UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





Washington,
D.C. 20549





FORM
10-K





(Mark
One)


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


For the
fiscal year ended December 31,
2008




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 000-53297




ENB Financial
Corp


(Exact
name of registrant as specified in its charter)





Pennsylvania
                    
                    51-066129State
      or other jurisdiction of incorporation or organization
                    
                    (IRS
      Employer Identification No.)31 E. Main St. Ephrata, PA
                    
                    17522(Address
      of principal executive offices)
                    
                    (Zip
      Code)





Registrant’s
      telephone number, including area code
                      
                      (717) 733-4181





Securities
      registered pursuant to Section 12(b) of the Act:
                    
                    None





Securities
registered pursuant to Section 12(g) of the Act:





Title of each
class


Common
Stock, Par Value $0.20 Per Share





Indicated
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes S                                No
£





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes S                                No
£





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes S  No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  S





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


Large
      Accelerated filer  £
                  Accelerated
      filer £Non-accelerated
      filer  £ (Do not
      check if a smaller reporting company)
                  Smaller
      reporting company  S





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


Yes  £                                No
S





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2008, was approximately $39,376,459.





The
number of shares of the registrant’s Common Stock outstanding as of March 6,
2009 was 2,831,195.





DOCUMENTS INCORPORATED BY
REFERENCE





The
Registrant’s Definitive Proxy Statement for its 2009 Annual Meeting of
Shareholders to be held on April 21, 2009, is incorporated into Parts III and IV
hereof.












ENB FINANCIAL CORP





Table of
Contents





Part
      IItem
      1.
                                    
                                    Business
                                    3Item
      1A.
                                    
                                    Risk Factors
                                    16Item
      1B.
                                    
                                    Unresolved Staff Comments
                                    23Item
      2.
                                    
                                    Properties
                                    23Item
      3.
                                    
                                    Legal Proceedings
                                    24Item
      4.
                                    
                                    Submission of Matters to a Vote of Security
      Holders
                                    25Part
      IIItem
      5.
                                    
                                    Market for the Registrant’s Common Equity, Related Shareholder
      Matters, and Issuer Purchases of Equity Securities
                                    25Item
      6.
                                    
                                    Selected Financial Data
                                    28Item
      7.
                                    
                                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                    29Item
      7A.
                                    
                                    Quantitative and Qualitative Disclosures about Market
      Risk
                                    56Item
      8.
                                    
                                    Financial Statements and Supplementary Data
                                    60Item
      9.
                                    
                                    Changes in and Disagreements with Accountant on Accounting and
      Financial Disclosure
                                    89Item
      9A.
                                    
                                    Controls and Procedures
                                    89Item
      9B.
                                    
                                    Other Information
                                    90Part
      IIIItem
      10.
                                    
                                    Directors and Officers and Corporate
    Governance
                                    91Item
      11.
                                    
                                    Executive Compensation
                                    91Item
      12.
                                    
                                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                    91Item
      13.
                                    
                                    Certain Relationships and Related Transactions, and Director
      Independence
                                    91Item
      14.
                                    
                                    Principal Accountant Fees and Services
                                    91Part
      IVItem
      15.
                                    
                                    Exhibits and Financial Statement Schedules
                                    92Signatures
                                    93Exhibit Index
                                    94





2
 Table of Contents




ENB
FINANCIAL CORP





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 we
incorporate by reference into this document.  These factors include,
but are not limited to the following:





·
            Monetary
      and interest rate policies of the Federal Reserve Board
      (“FRB”)


·
            Economic
      conditions


·
            Political
      changes and their impact on new laws and
  regulations


·
            Competitive
      forces


·
            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





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.





Item1.   Business





General





ENB
Financial Corp (the “Corporation”) is a bank holding company formed on July 1,
2008.  The Corporation’s wholly owned subsidiary, Ephrata National
Bank (the “Bank”), 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 Corporation and the Bank are both
headquartered in Ephrata, Lancaster County, Pennsylvania.  The Bank
was incorporated in 1881 pursuant to the United States 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 all located in northern
Lancaster County, Pennsylvania, the Corporation’s primary market
area.





The basic
business of the Corporation is to provide a broad range of financial services to
individuals and small to medium-sized businesses in Northern Lancaster County
and surrounding market areas. The Corporation utilizes funds gathered through
deposits from the general public to originate loans. The Corporation offers
time, demand, and savings deposits and secured and unsecured commercial, real
estate, and consumer loans. Ancillary services that provide added convenience
for our customers include direct deposit and direct payments of funds through
Electronic Funds Transfer, ATMs linked to the Star TM network, telephone and
internet banking, MasterCardTM debit cards, VisaTM or MasterCard credit cards, and
safe deposit box facilities.  The Corporation also offers a full
complement of trust and investment advisory services through the Bank’s Money
Management Group.





3
 Table of Contents









As of
December 31, 2008, the Corporation employed 225 persons, consisting of 180
full-time and 45 part-time employees.  The Bank’s number of full-time
employees increased by six and the number of part-time employees decreased by
twenty-seven from the previous year-end. The decline in total employees and the
shift from less part-time positions and several more full time positions was
attributable to an organizational realignment of resources that occurred during
2008, including a voluntary separation package that was offered to qualifying
employees.  The organizational realignment was part of a business
process improvement initiative to improve overall organizational
efficiency.  The Corporation added new positions during
2008.  However, due to a significant amount of employees electing to
take the separation package, a net decrease in thirty-seven employees
occurred.  A collective bargaining agent does not represent the
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 Financial Statements included in this Report.  The segment
reporting information in Note A is incorporated by reference into this Item
1.





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 become dissatisfied with or object to any product or service offered by
the Bank, 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.





Market Area and
Competition





The
Corporation’s primary market area is northern Lancaster County, Pennsylvania;
however, the Corporation’s market area also extends into contiguous Berks,
Lebanon and Chester Counties.  The area served by the Corporation is a
mix of rural communities and small-to mid-sized towns.  The
Corporation’s service area is located just south of the Pennsylvania turnpike
between the greater metropolitan areas of Philadelphia and Harrisburg and the
smaller cities of Reading and Lancaster. Lancaster County ranks high nationally
as a favored place to reside due to its scenic farmland, low-cost of living,
diversity of the local economy, and proximity to large cities. As a result, the
area is experiencing strong population growth and development.





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.  Additionally, 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,
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.





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 strategically addresses these competitive issues
by determining the new products and services to be offered as well as investing
in the expertise of staffing for expansion of the Corporation’s
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





4
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loans are
secured by real estate located in northern Lancaster County of
Pennsylvania.  The business activities of the Corporation are not
seasonal in nature.  Financial instruments with concentrations of
credit risk are described in Note P of the Notes to Financial Statements
included in this Report.  The concentration of credit risk information
in Note P is incorporated by reference into this Item 1.








Supervision
and Regulation





General
Overview





Bank
holding companies operate in a highly regulated environment and are regularly
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.





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
Board of Governors of the Federal Reserve System, and the FDIC.








Supervision
and Regulation of the Corporation





The Holding Company Act of
1956.





On the
day of the reorganization, the Corporation became subject to the provisions of
the 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, our
      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 Ephrata
      National Bank during periods of financial stress or
    adversity.





·
            Restrictions on Acquiring
      Control of Other Banks and Companies.  A bank holding
      company may not:





o
            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


o
            merge
      or consolidate with another bank holding company, without prior approval
      of the Federal Reserve Board.





In
addition, a bank holding company may not:





o
            engage
      in a non-banking business, or


o
            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





5
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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:





o
            extend
      credit,


o
            lease
      or sell property, or


o
            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:


o
            any
      extensions of credit to the bank holding company or any of its
      subsidiaries,


o
            investments
      in the stock or other securities of the Corporation,
      and


o
            taking
      these stock or securities as collateral for loans to any
      borrower.





·
            Risk-Based Capital
      Guidelines.  Bank holding companies must comply with the
      Federal Reserve Board’s risk-based capital guidelines.  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:


o
            some
      types of preferred stock,


o
            a
      limited amount of subordinated
debt,


o
            some
      hybrid capital instruments,


o
            other
      debt securities, and


o
            a
      limited amount of the general loan loss
  allowance.








The
risk-based capital guidelines are required to take adequate account of interest
rate risk, concentration 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 Ephrata National Bank is subject
      to similar capital requirements pursuant to the Federal Deposit Insurance
      Act.





·
            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 represents a comprehensive revision of laws affecting
corporate governance, accounting obligations and corporate
reporting.  The Sarbanes-Oxley Act is applicable to all companies with
equity or debt securities registered or that file reports under the Securities
Exchange Act of 1934.  In particular, the Sarbanes-Oxley Act
establishes: (i) requirements for audit committees, including independence,
expertise, and responsibilities; (ii) additional responsibilities regarding
financial statements for the Principal Executive Officer and Principal Financial
Officer of the reporting company; (iii) standards for auditors and regulation of
audits; (iv)





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increased
disclosure and reporting obligations for the reporting company and its directors
and executive officers; and (v) and increased civil and criminal penalties for
violations of the securities laws.  Many of the provisions were
effective immediately while other provisions become effective over a period of
time and are subject to rulemaking by the SEC.





Permitted
Activities for Bank Holding Companies





The
Federal Reserve Board permits bank holding companies to engage in activities so
closely related to banking or managing or controlling banks as to be a proper
incident of banking.  In 1997, the Federal Reserve Board significantly
expanded its list of permissible non-banking activities to improve the
competitiveness of bank holding companies. The following list includes
activities that a holding company may engage in, subject to change by the
Federal Reserve Board:





·
            Making,
      acquiring or servicing loans and other extensions of credit for its own
      account or for the account of
others.





·
            Any
      activity used in connection with making, acquiring, brokering, or
      servicing loans or other extensions of credit, as determined by the
      Federal Reserve Board.  The Federal Reserve Board has determined
      that the following activities are
permissible:





o
            real
      estate and personal property
appraising;


o
            arranging
      commercial real estate equity
financing;


o
            check-guaranty
      services;


o
            collection
      agency services;


o
            credit
      bureau services;


o
            asset
      management, servicing, and collection
  activities;


o
            acquiring
      debt in default, if a holding company divests shares or assets securing
      debt in default that are not permissible investments for bank holding
      companies within prescribed time periods, and meets various other
      conditions; and


o
            real
      estate settlement services.





·
            Leasing
      personal and real property or acting as agent, broker, or advisor in
      leasing property, provided that:





o
            the
      lease is a non-operating lease;


o
            the
      initial term of the lease is at least 90
days;


o
            if
      real property is being leased, the transaction will compensate the lessor
      for at least the lessor’s full investment in the property and costs, with
      various other conditions.





·
            Operating
      non-bank depository institutions, including an industrial bank or savings
      association.





·
            Performing
      functions or activities that may be performed by a trust company,
      including activities of a fiduciary, agency or custodial nature, in the
      manner authorized by federal or state law, so long as the holding company
      is not a bank.





·
            Acting
      as investment or financial advisor to any person,
    including:





o
            serving
      as investment advisor to an investment company registered under the
      Investment Company Act of 1940;


o
            furnishing
      general economic information and advice, general economic statistical
      forecasting services, and industry
studies;


o
            providing
      advice in connection with mergers, acquisitions, divestitures,
      investments, joint ventures, capital structuring, financing transactions,
      and conducting financial feasibility
studies;


o
            providing
      general information, statistical forecasting, and advice concerning any
      transaction in foreign exchange, swaps and similar transactions,
      commodities, and options, futures and similar
  instruments;


o
            providing
      educational courses and instructional materials to consumers on individual
      financial management matters; and





7
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o
            providing
      tax planning and tax preparation services to any
  person.








·
            Agency  transactional
      services for customer investments,
including:





o
            Securities brokerage --
      Providing securities brokerage services, whether alone or in combination
      with investment advisory services, and incidental activities, including
      related securities credit activities compliant with Federal Reserve Board
      Regulation T and custodial services, if the securities brokerage services
      are restricted to buying and selling securities solely as agent for the
      account of customers and do not include securities underwriting or
      dealing.





o
            Riskless-principal
      transactions -- Buying and selling all types of securities in the
      secondary market on the order of customers as “riskless
      principal.”





o
            Private-placement
      services -- Acting as agent for the private placement of securities
      in accordance with the requirements of the Securities Act of 1933 and the
      rules of the SEC.




o
            Futures commission
      merchant -- Acting as a futures commission merchant for
      unaffiliated persons in the execution and clearance of any futures
      contract and option on a futures contract traded on an exchange in the
      United States or abroad, if the activity is conducted through a separately
      incorporated subsidiary of the holding company and the company satisfies
      various other conditions.





·
            Investment
      transactions as principal:





o
            Underwriting
      and dealing in government obligations and money market instruments,
      including bankers’ acceptances and certificates of deposit, under the same
      limitations applicable if the activity were performed by a holding
      company’s subsidiary member banks.





·
            Engaging
      as principal in:





o
            foreign
      exchanges; and





o
            forward
      contracts, options, futures, options on futures, swaps, and similar
      contracts, with various conditions.





·
            Buying
      and selling bullion, and related
activities.





·
            Management
      consulting and counseling
activities:





o
            Subject
      to various limitations, management consulting on any matter to
      unaffiliated depository institutions, or on any financial, economic,
      accounting, or audit matter to any other company;
  and





o
            Providing
      consulting services to employee benefit, compensation, and insurance
      plans, including designing plans, assisting in the implementation of
      plans, providing administrative services to plans, and developing employee
      communication programs for plans.





·
            Providing
      career counseling services to:





o
            a
      financial organization and individuals currently employed by, or recently
      displaced from, a financial
organization;





o
            individuals
      who are seeking employment at a financial organization;
  and





o
            individuals
      who are currently employed in or who seek positions in the finance,
      accounting, and audit departments of any
  company.





8
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·
            Support
      services:





o
            providing
      limited courier services; and





o
            printing
      and selling checks and related items requiring magnetic ink character
      recognition.





·
            Insurance
      agency and underwriting:




o
            Subject
      to various limitations, acting as principal, agent, or broker for credit
      life, accident, health and unemployment insurance that is directly related
      to an extension of credit a holding company or any of its
      subsidiaries.





o
            Engaging
      in any insurance agency activity in a place where the Corporation or a
      subsidiary of the Corporation has a lending office and that has a
      population not exceeding 5,000 or has inadequate insurance agency
      facilities, as determined by the Federal Reserve
  Board.





o
            Supervising,
      on behalf of insurance underwriters, the activities of retail insurance
      agents who sell fidelity insurance and property and casualty insurance on
      the real and personal property used in the Corporation’s operations or its
      subsidiaries, and group insurance that protects the employees of the
      Corporation or its subsidiaries.





o
            Engaging
      in any insurance agency activities if the Corporation has total
      consolidated assets of $50 million or less, with the sale of life
      insurance and annuities being limited to sales in small towns or as credit
      insurance.





·
            Making
      equity and debt investments in corporations or projects designed primarily
      to promote community welfare, and providing advisory services to these
      programs.





·
            Subject
      to various limitations, providing others financially oriented data
      processing or bookkeeping services.





·
            Issuing
      and selling money orders, travelers' checks and United States savings
      bonds.





·
            Providing
      consumer financial counseling that involves counseling, educational
      courses and distribution of instructional materials to individuals on
      consumer-oriented financial management matters, including debt
      consolidation, mortgage applications, bankruptcy, budget management, real
      estate tax shelters, tax planning, retirement and estate planning,
      insurance and general investment management, so long as this activity does
      not include the sale of specific products or
  investments.





·
            Providing
      tax planning and preparation
advice.





Permitted
Activities for Financial Holding Companies





The
Gramm-Leach-Bliley Financial Services Modernization Act became law in November
1999 and amends the Holding Company Act of 1956 to create a new category of
holding company - the financial holding company.  To be designated as
a financial holding company, a bank holding company must file an application
with the Federal Reserve Board.  The Corporation must be and remain
well capitalized and well managed, as determined by Federal Reserve Board
regulations and maintain at least a “Satisfactory” examination
rating under the Community Reinvestment Act.  Once a bank holding
company becomes a financial holding company, the holding company or its
affiliates may engage in any financial activities that are financial in nature
or incidental to financial activities.  Furthermore, the Federal
Reserve may approve a proposed activity if it is complementary to financial
activities and does not threaten the safety and soundness of
banking.  The Act provides an initial list of activities that
constitute activities that are financial in nature, including:





·
            lending
      and deposit activities,


·
            insurance
      activities, including underwriting, agency and
  brokerage,


·
            providing
      financial investment advisory
services,





9
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·
            underwriting
      in, and acting as a broker or dealer in,
  securities,


·
            merchant
      banking, and


·
            insurance
      company portfolio investment.





Supervision
and Regulation of the Bank





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 Bank
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


·
            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 semiannual 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, 2008.  This designation has benefited the Bank in
the past and continues to benefit it in terms of a lower quarterly FDIC
rate.  The Bank was utilizing a one-time credit against calculated
quarterly FDIC assessments.  This credit was full utilized in the
second quarter of 2008, upon which the Bank began to pay FDIC insurance
again.  The FDIC adjusts the insurance rates when
necessary.  For 2009 the FDIC rate increased by 140%.  This
increase is designed to replenish the FDIC fund due to 2008 bank failures and to
provide for additional FDIC insurance coverage on deposit
accounts.  These increases include an overall insurance increase from
$100,000 to $250,000, and unlimited insurance coverage on non-interest bearing
deposits and interest-bearing deposit balances with rates less than or equal to
0.50%.  The total FDIC assessments paid by the Bank in 2008 were
$174,000.





In
addition to FDIC insurance costs, the Bank is subject to assessments to pay the
interest on Financing Corporation bonds.  Congress created the
Financing Corporation to issue bonds to finance the resolution of failed thrift
institutions.  These assessment rates are set
quarterly.  The total Financing Corporation assessments paid by the
Bank in 2008 were $56,000.





FDIC Insurance Premium
Increase





On
February 27, 2009, the FDIC announced that it was increasing federal deposit
insurance premiums, beginning the second quarter of 2009, for well managed, well
capitalized banks to a range between 12 and 16 cents per $100 of





10
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insured
deposits on an annual basis.  Management anticipates the Bank’s
insurance premiums for 2009, which will be paid from earnings, to increase by
approximately $490,000, or over 215%.





The FDIC
also voted to impose a special assessment of 20 basis points on all FDIC-insured
banks to be collected on September 30, 2009.  Management currently
anticipates that this special assessment will adversely affect earnings by
approximately $1,100,000 based on our current federally-insured deposit
amounts.  Furthermore, the FDIC has the authority, after June 30,
2009, to impose an additional 10 basis point emergency special assessment on all
FDIC-insured banks if it estimates the reserve ratio of the Deposit Insurance
Fund will fall to a level that it believes would adversely affect public
confidence or to a level which would be close to zero or negative at the end of
a calendar quarter.  At this time management cannot estimate the
probability of this event; however, any additional FDIC assessment and/or
premium would be adverse to our 2009 earnings.





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’s
most recent CRA rating was Outstanding.





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.





Capital
      Category
                              Total
      Risk-Based Ratio
                              Tier
      1 Risk-Based Ratio
                              Tier
      1 Leverage Ratio­­­­­­­­­Well
      Capitalized
                              > 10.0
                              > 6.0
                              > 5.0Adequately
      Capitalized
                              >   8.0
                              > 4.0
                              >4.0*Undercapitalized
                              <
        8.0
                              <
      4.0
                              <
      4.0*Significantly
      Undercapitalized
                              <
        6.0
                              <
      3.0
                              <
      3.0Critically
      Undercapitalized
                              
                              
                              < 2.0*3.0
      for those banks having the highest available regulatory
      rating.


­­­­­­­­


The
Bank’s capital ratios exceed the regulatory requirements to be considered Well
Capitalized for Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1
Leverage Capital.  The Capital Ratio table and 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.





Prompt Corrective
Action





In the
event 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





11
 Table of Contents








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.





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, as long as a first
lien on the executive officer’s residence secures the loan.  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 must
receive the approval of the Bank’s Board of Directors.




Legislation and Regulatory
Changes





From time
to time, legislation is enacted that has the effect of increasing the cost of
doing business, limiting or expanding permissible activities, or affecting the
competitive balance between banks and other financial
institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various regulatory
agencies.  No prediction can be made as to the likelihood of any major
changes or the impact such changes might have on the Corporation’s
operations.  See Item 1A. Risk Factors for more
information.





In the
following section, certain significant enacted or proposed legislation is
discussed that either has, or will likely, impact the
Corporation.  Certain legislation was enacted several years ago which
had phase in periods or requirements that only began impacting the Corporation
in 2008.  Others significant legislation, like the USA Patriot Act,
was enacted several years ago and continues to be a focus of regulatory
agencies.  The sub-prime crisis which became apparent in 2007, and the
broader credit crisis that followed in 2008, resulted in a number of very
historical legislative changes that occurred in late 2008, and continue to the
time of this report.  This legislation, along with other legislation
currently under consideration by Congress or various regulatory or professional
agencies, is also discussed below.





New Legislation and
Regulations





The
Fair and Accurate Credit Transactions (“FACT”) Act





The FACT
Act was passed by Congress in November 2003, and signed into law by the
President on December 4, 2003.  The FACT Act amended the Fair Credit
Reporting Act (“FCRA”), which was originally passed in 1978.  The FCRA
has been revised and amended several times since it first became law, the FACT
Act being the most recent.  The purpose of the FACT Act is to require
consumer agencies, creditors, and others to implement procedures
that:





·
            Assist
      in remedying identity theft


·
            Improve
      consumer credit report dispute
resolution





12
 Table of Contents










·
            Improve
      the accuracy of consumer credit
records


·
            Improve
      the access to, and use of credit
reports





Final
rule for Section 214 of the FACT Act was published in the Federal Register on
October 30, 2007, and became effective on January 1, 2008. This section,
entitled the “Affiliate Marketing Rule,” mandates that consumers be given an
opportunity to “opt out” before a company uses information provided by an
affiliate company to market its products and services to the consumer. The final
rule prohibits the use of information obtained from the consumer’s transactions
or account relationship with an affiliate, the consumer’s application, credit
reports, or other third party sources if the consumer is not given notice,
reasonable opportunity, and a simple method to opt out of any prospective
solicitations.





Section
114, “Identity Theft Red Flags,” and Section 315, “Address Discrepancy,” final
rules were published in the Federal Register on November 9, 2007, and became
effective on January 1, 2008.





The
“Identity Theft Red Flags” rules require financial institutions to develop and
implement an Identity Theft Prevention Program to protect new and existing
accounts from risk of identity theft. Policies and procedures must be enacted to
detect, prevent, and mitigate identity theft and enable financial institutions
to:





·
            Identify
      relevant patterns, practices, and specific forms of activity that are “red
      flags” signaling possible identity theft and incorporate those red flags
      into their program;


·
            Detect
      red flags that have been incorporated into their
  program;


·
            Respond
      appropriately to any red flags that are detected to prevent and mitigate
      identity theft; and


·
            Ensure
      their program is updated periodically to reflect changes in risks from
      identity theft.





The
“Address Discrepancy” final rules, Section 315, require financial institutions
to develop policies and procedures to assess the validity of a request for a
change of address by a credit or debit card holder that is followed closely by a
request for an additional or replacement card. These rules also require users of
consumer reports to develop policies and procedures to be used when a notice of
address discrepancy is received from a consumer reporting agency.





USA Patriot Act





President
Bush signed the USA Patriot Improvement and Reauthorization Act of 2005 into law
on March 9, 2006.  This enactment extended the requirements of the
original act signed into law in October of 2001.





The
rules, developed by the Secretary of the Treasury, require that the Bank have
procedures in place to:





·
            Verify
      the identity of persons applying to open an
  account


·
            Ensure
      adequate maintenance of the records used to verify a person’s identity,
      and


·
            Determine
      whether a person is on any U.S. governmental agency list of known or
      suspected terrorists, or a terrorist
  organization





The
regulators continue to stress the importance of the Bank Secrecy
Act.  The OCC is enhancing the risk assessment requirements for
banks.  These include requiring banks to report risk assessments on
bank products, customers, and geographies.





The
Corporation has implemented the required internal controls and continues to
enhance the policies, procedures, and monitoring programs to ensure proper
compliance.  Many of the new provisions added by the USA Patriot Act
apply to accounts at or held by foreign banks, or accounts of or transactions
with foreign entities.





Sarbanes-Oxley
Act of 2002





On July
30, 2002, the President signed the Sarbanes-Oxley Act of 2002 (“SOX”) into
law.  SOX applies to all publicly held companies, but has different
requirements and phase-in periods depending upon the market capitalization of
public companies.





Congress
determined that the primary responsibility for enacting, implementing, and
enforcement of new rules brought about by SOX would be that of the U.S.
Securities and Exchange Commission (“SEC”).  While some provisions of
SOX became effective upon enactment on July 30, 2002, the other provisions
became effective as the





13
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SEC
adopted various rules.  The SOX requirements have been deferred a
number of times for the Corporation as a smaller public company and a
non-accelerated filer.





In order
to ensure greater investor confidence in corporate disclosures from public
companies, the Sarbanes-Oxley Act restricts the services that public accounting
firms can provide publicly traded companies. The Corporation does not engage the
same professional accounting firm to do both external and internal
auditing.  Neither does the Corporation engage any professional
accounting firm for consulting services.





Section
404 of SOX requires publicly held companies to document and test their internal
controls that impact financial reporting and report on the
findings.  External auditors also must test and report on the
effectiveness of a company’s internal controls to ensure accurate financial
reporting.  Companies must report any deficiencies or material
weaknesses in their internal controls, as well as their remediation
efforts.





Accelerated
and large accelerated filers and their auditors have been required to report on
the effectiveness of internal controls in their annual reports since 2004, or
the first year of eligibility.  An accelerated filer is defined as
having between $75 million and $700 million of publicly traded market
capitalization; large accelerated filers are companies with over $700 million of
publicly traded market capitalization as of the end of their second quarter. The
Corporation does not meet the definition of an accelerated filer due to having a
public equity float of approximately $61 million as of June 30,
2008.





During
2005, as the SEC and Public Company Accounting Oversight Board (PCAOB) jointly
reviewed the 2004 annual reporting and evaluated the impact of SOX on these
accelerated filers, it was apparent that the experience was difficult and
costly, requiring more resources, people, and time than expected.  The
SEC was particularly concerned about the cost and other difficulties that
smaller companies would face in preparing to implement Section
404.  As a result, the requirement for non-accelerated filers to
comply with Section 404 has been delayed several times.





During
2007, the SEC issued rulings on several parts of Section 404.  The
2007 SEC ruling refined the definitions of material weakness and significant
deficiencies that management would be required to disclose if determined that
such weaknesses or deficiencies existed in the internal controls over financial
reporting. Under this ruling, management must assess the effectiveness of the
Corporation’s internal control structure over financial reporting and must test
the internal control process to ensure controls are functioning as
stated.  The rule also required that the independent registered public
accounting firm must attest to the effectiveness of the Corporation’s internal
control structure over financial reporting.  The rule was expected to
be required for financial years ending on or after December 15, 2008. It also
allowed the independent registered public accounting company to place more
reliance on the testing of internal controls over financial reporting done by
the management or the Corporation’s internal audit function.  In
February 2008, the SEC proposed a rule that would extend the date for
independent auditor attestation to first be included for years ended on or after
December 15, 2009.  This proposal was adopted and 2009 will be the
first year that the Corporation’s independent registered public accounting firm
will attest to the effectiveness of the Corporation’s internal control
structure.








Government
Sponsored Entities Takeover – September 7, 2008





On
September 7, 2008, the US Treasury Department took the unprecedented action of
placing the government sponsored entities (“GSE”) of Fannie Mae and Freddie Mac
under conservatorship.  The US government effectively became the owner
of these entities by taking a priority position in the preferred stock of these
entities. The financial condition of the two GSE had declined to the point that
their survival and the backing of their mortgage backed debt was called into
question.  Due to the huge amount of GSE debt held by institutions and
governments all over the world, the US Treasury Department believed taking over
the entities was the most appropriate course of action to ensure the backing of
this debt and provide support for the credit markets in general.  As a
result of the government’s action, Fannie Mae and Freddie Mac mortgage backed
instruments were able to hold on to an AAA rating by the major rating
services.  Due to the declining financial condition of the GSE and the
September 7, 2008, action by the US Treasury Department, the Corporation sold
and took impairment on preferred Fannie Mae stock that it held.  All
of the Corporation’s Fannie Mae preferred stock was sold by the end of
2008.





It is
likely the US Treasury Department will continue to hold both Fannie Mae and
Freddie Mac under conservatorship until the health of these entities can be
restored and the regulatory environment that govern these entities is
strengthened to ensure their long term success.





14
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FDIC
Insurance Reform





President
Bush signed the Emergency Economic Stabilization Act of 2008 on October 3,
2008.  This legislation temporarily raised the federal deposit
insurance coverage limit per depositor from $100,000 to $250,000 through
2009.  Additionally, the Federal Deposit Insurance Corporation (FDIC)
announced the details of its Temporary Liquidity Guarantee Program (TLGP) on
October 14, 2008.  The purpose of this program is to strengthen
confidence and encourage liquidity in the nation’s banking
system.  This program is composed of two components:





·
            The
      FDIC will guarantee certain newly issued senior unsecured debt issued on
      or after October 14, 2008, and before June 30, 2009, by participating
      financial institutions.  Financial institutions not desiring to
      participate in this program had to elect to opt out of this
      component.  The Corporation does not issue senior unsecured debt
      and therefore opted out of this feature of the
  TLGP.


·
            The
      FDIC will provide full deposit insurance coverage for all of a bank’s
      non-interest bearing deposit transaction accounts regardless of the dollar
      amount.  Negotiable Order of Withdraw (NOW) accounts with
      interest rates less than or equal to 0.5% and Interest on Lawyer Trust
      Accounts (IOLTA) are also covered by this extended
      coverage.  This guarantee is temporary, expiring on December 31,
      2009.  This component of the TLGP requires a bank to disclose to
      its customers if it is or is not participating in the
      program.  A participating bank is required to give a second
      disclosure to customers who have an agreement that sweeps money form a
      non-interest bearing transaction account to an interest bearing account or
      non-transaction account.  This disclosure must inform the
      customer that a transfer to an interest bearing account could decrease the
      customer’s FDIC deposit insurance
coverage.








Capital
Purchase Program of the Emergency Economic Stabilization Act of
2008





When the
Emergency Economic Stabilization Act (EESA) of 2008 was passed on October 3,
2008, with $700 billion of funding, the initial focus of the act was to provide
rapid relief to the banking and finance industry by purchasing troubled assets,
primarily mortgage related debt.  The Troubled Asset Relief Program
(“TARP”) was developed to purchase sub-prime debt and other impaired mortgage
backed instruments.  Due to the rapidly declining health of large
banks, brokerage houses, and insurance companies, the initial focus of the
government purchasing troubled mortgage backed instruments was quickly changed
to direct capital injections into the largest banks, and later regional and
larger community banks.  While TARP was the standard phrase for banks
receiving US Treasury funding, the Capital Purchase Program (CPP) was actually
the program established for the US Treasury to invest in the nations banks by
taking a senior cumulative preferred stock position.  Under the CPP
the US Treasury would hold the preferred stock for five years, receiving a 5%
dividend during this period.  The U.S. Treasury has the option to
redeem the preferred stock after three years, in which case the government
ownership would be transferred to other preferred equity holders or the
preferred shares would be eliminated.  After five years the dividend
rate on the preferred stock increases to 9%.  In an effort to provide
confidence to the banking system the government required the nation’s largest
banks to participate in the CCP.  Beyond the largest banks, other
regional and community bank could apply to receive capital under the
CPP.  Financial institutions had to evaluate their need for additional
capital, and the attractiveness of the initial dividend rate, with the many
strings attached to the program.  Many institutions did not have
provisions for preferred stock in their equity structure and applied on a
deferred basis until preferred shares could be authorized.  Besides
adding additional preferred stock to the equity structure, the cost of the
capital, and the element of government ownership, there are other restrictions
in the plan involving increases to dividends and restrictions on stock
repurchases that management did not believe were aligned with the Corporation’s
strategic plan.  The Corporation is considered “Well Capitalized”
under regulatory standards and compares vary favorably to the peer group in
total and regulatory capital and as such management elected not to participate
in the CPP.





American
Recovery and Reinvestment Act of 2009





On
February 18, 2009, President Barack Obama signed into law the American Recovery
and Reinvestment Act of 2009.  The historical $789 billion economic
recovery package is intended to stem the decline in the US
economy.  About 35% of the plan is dedicated to tax cuts for
businesses and individuals, including payroll tax credits, first time home buyer
credits, and tax breaks on new car loan interest and sales tax.  The
remainder of the package is spending related, including construction of highways
and bridges, water and waste water treatment facilities, and high speed internet
services.   Spending plans also include health and human services
initiatives such as expanded unemployment benefits, food stamps, and subsidies
for health insurance.  Due to the magnitude of this wide sweeping
legislation, the package will undoubtedly impact nearly all segments of the
economy and will in turn





15
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impact
the financial industry.  At the time of this report, Management is
unable to determine whether this legislation will have a material impact on the
Corporation’s financial condition and results of operations.








Ongoing
Legislation





As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Corporation’s business is particularly susceptible to changes
in the 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.








Statistical
Data





The
statistical disclosures required by this item are incorporated by reference
herein, from Item 6 on page 28 and the Income Statements on page 63 as found in
this Form 10-K filing.





Available
Information





A copy of
the Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
and Current Reports on Form 8-K, as required to be filed with the Securities and
Exchange Commission pursuant to Securities Exchange Act Rule 13a-1, may be
obtained, without charge, from our website: www.epnb.com or by
request via e-mail to pwenger@epnb.com.  This
information may also be obtained via written request to Mr. Paul W. Wenger,
Secretary, Shareholder Relations, at ENB Financial Corp, 31 East Main Street, PO
Box 457, Ephrata, PA, 17522.





The
Corporation’s reports, proxy statements, and other information are available for
inspection and copying at the SEC Public Reference Room at 100 F Street, N.E.,
Washington, DC, 20549 at prescribed rates.  The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.  The Corporation is an electronic filer
with the Commission.  The Commission maintains a website that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission.  The address
of the Commission’s website is http://www.sec.gov.







Item1A.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





16
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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 investments, the
Corporation’s net interest income, and therefore earnings, could be adversely
affected. Earnings could also be adversely affected if the interest rates
received on loans and other investments 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, 2008, 40.4% of the Corporation’s loan portfolio consisted of
commercial, industrial, and construction loans secured by real
estate.  Another 17.4% 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 residential real estate
loans or consumer loans. These types of loans are also typically larger than
residential real estate loans and 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 possible loan losses, charged to expense,
which represents management’s best estimate of probable losses that have been
incurred within 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 inherently 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





17
 Table of Contents









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
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.





The
Corporation’s Profitability Depends Significantly On Economic Conditions In The
Commonwealth of Pennsylvania





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
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 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.





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.





18
 Table of Contents









·
            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
Corporationis
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.





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.





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.





19
 Table of Contents









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 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 does not currently have
employment agreements or non-competition agreements with any of its senior
officers.





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. The occurrence of any failures, interruptions or security
breaches of the Corporation’s information systems could damage the Corporation’s
reputation, result in a loss of customer business, subject the Corporation to
additional regulatory scrutiny, or expose the 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, the Corporation’s financial condition, and
results of operations.





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.





20
 Table of Contents









Other
Events:





Natural
Disasters, Acts Of War Or Terrorism and Other External Events Could
Significantly Impact The Corporation’s Business





Severe
weather, natural disasters, acts of war or terrorism 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, or other adverse
external event, 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.


•
              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 Over the Counter
Bulletin Board (OTCBB) exchange.  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 Federal Deposit Insurance Bank (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 of the Corporation’s common stock may lose some or all of their
investment.





21
 Table of Contents









The
Corporation’s Articles Of Association, Bylaws and Shareholders Rights Plan
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.








Risks
Associated With The Corporation’s Industry:





The
Corporation operates in a highly regulated environment and may be adversely
affected by changes in federal, state and local laws and
regulations.





The
Corporation is subject to extensive regulation, supervision and examination by
federal and state banking authorities. Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on the
Corporation and its operations. Additional legislation and regulations that
could significantly affect the Corporation’s powers, authority and operations
may be enacted or adopted in the future, which could have a material adverse
effect on its financial condition and results of operations. Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws by banks and bank holding companies in the
performance of their supervisory and enforcement duties. The exercise of
regulatory authority may have a negative impact on the Corporation’s results of
operations and financial condition.





Like
other bank holding companies and financial institutions, the Corporation must
comply with significant anti-money laundering and anti-terrorism laws. Under
these laws, the Corporation is required, among other things, to enforce a
customer identification program and file currency transaction and suspicious
activity reports with the federal government. Government agencies have
substantial discretion to impose significant monetary penalties on institutions,
which fail to comply with these laws or make required reports.





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 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.





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.





22
 Table of Contents









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.





Item1B.  Unresolved Staff Comments





None





Item2. Properties





ENB
Financial Corp’s corporate headquarters and main office of Ephrata National Bank
are located at 31 East Main Street, Ephrata, Pennsylvania.





Listed
below are the office locations of properties owned by the
Corporation.  Owned properties are not subject to any mortgage, lien,
or encumbrance. The Corporation does not currently lease any
locations.





23
 Table of Contents









Property
      Location
                                                              
                                                              OwnedCorporate
      Headquarters/Main Office
                                                              
                                                              Owned31
      East Main StreetEphrata,
      PennsylvaniaMoney
      Management Group
                                                              
                                                              Owned47
      East Main StreetEphrata,
      PennsylvaniaTechnology Center
                                                              
                                                              Owned31
      East Franklin StreetEphrata,
      PennsylvaniaMain
      Street Drive-In
                                                              
                                                              Owned42
      East Main StreetEphrata,
      PennsylvaniaCloister
      Office
                                                              
                                                              Owned809
      Martin AvenueEphrata,
      PennsylvaniaHinkletown
      Office
                                                              
                                                              Owned935
      North Railroad AvenueNew
      Holland, PennsylvaniaDenver
      Office
                                                              
                                                              OwnedOne
      Main StreetDenver,
      PennsylvaniaAkron
      Office
                                                              
                                                              Owned351
      South Seventh StreetAkron,
      PennsylvaniaLititz
      Office
                                                              
                                                              Owned3190
      Lititz PikeLititz,
      PennsylvaniaBlue
      Ball Office
                                                              
                                                              Owned110
      Marble AvenueBlue
      Ball, PennsylvaniaManheim
      Office
                                                              
                                                              Owned1
      North Penryn RoadManheim,
      Pennsylvania








In
addition to the above properties, the Corporation owns two other properties
located in the Corporation’s Ephrata Main Street campus.  These
properties were acquired in 2002, when a group of properties adjacent and
surrounding the Corporation’s Main Office was purchased.  These two
properties are being held for future use or possible sale while the other
properties purchased in 2002 have been remodeled as office or operational space,
and are reflected in the offices shown above.





Item3.
            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 proceedings pending to which
the





24
 Table of Contents









Corporation
is a party or to, which, if determined adversely to the Corporation, would be
material in relation to the Corporation’s undivided profits or 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, are known to be threatened, or
contemplated against the Corporation by governmental authorities.





Item4.
            Submission
      of Matters to a Vote of Security
Holders





There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.








Part
II





Item5.
            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 $.20 per share.  As
of December 31, 2008, there were 12,000,000 shares of common stock authorized
with 2,869,557 shares issued and 2,844,195 shares outstanding to approximately
1,715 shareholders.  The Corporation’s common stock is traded on a
limited basis on the Over The Counter Bulletin Board (OTCBB).  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.





2008
                      
                      
                      2007High
                      
                      
                      Low
                      
                      
                      Dividend
                      
                      
                      High
                      
                      
                      Low
                      
                      
                      DividendFirst
      quarter
                      
                      $
                      26.85
                      
                      
                      $
                      25.00
                      
                      
                      $
                      0.31
                      
                      
                      $
                      32.95
                      
                      
                      $
                      29.00
                      
                      
                      $
                      0.30Second
      quarter
                      
                      
                      26.70
                      
                      
                      
                      23.50
                      
                      
                      
                      0.31
                      
                      
                      
                      34.95
                      
                      
                      
                      31.60
                      
                      
                      
                      0.30Third
      quarter
                      
                      
                      26.00
                      
                      
                      
                      22.76
                      
                      
                      
                      0.31
                      
                      
                      
                      34.60
                      
                      
                      
                      28.50
                      
                      
                      
                      0.30Fourth
      quarter
                      
                      
                      26.50
                      
                      
                      
                      24.85
                      
                      
                      
                      0.31
                      
                      
                      
                      30.25
                      
                      
                      
                      26.30
                      
                      
                      
                      0.31








Dividends





Since
1973, the Corporation has paid quarterly cash dividends on approximately March
15, June 15, September 15, and December 15 of each year.  Prior to
1973, dividends were paid semi-annually.  The Corporation expects to
continue the practice of paying quarterly cash dividends to its shareholders;
however, future dividends are dependent upon future earnings.  Certain
laws restrict the amount of dividends that may be paid to shareholders in any
given year.  See Note M to the financial statements, found on page 80
of 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 and the direct-deposit of cash dividends.  The
Dividend Reinvestment Plan 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 for either program, contact
the Stock Registrar and Dividend Paying Agent.








Purchases





The
following table details the Corporation’s purchase of its own common stock
during 2008.  ENB Financial Corp was formed on July 1, 2008, as the
successor of Ephrata National Bank, which did not have an open purchase plan in
effect during the first six months of 2008.





25
 Table of Contents








Issuer
      Purchase of Equity SecuritesPeriod
                            
                            Total
      Number of Shares Purchased
                            
                            
                            Average
      Price Paid Per Share
                            
                            
                            Total
      Number of Shares Purchased as Part of Publicly Announced Plans
      *
                            
                            
                            U
      Maximum Number of Shares that May Yet be Purchased nder the
      Plan *July
      1, 2008 to July 31, 2008
                            
                            None
                            
                            
                            N/A
                            
                            
                            None
                            
                            
                            N/AAugust
      1, 2008 to August 31, 2008
                            
                            None
                            
                            
                            N/A
                            
                            
                            None
                            
                            
                            N/ASeptember
      1, 2008 to September 30, 2008
                            
                            
                            16,500
                            
                            
                            $
                            25.84
                            
                            
                            
                            16,500
                            
                            
                            
                            123,500October
      1, 2008 to October 31, 2008
                            
                            
                            6,000
                            
                            
                            $
                            25.45
                            
                            
                            
                            22,500
                            
                            
                            
                            117,500November
      1, 2008 to November 30, 2008
                            
                            
                            7,800
                            
                            
                            $
                            25.65
                            
                            
                            
                            30,300
                            
                            
                            
                            109,700December
      1, 2008 to December 31, 2008
                            
                            
                            2,100
                            
                            
                            $
                            25.75
                            
                            
                            
                            32,400
                            
                            
                            
                            107,600Total
                            
                            
                            32,400





*On
August 13, 2008, the Board of Directors of ENB Financial Corporation announced
the approval of a plan to purchase, in open market and privately negotiated
transactions, up to 140,000 shares of outstanding common
stock.  Shares repurchased are being held as treasury shares to be
utilized in connection with the Corporation’s Dividend Reinvestment Plan (DRP)
and Employee Stock Purchase Plan (ESPP).  The first purchase of common
stock under this plan occurred on August 27, 2008.  By December 31,
2008, a total of 32,400 shares were repurchased at a total cost of $833,000 for
an average cost per share of $25.71.  It is anticipated that
management will continue to repurchase additional shares throughout
2009.





Recent Sales of Unregistered
Securities and Equity Compensation Plan





The Bank
does not have an equity compensation plan and has not sold any unregistered
securities.





Shareholder Performance
Graph





Set forth
below is a line graph comparing the yearly change in the cumulative total
shareholder return on ENB Financial Corp’s common stock against the cumulative
total return of the Russell 2000 Index and the Mid-Atlantic Custom Peer Group
Index for the period of five fiscal years commencing January 1, 2004, and ending
December 31, 2008.  The group shows that the cumulative investment
return to shareholders, based on the assumption that a $100 investment was made
on December 31, 2003, in each of the following: the Corporation’s common stock,
the Russell 2000 Index and the Mid-Atlantic Custom Peer Group Index, and that
all dividends were reinvested in those securities over the past five years, the
cumulative total return on such investment would be $91.04, $95.44, and $83.30,
respectively.  The shareholder return shown on the graph below is not
necessarily indicative of future performance.




26
 Table of Contents









ENB
      Financial Corp.









Period
      EndingIndex
                                                    
                                                    12/31/03
                                                    
                                                    
                                                    12/31/04
                                                    
                                                    
                                                    12/31/05
                                                    
                                                    
                                                    12/31/06
                                                    
                                                    
                                                    12/31/07
                                                    
                                                    
                                                    12/31/08ENB
      Financial Corp.
                                                    
                                                    
                                                    100.00
                                                    
                                                    
                                                    
                                                    115.63
                                                    
                                                    
                                                    
                                                    117.83
                                                    
                                                    
                                                    
                                                    102.62
                                                    
                                                    
                                                    
                                                    91.22
                                                    
                                                    
                                                    
                                                    91.04Russell
      2000
                                                    
                                                    
                                                    100.00
                                                    
                                                    
                                                    
                                                    118.33
                                                    
                                                    
                                                    
                                                    123.72
                                                    
                                                    
                                                    
                                                    146.44
                                                    
                                                    
                                                    
                                                    144.15
                                                    
                                                    
                                                    
                                                    95.44Mid-Atlantic
      Custom Peer Group*
                                                    
                                                    
                                                    100.00
                                                    
                                                    
                                                    
                                                    113.29
                                                    
                                                    
                                                    
                                                    113.25
                                                    
                                                    
                                                    
                                                    115.44
                                                    
                                                    
                                                    
                                                    107.89
                                                    
                                                    
                                                    
                                                    83.30








*Mid-Atlantic
Custom Peer Group consists of Mid-Atlantic commercial banks with assets less
than $1B.





27
 Table of Contents









Item6  - Selected Financial Data


(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)


The
selected financial data set forth below should be read in conjunction with the
Corporation's financial statements and their accompanying notes presented
elsewhere herein.





Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004$
                            
                            
                            $
                            
                            
                            $
                            
                            
                            $
                            
                            
                            $INCOME
      STATEMENT DATAInterest
      income
                            
                            
                            34,725
                            
                            
                            
                            33,784
                            
                            
                            
                            31,567
                            
                            
                            
                            28,087
                            
                            
                            
                            25,969Interest
      expense
                            
                            
                            14,598
                            
                            
                            
                            14,692
                            
                            
                            
                            12,904
                            
                            
                            
                            9,401
                            
                            
                            
                            7,703Net
      interest income
                            
                            
                            20,127
                            
                            
                            
                            19,092
                            
                            
                            
                            18,663
                            
                            
                            
                            18,686
                            
                            
                            
                            18,266Provision
      for loan losses
                            
                            
                            669
                            
                            
                            
                            1,446
                            
                            
                            
                            1,276
                            
                            
                            
                            390
                            
                            
                            
                            540Other
      income
                            
                            
                            4,907
                            
                            
                            
                            4,801
                            
                            
                            
                            3,402
                            
                            
                            
                            4,127
                            
                            
                            
                            3,780Other
      expenses
                            
                            
                            20,468
                            
                            
                            
                            16,831
                            
                            
                            
                            15,300
                            
                            
                            
                            13,828
                            
                            
                            
                            13,051Income
      before income taxes
                            
                            
                            3,897
                            
                            
                            
                            5,616
                            
                            
                            
                            5,489
                            
                            
                            
                            8,595
                            
                            
                            
                            8,455Provision
      for Federal income taxes
                            
                            
                            (117
                            )
                            
                            
                            553
                            
                            
                            
                            718
                            
                            
                            
                            1,610
                            
                            
                            
                            1,654Net
      income
                            
                            
                            4,014
                            
                            
                            
                            5,063
                            
                            
                            
                            4,771
                            
                            
                            
                            6,985
                            
                            
                            
                            6,801PER
      SHARE DATANet
      income (basic and diluted)
                            
                            
                            1.40
                            
                            
                            
                            1.77
                            
                            
                            
                            1.67
                            
                            
                            
                            2.39
                            
                            
                            
                            2.31Cash
      dividends paid
                            
                            
                            1.24
                            
                            
                            
                            1.21
                            
                            
                            
                            1.17
                            
                            
                            
                            1.12
                            
                            
                            
                            1.04Book
      value at year-end
                            
                            
                            23.92
                            
                            
                            
                            24.05
                            
                            
                            
                            23.14
                            
                            
                            
                            22.28
                            
                            
                            
                            22.28BALANCE
      SHEET DATATotal
      assets
                            
                            
                            688,423
                            
                            
                            
                            633,762
                            
                            
                            
                            606,670
                            
                            
                            
                            577,578
                            
                            
                            
                            544,063Total
      Loans
                            
                            
                            411,954
                            
                            
                            
                            384,999
                            
                            
                            
                            365,977
                            
                            
                            
                            328,766
                            
                            
                            
                            301,892Securities
                            
                            
                            214,421
                            
                            
                            
                            192,960
                            
                            
                            
                            191,577
                            
                            
                            
                            206,305
                            
                            
                            
                            208,094Deposits
                            
                            
                            511,112
                            
                            
                            
                            478,726
                            
                            
                            
                            469,259
                            
                            
                            
                            448,786
                            
                            
                            
                            415,138Total
      borrowings
                            
                            
                            103,800
                            
                            
                            
                            82,100
                            
                            
                            
                            67,200
                            
                            
                            
                            60,900
                            
                            
                            
                            59,400Stockholders'
      equity
                            
                            
                            68,045
                            
                            
                            
                            68,822
                            
                            
                            
                            65,957
                            
                            
                            
                            64,062
                            
                            
                            
                            65,561SELECTED
      RATIOSReturn
      on average assets
                            
                            
                            0.60
                            %
                            
                            
                            0.82
                            %
                            
                            
                            0.81
                            %
                            
                            
                            1.27
                            %
                            
                            
                            1.29
                            %Return
      on average stockholders' equity
                            
                            
                            5.89
                            %
                            
                            
                            7.63
                            %
                            
                            
                            7.45
                            %
                            
                            
                            10.71
                            %
                            
                            
                            10.59
                            %Average
      equity to average assets ratio
                            
                            
                            10.20
                            %
                            
                            
                            10.72
                            %
                            
                            
                            10.85
                            %
                            
                            
                            11.84
                            %
                            
                            
                            12.14
                            %Dividend
      payout ratio
                            
                            
                            88.57
                            %
                            
                            
                            68.36
                            %
                            
                            
                            70.06
                            %
                            
                            
                            46.86
                            %
                            
                            
                            44.96
                            %Efficiency
      ratio
                            
                            
                            75.09
                            %
                            
                            
                            65.42
                            %
                            
                            
                            61.92
                            %
                            
                            
                            56.42
                            %
                            
                            
                            56.20
                            %Net
      interest margin
                            
                            
                            3.51
                            %
                            
                            
                            3.62
                            %
                            
                            
                            3.68
                            %
                            
                            
                            3.92
                            %
                            
                            
                            4.01
                            %




28
 Table of Contents




ENB
FINANCIAL CORP


Management’s
Discussion and Analysis





Item7.
            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 the Corporation.  This discussion and
analysis should be read in conjunction with the financial statements and other
financial schedules included in this annual report.  The financial
condition and results presented are not indicative of future
performance.





Results
of Operations





Overview





The
Corporation recorded net income of $4,014,000 for the year ended December 31,
2008, a 20.7% decrease from the $5,063,000 earned during the same period in
2007.  The 2007 net income was 6.1% higher than the 2006 net income of
$4,771,000.  Earnings per share, basic and diluted, were $1.40 for
2008, compared to $1.77 in 2007 and $1.67 in 2006.





Two large
items negatively affected the Corporation’s 2008 net income:





·
            The
      Corporation recorded a total of $1,278,000 of losses related to FNMA
      preferred stock during 2008. The impairment and realized loss on Federal
      National Mortgage Association (“FNMA”) preferred stock resulting from the
      deterioration of the financial condition of FNMA, leading to a government
      takeover on September 7, 2008.  Losses on sale of the stock
      occurred in both the third and fourth quarter of 2008 with impairment
      recorded as of September 30, 2008.  The Corporation sold all the
      preferred stock held the investment portfolio prior to December 31, 2008,
      therefore no future losses will occur related to this
      investment.





·
            The
      Corporation recorded $1,222,000 of additional salary and benefit expense
      related to a separation package offered to qualifying
      employees.  Management chose to offer the package as part of an
      organizational restructuring. The organizational restructuring was one of
      many recommendations that resulted from a business process improvement
      engagement, based on industry standards.  Management anticipates
      that the Corporation will recoup the majority of this charge during 2009
      in the form of a lower level of salary and benefit costs than previously
      would have been experienced.  The organizational restructuring
      engagement was dilutive to income in 2008, because of the separation
      package and costs of the engagement, but is expected to be accretive to
      income in 2009 as operational efficiencies and income generation is gained
      from new processes.





Despite
economic disruption and a rapidly changing rate environment, the Corporation’s
net interest income increased at a healthy rate of 5.4%, or $1,035,000 for the
year ended December 31, 2008, compared to the prior year.   Other
income excluding the gain or loss on securities increased 16.6% or $769,000 for
2008, compared to 2007.  Meanwhile, operational costs for 2008
compared to 2007 increased at a pace of 21.6%, or $3,637,000, including the
charge for the separation package.  Excluding the one-time charge,
total operating expenses would have increased 14.3%.  The
Corporation’s provision for loan losses expense in 2008 decreased by $777,000 or
53.7% compared to 2007.





The
financial services industry uses two primary performance measurements to gauge
performance: return on average assets (“ROA”) and return on average equity
(“ROE”).  ROA measures how efficiently a bank generates income based
on the amount of assets or size of a company.  ROE measures the
efficiency of a company in generating income based on the amount of equity or
capital utilized.  The latter measurement typically receives more
attention from shareholders.  The 2008 ROA and ROE decreased from 2007
due to the lower level of income earned in 2008 compared to 2007.








Key
      Ratios
                                          
                                          Twelve
      Months EndedDecember
      31,2008
                                          
                                          
                                          2007Return
      on Average Assets
                                          
                                          
                                          0.60
                                          %
                                          
                                          
                                          0.82
                                          %Return
      on Average Equity
                                          
                                          
                                          5.89
                                          %
                                          
                                          
                                          7.63
                                          %




29
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


The
results of the Corporation’s operations is 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


·
            Non-interest
      income


·
            Non-interest
      expenses


·
            Provision
      for income taxes





The
following discussion analyzes each of these five components.








Net
Interest Income





Net
interest income represents the largest portion of the Corporation’s operating
income.  In 2008, net interest income generated nearly 80.4% of the
Corporation’s gross revenue stream, compared to 79.9% in 2007 and 84.6% in 2006. Since net
interest income comprises a significant portion of the operating income, the
direction and rate of increase or decrease will often indicate the overall
performance of the Corporation.





The
following table shows a summary analysis of net interest income on a fully
taxable equivalent (“FTE”) basis.  For analytical purposes and
throughout this discussion, yields, rates, and measurements such as NII, net
interest spread, and net yield on interest earning assets are presented on a FTE
basis.  The FTE net interest income shown in both tables below will
exceed the NII reported on the statements of income.  The amount of
FTE adjustment totaled $1,649,000 for 2008 and $1,776,000 for both 2007 and
2006.





The
amount of the tax adjustment varies depending on the amount of income earned on
tax-free assets. Currently, the Corporation is in an alternative minimum tax
position where tax–advantaged loans and securities do not offer the benefit that
they did previously.  As a result, the Corporation has discontinued
purchasing tax-free municipal securities until the Corporation resumes a normal
tax position. Therefore, the tax equivalent adjustment declined in 2008, and
will continue to decline in the next year.  In addition, management
has diversified the tax-free assets and income by purchasing bank owned life
insurance (BOLI), which is included in other income rather than in net interest
income.





Net
Interest Income


(Dollars
in thousands)





Year
      ending2008
                          
                          
                          2007
                          
                          
                          2006$
                          
                          
                          $
                          
                          
                          $Total
      interest income
                          
                          
                          34,725
                          
                          
                          
                          33,784
                          
                          
                          
                          31,567Total
      interest expense
                          
                          
                          14,598
                          
                          
                          
                          14,692
                          
                          
                          
                          12,904Net
      interest income
                          
                          
                          20,127
                          
                          
                          
                          19,092
                          
                          
                          
                          18,663Tax
      equivalent adjustment
                          
                          
                          1,649
                          
                          
                          
                          1,776
                          
                          
                          
                          1,776Net
      interest income (fully taxable equivalent)
                          
                          
                          21,776
                          
                          
                          
                          20,868
                          
                          
                          
                          20,439








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





·
            The
      rates charged on interest-earning assets and paid on interest-bearing
      liabilities


·
            The
      average balance of interest-earning assets and interest-bearing
      liabilities





The
Federal Funds rate, the Prime rate, and the shape of the US Treasury curve, all
affect the net interest income.





The
Federal Funds rate, which is the overnight rate that financial institutions
charge other financial institutions to buy or sell overnight funds, has declined
from 5.25% in August 2007 to 0.25% by December 31, 2008.  The Federal
Funds





30
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


rate
declined 100 basis points in the second half of 2007, with another 400 basis
points of reductions in 2008.  The rate reductions have generally had
offsetting positive and negative impacts to the Corporation’s NII.





The Prime
rate typically moves in tandem with the Federal Funds rate. The decrease in the
Federal Funds rate has reduced the cost of funds on overnight borrowings and
allowed lower interest rates paid on deposits, reducing the Corporation’s
interest expense.  The decrease of the Prime rate reduced the yield on
the Corporation’s prime-based loans.  Therefore, these same rate
movements had a direct negative impact on the interest income for the
Corporation.   The Corporation’s fixed rate loans do not reprice
as rates change; however, with the steep decline in interest rates, more
customers have refinanced into lower fixed rate loans or moved into Prime based
loans.  Management has instituted floors on certain loan instruments
and revised pricing standards to counter balance the reduction of loan yield
during this historically low rate period.





Through
most of 2007, the US Treasury curve was primarily flat.  By the first
quarter of 2008, overnight and short-term funds were at significantly lower
rates than in 2007, while mid-term and long-term rates did not decline,
resulting in a positively sloped yield curve.  The change in slope of
the US Treasury curve made it possible for management to grow interest-earning
assets at favorable yields.  Since deposits and borrowings are
generally priced on the short-term rates while loans and securities are priced
on rates out beyond one year, the significant rate drops on the short end of the
rate curve permitted management to reduce the overall cost of funds during 2008
by repricing time deposits and borrowings to lower levels.  Rates on
interest bearing core deposit accounts were also reduced during 2008, primarily
in the later half of the year.  Meanwhile, management continued to
invest in securities and originate loans at longer terms, where the US Treasury
curve and market rates remained higher.





Management
anticipates that interest rates will remain at these historically low rates for
most of 2009 and possibly into 2010 because of the current economic and credit
situation.  This will likely result in the US Treasury curve retaining
a significant positive slope for 2009, based on currently available economic
data.  This will allow management to continue to price the vast
majority of liabilities based at lower short-term rates, while pricing loans and
investments off of the 5-year and 10-year Treasury rates that are significantly
above short-term rates.  Management currently anticipates that the
Corporation’s margin will stabilize and could improve slightly in 2009 as
additional time deposits and borrowed funds reprice to lower interest
rates.





The
following table provides an analysis of year-to-year changes in net interest
income by isolating the changes in terms of changes in average balances and
changes in interest rates.





31
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





RATE/VOLUME
ANALYSIS OF CHANGES IN NET INTEREST INCOME


(TAXABLE
EQUIVALENT BASIS, DOLLARS IN THOUSANDS)





2008
      vs. 2007
                                  
                                  
                                  2007
      vs. 2006Increase
      (Decrease)
                                  
                                  
                                  Increase
      (Decrease)Due
      To Change In
                                  
                                  
                                  Due
      To Change InNet
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  NetAverage
                                  
                                  
                                  Interest
                                  
                                  
                                  Increase
                                  
                                  
                                  Average
                                  
                                  
                                  Interest
                                  
                                  
                                  IncreaseBalances
                                  
                                  
                                  Rates
                                  
                                  
                                  (Decrease)
                                  
                                  
                                  Balances
                                  
                                  
                                  Rates
                                  
                                  
                                  (Decrease)$
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $INTEREST
      INCOMEFederal
      funds sold
                                  
                                  
                                  (116
                                  )
                                  
                                  
                                  (86
                                  )
                                  
                                  
                                  (202
                                  )
                                  
                                  
                                  176
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  179Securities
      available for sale:Taxable
                                  
                                  
                                  1,988
                                  
                                  
                                  
                                  510
                                  
                                  
                                  
                                  2,498
                                  
                                  
                                  
                                  (344
                                  )
                                  
                                  
                                  350
                                  
                                  
                                  
                                  6Tax-exempt
                                  
                                  
                                  (523
                                  )
                                  
                                  
                                  39
                                  
                                  
                                  
                                  (484
                                  )
                                  
                                  
                                  (209
                                  )
                                  
                                  
                                  (132
                                  )
                                  
                                  
                                  (341
                                  )Total
      securities
                                  
                                  
                                  1,465
                                  
                                  
                                  
                                  549
                                  
                                  
                                  
                                  2,014
                                  
                                  
                                  
                                  (553
                                  )
                                  
                                  
                                  218
                                  
                                  
                                  
                                  (335
                                  )Loans
                                  
                                  
                                  948
                                  
                                  
                                  
                                  (1,865
                                  )
                                  
                                  
                                  (917
                                  )
                                  
                                  
                                  1,855
                                  
                                  
                                  
                                  464
                                  
                                  
                                  
                                  2,319Regulatory
      Stock
                                  
                                  
                                  30
                                  
                                  
                                  
                                  (111
                                  )
                                  
                                  
                                  (81
                                  )
                                  
                                  
                                  5
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  54Total
      interest income
                                  
                                  
                                  2,327
                                  
                                  
                                  
                                  (1,513
                                  )
                                  
                                  
                                  814
                                  
                                  
                                  
                                  1,483
                                  
                                  
                                  
                                  734
                                  
                                  
                                  
                                  2,217INTEREST
      EXPENSEDeposits:Demand
      deposits
                                  
                                  
                                  63
                                  
                                  
                                  
                                  (565
                                  )
                                  
                                  
                                  (502
                                  )
                                  
                                  
                                  40
                                  
                                  
                                  
                                  (216
                                  )
                                  
                                  
                                  (176
                                  )Savings
      deposits
                                  
                                  
                                  16
                                  
                                  
                                  
                                  (92
                                  )
                                  
                                  
                                  (76
                                  )
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (77
                                  )
                                  
                                  
                                  (82
                                  )Time
      deposits
                                  
                                  
                                  626
                                  
                                  
                                  
                                  (658
                                  )
                                  
                                  
                                  (32
                                  )
                                  
                                  
                                  331
                                  
                                  
                                  
                                  974
                                  
                                  
                                  
                                  1,305Total
      deposits
                                  
                                  
                                  705
                                  
                                  
                                  
                                  (1,315
                                  )
                                  
                                  
                                  (610
                                  )
                                  
                                  
                                  366
                                  
                                  
                                  
                                  681
                                  
                                  
                                  
                                  1,047Borrowings:Federal
      funds purchased
                                  
                                  
                                  70
                                  
                                  
                                  
                                  (58
                                  )
                                  
                                  
                                  12
                                  
                                  
                                  
                                  (67
                                  )
                                  
                                  
                                  1
                                  
                                  
                                  
                                  (66
                                  )Other
      borrowings
                                  
                                  
                                  647
                                  
                                  
                                  
                                  (143
                                  )
                                  
                                  
                                  504
                                  
                                  
                                  
                                  646
                                  
                                  
                                  
                                  161
                                  
                                  
                                  
                                  807Total
      borrowings
                                  
                                  
                                  717
                                  
                                  
                                  
                                  (201
                                  )
                                  
                                  
                                  516
                                  
                                  
                                  
                                  579
                                  
                                  
                                  
                                  162
                                  
                                  
                                  
                                  741Total
      interest expense
                                  
                                  
                                  1,422
                                  
                                  
                                  
                                  (1,516
                                  )
                                  
                                  
                                  (94
                                  )
                                  
                                  
                                  945
                                  
                                  
                                  
                                  843
                                  
                                  
                                  
                                  1,788NET
      INTEREST INCOME
                                  
                                  
                                  905
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  908
                                  
                                  
                                  
                                  538
                                  
                                  
                                  
                                  (109
                                  )
                                  
                                  
                                  429








In 2008,
the Corporation’s net interest income NII on a FTE basis increased by $908,000
compared to 2007, a 4.4% increase.  Total interest income for 2008
increased $814,000, or 2.3%, over 2007, while interest expense decreased by
$94,000, or 0.6%, from 2007 to 2008.  The FTE interest income from the
securities portfolio increased $2,014,000, or 20.2%, while loan interest income
declined $917,000 or 3.6%.  The remaining smaller other earning asset
categories also reflected declines in interest income.  During most of
2008, loan demand was low and the Corporation used available liquidity generated
by deposits and additional borrowings to invest in securities; therefore, the
growth in the securities portfolio added $1,465,000 to the net interest income,
while higher available yields contributed $549,000 of the increase to net
interest income.





Loan
demand did increase marginally in the last quarter of the year, contributing
growth in loan balances, which added $948,000 to net interest
income.  Decreases in loan yield offset the additional income from
loan growth, reducing net interest income by $1,865,000. In the 2008 rate
environment, management determined that the low yield on Federal Funds sold made
it less advantageous to carry extra cash; therefore, the Corporation managed
liquidity to maintain minimal Federal Funds Sold, decreasing the interest income
on Federal Funds sold by $202,000.





Interest-bearing
liabilities grew steadily throughout 2008; however, with significantly lower
interest rates, total interest expense declined slightly despite the increase in
balances.  Lower rates on all deposit groups caused $1,315,000 of
savings while higher balances increased interest expense by $705,000, resulting
in net savings of $610,000.  Demand deposits reprice the most rapidly
and therefore the Corporation reduced interest expense by $565,000 due to lower
rates. Time deposits balances increased especially in the second half of 2008,
when the stock market began to decline, adding $626,000 to expense, but time
deposits repricing to lower interest rates reduced interest expense by $658,000,
causing a net reduction of $32,000 in time deposit interest
expense.  Historically, the Corporation has seen increases
in





32
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


time
deposits when the equity markets decline, as investors attempt to protect
principal.  This occurred in 2008 and even with the historically low
rate environment; the Corporation was successful in increasing all deposits by
remaining competitive. As 2008 progressed, and interest rates declined, the
Corporation was able to reduce the cost of funds significantly. These rate
reductions more than compensated for the increase in deposit
balances.





The
Corporation used borrowings to supplement liquidity generated by deposits during
the year. The increase in Federal Funds purchased had almost a neutral effect,
increasing interest expense $70,000 related to increased balances, while
reducing expense $58,000 due to lower rates, for a net increase to expense of
$12,000.  Long-term borrowing balances increased interest expense
$647,000, only slightly higher than the increase generated by time deposit
growth.





The
following table shows a more detailed analysis of net interest income on a FTE
basis shown with all the major elements of the Bank’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 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.  NIM is generally the benchmark used by analysts to measure
how efficiently a bank generates net interest income.  For example, a
financial institution with a NIM of 3.75% would be able to use fewer assets and
still achieve the same level of net interest income as financial institution
with a NIM of 3.50%.





33
 Table of Contents





ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





COMPARATIVE
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME


(TAXABLE
EQUIVALENT BASIS, DOLLARS IN THOUSANDS)





December
      31,2008
                  
                  
                  2007
                  
                  
                  2006Average
                  
                  
                  
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  
                  
                  
                  Yield/Balance
                  
                  
                  Interest
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Rate$
                  
                  
                  $
                  
                  
                  %
                  
                  
                  $
                  
                  
                  $
                  
                  
                  %
                  
                  
                  $
                  
                  
                  $
                  
                  
                  %ASSETSInterest
      earning assets:Federal
      funds sold and interest on deposits at other banks
                  
                  
                  1,310
                  
                  
                  
                  32
                  
                  
                  
                  2.49
                  
                  
                  
                  4,502
                  
                  
                  
                  234
                  
                  
                  
                  5.20
                  
                  
                  
                  1,116
                  
                  
                  
                  55
                  
                  
                  
                  4.93Securities
      available for sale:Taxable
                  
                  
                  167,845
                  
                  
                  
                  8,511
                  
                  
                  
                  5.07
                  
                  
                  
                  128,031
                  
                  
                  
                  6,013
                  
                  
                  
                  4.69
                  
                  
                  
                  135,558
                  
                  
                  
                  6,007
                  
                  
                  
                  4.43Tax-exempt
                  
                  
                  54,403
                  
                  
                  
                  3,455
                  
                  
                  
                  6.35
                  
                  
                  
                  62,643
                  
                  
                  
                  3,939
                  
                  
                  
                  6.29
                  
                  
                  
                  65,947
                  
                  
                  
                  4,280
                  
                  
                  
                  6.49Total
      securities (d)
                  
                  
                  222,248
                  
                  
                  
                  11,966
                  
                  
                  
                  5.38
                  
                  
                  
                  190,674
                  
                  
                  
                  9,952
                  
                  
                  
                  5.22
                  
                  
                  
                  201,505
                  
                  
                  
                  10,287
                  
                  
                  
                  5.11Loans
      (a)
                  
                  
                  391,112
                  
                  
                  
                  24,209
                  
                  
                  
                  6.19
                  
                  
                  
                  376,539
                  
                  
                  
                  25,126
                  
                  
                  
                  6.67
                  
                  
                  
                  348,621
                  
                  
                  
                  22,807
                  
                  
                  
                  6.54Regulatory
      stock
                  
                  
                  4,737
                  
                  
                  
                  167
                  
                  
                  
                  3.52
                  
                  
                  
                  4,177
                  
                  
                  
                  248
                  
                  
                  
                  5.94
                  
                  
                  
                  4,074
                  
                  
                  
                  194
                  
                  
                  
                  4.76Total
      interest earning assets
                  
                  
                  619,407
                  
                  
                  
                  36,374
                  
                  
                  
                  5.87
                  
                  
                  
                  575,892
                  
                  
                  
                  35,560
                  
                  
                  
                  6.17
                  
                  
                  
                  555,316
                  
                  
                  
                  33,343
                  
                  
                  
                  6.00Non-interest
      earning assets (d)
                  
                  
                  48,773
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  43,494
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  34,732Total
      assets
                  
                  
                  668,180
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  619,386
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  590,048LIABILITIES
      &STOCKHOLDERS' EQUITYInterest
      bearing liabilities:Demand
      deposits
                  
                  
                  99,614
                  
                  
                  
                  1,231
                  
                  
                  
                  1.24
                  
                  
                  
                  95,961
                  
                  
                  
                  1,733
                  
                  
                  
                  1.81
                  
                  
                  
                  93,974
                  
                  
                  
                  1,909
                  
                  
                  
                  2.03Savings
      deposits
                  
                  
                  72,049
                  
                  
                  
                  300
                  
                  
                  
                  0.42
                  
                  
                  
                  68,956
                  
                  
                  
                  376
                  
                  
                  
                  0.55
                  
                  
                  
                  69,679
                  
                  
                  
                  458
                  
                  
                  
                  0.66Time
      deposits
                  
                  
                  219,769
                  
                  
                  
                  8,939
                  
                  
                  
                  4.07
                  
                  
                  
                  204,947
                  
                  
                  
                  8,971
                  
                  
                  
                  4.38
                  
                  
                  
                  196,718
                  
                  
                  
                  7,666
                  
                  
                  
                  3.90Borrowed
      funds
                  
                  
                  97,497
                  
                  
                  
                  4,128
                  
                  
                  
                  4.23
                  
                  
                  
                  79,902
                  
                  
                  
                  3,612
                  
                  
                  
                  4.52
                  
                  
                  
                  66,715
                  
                  
                  
                  2,871
                  
                  
                  
                  4.30Total
      interest bearing liabilities
                  
                  
                  488,929
                  
                  
                  
                  14,598
                  
                  
                  
                  2.99
                  
                  
                  
                  449,766
                  
                  
                  
                  14,692
                  
                  
                  
                  3.27
                  
                  
                  
                  427,086
                  
                  
                  
                  12,904
                  
                  
                  
                  3.02Non-interest
      bearing liabilities:Demand
      deposits
                  
                  
                  106,029
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  98,228
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  94,005Other
                  
                  
                  5,092
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,007
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,934Total
      liabilities
                  
                  
                  600,050
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  553,001
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  526,025Stockholders'
      equity
                  
                  
                  68,130
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  66,385
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  64,023Total
      liabilities & stockholders' equity
                  
                  
                  668,180
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  619,386
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  590,048Net
      interest income (FTE)
                  
                  
                  
                  
                  
                  
                  21,776
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  20,868
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  20,439Net
      interest spread (b)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.89
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.91
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.32Effect
      of non-interest bearing funds
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0.62
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0.71
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  0.36Net
      yield on interest earning assets (c)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.51
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.62
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.68





(a)
Includes balances of nonaccrual loans and the recognition of any related
interest income.  Average balances also include net deferred loan fees
of ($308,000) in 2008, ($348,000) in 2007 and ($513,000) in
2006.  Such fees recognized through income and included in the
interest amounts totaled $48,000 in 2008, $80,000 in 2007, and $118,000 in
2006.


(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.





34
 Table of Contents





ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





The
Corporation’s interest expense increased at a slightly faster pace than the
interest income, resulting in a lower net interest margin (“NIM”) at 3.51% for
2008 compared to 3.62% for 2007.  The lower NIM resulted from the rate
earned on asset decreasing at a faster pace than rates paid on
liabilities.  The yield earned on assets dropped 30 basis points while
the rate paid on liabilities dropped 28 basis points. While the difference in
yield earned and rate paid is not significant alone, it becomes more of a factor
given the amount assets that repriced compared to the amount of liabilities that
repriced.  Management anticipates NIM improvement in 2009 as the rate
curve remains in a steep positive slope allowing further cost savings to occur
on liabilities, while loans have essentially reached the bottom of the pricing
cycle. Prime rate decreases that have a negative impact to loan yield should be
over now that the target Federal funds rate is between 0.00% and
0.25%.  The Asset Liability Committee (ALCO) carefully monitors the
NIM because it indicates trends in net interest income, the Corporation’s
largest source of revenue.  For more information on the plans and
strategies in place to protect the NIM and moderate the impact of rising rates,
please see Quantitative and Qualitative Disclosures about Market
Risk.





Securities
achieved higher yields for the year 2008, compared to 2007.  Some of
the securities purchased four and five years ago, when interest rates were at
40-year historically lows, have matured. The Corporation reinvested those funds
at higher rates during 2008, prior to the significant fourth quarter 2008-rate
decreases.  Additionally, new purchases were made into instruments
that carried larger than traditional spreads due to the turmoil in the credit
markets.  Management anticipates that further improvement on asset
yield will be difficult to achieve with a low Prime rate on variable loans and
lower US Treasury rates, combined with customer refinancing fixed rate loans to
gain favorable terms.





The rate
paid on deposits and borrowings decreased for the year ended December 31, 2008,
over the same period for 2007.  Management follows a disciplined
pricing strategy on core deposit products that are not rate sensitive, meaning
that the balances do not fluctuate significantly when interest rates
change.  The pricing strategy helped to manage the cost of funds by
reducing interest rate expense on savings deposits by 13 basis points and on
time deposits by 31 basis points in 2008.  Management captured rate
savings on time deposits as large portions of the time deposit portfolio
repriced downward as interest rates declined.  This opportunity
resulted from several converging market conditions, including uncertainty in the
stock market, local bank consolidation, and economic
turmoil.  Typically, the Corporation sees increases in time deposits
during periods when consumers are not confident in the stock market and economic
conditions deteriorate.  During these periods, there is a “flight to
quality” and federally insured deposits.  Management believes the
Corporation benefited beyond these normal behavior patterns due to two recent
mergers in the Corporation’s immediate market area.  One merger was
finalized in the fourth quarter of 2007, and the other was finalized in the
first quarter of 2008.  In this environment, the Corporation is not
under normal pricing pressures.  Management believes the competitive
advantage related to merger activity has subsided.  The newest trend
is customers being less rate sensitive due to greater concern about the health
of the financial institution.  In this regard, the Corporation has
benefited due to stronger capital and better earnings performance than several
local competitors.





The
average rate of borrowed funds decreased a moderate 29 basis points from 2007 to
2008.  Several long-term borrowings matured and were refinanced at
lower interest rates.  Throughout most of 2008, the fixed borrowing
rates were lower than the average rate paid on the Corporation’s existing
borrowings.  The Corporation may have opportunities to decrease
borrowing costs in 2009 as additional fixed rate borrowings mature or
reprice.  Additionally, the average rate on borrowings will decline
should borrowings increase and additional loans are obtained at lower
rates.





Provision
for Loan Losses





The
allowance for loan losses 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 allowance for loan losses is
adequate to cover any losses inherent in the loan portfolio.  The
Corporation added $669,000 to the allowance for 2008 compared to $1,446,000 for
2007. The Corporation gives special attention to the level of delinquent
loans.  The analysis of the loan loss allowance takes into
consideration, among other things, the following factors:





·
            Historical
      loan loss experience by loan type


·
            Concentrations
      of credit risk


·
            Credit
      migration analysis


·
            Volume
      of delinquent and non-performing
loans


·
            Loan
      portfolio characteristics


·
            Current
      economic conditions





35
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





Despite
the current state of the economy, specifically the weaker housing market and
ongoing credit concerns, the Corporation has not experienced significant
increases in loan delinquencies or foreclosures.The provision for the year
ended December 31, 2008, has normalized to the usual range of $150,000 to
$200,000 per quarter.  Management deems this range sufficient to
provide for the growth in the loan portfolio, as well as minor changes in credit
risk.During
2007, management charged off several large commercial loans that were determined
to be uncollectible.  This action required a significant provision to
bring the allowance for loan losses back to the desired level. The Corporation
has experienced a lower amount of charged-off loans in
2008.  Management continues to take a prudent stance in determining
the allowance for loan losses and has continued to increase the allowance as a
percentage of total loans, ending December 31, 2008, at 1.02%, compared to 0.95%
as of December 31, 2007.





Management
continues to evaluate the allowance for loan loss in relation to the growth of
the loan portfolio and its associated credit risk, and believes the provision
and the allowance for loan losses are adequate to provide for future loan
losses. For further discussion of the calculation, see the “Allowance for Loan
Loss” section below.








Other
Income





Other
income for 2008 was $4,907,000, an increase of $106,000 or 2.2%, compared to the
$4,801,000 earned in 2007.  The following table details the categories
that comprise other operating income.





OTHER
INCOME


(DOLLARS
IN THOUSANDS)





2008
      vs. 2007
                    
                    
                    2007
      vs. 20062008
                    
                    
                    2007
                    
                    
                    Increase
      (Decrease)
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    Increase
      (Decrease)$
                    
                    
                    $
                    
                    
                    $
                    
                    
                    %
                    
                    
                    $
                    
                    
                    $
                    
                    
                    $
                    
                    
                    %Trust
      and investment services
                    
                    
                    971
                    
                    
                    
                    952
                    
                    
                    
                    19
                    
                    
                    
                    2.0
                    
                    
                    
                    952
                    
                    
                    
                    777
                    
                    
                    
                    175
                    
                    
                    
                    22.5Service
      charges on deposit accounts
                    
                    
                    1,454
                    
                    
                    
                    1,231
                    
                    
                    
                    223
                    
                    
                    
                    18.1
                    
                    
                    
                    1,231
                    
                    
                    
                    1,305
                    
                    
                    
                    (74
                    )
                    
                    
                    (5.7
                    )Other
      fees
                    
                    
                    607
                    
                    
                    
                    461
                    
                    
                    
                    146
                    
                    
                    
                    31.7
                    
                    
                    
                    461
                    
                    
                    
                    492
                    
                    
                    
                    (31
                    )
                    
                    
                    (6.3
                    )Commissions
                    
                    
                    1,328
                    
                    
                    
                    1,124
                    
                    
                    
                    204
                    
                    
                    
                    18.1
                    
                    
                    
                    1,124
                    
                    
                    
                    991
                    
                    
                    
                    133
                    
                    
                    
                    13.4Net
      realized gains (losses) on sales of securities available for
      sale
                    
                    
                    (506
                    )
                    
                    
                    157
                    
                    
                    
                    (663
                    )
                    
                    
                    (422.3
                    )
                    
                    
                    157
                    
                    
                    
                    (870
                    )
                    
                    
                    1,027
                    
                    
                    
                    (118.0
                    )Gain
      (loss) on sale of mortgages
                    
                    
                    123
                    
                    
                    
                    118
                    
                    
                    
                    5
                    
                    
                    
                    4.2
                    
                    
                    
                    118
                    
                    
                    
                    197
                    
                    
                    
                    (79
                    )
                    
                    
                    (40.1
                    )Earnings
      on bank owned life insurance
                    
                    
                    632
                    
                    
                    
                    469
                    
                    
                    
                    163
                    
                    
                    
                    35
                    
                    
                    
                    469
                    
                    
                    
                    253
                    
                    
                    
                    216
                    
                    
                    
                    85.4Other
      miscellaneous income
                    
                    
                    298
                    
                    
                    
                    289
                    
                    
                    
                    9
                    
                    
                    
                    3.1
                    
                    
                    
                    289
                    
                    
                    
                    257
                    
                    
                    
                    32
                    
                    
                    
                    12.5Total
      other income
                    
                    
                    4,907
                    
                    
                    
                    4,801
                    
                    
                    
                    106
                    
                    
                    
                    2.2
                    
                    
                    
                    4,801
                    
                    
                    
                    3,402
                    
                    
                    
                    1,399
                    
                    
                    
                    41.1





The most
significant variance for the year ended December 31, 2008, compared to the same
period of 2007, was in the gain or loss on security
transactions.  During 2008, the Corporation recorded losses of
$1,278,000 on the sale and impairment of Fannie Mae preferred
stock.  The declining financial condition of the Government Sponsored
Entities, and the unprecedented actions taken by the United States Treasury
Department and the Federal Housing Finance Agency (FHFA), directly resulted in a
sharp decline in the value of these preferred stocks, leading to sales and
impairment in the third quarter of 2008.  Management sold all
remaining preferred stock in the fourth quarter of 2008.Other
securities sold at gains and losses partially offset the $1,278,000 loss
recorded during 2008.  In 2007, the gains and losses resulted in a net
gain of $157,000.  The difference of recording net realized losses of
$506,000 in 2008 compared to net realized gains of $157,000 in 2007 represents a
year over year decrease of $663,000.





Trust and
investment services revenue consists of income from traditional trust services
and income from alternative investment services provided through a third
party.  In 2008, traditional trust service income remained stable
increasing $2,000.  Alternative investment services income increased
$17,000, or 6.7%, over 2007 income.  The amount of customer investment
activity drives the investment services income; therefore, the economic slowdown
throughout the year has diminished customer interest in investing in the equity
market.  The trust and investment services area continues to be an
area of strategic focus for the Corporation.  Management believes
there is a great need for retirement, estate, and small business planning in the
Corporation’s service area.  Management also sees these services as
being a necessary part of a comprehensive line of financial solutions across the
organization.





Service
charges on deposit accounts for the year ending December 31, 2008, increased by
$223,000, or 18.1%, compared to 2007.  Overdraft service charges for
2008, which comprise almost 90% of the total deposit service





36
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


charges
increased substantially to $1,300,000 in 2008 from $1,100,000 in 2007, an 18.2%
increase.  The Corporation instituted new operational procedures for
posting transactions and assessing overdraft charges in the fourth quarter of
2008, which caused this increase.  Management expects that overdraft
income for 2009 will also show a significant increase over 2008.





Other
fees increased for the year ended December 31, 2008, by $146,000, or 31.7%,
compared to the previous year.  Loan related fees increased $144,000,
while the remaining fee income categories remained flat.  The
Corporation assesses fees to customers when they amend the original terms of
their mortgage agreement, to change the length of the term, change the rate, or
both.  These amendments allow customers to obtain favorable terms
without rewriting the loan however.  These loan amendments do not
involve delinquent loans, or loans with collateral quality deterioration, which
are restructured loans.  This type of activity was prevalent
throughout 2008 as rates decreased, causing the Corporation’s loan related fees
to increase.





The
largest component of commission income is from the Corporation’s Debit
MasterCard®.  The amount of customer usage of the card at point of
sale transactions determines the level of commission income
received.  The earned debit card income of $1,087,000 in 2008 is an
increase of $156,000, or 16.8%, over 2007.  Customers have become more
comfortable with the use of debit cards, and they are now widely accepted by
merchants, thereby increasing the number of transactions
processed.  Another large component of commission income is from
MasterCard and Visa® commission, which provided income of $165,000 for 2008, an
increase of $33,000, or 25.3%, over 2007.  MasterCard and Visa
commission is the amount the Corporation earns on transactions processed through
the MasterCard and Visa systems for business customers.  Management
expects both of these categories to increase as the reliance on electronic
payment systems expands.





Although
economic conditions have slowed the sale of homes and new construction
throughout 2008, the amount of mortgages originated for sale to the secondary
market was similar to 2007.  Secondary mortgage financing activity
drives the gains on the sale of mortgages, which showed an increase of $5,000 or
4.2% for 2008 compared to 2007. Given the current housing market conditions,
management anticipates that gain or loss on sale of mortgages may
decline.





The
earnings on BOLI increased $163,000, or 35%, for 2008 compared to
2007.  The increases in BOLI income resulted from additional BOLI
purchases that occurred in 2007.  The BOLI income for 2008 reflects
the first full year of income recorded on those purchases, compared to the
partial year of income recorded last year.  Management does not
foresee any further BOLI purchases in 2009; therefore, increases in BOLI income
generally result from increases in the cash surrender value. Death benefits paid
upon death that exceed the policies cash surrender value are recorded in
miscellaneous income.





The
miscellaneous income category increased $9,000, or 3.1%, for 2008 over
2007.  This category had a number of offsetting increases and
decreases.  Increases occurred related to a sales tax refund of
$23,000 and a death benefit over existing cash surrender value of
$12,000.  Offsetting these increases was a $25,000 reduction of net
servicing fees on mortgage servicing rights due to the loss of value of the
mortgage-servicing asset.





Operating
Expenses





The
following table provides details of the Corporation’s operating expenses for the
last three years along with the percentage increase or decrease for 2008 and
2007 compared to the previous year.





37
 Table of Contents





ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





OPERATING
EXPENSES


(DOLLARS
IN THOUSANDS)





2008
      vs. 2007
                
                
                2007
      vs. 20062008
                
                
                2007
                
                
                Increase
      (Decrease)
                
                
                2007
                
                
                2006
                
                
                Increase
      (Decrease)$
                
                
                $
                
                
                $
                
                
                %
                
                
                $
                
                
                $
                
                
                $
                
                
                %Salaries
      and employee benefits
                
                
                11,892
                
                
                
                9,693
                
                
                
                2,199
                
                
                
                22.7
                
                
                
                9,693
                
                
                
                8,600
                
                
                
                1,093
                
                
                
                12.7Occupancy
      expenses
                
                
                1,242
                
                
                
                1,146
                
                
                
                96
                
                
                
                8.4
                
                
                
                1,146
                
                
                
                1,025
                
                
                
                121
                
                
                
                11.8Equipment
      expenses
                
                
                957
                
                
                
                899
                
                
                
                58
                
                
                
                6.5
                
                
                
                899
                
                
                
                891
                
                
                
                8
                
                
                
                0.9Advertising
      & marketing expenses
                
                
                411
                
                
                
                415
                
                
                
                (4
                )
                
                
                (1.0
                )
                
                
                415
                
                
                
                423
                
                
                
                (8
                )
                
                
                (1.9
                )Computer
      software & data processing expenses
                
                
                1,508
                
                
                
                1,383
                
                
                
                125
                
                
                
                9.0
                
                
                
                1,383
                
                
                
                1,330
                
                
                
                53
                
                
                
                4.0Shares
      tax
                
                
                721
                
                
                
                449
                
                
                
                272
                
                
                
                60.6
                
                
                
                449
                
                
                
                432
                
                
                
                17
                
                
                
                3.9Outside
      services
                
                
                1,643
                
                
                
                968
                
                
                
                675
                
                
                
                69.7
                
                
                
                968
                
                
                
                928
                
                
                
                40
                
                
                
                4.3Other
      operating expenses
                
                
                2,094
                
                
                
                1,878
                
                
                
                216
                
                
                
                11.5
                
                
                
                1,878
                
                
                
                1,671
                
                
                
                207
                
                
                
                12.4Total
      Operating Expenses
                
                
                20,468
                
                
                
                16,831
                
                
                
                3,637
                
                
                
                21.6
                
                
                
                16,831
                
                
                
                15,300
                
                
                
                1,531
                
                
                
                10.0





Salaries
and employee benefits are the largest category of other expenses.  In
general, they comprise more that 55% of the Corporation’s total operating
expense.  For the year 2008, salaries and benefits increased
$2,199,000 or 22.7%, however $1,222,000 of the increase related to a separation
package offered to a specific group of employees as part of workforce
realignment.  The $1,222,000 charge consists of $866,000 for severance
pay and $356,000 for medical insurance coverage continuation. Excluding the
one-time separation package, the salaries and benefits for 2008 increased
$977,000, or 10.1%, over 2007.  Salaries grew primarily due to
additional staff, including the staff for a new branch, new operational and
administrative positions, and typical merit increases.  Insurance
costs continue to increase at a rate of over 10% per year.  Pension
expense was $527,000 in 2008 compared to $476,000 in 2007, a $51,000, or 10.7%,
increase.  Eligible employees receive pension contributions based upon
compensation subject to certain caps; therefore, this increase is generally
consistent with the increase in salary expense.





Occupancy
expenses consist of the following:





·
            Depreciation
      of bank buildings


·
            Real
      estate taxes and property insurance


·
            Utilities


·
            Building
      repair and maintenance





Occupancy
expenses have increased by $96,000, or 8.4%, for 2008 compared to
2007.  The increases were spread across all occupancy
categories.  Depreciation increased $31,000, or 6.4%, and real estate
taxes increased $13,000, or 6.2%.  The addition of a new branch was
primarily responsible for these increases.  Utility expenses were
higher due to higher energy costs affecting electric and oil
prices.  Building repair and maintenance costs continue to rise in
tandem with higher cost related to materials and supplies, along with the aging
of facilities.





The
computer software and data processing expenses are comprised of STAR® network
processing fees, software amortization, software purchases, and software
maintenance agreements.  The STAR network fees are the fees paid to
process all ATM and debit card transactions.  STAR network fees were
$794,000 in 2008 and $723,000 in 2007, a $71,000, or 9.8%,
increase.  This increase parallels the increased number of electronic
transactions executed by customers. Management expects that this cost will rise
as ATM and debit card point of sale transactions increase. Software related
expenses increased $45,000, or 7.1%, for the year ending December 31, 2008,
compared to the same period in 2007.  The majority of the software
cost increase comes from software investments to update the Corporation’s
technology, including an upgrade in the core processing software system in
2008.  Management expects software expenses to rise in 2009 due to
several software-based initiatives.





Outside
services expenses rose $675,000, or 69.7%, over the 2007
expenses.  Outside services include accounting and auditing fees,
legal fees, loan review fees and other third-party services.  In 2008,
management engaged the consulting arm of the Corporation’s core-processing
vendor to conduct an organizational efficiency and income generation
initiative.  The fees associated with that contract amounted to
$481,000 in 2008 of outside services expenses with an additional $275,000 due in
2009.  In addition, legal and shareholder related expenses increased
substantially in 2008 due to the formation of the bank holding
company.  Combined, these two categories increased
$99,000.  Accounting and auditing fees increased $21,000, or 9.3%,
which is typical across the industry to provide the necessary level of audit
service for the Corporation’s size and complexity.  Additionally, the
majority of the increase in accounting and





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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


auditing
costs is the result of the Corporation being subject to Section 404 of the
Sarbanes Oxley Act, which in 2009 includes the attestation of internal
controls.  Student loan servicing expense increased $19,000, or 32.7%,
due to higher costs to service the loans, while trust department processing fees
increased $25,000, or 78.1%, due to upgrades and an agreement for a higher level
of service.  Additionally, two new servicing arrangements related to
the bank holding company increased other outside services by
$15,000.  Offsetting these increases, courier services declined
$14,000, or 34.1%, for the year 2008 compared to 2007 due to efficiencies gained
through Check 21 imaging initiatives.  The remainder of the increase
in outside services occurred among a variety of different service
providers.





Shares
tax expense rose $272,000, or 60.6%, for 2008 over 2007.  In 2007 and
prior years, the Bank was able to reduce shares tax expenses by reducing the
number of shares on which the tax was assessed due to charitable trusts with
Ephrata National Bank stock holdings.  In 2008, the shares that were
previously exempt from taxation as part of charitable trusts were no longer
eligible for exemption. Therefore, all outstanding ENB Financial Corp shares are
now subject to tax.  Management does not anticipate a substantial
increase in this expense in 2009.





Other
operating expenses include the remainder of the Corporation’s operating
expenses.  Some of the larger items included in this category
are:





·
            Postage


·
            Regulator
      and tax assessments


·
            Director
      fees and expense


·
            Travel
      expense


·
            General
      supplies


·
            Charitable
      contributions


·
            Delinquent
      loan expenses





The
largest increases for 2008 over 2007 occurred in FDIC assessments up, $175,000;
travel expense, up $104,000, and adjustments to the allowance for off balance
sheet commitments, up $89,000.  The FDIC expenses for 2008 include the
significantly higher charges for the FDIC insurance fund.  In 2007,
the FDIC insurance charges were offset by a one-time credit determined in 2006
that was applied to the insurance charges when the FDIC began assessing them in
2007.  Additionally, the FDIC has announced significant increases in
the insurance assessments in 2009 to reimburse the fund after payouts related to
bank failures and to pay for increase in the insurance level from $100,000 to
$250,000.  Management estimates that FDIC costs could increase by more
than $500,000 in 2009. Information subsequent to the reporting date indicates
there may be additional FDIC assessments.  Based on information
currently available, management estimates an additional $1.1 million in FDIC
insurance expense resulting from a one-time assessment, which is in addition to
the increase in the regular quarterly assessments.  Travel expenses
were higher in 2008 mostly due to the out of pocket and travel expenses
associated with the Corporation’s business consulting
engagement.  Management anticipates that travel expenses will revert
to a normal level in 2009.  Offsetting these increases, the expense on
other real estate owned (“OREO”) decreased $88,000 because a loss of $116,000 on
OREO was recorded in 2007, with no comparable activity in
2008.  Additionally, director expense decreased $33,000 due to the
completion of deferred compensation payments for past
directors.  Delinquent loan expense declined $32,000 because of higher
expense related to charged off properties in 2007.





Management
uses the efficiency ratio as one metric to evaluate operating
expenses.  The efficiency ratio measures the efficiency of the
Corporation in producing one dollar of revenue.  For example, an
efficiency ratio of 60% means it costs sixty cents to generate one dollar of
revenue.  A lower ratio represents better operational
efficiency.  The formula for calculating the efficiency ratio is total
operating expenses, excluding foreclosed property and OREO expenses, divided by
FTE net interest income, prior to the provision for loan losses plus other
income, excluding gain or loss on securities.  For 2008, the
Corporation’s efficiency ratio was 75.1%, an increase from 65.4% for
2007.  This significant increase is largely due to the one time cost
of $1,222,000 for the separation package related to the Corporations realignment
of resources.  Management has a long-term goal of reducing the
efficiency ratio to less than 65% and believes in 2009 the efficiency ratio will
improve to a ratio similar the 2007 ratio.





Income
Taxes





The
majority of the Corporation’s income is taxed at a corporate rate of 34% for
Federal income tax purposes.  The Corporation is also subject to
Pennsylvania Corporate Net Income Tax; however, no 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.





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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





Certain
items of income are not subject to Federal income tax, such as tax-exempt
interest income on loans and securities; 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 pretax income for the applicable period.  Note L to
the financial statements provides details on the Corporation’s Federal income
tax.





For the
year ended December 31, 2008, a tax benefit of $117,000, rather than a tax
provision, was recorded.  The Corporation’s taxable income for book
purposes was negative due to the lower earnings performance, combined with the
benefit of a high level of tax-free assets, and the reduction of a tax valuation
allowance.  The amount of the Corporation’s tax-exempt income nearly
equaled the amount of net income before tax.  In addition, the
Corporation was able to reduce a tax valuation allowance that exceeded remaining
taxable income, resulting in a net tax benefit.  The tax valuation
allowance related to prior losses on US Agency preferred stock that previously
could not be utilized until the stock was actually sold.  All
remaining preferred stock was sold in 2008





Due to
lower earnings and tax-free income making up a much larger percentage of total
income, the Corporation became subject to the alternative minimum tax (AMT) in
2006, 2007 and 2008.  The AMT affects the amount of Federal income tax
due and paid, but it does not affect the book tax provision.  However,
because of being subject to AMT tax, management allowed tax-free securities to
decline and became less aggressive in pursuing tax-free loans.  This
practice will continue until the Corporation is no longer subject to
AMT.  Reducing tax-free assets will have an impact on the
Corporation’s future book tax as tax-exempt income declines as a percentage of
total income. Due to further planned reductions in tax-free assets, management
anticipates that the Corporation’s provision for Federal income tax will
increase as a percentage of pretax income in 2009.




40
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


Financial
Condition





Cash
and Cash Equivalents





Cash and
cash equivalents consist of the cash on hand in the Corporation’s vaults,
operational transaction accounts with the Federal Reserve Bank (“FRB”), and
deposits in other banks.  The FRB requires a specified amount of cash
available either in vault cash or in an FRB account.  Known as cash
reserves, these funds provide for the daily clearing house activity of the
Corporation and fluctuate based on the volume of each day’s
transactions.  As of December 31, 2008, the Corporation had $19.4
million in cash and cash equivalents, compared to $17.3 million as of December
31, 2007.  The cash and cash equivalents represent only one element
liquidity.  For further discussion on liquidity management refer to
“Item 7A.  Quantitative and Qualitative Disclosures about Market
Risk.”





Sources
and Uses of Funds





The
following table shows an overview of the Corporation’s primary sources and uses
of funds.  This table utilizes average balances to explain the change
in the sources and uses of funding.  Management uses this analysis
tool to evaluate changes in the each balance sheet category.  Trends
identified from past performance assist management with decisions concerning
future growth.





Some
conclusions drawn from the following table are as follows:





·
            Balance
      sheet growth was stronger in 2008 compared to
  2007.


·
            Short
      term investments were maintained at lower levels to take advantage of
      higher yielding assets


·
            Growth
      in securities was used to supplement slower growth in the loan
      portfolio.


·
            Deposit
      growth was moderate in 2008 compared to slow growth in
    2007.


·
            Borrowings
      continued to increase in 2008


·
            Non-interest
      bearing deposits grew considerably in both 2008, compared to moderate
      growth in 2007.





SOURCES
      AND USES OF FUNDS(DOLLARS
      IN THOUSANDS)





2008
      vs. 2007
                      
                      
                      2007
      vs. 20062008
                      
                      
                      2007
                      
                      
                      Increase
      (Decrease)
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      Increase
      (Decrease)Average
      Balances
                      
                      $
                      
                      
                      $
                      
                      
                      $
                      
                      
                      %
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $
                      
                      
                      %Short-term
      investments
                      
                      
                      1,310
                      
                      
                      
                      4,502
                      
                      
                      
                      (3,192
                      )
                      
                      
                      (70.9
                      )
                      
                      
                      4,502
                      
                      
                      
                      1,116
                      
                      
                      
                      3,386
                      
                      
                      
                      303.4Securities
      available for sale
                      
                      
                      222,248
                      
                      
                      
                      190,674
                      
                      
                      
                      31,574
                      
                      
                      
                      16.6
                      
                      
                      
                      190,674
                      
                      
                      
                      201,505
                      
                      
                      
                      (10,831
                      )
                      
                      
                      (5.4
                      )Regulatory
      stock
                      
                      
                      4,737
                      
                      
                      
                      4,177
                      
                      
                      
                      560
                      
                      
                      
                      13.4
                      
                      
                      
                      4,177
                      
                      
                      
                      4,074
                      
                      
                      
                      103
                      
                      
                      
                      2.5Loans
                      
                      
                      391,112
                      
                      
                      
                      376,539
                      
                      
                      
                      14,573
                      
                      
                      
                      3.9
                      
                      
                      
                      376,539
                      
                      
                      
                      348,621
                      
                      
                      
                      27,918
                      
                      
                      
                      8.0Total
      Uses
                      
                      
                      619,407
                      
                      
                      
                      575,892
                      
                      
                      
                      43,515
                      
                      
                      
                      7.6
                      
                      
                      
                      575,892
                      
                      
                      
                      555,316
                      
                      
                      
                      20,576
                      
                      
                      
                      3.7Interest
      bearing demand deposits
                      
                      
                      99,614
                      
                      
                      
                      95,961
                      
                      
                      
                      3,653
                      
                      
                      
                      3.8
                      
                      
                      
                      95,961
                      
                      
                      
                      93,974
                      
                      
                      
                      1,987
                      
                      
                      
                      2.1Savings
      deposits
                      
                      
                      72,049
                      
                      
                      
                      68,956
                      
                      
                      
                      3,093
                      
                      
                      
                      4.5
                      
                      
                      
                      68,956
                      
                      
                      
                      69,679
                      
                      
                      
                      (723
                      )
                      
                      
                      (1.0
                      )Time
      deposits
                      
                      
                      219,769
                      
                      
                      
                      204,947
                      
                      
                      
                      14,822
                      
                      
                      
                      7.2
                      
                      
                      
                      204,947
                      
                      
                      
                      196,718
                      
                      
                      
                      8,229
                      
                      
                      
                      4.2Borrowings
                      
                      
                      97,497
                      
                      
                      
                      79,902
                      
                      
                      
                      17,595
                      
                      
                      
                      22.0
                      
                      
                      
                      79,902
                      
                      
                      
                      66,715
                      
                      
                      
                      13,187
                      
                      
                      
                      19.8Non-interest
      bearing funds
                      
                      
                      106,029
                      
                      
                      
                      98,228
                      
                      
                      
                      7,801
                      
                      
                      
                      7.9
                      
                      
                      
                      98,228
                      
                      
                      
                      94,005
                      
                      
                      
                      4,223
                      
                      
                      
                      4.5Total
      Sources
                      
                      
                      594,958
                      
                      
                      
                      547,994
                      
                      
                      
                      46,964
                      
                      
                      
                      8.6
                      
                      
                      
                      547,994
                      
                      
                      
                      521,091
                      
                      
                      
                      26,903
                      
                      
                      
                      5.2






Securities
Available for Sale





The
Corporation classifies all of its securities as available for sale and reports
the portfolio at fair market value.  As of December 31, 2008, the
Corporation had $214.4 million of securities available for sale, which accounted
for 31.1% of assets, compared to 30.4% as of December 31, 2007.  This
indicates that the securities portfolio on an ending basis grew at a faster pace
that total assets.  Based on ending balances, the securities portfolio
increased 11.1% from December 31, 2007, to December 31,
2008.  Comparatively, the securities portfolio remained flat during
the period between December 31, 2006 and December 31, 2007.





41
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





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





·
            Performance
      of the various instruments


·
            Direction
      of interest rates


·
            Slope
      of the yield curve


·
            ALCO
      positions as to liquidity, interest rate risk, and net portfolio
      value


·
            State
      of the economy and credit risk





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





SECURITIES
PORTFOLIO


(DOLLARS
IN THOUSANDS)





December
      31,2008
                
                
                2007
                
                
                2006$
                
                
                %
                
                
                $
                
                
                %
                
                
                $
                
                
                %U.S.
      treasuries & governmental agencies
                
                
                47,064
                
                
                
                22.0
                
                
                
                47,599
                
                
                
                24.7
                
                
                
                41,285
                
                
                
                21.6Mortgage-backed
      securities
                
                
                46,093
                
                
                
                21.5
                
                
                
                33,097
                
                
                
                17.1
                
                
                
                30,531
                
                
                
                15.9Collateralized
      mortgage obligations
                
                
                36,049
                
                
                
                16.8
                
                
                
                36,833
                
                
                
                19.1
                
                
                
                36,473
                
                
                
                19.0Private
      collateralized mortgage obligations
                
                
                18,294
                
                
                
                8.5
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Corporate
      debt securities
                
                
                11,637
                
                
                
                5.4
                
                
                
                11,507
                
                
                
                6.0
                
                
                
                10,468
                
                
                
                5.5Obligations
      of states and political subdivisions
                
                
                52,521
                
                
                
                24.5
                
                
                
                60,422
                
                
                
                31.3
                
                
                
                64,737
                
                
                
                33.8Equity
      securities
                
                
                2,763
                
                
                
                1.3
                
                
                
                3,502
                
                
                
                1.8
                
                
                
                8,083
                
                
                
                4.2Total
      securities
                
                
                214,421
                
                
                
                100.0
                
                
                
                192,960
                
                
                
                100.0
                
                
                
                191,577
                
                
                
                100.0








The
Corporation typically invests excess liquidity into securities, primarily fixed
income bonds.  The securities portfolio provides interest and dividend
income to supplement the interest income on loans. Additionally, the securities
portfolio assists in the management of both liquidity risk and interest rate
risk. Refer to Item 7A “Quantitative and Qualitative Disclosures about Market
Risk” for further discussion of risk strategies.  In order to provide
flexibility for management of liquidity and interest rate risks, the securities
portfolio is classified as available for sale and reported at fair
value.  Management adjusts the value the portfolio on a monthly basis
to fair market value as determined in accordance with FAS 115 Accounting for Certain
Investments in Debt & Equity Securitiesand FAS 157 Fair Value Measurements.Management has the ability and intent to hold all debt securities until
maturity and does not generally record impairment on the bonds that are
currently valued below par.  Equity securities generally pose a
greater risk to loss of principal since there is no specified maturity date on
which the Corporation will recover the entire principal. Recovery of the
principal investment is dependent on the fair value of the security at the time
of sale.





Based on
fair market value, on December 31, 2008, approximately 98.7% of the
Corporation’s securities were invested in debt securities with final maturities
while 1.3% of the portfolio was invested in equity securities.  The
equity percentage declined from 1.8% as of December 31, 2007, due to the
impairment and eventual sale of all remaining Fannie Mae preferred stock by
December 31, 2008.  On September 7, 2008, the U.S. Treasury Department
and the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac under
conservatorship, essentially taking over these entities due to significantly
declining financial condition. The action was primarily designed to ensure the
governments backing of all the mortgage back debt issued by these
agencies.  In this action the government took a higher preferred stock
position than the existing preferred shareholders, and preferred stock dividend
payments were halted, causing an immediate and severe loss in value of the
Fannie Mae preferred stock held by the Corporation.  While the equity
holdings make up a very small percentage of the securities portfolio, they were
responsible for all of the $760,000 of impairment and $518,000 of losses
recorded by the Corporation during 2008.  The remaining equity
security is a CRA fund investment. The CRA fund is structured as a mutual fund
where dollars are invested in CRA qualifying mortgage pools.  The
current guideline used by management for the amount to be invested in CRA
approved investments is approximately 0.5% of assets.  The CRA fund is
rated AAA by both Moodys and S&P.





At the
beginning of the year, the Corporation was able to utilize the positively sloped
treasury curve to add higher yielding securities to the portfolio, increasing
portfolio income from both a volume and rate standpoint.  This action
was taken in part to offset the slower loan growth being experienced by the
Corporation.  The majority of growth occurred in





42
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


government
agency sponsored mortgage backed securities (MBS), and private label
collateralized mortgage obligations (PCMO).  The PCMO’s are mortgage
backed instruments like U.S. government backed collateralized mortgage
obligations (CMO) however they do not have the backing of one of the U.S.
government.  Instead of being issued by Fannie Mae or Freddie Mac,
they are issued by brokerage firms or financial institutions that pool and sell
these assets.  Although the specific structure and backing of MBS,
CMO’s, and PCMO’s are different, they all consist of pools of mortgages and have
some common characteristics that make them appropriate for the Corporation’s
investment strategy.  They match the overall objectives of the
securities strategy of providing:





·
            a
      stable and reliable cash flow for
liquidity


·
            generally
      carry AAA credit ratings


·
            strong
      income compared to other debt
securities





Investment
in a substantial amount of the mortgage backed security types referred to above
assists management in maintaining a stable five year ladder of cash flows which
in turn assists with more stable liquidity and interest rate risk
positions.  While cash flows coming off of mortgage back maturities do
slow down and speed up as interest rates increase or decrease, the overall
effect on the portfolio is minimal.  These cash flows act to soften
the impact of other debt securities being called or maturing in their
entirety.





Obligations
of states and political subdivisions, often referred to as municipal bonds, are
tax-free securities that generally provide the highest yield in the securities
portfolio.  In 2006, 2007, and 2008, the Corporation was in an
alternative minimum tax (AMT) position when income levels fell and tax exempt
income remained high.  The AMT requires the payment of a minimum level
of tax should an entity have excessive amounts of tax preference items relative
to a Corporation’s income.  The Corporations primary tax preference
item is the large amount of tax free income generated by tax-free loans and tax
exempt securities.  As a result of the Corporation’s AMT tax position,
management has determined that the size of the municipal bond holdings in
relation to the rest of the securities portfolio should be
decreased.  Sizable reductions in the Corporation’s tax -free assets
would assist the Corporation in emerging from an AMT position. For that reason
management has slowed investment in municipal bonds and has reduced the
percentage of municipal bonds as a percentage of the portfolio from 31.3% on
December 31, 2007, to 24.5% as of December 31, 2008. When the Corporation is no
longer subject to AMT, management will resume investing in municipal bonds to
take advantage of the higher tax-equivalent yields.





During
the last quarter of 2008 market volatility, economic slowdown, and the collapse
of several large financial institutions caused the downgrading of many
securities.  This phenomenon has affected all segments of the
Corporation’s portfolio not secured or backed by the U. S. Government,
specifically, PCMO’s, corporate bonds and municipal bonds. As of December 31,
2008, all but one of the PCMO securities were rated at AAA, which is above the
credit standards established by the regulators and the more stringent standards
set by corporate policy. The one of the seven PCMO securities held with a book
value of $3,810,000 was downgraded to B+ by S&P, which is below the
Corporation’s initial credit standards and below what is considered investment
grade. Additionally, one CitiGroup corporate bond with a book value of
$1,000,000 has been downgraded to below the level set by policy, but remains
above investment grade.  As of December 31, 2008, $15.8 million, or
30.0%, of the municipal bonds have been downgraded to below the levels set by
internal policies, but still substantially exceed investment grade standards.
Management will continue to closely monitor the securities that have been
downgraded. The municipal bond ratings have been affected primarily by concern
over the insurance backing the bond issues.  Presently, management has
the intent and the ability to hold the securities to maturity and believes that
full recovery of principal is probable.





The
entire securities portfolio is reviewed monthly for credit risk and evaluated
quarterly for possible impairment.  In terms of credit risk and
impairment, management most closely watches the Corporation’s CRA fund and since
it does not have a stated maturity date. Corporate bonds and private mortgage
backed securities have the most potential credit risk out of the Corporation’s
debt instruments.  As of December 31, 2008, none of the Corporation’s
unrealized security losses were considered other than temporary. For further
information on impairment see Note B.  For further details regarding
credit risk see Note P.





The
following table shows the weighted average life and yield on the Corporation’s
securities by maturity intervals as of December 31, 2008, 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.





43
 Table of Contents





ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


SECURITIES
PORTFOLIO MATURITY ANALYSIS


(DOLLARS
IN THOUSANDS)





Within
                  
                  
                  
                  
                  
                  1 –
      5
                  
                  
                  
                  
                  
                  5 -
      10
                  
                  
                  
                  
                  
                  Over1
      Year
                  
                  
                  
                  
                  
                  Years
                  
                  
                  
                  
                  
                  Years
                  
                  
                  
                  
                  
                  Years
                  
                  
                  
                  
                  
                  Total%
                  
                  
                  
                  
                  
                  %
                  
                  
                  
                  
                  
                  %
                  
                  
                  
                  
                  
                  %
                  
                  
                  
                  
                  
                  %$
                  
                  
                  Yield
                  
                  
                  $
                  
                  
                  Yield
                  
                  
                  $
                  
                  
                  Yield
                  
                  
                  $
                  
                  
                  Yield
                  
                  
                  $
                  
                  
                  YieldU.S.
      treasuries & agencies
                  
                  
                  4,507
                  
                  
                  
                  4.23
                  
                  
                  
                  10,215
                  
                  
                  
                  4.49
                  
                  
                  
                  32,216
                  
                  
                  
                  4.92
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  46,938
                  
                  
                  
                  4.76Mortgage-backed
      securities
                  
                  
                  7,303
                  
                  
                  
                  5.12
                  
                  
                  
                  20,597
                  
                  
                  
                  5.05
                  
                  
                  
                  11,631
                  
                  
                  
                  5.23
                  
                  
                  
                  5,874
                  
                  
                  
                  5.30
                  
                  
                  
                  45,405
                  
                  
                  
                  5.14Collateralized
      mortgage obligations
                  
                  
                  17,174
                  
                  
                  
                  4.19
                  
                  
                  
                  18,310
                  
                  
                  
                  4.74
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  35,484
                  
                  
                  
                  4.48Private
      collaterized mortgage obligations
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  5,822
                  
                  
                  
                  6.28
                  
                  
                  
                  2,652
                  
                  
                  
                  5.92
                  
                  
                  
                  12,037
                  
                  
                  
                  5.83
                  
                  
                  
                  20,511
                  
                  
                  
                  5.97Corporate
      bonds
                  
                  
                  5,524
                  
                  
                  
                  4.89
                  
                  
                  
                  6,084
                  
                  
                  
                  5.36
                  
                  
                  
                  500
                  
                  
                  
                  5.30
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,108
                  
                  
                  
                  5.14Obligations
      of states andpolitical
      subdivisions
                  
                  
                  1,228
                  
                  
                  
                  7.65
                  
                  
                  
                  6,161
                  
                  
                  
                  5.76
                  
                  
                  
                  29,024
                  
                  
                  
                  6.45
                  
                  
                  
                  16,020
                  
                  
                  
                  6.56
                  
                  
                  
                  52,433
                  
                  
                  
                  6.43Other
      equity securities
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  3,000
                  
                  
                  
                  4.70
                  
                  
                  
                  3,000
                  
                  
                  
                  4.70Total
      securities
                  
                  
                  35,736
                  
                  
                  
                  4.62
                  
                  
                  
                  67,189
                  
                  
                  
                  5.10
                  
                  
                  
                  76,023
                  
                  
                  
                  5.69
                  
                  
                  
                  36,931
                  
                  
                  
                  6.09
                  
                  
                  
                  215,879
                  
                  
                  
                  5.33





Securities
are assigned to categories based on stated contractual maturity except for
mortgage-backed securities, CMO's, and PCMO's, which are based on anticipated
payment periods.





The yield
on the securities portfolio was 5.33% as of the year ended December 31, 2008,
compared to 5.26% as of December 31, 2007.   The weighted average
life of the Corporation’s securities portfolio was 5.90 years as of December 31,
2008, compared to 4.72 years as of December 31, 2007.   Weighted
average life is one measurement of the length of the securities
portfolio.  A shorter portfolio will adjust more quickly in a rising
interest rate environment, whereas a longer portfolio will tend to generate more
return over the long-term and will outperform a shorter portfolio when interest
rates decline.  Because the Corporation’s securities portfolio is
longer than the average peer bank, it will generally outperform the average peer
bank given a decline in interest rates and will generally underperform given
higher interest rates.





Loans





Net loans
outstanding increased $26.5 million or 6.9% from $381.3 million at December 31,
2007, to $407.8 million at December 31, 2008.  The following table
shows the composition of the loan portfolio as of December 31for
each of the past five years.





LOANS BY
MAJOR CATEGORY


(DOLLARS
IN THOUSANDS)





December
      31,2008
                
                
                
                
                
                2007
                
                
                
                
                
                2006
                
                
                
                
                
                2005
                
                
                
                
                
                2004$
                
                
                %
                
                
                $
                
                
                %
                
                
                $
                
                
                %
                
                
                $
                
                
                %
                
                
                $
                
                
                %Real
      estateResidential
      (a)
                
                
                163,076
                
                
                
                39.6
                
                
                
                150,996
                
                
                
                39.2
                
                
                
                148,828
                
                
                
                40.6
                
                
                
                135,381
                
                
                
                41.1
                
                
                
                124,175
                
                
                
                41.0Commercial
                
                
                152,942
                
                
                
                37.1
                
                
                
                131,297
                
                
                
                34.1
                
                
                
                124,414
                
                
                
                34.0
                
                
                
                110,770
                
                
                
                33.6
                
                
                
                101,524
                
                
                
                33.5Construction
                
                
                13,540
                
                
                
                3.3
                
                
                
                16,960
                
                
                
                4.4
                
                
                
                10,751
                
                
                
                2.9
                
                
                
                5,662
                
                
                
                1.7
                
                
                
                8,608
                
                
                
                2.8Commercial
                
                
                71,765
                
                
                
                17.4
                
                
                
                75,172
                
                
                
                19.5
                
                
                
                70,300
                
                
                
                19.2
                
                
                
                64,333
                
                
                
                19.5
                
                
                
                54,568
                
                
                
                18.0Consumer
                
                
                10,887
                
                
                
                2.6
                
                
                
                10,896
                
                
                
                2.8
                
                
                
                12,091
                
                
                
                3.3
                
                
                
                13,253
                
                
                
                4.0
                
                
                
                13,934
                
                
                
                4.6412,210
                
                
                
                100.0
                
                
                
                385,321
                
                
                
                100.0
                
                
                
                366,384
                
                
                
                100.0
                
                
                
                329,399
                
                
                
                100.0
                
                
                
                302,809
                
                
                
                100.0Less:Deferred
      loan fees, net
                
                
                256
                
                
                
                
                
                
                
                322
                
                
                
                
                
                
                
                407
                
                
                
                
                
                
                
                633
                
                
                
                
                
                
                
                827Allowance
      for loan losses
                
                
                4,203
                
                
                
                
                
                
                
                3,682
                
                
                
                
                
                
                
                3,244
                
                
                
                
                
                
                
                2,795
                
                
                
                
                
                
                
                2,764Total
      net loans
                
                
                407,751
                
                
                
                
                
                
                
                381,317
                
                
                
                
                
                
                
                362,733
                
                
                
                
                
                
                
                325,971
                
                
                
                
                
                
                
                299,218





(a)
            Residential
      real estate loans do not include mortgage loans sold to Fannie Mae and
      service by ENB.  These loans totaled $11,058,000 as of December
      31, 2008, $9,975,000 as of December 31, 2007, $9,358,000 as of December
      31, 2006, and $5,412,000 as of December 31, 2005. There were no loans sold
      and serviced as of December 31,
2004.





44
 Table of Contents


ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





The
composition of the loan portfolio has had minor changes in recent
years.  Real estate loans comprised more than 75% of loans for each of
the last five years.   Residential real estate is the largest
category of the loan portfolio and includes first mortgages, second mortgages,
and home equity loans.  The residential real estate loans as a
percentage of the total portfolio had been slowly trending downward, from over
41% in 2005 to a low of 39.2% as of December 31, 2007.  In late 2008,
the pace of residential real estate loan growth increased as mortgage rates
declined, which grew residential purpose real estate loans as a percentage of
the loan portfolio.  Commercial real estate loans have picked up in
growth as well, offsetting a reduction in commercial lending not secured by real
estate and construction loans secured by real estate.  The commercial
real estate loan growth was aided by new business gained from
competition.  The majority of banks in the Corporation’s market area
have gone to a Prime plus floor, while the Corporation continues offer prime
rate loans to the majority of corporate customers.





Residential
real estate loans, consisting of first and second mortgages and home equity
loans, comprise the largest portion of the Corporation’s total
loans.   The residential real estate category is consistently
near 40% of the total loans.  The balances in the real estate
residential category grew $12.1 million or 8.0% from December 31,
2007.  The growth during 2008 is indicative of the Corporation
originating mortgages to be held at Ephrata National as opposed to being sold to
other parties.  Given recent negative national events with regard to
the mortgage industry and large commercial banks, more consumers prefer that
their mortgage be held by a local financial institution.  Even though
the mortgage business has generally slowed, the Corporation has seen new
business from other financial institutions where borrowers are refinancing
adjustable rate instruments into traditional fixed rate
mortgages.   Management believes that there may be a slowdown in
mortgage originations as the housing market continues to weaken and the amount
of mortgages likely to be refinanced declines.





Home
equity loans have averaged from 25% to 30% of the Corporation’s residential real
estate loan portfolio. The use of home equity loans is motivated by the
favorable tax treatment of real estate secured loans compared to unsecured
loans.  During the past several years, the higher percentage of home
ownership along with sizeable gains in real estate valuations made the home
equity loan available to more borrowers. In the local area, home values have not
decreased as significantly as in other markets; however, home equity has
declined.  This means that borrowers, who have used equity in their
home already, do not have more equity to borrow against as had been the case in
prior years.  This slowed the growth of new fixed home equity
loans.  There has been a surge of borrowing against home equity lines
of credit as consumers tap into equity to maintain cash flow at rates lower than
available on fixed rate loans. The growth in home equity lines of credit more
than offset the reduction in fixed rate borrowing. Management believes that the
potential for new home equity loans and extensions on lines of credit will be
relatively stagnate for the next year as most available equity has been utilized
and consumers are pulling back on discretionary spending due to the state of the
economy.





Commercial
real estate loans grew $28.5 million, or 22.9%, while commercial loans not
secured by real estate declined $3.6 million or 5.0%, during the year from
December 31, 2007, to December 31, 2008.  In the current credit
environment, with economic uncertainty, any new loans and extensions of credit
to commercial borrowers is generally done with the backing of real estate as
collateral. Loans secured with real estate provide better protection in cases
where a business defaults.  The Corporation provides credit to many
small and medium sized businesses.  The Corporation’s market area is
very diverse and generally has a healthy economic climate; however, when a
national economic decline is substantial and ongoing, the local economy is
impacted.  Management anticipates that the commercial real estate loan
growth will slow in 2009 due to the state of the broader and local
economy.





A large
portion of the Corporation’s recent commercial real estate growth has been
generated in agricultural lending.  Another segment experiencing
growth is Prime-based variable loans.  The Prime rate stood at 5.00%
at the end of September of 2008, and was further reduced to 4.00% by the end of
October 2008 and declined to 3.25% by mid- December 2008.  As a
result, the Prime rate has been well below commercial fixed
rates.  Businesses see the advantage of converting their fixed rate
loans to variable rate loans at these historically low interest rates to reduce
their costs, therefore, the Corporation is seeing some shifting of fixed to
variable products within the business and commercial segment of the loan
portfolio.  When the Prime rate moves substantially off of the current
lows, it is likely that businesses will refinance from variable rate loans to
fixed rate loans to avoid even higher rates.





The
consumer loan portfolio has declined in recent years as home owners have turned
to equity in their homes to finance cars and education, rather than traditional
loans for those expenditures.  Additionally, specialized lenders have
emerged for consumer needs.  From December 31, 2007, through December
31, 2008, consumer loans remained flat decreasing by only
$9,000.   Due to current liquidity conditions, specialized
lenders began pulling back on the availability of credit and more favorable
credit terms. Underwriting standards of major financing and credit card
companies began to strengthen after years of lower credit
standards.  This led consumers to seek unsecured credit away from home
equity loans and national finance companies and back to their bank of
choice.  Management has seen the need for additional unsecured credit
accelerate in the third and fourth quarter of 2008.  Management
anticipates that the need for unsecured





45
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


credit
will grow during this current credit crisis and economic downturn as many
consumers need to access all available credit and their other sources of real
estate secured credit are not available due to declines in collateral
value.





Management
does not anticipate that the loan portfolio composition will change materially
in 2009.





The
following tables show the maturities for the loan portfolio and the loans, which
are floating or fixed maturing after one year.





LOAN
MATURITIES


(DOLLARS
IN THOUSANDS)





Due
      in One Year or Less
                    
                    
                    Due
      After One Year Through Five Years
                    
                    
                    Due
      After Five Years
                    
                    
                    Total$
                    
                    
                    $
                    
                    
                    $
                    
                    
                    $Real
      estate (a)Residential
                    
                    
                    11,120
                    
                    
                    
                    13,241
                    
                    
                    
                    138,715
                    
                    
                    
                    163,076Commercial
                    
                    
                    16,320
                    
                    
                    
                    5,271
                    
                    
                    
                    131,351
                    
                    
                    
                    152,942Construction
                    
                    
                    5,953
                    
                    
                    
                    3,943
                    
                    
                    
                    3,644
                    
                    
                    
                    13,540Commercial
                    
                    
                    21,962
                    
                    
                    
                    21,610
                    
                    
                    
                    28,193
                    
                    
                    
                    71,765Consumer
                    
                    
                    2,752
                    
                    
                    
                    7,991
                    
                    
                    
                    144
                    
                    
                    
                    10,887Total
      amount due
                    
                    
                    58,107
                    
                    
                    
                    52,056
                    
                    
                    
                    302,047
                    
                    
                    
                    412,210








FIXED AND
FLOATING LOANS DUE AFTER ONE YEAR


(DOLLARS
IN THOUSANDS)





Floating
      orFixed
      Rates
                  
                  
                  Adjustable
      Rates$
                  
                  
                  $Real
      estateResidential
                  
                  
                  137,588
                  
                  
                  
                  14,368Commercial
                  
                  
                  9,386
                  
                  
                  
                  127,236Construction
                  
                  
                  287
                  
                  
                  
                  7,301Commercial
                  
                  
                  48,567
                  
                  
                  
                  1,235Consumer
                  
                  
                  8,135
                  
                  
                  
                  -Total
      amount due
                  
                  
                  203,963
                  
                  
                  
                  150,140




The
majority of the Corporation’s 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 10, 15
or 20 years.   Commercial mortgages have maturities that range
from 3 years to 25 years.  The most popular commercial mortgage term
is a 20-year amortization with a 5-year reset period.  In this case,
the loan matures in twenty years but after five years either the loan rate
resets to the Prime rate or a fixed rate for another reset
period.  The original maturity date does not
change.  Customers will generally opt for another fixed reset period
and can refinance at this point.





Out of
all the loans due after one year, 57.6% are fixed rate loans.  These
loans will not reprice to a higher or lower interest rate unless they mature or
are refinanced by the borrower.  Floating or adjustable rate loans
reflect different types of repricing.  Approximately 47% of the $150
million of floating or adjustable loans due after one year are true floating
loans. These loans are tied to the Prime rate and will reprice when the Prime
rate changes, with no floors in place as of December 31,
2008.   The other 53% of the floating or adjustable loans due
after one year are adjustable in nature and will reprice at a predetermined time
in the amortization of the loan. These loans are mostly real estate commercial
loans and typically will only reprice once over the life of the
loan.





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 Disclosure
about Market Risk.





46
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


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
      31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004$
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $Non-accrual
      loans
                        
                        
                        1,248
                        
                        
                        
                        425
                        
                        
                        
                        548
                        
                        
                        
                        544
                        
                        
                        
                        757Loans
      past due 90 days or more and still accruing
                        
                        
                        531
                        
                        
                        
                        498
                        
                        
                        
                        342
                        
                        
                        
                        53
                        
                        
                        
                        42Troubled
      debt restructurings
                        
                        
                        1,641
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      non-performing loans
                        
                        
                        3,420
                        
                        
                        
                        923
                        
                        
                        
                        890
                        
                        
                        
                        597
                        
                        
                        
                        799Other
      real estate owned
                        
                        
                        520
                        
                        
                        
                        675
                        
                        
                        
                        698
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      non-performing assets
                        
                        
                        3,940
                        
                        
                        
                        1,598
                        
                        
                        
                        1,588
                        
                        
                        
                        597
                        
                        
                        
                        799Non-performing
      assets to net loans
                        
                        
                        0.97
                        %
                        
                        
                        0.42
                        %
                        
                        
                        0.44
                        %
                        
                        
                        0.18
                        %
                        
                        
                        0.27
                        %








Non-performing
assets increased $2.3 million from December 31, 2007 to December 31,
2008.  This increase primarily resulted from the addition of two loans
totaling $1,641,000 to a borrower and a related interest, shown as troubled debt
restructurings above.  In addition, an $883,000 line of credit to a
related interest was placed on non-accrued status.  All three loans
are secured by real estate assets.  These loans are for real estate
development.  The loans were restructured by allowing the borrower to
pay interest only for a period of four months beginning in 2009.  The
interest rate was changed from fixed to a floating rate.  The final
maturity of the loan was not extended.  After four months the borrower
is to again make principal and interest payments and the interest rate will
increase back to the original contract rate.  The developer had home
lots under contract with a builder; however approval from the municipality had
not been obtained and the builder pulled out of the contract prior to December
31, 2008.  In regard to these facts, the Corporation made concessions
on the original terms of the loans by allowing restructuring of the
loans.





The
non-accrual loans increased by $823,000, primarily due to the addition of the
$883,000 mentioned above.  Meanwhile, loans past 90 days or more and
still accruing have increased marginally. The Corporation has seen an uptick in
delinquencies in the shorter time frames; however they have not migrated into
longer delinquencies.  This means that customers are still making the
payments, but on a late basis. Management is monitoring delinquency trends
closely.  At this time, management believes that the potential for
significant losses related to non-performing loans is minimal but
increasing.





As of
December 31, 2008, other real estate owned (“OREO”) is shown at a recorded fair
market value, net of anticipated selling costs, of $520,000.  The
balance consists of one manufacturing property that has been in OREO since
December of 2006.  This property is under an agreement of sale, the
second agreement of sale negotiated on this property since late
2007.  A new agreement of sale was obtained in the second quarter of
2008 with a new party for the recorded value of the property, after the first
agreement of sale expired.  Settlement on the sale has been deferred,
pending the completion of a due-diligence period whereby the property meets all
contingencies of the agreement.








Allowance
for Loan Losses





The
allowance for loan 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 loan
losses.  This calculation is based upon a systematic methodology for
determining the allowance for loan losses in accordance with 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 delinquent and non-performing
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





47
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


will
adjust the allowance for loan losses through the provision as
necessary.  Changes to the allowance for loan losses during the year
are primarily affected by three events:




·
            Charge
      off of loans considered not
recoverable


·
            Recovery
      of loans previously charged off


·
            Provision
      for loan loss





Strong
credit and collateral policies have been instrumental in producing a favorable
history of loan losses. The Allowance for Loan Losses table below shows the
activity in the allowance for loan losses for each of the past five
years.  At the bottom of the table two benchmark percentages are
shown.  The first is net charge-offs as a percentage of average loans
outstanding for the year.  The second is the total allowance for loan
losses as a percentage of total loans.





ALLOWANCE
      FOR LOAN LOSSES(DOLLARS
      IN THOUSANDS)





December
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $Balance
      at January 1,
                  
                  
                  3,682
                  
                  
                  
                  3,244
                  
                  
                  
                  2,795
                  
                  
                  
                  2,764
                  
                  
                  
                  2,397Loans
      charged off:Real
      estate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  419
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
      and industrial
                  
                  
                  150
                  
                  
                  
                  925
                  
                  
                  
                  372
                  
                  
                  
                  79
                  
                  
                  
                  43Consumer
                  
                  
                  91
                  
                  
                  
                  153
                  
                  
                  
                  111
                  
                  
                  
                  171
                  
                  
                  
                  154241
                  
                  
                  
                  1,078
                  
                  
                  
                  902
                  
                  
                  
                  250
                  
                  
                  
                  197Recoveries
      of loans previously charged off:Real
      estate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Commercial
      and industrial
                  
                  
                  69
                  
                  
                  
                  19
                  
                  
                  
                  11
                  
                  
                  
                  13
                  
                  
                  
                  1Consumer
                  
                  
                  24
                  
                  
                  
                  51
                  
                  
                  
                  64
                  
                  
                  
                  47
                  
                  
                  
                  2393
                  
                  
                  
                  70
                  
                  
                  
                  75
                  
                  
                  
                  60
                  
                  
                  
                  24Net
      loans charged off
                  
                  
                  148
                  
                  
                  
                  1,008
                  
                  
                  
                  827
                  
                  
                  
                  190
                  
                  
                  
                  173Provision
      charged to operating expense
                  
                  
                  669
                  
                  
                  
                  1,446
                  
                  
                  
                  1,276
                  
                  
                  
                  390
                  
                  
                  
                  540Allowance
      reclassified to other liabilities for off-balance sheet
      commitments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (169
                  )
                  
                  
                  -Balance
      at December 31,
                  
                  
                  4,203
                  
                  
                  
                  3,682
                  
                  
                  
                  3,244
                  
                  
                  
                  2,795
                  
                  
                  
                  2,764Net
      charge-offs as a %of average total loans outstanding
                  
                  
                  0.04
                  
                  
                  
                  0.27
                  
                  
                  
                  0.24
                  
                  
                  
                  0.06
                  
                  
                  
                  0.06Allowance
      at year end as a % of total loans
                  
                  
                  1.02
                  
                  
                  
                  0.96
                  
                  
                  
                  0.89
                  
                  
                  
                  0.85
                  
                  
                  
                  0.92








Charge-offs
for the year ended December 31, 2008, were $241,000 compared to $1,078,000 for
the same period in 2007.  The charge-offs in 2008 represent a more
typical level of consumer loan and small business loan charge-offs that would
result from management charging off unsecured debt over 90 days delinquent with
little likelihood of recovery.  The significantly higher charge-offs
in 2007 resulted from two commercial loans totaling $844,000 being charged off
in the first quarter 2007 when the business ceased operations.  In
2008, a $50,000 recovery was made on the $844,000 written off during
2007.





Through
December 31, 2008, the Corporation provided $669,000 to the allowance for loan
losses, compared to $1,446,000 in the same period of 2007.  The
provision is used to increase the allowance for loan losses at a pace similar to
the growth of the loan portfolio. The additional provision in 2007 was to
partially offset the reduction to the allowance for loan losses caused by the
charge offs.





The
allowance as a percentage of total loans represents the portion of the total
loan portfolio for which an allowance has been provided.  For the five
year period from 2003 through 2007, the Corporation maintained an allowance as a
percentage of loans in a narrow range between 0.84% and 0.96%.  In
2008, the percentage has increased from 0.96% at the beginning of the year, to
1.02% as of December 31, 2008.  The composition of the Corporation’s
loan portfolio has





48
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


not
changed materially from 2007 to 2008; however, management views the overall risk
profile of the portfolio to be higher in 2008, as a result of more loans
classified as substandard and special mention.  These classifications
require larger provision amounts due to a higher potential risk of
loss.  Management anticipates maintaining the allowance as a
percentage of total loans above 1.00% for the foreseeable future.





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 management’s strong credit practices. The
0.04% shown for the year 2008 is similar to charge off rates experienced in 2004
and 2005.





The
following table provides the allocation of the Corporation’s allowance for loan
losses amount by major loan classifications.  The percentage of loans
indicates what percentage that loan type makes up of the entire loan portfolio.
The reserve associated with real estate loans increased substantially from
December 31, 2007, to December 31, 2008, coinciding with the increase in real
estate loans as a percentage of the total loan portfolio. Real estate loans
include residential and commercial real estate.  The vast majority of
the Corporation’s non-performing loans are secured by real estate; therefore, a
higher percentage of the allowance is dedicated toward these
loans.  On December 31, 2007, 42.3% of the allowance was allocated to
real estate loans.  On December 31, 2008, 54.6% of the allowance was
allocated to real estate loans.  The increase in the allowance to real
estate loans occurred primarily in the commercial and industrial loans secured
by real estate.  In the Corporation’s market area the current economic
conditions have impacted certain segments of the commercial customers where as
the Corporation has experienced very little delinquencies on personal
residential real estate.  Since commercial loans are usually larger in
dollar amount, the potential for loss from commercial real estate is
greater.  Commercial and industrial loans not secured by real estate
declined as a percentage of total loans as did the allocation of the allowance
associated with these loans.





This
allocation may change as the mix of delinquent and substandard classified loans
within the portfolio changes.  In total, the allowance for loan losses
is maintained at a level considered by management to be adequate to provide for
losses that can be reasonably anticipated.





ALLOCATION
OF RESERVE


(DOLLARS
IN THOUSANDS)





December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004%
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of$
                
                
                Loans
                
                
                $
                
                
                Loans
                
                
                $
                
                
                Loans
                
                
                $
                
                
                Loans
                
                
                $
                
                
                LoansReal
      estate
                
                
                2,293
                
                
                
                80.0
                
                
                
                1,558
                
                
                
                77.7
                
                
                
                1,654
                
                
                
                77.5
                
                
                
                1,327
                
                
                
                76.5
                
                
                
                1,162
                
                
                
                77.4Commercial
      and industial
                
                
                1,727
                
                
                
                17.4
                
                
                
                1,768
                
                
                
                19.5
                
                
                
                1,291
                
                
                
                19.2
                
                
                
                968
                
                
                
                19.5
                
                
                
                1,157
                
                
                
                18.0Consumer
                
                
                155
                
                
                
                2.6
                
                
                
                166
                
                
                
                2.8
                
                
                
                299
                
                
                
                3.3
                
                
                
                236
                
                
                
                4.0
                
                
                
                246
                
                
                
                4.6Unallocated
                
                
                28
                
                
                
                -
                
                
                
                190
                
                
                
                -
                
                
                
                0
                
                
                
                -
                
                
                
                264
                
                
                
                -
                
                
                
                199
                
                
                
                -Total
      allowance for loan losses
                
                
                4,203
                
                
                
                100.0
                
                
                
                3,682
                
                
                
                100.0
                
                
                
                3,244
                
                
                
                100.0
                
                
                
                2,795
                
                
                
                100.0
                
                
                
                2,764
                
                
                
                100.0





Premises
and Equipment





Premises
and equipment, net of accumulated depreciation, increased by $2,103,000 to
$19,913,000 on December 31, 2008, from $17,810,000, as of December 31,
2007.  In 2008 $3,206,000 of new investments were made in premises and
equipment while the Corporation recorded $1,103,000 of accumulated depreciation
on existing assets.  During 2008, a new branch facility located in
Penn Township was constructed with building, equipment and furnishings for the
branch totaling $2.8 million.  As of December 31, 2008, $97,000
classified as construction in process. The construction in process includes
initial payments for renovations at the Denver Office and Main Office locations.
For further information on fixed assets please see Note D to the Financial
Statements and for construction commitments see the off balance sheet
arrangements section.





Bank
Owned Life Insurance (BOLI)





The
Corporation owned life insurance with a total recorded cash surrender value
(“CSV”) of $14,512,000 as of December 31, 2008, compared to $13,871,000 on
December 31, 2007.  The Corporation holds two distinct BOLI
programs.  The first with a CSV of $3,573,000 was the result of
insurance policies taken out on directors of Ephrata National Bank electing to
participate in a directors deferred compensation plan.  The program
was designed 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 plan was closed to entry in 1999 when
directors were no longer provided with the option of deferring their board
pay.  The Corporation pays the required premiums for the policies
and





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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


is the
owner and beneficiary of the policies. The life insurance policies in the plan
generally have annual premiums; however, the premium payments are not required
after the first five years.  The Corporation continues to make the
premium payments, which cover the cost of the insurance and generally adds to
the cash surrender value of the policy.





The
second BOLI plan was taken out on a select group of the Corporation’s officers,
with the additional income generated used to offset rising personnel costs. The
CSV for this plan increased to $10,939,000 as of December 31, 2008 from
$10,467,000 as of December 31, 2007. The increase resulted solely from the
returns on the insurance policy investment. The Corporation purchased whole life
policies for this BOLI plan and is the owner and beneficiary of the
policies.  Management does not anticipate purchasing any additional
BOLI in 2009.





Deposits





The
Corporation’s total ending deposits increased $32.4 million, or 6.8%, from
$478.7 million on December 31, 2007, to $511.1 million on December 31,
2008.  Customer deposits are the Corporation’s primary source of
funding for loans and investments.  This year the economic concerns
and poor performance of other types of investments led customers back to banks
for safe places to invest money, in spite of low interest rates. The mix of
deposit categories has remained relatively stable.





The
Deposits by Major Classification table, shown below, provides the average
balances and rates paid on each deposit category for each of the past three
years.  The average 2008 balance carried on all deposits was $497.5
million compared to $468.1 million for 2007.  This represents an
increase of 6.3% on average deposit balances.  The increase of average
deposit balances from 2006 to 2007 was 3.0%.  Average balances provide
a more accurate picture of growth in deposits because deposit balances can vary
throughout the year.  In addition, the interest paid is based on
average deposit balances carried during the year calculated on a daily
basis.





DEPOSITS
BY MAJOR CLASSIFICATION


(DOLLARS
IN THOUSANDS)








Average
balances and average rates paid on deposits by major category are summarized as
follows:





December
      31,2008
                
                
                2007
                
                
                2006$
                
                
                %
                
                
                $
                
                
                %
                
                
                $
                
                
                %Non-interest
      bearing demand deposits
                
                
                106,029
                
                
                
                -
                
                
                
                98,228
                
                
                
                -
                
                
                
                94,005
                
                
                
                -NOW
      accounts
                
                
                60,098
                
                
                
                1.23
                
                
                
                54,960
                
                
                
                1.62
                
                
                
                50,966
                
                
                
                1.75Money
      market deposit accounts
                
                
                39,516
                
                
                
                1.25
                
                
                
                41,001
                
                
                
                2.06
                
                
                
                43,008
                
                
                
                2.36Savings
      deposits
                
                
                72,049
                
                
                
                0.42
                
                
                
                68,956
                
                
                
                0.55
                
                
                
                69,679
                
                
                
                0.66Time
      deposits
                
                
                219,769
                
                
                
                4.07
                
                
                
                204,947
                
                
                
                4.38
                
                
                
                196,718
                
                
                
                3.90Total
      deposits
                
                
                497,461
                
                
                
                
                
                
                
                468,092
                
                
                
                
                
                
                
                454,376








The
growth and mix of deposits is often driven by several factors
including:


·
            Convenience
      and service provided


·
            Fees


·
            Permanence
      of the institution


·
            Possible
      risks associated with other investment
  opportunities


·
            Current
      rates paid on deposits compared to competitor
  rates





The
Corporation has been a stable presence in the local area and offers convenient
locations, low service fees and competitive interest rates because of a strong
commitment to the customers and the communities that it
serves.   Management has always priced products and services in a
manner that makes them affordable for all customers.  This in turn
creates a high degree of customer loyalty, which has provided stability to the
deposit base.  Additionally, there were two bank mergers completed
recently.  The Corporation’s deposit base increase as a result of on
the merger activity in the local area, there are some disenfranchised customers
who seek the services of a community bank, and consequently, the deposit base
increased for the Corporation. Additionally, a new branch location opened in
September 2008, which assisted in deposit growth.





The
Corporation’s core deposits, including non-interest bearing demand deposits, NOW
accounts, MMDA accounts and Savings accounts based on average balances grew
$14.6 million, or 5.5%, since December 31, 2007.   Out of these
core deposit categories, all experienced growth except the
MMDAs.  Several converging factors are assisting in the
increase





50
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


of core
deposits.  Interest rates are at historic lows across all terms but
customers are trying to build more liquid funds to meet cash flow needs in a
slowing economy.  The safety of FDIC insured funds and immediate, or
nearly immediate, funds in the current environment appear to be more of a
concern to customers than interest rates.  Additionally, the concern
over the stability of some larger financial institutions and banks has led
customers seeking security to community banks with high levels of capital and
long-standing reputations.





Time
deposits are typically a more rate sensitive product making it 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. Due to current adequate funding levels from all sources, the
Corporation’s recent time deposit strategy has been to offer rates that meet or
slightly exceed the average rates offered by the local competing
banks.  The Corporation did benefit earlier in 2008 when consumers
were concerned with a declining stock market, and the time deposit rates of the
Corporation compared very favorably to local competition.  Time
deposit growth continued to be aided in the remainder of 2008 by the very
volatile and weak stock market in recent months.  This condition
continues to prevail at the time of the writing of this filing.  Time
deposits are a safe investment with FDIC coverage insuring no loss of principal
below certain levels.  Up until October 3, 2008 FDIC coverage was
$100,000 non IRA time deposits and $250,000 on IRA time
deposits.  Effective October 3, 2008, the FDIC insurance increased to
$250,000 for all deposit accounts with the signing of the Emergency Economic
Stabilization Act of 2008.  The higher FDIC insurance limits benefited
the Corporation due to its strong level of capital and consistent
earnings.  In this environment, the Corporation experienced time
deposit growth due to weak earnings and/or capital levels of competing national,
regional, and local community banks.  Often as customers placed more
and more time deposits in financial institutions, due to the declining stock
market, they did not want to exceed the FDIC insurance limits and therefore the
Corporation gained many new time deposit customers.  The culmination
of all of these conditions contributed to the $14.8 million or 7.2% increase in
time deposits between December 31, 2007, and December 31, 2008.





The
majority of the time deposit growth achieved in 2008 was in terms less than 18
months, which have lower rates than longer term time deposits, indicating that
customers are not looking for long-term investments with the best return, but
shorter safe investments.  Management expects that when equity
investments begin to rebound in performance there will be a reduction in the
Corporation’s time deposits.





As of
December 31, 2008, time deposits over $100,000 made up 24.3% of the total time
deposits.  This compares to 19.3% on December 31,
2007.  Since time deposits over $100,000 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.
Management believes the growth in time deposits over $100,000 was due primarily
to an increase in the FDIC insurance levels and to a lesser degree the weak
equity markets.  The following table provides the total amount of time
deposits of $100,000 or more for the past three years by maturity
distribution.





MATURITY
OF TIME DEPOSITS OF $100,000 OR MORE


(DOLLARS
IN THOUSANDS)





December
      31,2008
                  
                  
                  2007
                  
                  
                  2006$
                  
                  
                  $
                  
                  
                  $Three
      months or less
                  
                  
                  14,545
                  
                  
                  
                  5,281
                  
                  
                  
                  3,613Over
      three months through six months
                  
                  
                  2,998
                  
                  
                  
                  3,756
                  
                  
                  
                  10,575Over
      six months through twelve months
                  
                  
                  17,905
                  
                  
                  
                  13,337
                  
                  
                  
                  8,469Over
      twelve months
                  
                  
                  20,583
                  
                  
                  
                  16,759
                  
                  
                  
                  13,691Total
                  
                  
                  56,031
                  
                  
                  
                  39,133
                  
                  
                  
                  36,348








In order
to meet future funding obligations it is necessary to review the timing of
maturity for large depositors like the time deposits of $100,000 or
more.  The Corporation monitors all large depositors to ensure that
there is a steady flow of maturities.  As of December 31, 2008, the
Corporation had a typical laddering of large time deposits, with the exception
of slightly more being due in three months or less. The reason for more than
usual maturing in the three month time frame is that many customers are waiting
and hoping that rates will rise in the short term, prior to locking in rates for
a longer period of time. For more information on liquidity management please see
Item 7A. Quantitative and Qualitative Disclosure about Market
Risk.  Additionally, for more information on the maturity of the time
deposits, see Note E to the Financial Statements.





51
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


Borrowings





Total
borrowings were $103.8 million and $82.1 million as of December 31, 2008, and
2007 respectively.  The Corporation was purchasing short-term funds of
$11.8 million at the end of 2008 compared to $100,000 million as of December 31,
2007. Short-term funds are used for immediate liquidity needs and are not
typically part of an ongoing liquidity or interest rate risk strategy;
therefore, they fluctuate more rapidly.  At the end of 2008, the short
term borrowings were split between the Federal Home Loan Bank (“FHLB”) and
overnight funds through correspondent banking relationships.





Long-term
borrowings increased $10.0 million from December 31, 2007, to December 31,
2008.  The Corporation uses two main sources for long-term
borrowings:  FHLB and repurchase agreements through brokers or
correspondent banks.  Both of these types of borrowings are used as a
secondary source of funding and to mitigate interest rate
risk.  Management will continue to analyze and compare the costs and
benefits of borrowing versus obtaining funding from deposits.





Total
FHLB borrowings were $67.0 million as of December 31, 2008, compared to $62.0
million as of December 31, 2007.  The FHLB borrowings increase related
to one additional $5.0 million loan taken out during 2008. In addition, several
loans that matured were replaced with new loans, reducing the rates paid on the
borrowings. The borrowings with FHLB are primarily fixed-rate loans. The
Corporation occasionally uses convertible select loans that give advantageous
pricing compared to fixed-rate loans; however, they generally have additional
risk due to a call feature being included on the loan.  Management
compares the length of the first call of these borrowings to the normal length
of time deposits.  Often, a convertible select borrowing from FHLB can
provide a longer period of rate protection than the term of some of the
Corporation’s typical time deposit promotions. The call feature may be based on
a time requirement or a specific rate requirement.  As of December 31,
2008, the Corporation held $25.0 million of convertible select loans, the same
level as December 31, 2007.





As of
December 31, 2008, the Corporation held $30.0 million of repurchase agreements
compared to $20.0 million as of December 31, 2007.  Two additional
repurchase agreements for $5.0 million each were added in 2008.  One
repurchase agreement totaling $5.0 million was a two year advance with no call
provision.  The other $5.0 million was a convertible callable
structure with one year of call protection. The remaining $20 million of
repurchase agreements that existed on December 31, 2008 and were in existence on
December 31, 2007, all have some call feature, much like FHLB convertible select
loans.  All of the callable repurchase agreements had an initial
period where no call could occur.  However, all of the $20 million of
callable repurchase agreements are now into their call period where calls could
occur on a quarterly basis.  It is unlikely any of the callable
repurchase agreements will be called in the near future as their rates are well
above market rates for the same term.  Two of the repurchase
agreements existing prior to 2008, totaling $10 million are in a back-end fixed
rate with a quarterly call, whereas the two other repurchase agreements are at a
floating rate that resets quarterly with a call provision. The interest rates on
callable repurchase agreements are more favorable than non-callable long-term
fixed rates; therefore these instruments assist the Corporation in increasing
net interest margin.  In all cases, the rate advantage of callable
borrowing structures is weighed against any additional interest rate risk
exposure taken compared to non-callable borrowing
structures.  Management views repurchase agreement transactions as a
diversification of funding outside of the FHLB, because principally the same
funding structures can be obtained from FHLB.  Management monitors the
amount of convertible select loans that could be called in any one year to
ensure that the Corporation does not have a concentrated amount of call risk in
any one year





In order
to limit the Corporation’s exposure and reliance to a single funding source, the
Corporation’s Asset Liability Policy sets a goal of maintaining the amount of
borrowings from the FHLB to 15% of asset size.  As of December 31,
2008, the Corporation was within this policy guideline at 10.5% of asset size
with $72.0 million of total FHLB borrowings.   The Corporation
also has a policy that limits total borrowing from all sources to 150% of the
Corporation’s capital.  As of December 31, 2008, total borrowings from
all sources amounted to 152.5% of the Corporation’s capital, slightly exceeding
the guideline.  The Corporation has maintained FHLB borrowings and
total borrowings within these throughout most of the year.  There was
an increase in short term borrowings at the end of the year to fund a large
loan.  Subsequent to year end and prior to this filing both ratios are
within guidelines, and management expects borrowings to be maintained within
policy guidelines.





The
Corporation continues to be well under the FHLB maximum borrowing capacity
(MBC), which is currently $324.3 million.  The Corporation’s two
internal policy limits are far more restrictive than the FHLB MBC, which is
calculated and set quarterly by FHLB.  Due to recent circumstances in
the financial and mortgage sectors, FHLB has been under regulatory and operating
performance pressures and has taken steps to preserve capital.  As a
result, FHLB has suspended the dividend paid on stock owned by banks that have
FHLB borrowings.  Additionally, FHLB will no longer





52
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


repurchase
excess stock if a bank reduces its borrowings.  For this reason,
management is committed to maintaining current borrowing levels, but not placing
more reliance on FHLB for additional borrowings.





Stockholders’
Equity





Federal
regulatory authorities require banks to meet minimum capital
levels.  The Corporation maintains capital ratios well above those
minimum levels and higher than the peer group average.  The
risk-weighted capital ratios are calculated by dividing capital by the
risk-weighted assets.  Regulatory guidelines determine the
risk-weighted assets by assigning assets to one of four risk-weighted
categories.  The calculation of Tier I Capital to Risk Weighted Assets
includes a reduction to capital for the Allowance for Loan Losses, thereby,
making this ratio lower than the Total Capital to Risk-Weighted Assets
ratio.  See Notes H and M to the Financial Statements for additional
information on capital transactions.





The
following table reflects the Corporation’s capital ratios compared to the
regulatory capital requirements.





Regulatory
      Capital Ratios
                        
                        Capital
      Ratios
                        
                        
                        Regulatory
      RequirementsAs
      of Dec. 31, 2008
                        
                        
                        As
      of Dec. 31, 2007
                        
                        
                        As
      of Dec. 31, 2006
                        
                        
                        Adequately
      Capitalized
                        
                        
                        Well
      CapitalizedTotal
      Capital to Risk-Weighted Assets
                        
                        
                        16.2
                        %
                        
                        
                        16.6
                        %
                        
                        
                        17.4
                        %
                        
                        
                        8.0
                        %
                        
                        
                        10.0
                        %Tier
      I Capital to Risk-Weighted Assets
                        
                        
                        15.2
                        %
                        
                        
                        15.8
                        %
                        
                        
                        16.6
                        %
                        
                        
                        4.0
                        %
                        
                        
                        6.0
                        %Tier
      I Capital to Average Assets
                        
                        
                        10.1
                        %
                        
                        
                        10.9
                        %
                        
                        
                        11.1
                        %
                        
                        
                        4.0
                        %
                        
                        
                        5.0
                        %








The high
level of capital maintained by the Corporation provides a greater degree of
financial security and acts as a non-interest bearing source of
funds.  Conversely, a high level of capital, also referred to as
equity, makes it more difficult for the Corporation to improve return on average
equity, which is a benchmark of shareholder return.  The Corporation’s
capital is affected by earnings, the payment of dividends, changes in
accumulated comprehensive income or loss, and equity transactions.





Total
dividends paid to shareholders for the 2008, were $3,549,000 or $1.24 per share,
compared to $3,453,000 or $1.21 per share paid to shareholders during the same
period in 2007.  The Corporation uses current earnings and available
retained earnings to pay dividends.  The Corporation’s current capital
plan calls for management to maintain Tier I Capital to average assets between
9.0% and 12.0%.  Management also desires a dividend payout ratio
between 40% and 50%.  This ratio will vary according to income, but
over the long term management’s goal is to average a payout ratio in this
range.  For 2008, the dividend payout ratio was
88.40%.  Management anticipates that the payout ratio for the year
2009 will be lower, but still above the target of between 40% and
50%.





The
amount of unrealized gain or loss on the Corporation’s securities portfolio is
reflected, net of tax, as an adjustment to capital, as required by Statement of
Financial Accounting Standards No. 115.   This is recorded as
accumulated other comprehensive income in the capital section of the
Corporation’s balance sheet.  An unrealized gain increases the
Corporation’s capital while an unrealized loss reduces the Corporation’s
capital.  This requirement takes the position that if the Corporation
liquidated at the end of each period, the current unrealized gain or loss of the
securities portfolio would directly impact the Corporation’s
capital.  As of December 31, 2008, the Corporation showed unrealized
loss, net of tax, of $963,000, compared to unrealized losses of $181,000 on
December 31, 2007.  The changes in unrealized losses are due to normal
changes in market valuations of the Corporation’s Securities as a result of
interest rate movements.





At the
close of the period ended June 30, 2008, 130,443 shares of treasury stock held
as a result of previous stock purchase plans, less shares utilized for the
Employee Stock Purchase Plan and Dividend Reinvestment Plan, were
retired.  The retirement of treasury shares was required as part of
the formation of ENB Financial Corp.  Treasury shares act as a
reduction to capital; therefore, the retirement of treasury shares into common
stock and capital surplus had no impact to the Corporation’s
capital.  Since the formation of the Corporation on July 1, 2008,
32,400 shares of treasury stock have been repurchased and 7,038 reissued with
25,362 treasury shares on December 31, 2008.





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, 2008, and shows the
future periods in which settlement of the obligations is
expected.  The contractual obligations numbers below do not include
accrued interest. Refer to the Notes to the Financial Statements referenced in
the table for additional details regarding these obligations.





53
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





CONTRACTUAL
OBLIGATIONS


(DOLLARS
IN THOUSANDS)





Total
                        
                        
                        Less
      than 1 year
                        
                        
                        1-3
      years
                        
                        
                        4-5
      years
                        
                        
                        More
      than 5 years$
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $Time
      deposits (Note E)
                        
                        
                        230,949
                        
                        
                        
                        135,813
                        
                        
                        
                        75,178
                        
                        
                        
                        19,958
                        
                        
                        
                        0Borrowings
      (Notes F and G)
                        
                        
                        97,000
                        
                        
                        
                        20,000
                        
                        
                        
                        37,000
                        
                        
                        
                        17,500
                        
                        
                        
                        22,500Total
      contractual obligations
                        
                        
                        327,949
                        
                        
                        
                        155,813
                        
                        
                        
                        112,178
                        
                        
                        
                        37,458
                        
                        
                        
                        22,500








At the
time of writing this filing, the Corporation has a design contract in place for
renovations at the Denver Office in the amount of $128,000, of which $39,000 has
been paid subsequent to the reporting date, but prior to filing.  At
this time there is not a construction contract; however, management intends to
renovate the branch in 2009.  Additionally, the Main Office is under
renovation.  There is not a contract for these renovations, but the
estimated costs are $150,000 and renovations are anticipated to be completed in
the first quarter of 2009.





Management
signed a contract in March of 2008 with the Corporation’s core processing vendor
to conduct a comprehensive business processing improvement (“BPI”)
engagement.  The majority of the engagement occurred over the six
month period beginning in July of 2008.  Benefits are to be realized
beginning in the final quarter of 2008 with an acceleration of benefits to occur
in 2009 and subsequent years.   The financial goal of the BPI is
to obtain $1.4 million to $2.2 million of annual pretax benefit through
operational cost savings and revenue enhancements.  The strategic goal
of the BPI engagement is to be a more efficient organization, with better
customer service, at increased levels of profitability. The fees for the entire
BPI engagement are expected to be $756,000 plus travel related expenses; billed
through April 2009 at a rate of $68,700 per month.  The majority of
the travel related expenses have been paid.





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 Bank has in place sufficient liquidity
alternatives to meet these obligations. The following table presents information
on the commitments by the Bank as of December 31, 2008.  For further
details regarding off balance sheet arrangements, refer to Note O to the
Financial Statements.







OFF-BALANCE
      SHEET ARRANGEMENTS(DOLLARS
      IN THOUSANDS)December
      31,2008$Commitments
      to extend credit:Revolving
      home equity
                                
                                
                                14,651Construction
      loans
                                
                                
                                11,095Real
      estate loans
                                
                                
                                5,019Business
      loans
                                
                                
                                45,950Consumer
      loans
                                
                                
                                3,008Other
                                
                                
                                3,530Standby
      letters of credit
                                
                                
                                14,448Total
                                
                                
                                97,701




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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





Recently
Issued Accounting Standards





Refer to
Note A to Financial Statements for discussion on recently issued accounting
standards.








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 Loan Losses


A
material estimate that is particularly susceptible to significant change is the
determination of the allowance for loan losses.  Management believes
that the allowance for loan losses is adequate and reasonable.  The
Corporation’s methodology for determining the allowance for loan losses is
described in an earlier section of this Management’s Discussion and
Analysis.  Given the very subjective nature of identifying and valuing
loan 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 loan losses.  Such agencies may require the Corporation
to recognize adjustments to the allowance based on their judgments of
information available to them at the time of their examination.





Other
than Temporary Impairment of Investments


Investments
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 prospects for a near term recovery
of value are 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
investment.  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 our position that the
benefit of our 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 our net income will be reduced.  Our deferred tax assets are
described further in Note L of the “Notes to Consolidated Financial
Statements.”




55
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


Item7A.  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


·
            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 Strategic Plan goals.





For
discussion on credit risk, refer to the sections on non-performing assets,
allowance for loan losses, Note C and Note O to the 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.  Minimal cost is an important component of
liquidity.  If a financial institution is required to take significant
action to obtain funding, and is forced to utilize an expensive source, it has
not properly planned for its liquidity needs.  Funding new loans and
covering deposit withdrawals are the primary liquidity needs of the
Corporation.  The Corporation uses a variety of funding sources to
meet liquidity needs, such as:





·
            Deposits


·
            Loan
      repayments


·
            Maturities
      and sales of securities


·
            Borrowings
      from correspondent and member banks


·
            Repurchase
      agreements


·
            Brokered
      Deposits


·
            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 maturities are identified and assist Management in determining
potential liquidity issues. A cumulative maturity gap of 100% indicates that the
same amount of assets and liabilities are maturing within the specified
period.  While this would be ideal, loans usually have longer lives
than deposits.





The table
below shows the six-month, one-year, three-year, and five-year cumulative gaps
as of December 31, 2008, 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.





56
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ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





MATURITY
GAP ANALYSIS


(DOLLARS
IN THOUSANDS)





Maturity
      Gap
                      
                      Less
      than 6 months
                      
                      
                      More
      than 6 months to 1 year
                      
                      
                      More
      than 1 year to 3 years
                      
                      
                      More
      than 3 years to 5 years
                      
                      
                      More
      than 5 years$
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $
                      
                      
                      $Assets
      maturing
                      
                      
                      57,802
                      
                      
                      
                      50,502
                      
                      
                      
                      162,125
                      
                      
                      
                      92,286
                      
                      
                      
                      214,538Liabilities
      maturing
                      
                      
                      105,939
                      
                      
                      
                      82,733
                      
                      
                      
                      146,181
                      
                      
                      
                      92,143
                      
                      
                      
                      158,807Maturity
      gap
                      
                      
                      (48,137
                      )
                      
                      
                      (32,231
                      )
                      
                      
                      15,944
                      
                      
                      
                      143
                      
                      
                      
                      55,731Cumulative
      maturity gap
                      
                      
                      (48,137
                      )
                      
                      
                      (80,368
                      )
                      
                      
                      (64,424
                      )
                      
                      
                      (64,281
                      )
                      
                      
                      (8,550
                      )Maturity
      gap %
                      
                      
                      54.6
                      %
                      
                      
                      61.0
                      %
                      
                      
                      110.9
                      %
                      
                      
                      100.2
                      %
                      
                      
                      135.1
                      %Cumulative
      maturity gap %
                      
                      
                      54.6
                      %
                      
                      
                      57.4
                      %
                      
                      
                      80.8
                      %
                      
                      
                      84.9
                      %
                      
                      
                      98.5
                      %Cumulative
      maturity gap % guideline
                      
                      45%
      to 155
                      %
                      
                      60%
      to 140
                      %
                      
                      75%
      to 125
                      %
                      
                      85%
      to 115
                      %








As of
December 31, 2008, all except the six month to one year maturity gaps are within
Corporate Policy guidelines.  The six month to one year maturity gap
is slightly lower than guidelines indicating that the ratio of assets to
liabilities maturing in that time frame is under normal operating
levels.   Management does not desire to have large amounts of
assets repricing when interest rates are at historic lows and believes operating
with a lower one year gap is in the best interest of the
Corporation.  The risk in this situation is that should interest rates
rise rapidly than maturing liabilities will either reprice at higher rates or
leave the Bank; thereby reducing funding.  At this point in time the
risk of liabilities repricing at higher interest rates is low.  Given
the alternative investment options available, management also does not perceive
significant risk that deposits maturing in that time frame will leave the
Corporation.





The
Maturity Gap Analysis in only one of a variety of metrics used to monitor
liquidity risk.  The Corporation also monitors the availability of
alternative funding sources such as overnight borrowings, long-term borrowings
and the liquidity of the investment portfolio should the need for funding
arise.  Management believes that as of December 31, 2008, there are
sufficient sources of funding to meet liquidity needs, both current and
future.





Interest
Rate Risk and Fair Value Risk





Identifying
the interest rate risk of the Corporation’s interest-earning assets and the
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 rise or fall, given an increasing or decreasing interest rate
environment.  Net portfolio value (“NPV”) analysis measures the change
in the Corporation’s capital fair value, given interest rate fluctuations, while
interest rate sensitivity analysis (“IRSA”) measures the impact of a change in
interest rates on the net interest income and net interest
margin.  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:





·
            Changes
      in net portfolio value


·
            Changes
      in net interest income





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


·
            Prepayment
      speeds loans held and mortgage backed
securities


·
            Anticipated
      calls on securities with call
options


·
            Deposit
      and loan balance fluctuations


·
            Economic
      conditions


·
            Consumer
      reaction to interest rate changes





As a
result of the many assumptions, this information should not be relied upon to
predict future results.  Additionally, both of the analyses shown
below do not consider any action that management could take to minimize or
offset the





57
 Table of Contents




ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis


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.





The
change in net portfolio value 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 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,
2008.   As part of the Asset Liability Policy, the Board of
Directors has established risk measurement guidelines to protect the Corporation
against decreases in the net portfolio value and net interest income in the
event of interest rate changes described above. All scenarios for both 2008 and
2007 show the Corporation within ALCO guidelines.








CHANGES
IN NET PORTFOLIO VALUE





2008
      Percentage
                  
                  
                  2007
      Percentage
                  
                  
                  Policy
      GuidelinesChange
                  
                  
                  Change
                  
                  
                  %300
      basis point rise
                  
                  
                  13.7
                  
                  
                  
                  4.0
                  
                  
                  
                  (37.5
                  )200
      basis point rise
                  
                  
                  12.8
                  
                  
                  
                  3.9
                  
                  
                  
                  (25.0
                  )100
      basis point rise
                  
                  
                  7.8
                  
                  
                  
                  2.7
                  
                  
                  
                  (12.5
                  )Base
      rate scenario
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -100
      basis point decline
                  
                  
                  0.4
                  
                  
                  
                  (4.3
                  )
                  
                  
                  (12.5
                  )200
      basis point decline
                  
                  
                  (0.9
                  )
                  
                  
                  (9.0
                  )
                  
                  
                  (25.0
                  )300
      basis point decline
                  
                  
                  (0.5
                  )
                  
                  
                  (14.6
                  )
                  
                  
                  (37.5
                  )





This
table shows the effect of an immediate interest rate shock on the net value of
the Corporaton's assets and liabilities.  Base rate is the Prime
rate.








The
results for as of December 31, 2008, indicate low risk to NPV for changes in
rates.   The percentage change for all scenarios is well within
policy guidelines.  Current interest rates are so low that any change
in the values of assets and liabilities on declining rate scenarios has little
or no room to decline further; therefore, they are maintaining almost a neutral
NPV.  The minimum exposure given rates down 200 and 300 is very
unlikely to occur given that interest rates are already at historical lows and
the Federal Reserves target overnight interest rate is already down to 0.00% to
0.25%.  For lower interest rates to occur the Prime rate would have to
move independent of the overnight Federal funds rate, which has not occurred in
recent history.  Although there is some volatility as rates rise, it
indicates that the Corporation gains NPV, with the value of assets declining at
a slower rate than the decrease in the value of deposits.





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.





58
 Table of Contents


ENB
FINANCIAL CORP
 Management’s
Discussion and Analysis





CHANGES
IN NET INTEREST INCOME





2008
                  
                  
                  2007
                  
                  
                  PolicyPercentage
                  
                  
                  Percentage
                  
                  
                  GuidelinesChange
                  
                  
                  Change
                  
                  
                  %300
      basis point rise
                  
                  
                  1.6
                  
                  
                  
                  (0.5
                  )
                  
                  
                  (15.0
                  )200
      basis point rise
                  
                  
                  (0.1
                  )
                  
                  
                  (0.8
                  )
                  
                  
                  (10.0
                  )100
      basis point rise
                  
                  
                  (1.0
                  )
                  
                  
                  (0.5
                  )
                  
                  
                  (5.0
                  )Base
      rate scenario
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -100
      basis point decline
                  
                  
                  (1.1
                  )
                  
                  
                  0.3
                  
                  
                  
                  (5.0
                  )200
      basis point decline
                  
                  
                  (8.4
                  )
                  
                  
                  0.1
                  
                  
                  
                  (10.0
                  )300
      basis point decline
                  
                  
                  (16.1
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  (15.0
                  )





This
      table shows the effect of an immediate interest rate shock, over a
      one-year period on the Corporaton's net interest income.  Base
      rate is the Prime rate.








The above
analysis shows a slightly negative impact to the Corporation’s net interest
income when rates rise 100 and 200 basis points, as well as in all rate down
scenarios. In the unique current rate environment, the amount of Corporation’s
assets repricing higher will be fairly slow due to the low six month to one year
gap ratio with lower levels of assets repricing than liabilities.  On
the liability side if rates increase it is typical for management to react
slowly in increasing deposit rates.  Even when deposit rates are
increased they are typically increased at a fraction of the increase in the
Prime rate.  In the current environment, if interest rates rise it is
expected that deposit rates will move upward, but more slowly than in past rates
up cycles.  It is unlikely that rates will go down, but in the event
that they would go lower the Corporation would have exposure in the Prime based
lending segment, with those assets earning less return.  The scenarios
above show rates down 100 basis points through up 200 basis points at relatively
neutral positions.  This is indicative that even if rates move up or
down 100 basis points there would be relatively little change in net interest
income.   While rates down 200 and 300 show more net interest
income exposure, management does not see these scenarios as realistic given the
Prime rate is already at 3.25%.  This analysis focuses on immediate
rate movements, referred to as rate shocks, and measured over the course of one
year.  The Corporation’s model also has the ability to measure changes
to net interest income given interest rate changes that occur more slowly over
time.  This type of modeling is referred to as interest rate ramps,
where a set change in rates occurs over a period of
time.     If rates were to move upward slowly over the
course of the next year, the results are very close to the results using a rate
shock.  Using rate ramps the scenarios from rates up 300 basis points
to down 100 basis points are less than 1.0% different than the rate shock
scenarios.  For the rates down 200 and 300 scenarios, which are highly
unlikely, the rate ramps show about 5.0% less exposure than rate shocks
primarily because management has more time to compensate for the modeled sharp
decline in Prime.





The above
analysis also shows the Corporation’s net interest income would decrease if
rates decline.  This results from several types of deposit products‘s
current offering rates being at or near the floor for pricing.  For
instance, savings accounts were being paid .30% as of December 31,
2008.  Management is only able to reduce the rate to zero; therefore,
any reduction in the savings rate only benefits earnings in the case of a 30
basis point rate decline.  Since most loan rates would be able to
reprice lower under all three declining rate scenarios and the deposit rate
decreases are limited, the Corporation would have less earnings under a
declining rate scenario.  It is likely that management would control
the reduction in loan rates to prevent an actual reduction in net interest
income in a downward rate environment.





The
assumptions and analysis of the interest rate risk is 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.




59
 Table of Contents




ENB
FINANCIAL CORP


Item8.
              Financial
      Statements and Supplementary Data
 
 The
following audited financial statements are set forth in this Annual Report of
Form 10-K on the following pages:
  
 Index to Financial Statements and Supplementary
      Data
                  PageReport
      of Independent Registered Public Accounting Firm
                  61Balance
      Sheets
                  62Statements
      of Income
                  63Statements
      of Stockholders’ Equity
                  64Statements
      of Cash Flows
                  65Notes
      to Financial Statements
                  66
 
 60
 Table of Contents
 
 
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 ENB
Financial Corp
 
 We have
audited the accompanying consolidated balance sheets of ENB Financial Corp (the
“Corporation) and subsidiary as of December 31, 2008 and 2007, and the related
statements of income, changes in stockholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2008.  These
financial statements are the responsibility of the Corporation’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ENB Financial Corp as of December
31, 2008 and 2007, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.
 
 As
discussed in Note Q to the consolidated financial statements, effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, Fair
Value Measurements.
 
 We were
not engaged to examine management’s assertions about the effectiveness of ENB
Financial Corp’s internal control over financial reporting as of December 31,
2008, included in the accompanying “Report on Management’s Assessment of Internal Control
Over Financial Reporting” and, accordingly, we do not express an opinion
thereon.
 
 
 /s/S.R. Snodgrass,
A.C.
 
 
 Wexford,
PA
 March 9,
2009
 
 61
 Table of Contents
  
 
 BALANCE
SHEETS
 (DOLLARS
IN THOUSANDS)
 
 December
      31,2008
                  
                  
                  2007$
                  
                  
                  $ASSETSCash
      and due from banks
                  
                  
                  19,286
                  
                  
                  
                  17,201Interest-bearing
      deposits in other banks
                  
                  
                  106
                  
                  
                  
                  96Total
      cash and cash equivalents
                  
                  
                  19,392
                  
                  
                  
                  17,297Securities
      available for sale (at fair value)
                  
                  
                  214,421
                  
                  
                  
                  192,960Loans
      held for sale
                  
                  
                  245
                  
                  
                  
                  365Loans
                  
                  
                  411,954
                  
                  
                  
                  384,999Less:  Allowance
      for loan losses
                  
                  
                  4,203
                  
                  
                  
                  3,682Net
      loans
                  
                  
                  407,751
                  
                  
                  
                  381,317Premises
      and equipment
                  
                  
                  19,913
                  
                  
                  
                  17,810Regulatory
      stock
                  
                  
                  4,915
                  
                  
                  
                  4,111Bank-owned
      life insurance
                  
                  
                  14,512
                  
                  
                  
                  13,871Other
      assets
                  
                  
                  7,274
                  
                  
                  
                  6,031Total
      assets
                  
                  
                  688,423
                  
                  
                  
                  633,762LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Deposits:Noninterest-bearing
                  
                  
                  114,262
                  
                  
                  
                  107,839Interest-bearing
                  
                  
                  396,850
                  
                  
                  
                  370,887Total
      deposits
                  
                  
                  511,112
                  
                  
                  
                  478,726Short-term
      borrowings
                  
                  
                  11,800
                  
                  
                  
                  100Long-term
      debt
                  
                  
                  92,000
                  
                  
                  
                  82,000Other
      liabilities
                  
                  
                  5,466
                  
                  
                  
                  4,114Total
      liabilities
                  
                  
                  620,378
                  
                  
                  
                  564,940Stockholders'
      equity:Common
      stock, par value $0.20Shares:  Authorized
      12,000,000, Issued 2,869,557, Outstanding  2,844,195 (Issued
      3,000,000, Outstanding  2,861,854 as of
12-31-07)
                  
                  
                  574
                  
                  
                  
                  600Capital
      surplus
                  
                  
                  4,457
                  
                  
                  
                  4,502Undivided
      profits
                  
                  
                  64,629
                  
                  
                  
                  68,158Accumulated
      other comprehensive loss, net of tax
                  
                  
                  (963
                  )
                  
                  
                  (181
                  )Less:  Treasury
      stock shares at cost 25,362  (138,146 as of
      12-31-07)
                  
                  
                  (652
                  )
                  
                  
                  (4,257
                  )Total
      stockholders' equity
                  
                  
                  68,045
                  
                  
                  
                  68,822Total
      liabilities and stockholders' equity
                  
                  
                  688,423
                  
                  
                  
                  633,762
 
 See notes
to financial statements
 
 62
 Table of Contents
   
 STATEMENTS
OF INCOME
 (DOLLARS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
 Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006$
                  
                  
                  $
                  
                  
                  $Interest
      and dividend income:Interest
      and fees on loans
                  
                  
                  23,675
                  
                  
                  
                  24,648
                  
                  
                  
                  22,470Interest
      on securities available for sale:Taxable
                  
                  
                  8,346
                  
                  
                  
                  5,825
                  
                  
                  
                  5,794Tax-Exempt
                  
                  
                  2,361
                  
                  
                  
                  2,700
                  
                  
                  
                  2,924Interest
      on federal funds sold
                  
                  
                  28
                  
                  
                  
                  221
                  
                  
                  
                  41Interest
      on deposits at other banks
                  
                  
                  5
                  
                  
                  
                  13
                  
                  
                  
                  14Dividend
      income
                  
                  
                  310
                  
                  
                  
                  377
                  
                  
                  
                  324Total
      interest and dividend income
                  
                  
                  34,725
                  
                  
                  
                  33,784
                  
                  
                  
                  31,567Interest
      expense:Interest
      on deposits
                  
                  
                  10,470
                  
                  
                  
                  11,080
                  
                  
                  
                  10,033Interest
      on short-term borrowings
                  
                  
                  73
                  
                  
                  
                  60
                  
                  
                  
                  227Interest
      on long-term debt
                  
                  
                  4,055
                  
                  
                  
                  3,552
                  
                  
                  
                  2,644Total
      interest expense
                  
                  
                  14,598
                  
                  
                  
                  14,692
                  
                  
                  
                  12,904Net
      interest income
                  
                  
                  20,127
                  
                  
                  
                  19,092
                  
                  
                  
                  18,663Provision
      for loan losses
                  
                  
                  669
                  
                  
                  
                  1,446
                  
                  
                  
                  1,276Net
      interest income after provision for loan losses
                  
                  
                  19,458
                  
                  
                  
                  17,646
                  
                  
                  
                  17,387Other
      income:Trust
      and investment services income
                  
                  
                  971
                  
                  
                  
                  952
                  
                  
                  
                  777Service
      fees
                  
                  
                  2,061
                  
                  
                  
                  1,692
                  
                  
                  
                  1,797Commissions
                  
                  
                  1,328
                  
                  
                  
                  1,124
                  
                  
                  
                  991Gains/(losses)
      on securities transactions, net
                  
                  
                  (506
                  )
                  
                  
                  157
                  
                  
                  
                  (870
                  )Gains
      on sale of mortgages
                  
                  
                  123
                  
                  
                  
                  118
                  
                  
                  
                  197Earnings
      on bank owned life insurance
                  
                  
                  632
                  
                  
                  
                  469
                  
                  
                  
                  253Other
                  
                  
                  298
                  
                  
                  
                  289
                  
                  
                  
                  257Total
      other income
                  
                  
                  4,907
                  
                  
                  
                  4,801
                  
                  
                  
                  3,402Operating
      expenses:Salaries
      and employee benefits
                  
                  
                  11,892
                  
                  
                  
                  9,693
                  
                  
                  
                  8,600Occupancy
                  
                  
                  1,242
                  
                  
                  
                  1,146
                  
                  
                  
                  1,025Equipment
                  
                  
                  957
                  
                  
                  
                  899
                  
                  
                  
                  891Advertising
      & marketing
                  
                  
                  411
                  
                  
                  
                  415
                  
                  
                  
                  423Computer
      software & data processing
                  
                  
                  1,508
                  
                  
                  
                  1,383
                  
                  
                  
                  1,330Shares
      tax
                  
                  
                  721
                  
                  
                  
                  449
                  
                  
                  
                  432Outside
      services
                  
                  
                  1,643
                  
                  
                  
                  968
                  
                  
                  
                  928Other
                  
                  
                  2,094
                  
                  
                  
                  1,878
                  
                  
                  
                  1,671Total
      operating expenses
                  
                  
                  20,468
                  
                  
                  
                  16,831
                  
                  
                  
                  15,300Income
      before income taxes
                  
                  
                  3,897
                  
                  
                  
                  5,616
                  
                  
                  
                  5,489Provision(Benefit)
      for federal income taxes
                  
                  
                  (117
                  )
                  
                  
                  553
                  
                  
                  
                  718Net
      income
                  
                  
                  4,014
                  
                  
                  
                  5,063
                  
                  
                  
                  4,771Earnings
      per share of common stock
                  
                  
                  1.40
                  
                  
                  
                  1.77
                  
                  
                  
                  1.67Cash
      dividends paid per share
                  
                  
                  1.24
                  
                  
                  
                  1.21
                  
                  
                  
                  1.17Weighted
      average number of shares outstanding
                  
                  
                  2,860,856
                  
                  
                  
                  2,854,400
                  
                  
                  
                  2,850,657
 
 See notes
to financial statements
 
 63
 Table of Contents
   
 STATEMENTS
      OF STOCKHOLDERS' EQUITY(DOLLARS
      IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
 
 Common
      Stock
                                  
                                  
                                  Capital
      Surplus
                                  
                                  
                                  Undivided
      Profits
                                  
                                  
                                  Accumulated
      Other Comprehensive Income (Loss)
                                  
                                  
                                  Treasury
      Stock
                                  
                                  
                                  Total
      Stockholders' Equity$
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $
                                  
                                  
                                  $Balances,
      December 31, 2005
                                  
                                  
                                  600
                                  
                                  
                                  
                                  4,451
                                  
                                  
                                  
                                  65,113
                                  
                                  
                                  
                                  (2,468
                                  )
                                  
                                  
                                  (3,634
                                  )
                                  
                                  
                                  64,062Comprehensive
      income:Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,771
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,771Unrealized
      holding gains on securities available for sale arising during the year,
      net of tax $419
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  813
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  813Reclassification
      adjustment for losses included in net income, net of tax
    $296
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  574
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  574Total
      comprehensive income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6,158Treasury
      stock purchased  - 37,605 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,366
                                  )
                                  
                                  
                                  (1,366
                                  )Treasury
      stock issued  - 12,382 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  59
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  380
                                  
                                  
                                  
                                  439Cash
      dividends paid, $1.17 per share
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,336
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,336
                                  )Balances,
      December 31, 2006
                                  
                                  
                                  600
                                  
                                  
                                  
                                  4,510
                                  
                                  
                                  
                                  66,548
                                  
                                  
                                  
                                  (1,081
                                  )
                                  
                                  
                                  (4,620
                                  )
                                  
                                  
                                  65,957Comprehensive
      income:Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,063
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,063Unrealized
      holding gains on securities available for sale arising during the year,
      net of tax $517
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,004
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,004Reclassification
      adjustment for gains included in net income, net of tax
    ($53)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (104
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (104
                                  )Total
      comprehensive income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  5,963Treasury
      stock issued  - 11,789 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  363
                                  
                                  
                                  
                                  355Cash
      dividends paid, $1.21 per share
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,453
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,453
                                  )Balances,
      December 31, 2007
                                  
                                  
                                  600
                                  
                                  
                                  
                                  4,502
                                  
                                  
                                  
                                  68,158
                                  
                                  
                                  
                                  (181
                                  )
                                  
                                  
                                  (4,257
                                  )
                                  
                                  
                                  68,822Comprehensive
      income:Net
      income
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,014
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,014Unrealized
      holding losses on securities available for sale arising during the year,
      net of tax ($575)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,116
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,116
                                  )Reclassification
      adjustment for losses included in net income, net of tax
    $172
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  334
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  334Total
      comprehensive income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,232Treasury
      stock retired - 130,443 shares
                                  
                                  
                                  (26
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,994
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,020
                                  
                                  
                                  
                                  -Treasury
      stock purchased - 32,400 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (833
                                  )
                                  
                                  
                                  (833
                                  )Treasury
      stock issued - 7,038 shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (45
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  418
                                  
                                  
                                  
                                  373Cash
      dividends paid, $1.24 per share
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,549
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,549
                                  )Balances,
      December 31, 2008
                                  
                                  
                                  574
                                  
                                  
                                  
                                  4,457
                                  
                                  
                                  
                                  64,629
                                  
                                  
                                  
                                  (963
                                  )
                                  
                                  
                                  (652
                                  )
                                  
                                  
                                  68,045
 
 See notes
to financial statements
 
 64
 Table of Contents
   
 STATEMENTS
      OF CASH FLOWS(DOLLARS
      IN THOUSANDS)
 
 Year
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    $
                    
                    
                    $Cash
      flows from operating activities:Net
      income
                    
                    
                    4,014
                    
                    
                    
                    5,063
                    
                    
                    
                    4,771Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      amortization of securities and loan fees
                    
                    
                    332
                    
                    
                    
                    491
                    
                    
                    
                    493(Increase)
      decrease in interest receivable
                    
                    
                    28
                    
                    
                    
                    167
                    
                    
                    
                    (414
                    )Increase
      in interest payable
                    
                    
                    36
                    
                    
                    
                    102
                    
                    
                    
                    457Provision
      for loan losses
                    
                    
                    669
                    
                    
                    
                    1,446
                    
                    
                    
                    1,276(Gains)
      losses on securities transactions, net
                    
                    
                    506
                    
                    
                    
                    (157
                    )
                    
                    
                    870Gains
      on sale of mortgages
                    
                    
                    (123
                    )
                    
                    
                    (118
                    )
                    
                    
                    (197
                    )Loans
      originated for sale
                    
                    
                    (2,100
                    )
                    
                    
                    (1,387
                    )
                    
                    
                    (4,261
                    )Proceeds
      from sales of loans
                    
                    
                    2,343
                    
                    
                    
                    1,664
                    
                    
                    
                    4,612Earnings
      on bank owned life insurance
                    
                    
                    (632
                    )
                    
                    
                    (469
                    )
                    
                    
                    (253
                    )Depreciation
      of premises and equipment and amortization of software
                    
                    
                    1,261
                    
                    
                    
                    1,137
                    
                    
                    
                    1,116Deferred
      income tax
                    
                    
                    (857
                    )
                    
                    
                    (396
                    )
                    
                    
                    (594
                    )Other
      assets and other liabilities, net
                    
                    
                    1,453
                    
                    
                    
                    (340
                    )
                    
                    
                    393Net
      cash provided by operating activities
                    
                    
                    6,930
                    
                    
                    
                    7,203
                    
                    
                    
                    8,269Cash
      flows from investing activities:Securities
      available for sale:Proceeds
      from maturities, calls, and repayments
                    
                    
                    50,623
                    
                    
                    
                    27,778
                    
                    
                    
                    26,159Proceeds
      from sales
                    
                    
                    52,970
                    
                    
                    
                    10,279
                    
                    
                    
                    19,120Purchases
                    
                    
                    (127,127
                    )
                    
                    
                    (38,490
                    )
                    
                    
                    (29,930
                    )Proceeds
      from sale of other real estate owned
                    
                    
                    150
                    
                    
                    
                    -
                    
                    
                    
                    -Purchase
      of regulatory bank stock
                    
                    
                    (815
                    )
                    
                    
                    (664
                    )
                    
                    
                    (1,281
                    )Redemptions
      of regulatory bank stock
                    
                    
                    11
                    
                    
                    
                    670
                    
                    
                    
                    811Purchase
      of BOLI
                    
                    
                    (9
                    )
                    
                    
                    (5,111
                    )
                    
                    
                    (5,128
                    )Net
      increase in loans
                    
                    
                    (27,053
                    )
                    
                    
                    (20,044
                    )
                    
                    
                    (38,618
                    )Purchases
      of premises and equipment
                    
                    
                    (3,206
                    )
                    
                    
                    (1,971
                    )
                    
                    
                    (3,036
                    )Purchase
      of computer software
                    
                    
                    (456
                    )
                    
                    
                    (89
                    )
                    
                    
                    (39
                    )Net
      cash used in investing activities
                    
                    
                    (54,912
                    )
                    
                    
                    (27,642
                    )
                    
                    
                    (31,942
                    )Cash
      flows from financing activities:Net
      increase (decrease) in demand, NOW, and savings accounts
                    
                    
                    4,161
                    
                    
                    
                    15,886
                    
                    
                    
                    (10,738
                    )Net
      increase (decrease) in time deposits
                    
                    
                    28,225
                    
                    
                    
                    (6,419
                    )
                    
                    
                    31,211Net
      increase (decrease) in short term borrowings
                    
                    
                    11,700
                    
                    
                    
                    (1,100
                    )
                    
                    
                    (200
                    )Proceeds
      from long-term debt
                    
                    
                    20,000
                    
                    
                    
                    34,000
                    
                    
                    
                    14,000Repayments
      of long-term debt
                    
                    
                    (10,000
                    )
                    
                    
                    (18,000
                    )
                    
                    
                    (7,500
                    )Dividends
      paid
                    
                    
                    (3,549
                    )
                    
                    
                    (3,453
                    )
                    
                    
                    (3,336
                    )Treasury
      stock sold
                    
                    
                    373
                    
                    
                    
                    355
                    
                    
                    
                    439Treasury
      stock purchased
                    
                    
                    (833
                    )
                    
                    
                    -
                    
                    
                    
                    (1,366
                    )Net
      cash provided by financing activities
                    
                    
                    50,077
                    
                    
                    
                    21,269
                    
                    
                    
                    22,510Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    2,095
                    
                    
                    
                    830
                    
                    
                    
                    (1,163
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    17,297
                    
                    
                    
                    16,467
                    
                    
                    
                    17,630Cash
      and cash equivalents at end of period
                    
                    
                    19,392
                    
                    
                    
                    17,297
                    
                    
                    
                    16,467Supplemental
      disclosures of cash flow information:Interest
      paid
                    
                    
                    14,562
                    
                    
                    
                    14,590
                    
                    
                    
                    12,447Income
      taxes paid
                    
                    
                    1,050
                    
                    
                    
                    950
                    
                    
                    
                    1,175Supplemental
      disclosure of non-cash investing and financing activities:Net
      transfer of other real estate owned held for sale from
    loans
                    
                    
                    -
                    
                    
                    
                    93
                    
                    
                    
                    698
 
 See notes
to the financial statements
  65
 Table of Contents
 
 ENB
Financial Corp
 Notes to
Financial Statements
 
 NOTE
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Nature
of Operations:
 ENB
Financial Corp, through its wholly owned subsidiary Ephrata National Bank,
provides financial services to Northern Lancaster County and
surrounding communities.  ENB Financial Corp, a bank holding company,
was formed on July 1, 2008, and is the successor to Ephrata National Bank, which
existed as a stand alone national bank since formation in 1881.  The
Corporation’s wholly owned subsidiary Ephrata National Bank offers a full array
banking services including loan and deposit products for both personal and
commercial customers, as well as trust and investment services, through nine
office locations.
 
 Basis
of Presentation:
 The
consolidated financial statements of ENB Financial Corp and its subsidiary,
Ephrata National Bank, (collectively the “Corporation”) conform to U.S.
generally accepted accounting principles (GAAP). The preparation of these
statements requires that management make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period.  Material estimates of the Corporation, including the
allowance for loan losses, the fair market value of securities available for
sale, the valuation of foreclosed real estate, other than temporary investment
impairments, intangible assets, and deferred tax assets or liabilities, are
evaluated regularly by management.  Actual results could differ from
the reported estimates given different conditions or assumptions.
 
 The
accounting and reporting policies followed by the Corporation conform with U.S.
GAAP and to general practices within the banking industry. All intercompany
transactions have been eliminated in consolidation. The following is a summary
of the more significant policies.
 
 Cash
and Cash Equivalents:
 For
purposes of reporting cash flows, cash and cash equivalents are identified as
cash and due from banks, and includes cash on hand, collection items, amounts
due from banks, and interest bearing deposits with other banks with maturities
of less than 90 days.
 
 Securities
Available for Sale:
 The
Corporation classifies its entire portfolio of debt and equity securities as
available for sale securities, which the Corporation reports at fair
value.  Any appreciation or depreciation in the portfolio is reported
as a separate component of Stockholders' Equity, net of deferred income
taxes.  The constant yield method is used for the amortization of
premiums and the accretion of discounts for all of the Corporation’s securities
with the exception of collateralized mortgage obligations (“CMOs”) and index
amortizing notes (“IANs”).  The constant yield method maintains a
stable yield on the instrument through its maturity.  For CMOs and
IANs, a two-step/pro-ration method is used for amortization and
accretion.  The first step is a pro-ration based on the current pay
down.  This component ensures that the book price stays level with
par.  The second step amortizes or accretes the remaining premium or
discount to the calculated final amortization or accretion date based on the
current 3-month constant prepayment rates.  Net gains or losses
realized on sales or calls of securities are reported as gains or losses on
security transactions during the year of sale, using the specific identification
method.
 
 Other
Than Temporary Impairment (OTTI)
 Management
monitors all of the Corporation’s securities for OTTI on a monthly basis and
will determine whether any impairment should be recorded on a quarterly
basis.  A number of factors are considered in determining whether a
security is impaired, including, but not limited to the following:
 
 ·
              period
      of time the security has had unrealized
losses,
 ·
              percentage
      of unrealized loss,
 ·
              the
      ability and intent of management to hold the security until
      maturity,
 ·
              type
      of security, and
 ·
              market
      dynamics impacting the market and liquidity of the
    security.
 
 Management
will more closely evaluate those securities that have unrealized losses of 10%
or more and have had unrealized losses for more than twelve
months.  If management determines that the declines in value of the
security are not temporary, or if management does not have the ability to hold
the security until maturity, which is the case with equity securities, than
management will record impairment on the security.  The amount of
impairment is the
 
 66
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Financial Corp
 Notes to
Financial Statements
 
 difference
between the securities book value and current fair market value determined
by obtaining independent market pricing.  Impairment is recording as
loss on securities.
 
 Loans
and Allowance for Loan Losses:
 The
Corporation reports loans receivable at their outstanding principal balances,
reduced by any charge-offs and net of any deferred loan origination fees or
costs. Net loan origination fees and costs are deferred and recognized as an
adjustment of yield over the contractual life of the loan.
 
 In
general, fixed rate residential mortgage loans originated by the Corporation,
and held for sale, are carried in the aggregate at the lower of cost or
market.  Such mortgage loans are sold to Fannie Mae and serviced by
the Corporation.  The Corporation also originates loans for immediate
sale to Wells Fargo.  The Corporation does not service any mortgages
sold to Wells Fargo.
 
 Interest
accrues daily on outstanding loan balances.  Generally, the accrual of
interest discontinues when the ability to collect the loan becomes doubtful or
when a loan becomes more than 90 days past due as to principal and interest.
Management may elect to continue the accrual of interest based on the
expectation of future payments and/or the sufficiency of the underlying
collateral.
 
 The
allowance for loan losses is maintained at a level considered by management to
be adequate to provide for probable losses that can be reasonably
anticipated.  The monthly provision for loan losses is an expense
which increases the allowance, while charge-offs net of recoveries decrease the
allowance.  The Corporation makes periodic credit reviews of the loan
portfolio and considers current economic conditions, historical loan loss
experience, and other factors in determining the adequacy of the reserve
balance.  Loans determined to be uncollectible are charged to the
allowance during the period in which such determination is made.
 
 In
accordance with FASB Statement No. 114, "Accounting by Creditors for Impairment
of a Loan," and as amended by Statement No.118, a loan is impaired when it is
probable that a creditor will be unable to collect all principal and interest
payments due according to the contractual terms of the loan
agreement.
 
 The
Corporation individually evaluates commercial and commercial real estate loans
for impairment and does not aggregate loans by major risk
classifications.  The definition of “impaired loans” is not the same
as the definition of “non-accrual loans,” although the two categories
overlap.  The Corporation may choose to place a loan on non-accrual
status due to payment delinquency or uncertain collectability while not
classifying the loan as impaired, provided the loan is not a commercial or
commercial real estate classification.  Factors considered by
management in determining impairment include payment status and collateral
value.  The amount of impairment for these types of loans is
determined by the difference between the present value of the expected cash
flows related to the loan using the original interest rate and its recorded
value or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans.  When foreclosure is probable, impairment is measured based
on the fair value of the collateral.
 
 Mortgage
loans secured by one-to-four family properties and all consumer loans are
considered to be large groups of smaller-balance homogenous loans and are
measured for impairment collectively.  Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally
are not classified as impaired.  Management determines the
significance of payment delays on a case-by-case basis, taking into
consideration all circumstances concerning the loan, the creditworthiness and
payment history of the borrower, the length of the payment delay, and the amount
of shortfall in relation to the principal and interest owed.
 
 Other
Real Estate Owned:
 Other
real estate owned (“OREO”) represents properties acquired through customer loan
defaults. Properties acquired through the default of loans, are recorded at the
lower of fair value less disposal costs at acquisition date, or the loan
balance. Fair value is determined by current appraisals. Costs associated with
holding other real estate are charged to operational expense. OREO is recorded
as other assets on the Balance Sheets.
 
 Mortgage
Servicing Rights (“MSRs”):
 The
Corporation has agreements for the express purpose of selling loans in the
secondary market.  The Corporation maintains all servicing rights for
the loans sold through Fannie Mae.  Originated MSRs are recorded by
allocating total costs incurred between the loans and servicing rights based on
their relative fair values.  MSRs are amortized in proportion to the
estimated servicing income over the estimated life of the servicing
portfolio.  Impairment is
 
 67
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  ENB
Financial Corp
 Notes to
Financial Statements
 evaluated
based on the fair value of the right, based on portfolio interest rates and
prepayment characteristics.  MSRs are a component of other assets on
the Balance Sheets.
 
 Premises
and Equipment:
 Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed using both straight-line and accelerated methods over the estimated
useful lives of generally fifteen to thirty-nine years for buildings and
improvements and five to ten years for furniture and
equipment.  Maintenance and repairs of property and equipment are
charged to operational expense as incurred, while major improvements are
capitalized. Net gains or losses upon disposition are included in other income
or operational expense, as applicable.
 
 Bank-Owned
Life Insurance:
 Bank-owned
life insurance (“BOLI”) is carried by the Corporation at the cash surrender
value of the underlying policies. Income earned on the policies is based on any
increase in cash surrender value in the policies less the cost of the insurance,
which varies according to age and health of the insured. The life insurance policies
owned by the Corporation had a cash surrender value of $14,512,000 and
$13,871,000 as of December 31, 2008, and 2007, respectively.
 
 Long-Lived
Assets:
 Long-lived
assets to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the difference between the carrying value and the fair
market value of the asset.  Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair market value, less cost to sell
or cost to dispose.
 
 Advertising
Costs:
 The
Corporation expenses advertising costs as incurred. Advertising expense for the
years ended December 31, 2008, 2007, and 2006 were $411,000, $415,000, and
$423,000, respectively.
 
 Income
Taxes:
 In
accordance with FASB Statement No.109, “Accounting for Income Taxes,” an asset
and liability approach is followed for financial accounting and reporting for
income taxes. Accordingly, a net deferred tax asset or liability is recorded in
the financial statements for the tax effects of temporary differences, which are
items of income and expense reported in different periods for income tax and
financial reporting purposes. Deferred tax expense is determined by the change
in the assets or liabilities for deferred taxes. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
 
 Earnings
per Share:
 The
Corporation currently maintains a simple capital structure with no stock option
plans that would have a dilutive effect on earnings per
share.  Earnings per share are calculated by dividing net income by
the weighted-average number of shares outstanding for the periods.
 
 Comprehensive
Income:
 The
Corporation is required to present comprehensive income in a full set of
general-purpose financial statements for all periods presented.  Other
comprehensive income comprises of unrealized holding gains and losses on the
available for sale securities portfolio.  The Corporation has elected
to report the effects of other comprehensive income as part of the Statement of
Stockholders’ Equity.
 
 Segment
Disclosure:
 FASB
issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997. This statement establishes standards for the
manner in which public business enterprises report information about segments in
the annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
regarding financial products and services, geographic areas, and major
customers.  The Corporation has only one operating segment consisting
primarily of its banking and fiduciary activity.
 
 68
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  ENB
Financial Corp
 Notes to
Financial Statements
 Pension
Plans:
 The
Corporation has a noncontributory defined contribution pension plan covering
substantially all employees. The Corporation contributes 7.5% of qualifying
employees’ covered compensation, plus 5.7% of covered compensation in excess of
the Social Security wage base, which is charged to operating expense and funded
on a current basis.
 
 Trust
Assets and Income:
 Assets
held by the Money Management Group in a fiduciary or agency capacity for
customers are not included in the Corporation’s balance sheets since these items
are not assets of the Corporation. In accordance with banking industry practice,
trust income is recognized on a cash basis, and such income does not differ
significantly from amounts that would be recognized on an accrual
basis.  Trust income is reported in the Corporation’s income
statements under other income.
 
 Reclassification
of Comparative Amounts:
 Certain
comparative amounts for the prior year have been reclassified to conform to
current-year classifications.  Such reclassifications had no effect on
net income or stockholders’ equity.
 
 Recently
Issued Accounting Standards:
 In
December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS
141(R)), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination.  FAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008.  Earlier adoption is
prohibited.  The adoption of this standard is not expected to have a
material effect on the Corporation’s results of operations or financial
position.
  
 In
September 2006, the FASB issued FAS No. 157, Fair Value Measurements,
which provides enhanced guidance for using fair value to measure assets and
liabilities.  The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value.  The
Standard does not expand the use of fair value in any new
circumstances.  FAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.  In February 2008, the FASB issued
Staff Position No. 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13, which removed leasing transactions accounted for
under FAS No. 13 and related guidance from the scope of FAS No.
157.  Also in February 2008, the FASB issued Staff Position No.157-2,
Partial Deferral of the
Effective Date of Statement 157, which deferred the effective date of FAS
No. 157 for all nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008.  The adoption of this standard did
not have a material effect on the Corporation’s results of operations or
financial position.
  
 In
December 2007, the FASB issued FAS No. 160, Non-controlling Interests in
Consolidated Financial Statements — an amendment of ARB
No. 51.  FAS No. 160 amends ARB No. 51 to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary.  It clarifies that
a non-controlling interest in a subsidiary, which is sometimes referred to as
minority interest, is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. 
Among other requirements, this statement requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the non-controlling interest.  It also requires disclosure, on the face of
the consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the non-controlling interest.   FAS
No. 160 is effective for fiscal years beginning on or after December 15,
2008.  Earlier adoption is prohibited.  The adoption of this
standard is not expected to have a material effect on the Corporation’s results
of operations or financial position.
 
 In March
2008, the FASB issued FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, to require enhanced disclosures about
derivative instruments and hedging activities. The new standard has revised
financial reporting for derivative instruments and hedging activities by
requiring more transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities; and how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows.  FAS No. 161 requires disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. It also requires entities to provide more information about their
liquidity by requiring disclosure of derivative features that
 
 69
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  ENB
Financial Corp
 Notes to
Financial Statements
 are
credit risk-related. Further, it requires cross-referencing within footnotes to
enable financial statement users to locate important information about
derivative instruments.  FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encourage.  The adoption of this
standard is not expected to have a material effect on the Corporation’s results
of operations or financial position.
 
 In June
2008, the FASB ratified EITF Issue No. 08-4, Accountingfor Convertible Securities with
Beneficial Conversion Features or Contingently Adjusted Conversion
Ratios.  This Issue provides transition guidance for conforming
changes made to EITF Issue No. 98-5, Accountingfor Convertible Securities with
Beneficial Conversion Features or Contingently Adjusted Conversion
Ratios, that resulted from EITF Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments,and FAS No. 150, Accountingfor Certain Financial Instruments
with Characteristics of both Liability and Equity.  The
conforming changes are effective for financial statements issued for fiscal
years ending after December 15, 2008, with earlier application
permitted.  The adoption of this FSP is not expected to have a
material effect on the Corporation’s 2009 results of operations or financial
position.
 
 In
February 2008, the FASB issued FSP No. FAS 140-3, Accountingfor Transfers of Financial Assets
and Repurchase Financing Transactions.  This FSP concludes that
a transferor and transferee should not separately account for a transfer of a
financial asset and a related repurchase financing unless (a) the two
transactions have a valid and distinct business or economic purpose for being
entered into separately and (b) the repurchase financing does not result in the
initial transferor regaining control over the financial asset.  The
FSP is effective for financial statements issued for fiscal years beginning on
or after November 15, 2008, and interim periods within those fiscal
years.  The adoption of this FSP is not expected to have a material
effect on the Corporation’s 2009 results of operations or financial
position.
 
 In April
2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets(“FSP 142-3”). FSP 142-3 amends the factors that should
be considered in developing assumptions about renewal or extension used in
estimating the useful life of a recognized intangible asset under FAS
No. 142, Goodwill and
Other Intangible Assets. This standard is intended to improve the
consistency between the useful life of a recognized intangible asset under FAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under FAS No. 141R  and other GAAP. FSP 142-3
is effective for financial statements issued for fiscal years beginning after
December 15, 2008. The measurement provisions of this standard will apply
only to intangible assets of the Corporation acquired after the effective
date.  The adoption of this FSP is not expected to have a material
effect on the Corporation’s 2009 results of operations or financial
position.
 
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Financial Corp
 Notes to
Financial Statements
 NOTE
B - SECURITIES AVAILABLE FOR SALE
 (DOLLARS
IN THOUSANDS)
 
 The
amortized cost and fair value of securities held at December 31, 2008 and 2007
are as follows:
 
 Amortized
      Cost
                  
                  
                  Gross
      Unrealized Gains
                  
                  
                  Gross
      Unrealized Losses
                  
                  
                  Fair
      Value$
                  
                  
                  $
                  
                  
                  $
                  
                  
                  $December
      31, 2008U.S.
      treasuries & government agencies
                  
                  
                  46,938
                  
                  
                  
                  447
                  
                  
                  
                  (321
                  )
                  
                  
                  47,064Mortgage-backed
      securities
                  
                  
                  45,405
                  
                  
                  
                  761
                  
                  
                  
                  (73
                  )
                  
                  
                  46,093Collateralized
      mortgage obligations
                  
                  
                  35,484
                  
                  
                  
                  566
                  
                  
                  
                  (1
                  )
                  
                  
                  36,049Private
      label collateralized mortgage obligations
                  
                  
                  20,511
                  
                  
                  
                  -
                  
                  
                  
                  (2,217
                  )
                  
                  
                  18,294Corporate
      bonds
                  
                  
                  12,108
                  
                  
                  
                  83
                  
                  
                  
                  (554
                  )
                  
                  
                  11,637Obligations
      of states and political subdivisions
                  
                  
                  52,433
                  
                  
                  
                  874
                  
                  
                  
                  (786
                  )
                  
                  
                  52,521Total
      debt securities
                  
                  
                  212,879
                  
                  
                  
                  2,731
                  
                  
                  
                  (3,952
                  )
                  
                  
                  211,658Marketable
      equity securities
                  
                  
                  3,000
                  
                  
                  
                  -
                  
                  
                  
                  (237
                  )
                  
                  
                  2,763Total
      securities available for sale
                  
                  
                  215,879
                  
                  
                  
                  2,731
                  
                  
                  
                  (4,189
                  )
                  
                  
                  214,421December
      31, 2007U.S.
      treasuries & government agencies
                  
                  
                  47,739
                  
                  
                  
                  34
                  
                  
                  
                  (174
                  )
                  
                  
                  47,599Mortgage-backed
      securities
                  
                  
                  33,367
                  
                  
                  
                  86
                  
                  
                  
                  (356
                  )
                  
                  
                  33,097Collateralized
      mortgage obligations
                  
                  
                  36,654
                  
                  
                  
                  261
                  
                  
                  
                  (82
                  )
                  
                  
                  36,833Corporate
      bonds
                  
                  
                  11,637
                  
                  
                  
                  26
                  
                  
                  
                  (156
                  )
                  
                  
                  11,507Obligations
      of states and political subdivisions
                  
                  
                  59,790
                  
                  
                  
                  1,046
                  
                  
                  
                  (414
                  )
                  
                  
                  60,422Total
      debt securities
                  
                  
                  189,187
                  
                  
                  
                  1,453
                  
                  
                  
                  (1,182
                  )
                  
                  
                  189,458Marketable
      equity securities
                  
                  
                  4,047
                  
                  
                  
                  -
                  
                  
                  
                  (545
                  )
                  
                  
                  3,502Total
      securities available for sale
                  
                  
                  193,234
                  
                  
                  
                  1,453
                  
                  
                  
                  (1,727
                  )
                  
                  
                  192,960
 
 The
amortized cost and fair value of debt securities available for sale at December
31, 2008, by contractual maturity are shown below.  Actual maturities
may differ from contractual maturities due to certain call or prepayment
provisions.
 
 CONTRACTUAL
MATURITY OF DEBT SECURITIES
 (DOLLARS
IN THOUSANDS)
 
 AmortizedCost
                    
                    
                    Fair
      Value$
                    
                    
                    $Due
      in one year or less
                    
                    
                    35,736
                    
                    
                    
                    35,812Due
      after one year through five years
                    
                    
                    67,188
                    
                    
                    
                    66,934Due
      after five years through ten years
                    
                    
                    76,023
                    
                    
                    
                    76,216Due
      after ten years
                    
                    
                    33,932
                    
                    
                    
                    32,696Total
      debt securities
                    
                    
                    212,879
                    
                    
                    
                    211,658
 
 
 Proceeds
from sales of securities available for sale, along with the associated gross
realized gains and gross realized losses, are shown below.  Realized
gains and losses are computed on the basis of specific
identification.
 
 71
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  ENB
Financial Corp
 Notes to
Financial Statements
 PROCEEDS
FROM SALES OF SECURITIES AVAILABLE FOR SALE
 (DOLLARS
IN THOUSANDS)
 
 Securities
      Available for Sale2008
                          
                          
                          2007
                          
                          
                          2006$
                          
                          
                          $
                          
                          
                          $Proceeds
      from sales
                          
                          52,970
                          
                          
                          10,279
                          
                          
                          19,120Gross
      realized gains
                          
                          792
                          
                          
                          179
                          
                          
                          89Gross
      realized losses
                          
                          1,298
                          
                          
                          22
                          
                          
                          959
 
 
 The gross
realized losses above include $760,000 of impairment in 2008 and $772,000 in
2006.
 
 Securities
available for sale with a par value of $63,455,000 and $47,161,000 at December
31, 2008, and 2007 respectively, were pledged or restricted for public funds,
borrowings, or other purposes as required by law.  The fair value of
these pledged securities was $64,779,000 at December 31, 2008, and $47,118,000
at December 31, 20007.
 
 Management
evaluates all of the Corporation’s securities for other than temporary
impairment (OTTI) on a periodic basis.  The process management follows
to determine whether a security is OTTI is described in Note A.  As of
December 31, 2008 all of the Corporation’s securities carrying unrealized losses
were determined to be temporarily impaired and not permanently
impaired.  Information pertaining to securities with gross unrealized
losses at December 31, 2008 and 2007 aggregated by investment category and
length of time that individual securities have been in a continuous loss
positions follows:
 
 TEMPORARY
IMPAIRMENTS OF SECURITIES
 (DOLLARS
IN THOUSANDS)
 
 Less
      than 12 months
                        
                        
                        More
      than 12 months
                        
                        
                        TotalFair
      Value
                        
                        
                        Gross
      Unrealized Losses
                        
                        
                        Fair
      Value
                        
                        
                        Gross
      Unrealized Losses
                        
                        
                        Fair
      Value
                        
                        
                        Gross
      Unrealized Losses$
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $
                        
                        
                        $As
      of December 31, 2008U.S.
      treasuries & government agencies
                        
                        
                        21,531
                        
                        
                        
                        295
                        
                        
                        
                        1,813
                        
                        
                        
                        26
                        
                        
                        
                        23,344
                        
                        
                        
                        321Mortgage-backed
      securities
                        
                        
                        2,527
                        
                        
                        
                        10
                        
                        
                        
                        3,971
                        
                        
                        
                        63
                        
                        
                        
                        6,498
                        
                        
                        
                        73Collateralized
      mortgage obligations
                        
                        
                        215
                        
                        
                        
                        -
                        
                        
                        
                        495
                        
                        
                        
                        1
                        
                        
                        
                        710
                        
                        
                        
                        1Private
      label collateralized mortgage obligations
                        
                        
                        18,294
                        
                        
                        
                        2,217
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        18,294
                        
                        
                        
                        2,217Corporate
      bonds
                        
                        
                        7,491
                        
                        
                        
                        554
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,491
                        
                        
                        
                        554Obligations
      of state and political subdivisions
                        
                        
                        9,628
                        
                        
                        
                        380
                        
                        
                        
                        6,901
                        
                        
                        
                        406
                        
                        
                        
                        16,529
                        
                        
                        
                        786Total
      debt securities
                        
                        
                        59,686
                        
                        
                        
                        3,456
                        
                        
                        
                        13,180
                        
                        
                        
                        496
                        
                        
                        
                        72,866
                        
                        
                        
                        3,952Marketable
      equity securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,763
                        
                        
                        
                        237
                        
                        
                        
                        2,763
                        
                        
                        
                        237Total
      temporary impaired securities
                        
                        
                        59,686
                        
                        
                        
                        3,456
                        
                        
                        
                        15,943
                        
                        
                        
                        733
                        
                        
                        
                        75,629
                        
                        
                        
                        4,189As
      of December 31, 2007U.S.
      treasuries & government agencies
                        
                        
                        8,321
                        
                        
                        
                        15
                        
                        
                        
                        21,221
                        
                        
                        
                        159
                        
                        
                        
                        29,542
                        
                        
                        
                        174Mortgage-backed
      securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        22,059
                        
                        
                        
                        356
                        
                        
                        
                        22,059
                        
                        
                        
                        356Collateralized
      mortgage obligations
                        
                        
                        705
                        
                        
                        
                        1
                        
                        
                        
                        9,836
                        
                        
                        
                        81
                        
                        
                        
                        10,541
                        
                        
                        
                        82Corporate
      bonds
                        
                        
                        1,038
                        
                        
                        
                        4
                        
                        
                        
                        8,444
                        
                        
                        
                        152
                        
                        
                        
                        9,482
                        
                        
                        
                        156Obligations
      of state and political subdivisions
                        
                        
                        5,295
                        
                        
                        
                        120
                        
                        
                        
                        14,736
                        
                        
                        
                        294
                        
                        
                        
                        20,031
                        
                        
                        
                        414Total
      debt securities
                        
                        
                        15,359
                        
                        
                        
                        140
                        
                        
                        
                        76,296
                        
                        
                        
                        1,042
                        
                        
                        
                        91,655
                        
                        
                        
                        1,182Marketable
      equity securities
                        
                        
                        680
                        
                        
                        
                        367
                        
                        
                        
                        2,822
                        
                        
                        
                        178
                        
                        
                        
                        3,502
                        
                        
                        
                        545Total
      temporary impaired securities
                        
                        
                        16,039
                        
                        
                        
                        507
                        
                        
                        
                        79,118
                        
                        
                        
                        1,220
                        
                        
                        
                        95,157
                        
                        
                        
                        1,727
  72
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 ENB
Financial Corp
 Notes to
Financial Statements
 
 There are
67 positions that are considered temporarily impaired at December 31,
2008.  The Corporation evaluates both equity and fixed maturity
positions for other-than-temporary impairment at least on a quarterly basis, and
more frequently when economic and market concerns warrant such
evaluation.
 
 Recent
market conditions throughout the financial sector have made the evaluation
regarding the possible impairment of mortgaged backed and CMO securities
difficult to fully determine given the volatility of their pricing, based not
only on rate changes, but collateral uncertainty as well. The majority of the
MBS and CMO’s owned by the Corporation are backed by the US
government.   Approximately 20% of the Corporations MBS and CMO’s
are private label CMO’s, not backed by the U.S. government.  As of
December 31, 2008, seven private label securities were held with six of the
seven rated AAA by both Moodys and S&P.  The remaining security
was rated below investment grade.  Management evaluates all of the
private label securities on a monthly basis and intends to continue to hold
these securities. Management has concluded that as of December 31, 2008, the
declines outlined in the above table represent temporary declines, and the
Corporation does have the intent and ability to hold those securities until
maturity or to allow a market recovery.
 
 
 NOTE
C - LOANS AND ALLOWANCE FOR LOAN LOSSES
 
 LOAN
      SUMMARY(DOLLARS
      IN THOUSANDS)
 
 December
      31,2008
                      
                      
                      2007$
                      
                      
                      $Real
      estate (a)Residential
                      
                      
                      163,076
                      
                      
                      
                      150,996Commercial
                      
                      
                      152,942
                      
                      
                      
                      131,297Construction
                      
                      
                      13,540
                      
                      
                      
                      16,960Commercial
                      
                      
                      71,765
                      
                      
                      
                      75,172Consumer
                      
                      
                      10,887
                      
                      
                      
                      10,896412,210
                      
                      
                      
                      385,321Less:Deferred
      loan fees, net
                      
                      
                      256
                      
                      
                      
                      322Allowance
      for loan losses
                      
                      
                      4,203
                      
                      
                      
                      3,682Total
      net loans (b)
                      
                      
                      407,751
                      
                      
                      
                      381,317
 
 (a)
              Real
      estate loans serviced for Fannie Mae, which are not included in the
      Balance Sheets, totaled $11,058,000 and $9,975,000 as of December 31,
      2008, and 2007 respectively.
 (b)
              Included
      in total loans are $101,000 and $541,000 of loans in process as of
      December 31, 2008, and 2007,
respectively.
 
 ALLOWANCE
FOR LOAN LOSS SUMMARY
 (DOLLARS
IN THOUSANDS)
 
 Year
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006$
                      
                      
                      $
                      
                      
                      $Balance
      at January 1
                      
                      
                      3,682
                      
                      
                      
                      3,244
                      
                      
                      
                      2,795Amounts
      charged off
                      
                      
                      (241
                      )
                      
                      
                      (1,078
                      )
                      
                      
                      (902
                      )Recoveries
      of amounts previously charged off
                      
                      
                      93
                      
                      
                      
                      70
                      
                      
                      
                      75Balance
      before current year provision
                      
                      
                      3,534
                      
                      
                      
                      2,236
                      
                      
                      
                      1,968Provision
      charged to operating expense
                      
                      
                      669
                      
                      
                      
                      1,446
                      
                      
                      
                      1,276Balance
      at December 31
                      
                      
                      4,203
                      
                      
                      
                      3,682
                      
                      
                      
                      3,244
 
 
 At year
end for 2008, 2007 & 2006, all of the loans on non-accrual were also
considered impaired.  Interest income on loans would have increased by
approximately $1,000, $0 and $3,000 during 2008, 2007 and 2006 respectively, if
these loans had performed in accordance with their original terms.
 
 73
 Table of Contents
 ENB
Financial Corp
 Notes to
Financial Statements
 
 Information
with respect to impaired loans as of and for the years ended December 31 is as
follows:
  IMPAIRED
      LOANS
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006(DOLLARS
      IN THOUSANDS)
                              
                              $
                              
                              
                              $
                              
                              
                              $Impaired
      loansLoan
      Balances without a related allowance for loan losses
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Loan
      Balances with a related allowance for loan losses
                              
                              
                              2,889
                              
                              
                              
                              425
                              
                              
                              
                              548Related
      allowance for loan losses
                              
                              
                              455
                              
                              
                              
                              220
                              
                              
                              
                              38Average
      recorded balance of impaired loans
                              
                              
                              154
                              
                              
                              
                              425
                              
                              
                              
                              548Interest
      income recognized on impaired loans
                              
                              
                              8
                              
                              
                              
                              32
                              
                              
                              
                              44
 
 
 NOTE
D - PREMISES AND EQUIPMENT
 (DOLLARS
IN THOUSANDS)
 
 The major
classes of Corporation premises and equipment and the accumulated depreciation
are as follows:
 
 December
      31,2008
                      
                      
                      2007$
                      
                      
                      $Land
                      
                      
                      3,017
                      
                      
                      
                      3,017Buildings
      and improvements
                      
                      
                      19,533
                      
                      
                      
                      17,284Furniture
      and equipment
                      
                      
                      8,654
                      
                      
                      
                      7,486Construction
      in process
                      
                      
                      97
                      
                      
                      
                      319Total
                      
                      
                      31,301
                      
                      
                      
                      28,106Less
      accumulated depreciation
                      
                      
                      11,388
                      
                      
                      
                      10,296Premises
      and equipment
                      
                      
                      19,913
                      
                      
                      
                      17,810
 
 
 Depreciation
expense, which is included in operating expenses, amounted to $1,103,000 for
2008, $1,033,000 for 2007, and $1,012,000 for 2006. The construction in process
category represents expenditures for ongoing projects. When construction is
completed, these amounts will be reclassified into buildings and improvements,
and/or furniture and equipment. Depreciation only begins when the project or
asset is placed into service.  As of December 31, 2008, the
construction in process consists of preliminary costs associated with a
renovations being made to existing facilities to be completed in
2009.
 
 74
 Table of Contents
 ENB
Financial Corp
 Notes to
Financial Statements
 
 NOTE
E - DEPOSITS
 (DOLLARS
IN THOUSANDS)
 
 Deposits
by major classification are summarized as follows:
 
 December
      31,2008
                    
                    
                    2007$
                    
                    
                    $Noninterest-bearing
      demand
                    
                    
                    114,262
                    
                    
                    
                    107,839NOW
      accounts
                    
                    
                    51,617
                    
                    
                    
                    61,345Money
      market deposit accounts
                    
                    
                    42,074
                    
                    
                    
                    39,474Savings
      accounts
                    
                    
                    72,210
                    
                    
                    
                    67,344Time
      deposits under $100,000
                    
                    
                    174,918
                    
                    
                    
                    163,591Time
      deposits of $100,000 or more
                    
                    
                    56,031
                    
                    
                    
                    39,133Total
      deposits
                    
                    
                    511,112
                    
                    
                    
                    478,726
 
 At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
 
 2009
                            
                            
                            135,8132010
                            
                            
                            42,5002011
                            
                            
                            32,6782012
                            
                            
                            10,0612013
                            
                            
                            9,897230,949
 
 
 NOTE
F - SHORT-TERM BORROWINGS
 (DOLLARS
IN THOUSANDS)
 
 Short-term
borrowings consist of Federal funds purchased that mature one day from the
transaction date, overnight borrowings from the FRB Discount Window, and FHLB
fixed rate loans for a term of less than one year.
 
 A summary
of short-term borrowings is as follows for the years ended December 31, 2008,
and 2007:
 
 2008
                    
                    
                    2007$
                    
                    
                    $Total
      short-term borrowings outstanding at year end
                    
                    
                    11,800
                    
                    
                    
                    100Average
      interest rate at year end
                    
                    
                    0.56
                    %
                    
                    
                    4.00
                    %Maximum
      outstanding at any month-end
                    
                    
                    12,743
                    
                    
                    
                    15,500Average
      amount outstanding for the year
                    
                    
                    3,926
                    
                    
                    
                    1,157Weighted
      average interest rate for the year
                    
                    
                    1.86
                    %
                    
                    
                    5.19
                    %
 
 
 As of
December 31, 2008, the Corporation had approved Federal funds lines of $33
million unsecured.  An additional $2 million of secured credit is
available upon the pledging of collateral.  The Corporation also has
the ability to borrow through the FRB Discount Window.  The amount of
borrowing available through the Discount Window was $3.8 million as of December
31, 2008.  For further information on borrowings from FHLB see Note
G.
 
 75
 Table of Contents
  ENB
Financial Corp
 Notesto Financial
Statements
 NOTE
G – OTHER BORROWED FUNDS
 (DOLLARS
IN THOUSANDS)
 
 Maturities
of other borrowings at December 31 are summarized as follows:
 
 At
      December 31, 2008
                                        
                                        
                                        At
      December 31, 2007Amount
                                        
                                        
                                        Weighted
      Average Rate
                                        
                                        
                                        Amount
                                        
                                        
                                        Weighted
      Average Rate$
                                        
                                        
                                        %
                                        
                                        
                                        $
                                        
                                        
                                        %FHLB
      fixed rate loans2008
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        5.232009
                                        
                                        
                                        15,000
                                        
                                        
                                        
                                        4.51
                                        
                                        
                                        
                                        15,000
                                        
                                        
                                        
                                        4.512010
                                        
                                        
                                        12,500
                                        
                                        
                                        
                                        4.14
                                        
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        4.422011
                                        
                                        
                                        9,500
                                        
                                        
                                        
                                        3.83
                                        
                                        
                                        
                                        4,500
                                        
                                        
                                        
                                        4.612012
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.13
                                        
                                        
                                        
                                        2,500
                                        
                                        
                                        
                                        4.80FHLB
      convertible loans2008
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        3.162011
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.79
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.792012
                                        
                                        
                                        7,500
                                        
                                        
                                        
                                        4.62
                                        
                                        
                                        
                                        7,500
                                        
                                        
                                        
                                        4.302013
      and after
                                        
                                        
                                        7,500
                                        
                                        
                                        
                                        4.35
                                        
                                        
                                        
                                        7,500
                                        
                                        
                                        
                                        4.33Repurchase
      agreements2010
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        3.15
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -2011
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.64
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.642012
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.82
                                        
                                        
                                        
                                        5,000
                                        
                                        
                                        
                                        4.822013
      and after
                                        
                                        
                                        15,000
                                        
                                        
                                        
                                        3.90
                                        
                                        
                                        
                                        10,000
                                        
                                        
                                        
                                        4.52Total
      other borrowings
                                        
                                        
                                        92,000
                                        
                                        
                                        
                                        4.23
                                        
                                        
                                        
                                        82,000
                                        
                                        
                                        
                                        4.48
   As a
member of the FHLB of Pittsburgh, the Corporation has access to significant
credit facilities.  Borrowings from FHLB are secured with a blanket
security agreement and required investment of FHLB member bank
stock.   As part of the security agreement the Corporation
maintains unencumbered qualifying assets (principally 1-4 family residential
mortgage loans and U.S. agency notes, bonds, mortgage-backed securities, and
collateralized mortgage obligations) in an amount at least as much as the
advances from the FHLB.  Additionally, the Corporation’s FHLB stock of
$4,728,400 and $3,924,400 at December 31, 2008, and 2007 respectively, is also
pledged to secure these advances.
 
 The
Corporation had a FHLB maximum borrowing capacity of $319.5 million as of
December 31, 2008, with remaining borrowing capacity of approximately $252.5
million.  The borrowing arrangement with FHLB is subject to annual
renewal.  The maximum borrowing capacity is recalculated
quarterly.
 
 The terms
of FHLB convertible borrowings allow the FHLB to convert the interest rate to an
adjustable rate based on the three-month London Interbank Offering Rate
(“LIBOR”). The rates on these instruments can change quarterly, once certain
conditions or rate lockout periods are met.  At conversion date, the
Corporation has the option of paying the borrowing off or continuing to borrow
under the new terms of the convertible borrowing.
 
 As of
December 31, 2008, the Corporation had six repurchase agreements; securities
sold under an agreement to repurchase, for $30 million.  The
Corporation pledged securities with a fair market value of $40.7 million as of
December 31, 2008 as collateral for these borrowings.  One $5.0
million repurchase instrument is at a fixed rate with no call
features.  The remaining $25.0 million of instruments have call
features with different variable to fixed and fixed to variable rate
provisions.
 
 76
 Table of Contents
  ENB
Financial Corp
 Notes to
Financial Statements
 NOTE
H – CAPITAL TRANSACTIONS
 
 On July
1, 2008, ENB Financial Corp, a bank holding company, was formed.  At
that time all shares of Ephrata National Bank stock were converted to ENB
Financial Corp shares on a one for one basis. The 130,443 treasury shares owned
by the Bank as of June 30, 2008, were retired and the Corporation began
existence with 2,869,557 outstanding shares of common stock.
 
 As a bank
holding company, the Board of Directors now has authority to purchase the
Corporation’s common stock without prior shareholder or regulator
consent.  On August 14, 2008, the Board authorized a stock buyback to
last one year for the purchase of up to 140,000 shares. Through December 31,
2008, 32,400 shares were purchased at an average weighted cost of $25.71.
Currently two stock plans are in place, a nondiscriminatory employee stock
purchase plan, which allows employees to purchase shares at a 10% discount from
the stocks fair market value at the end of each quarter, and a dividend
reinvestment plan.   Both plans issue shares from treasury shares
acquired.   As of December 31, 2008, the Corporation held 25,362
treasury shares, at a weighted average cost of $25.71 per share, with a basis of
$652,000.
 
 
 NOTE
I – RETIREMENT PLAN
 
 The
Corporation has a defined contribution pension plan (the “plan”) covering all
employees aged 21 or older who work 1,000 or greater hours in a calendar
year and have completed at least one full year of employment.  The
Corporation contributes 7.5% of the covered compensation of all plan
participants, plus 5.7% of covered compensation in excess of the Social Security
wage base, which was $102,000 for 2008, $97,500 for 2007, and $94,200 for
2006.  For purposes of the plan, covered compensation was limited to
$230,000 in 2008, $225,000 in 2007, and $220,000 in 2006.  Total
expense of the plan was $527,000, $476,000 and $412,000, for 2008, 2007, and
2006 respectively.  The Corporation’s pension plan is fully
funded.
 
 The
Corporation also provides an optional 401(K) plan, in which employees may elect
to defer pre-tax salary dollars, subject to the maximum annual Internal Revenue
Service contribution amounts. The contribution maximum for 2008 was $15,500 for
persons under age 50, and $20,500 for persons over 50 years in age. The 401(K)
plan was amended at the end of 2002 to allow for employer
contributions.  No employer contributions were made into the plan for
2008, 2007 or 2006.
 
 77
 Table of Contents
 
 ENB
Financial Corp
 Notes to
Financial Statements
 NOTE
J - DEFERRED COMPENSATION
 
 Prior to
1999 directors of the Corporation had the ability to defer their directors' fees
into a directors deferred compensation plan  For the directors who
elected to have their compensation deferred, a contract was signed for each
period of deferred pay.  At the time of deferment, the Corporation
used the amount of the annual director's fee to pay the premiums on the life
insurance policies, insuring the individual lives of the participating
directors.  The Corporation could continue to pay premiums after the
deferment period, or could allow the policies to fund annual premiums through
loans against the policies cash surrender value.  The Corporation has
continued to pay the premiums on the life insurance policies and no loans exist
on the policies.
 
 The
Corporation is the owner and beneficiary of all life insurance policies on the
directors.  The life insurance proceeds that the Corporation will
ultimately receive are designed to fund its present and future obligations to
the directors under these deferred compensation agreements; accordingly, the
amount of deferred compensation to be paid to each director was actuarially
determined based on the amount of life insurance the annual director's fees were
able to purchase. This amount varies for each director depending on age, general
health, and the number of years until the director is entitled to begin
receiving payments.
 
 The life
insurance policies had an aggregate face amount of $3,911,000.00 for December
31, 2008 and $3,953,000 for December 31, 2007.  The death benefits
totaled $6,363,000 and $6,320,000 as of December 31, 2008, and 2007
respectively.  The cash surrender value of the above policies totaled
$3,573,000 and $3,404,000 as of December 31, 2008, and 2007
respectively.  The net present value of the vested portion of deferred
payments totaled $1,883,000 at December 31, 2008, and $2,027,000 at
December 31, 2007. The interest rate used to discount these obligations was
5.50% for 2008, 6.00% for 2007 and 6.50% for 2006. These net present value
amounts are included in "Other liabilities" on the Balance Sheets. Total charges
to expense for deferred compensation amounted to $145,000 for 2008,
$171,000 for 2007, and $109,000 for 2006, and are included in "Other operating
expenses" in the Statements of Income.
 
 
 NOTE
K – COMPENSATORY OBLIGATIONS
 
 In
October 2008, the Corporation recognized a $1,222,000 liability and
corresponding expense in connection with a voluntary separation
package.  The separation package was offered to qualifying individuals
as part of a corporate wide realignment of resources to improve
efficiency.  The liability includes provisions for severance
compensation and medical insurance coverage.  It will be paid out
bi-weekly, following the designated payroll schedule, until all obligations are
fully satisfied in 2010.  The balance of the separation liability
account was $1,188,000 as of December 31, 2008.  No further liability
or expense is anticipated in connection with the separation package in 2009 or
beyond.
 
 78
 Table of Contents
 
 ENB
Financial Corp
 Notes to
Financial Statements
 NOTE
L - INCOME TAXES
 (DOLLARS IN
THOUSANDS)
 
 Federal
income tax expense as reported differs from the amount computed by applying the
statutory Federal income tax rate to income before income taxes.  A
reconciliation of the differences by amount and percent is as
follows:
 
 Federal
Income Tax Summary:
 
 Year
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006$
                    
                    
                    %
                    
                    
                    $
                    
                    
                    %
                    
                    
                    $
                    
                    
                    %Income
      tax at statutory rate
                    
                    
                    1,325
                    
                    
                    
                    34.0
                    
                    
                    
                    1,909
                    
                    
                    
                    34.0
                    
                    
                    
                    1,866
                    
                    
                    
                    34.0Tax-exempt
      interest income
                    
                    
                    (1,213
                    )
                    
                    
                    (31.1
                    )
                    
                    
                    (1,317
                    )
                    
                    
                    (23.5
                    )
                    
                    
                    (1,301
                    )
                    
                    
                    (23.7
                    )Non-deductible
      interest expense
                    
                    
                    124
                    
                    
                    
                    3.2
                    
                    
                    
                    144
                    
                    
                    
                    2.6
                    
                    
                    
                    129
                    
                    
                    
                    2.4Bank-owned
      life insurance
                    
                    
                    (215
                    )
                    
                    
                    (5.5
                    )
                    
                    
                    (160
                    )
                    
                    
                    (2.9
                    )
                    
                    
                    (86
                    )
                    
                    
                    (1.6
                    )Other
                    
                    
                    (138
                    )
                    
                    
                    (3.6
                    )
                    
                    
                    (23
                    )
                    
                    
                    (0.4
                    )
                    
                    
                    110
                    
                    
                    
                    2.0Income
      tax expense
                    
                    
                    (117
                    )
                    
                    
                    (3.0
                    )
                    
                    
                    553
                    
                    
                    
                    9.8
                    
                    
                    
                    718
                    
                    
                    
                    13.1
   Significant
components of income tax expense are as follows:
 Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006$
                        
                        
                        $
                        
                        
                        $Current
      tax expense
                        
                        
                        816
                        
                        
                        
                        983
                        
                        
                        
                        1,050Deferred
      tax benefit
                        
                        
                        (857
                        )
                        
                        
                        (369
                        )
                        
                        
                        (594
                        )Valuation
      allowance adjustment
                        
                        
                        (76
                        )
                        
                        
                        (61
                        )
                        
                        
                        262Income
      tax expense
                        
                        
                        (117
                        )
                        
                        
                        553
                        
                        
                        
                        718
 
 Components
of the Bank's net deferred tax position are as follows:
 
 December
      31,2008
                        
                        
                        2007
                        
                        
                        2006$
                        
                        
                        $
                        
                        
                        $Deferred
      tax assetsAllowance
      for loan losses
                        
                        
                        1,429
                        
                        
                        
                        1,252
                        
                        
                        
                        1,009Net
      unrealized holding losses on securities available for sale
                        
                        
                        496
                        
                        
                        
                        93
                        
                        
                        
                        557Deferred
      compensation reserve
                        
                        
                        640
                        
                        
                        
                        689
                        
                        
                        
                        739Separation
      compensation obligation reserve
                        
                        
                        404
                        
                        
                        
                        -
                        
                        
                        
                        -Unrealized
      capital loss
                        
                        
                        -
                        
                        
                        
                        76
                        
                        
                        
                        262Capital
      loss carryforward
                        
                        
                        125
                        
                        
                        
                        125
                        
                        
                        
                        -Tax
      credit carryforwards
                        
                        
                        900
                        
                        
                        
                        433
                        
                        
                        
                        124Charitable
      contribution carryforward
                        
                        
                        89
                        
                        
                        
                        23
                        
                        
                        
                        -Allowance
      for off-balance sheet extensions of credit
                        
                        
                        72
                        
                        
                        
                        65
                        
                        
                        
                        85Interest
      on non-accrual loans
                        
                        
                        19
                        
                        
                        
                        3
                        
                        
                        
                        1Other
                        
                        
                        6
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      deferred tax assets
                        
                        
                        4,180
                        
                        
                        
                        2,759
                        
                        
                        
                        2,777Valuation
      allowance
                        
                        
                        (125
                        )
                        
                        
                        (201
                        )
                        
                        
                        (262
                        )Net
      deferred taxes
                        
                        
                        4,055
                        
                        
                        
                        2,558
                        
                        
                        
                        2,515Deferred
      tax liabilitiesPremises
      and equipment
                        
                        
                        (1,559
                        )
                        
                        
                        (1,391
                        )
                        
                        
                        (1,395
                        )Discount
      on investment securities
                        
                        
                        (78
                        )
                        
                        
                        (55
                        )
                        
                        
                        (25
                        )Other
                        
                        
                        -
                        
                        
                        
                        (5
                        )
                        
                        
                        (5
                        )Total
      deferred tax liabilities
                        
                        
                        (1,637
                        )
                        
                        
                        (1,451
                        )
                        
                        
                        (1,425
                        )Net
      deferred tax assets
                        
                        
                        2,418
                        
                        
                        
                        1,107
                        
                        
                        
                        1,090
  79
 Table of Contents
  ENB
Financial Corp
 Notes to
Financial Statements
 The ability to realize the benefit of
deferred tax assets is dependent upon a number of factors, including the
generation of future taxable income, the ability to carry back taxes paid in
previous years, the ability to offset capital losses with capital gains, the
reversal of deferred tax liabilities and certain tax planning
strategies.  Avaluation allowance of $262,000 was established
during the year ending December 31, 2006, to offset in its entirety the tax
benefits associated with certain impaired securities that management believes
may not be realizable.  Due to sales in 2007 and 2008 of previously
impaired securities at a book gain, this valuation allowance was reduced to
$125,000 as of December 31, 2008.
 
 The
Corporation had a deferred tax asset of $820,000 and $381,000 for credits
related to Alternative Minimum Taxes (AMT) as of December 31, 2008 and 2007
respectively, and a deferred tax asset of $80,000 and $54,000 as of December 31,
2008 and 2007 respectively, for credits related to low income housing
credits.  In addition, as of the end of 2008, the Bank had a deferred
tax asset of $89,000 related to a charitable contribution
carryover.   No valuation has been established for these deferred
tax assets in view of the Bank’s ability to carry forward taxes paid in previous
years, and credits to future years, coupled with the anticipated future taxable
income as evidenced by the Corporation’s earnings potential.
 
 
 NOTE
M – REGULATORY MATTERS AND RESTRICTIONS
 (DOLLARS
IN THOUSANDS)
 
 The
Corporation and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.  Failure to meet the
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation’s financial statements.
 
 Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices.  The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors. The quantitative measures established by regulation to ensure
capital adequacy, require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth below) of Tier 1 capital to average assets and
Tier 1 and total capital to risk weighted assets.
 
 As of
December 31, 2008 and 2007, the Corporation and Bank were categorized as “well
capitalized” under the regulatory framework for prompt corrective
action.  There are no conditions or events since that notification
that management believes have changed the institution’s category.
 
 In
addition, to the capital guidelines, certain laws restrict the amount of
dividends paid to stockholders in any given year.  The approval of the
OCC shall be required if the total of all dividends declared by the Bank in any
year shall exceed the total of its net profits of that year combined with
retained net profits of the preceding two years.  Under this
restriction, the Corporation could declare dividends in 2009, without the
approval of the OCC, or approximately $2.1 million, plus an additional amount
equal to the Corporation’s net profits for 2009, up to the date of any such
dividend declaration.
 
 80
 Table of Contents
  ENB
Financial Corp
 Notes to
Financial Statements
 CAPITAL
      LEVELS
                    (DOLLARS
      IN THOUSANDS)
                  
                  Actual
                  
                  
                  For
      Capital Adequacy Purposes
                  
                  
                  To
      Be Well Capitalized Under Prompt Corrective Action
    Provision$
                  
                  
                  %
                  
                  
                  $
                  
                  
                  %
                  
                  
                  $
                  
                  
                  %As
      of December 31, 2008Total
      Capital to Risk-Weighted AssetsConsolidated
                  
                  
                  73,264
                  
                  
                  
                  16.2
                  
                  
                  
                  36,246
                  
                  
                  
                  8.0
                  
                  
                  
                  45,308
                  
                  
                  
                  10.0Bank
                  
                  
                  72,917
                  
                  
                  
                  16.1
                  
                  
                  
                  36,246
                  
                  
                  
                  8.0
                  
                  
                  
                  45,308
                  
                  
                  
                  10.0Tier
      I Capital to Risk-Weighted AssetsConsolidated
                  
                  
                  68,848
                  
                  
                  
                  15.2
                  
                  
                  
                  18,123
                  
                  
                  
                  4.0
                  
                  
                  
                  27,185
                  
                  
                  
                  6.0Bank
                  
                  
                  68,501
                  
                  
                  
                  15.1
                  
                  
                  
                  18,123
                  
                  
                  
                  4.0
                  
                  
                  
                  27,185
                  
                  
                  
                  6.0Tier
      I Capital to Average AssetsConsolidated
                  
                  
                  68,848
                  
                  
                  
                  10.1
                  
                  
                  
                  27,227
                  
                  
                  
                  4.0
                  
                  
                  
                  34,034
                  
                  
                  
                  5.0Bank
                  
                  
                  68,501
                  
                  
                  
                  10.1
                  
                  
                  
                  27,236
                  
                  
                  
                  4.0
                  
                  
                  
                  34,045
                  
                  
                  
                  5.0As
      of December 31, 2007  (Bank Only)Total
      Capital to Risk-Weighted Assets
                  
                  
                  72,508
                  
                  
                  
                  16.6
                  
                  
                  
                  34,858
                  
                  
                  
                  8.0
                  
                  
                  
                  43,573
                  
                  
                  
                  10.0Tier
      I Capital to Risk-Weighted Assets
                  
                  
                  68,636
                  
                  
                  
                  15.8
                  
                  
                  
                  17,429
                  
                  
                  
                  4.0
                  
                  
                  
                  26,144
                  
                  
                  
                  6.0Tier
      I Capital to Average Assets
                  
                  
                  68,636
                  
                  
                  
                  10.9
                  
                  
                  
                  25,192
                  
                  
                  
                  4.0
                  
                  
                  
                  31,490
                  
                  
                  
                  5.0
 
 
 NOTE
N – TRANSACTIONS WITH DIRECTORS AND OFFICERS
 (DOLLARS
IN THOUSANDS)
 
 The
following table presents activity in the amounts due from Directors, Executive
Officers, Immediate Family and Affiliated Companies.  These
transactions are made on the same terms and conditions, including interest rates
and collateral requirements as those prevailing at the time for comparable
transactions with others.  An analysis of the activity with respect to
such aggregate loans to related parties is shown below.
 
 
 Loans to
Insiders
 (Dollars
In Thousands)
 
 Actual$Balance,
      December 31, 2007
                      
                      
                      16,273Advances
                      
                      
                      11,131Repayments
                      
                      
                      (11,086
                      )Balance,
      December 31, 2008
                      
                      
                      16,318
 
 
 Deposits
from insiders represented in the table above totaled $8,857,886 as of December
31, 2008, and $10,341,000 on December 31, 2007.
 
 
 NOTE
O - COMMITMENTS AND CONTINGENCIES
 
 In the
normal course of business the Corporation makes various commitments that are not
reflected in the accompanying financial statements. These are commonly referred
to as off-balance sheet commitments and include firm commitments to extend
credit, unused lines of credit, and open letters of credit.  On
December 31, 2008, firm loan commitments totaled $15 million; unused lines of
credit totaled $69 million; and open letters of credit totaled
 
 81
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  ENB
Financial Corp
 Notes to
Financial Statements
 approximately
$14 million. The sum of these commitments, $98 million, represents total
exposure to credit loss in the event of nonperformance by customers with respect
to these financial instruments; however the vast majority of these commitments
are typically not drawn upon. The same credit policies for on-balance-sheet
instruments apply for making commitments and conditional obligations and the
actual credit losses could arise from the exercise of these commitments is
expected to compare favorably with the loan loss experience on the loan
portfolio taken as a whole. Commitments to extend credit on December 31, 2007,
totaled $100 million, representing firm loan commitments of $13 million, unused
lines of credit of $75 million, and open letters of credit totaling $12
million.
 
 Firm
commitments to extend credit and unused lines of credit are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Each customer’s credit worthiness is
evaluated on an individual basis. The amount of collateral obtained, if deemed
necessary by the extension of credit, is based on management’s credit evaluation
of the customer. The required collateral may vary but could include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties.
 
 Open
letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. Most guarantees
expire within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. Various
assets support the collateral of commitments for which collateral is deemed
necessary.
 
 
 NOTE
P - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
 
 The
Corporation determines concentrations of credit risk by reviewing loans by
borrowers, geographical area, and loan purpose.  The amount of credit the
extended to a single borrower or group of borrowers is capped by the legal
lending limit, which is defined as 15% of the Risk Based Capital, less the
allowance for loan losses.  The Corporation’s lending policy further
restricts the amount to 75% of the legal lending limit.  As of
December 31, 2008, the Corporation’s legal lending limit was $10,928,000, and
the Corporation’s policy limit was $8,196,000.  As of December 31,
2008, one lending relationship to a local municipality
totaled $8,858,000 or 12.1% of risk based capital, which exceeded the
Corporation’s internal lending policy limit, but not the legal lending
limit.
 
 Geographically,
the primary lending area for the Corporation encompasses Lancaster, Lebanon and
Berks counties of Pennsylvania, with the majority of the loans made in
Lancaster County.  The ability of debtors’ to honor their loan
agreements is impacted by the health of the local economy.  The
Corporation’s immediate market area benefits from a diverse economy, which has
resulted in a diverse loan portfolio.  As a community bank, the
largest amount of loans outstanding consists of personal mortgages, residential
rental loans, and personal loans secured by real estate.  Beyond
personal lending, the Corporation’s business and commercial lending includes
loans for agricultural, construction, specialized manufacturing, service
industries, many types of small businesses, and loans to non-profit entities and
governmental units.
 
 Management
evaluates concentrations of credit based on loan purpose on a quarterly
basis.  The Corporation’s greatest concentration of loans by purpose
is residential real estate, which comprises $163.1 million, or 40.0%, of the
$407.8 million total loans outstanding.  Residential real estate
consists of first mortgages and home equity loans.  A concentration in
commercial real estate of 37.5%, or $152.9 million, also exists; however, within
that category there is not a concentration by industry.  More
specifically within these larger purpose categories, management monitors on a
quarterly basis the largest concentrations of non-consumer credit based on the
North American Industrial Classification System (“NAICS”).  As of
December 31, 2008, the largest specific industry type categories were
residential real estate investment loans with a balance of $37.1, million or
9.1%, of net loans, and non-residential investment real estate of $26.0 million
or 6.4% of net loans, and public finance activities of
$20.9 million, or 5.1%, of net loans.
 
 To
evaluate risk for the securities portfolio the Corporation reviews both
geographical concentration and credit ratings.  As of December 31,
2008, the Corporation held obligations of state and political subdivisions
issued by municipalities located within the state of Pennsylvania totaling $13.3
million, which is 25.3% of the municipal
 
 82
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  ENB
Financial Corp
 Notes to
Financial Statements
 portfolio
and 6.3% of the total portfolio. Internal policy requires municipal bonds
purchased to be rated at least A1 by Moody and/or A+ by Standard & Poor’s
(‘S&P”) at the time of purchase, which is the highest single A insurance
rating by both services. Presently, $15.8 million or 30.0% of the municipal
bonds are below the A+/A- credit ratings the Corporation requires at the time of
purchase.  Corporate bonds must carry an initial credit rating of A3
by Moody and A- for S&P and at all times corporate bonds are to be
investment grade, which is defined as Baa3 for Moody and BBB- for S&P, or
above.  Approximately 92.2% of the Corporation’s corporate bonds carry
at least a credit rating of A3 by Moody and A- for S&P as of December 31,
2008.
 
 As of
December 31, 2008, the Corporation held $20.5 million of book value in private
label collateralized mortgage obligations (PLCMO’s).  The PLCMO’s are
not backed by the U.S. government.  A total of seven PLCMO instruments
were held as of December 31, 2008, with six of the seven instruments rated AAA
by Moody and S&P.  The remaining security, with a book value of
$3.8 million, was rated below investment grade.
 
 
 NOTE
Q - FAIR VALUE MEASUREMENTS
 
 Effective
January 1, 2008, the Corporation adopted the provisions of
FAS No. 157, Fair
Value Measurements, for financial assets and financial
liabilities.  FAS No. 157 provides enhanced guidance for using
fair value to measure assets and liabilities.  The standard applies
whenever other standards require or permit assets or liabilities to be measured
at fair value.  The standard does not expand the use of fair value in
any new circumstances.  The FASB issued Staff Position No. 157-1,
Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, which removed leasing transactions
accounted for under FAS No. 13 and related guidance from the scope of FAS No.
157.  The FASB also issued Staff Position No.157-2, Partial Deferral of the Effective
Date of Statement 157, which deferred the effective date of FAS No. 157
for all nonfinancial assets and nonfinancial liabilities to fiscal years
beginning after November 15, 2008.
  FAS
No. 157 establishes a hierarchal disclosure framework associated with the
level of observable pricing utilized in measuring assets and liabilities at fair
value. The three broad levels defined by FAS No. 157 hierarchy are as
follows:
 
 Level
      I:
              Quoted
      prices are available in active markets for identical assets or liabilities
      as of the reported date.
 
 Level
      II:
              Pricing
      inputs are other than the quoted prices in active markets, which are
      either directly or indirectly observable as of the reported
      date.  The nature of these assets and liabilities includes items
      for which quoted prices are available but traded less frequently and items
      that are fair-valued using other financial instruments, the parameters of
      which can be directly observed.
 
 Level
      III:
              Assets
      and liabilities that have little to no observable pricing as of the
      reported date.  These items do not have two-way markets and are
      measured using management’s best estimate of fair value, where the inputs
      into the determination of fair value require significant management
      judgment or estimation.
 
 The
following table presents the assets reported on the balance sheet at their fair
value as of December 31, 2008, by level within the fair value
hierarchy.  As required by FAS No. 157, financial assets and
liabilities are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
 
 Dollars
      in Thousands
                  
                  December
      31, 2008Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      III
                  
                  
                  TotalAssets:Investment
      securitiesavailable
      for sale
                  
                  $
                  2,763
                  
                  
                  $
                  208,549
                  
                  
                  $
                  3,109
                  
                  
                  $
                  214,421
 
 
 On
December 31, 2008, the Corporation held one private label bond that was valued
using level III inputs due to the limited reliable observable inputs that were
available for below investment grade private label mortgage backed securities
and volatility of the market for this type of security.  The security
had a book value of $3,810,000 with a fair market value of $3,109,000 using
level three inputs.
 
 83
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 ENB
Financial Corp
 Notes to
Financial Statements
  Prices on
this private label security were calculated by a third party.  Due to
broad dislocations in the credit markets, and the lack of trading and new
issuance in private label CMO securities, market price indications generally
reflect the lack of liquidity in the market in addition to credit
concerns.  The third party obtained data about the deal structure and
the underlying collateral.  The collateral was analyzed in terms of
its “quality” – or its ability to generate cash – based on its potential for
eventually defaulting.  The cash generated by the collateral was
allocated across the deal’s capital structure on a priority-of-claims basis to
see which investors get paid – and which suffer losses.  The cash
flows of the security were discounted to December 31, 2008, to determine an
intrinsic value.  Based on the third-party analysis and the current
investment ratings of the securities, and because the Corporation has the
ability and intent to hold the investments until a recovery of fair value, which
may be maturity, the Corporation does not consider these assets to be
other-than-temporarily impaired at December 31, 2008. However, continued price
declines or actual credit losses could result in a write-down of this
security.
 
 Financial
instruments are considered Level III when their values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable.  In
addition to these unobservable inputs, the valuation models for Level III
financial instruments typically also rely on a number of inputs that are readily
observable either directly or indirectly.  Level III financial
instruments also include those for which the determination of fair value
requires significant management judgment or estimation.  The following
table presents the changes in the Level III fair-value category for the year
ended December 31, 2008.
 
 The
following represent fair value measurements using significant unobservable
inputs (Level III):
 
 Dollars
      in Thousands
                  
                  Available-For-SaleSecuritiesBalance,
      January 1, 2008,
                  
                  $
                  -Total
      gains or losses (realized/unrealized):
                  
                  
                  -Included
      in earnings
                  
                  
                  -Included
      in other comprehensive income
                  
                  
                  -Purchases,
      issuances, and settlements
                  
                  
                  -Transfers
      in and/or out of Level III
                  
                  
                  3,109Balance,
      December 31, 2008
                  
                  $
                  3,109
 
 
 The
following table presents the assets measured on a nonrecurring basis on the
consolidated statements of financial condition at their fair value as of
December 31, 2008, by level within the fair value hierarchy.
 
 December
      31, 2008Level
      I
                  
                  
                  Level
      II
                  
                  
                  Level
      III
                  
                  
                  TotalAssets:Impaired
      Loans
                  
                  $
                  -
                  
                  
                  $
                  2,444
                  
                  
                  $
                  -
                  
                  
                  $
                  2,444OREO
                  
                  
                  520
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  520Total
                  
                  $
                  520
                  
                  
                  $
                  2,444
                  
                  
                  $
                  -
                  
                  
                  $
                  2,964
 
 The
Corporation had a total of $2,889,000 of impaired loans as of December 31, 2008,
with $455,000 of specifically allocated allowance against these
loans.  Impaired Loans are valued based on a discounted present value
of expected future cash flow.
 
 Other
real estate owned (“OREO”) is measured at fair value, less cost to sell at the
date of foreclosure, establishing a new cost basis.  Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value, less cost to
sell.  Management has an agreement of sale for an amount less expected
settlement costs of $520,000.  Income and expenses from operations and
changes in valuation allowance are included in the net expenses from
OREO.  For the year ended December 31, 2008, $155,000 of
additional write-downs were recorded that impacted OREO.
 
 84
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 ENB
Financial Corp
 Notes to
Financial Statements
  NOTE
R - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 (DOLLARS IN
THOUSANDS)
 
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments:
 
 Cash
and Cash Equivalents, Accrued Interest Receivable and Accrued Interest
Payable
 For these
short-term instruments, the carrying amount is a reasonable estimate of fair
value.
 
 Securities
Available for Sale
 Management
utilizes quoted market pricing for the fair value of the Corporation's
securities that are available for sale, if available.  If a quoted
market rate is not available, fair value is estimated using quoted market prices
for similar securities.
 
 Loans
Held for Sale
 Loans
held for sale are individual loans for which the Corporation has a firm sales
commitment; therefore, the carrying value is a reasonable estimate of the fair
value.
 
 Loans
 The fair
value of fixed and variable rate loans is estimated by discounting back the
scheduled future cash flows of the particular loan product, using the market
interest rates of comparable loan products in the Corporation’s greater market
area, with the same general structure, comparable credit ratings, and for the
same remaining maturities.
 
 Bank
Owned Life Insurance
 Fair
value is equal to the cash surrender value of the life insurance
policies.
 
 Mortgage
Servicing Asset
 The fair
value of mortgage servicing assets is based on the present value of future cash
flows for pools of mortgages, stratified by rate and maturity date.
 
 Deposits
 The fair
value of non-interest bearing demand deposit accounts and interest bearing
demand deposit and savings accounts was based on the amount payable on demand at
the reporting date.  The fair value of fixed-maturity time deposits is
estimated by discounting back the expected cash flows of the time deposit using
market interest rates from the Corporation’s greater market area currently
offered for similar time deposits of similar remaining maturities.
 
 Borrowings
 The fair
value for overnight borrowings is equal to the carrying value.  The
fair value of a term borrowing is estimated by comparing the rate currently
offered for the same type of borrowing instrument with a matching remaining
term.
 
 Firm
Commitments to Extend Credit, Lines of Credit and Open Letters of
Credit
 These
financial instruments are generally not subject to sale and estimated fair
values are not readily available.  The carrying value, represented by
the net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining contractual
fee over the term of the commitment, using fees currently charged to enter into
similar agreements with similar credit risk, is not considered material for
disclosure purposes.  The contractual amounts of unfunded commitments
are presented in Note O.
 
 The
carrying amounts and estimated fair values of the Corporation's financial
instruments at December 31 are as follows:
 
 85
 Table of Contents
  ENB
Financial Corp
 Notes to
Financial Statements
  FAIR
VALUE OF FINANCIAL INSTRUMENTS
 (DOLLARS
IN THOUSANDS)
 
 December
      31,
                                
                                
                                December
      31,2008
                                
                                
                                2007Carrying
      Amount
                                
                                
                                Fair
      Value
                                
                                
                                Carrying
      Amount
                                
                                
                                Fair
      Value$
                                
                                
                                $
                                
                                
                                $
                                
                                
                                $Financial
      Assets:Cash
      and cash equivalents
                                
                                
                                19,392
                                
                                
                                
                                19,392
                                
                                
                                
                                17,297
                                
                                
                                
                                17,297Securities
      available for sale
                                
                                
                                214,421
                                
                                
                                
                                214,421
                                
                                
                                
                                192,960
                                
                                
                                
                                192,960Loans
      held for sale
                                
                                
                                245
                                
                                
                                
                                245
                                
                                
                                
                                365
                                
                                
                                
                                365Loans,
      net of allowance
                                
                                
                                407,751
                                
                                
                                
                                398,291
                                
                                
                                
                                381,317
                                
                                
                                
                                378,641Accrued
      interest receivable
                                
                                
                                2,794
                                
                                
                                
                                2,794
                                
                                
                                
                                2,822
                                
                                
                                
                                2,822Bank
      owned life insurance
                                
                                
                                14,512
                                
                                
                                
                                14,512
                                
                                
                                
                                13,871
                                
                                
                                
                                13,871Mortgage
      servicing asset
                                
                                
                                33
                                
                                
                                
                                33
                                
                                
                                
                                70
                                
                                
                                
                                70Financial
      Liabilities:Demand
      deposits
                                
                                
                                114,262
                                
                                
                                
                                114,262
                                
                                
                                
                                107,839
                                
                                
                                
                                107,839Interest
      demand deposits
                                
                                
                                51,617
                                
                                
                                
                                51,617
                                
                                
                                
                                61,345
                                
                                
                                
                                61,345Savings
      deposits
                                
                                
                                72,210
                                
                                
                                
                                72,210
                                
                                
                                
                                67,344
                                
                                
                                
                                67,344Money
      market deposit accounts
                                
                                
                                42,074
                                
                                
                                
                                42,074
                                
                                
                                
                                39,474
                                
                                
                                
                                39,474Time
      deposits
                                
                                
                                230,949
                                
                                
                                
                                234,725
                                
                                
                                
                                202,724
                                
                                
                                
                                205,392Total
      deposits
                                
                                
                                511,112
                                
                                
                                
                                514,888
                                
                                
                                
                                478,726
                                
                                
                                
                                481,394Short-term
      borrowings
                                
                                
                                11,800
                                
                                
                                
                                11,800
                                
                                
                                
                                100
                                
                                
                                
                                100Long-term
      borrowings
                                
                                
                                92,000
                                
                                
                                
                                98,251
                                
                                
                                
                                82,000
                                
                                
                                
                                84,664Total
      borrowings
                                
                                
                                103,800
                                
                                
                                
                                110,051
                                
                                
                                
                                82,100
                                
                                
                                
                                84,764Accrued
      interest payable
                                
                                
                                1,703
                                
                                
                                
                                1,703
                                
                                
                                
                                1,667
                                
                                
                                
                                1,667
 
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  ENB
Financial Corp
 Notes to
Financial Statements
 NOTE
S – CONDENSED PARENT ONLY DATA (First Year - Six Months activity)
 
 Condensed
Balance Sheet (Parent Company Only)
 (Dollars
in Thousands)
 
 December
      31,2008$AssetsCash
                        
                        
                        347Equity
      in subsidiary (ENB)
                        
                        
                        67,698Total
      assets
                        
                        
                        68,045Capital
      stock
                        
                        
                        574Capital
      surplus
                        
                        
                        4,457Retained
      earnings
                        
                        
                        64,629Unrealized
      gain/loss AFS securities
                        
                        
                        (963
                        )Treasury
      stock
                        
                        
                        (652
                        )Total
      stockholder's equity
                        
                        
                        68,045
 
 Condensed
Statement of Income (Six Months Commencing July 1, 2008)
 (Dollars
in Thousands)
 
 Year
      EndingDecember
      31,2008$IncomeDividend
      income
                      
                      
                      2,773Undistributed
      earnings of bank subsidiary
                      
                      
                      (1,581
                      )Net
      Income
                      
                      
                      1,192
 
 Condensed
Statement of Cash Flows (Six Months Commencing July 1, 2008)
 (Dollars
in Thousands)
 
 $Cash
      Flows from Opeating Activities:Net
      income
                          
                          
                          1,192Equity
      in undistributed earnings of subsidiaries
                          
                          
                          1,581Net
      cash provided by operating activities
                          
                          
                          2,773Cash
      Flows from Financing Activities:Proceeds
      from issuance of treasury stock
                          
                          
                          180Payment
      to repurchase common stock
                          
                          
                          (833
                          )Dividends
      paid
                          
                          
                          (1,773
                          )Net
      cash used by financing activities
                          
                          
                          (2,426
                          )Cash
      and Cash Equivalents:Net
      change in cash and cash equivalents
                          
                          
                          347Cash
      and cash equivalents at beginning of year
                          
                          
                          -Cash
      and cash equivalents, current year-to-date
                          
                          
                          347
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  ENB
Financial Corp
 Notes to
Financial Statements
 
 NOTE
T - SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
 (DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
 
 The
unaudited quarterly results of operations for the years ended 2008 and
2007:
 20081st
      Qtr
                                                              
                                                              
                                                              2nd
      Qtr
                                                              
                                                              
                                                              3rd
      Qtr
                                                              
                                                              
                                                              4th
      Qtr$
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              $Interest
      income
                                                              
                                                              
                                                              8,585
                                                              
                                                              
                                                              
                                                              8,668
                                                              
                                                              
                                                              
                                                              8,818
                                                              
                                                              
                                                              
                                                              8,654Interest
      expense
                                                              
                                                              
                                                              3,752
                                                              
                                                              
                                                              
                                                              3,641
                                                              
                                                              
                                                              
                                                              3,625
                                                              
                                                              
                                                              
                                                              3,580Net
      interest income
                                                              
                                                              
                                                              4,833
                                                              
                                                              
                                                              
                                                              5,027
                                                              
                                                              
                                                              
                                                              5,193
                                                              
                                                              
                                                              
                                                              5,074Less
      provision for loan losses
                                                              
                                                              
                                                              199
                                                              
                                                              
                                                              
                                                              150
                                                              
                                                              
                                                              
                                                              170
                                                              
                                                              
                                                              
                                                              150Net
      interest income after provision for loan losses
                                                              
                                                              
                                                              4,634
                                                              
                                                              
                                                              
                                                              4,877
                                                              
                                                              
                                                              
                                                              5,023
                                                              
                                                              
                                                              
                                                              4,924Other
      income
                                                              
                                                              
                                                              1,356
                                                              
                                                              
                                                              
                                                              1,363
                                                              
                                                              
                                                              
                                                              441
                                                              
                                                              
                                                              
                                                              1,747Operating
      expenses:Salaries
      and employee benefits
                                                              
                                                              
                                                              2,638
                                                              
                                                              
                                                              
                                                              2,607
                                                              
                                                              
                                                              
                                                              2,654
                                                              
                                                              
                                                              
                                                              3,993Occupancy
      & equipment expenses
                                                              
                                                              
                                                              534
                                                              
                                                              
                                                              
                                                              543
                                                              
                                                              
                                                              
                                                              534
                                                              
                                                              
                                                              
                                                              588Other
      operating expenses
                                                              
                                                              
                                                              1,232
                                                              
                                                              
                                                              
                                                              1,442
                                                              
                                                              
                                                              
                                                              1,799
                                                              
                                                              
                                                              
                                                              1,904Total
      operating expenses
                                                              
                                                              
                                                              4,404
                                                              
                                                              
                                                              
                                                              4,592
                                                              
                                                              
                                                              
                                                              4,987
                                                              
                                                              
                                                              
                                                              6,485Income
      before income taxes
                                                              
                                                              
                                                              1,586
                                                              
                                                              
                                                              
                                                              1,648
                                                              
                                                              
                                                              
                                                              477
                                                              
                                                              
                                                              
                                                              186Provision
      (benefit) for Federal income taxes
                                                              
                                                              
                                                              191
                                                              
                                                              
                                                              
                                                              220
                                                              
                                                              
                                                              
                                                              212
                                                              
                                                              
                                                              
                                                              (740
                                                              )Net
      income
                                                              
                                                              
                                                              1,395
                                                              
                                                              
                                                              
                                                              1,428
                                                              
                                                              
                                                              
                                                              265
                                                              
                                                              
                                                              
                                                              926FINANCIAL
      RATIOSPer
      share data:.Net
      income
                                                              
                                                              
                                                              0.49
                                                              
                                                              
                                                              
                                                              0.50
                                                              
                                                              
                                                              
                                                              0.09
                                                              
                                                              
                                                              
                                                              0.32Cash
      dividends paid
                                                              
                                                              
                                                              0.31
                                                              
                                                              
                                                              
                                                              0.31
                                                              
                                                              
                                                              
                                                              0.31
                                                              
                                                              
                                                              
                                                              0.3120071st
      Qtr
                                                              
                                                              
                                                              2nd
      Qtr
                                                              
                                                              
                                                              3rd
      Qtr
                                                              
                                                              
                                                              4th
      Qtr$
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              $
                                                              
                                                              
                                                              $Interest
      income
                                                              
                                                              
                                                              8,209
                                                              
                                                              
                                                              
                                                              8,419
                                                              
                                                              
                                                              
                                                              8,538
                                                              
                                                              
                                                              
                                                              8,618Interest
      expense
                                                              
                                                              
                                                              3,578
                                                              
                                                              
                                                              
                                                              3,646
                                                              
                                                              
                                                              
                                                              3,726
                                                              
                                                              
                                                              
                                                              3,742Net
      interest income
                                                              
                                                              
                                                              4,631
                                                              
                                                              
                                                              
                                                              4,773
                                                              
                                                              
                                                              
                                                              4,812
                                                              
                                                              
                                                              
                                                              4,876Less
      provision for loan losses
                                                              
                                                              
                                                              1,074
                                                              
                                                              
                                                              
                                                              162
                                                              
                                                              
                                                              
                                                              90
                                                              
                                                              
                                                              
                                                              120Net
      interest income after provision for loan losses
                                                              
                                                              
                                                              3,557
                                                              
                                                              
                                                              
                                                              4,611
                                                              
                                                              
                                                              
                                                              4,722
                                                              
                                                              
                                                              
                                                              4,756Other
      income
                                                              
                                                              
                                                              1,115
                                                              
                                                              
                                                              
                                                              1,175
                                                              
                                                              
                                                              
                                                              1,304
                                                              
                                                              
                                                              
                                                              1,207Operating
      expenses:Salaries
      and employee benefits
                                                              
                                                              
                                                              2,384
                                                              
                                                              
                                                              
                                                              2,379
                                                              
                                                              
                                                              
                                                              2,405
                                                              
                                                              
                                                              
                                                              2,525Occupancy
      & equipment expenses
                                                              
                                                              
                                                              527
                                                              
                                                              
                                                              
                                                              503
                                                              
                                                              
                                                              
                                                              507
                                                              
                                                              
                                                              
                                                              508Other
      operating expenses
                                                              
                                                              
                                                              1,223
                                                              
                                                              
                                                              
                                                              1,426
                                                              
                                                              
                                                              
                                                              1,142
                                                              
                                                              
                                                              
                                                              1,302Total
      operating expenses
                                                              
                                                              
                                                              4,134
                                                              
                                                              
                                                              
                                                              4,308
                                                              
                                                              
                                                              
                                                              4,054
                                                              
                                                              
                                                              
                                                              4,335Income
      before income taxes
                                                              
                                                              
                                                              538
                                                              
                                                              
                                                              
                                                              1,478
                                                              
                                                              
                                                              
                                                              1,972
                                                              
                                                              
                                                              
                                                              1,628Provision
      (benefit) for Federal income taxes
                                                              
                                                              
                                                              (144
                                                              )
                                                              
                                                              
                                                              167
                                                              
                                                              
                                                              
                                                              328
                                                              
                                                              
                                                              
                                                              202Net
      income
                                                              
                                                              
                                                              682
                                                              
                                                              
                                                              
                                                              1,311
                                                              
                                                              
                                                              
                                                              1,644
                                                              
                                                              
                                                              
                                                              1,426FINANCIAL
      RATIOSPer
      share data:Net
      income
                                                              
                                                              
                                                              0.24
                                                              
                                                              
                                                              
                                                              0.46
                                                              
                                                              
                                                              
                                                              0.58
                                                              
                                                              
                                                              
                                                              0.50Cash
      dividends paid
                                                              
                                                              
                                                              0.30
                                                              
                                                              
                                                              
                                                              0.30
                                                              
                                                              
                                                              
                                                              0.30
                                                              
                                                              
                                                              
                                                              0.31
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ENB
FINANCIAL CORP




Item9.
            Changes
      in and Disagreements with Accountant on Accounting and Financial
      Disclosure





None








Item9A (T).
            Controls
      and Procedures





(a)
Evaluation of Disclosure Controls and Procedures.





Management
carried out an evaluation, under the supervision and with the participation of
the Chief Executive Officer and Treasurer (Principal Accounting Officer), of the
effectiveness of the design and the operation of the Corporation’s disclosure
controls and procedures (as such term as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of December 31, 2008, pursuant to Exchange
Act Rule 13a-15.  Based upon that evaluation, the Chief Executive
Officer along with the Treasurer (Principal Accounting Officer) concluded that
the Corporation’s disclosure controls and procedures as of December 31, 2008,
are effective in timely alerting them to material information relating to the
Corporation required to be in the Corporation’s periodic filings under the
Exchange Act.





(b)
Changes in Internal Controls.





There
have been no changes in the Corporation’s internal controls over financial
reporting that occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Corporation’s internal control over financial reporting.





(c)
Report on Management’s Assessment of Internal Control over Financial
Reporting





The
Corporation is responsible for the preparation, integrity, and fair presentation
of the financial statements included in this annual report. The financial
statements and notes included in this annual report have been prepared in
conformity with United States generally accepted accounting principles and
necessarily include some amounts that are based on management's best estimates
and judgments.





Management
of the Corporation is responsible for establishing and maintaining effective
internal control over financial reporting that is designed to produce reliable
financial statements in conformity with United States generally accepted
accounting principles. The system of internal control over financial reporting
as it relates to the financial statements is evaluated for effectiveness by
management and tested for reliability through a program of internal audits.
Actions are taken to correct potential deficiencies as they are identified. Any
system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or
overridden and misstatements due to error or fraud may occur and not be
detected. Also, because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of internal control
will provide only reasonable assurance with respect to financial statement
preparation.





Management
assessed the Corporation’s system of internal control over financial reporting
as of December 31, 2008, in relation to criteria for effective internal control
over financial reporting as described in "Internal Control - Integrated
Framework," issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management concludes that, as of December
31, 2008, its system of internal control over financial reporting is effective
and meets the criteria of the "Internal Control – Integrated
Framework".





This
annual report does not include an attestation report of the Corporation’s
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Corporation’s registered public accounting firm pursuant to




89
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ENB
FINANCIAL CORP





temporary
rules of the Securities and Exchange Commission that permit the Corporation to
provide only management’s report in this annual report.







/s/  Aaron L. Groff,
      Jr.
                /s/  Scott E.
      LiedAaron
      L. Groff, Jr.
                Scott
      E. LiedPresident,
      Chief Executive Officer
                Treasurer&
      Chairman of the Board
                (Principal
      Financial Officer)Ephrata,
      PAMarch
      11, 2009






Item9B. Other Information






None




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ENB
FINANCIAL CORP


Part
III
 
 
 Item10. Directors and Officers and Corporate
Governance
 
 The
information required by this Item, relating to directors, executive officers,
and control persons is set forth under the captions, “Election of Directors,”
“Information as to Nominees and Directors,” “Nominees and Current Directors,”
“Officers of the Corporation,” and “Audit and Related Fees,” of the
Corporation’s definitive Proxy Statement to be used in connection with the
Annual Meeting of Shareholders, to be held on April 21, 2009, which are
incorporated herein by reference.
 
 Based
solely on its review of copies of the forms received from the directors,
officers, and 10% shareholders of the Corporation, management believes that
during fiscal year 2008, all applicable filings requirements under Section 16(a)
of the Securities Exchange Act of 1934 were complied with in a timely
manner.
 
 Item11.  Executive Compensation
 
 The
information required by this Item, relating to executive compensation, is set
forth under the captions, “Executive Compensation,” “Summary Compensation
Table,” “Compensation Discussion and Analysis,” Compensation Committee Report,”
and “Compensation Committee Interlocks and Insider Participation,” of the
Corporation’s definitive Proxy Statement to be used in connection with the
Annual Meeting of Shareholders, to be held on April 21, 2009, which is
incorporated herein by reference.
 
 Item12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
 
 The
information required by this Item, related to beneficial ownership of the
Corporation’s common stock, is set forth under the captions, “Principal
Beneficial Owner of the Corporation’s Stock,” and “Beneficial Ownership by
Officers, Directors and Nominees,” of the Corporation’s definitive Proxy
Statement to be used in connection with the Annual Meeting of Shareholders to be
held on April 21, 2009, which are incorporated herein by reference.
 
 Item13.  Certain Relationships and Related Transactions,
and Director Independence
 
 The
information required by this Item related to transactions with management and
others, certain business relationships and indebtedness of management, is set
forth under the caption, “Certain Transactions,” and “Nominees and Current
Directors” of the Registrant’s definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 21, 2009,which is incorporated
herein by reference.
 
 Item14.   Principal Accountant Fees and
Services
 
 The information required by this Item
related to fees and the audit committees pre-approved policies are set forth
under the caption, “Appointment of Independent Registered Public Accounting Firm
and “Audit and Related Fees” of the Corporation’s definitive Proxy Statement to
be used in connection with the Annual Meeting of Shareholders to be held on
April 21, 2009, which is incorporated herein by reference.
  91
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  ENB
FINANCIAL CORP
 
 Part
IV
 
 Item15.
              Exhibits,
      Financial Statement Schedules, and Reports on Form
  8-K
 
 (a)
              1.
              Financial
      Statements.
 
 The
following financial statements are included by reference in Part II, Item 8
hereof.
 
 Report of
Independent Registered Accounting Firm
 Balance
Sheets
 Statements
of Income
 Statements
of Stockholders’ Equity
 Statements
of Cash Flows
 Notes to
Financial Statements
 
 2.
              The
      financial statement schedules required by this Item are omitted because
      the information is either inapplicable, not required, or is shown in the
      respective financial statements or the notes
  thereto.
 
 3.
              The
      Exhibits filed herewith or incorporated by reference as a part of this
      Annual Report, are set forth in (c),
below.
 
 
 (b)
              EXHIBITS
 
 3
      (i)
                Articles
      of Association of the Registrant, as amended. (Incorporated herein by
      reference to Exhibit 3.1 of the Corporation’s Form 8-K12g3 filed with the
      SEC on July 1, 2008.)
 
 3
      (ii)
                Bylaws
      of the Registrant, as amended. (Incorporated herein by reference to
      Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on July 9,
      2008.)
 
 10.1
                Form
      of Deferred Income Agreement. (Incorporated herein by reference from
      Exhibit 10.1 to the Corporation’s Form 10-Q, filed with the SEC on August
      12, 2008.)
 
 10.2
                2001
      Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
      99.1 of the Corporation’s Registration Statement on Form S-8 filed with
      the SEC on July 9, 2008.)
 
 11
                Statement
      re:  Computation of Earnings per Share as found on pages 28 and
      63 of this 2008 Form 10-K filing, which is included
  herein.
 
 12
                Statement
      re:  Computation of Ratios as found on page 28 of this 2008 Form
      10-K filing, which is included
herein.
 
 14
                Code
      of Ethics Policy of Registrant as amended March 11,
  2009.
 
 23
                Consent
      of Independent Registered Public Accounting
Firm
 
 23.1
                Consent
      of Independent Auditors
 
 31.1
                Section
      302 Chief Executive Officer Certification (Required by Rule
      13a-14(a)/15a-14(a)).
 
 31.2
                Section
      302 Principal Financial Officer Certification (Required by Rule
      13a-14(a)/15a-14(a)).
 
 32.1
                Section
      1350 Chief Executive Officer Certification (Required by Rule
      13a-14(b)).
 
 32.2
                Section
      1350 Principal Financial Officer Certification (Required by Rule
      13a-14(b)).
 
 (c)
              NOT
      APPLICABLE.
 92
 Table of Contents
  ENB
FINANCIAL CORP
 
 SIGNATURES
 
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 
 ENB
      FINANCIAL CORPBy:
                /s/    Aaron
      L. Groff, Jr.Aaron
      L. Groff, Jr., Chairman of the Board,President
      and Chief Executive Officer
 
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 
 
 /s/   Aaron L. Groff,
      Jr.
                Chairman
      of the Board, President,
                March
      11, 2009(Aaron
      L. Groff, Jr.)
                Chief
      Executive Officer and Director/s/    Scott E.
      Lied
                Treasurer
                March
      11, 2009(Scott
      E. Lied)
                Principal
      Financial Officer)/s/    Paul W.
      Wenger
                Secretary
                March
      11, 2009(Paul
      W. Wenger)/s/    Donald Z.
      Musser
                Director
                March
      11, 2009(Donald
      Z. Musser)/s/    Willis R.
      Lefever
                Director
                March
      11, 2009(Willis
      R. Lefever)/s/   Susan Young
      Nicholas
                Director
                March
      11, 2009(Susan
      Young Nicholas)/s/    Bonnie R.
      Sharp
                Director
                March
      11, 2009(Bonnie
      R. Sharp)/s/    J. Harold
      Summers
                Director
                March
      11, 2009(J.
      Harold Summers)/s/    Mark C.
      Wagner
                Director
                March
      11, 2009(Mark
      C. Wagner)/s/    Paul M. Zimmerman,
      Jr.
                Director
                March
      11, 2009(Paul
      M. Zimmerman, Jr.)/s/    Thomas H.
      Zinn
                Director
                March
      11, 2009(Thomas
      H. Zinn)
 
 93
 Table of Contents
  ENB
 
  Exhibit
      No.
                    Description
                    Page
      number
                      on
      Manually Signed
                      Original3(i)
                    Articles
      of Association of the Registrant, as amended. (Incorporated herein by
      reference to Exhibit 3.1 of the Corporation’s Form 8-K12g3 filed with the
      SEC on July 1, 2008)3
      (ii)
                    Bylaws
      of the Registrant, as amended. (Incorporated herein by reference to
      Exhibit 3.2 of the Corporation’s Form 8-K filed with the SEC on July 9,
      2008.)10.1
                    Form
      of Deferred Income Agreement. (Incorporated herein by reference to the
      Corporation’s Quarterly Report on Form 10-Q filed with the SEC on August
      12, 2008.)10.2
                    2001
      Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit
      99.1 of the Corporation’s Registration Statement on Form S-8 filed with
      the SEC on July 9, 2008.)11
                    Statement
      re: Computation of Earnings Per Share as found on page 63 of Form 10-K,
      which is included herein.12
                    Statement
      re: Computation of Ratios as found on page 28 of Form 10-K, which is
      included herein.14
                    Code
      of Ethics Policy of Registrant as amended March 11, 2009
                    Page
      9523
                    Consent
      of Independent Registered Public Accounting Firm
                    Page
      10231.1
                    Section
      302 Chief Executive Officer Certification (Required by Rule
      13a-14(a)).
                    Page
      10331.2
                    Section
      302 Principal Financial Officer Certification (Required by Rule
      13a-14(a)).
                    Page
      10432.1
                    Section
      1350 Chief Executive Officer Certification (Required by Rule
      13a-14(b)).
                    Page
      10532.2
                    Section
      1350 Principal Financial Officer Certification (Required by Rule
      13a-14(b)).
                    Page
      106


94