Item 1A. RISK FACTORS.
Before investing in Embassy Bancorp, Inc. common stock, an investor should carefully consider the risk factors described below, which are not intended to be all inclusive, and review other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that we are not aware of, or that we currently deem less significant, or that we otherwise are not specifically focused on, may also impact our business, results of operations, and our common stock. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and an investor could lose all or part of his or her investment in the Company.
Unless the context otherwise requires, references to “we,” “us,” “our,” “Embassy,” or “Embassy Bancorp, Inc.,” collectively refer to Embassy Bancorp, Inc. and its banking subsidiary, and specific references to the “Bank” refer to Embassy Bank for the Lehigh Valley, the wholly-owned banking subsidiary of Embassy Bancorp, Inc.
Risks Related to Our Business
Changes in interest rates may adversely affect our earnings and financial condition.
Our ability to make a profit, like that of most financial institutions, substantially depends upon our net interest income, which is the difference between the interest income earned on interest earning assets, such as loans and
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investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or reduce net interest income and net income.
Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in the United States and other financial markets.
We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact and a substantial, unexpected, prolonged, or rapid change in interest rates could adversely affect our financial condition and results of operations.
Interest rate volatility could negatively affect our net interest income, lending activities, deposits, and profitability.
Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
Effects of inflation may adversely affect our profitability.
The majority of assets and liabilities of the Company are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Company is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Company’s assets, as well as the expense paid on our deposits and borrowings. Inflation may also affect the general level of interest rates, which can have a direct bearing on the profitability of the Company.
As a participating lender in the SBA’s PPP, we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
The Company participates in the SBA’s PPP under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). Under the PPP, small businesses and other entities and individuals applied for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. We participated as a lender in the PPP and started accepting applications from qualified borrowers on April 3, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to
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receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us. We are not aware of any fraud related to PPP loans originated by the Bank.
As of December 31, 2022, the Company had $286 thousand of PPP loans yet to be forgiven.
We are subject to credit risk.
As of December 31, 2022, excluding PPP loans, approximately 47 percent of the Company’s loan portfolio consisted of commercial, commercial construction, and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate or secured consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because our loan portfolio contains a significant number of commercial, commercial 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 our financial condition and results of operations.
Our allowance for loan losses may be insufficient.
We maintain an allowance for loan losses, which is a reserve established that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The Company has determined, because of the 100% SBA guarantee, that no allowance for loan losses is required on the PPP loan portfolio. 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. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires us 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 credits and other factors, both within and outside of our control, may require an increase in the allowance. In addition, bank regulatory agencies periodically review our allowance for possible loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on information unavailable to, or judgments different than those of, management. In addition, if charge-offs in future periods exceed the allowance, we may need additional provisions to increase the allowance for possible loan losses. Any increases in the allowance resulting from loan loss provisions will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.
The FASB issued an accounting standard on allowance for loan losses. This new accounting standard became effective for us beginning on January 1, 2023. This standard, referred to as CECL, requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan losses. CECL may cause volatility in the allowance due to its forecasting requirement. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
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Our profitability depends significantly on economic conditions in Pennsylvania.
Unlike larger or regional financial institutions that are more geographically diversified, our success is dependent to a significant degree on economic conditions in Pennsylvania, especially in Lehigh and Northampton Counties, which are the counties and markets primarily served by us in the years up to and including 2022. The banking industry is affected by general economic conditions, including the effects of inflation, recession, unemployment, real estate values, trends in national and global economics, and other factors beyond our control. An economic recession or a delayed recovery over a prolonged period of time in Pennsylvania, or more specific to the areas served by us, could cause an increase in the level of the Bank’s non-performing assets and loan losses, thereby causing operating losses, impairing liquidity, and eroding capital. We can give no assurance that adverse changes in the local economy would not have a material adverse effect on our consolidated financial condition, results of operations, and cash flows.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. The geographic market the Company serves is highly competitive for deposits and loans. The Company competes with local, regional, and national traditional banking institutions, as well as non-bank financial service providers such as credit unions, brokerage firms, insurance companies and mortgage companies. In the Company’s primary market area, major regional and super-regional banks generally hold larger market share positions. By virtue of their larger capital bases and greater financial resources, these institutions have significantly larger lending limits, more robust advertising campaigns, larger branch networks, and can invest in technology on a larger scale. The industry, as a whole, competes primarily in the area of interest rates, products offered, customer service and convenience. Our profitability depends upon our ability to successfully compete in our market area.
The Basel III capital rules require us to maintain higher levels of capital, which could reduce our profitability.
Basel III targets higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital. Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. In the future, we may be required to maintain higher levels of capital, thus potentially reducing opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to us, and adversely impact our financial condition and results of operations.
If our information systems are interrupted or sustain a breach in security, those events may negatively affect our financial performance and reputation.
In conducting our business, we rely heavily on our information systems. Maintaining and protecting those systems and data is difficult and expensive, as is dealing with any failure, interruption, or breach in security of these systems, whether due to acts or omissions by us or by a third party, and whether intentional or not. Any such failure, interruption, or breach could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. A breach of our information security may result from fraudulent activity committed against us or our customers, resulting in financial loss to us or our customers, or privacy breaches against our customers. Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering, identity theft, or other deceptive acts. Such fraudulent activity could be heightened by geopolitical events, including the Russia/Ukraine conflict. The policies, procedures, and technical safeguards put in place by us to prevent or limit the effect of any failure, interruption, or security breach of our information systems and data may be insufficient to prevent or remedy the effects of any such occurrences. The occurrence of any failures, interruptions, or security breaches of our information systems, or those of our third party vendors, and data could damage our reputation, cause us to incur additional expenses, result in online services or other businesses becoming inoperable, subject us to regulatory sanctions or additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
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Our business operations and interaction with customers are increasingly done via electronic means, and this has increased risks related to cyber security.
We are exposed to the risk of cyber-attacks in the ordinary course of our business. In general, cyber incidents can result from deliberate attacks or unintentional events. An increased level of attention in the industry is focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, we have policies and procedures in place to prevent or limit the effect of the possible security breach of our information systems and we have insurance against some cyber-risks and attacks. While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs, which may include liability for stolen assets or information and repairing system damage; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are 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 us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our 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 our results of operations and financial condition.
We are required to make a number of judgments in applying generally accepted accounting principles and different estimates and assumptions in the application of these standards could result in a decrease in capital and/or other material changes to our reports of financial condition and results of operations.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and reserve for unfunded lending commitments, and the fair value of certain financial instruments (securities). While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these standards could result in a decrease to net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations. From time to time, the FASB and the SEC issues changes to or updated interpretations of the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes are beyond our control, can be difficult to predict, and could materially impact how we report our financial condition and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior financial statements by material amounts. The implementation of new or revised guidance could also result in material adverse effects to our reported capital.
Prior levels of market volatility were unprecedented and future volatility may have materially adverse effects on the market price of our common stock, our liquidity and financial condition.
Starting in March 2020, the capital and credit markets have experienced extreme volatility and disruption related to the COVID-19 pandemic and, more recently, as a result of the failures of Silicon Valley Bank (“SVB”) and Signature Bank. In many cases, the markets exerted downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying financial strength. If such levels of market disruption and volatility continue, there can be no assurance that we will not experience adverse effects, which may materially affect the market price of our common stock and/or our liquidity, financial condition, and profitability.
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Our banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect our earnings.
Poor economic conditions and the resulting bank failures from the most recent recession have stressed the Deposit Insurance Fund and increased the costs of our FDIC insurance assessments. Promptly following the recent failures of SVB and Signature Bank in March 2023, the federal banking regulators announced that the FDIC will use funds from the Deposit Insurance Fund to ensure that all depositors in SVB and Signature Bank are made whole, at no cost to taxpayers. We anticipate that the FDIC will impose special assessments on all banks in order to replenish the DIF, in addition to the recently announced increase in premiums. Additional bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments. We are generally unable to control the amount of premiums or special assessments that our banking subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and our ability to continue to pay dividends on our common stock at the current rate or at all.
If we conclude that the decline in the value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value of individual securities or the portfolio as a whole is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. Due to the complexity of the calculations and assumptions used in determining whether an asset is impaired, the impairment disclosed, or lack thereof, may not accurately reflect the actual impairment in the future.
Our financial performance may suffer if our information technology is unable to keep pace with our growth or industry developments.
Effective and competitive delivery of our products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors. In addition to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have greater resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for us. Our failure to timely and effectively implement technological advances could adversely affect our financial condition and results of operations.
We are highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. A cybersecurity breach of a vendor’s system may result in theft of our data or disruption of business processes. In most cases, we will remain primarily liable to our customers for losses arising from a breach of a vendor’s data security system. We rely on our outsourced service providers to implement and maintain prudent cybersecurity controls. We have procedures in place to assess a vendor’s cybersecurity controls prior to establishing a contractual relationship and to periodically review assessments of those control systems; however, these procedures are not infallible, and a vendor’s system can be breached despite the procedures we employ. We cannot be sure that we will be able to maintain these relationships on favorable terms. The loss of these vendor relationships could disrupt the services we provide to our customers and cause us to incur expense in connection with replacing these services.
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The soundness of other financial institutions may adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be readily realized or liquidated at prices sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
On March 10, 2023, the FDIC took control and was appointed receiver of SVB, and on March 12, 2023, the FDIC took control and was appointed receiver of Signature Bank, in each case due primarily to liquidity concerns related to those institutions. As of March 13, 2023, we did not have any direct exposure to SVB or Signature Bank. However, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
The trading volume in our common stock is less than that of larger public companies, which can contribute to volatility in our stock price and adversely affect the liquidity of an investment in our common stock.
Our common stock is not traded on a security exchange. Trades in our stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets, but trading in our stock is sporadic. The trading history of our common stock has been characterized by relatively low trading volume. This lack of an active public market means that the value of a shareholder’s investment in our common stock may be subject to sudden fluctuations, as individual trades have a greater effect on our reported trading price than would be the case in a broad public market with significant daily trading volume.
The market price of our common stock may also be subject to fluctuations in response to numerous other factors, including the factors discussed in this report, regardless of our actual operating performance. The possibility of such fluctuations occurring is increased due to the illiquid nature of the trading market of our common stock. Therefore, a shareholder may be unable to sell our common stock at or above the price at which it was purchased, at or above the current market price, or at the time of his, her or its choosing.
Our insiders control a substantial percentage of our stock and therefore have the ability to exercise significant control over our affairs.
As of December 31, 2022, our directors and executive officers beneficially owned in excess of 28% of our issued and outstanding common stock on a fully diluted basis. Such persons, as a group, will have sufficient votes to strongly influence the outcome of all matters submitted to our shareholders, including the election of directors. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company.
Our ability to pay dividends on our common stock, and principal and interest on our debt, depends primarily on dividends from our banking subsidiary, which is subject to regulatory limits.
Embassy Bancorp, Inc. is a bank holding company and its operations are conducted by its direct and indirect subsidiaries, primarily the Bank. Our ability to pay dividends on our common stock and principal and interest on our debt depends on our receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of the Bank to pay dividends is also subject to profitability, financial condition, liquidity, and capital management limits. There is no assurance that our subsidiary will be able to pay dividends in the future or that we will generate adequate cash flow to pay dividends in the future. Federal Reserve policy, which applies to us as a
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registered bank holding company, also provides that dividends by bank holding companies should generally be paid out of earnings from both the current period and a designated look-back period. Our failure to pay dividends on our common stock could have a material adverse effect on the market price of our common stock.
Provisions of our articles of incorporation and bylaws, Pennsylvania law, state and federal banking regulations, and our significant percentage of insider ownership, could act to delay or prevent a takeover by a third party.
Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquireus, even if the acquisition would be advantageous to our shareholders. By incorporating under Pennsylvania law, our board of directors owes its fiduciary duty solely to the corporation. As such, Pennsylvania law does not require a director to act solely because of the effect such action might have on an acquisition or potential acquisition of control of the corporation or the consideration that might be offered or paid to shareholders in such an acquisition. Additionally, Pennsylvania law:
expands the factors and groups which a corporation’s board of directors can consider in determining whether an action is in the best interests of the corporation, including the effect of such action on its shareholders, employees, suppliers, customers, creditors and communities;
provides that a corporation’s board of directors need not consider the interests of any particular group (including the shareholders) as dominant or controlling;
provides that a corporation’s directors, in order to satisfy the presumption that they have acted in the best interests of the corporation, need not satisfy any greater obligation or higher burden of proof with respect to actions relating to an acquisition or potential acquisition of control; and
provides that actions relating to acquisitions of control that are approved by a majority of “disinterested directors” are presumed to satisfy the directors’ standard, unless it is proven by clear and convincing evidence that the directors did not assent to such action in good faith after reasonable investigation.
In addition, we have various anti-takeover measures in place under our articles of incorporation and bylaws, including a supermajority vote requirement for mergers, advance notice requirements for nominations for election of directors and the presentation of shareholder proposals at meetings of shareholders, a staggered Board of Directors, and the absence of cumulative voting.
Further, federal and state banking laws and regulations generally require filings and approvals prior to certain transactions that would result in a party acquiring control of our company.
Any one or more of these laws or measures, particularly when coupled with the fact that our insiders hold approximately 28% of our voting shares, may impede the takeover of the Company and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.
General Risk Factors
Our controls and procedures may fail or could be circumvented.
Management has implemented a series of internal controls, disclosure controls and procedures, and corporate governance policies and procedures in order to ensure accurate financial control and reporting. However, any system of controls, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure or circumvention of our controls and/or procedures could have a material adverse effect on our business and results of operation and financial condition.
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Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.
We have assembled a leadership management team which has substantial background and experience in banking and financial services in the markets we serve. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on our business and operations.
Acts of war or terrorism, natural disasters, global climate change, pandemics, global conflicts, geopolitical events, including the military tensions between Russia and Ukraine, or other similar events, or a combination of these factor or other factors, could have a negative impact on our business and operations. While we have in place business continuity plans, such events could still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict.
Negative public opinion could damage our reputation and adversely affect our earnings.
Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including banking operations, our management of actual or potential conflicts of interest and ethical issues, and our protection of confidential client information. Negative public opinion can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in the way we conduct our business activities and deal with our customers, communities and vendors, these steps may not be effective.
If we need to, or are compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
Federal banking regulators require us and our bank subsidiary to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation, and bank regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that they believe are necessary to support our business operations. As of December 31, 2022, all three capital ratios for us and our banking subsidiary were above “well capitalized” levels under current bank regulatory guidelines.
Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms and time frames acceptable to us or to raise additional capital at all. If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition, and results of operating. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through issuance of additional shares of common stock may have an adverse impact on our stock price.
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Our common stock is equity and is subordinate to all of our existing and future indebtedness.
Shares of our common stock are equity interests in our company and do not constitute indebtedness. As such, shares of our common stock rank junior to all indebtedness and other non-equity claims on us with respect to assets available to satisfy claims on us, including in a liquidation of us. Also, our right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors, including the preferred claims of the Bank’s depositors.
Our common stock is not insured by any governmental entity.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section. As a result, if you acquire our common stock, you may lose some or all of your investment.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
The Company, through the Bank, occupies ten (10) full-service banking offices in the Lehigh Valley:
Northampton County:
Hanover Township (includes administrative offices)
Lower Saucon Township
Lower Nazareth Township
Borough of Nazareth
Lehigh County:
South Whitehall Township
Salisbury Township
Lower Macungie Township
City of Bethlehem
Borough of Macungie
City of Allentown
The Company currently leases nine (9) of its bank premises and leases the land at Borough of Macungie branch. The Borough of Macungie branch building is owned by the Company.
Item 3. LEGAL PROCEEDINGS.
The Company and the Bank are an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Company’s operations or financial position.
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a)Shares of Company common stock are traded over-the-counter and in privately negotiated transactions. The Company’s common stock is not listed on any national securities exchange.
Trades in Company common stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets under the symbol “EMYB”. The following table reflects high and low bid prices for shares of the Company’s common stock for the periods indicated, based upon information derived from www.otcmarkets.com.
High Low High Low
The above quotations may not reflect inter-dealer prices and should not be considered over-the-counter market quotations as that term is customarily used.
(b)As of March 10, 2023, there are approximately 863 owners of record of the common stock of the Company.
(c)On July 15, 2022, the Company paid $2,643,640 or $0.35 per share, in an annual cash dividend on its common stock. On July 16, 2021, the Company paid $2,252,429 or $0.30 per share, in an annual cash dividend on its common stock. As a general matter, cash available for dividend distribution to shareholders of the Company may come from dividends paid to the Company by the Bank, depending upon existing cash levels at the Company. See “Supervision and Regulation – Dividend Restrictions” in Item 1 of this report for a description of restrictions that may limit the Company’s ability to pay dividends on its common stock.
(d)The following table sets forth information about options outstanding under the Company’s shareholder approved Stock Incentive Plan, as of December 31, 2022:
Equity Compensation Plans andIndividual Employment Agreements - N/A 407,875
(e)Sales of Securities.
None.
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Embassy Bancorp, Inc.
(f)Repurchase of Equity Securities.
The following table sets forth the number of shares of common stock repurchased by the Company, and the average price paid for such shares, during the fourth quarter of 2022. The Company has not publicly announced any purchase plan or program.
Issuer Purchases of Equity Securities
October 1 - 31, 2022 N/A N/A N/A N/A
November 1 - 30, 2022 N/A N/A N/A N/A
Item 6. [Reserved]
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis provides an overview of the consolidated financial condition and results of operations of the Company for the years ended December 31, 2022 and 2021. This discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report.
Critical Accounting Estimates and Judgements
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which require the Company to make estimates and assumptions. The Company believes that its determination of the allowance for loan losses involves a higher degree of judgment and complexity than the Company’s other significant accounting policies. Further, this estimate can be materially impacted by changes in market conditions or the actual or perceived financial condition of the Company’s borrowers, subjecting the Company to significant volatility of earnings.
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Company maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is established through the provision for loan losses, which is a charge against earnings. Provision for loan losses is made to reserve for estimated probable losses on loans. The allowance for loan losses is a significant estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in actual and forecasted credit quality, including delinquency, charge-off and bankruptcy rates, and current economic conditions that may affect a borrower’s ability to pay. The use of different estimates or assumptions could produce different provision for loan losses. Management believes the allowance for loan losses is adequate and reasonable. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Provision for Loan Losses” and “Allowance for Loan Losses” in Notes 1 and 3 to the consolidated financial statements. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for
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Embassy Bancorp, Inc.
loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
GENERAL
The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the BHC Act. The Company was formed for purposes of acquiring the Bank in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow.
The Bank, which is the Company’s primary operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.
Since its inception, the Board’s philosophy has been that, by running the Bank with a view toward the long term, only good things will happen for the Bank’s customers, team members, shareholders, and the Lehigh Valley community.
OVERVIEW
The Company’s assets grew $7.0 million from $1.63 billion at December 31, 2021 to $1.64 billion at December 31, 2022. The increase was due to an increase of $6.7 million in securities available for sale, an increase of $99.6 million in net loans receivable (excluding PPP loans), and an increase of $11.8 million in other assets; offset by a decrease of $102.4 million in cash and cash equivalents and a decrease of $8.3 million in net PPP loans receivable due to net loan forgiveness. The decrease in cash and cash equivalents was primarily due to repayments of FHLB long term borrowings of $14.7 million maturing during the first quarter of 2022, purchases of available for sale securities, and net loan growth (excluding PPP), offset, in part, by the forgiveness of PPP loans, an increase in deposits, and an increase in securities sold under agreement to repurchase. The $6.7 million growth in securities available for sale was net of an increase in unrealized losses of $63.2 million. The increase of $11.8 million in other assets was primarily due to the growth of $13.3 million in the deferred tax asset in relation to unrealized losses on securities. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in response to economic conditions since purchase and not due to credit quality of the investment portfolio.
Net loans receivable (excluding PPP loans) increased by $99.6 million to $1.20 billion at December 31, 2022 from $1.10 billion at December 31, 2021. The market continues to be very competitive and the Company is committed to maintaining a high-quality portfolio that returns a reasonable market rate. While the past and current economic and competitive conditions in the marketplace have created more competition for loans to credit-worthy customers, the Company continues to expand its market presence and pipeline, and continues to focus on developing a reputation as being a market leader in both commercial and consumer/mortgage lending. Management believes that this combination of relationship building, cross marketing and responsible underwriting will translate into continued long-term growth of a portfolio of quality loans and core deposit relationships, although there can be no assurance of this. The Company continues to monitor interest rate exposure of its interest-bearing assets and liabilities and believes that it is well positioned for any anticipated future market rate adjustments. See expanded discussion under the Financial Condition: Loans section below.
The Company's deposits grew $54.1 million from $1.47 billion at December 31, 2021 to $1.52 billion at December 31, 2022. The overall deposit growth was due to a highly effective relationship building, sales and marketing effort, which served to further increase the Company’s overall presence in the market it serves, along with deposit relationships developed as a result of cross-marketing efforts to its loan and other non-depository banking service customers. Also contributing to the growth is the increased usage of the Company’s online banking platform, competitively offered rates, and the continued convenience and efficiency of our branch network and branch personnel. The Company also continues to gain new deposit opportunities created by mergers, name changes, and
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Embassy Bancorp, Inc.
competitive branch hour adjustments and/or closures in the Company’s market area, attracting new customers looking to relocate to a local, reputable community bank.
The Company’s net income increased $916 thousand, or 5.5%, to $17.7 million in 2022 from $16.8 million in 2021. Diluted earnings per share increased to $2.34 in 2022 from $2.22 in 2021, and basic earnings per share increased to $2.34 in 2022 from $2.23 in 2021, respectively. The difference in net income for the year ended December 31, 2022 and December 31, 2021 resulted from increases in net interest income and a decrease in the provision for loan losses; offset by a slight decrease in non-interest income and an increase in non-interest expenses and income tax expense. The Company’s pre-tax net income for 2021 included $2.7 million of PPP loan interest and fees, as compared to $184 thousand for 2022.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The majority of the Company’s earnings derives from net interest income, which is the difference between income earned on assets and the cost supporting those assets. The net interest margin is the ratio of net interest income to average earning assets. Earning assets are composed primarily of loans and investments, along with interest-bearing deposits with other banks. Interest-bearing deposits and borrowings make up the cost of funds. Non-interest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income and net interest margin. The timing of deposit and loan growth also impacts net interest income.
Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Interest rate spread is the mathematical difference between the average interest earned on earning assets and interest paid on interest bearing liabilities. Interest margin represents the net interest yield on earning assets. The interest margin gives a reader a better indication of asset earning results when compared to peer groups or industry standards.
The Company determines interest rate spread and margin on both US GAAP and tax equivalent basis. The use of tax equivalent basis in determining interest rate spread and margin is considered a non-US GAAP measure. The Company believes use of this measure provides meaningful information to the reader of the consolidated financial statements when comparing taxable and non-taxable assets. However, it is supplemental to US GAAP which is used to prepare the Company’s consolidated financial statements and should not be read in isolation or relied upon as a substitute for US GAAP measures. In addition, the non-US GAAP measure may not be comparable to non-US GAAP measures reported by other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2022 and 2021.
2022 Compared to 2021
Total interest income for the year ended December 31, 2022 was $50.4 million, compared to $47.5 million for the year ended December 31, 2021. Average earning assets were $1.58 billion for the year ended December 31, 2022 as compared to $1.47 billion for the year ended December 31, 2021. The tax equivalent yield on average earning assets was 3.22% for the year ended December 31, 2022 as compared to 3.25% for the year ended December 31, 2021.
Total interest expense for the year ended December 31, 2022 increased $91 thousand to $4.1 million, as compared to $4.0 million for the year ended December 31, 2021. Average interest bearing liabilities were $1.16 billion for the year ended December 31, 2022 as compared to $1.08 billion for the year ended December 31, 2021. The yield on average interest bearing liabilities was 0.35% and 0.37% for the year ended December 31, 2022 and December 31, 2021, respectively.
Net interest income increased $2.8 million, or 6.4%, to $46.3 million for the year ended December 31, 2022 as compared to $43.5 million for the year ended December 31, 2021. The improvement in net interest income is, in part, the result of an increase in the balances of taxable and non-taxable loans, an increase in taxable and non-taxable
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Embassy Bancorp, Inc.
investments due to purchases of $93.3 million in 2022, along with an increase in the rates of non-taxable loans, taxable and non-taxable investments, federal funds sold, and interest bearing deposits with banks. Also contributing to the improvement in net interest income for the year ended December 31, 2022 was a decrease in the balance of certificates of deposit, a decrease in interest expense on long term FHLB borrowings due to repayment in the first quarter of 2022, and no interest expense from PPPLF borrowings due to repayment in the first quarter of 2021. The improvements were offset, in part, by a decrease in the interest and fee income from PPP loans, a decrease in the balance of interest bearing due from banks, a decrease in the rates of taxable loans, and an increase in the balance and rates of interest bearing demand deposits, NOW, money market, and savings, along with an increase in the rate of certificates of deposit. The Company’s net interest margin for the year ended December 31, 2022 was 2.94% on a US GAAP basis and 2.96% on a non-US GAAP basis, compared to 2.96% on a US GAAP basis and 2.98% on a non-US GAAP basis for the year ended December 31, 2021.
The Company’s net interest margin was also affected by the balance of PPP loans, which bear interest at a rate of 1.0%, and PPPLF borrowings, which bore an interest rate of 0.35% and were paid off in early February 2021. The net interest margin on a tax equivalent (non-US GAAP) basis excluding PPP loans and PPP interest income and PPPLF borrowings interest expense for the year ended December 31, 2022 was 2.97%, compared to 2.86% for the year ended December 31, 2021.
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Embassy Bancorp, Inc.
The following table includes the average balances, interest income and expense and the average rates earned and paid for assets and liabilities for the periods presented. All average balances are daily average balances.
Average Balances, Rates and Interest Income and Expense
Average Tax Equivalent Average Tax Equivalent
Balance Interest Yield Balance Interest Yield
(Dollars in Thousands)
ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND
Tax equivalent adjustments:
Total tax equivalent adjustments 373 321
Net interest income on a tax equivalent basis $ 46,655 $ 43,815
Net interest spread (US GAAP basis) 2.84% 2.86%
Net interest margin (US GAAP basis) 2.94% 2.96%
Net interest spread (non-US GAAP basis) (3) 2.87% 2.88%
Net interest margin (non-US GAAP basis) (3) 2.96% 2.98%
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Embassy Bancorp, Inc.
The table below demonstrates the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.
Increase (decrease) due to changes in:
(In Thousands)
Volume Rate Total
Interest-earning assets:
Loans - Paycheck Protection Program (2,598) 35 (2,563)
Loans - non-taxable 5 11 16
Investment securities - non-taxable 122 60 182
Federal funds sold - 17 17
Interest bearing deposits with banks (31) 922 891
Total net change in income on
Interest-bearing liabilities:
Interest bearing demand deposits,
Securities sold under agreements to
repurchase and other borrowings (52) (23) (75)
Paycheck Protection Program
Liquidity Facility borrowings (15) - (15)
Total net change in expense on
interest-bearing liabilities (135) 226 91
Provision for Loan Losses
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level management considers to be adequate to provide for losses that can be reasonably anticipated. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. The Company has determined, because of the 100% SBA guarantee, that no allowance for loan losses is required on PPP loans.
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Embassy Bancorp, Inc.
The allowance consists of general, specific, and unallocated components. The general component covers non-classified loans and classified loans not considered impaired, and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are classified as impaired and/or restructured. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. An allowance for loan losses is not maintained on loans designated as held for sale.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or there is a possible loss expected.
For the year ended December 31, 2022, the provision for loan losses was $895 thousand, compared to $915 thousand for the year ended December 31, 2021. Gross loans, excluding PPP loans, grew $100.3 million, or 9.1%, in 2022 over 2021. During the year ended December 31, 2022, there were no charge-offs and $70 thousand in recoveries, as compared to $4 thousand in charge-offs and $3 thousand in recoveries for the year ended December 31, 2021. The provision for loan losses is a function of the allowance for loan loss methodology that the Bank uses to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. During the years ending December 31, 2022 and 2021, the Company adjusted the economic risk factor and other external factor methodologies to incorporate the current economic implications of inflation rates, gas prices, supply chain disruptions, and any future interest rate increases. See further discussion following in the “Credit Risk and Loan Quality” section of the Bank’s considerations of its December 31, 2022 allowance for loan loss levels. The allowance for loan losses as of December 31, 2022 was $12.4 million representing 1.03% of outstanding loans receivable (excluding PPP loans), as compared to $11.5 million as of December 31, 2021, representing 1.04% of outstanding loans receivable. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Bank’s market area, the allowance is believed to be adequate to absorb any losses inherent in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate. The Bank has not participated in any sub-prime lending activity.
Non-interest Income
Non-interest income is derived from the Company’s operations and represents primarily merchant and credit card processing fees, debit card interchange fees, service fees on deposit and loan relationships and income from bank owned life insurance. Non-interest income also may include net gains and losses from the sale of available for sale securities, loans, and other real estate owned.
Total non-interest income decreased by $57 thousand from $2.4 million at December 31, 2021 to $2.3 million for the year ended December 31, 2022. The slight decrease is, in part, attributable to a decrease in bank owned life insurance
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Embassy Bancorp, Inc.
income of $83 thousand. The decrease in the bank owned life insurance income was primarily due to a decrease in separate account life insurance assets driven by the effect market conditions had on underlying life insurance assets, offset by death benefit proceeds recognized in the first quarter of 2022. Additional decreases in non-interest income are attributable to the gain on the sale of securities of $24 thousand and gain on the sale of other real estate owned of $103 thousand for the year ended December 31, 2021, compared to no gains on the sale of securities and no gains on the sale of real estate owned for the year ended December 31, 2022. The decrease was offset by an increase in merchant and credit card processing fees of $35 thousand, an increase in debit card interchange fees of $21 thousand, and an increase of $97 thousand in other service fees, in part, due to an expanding customer base, overdraft fees, and early certificates of deposit withdrawals. As the deposit customer account base continues to grow and the Company continues to mature and develop additional sources of fee income, non-interest income is expected to become a more significant contributor to the overall profitability of the Company. Currently, and unlike many in the industry, the Company does not derive additional non-interest fee income by selling its mortgages in the secondary market, nor does it offer trust or investment/brokerage services to its customers.
Non-interest Expense
Non-interest expenses represent the normal operating expenses of the Company. These expenses include salaries, employee benefits, occupancy, equipment, data processing, advertising and other expenses related to the overall operation of the Company.
Non-interest expenses for the year ended December 31, 2022 was $25.7 million, compared to $24.1 million for the year ended December 31, 2021. The increase in non-interest expenses is primarily due to an increase of $1.3 million, or 10.3%, over 2021, in salaries and employee benefits. The Company had an increase in full-time equivalent employees from one hundred six (106) at December 31, 2021 to one hundred nine (109) at December 31, 2022, respectively. New hires included a commercial lender and various branch and other operational personnel. The increase in the number of employees, together with the annual increases in salaries and benefits, an increase in employee taxes, an increase in health insurance cost, an increase in stock grant expense, a decrease in deferred loan costs primarily associated with no PPP loan originations in 2022, offset by a decrease in non-qualified pension expense, resulted in an increase in overall salary and benefits. Additional increases in non-interest expenses are attributable to an increase of $75 thousand in occupancy and equipment due, in part, to the opening of the Company’s new branch office at 2002 West Liberty Street in Allentown, Pennsylvania, along with an increase in other occupancy expenses, an increase of $279 thousand in data processing due primarily to e-commerce, the expanding customer base, fees for the Company’s transition to a new online banking platform, an increase in data communications due to fees associated with switching to a new vendor, along with an increase in ATM network fees, an increase of $100 thousand in professional fees, an increase of $65 thousand in charitable contributions primarily due to a Neighborhood Assistance Program contribution made in the first quarter of 2022, and a $190 thousand increase in other expenses due, in part, to an increase in bank shares tax, director compensation, customer entertainment, employee activities, and debit card production, offset by a decrease in operating expenses. These increases in non-interest expenses were offset, in part, by a decrease of $178 thousand in advertising and promotions, a decrease of $87 thousand in FDIC insurance due to a decrease in the quarterly assessment multiplier, and a decrease of $88 thousand in loan and real estate expenses primarily due to decreases in recording and filing fees, legal loan fees, appraisal fees, and other loan expenses. The Company’s efficiency ratio was 52.9% and 52.6% for the year ending December 31, 2022 and 2021, respectively.
A breakdown of other non-interest expenses is included in the Consolidated Statements of Income in the Consolidated Financial Statements included in Item 8 of this Report.
Income Taxes
The provision for income taxes was $4.3 million and $4.1 million for the years ended December 31, 2022 and December 31, 2021, respectively. The effective rate on income taxes for the years ended December 31, 2022 and 2021 was 19.5%, respectively.
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Embassy Bancorp, Inc.
FINANCIAL CONDITION
Securities
The Company’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Company intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is generally structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. Investment securities consist primarily of mortgage-backed securities issued by FHLMC or FNMA, taxable and non-taxable municipal bonds, government agency bonds, and Treasury bonds. The Company holds no high-risk or direct internationally exposed securities or derivatives as of December 31, 2022. The Company has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans. The current liquidity of the portfolio has been impacted by the increase in market interest rates. Selling of securities would not be a primary source of short term liquidity needs given the unrealized losses currently in the portfolio.
The Company’s securities portfolio was $317.0 million at December 31, 2022, a $6.7 million increase from securities of $310.3 million at December 31, 2021.The increase in the investment portfolio resulted from the purchase of twelve (12) mortgage-backed securities, two (2) government agency bonds, twenty-five (25) tax-free municipal bonds, twelve (12) taxable municipal bonds, and eight (8) Treasury bonds totaling $93.3 million; offset by principal pay downs on mortgage-backed securities, the calls of seven (7) non-taxable municipal bonds, and the maturity of one (1) taxable municipal bond totaling $23.8 million, and an increase in unrealized losses of $63.2 million. The carrying value of the securities portfolio as of December 31, 2022 includes a net unrealized loss of $64.7 million, which is recorded as accumulated other comprehensive loss in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $1.5 million at December 31, 2021. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in 2022 in response to economic conditions since purchase. No securities are deemed to be other than temporarily impaired and the Company has the intent and ability to hold the securities until maturity or market price recovery.
The following table sets forth the composition of the securities portfolio at fair value as of December 31, 2022 and 2021.
(In Thousands)
U.S. Treasury securities $ 16,771 $ -
U.S. Government sponsored enterprise (GSE)
- Mortgage-backed securities - commercial 434 530
U.S. Government sponsored enterprise (GSE)
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Embassy Bancorp, Inc.
The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2022. Maturities of mortgage-backed securities are based on estimated life. Yields are based on amortized cost.
Securities by Maturities
1 year or Less 1-5 Years 5-10 Years Over 10 Years Total
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars In Thousands)
U.S. Government agency
U.S. GSE - Mortgage-
backed securities-
U.S. GSE - Mortgage-
backed securities-
Loans
The loan portfolio comprises a major component of the Company’s earning assets. All of the Company’s loans are to domestic borrowers. Total net loans receivable (excluding PPP loans) at December 31, 2022 increased $99.6 million to $1.20 billion from $1.10 billion at December 31, 2021. The gross loan-to-deposit ratio (excluding PPP loans) increased from 76% at December 31, 2021 to 79% at December 31, 2022. The Company’s loan portfolio at December 31, 2022 was comprised of residential real estate and consumer loans of $644.8 million, an increase of $25.4 million from December 31, 2021, and commercial loans of $563.6 million, an increase of $74.9 million from December 31, 2021. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans. The Company was a participant in the SBA PPP to support the needs of its small business clients. PPP loans receivable at December 31, 2022 and December 31, 2021 was $286 thousand and $8.6 million, respectively.
Payment accommodations related to COVID-19 assistance were in the form of short-term (six months or less) principal and/or interest deferrals and the loans were considered current at the time of the accommodation. These payment accommodations were made in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and the Company did not categorize these modifications as troubled debt restructurings. As of December 31, 2022, the Company had one hundred fifty-eight (158) loans totaling $98.9 million, for which the payment accommodation period has ended and the loans have resumed payments under their original contractual terms.
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Embassy Bancorp, Inc.
The following table sets forth information on the composition of the loan portfolio by type at December 31, 2022 and 2021. All of the Company’s loans are to domestic borrowers.
Percentage of Percentage of
Balance total Loans Balance total Loans
(Dollars in Thousands)
Unearned origination costs 275 25
The following table shows the maturities of the commercial and consumer loan portfolios and the loans subject to interest rate fluctuations at December 31, 2022.
(In Thousands)
Credit Risk and Loan Quality
The allowance for loan losses increased $965 thousand to $12.4 million at December 31, 2022 from $11.5 million at December 31, 2021. At December 31, 2022 and December 31, 2021, the allowance for loan losses represented 1.03% and 1.04% of total loans receivable, respectively. During 2022, the Company increased the other economic conditions methodology to reflect record inflation, continued supply chain disruptions, and overarching economic implications caused by the Ukraine conflict, leading to an increase in the allowance for loan losses and a decrease in the unallocated reserve. In determining its allowance for loan loss level at December 31, 2022, the Company considered the health and composition of its loan portfolio going into and during the COVID-19 pandemic. All loans that had the CARES Act Section 4013 modification are provided additional qualitative reserve in the Company’s allowance for loan loss calculation. The Company’s non-performing loans to total loans receivable and nonperforming loans to total
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Embassy Bancorp, Inc.
loans receivable excluding PPP loans was 0.20% at December 31, 2022 and 0.23% at December 31, 2021. At December 31, 2022 approximately 95% of the Company’s loan portfolio is collateralized by real estate. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Company and comparable institutions in the Company’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses. The Company will continue to evaluate the allowance for loan losses as new information becomes available. The Company adopted the Current Expected Credit Losses (“CECL”) FASB accounting standard effective January 1, 2023.
In certain circumstances in which the Company has deemed it prudent for reasons related to a borrower’s financial condition, the Company has agreed to restructure certain loans (referred to as troubled debt restructurings). Troubled debt restructured loans, which are considered non-performing loans, outstanding at December 31, 2022 and December 31, 2021 totaled $2.2 million and $2.4 million, respectively. Generally, a loan is classified as nonaccrual when it is determined that the collection of all or a portion of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection. A non-performing loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Non-accrual loans outstanding as of December 31, 2022 and December 31, 2021 totaled $192 thousand and $242 thousand, respectively. The Company’s non-performing loans to total loans receivable was 0.20% at December 31, 2022, compared to 0.23% at December 31, 2021. During the year ended December 31, 2022, there were no charge-offs and $70 thousand in recoveries, as compared to $4 thousand in charge-offs and $3 thousand in recoveries for the year ended December 31, 2021. At December 31, 2022, the Company had no recorded investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure. At December 31, 2021, the Company had $217 thousand in recorded investment in one (1) consumer mortgage loan collateralized by real estate property that was in the process of foreclosure.
As of December 31, 2022 and 2021, the Company had no foreclosed assets. The details for the non-performing loans and assets are included in the following table:
December 31,
(Dollars In Thousands)
Non-accrual - commercial $ - $ -
Restructured, accruing interest 2,182 2,337
Loans past due 90 or more days, accruing interest - -
Foreclosed assets - -
Total nonperforming assets $ 2,374 $ 2,579
Nonperforming loans to total loans (excluding
Nonperforming assets to total assets 0.14% 0.16%
Non-accrual loans to total loans (excluding PPP
Net charge-offs (recoveries) to average loans
(excluding PPP loans) 0.00% 0.00%
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Embassy Bancorp, Inc.
Allowance for Loan Losses
Based upon current economic conditions, the composition of the loan portfolio and loan loss experience of comparable institutions in the Company’s market areas, an allowance for loan losses has been provided at 1.03% of outstanding loans receivable. Based on its knowledge of the portfolio and current economic conditions, management believes that, as of December 31, 2022, the allowance is adequate to absorb reasonably anticipated losses. As of December 31, 2022, the Company had $3.2 million of impaired loans (defined as a loan that management feels probable the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or loans considered to be troubled debt restructurings) compared to $3.5 million at December 31, 2021. Most of the Company’s impaired loans required no specific reserves due to adequate collateral. As of December 31, 2022, the Company had impaired loans of $1.0 million requiring a specific reserve of $169 thousand. As of December 31, 2021, the Company had impaired loans of $1.1 million requiring a specific reserve of $164 thousand.
The activity in the allowance for loan losses is shown in the following table, as well as period end loans receivable and the allowance for loan losses as a percent of the total loan portfolio (excluding PPP loans):
December 31,
(Dollars In Thousands)
Allowance for loan losses:
Provision for loan losses 895 915
Loans charged off:
Commercial real estate - -
Commercial construction - -
Commercial - -
Residential real estate - (2)
Consumer - (2)
Total charged off - (4)
Recoveries of loans previously charged-off:
Commercial real estate - -
Commercial construction - -
Commercial - -
Residential real estate 70 3
Consumer - -
Total recoveries 70 3
Net charged off 70 (1)
Allowance for loan losses to loans
receivable at end of year 1.03% 1.04%
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Embassy Bancorp, Inc.
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to various loan categories (excluding PPP loans) and the related percent of total loans in each category. While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb losses in any category.
December 2022 % of Total Loans December 2021 % of Total Loans
(Dollars in Thousands)
Deposits
As growth continues, the Company expects that the principal sources of its funds will be deposits, consisting of demand deposits, NOW accounts, money market accounts, savings accounts, and certificates of deposit from the local market areas surrounding the Company’s offices. These accounts provide the Company with a source of fee income and a relatively stable source of funds.
Total deposits at December 31, 2022 were $1.52 billion, an increase of $54.1 million, or 3.7%, over total deposits of $1.47 billion as of December 31, 2021. The increase in the Company’s deposits was due to an increase of $58.3 million in non-interest bearing demand deposits and an increase of $57.8 million in time deposits, offset by a decrease of $3.8 million in interest bearing demand, NOW and money market deposits and a decrease of $58.2 million in savings deposits. The growth in total deposits was primarily due to organic growth of new and existing customers. The shift out of savings and into time deposits is primarily due to time deposits currently yielding higher rates due to the current rate environment. Included in the above mentioned increase was a $27.5 million increase in non-interest bearing demand personal deposits and a $30.8 million increase in non-interest bearing demand business deposits. The funds were primarily used to fund new loan growth, purchase securities, and to pay off FHLB long-term borrowings. Included in total deposits at December 31, 2022 were personal deposits of $1.09 billion, business deposits of $324.1 million, and municipal deposits of $102.6 million. Included in total deposits at December 31, 2021 were personal deposits of $1.05 billion, business deposits of $329.3 million, and municipal deposits of $88.5 million.
The following table reflects the Company’s deposits by category for the periods indicated. All deposits are domestic deposits.
(In Thousands)
Demand, NOW and money market, interest bearing 244,629 248,401
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Embassy Bancorp, Inc.
The following table sets forth the average balance of the Company’s deposits and the average rates paid on those deposits:
Average Average Average Average
Amount Rate Amount Rate
(Dollars In Thousands)
Demand, NOW and money market,
The following table displays the maturities and the amounts of the Company’s certificates of deposit of $250,000 or more:
(In Thousands)
As a FDIC member institution, the Company’s deposits are insured to a maximum of $250,000 per depositor through the DIF that is administered by the FDIC and each institution is required to pay quarterly deposit insurance premium assessments to the FDIC.
Liquidity
Liquidity is a measure of the Company’s ability to meet the demands required for the funding of loans and to meet depositors’ requirements for use of their funds. The Company’s sources of liquidity are cash balances, due from banks, and federal funds sold. Cash and cash equivalents were $67.3 million at December 31, 2022, compared to $169.7 million at December 31, 2021. There are other sources of liquidity that are available to the Company, as well, including those described below.
Additional asset liquidity sources include principal and interest payments from investment securities, unpledged investment securities, and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling or participating loans, or raising additional capital. Selling of securities would not be a primary source of short term liquidity needs given the unrealized losses currently in the portfolio. At December 31, 2022, the Company had $317.0 million of available for sale securities, compared to $310.3 million at December 31, 2021. Securities with carrying values of approximately $147.2 million and $114.0 million at December 31, 2022 and December 31, 2021, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.
At December 31, 2022, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $763.5 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million.
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Embassy Bancorp, Inc.
There were no short-term FHLB advances outstanding as of December 31, 2022 and December 31, 2021. There were no long term FHLB advances outstanding as of December 31, 2022 and $14.7 million in long-term FHLB advances outstanding as of December 31, 2021. All FHLB borrowings are secured by qualifying assets of the Bank.
The Bank also has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at December 31, 2022 and December 31, 2021. Advances from this line are unsecured.
The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at December 31, 2022 and December 31, 2021. Advances from this line are unsecured.
The Bank is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250 thousand that are placed in the program. The Bank also has available the Insured Cash Sweep (ICS) program, another program offered through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity similar to a money market or savings account.
Because of the composition of the Company’s balance sheet, its strong capital base, deposit growth, and borrowing capacity, the Company believes that it remains well positioned with respect to liquidity. While it is desirable to be liquid, it has the effect of a lower interest margin. The majority of the Company’s funds are invested in loans; however, a portion is invested in investment securities that generally carry a lower yield. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.
Off-Balance Sheet Arrangements
The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These commitments consist of unfunded loans and commitments, lines of credit, and letters of credit made under the same standards as on-balance sheet loan instruments. These off-balance sheet arrangements at December 31, 2022 and December 31, 2021 totaled $198.4 million and $164.7 million, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. For further information see Note 4. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.
Capital Resources and Adequacy
Total stockholders’ equity was $88.3 million as of December 31, 2022, representing a net decrease of $34.2 million from December 31, 2021. The decrease in capital was primarily the result of an increase of $49.9 million in accumulated other comprehensive loss from unrealized losses on available for sale securities due to market conditions, as securities were affected by increasing market interest rates in 2022 leading to unrealized losses in the investment portfolio. The accumulated other comprehensive losses are excluded from both the Bank’s and the Company’s Tier 1 regulatory capital calculations. In addition, treasury stock purchases of $100 thousand and dividends paid of $2.6 million, were offset by net income of $17.7 million, an increase in common stock of $52 thousand, and an increase in surplus of $664 thousand due to stock grants, exercise of stock options, and employee stock purchases with compensation expense.
The Company’s tangible book value per share, calculated as total stockholders’ equity divided by outstanding common stock shares, was $11.64 and $16.24 at December 31, 2022 and December 31, 2021, respectively. The Company’s tangible book value per share not including accumulated other comprehensive loss in the total stockholders’ equity numerator (a non-GAAP measure) was $18.37 and $16.40 at December 31, 2022 and December 31, 2021, respectively. The Company believes this non-GAAP measurement enhances the overall understanding of Company performance and increases comparability of period to period results, but should not be viewed as a
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Embassy Bancorp, Inc.
substitute for the measure as determined in accordance with GAAP or an inference that future results will be unaffected by similar adjustments to be determined in accordance with GAAP.
The following table presents the computation of this non-GAAP based measure shown together with its most directly comparable GAAP measure:
(Dollars In Thousands Except Per Share Data)
Tangible Book Value Per Share
Addback: accumulated other comprehensive loss ("AOCL") 51,107 1,194
Total stockholders' equity not included AOCL (non-GAAP) $ 139,383 $ 123,709
Book value per share not including AOCL (non-GAAP) $ 18.37 $ 16.40
The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material adverse effect on the consolidated financial statements.
The regulations require that banks maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and Tier 1 capital to average assets (as defined). As of December 31, 2022, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.
The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:
(Dollars In Thousands)
Tier 2, allowable portion of allowance for loan losses 12,449 11,484
Common equity tier 1 capital ratio 12.9% 12.8%
Tier 1 risk based capital ratio 12.9% 12.8%
Total risk based capital ratio 14.1% 14.0%
Tier 1 leverage ratio 8.3% 7.7%
In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum
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Embassy Bancorp, Inc.
leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.
The capital ratios to be considered “well capitalized” under the new capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and Total Risk-Based capital of 10%.
The Company qualifies as a small bank holding company and is not subject to the Federal Reserve’s consolidated capital rules, although an institution that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios.
The following table provides the Company’s risk-based capital ratios and leverage ratios:
(Dollars In Thousands)
Tier 2, allowable portion of allowance for loan losses 12,449 11,484
Common equity tier 1 capital ratio 12.9% 12.9%
Tier 1 risk based capital ratio 12.9% 12.9%
Total risk based capital ratio 14.1% 14.0%
Tier 1 leverage ratio 8.3% 7.7%
Interest Rate Risk Management
A principal objective of the Company’s asset/liability management policy is to minimize the Company’s exposure to changes in interest rates by an ongoing review of the maturity and repricing of interest-earning assets and interest-bearing liabilities. The Asset Liability Committee (ALCO), which meets as part of the Board of Directors meeting, oversees this review, which establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a company’s earnings resulting from a movement in market interest rates. The Company monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. The Company’s asset/liability management policy, monthly and quarterly financial reports, along with simulation modeling, supplies management with guidelines to evaluate and manage rate sensitivity.
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Embassy Bancorp, Inc.
GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. NOW and savings accounts are categorized by their respective estimated decay rates. The Company is liability sensitive, which means that if interest rates fall, interest income will fall slower than interest expense and net interest income will likely increase. If interest rates rise, interest income will rise slower than interest expense and net interest income will likely decrease. The Company continues to monitor interest rate exposure of its interest bearing assets and liabilities and believes that it is well positioned for any future market rate adjustments.
Over 3 Over 1 Over 3
0 to 3 Months to Year to Years to Over 5
Months 12 Months 3 Years 5 Years Years Total
(In Thousands)
Interest-earning assets
Federal funds sold and interest-
Interest-bearing liabilities
Repurchase agreements
GAP TO INTEREST EARNING
CUMULATIVE GAP TO
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Embassy Bancorp, Inc.
Based on a twelve-month forecast of the balance sheet, the following table sets forth our interest rate risk profile at December 31, 2022. Forincome simulation purposes, personal and business savings accounts reprice every three months, personal and business NOW accounts reprice every four months and personal and business money market accounts reprice every two months. Management reviews all assumptions on a periodic basis and believe current assumptions support market conditions. The impact on net interest income, illustrated in the following table, would vary if different assumptions were used or if actual experience differs from that indicated by the assumptions.
Change in Interest Rates Percentage Change in Net Interest Income
Down 100 basis points 1.7%
Down 200 basis points 0.4%
Return on Assets and Equity
For the year ended December 31, 2022, the return on average assets was 1.08%, the return on average equity was 18.09%, and the ratio of average shareholders’ equity to average total assets was 5.98%.
For the year ended December 31, 2021, the return on average assets was 1.11%, the return on average equity was 14.24%, and the ratio of average shareholders’ equity to average total assets was 7.76%.
Dividend Payout Ratio
For the years ended December 31, 2022 and 2021, the dividend payout ratio was 14.94% and 13.42%, respectively.
Effects of Inflation
The majority of assets and liabilities of the Company are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Company is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Company’s assets. Inflation may also affect the general level of interest rates, which can have a direct bearing on the Company.
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Embassy Bancorp, Inc.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Table of Contents
PageNumber
Management Report on Internal Controls Over Financial Reporting 48
Report of Independent Registered Public Accounting Firm (PCAOB ID: 23) 49
Consolidated Balance Sheets 51
Consolidated Statements of Income 52
Consolidated Statements of Comprehensive (Loss) Income 53
Consolidated Statements of Stockholders’ Equity 54
Consolidated Statement of Cash Flows 55
Notes to Financial Statements 57
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Embassy Bancorp, Inc.
Management Report on Internal Controls Over Financial Reporting
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in SEC Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2022, the Company’s internal control over financial reporting is effective based on those criteria.
/s/
/s/ David M. Lobach, Jr. /s/ Judith A. Hunsicker
David M. Lobach, Jr. Judith A. Hunsicker
Chairman, President and First Executive Officer, Chief Operating
Chief Executive Officer Officer, Secretary and Chief Financial
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Embassy Bancorp, Inc.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Embassy Bancorp, Inc. and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Embassy Bancorp, Inc. and Subsidiary (Company) as of December 31, 2022 and 2021, and the related consolidated statements of income, comprehensive (loss) income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – General Component – Qualitative Factors
As discussed in Notes 1 and 3 to the consolidated financial statements, the allowance for loan losses is established through a provision for loan losses and represents an amount, which, in management’s judgment, will be adequate to absorb losses in the loan portfolio. Management develops the general component based on historical loan loss experience adjusted for qualitative factors not reflected in the historical loss experience. Historical loss ratios are measured using the average charge-off ratio for the most recent rolling four years plus current year to date. The qualitative factors used by the Company include factors such as national and local economic conditions, levels of and trends in delinquency rates, classified, and nonaccrual loans, quality of the loan review system, trends in volumes and terms of loans, changes in
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Embassy Bancorp, Inc.
lending policies, lending personnel, and collateral, concentrations in loan types, industry, and geography as well as other external factors, including regulatory risk. The adjustments for qualitative factors require a significant amount of judgment by management and involve a high degree of estimation uncertainty.
We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
Our audit procedures related to the qualitative factor component of the allowance for loan losses included the following, among others:
Obtaining an understanding of the relevant controls related to the allowance for loan losses, including controls related to management’s determination and review of the qualitative factors, and the completeness and accuracy of data used in determining qualitative factors.
Testing of the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing to internal and external source data.
Testing of the mathematical accuracy of the allowance calculation, including the calculation of the qualitative factor component.
Evaluating the reasonableness of management’s conclusions regarding the appropriateness of the qualitative factor adjustments when compared to the underlying internal and external source data.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2001.
Allentown, Pennsylvania
March 17, 2023
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Embassy Bancorp, Inc.
Consolidated Balance Sheets
December 31, December 31,
(In Thousands, Except Share Data)
Interest bearing demand deposits with banks 44,368 153,448
Restricted investment in bank stock 995 1,424
Paycheck Protection Program loans receivable 286 8,568
Premises and equipment, net of accumulated depreciation 3,843 3,994
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Securities sold under agreements to repurchase 13,384 11,252
Long-term borrowings - 14,651
Accrued interest payable 986 652
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
Accumulated other comprehensive loss (51,107) (1,194)
See notes to consolidated financial statements.
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Embassy Bancorp, Inc.
Consolidated Statements of Income
Year Ended December 31,
INTEREST INCOME (In Thousands, Except Per Share Data)
Paycheck Protection Program loans, including fees 184 2,747
Short-term investments, including federal funds sold 1,062 154
INTEREST EXPENSE
Securities sold under agreements to repurchase and
federal funds purchased 24 8
Long-term borrowings 19 110
Paycheck Protection Program Liquidity Facility borrowings - 15
PROVISION FOR LOAN LOSSES 895 915
Net Interest Income after Provision for Loan Losses 45,387 42,579
OTHER NON-INTEREST INCOME
Merchant and credit card processing fees 356 321
Debit card interchange fees 887 866
Bank owned life insurance 524 607
Gain on sale of securities - 24
Gain on sale of other real estate owned - 103
Total Other Non-Interest Income 2,343 2,400
OTHER NON-INTEREST EXPENSES
Advertising and promotion 809 987
Charitable contributions 936 871
BASIC EARNINGS PER SHARE $ 2.34 $ 2.23
DILUTED EARNINGS PER SHARE $ 2.34 $ 2.22
DIVIDENDS PER SHARE $ 0.35 $ 0.30
See notes to consolidated financial statements.
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Embassy Bancorp, Inc.
Consolidated Statements of Comprehensive (Loss) Income
Year Ended December 31,
(In Thousands)
Change in Accumulated Other Comprehensive Loss:
Unrealized holding loss
on securities available for sale (63,181) (5,205)
Less: reclassification adjustment
for realized gains - (24)
Other comprehensive loss, net of tax (49,913) (4,131)
See notes to consolidated financial statements.
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Embassy Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2022 and 2021
(In Thousands, Except Share and Per Share Data)
Other comprehensive loss, net of tax - - - (4,131) - (4,131)
Dividend declared and paid, $0.30 per share - - (2,253) - - (2,253)
Stock tendered for funding exercise of
stock options, 4,600 shares (4) (88) - - - (92)
Common stock grants to directors,
Common stock grants to officers, 10,298 shares
and compensation expense recognized on
stock grants, net of unearned compensation
Shares issued under employee stock purchase plan, 3,254 shares 3 58 - - - 61
Purchase treasury stock, 25,000 shares
Other comprehensive loss, net of tax - - - (49,913) - (49,913)
Dividend declared and paid, $0.35 per share - - (2,644) - - (2,644)
Stock tendered for funding exercise of
Common stock grants to directors,
Common stock grants to officers, 11,931 shares
and compensation expense recognized on
stock grants, net of unearned compensation
Shares issued under employee stock purchase plan, 3,390 shares 3 64 - - - 67
Purchase treasury stock, 883 shares
See notes to consolidated financial statements.
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Embassy Bancorp, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Provision for loan losses 895 915
Amortization of deferred loan costs 182 136
Accretion of deferred Paycheck Protection Program loan fees (165) (2,388)
Stock compensation expense 527 432
Net realized gain on sale of other real estate owned - (103)
Income on bank owned life insurance (524) (607)
Deferred income taxes (348) (258)
Realized gain on sale of securities available for sale - (24)
(Increase) decrease in accrued interest receivable (323) 533
Increase (decrease) in accrued interest payable 334 (988)
Decrease in other liabilities (625) (914)
Net Cash Provided by Operating Activities 19,911 15,249
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (93,347) (236,159)
Proceeds from sales of securities available for sale - 3,333
Net decrease in Paycheck Protection Program loans 8,447 48,154
Net redemption (purchase) of restricted investment in bank stock 429 (94)
Proceeds from sale of other real estate owned - 115
Purchases of premises and equipment (719) (1,512)
Death benefit proceeds on bank owned life insurance 717 -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Employee Stock Purchase Plan 67 61
Repayment of long-term borrowed funds (14,651) -