-aligned asset quality levels. While facing competitive pressures from larger institutions and navigating interest rate sensitivity and potential impacts from trade policies, ENBP maintains robust capital and liquidity positions. The success of its investment leverage strategy highlights management's proactive approach to enhancing earnings. The investment thesis hinges on ENBP's ability to continue optimizing its balance sheet in response to rate changes, effectively manage credit risk in potentially challenging economic segments, and leverage its community banking model to sustain deposit and loan growth against larger rivals. Investors should monitor trends in asset quality, the net interest margin trajectory, and the effectiveness of its strategic balance sheet initiatives in the evolving rate landscape.