EMBASSY BANCORP, INC. This discussion and analysis provides an overview of the consolidated financial condition and results of operations of the Company for the years endedDecember 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 inthe 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 27
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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 aPennsylvania 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 onNovember 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
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 theLehigh Valley community.
OVERVIEW
The Company's assets grew$7.0 million from$1.63 billion atDecember 31, 2021 to$1.64 billion atDecember 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 atDecember 31, 2022 from$1.10 billion atDecember 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 atDecember 31, 2021 to$1.52 billion atDecember 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 28
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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 endedDecember 31, 2022 andDecember 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 endedDecember 31, 2022 was$50.4 million , compared to$47.5 million for the year endedDecember 31, 2021 . Average earning assets were$1.58 billion for the year endedDecember 31, 2022 as compared to$1.47 billion for the year endedDecember 31, 2021 . The tax equivalent yield on average earning assets was 3.22% for the year endedDecember 31, 2022 as compared to 3.25% for the year endedDecember 31, 2021 . Total interest expense for the year endedDecember 31, 2022 increased$91 thousand to$4.1 million , as compared to$4.0 million for the year endedDecember 31, 2021 . Average interest bearing liabilities were$1.16 billion for the year endedDecember 31, 2022 as compared to$1.08 billion for the year endedDecember 31, 2021 . The yield on average interest bearing liabilities was 0.35% and 0.37% for the year endedDecember 31, 2022 andDecember 31, 2021 , respectively. Net interest income increased$2.8 million , or 6.4%, to$46.3 million for the year endedDecember 31, 2022 as compared to$43.5 million for the year endedDecember 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 29
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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 endedDecember 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 endedDecember 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 endedDecember 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 earlyFebruary 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 endedDecember 31, 2022 was 2.97%, compared to 2.86% for the year endedDecember 31, 2021 . ? 30
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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
Year Ended December 31, 2022 Year Ended
Average Tax Equivalent Average Tax Equivalent
Balance Interest Yield Balance Interest Yield
(Dollars in Thousands)
ASSETS
Loans - taxable (2) $ 1,145,441 $ 41,813 3.65% $ 1,101,030 $ 40,633 3.69%
Loans - Paycheck Protection
Program 1,852 184 9.94% 34,058 2,747 8.07%
Loans - non-taxable (1) 6,451 209 4.10% 6,302 193 3.88%
Investment securities -
taxable 290,357 5,921 2.04% 177,719 2,765 1.56%
Investment securities -
non-taxable (1) 41,854 1,196 3.62% 37,374 1,014 3.43%
Federal funds sold 1,000 17 1.72% 1,000 - 0.04%
Interest bearing deposits
with banks 88,996 1,045 1.17% 111,115 154 0.14%
TOTAL INTEREST EARNING
ASSETS 1,575,951 50,385 3.22% 1,468,598 47,506 3.25%
Less allowance for loan
losses (11,869) (11,096)
Other assets 71,313 61,315
TOTAL ASSETS $ 1,635,395 $ 1,518,817
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing demand
deposits,
?NOW and money market $ 247,379 $ 184 0.07% $ 225,658 $ 142 0.06%
Savings 751,101 2,189 0.29% 635,626 1,775 0.28%
Certificates of deposit 148,661 1,687 1.13% 187,255 1,962 1.05%
Securities sold under
agreements to
? repurchase and other
borrowings 15,437 43 0.27% 27,520 118 0.43%
Paycheck Protection Program
Liquidity
? Facility borrowings - - 0.00% 4,256 15 0.35%
TOTAL INTEREST BEARING
LIABILITIES 1,162,578 4,103 0.35% 1,080,315 4,012 0.37%
Non-interest bearing demand
deposits 357,184 301,800
Other liabilities 17,801 18,794
Stockholders' equity 97,832 117,908
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,635,395 $ 1,518,817
Net interest income $ 46,282 $ 43,494
Tax equivalent adjustments:
Loans 56 51
Investments 318 270
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%
(1) Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of December
31, 2022 and 2021, respectively.
(2) The average balance of taxable loans includes loans in which interest is no longer accruing.
(3) Non-US GAAP net interest spread and net interest margin calculated on a fully tax equivalent basis at a tax rate of 21%
as of December 31, 2022 and 2021, respectively.
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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.
2022 vs. 2021
Increase (decrease) due to changes in:
(In Thousands)
Volume Rate Total
Interest-earning assets:
Loans - taxable $ 1,639 $ (459) $ 1,180
Loans - Paycheck Protection Program (2,598) 35 (2,563)
Loans - non-taxable 5 11
16
Investment securities - taxable 1,752 1,404
3,156
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-earning assets 889 1,990
2,879
Interest-bearing liabilities: Interest bearing demand deposits, NOW and money market 14 28 42 Savings 322 92 414 Certificates of deposit (404) 129 (275) Total deposits (68) 249 181 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
Change in net interest income
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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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 endedDecember 31, 2022 , the provision for loan losses was$895 thousand , compared to$915 thousand for the year endedDecember 31, 2021 . Gross loans, excluding PPP loans, grew$100.3 million , or 9.1%, in 2022 over 2021. During the year endedDecember 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 endedDecember 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 endingDecember 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 itsDecember 31, 2022 allowance for loan loss levels. The allowance for loan losses as ofDecember 31, 2022 was$12.4 million representing 1.03% of outstanding loans receivable (excluding PPP loans), as compared to$11.5 million as ofDecember 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
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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 endedDecember 31, 2021 , compared to no gains on the sale of securities and no gains on the sale of real estate owned for the year endedDecember 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 endedDecember 31, 2022 was$25.7 million , compared to$24.1 million for the year endedDecember 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) atDecember 31, 2021 to one hundred nine (109) atDecember 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 at2002 West Liberty Street inAllentown, 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 aNeighborhood 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 inFDIC 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 endingDecember 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 endedDecember 31, 2022 andDecember 31, 2021 , respectively. The effective rate on income taxes for the years endedDecember 31, 2022 and 2021 was 19.5%, respectively. 34
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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 orFNMA , taxable and non-taxable municipal bonds, government agency bonds, andTreasury bonds. The Company holds no high-risk or direct internationally exposed securities or derivatives as ofDecember 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 atDecember 31, 2022 , a$6.7 million increase from securities of$310.3 million atDecember 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 ofDecember 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 atDecember 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
2022 2021
(In Thousands)
U.S. Treasury securities $ 16,771 $ -
U.S. Government agency obligations 32,551 28,858
Municipal securities 58,617 61,104
- Mortgage-backed securities - commercial 434 530
- Mortgage-backed securities - residential 208,619 219,772
Total Securities Available for Sale
?
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The following table presents the maturities and average weighted yields of the debt securities portfolio as ofDecember 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. Treasury
securities $ 2,481 2.90% $ 14,290 2.94% $ - - $ - - $ 16,771 2.93%
U.S. Government
agency
obligations 30,294 0.25% 2,257 1.28% - - - - 32,551 0.32%
Municipal
securities 249 0.88% 1,805 2.82% 5,135 3.63% 51,428 3.01% 58,617 3.05%
U.S. GSE -
Mortgage-
backed
securities-
commercial - - - - 434 2.39% - - 434 2.39%
U.S. GSE -
Mortgage-
backed
securities-
residential - - 15,544 2.86% 64,640
1.70% 128,435 1.82% 208,619 1.86%
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) atDecember 31, 2022 increased$99.6 million to$1.20 billion from$1.10 billion atDecember 31, 2021 . The gross loan-to-deposit ratio (excluding PPP loans) increased from 76% atDecember 31, 2021 to 79% atDecember 31, 2022 . The Company's loan portfolio atDecember 31, 2022 was comprised of residential real estate and consumer loans of$644.8 million , an increase of$25.4 million fromDecember 31, 2021 , and commercial loans of$563.6 million , an increase of$74.9 million fromDecember 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 atDecember 31, 2022 andDecember 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 ofDecember 31, 2022 , the Company had one hundred fifty-eight (158) loans totaling$98.9 million , for which the payment accommodation period has ended and the loans have resumed payments under their original contractual terms. ? 36
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The following table sets forth information on the composition of the loan portfolio by type atDecember 31, 2022 and 2021. All of the Company's loans are to domestic borrowers. December 31, 2022 December 31, 2021 Percentage of Percentage of Balance total Loans Balance total Loans (Dollars in Thousands) Commercial real estate$ 507,300 41.98%$ 440,655 39.77% Commercial construction 16,761 1.39% 6,100 0.55% Commercial 39,520 3.27% 41,923 3.78% Residential real estate 643,975 53.30% 618,694 55.84% Consumer 782 0.06% 642 0.06% Gross loans 1,208,338 100.00% 1,108,014 100.00% Unearned origination costs 275 25 Allowance for loan losses (12,449) (11,484) Net Loans$ 1,196,164 $ 1,096,555 The following table shows the maturities of the commercial and consumer loan portfolios and the loans subject to interest rate fluctuations atDecember 31, 2022 . After One Year After Five Through Five Years Through After Fifteen One Year or Less Years Fifteen Years Years Total (In Thousands) Commercial real estate $ 34,590$ 278,474 $ 193,347 $ 889$ 507,300 Commercial construction 16,015 746 - - 16,761 Commercial 5,472 25,682 7,917 449 39,520 Residential Real Estate 3,801 18,834 367,434 253,906 643,975 Consumer 329 374 26 53 782 $ 60,207$ 324,110 $ 568,724 $ 255,297 $ 1,208,338 Fixed Rates $ 40,912$ 323,320 $ 568,697 $ 241,495 $ 1,174,424 Variable Rates 19,295 790 27 13,802 33,914 $ 60,207$ 324,110 $ 568,724 $ 255,297 $ 1,208,338
Credit Risk and Loan Quality
The allowance for loan losses increased$965 thousand to$12.4 million atDecember 31, 2022 from$11.5 million atDecember 31, 2021 . AtDecember 31, 2022 andDecember 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 theUkraine 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 atDecember 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 37
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loans receivable excluding PPP loans was 0.20% atDecember 31, 2022 and 0.23% atDecember 31, 2021 . AtDecember 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 effectiveJanuary 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 atDecember 31, 2022 andDecember 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 ofDecember 31, 2022 andDecember 31, 2021 totaled$192 thousand and$242 thousand , respectively. The Company's non-performing loans to total loans receivable was 0.20% atDecember 31, 2022 , compared to 0.23% atDecember 31, 2021 . During the year endedDecember 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 endedDecember 31, 2021 . AtDecember 31, 2022 , the Company had no recorded investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure. AtDecember 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 ofDecember 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, 2022 2021 (Dollars In Thousands) Non-accrual - commercial $ - $ - Non-accrual - consumer 192 242 Restructured, accruing interest 2,182
2,337
Loans past due 90 or more days, accruing interest - - Total nonperforming loans 2,374 2,579 Foreclosed assets - - Total nonperforming assets$ 2,374 $ 2,579
Nonperforming loans to total loans (excluding
PPP loans) 0.20%
0.23%
Nonperforming assets to total assets 0.14%
0.16%
Non-accrual loans to total loans (excluding PPP
loans) 0.02%
0.02%
Allowance to non-accrual loans 6483.85%
4745.45%
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 ofDecember 31, 2022 , the allowance is adequate to absorb reasonably anticipated losses. As ofDecember 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 atDecember 31, 2021 . Most of the Company's impaired loans required no specific reserves due to adequate collateral. As ofDecember 31, 2022 , the Company had impaired loans of$1.0 million requiring a specific reserve of$169 thousand . As ofDecember 31, 2021 , the Company had impaired loans of$1.1 million requiring a specific reserve of$164 thousand . The activity in the allowance for loan losses is shown in the following table, as well as period end loans receivable and the allowance for loan losses as a percent of the total loan portfolio (excluding PPP loans): December 31, 2022 2021 (Dollars In Thousands) Loans receivable at end of year$ 1,208,613 $ 1,108,039 Allowance for loan losses: Balance, beginning$ 11,484 $ 10,570 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) Balance at end of year$ 12,449 $ 11,484
Allowance for loan losses to loans
receivable at end of year 1.03% 1.04%
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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.
% of % of
Total Total
December 2022 Loans December 2021 Loans
(Dollars in Thousands)
Commercial real
estate $ 5,113 41.98% $ 4,400 39.77%
Commercial
construction 200 1.39% 71 0.55%
Commercial 1,289 3.27% 1,328 3.78%
Residential real
estate 4,960 53.30% 4,718 55.84%
Consumer 13 0.06% 14 0.06%
Unallocated 874 953
Total Allowance for
Loan Losses $ 12,449 100.00% $ 11,484 100.00%
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.
December 31, December 31,
2022 2021
(In Thousands)
Demand, non-interest bearing $ 381,811 $ 323,513
Demand, NOW and money market,
interest bearing 244,629 248,401
Savings 681,394 739,637
Time, $250 and over 82,916 54,739
Time, other 130,357 100,735
Total deposits $ 1,521,107 $ 1,467,025
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The following table sets forth the average balance of the Company's deposits and the average rates paid on those deposits:
December 31, 2022 December 31, 2021
Average Average Average Average
Amount Rate Amount Rate
(Dollars In Thousands)Demand, NOW and money market,
interest bearing deposits$ 247,379 0.07%$ 225,658 0.06% Savings 751,101 0.29% 635,626 0.28% Certificates of deposit 148,661 1.13% 187,255 1.05%
Total interest bearing deposits 1,147,141 0.35% 1,048,539
0.37%
Non-interest bearing demand deposits 357,184 301,800 Total$ 1,504,325 $ 1,350,339
The following table displays the maturities and the amounts of the Company's
certificates of deposit of
December 31, 2022 December 31, 2021
(In Thousands)
3 months or less $ 16,648 $ 10,640
Over 3 through 6 months 13,303 17,170
Over 6 through 12 months 33,269 10,382
Over 12 months 19,696 16,547
Total $ 82,916 $ 54,739
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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There were no short-term FHLB advances outstanding as ofDecember 31, 2022 andDecember 31, 2021 . There were no long term FHLB advances outstanding as ofDecember 31, 2022 and$14.7 million in long-term FHLB advances outstanding as ofDecember 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
The Company has a revolving line of credit facility with the ACBB of
The Bank is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered byPromontory 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 fullFDIC 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 throughPromontory 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 atDecember 31, 2022 andDecember 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 ofDecember 31, 2022 , representing a net decrease of$34.2 million fromDecember 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 atDecember 31, 2022 andDecember 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 atDecember 31, 2022 andDecember 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 42
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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:
December 31, December 31,
2022 2021
(Dollars In Thousands Except
Per Share Data)
Tangible Book Value Per Share
Total stockholders' equity $ 88,276 $ 122,515
Addback: accumulated other comprehensive
loss ("AOCL") 51,107 1,194
Total stockholders' equity not
included AOCL (non-GAAP)$ 139,383 $
123,709
Common stock shares outstanding 7,586,991
7,541,776
Book value per share (most directly
comparable GAAP based measure)$ 11.64 $
16.24
AOCL per share 6.74
0.16
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 ofDecember 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:
December 31, 2022 December 31, 2021 (Dollars In Thousands)
Tier 1, common stockholders' equity $ 139,175 $ 123,520
Tier 2, allowable portion of allowance for
loan losses 12,449 11,484
Total capital $ 151,624 $ 135,004
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%
Note: Unrealized gains and losses on securities available for sale are excluded
from regulatory capital components of risk-based capital and leverage ratios.
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
43--------------------------------------------------------------------------------
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 theFederal 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:December 31, 2022 December 31, 2021 (Dollars In Thousands)
Tier 1, common stockholders' equity $ 139,383 $ 123,709
Tier 2, allowable portion of allowance for
loan losses 12,449 11,484
Total capital $ 151,832 $ 135,193
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%
Note: Unrealized gains and losses on securities available for sale are excluded
from regulatory capital components of risk-based capital and leverage ratios.
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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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-
bearing deposits $ 45,368 $ - $ - $ - $ - $ 45,368
Investment securities 10,764 44,347 62,098 43,020 157,758 317,987
Loans receivable, gross 64,031 144,786 280,220 221,716 497,860 1,208,613
Loans receivable - PPP,
gross 1 3 19 263 - 286
Total interest-earning
assets 120,164 189,136 342,337 264,999 655,618 1,572,254
Interest-bearing
liabilities
NOW and money market
accounts 26,855 50,874 63,845 35,755 67,300 244,629
Savings 64,592 159,079 250,241 112,686 94,796 681,394
Certificates of deposit 30,712 101,577 78,236 2,748 - 213,273
Repurchase agreements
and federal funds
purchased 13,384 - - - - 13,384
Total interest-bearing
liabilities 135,543 311,530 392,322 151,189 162,096 1,152,680
GAP $ (15,379) $ (122,394) $ (49,985) $ 113,810 $ 493,522 $ 419,574
CUMULATIVE GAP $ (15,379) $ (137,773) $ (187,758) $ (73,948) $ 419,574
GAP TO INTEREST EARNING
ASSETS -0.98% -7.78% -3.18% 7.24% 31.39%
CUMULATIVE GAP TO
INTEREST EARNING ASSETS -0.98% -8.76% -11.94% -4.70% 26.69%
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Based on a twelve-month forecast of the balance sheet, the following table sets forth our interest rate risk profile atDecember 31, 2022 . For income 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% Up 100 basis points -2.6% Up 200 basis points -5.4% Return on Assets and Equity For the year endedDecember 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 endedDecember 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
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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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Table of Contents
Page
NumberManagement 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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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 ofDecember 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 theSEC'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 withU.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 ofDecember 31, 2022 , using the criteria set forth by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO) Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that, as ofDecember 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 FinancialMarch 17, 2023 OfficerMarch 17, 2023 48
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Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of Directors of
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets ofEmbassy Bancorp, Inc. and Subsidiary (Company) as ofDecember 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 ofDecember 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 inthe 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 thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities 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
49--------------------------------------------------------------------------------
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/
We have served as the Company's auditor since 2001.
Allentown, Pennsylvania March 17, 2023 50
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Embassy Bancorp, Inc. Consolidated Balance Sheets December 31, December 31, ASSETS 2022 2021 (In Thousands, Except Share Data) Cash and due from banks $ 21,927$ 15,244 Interest bearing demand deposits with banks 44,368 153,448 Federal funds sold 1,000 1,000 Cash and Cash Equivalents 67,295 169,692 Securities available for sale
316,992 310,264
Restricted investment in bank stock 995 1,424
Loans receivable, net of allowance for loan losses of
$12,449 in 2022;$11,484 in 2021
1,196,164 1,096,555
Paycheck Protection Program loans receivable 286 8,568 Premises and equipment, net of accumulated depreciation 3,843 3,994 Bank owned life insurance 25,603 25,796 Accrued interest receivable 2,926 2,603 Other assets 26,123 14,298 Total Assets$ 1,640,227 $ 1,633,194
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities: Deposits: Non-interest bearing $ 381,811$ 323,513 Interest bearing 1,139,296 1,143,512 Total Deposits 1,521,107 1,467,025 Securities sold under agreements to repurchase 13,384 11,252 Long-term borrowings - 14,651 Accrued interest payable 986 652 Other liabilities 16,474 17,099 Total Liabilities 1,551,951 1,510,679 Stockholders' Equity: Common stock,$1 par value; authorized 20,000,000 shares; 2022 issued 7,739,785 shares; outstanding 7,586,991 shares; 2021 issued 7,687,919 shares; outstanding 7,541,776 shares 7,740 7,688 Surplus 27,627 26,963 Retained earnings 106,551 91,493 Accumulated other comprehensive loss
(51,107) (1,194)
December 31, 2021 , respectively
(2,535) (2,435)
Total Stockholders' Equity 88,276
122,515
Total Liabilities and Stockholders' Equity
See notes to consolidated financial statements.
?
51
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Consolidated Statements of Income
Year Ended December 31,
2022 2021
(In Thousands, Except Per Share
INTEREST INCOME Data)
Loans, including fees $ 42,022 $ 40,826
Paycheck Protection Program loans, including
fees 184 2,747
Securities, taxable 5,921 2,765
Securities, non-taxable 1,196 1,014
Short-term investments, including federal funds
sold 1,062 154
Total Interest Income 50,385 47,506
INTEREST EXPENSE
Deposits 4,060 3,879
Securities sold under agreements to repurchase
and
federal funds purchased 24 8
Long-term borrowings 19 110
Paycheck Protection Program Liquidity Facility
borrowings - 15
Total Interest Expense 4,103 4,012
Net Interest Income 46,282 43,494
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
Other service fees 576 479
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 Salaries and employee benefits 13,403 12,149 Occupancy and equipment 3,755 3,680 Data processing 3,220 2,941 Advertising and promotion 809 987 Professional fees 934 834 FDIC insurance 468 555 Loan & real estate 214 302 Charitable contributions 936 871 Other 1,998 1,808 Total Other Non-Interest Expenses 25,737 24,127 Income before Income Taxes 21,993 20,852 INCOME TAX EXPENSE 4,291 4,066 Net Income $ 17,702$ 16,786 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. ? 52
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Consolidated Statements of Comprehensive (Loss) Income
Year Ended December 31,
2022 2021
(In Thousands)
Net Income $ 17,702 $ 16,786
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)
(63,181) (5,229)
Income tax effect 13,268 1,098
Net unrealized loss (49,913) (4,131)
Other comprehensive loss, net of tax (49,913) (4,131)
Comprehensive (Loss) Income $ (32,211) $ 12,655
See notes to consolidated financial statements.
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Consolidated Statements of Stockholders' Equity
Years Ended
Accumulated Other
Retained Comprehensive Treasury
Common Stock Surplus Earnings Loss Stock Total
(In Thousands, Except Share and Per Share Data)
BALANCE - DECEMBER 31, 2020 $ 7,637 $ 26,405 $ 76,960 $ 2,937 $ (1,765) $ 112,174
Net income - - 16,786 - - 16,786
Other comprehensive loss, net
of tax - - - (4,131) - (4,131)
Dividend declared and paid,
$0.30 per share - - (2,253) - - (2,253)
Exercise of stock options,
29,742 shares 30 178 - - - 208
Stock tendered for funding
exercise of
stock options, 4,600 shares (4) (88) - - - (92)
Common stock grants to
directors,
12,009 shares 12 174 - - - 186
Common stock grants to
officers, 10,298 shares
and compensation expense
recognized on
stock grants, net of unearned
compensation
expense of $718 10 236 - - - 246
Shares issued under employee
stock purchase
? plan, 3,254 shares 3 58 - - - 61
Purchase treasury stock,
25,000 shares
at $16.65 per share, 9,400
shares at $19.60
per share, and 3,494 at
$20.00 per share - - - - (670) (670)
BALANCE -
(1,194)
BALANCE -
(1,194) $ (2,435) $ 122,515
Net income - - 17,702 - - 17,702
Other comprehensive loss, net
of tax - - - (49,913) - (49,913)
Dividend declared and paid,
$0.35 per share - - (2,644) - - (2,644)
Exercise of stock options,
33,890 shares 34 242 - - - 276
Stock tendered for funding
exercise of
stock options, 8,046 shares (8) (146) - - - (154)
Common stock grants to
directors,
10,701 shares 11 212 - - - 223
Common stock grants to
officers, 11,931 shares
and compensation expense
recognized on
stock grants, net of unearned
compensation
expense of $642 12 292 - - - 304
Shares issued under employee
stock purchase
? plan, 3,390 shares 3 64 - - - 67
Purchase treasury stock, 883
shares
at $20.79 per share, 4,060
shares at $18.79
per share and 293 at $18.67
per share - - - - (100) (100)
Forfeiture of unvested common
stock grants
? to officers to treasury
stock, 1,415 shares at
a $0.00 cost basis - - - - - -
BALANCE -
(51,107)
See notes to consolidated financial statements.
?
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Consolidated Statements of Cash Flows
Year Ended December 31,
2022 2021
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,702 $ 16,786
Adjustments to reconcile net income to net cash provided by
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)
Depreciation 883
864
Net (accretion) amortization of investment security premiums and discounts
(405) 65
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
Decrease in other assets 1,778
800
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)
Maturities, calls and principal repayments of securities available for sale
23,843 48,232
Proceeds from sales of securities available for sale -
3,333
Net increase in loans (100,686)
(18,279)
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 - Net Cash Used in Investing Activities (161,316)
(156,210)
CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 54,082
234,646
Net increase (decrease) in securities sold under agreements to repurchase
2,132 (2,360)
Proceeds from Employee Stock Purchase Plan 67
61
Repayment of long-term borrowed funds (14,651) -
Repayment of Paycheck Protection Program Liquidity Facility borrowed funds
- (50,794)
Purchase of treasury stock (100)
(670)
Exercise of stock options, net of payment for stock tendered 122
116
Dividends paid (2,644)
(2,253)
Net Cash Provided by Financing Activities 39,008
178,746
Net (Decrease) Increase in Cash and Cash Equivalents (102,397)
37,785
CASH AND CASH EQUIVALENTS - BEGINNING 169,692
131,907
CASH AND CASH EQUIVALENTS - ENDING$ 67,295 $ 169,692 ? 55
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Consolidated Statements of Cash Flows
SUPPLEMENTARY CASH FLOWS INFORMATION Interest paid$ 3,769 $ 5,000 Income taxes paid$ 4,268 $ 4,634 Non-cash Investing and Financing Activities: Other real estate acquired in settlement of loans $ - $
12
Right of use assets obtained in exchange for new operating lease liabilities
$ - $ 1,233
See notes to consolidated financial statements.
?
56
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Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
Embassy Bancorp, Inc. (the "Company") is aPennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company was formed for purposes of acquiringEmbassy Bank For The Lehigh Valley (the "Bank") in connection with the reorganization of the Bank into a bank holding company structure, which was consummated onNovember 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 principal operating subsidiary, was originally
incorporated as a
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of other-than-temporary impairment on available for sale debt securities, and the determination of the allowance for loan losses.
Concentrations of Credit Risk
Most of the Company's activities are with customers located in theLehigh Valley area ofPennsylvania . Note 2 discusses the types of securities in which the Company invests. The concentrations of credit by type of loan are set forth in Note 3. The Company does not have any significant concentrations to any one specific industry or customer, with the exception of lending activity to a broad range of lessors of residential and non-residential real estate within theLehigh Valley . Although the Company has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy.
Presentation of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest-bearing demand deposits with banks, and
federal funds sold. Generally, federal funds are purchased or sold for less than
one week periods.
Securities
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Securities available for sale are carried at fair value. Any decision
to sell a security classified as available for sale would be based on various
factors, including significant movement in interest rates, changes in maturity
mix of the Company's assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Unrealized gains and losses are
reported as increases or decreases in other comprehensive (loss) income.
Realized gains or losses, determined on the basis of the cost of the specific
securities sold, are included in earnings. Premiums and discounts are recognized
in interest income using the interest method over the terms of the securities.
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Other-than-temporary accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Company recognized no other-than-temporary impairment charges during the years endedDecember 31, 2022 and 2021.
Restricted Investments in
Restricted investments in bank stock consist ofFHLBank Pittsburgh ("FHLB") stock andAtlantic Community Bankers Bank ("ACBB") stock. The restricted stocks have no quoted market value and are carried at cost. Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula. Management evaluates the FHLB and ACBB restricted stock for impairment. Management's determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer. Management believes no impairment charge is necessary related to the FHLB or ACBB restricted stock as ofDecember 31, 2022 . No impairment charge was taken related to the FHLB or ACBB restricted stock as ofDecember 31, 2021 .
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are stated at their outstanding unpaid
principal balances, net of any deferred fees or costs. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
yield using the effective interest method. Premiums and discounts on purchased
loans are amortized as adjustments to interest income using the effective
interest method. Delinquency fees are recognized in income when collected.
As described in Note 3, the Company has presented Paycheck Protection Program
("PPP") loans separately from loans receivable on the Consolidated Balance
Sheets. The non-PPP loans receivable portfolio is segmented into commercial and
consumer loans. Commercial loans consist of the following classes: commercial
real estate, commercial construction and commercial. Consumer loans consist of
the following classes: residential real estate and other consumer loans.
The Company makes commercial loans for real estate development and other
business purposes required by the customer base. The Company's credit policies
determine advance rates against the different forms of collateral that can be
pledged against commercial loans. Typically, the majority of loans will be
limited to a percentage of their underlying collateral values such as real
estate values, equipment, eligible accounts receivable and inventory. Individual
loan advance rates may be higher or lower depending upon the financial strength
of the borrower and/or term of the loan. The assets financed through commercial
loans are used within the business for its ongoing operation. Repayment of these
kinds of loans generally comes from the cash flow of the business or the ongoing
conversion of assets. Commercial real estate loans include long-term loans
financing commercial properties. Repayments of these loans are dependent upon
either the ongoing cash flow of the borrowing entity or the resale of or lease
of the subject property. Commercial real estate loans typically require a loan
to value ratio of not greater than 80% and vary in terms.
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Residential mortgages and home equity loans are secured by the borrower's residential real estate in either a first or second lien position. Residential mortgages and home equity loans have varying interest rates (fixed or variable) depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages may have amortizations up to 30 years and home equity loans may have maturities up to 25 years. Other consumer loans include installment loans, car loans, and overdraft lines of credit. Some of these loans may be unsecured. For all classes of loans receivable, the accrual of interest may be discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed. Interest received on nonaccrual loans, including impaired loans, generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans, or portions of loans, determined to be confirmed losses are charged against the allowance account and subsequent recoveries, if any, are credited to the account. A loss is considered confirmed when information available at the balance sheet date indicates the loan, or a portion thereof, is uncollectible. As further described in Note 3, because of the 100%Small Business Administration's ("SBA") guarantee, the Company has determined that no allowance for loan losses is required on PPP loans. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company's past loan loss experience, 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 revision as more information becomes available. Management maintains the allowance for loan losses at a level it believes adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet dates. The allowance for loan losses account consists of specific and general reserves. For the specific portion of the allowance for loan losses, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Factors considered by management in determining impairment include payment status, ability to pay 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. Loans considered impaired are measured for impairment based on 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. If 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, is less than the recorded investment in the loan, including accrued interest and net deferred loan fees or costs, the Company will recognize the impairment by adjusting the allowance for loan losses account through charges to earnings as a provision for loan losses.
For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of
59--------------------------------------------------------------------------------
the real estate is necessary. This decision is based on various considerations,
including the age of the most recent appraisal, loan-to-value ratio based on the
original appraisal and the condition of the property. Appraised values are
discounted to arrive at the estimated selling price of the collateral, which is
considered to be the estimated fair value. The discounts also include estimated
costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such
as accounts receivable, inventory and equipment, estimated fair values are
determined based on the borrower's financial statements, inventory reports,
accounts receivable aging or equipment appraisals or invoices. Indications of
value from these sources are generally discounted based on the age of the
financial information or the quality of the assets.
The general portion of the allowance for loan losses covers pools of loans by
major loan class including commercial loans not considered impaired, as well as
smaller balance homogeneous loans, such as residential real estate and other
consumer loans. Loss contingencies for each of the major loan pools are
determined by applying a total loss factor to the current balance outstanding
for each individual pool. The total loss factor is comprised of a historical
loss factor using the loss migration method plus a qualitative factor, which
adjusts the historical loss factor for changes in trends, conditions and other
relevant factors that may affect repayment of the loans in these pools as of the
evaluation date. Loss migration involves determining the percentage of each pool
that is expected to ultimately result in loss based on historical loss
experience. Historical loss factors are based on the ratio of net loans
charged-off to loans, net, for each of the major groups of loans. The historical
loss factor for each pool, includes but is not limited to, an average of the
Company's historical net charge-off ratio for the most recent rolling four years
plus current year to date.
In addition to these historical loss factors, management also uses a qualitative
factor that represents a number of environmental risks that may cause estimated
credit losses associated with the current portfolio to differ from historical
loss experience. These environmental risks include: (i) changes in lending
policies and procedures including underwriting standards and collection,
charge-off and recovery practices; (ii) changes in the composition and volume of
the portfolio; (iii) changes in national, local and industry conditions,
including the effects of such changes on the value of underlying collateral for
collateral-dependent loans; (iv) changes in the volume and severity of
classified loans, including past due, nonaccrual, troubled debt restructures and
other loan modifications; (v) changes in the levels of, and trends in,
charge-offs and recoveries; (vi) the existence and effect of any concentrations
of credit and changes in the level of such concentrations; (vii) changes in the
experience, ability and depth of lending management and other relevant staff;
(viii) changes in the quality of the loan review system and the degree of
oversight by the board of directors; and (ix) the effect of external factors
such as competition and regulatory requirements on the level of estimated credit
losses in the current loan portfolio. Each environmental risk factor is assigned
a value to reflect improving, stable or declining conditions based on
management's best judgment using relevant information available at the time of
the evaluation. Adjustments to the factors are supported through documentation
of changes in conditions in a narrative accompanying the allowance for loan loss
calculation. In 2021 and 2022, the Bank 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. All loans that received a CARES Act Section 4013
modification are provided additional qualitative reserve in the Company's
allowance for loan loss calculation.
The unallocated component of the general allowance is used to cover inherent
losses that exist as of the evaluation date, but which have not been identified
as part of the allocated allowance using the above impairment evaluation
methodology due to limitations in the process. One such limitation is the
imprecision of accurately estimating the impact current economic conditions will
have on historical loss rates. Variations in the magnitude of impact may cause
estimated credit losses associated with the current portfolio to differ from
historical loss experience, resulting in an allowance that is higher or lower
than the anticipated level.
The allowance calculation methodology includes further segregation of loan
classes into risk rating categories. The borrower's overall financial condition,
repayment sources, guarantors, and value of collateral, if appropriate, are
evaluated annually for commercial loans or when credit deficiencies arise, such
as delinquent loan payment, for commercial and consumer loans. Credit quality
risk ratings include regulatory classifications of special mention, substandard,
doubtful and loss. Loans criticized as special mention have potential weaknesses
that deserve management's close attention. If uncorrected, the potential
weakness may result in deterioration of the repayment prospects. Loans
classified substandard have a well-defined weakness and borrowers are highly
leveraged. They
60
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include loans that are inadequately protected by the current sound net worth and the paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. Federal regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate. Other Real Estate Owned Other real estate owned is comprised of properties acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosures. A loan is classified as an in-substance foreclosure when the Company has taken possession of the collateral, regardless of whether formal foreclosure proceedings take place. Other real estate owned is recorded at fair value less cost to sell at the time of acquisition. Any excess of the loan balance over the recorded value is charged to the allowance for loan losses at the time of acquisition. After foreclosure, valuations are periodically performed and the assets are carried at the lower of cost or fair value less cost to sell. Changes in the valuation allowance on foreclosed assets are included in other non-interest income. Costs to maintain the assets are included in other non-interest expenses. Any gain or loss realized upon disposal of other real estate owned is included in other non-interest income. There were no foreclosed assets as ofDecember 31, 2022 and 2021.
Bank Owned Life Insurance
The Company invests in bank owned life insurance ("BOLI") as a tax deferred
investment and a source of funding for employee benefit expenses. BOLI involves
the purchasing of life insurance by the Company on certain of its employees and
directors. The Company is the owner and primary beneficiary of the policies.
This life insurance investment is carried at the cash surrender value of the
underlying policies. Income from increases in cash surrender value of the
policies is included in non-interest income and is not subject to income taxes
unless surrendered. The Company does not intend to surrender these policies, and
accordingly, no deferred taxes have been recorded on the earnings from these
policies.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the following
estimated useful lives of the related assets: furniture, fixtures and equipment
for five years to ten years, leasehold improvements for the life of the lease,
building for forty years, computer equipment and data processing software for
one year to five years, and automobiles for five years.
Transfers of Financial Assets
Transfers of financial assets, including sales of loan participations, are
accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets and (3) the Company does not maintain
effective control over the transferred assets through an agreement to repurchase
them before their maturity.
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61
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Embassy Bancorp, Inc. Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense:
current and deferred. Current income tax expense reflects taxes to be paid or
refunded for the current period by applying the provisions of the enacted tax
law to taxable income. Deferred income taxes are provided on the asset and
liability method whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and net operating loss carry forwards
and their tax basis. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period, as adjusted for stock dividends and splits. Diluted earnings per share
reflect additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustments to income
that would result from the assumed issuance. Potential common shares that may be
issued by the Company relate solely to outstanding stock options and are
determined using the treasury stock method.
Year Ended December 31,
2022 2021
(Dollars In Thousands, Except Per Share
Data)
Net income $ 17,702 $ 16,786
Weighted average shares
outstanding 7,554,790 7,517,669
Dilutive effect of potential
common
shares, stock options 16,438 37,116
Diluted weighted average
common
shares outstanding 7,571,228 7,554,785
Basic earnings per share $ 2.34 $ 2.23
Diluted earnings per share $ 2.34 $ 2.22
There were no stock options not considered in computing diluted earnings per
common share for the years ended
Employee Benefit Plan
The Company has a 401(k) Plan (the "Plan") for employees. All employees are eligible to participate after they have attained the age of 21 and have also completed 6 consecutive months of service during which at least 500 hours of service are completed. The employees may contribute up to the maximum percentage allowable by law of their compensation to the Plan, and the Company provides a match of fifty percent of the first 8% percent to eligible participating employees. Full vesting in the Plan is prorated equally over a four year period. The Company's contributions to the Plan for the years endedDecember 31, 2022 and 2021 were$284 thousand and$278 thousand , respectively. ? 62
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Off Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the consolidated balance sheet when they are funded.
Comprehensive (Loss) Income
US GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income.
Stock-Based Compensation
The Company measures and records compensation expense for share-based payments based on the instrument's fair value on the date of grant. The fair value of each stock option grant is measured using the Black-Scholes option pricing model. The fair value of stock awards is based on the Company's stock price. Share-based compensation expense is recognized over the service period, generally defined as the vesting period.
Non-Interest Income
The majority of the Company's revenue-generating transactions are not subject to Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, including revenue generated from financial instruments, such as its loans and investment securities, as these activities are subject to other US GAAP discussed elsewhere within the Company's disclosures. Descriptions of the Company's revenue-generating activities that are within the scope of Topic 606, which are presented in the consolidated statement of income as components of non-interest income, are merchant processing and credit card processing fees, debit card interchange fees, other service fees on deposit accounts, and gains and losses on other real estate owned. Credit card processing fees include income from consumer and commercial credit cards and merchant processing income. Income for such performance obligations are generally received at the time the performance obligations are satisfied or within the monthly service period. Service fees on deposit accounts represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when the Company's performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). The Company recognizes debit card interchange fees daily from debit cardholder transactions conducted through the MasterCard payment network. The Company records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction prices and related gain or loss on the sale if a significant financing component is present. The Company does not sell its mortgages on the secondary market, nor does it offer trust or investment brokerage services to its customers to generate fee income.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the
balance sheet date of
?
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Embassy Bancorp, Inc. Future Accounting Standards InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses". ASU 2016-13 requires entities to report "expected" credit losses on financial instruments and other commitments to extend credit rather than the current "incurred loss" model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. InNovember 2019 , the FASB issued an update to defer the implementation date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company under SEC Regulation S-K and, therefore, the guidance is effective for the Company in 2023. Management has gathered all necessary data and selected a method to calculate the expected credit losses. The Company will adopt ASU 2016-13 onJanuary 1, 2023 using the modified retrospective approach. Based on implementation efforts to date, management expects to make an immaterial adjustment to opening retained earnings as a result of its adoption of this standard. The Company is in the process of finalizing its operational and control structure supporting the process.
Reclassification
Certain amounts in the 2021 consolidated financial statements may have been reclassified to conform to 2022 presentation. These reclassifications had no effect on 2021 net income.
Note 2 - Securities Available For Sale
The amortized cost and approximate fair values of securities available-for-sale
were as follows at
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
December 31, 2022:
U.S. Treasury securities $ 17,217 $ - $ (446) $ 16,771
U.S. Government agency obligations 34,069 - (1,518) 32,551
Municipal bonds 73,958 112 (15,453) 58,617
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
commercial 510 - (76) 434
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
residential 255,930 2 (47,313) 208,619
Total $ 381,684 $ 114 $ (64,806) $ 316,992
December 31, 2021:
U.S. Government agency obligations $ 29,146 $ - $ (288) $ 28,858
Municipal bonds 60,017 1,464 (377) 61,104
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
commercial 511 19 - 530
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
residential 222,101 885 (3,214) 219,772
Total $ 311,775 $ 2,368 $ (3,879) $ 310,264
?
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The amortized cost and fair value of securities as of
Amortized Fair
Cost Value
(In Thousands)
Due in one year or less $ 34,369 $ 33,024
Due after one year through five years 19,053 18,352
Due after five years through ten years 5,363 5,135
Due after ten years 66,459 51,428
125,244 107,939
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial 510 434
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential 255,930 208,619
$ 381,684 $ 316,992
There were no sales of securities for the year ended December 31, 2022 . Gross
gains of $24 thousand were realized on the sales of securities for the year
ended December 31, 2021 . There were no gross losses on the sales of securities
for the year ended December 31, 2021 .
The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December 31,
2022 and December 31, 2021 , respectively:
Less Than 12 Months 12 Months or More Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
December 31, 2022 : (In Thousands)
U.S. Treasury securities $ 16,771 $ (446) $ - $ - $ 16,771 $ (446)
U.S. Government agency
obligations - - 32,551 (1,518) 32,551 (1,518)
Municipal bonds 32,103 (6,308) 22,099 (9,145) 54,202 (15,453)
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
commercial 434 (76) - - 434 (76)
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
residential 32,203 (3,166) 176,281 (44,147) 208,484 (47,313)
Total Temporarily Impaired 81,511 (9,996) 230,931 (54,810) 312,442 (64,806)
Securities $ $ $ $ $ $
December 31, 2021 :
U.S. Government agency
obligations $ 9,911 $ (84) $ 18,947 $ (204) $ 28,858 $ (288)
Municipal bonds 20,722 (377) - - 20,722 (377)
U.S. Government Sponsored
Enterprise (GSE) -
? Mortgage-backed securities -
residential 190,435 (3,214) - - 190,435 (3,214)
Total Temporarily Impaired
Securities $ 221,068 $ (3,675) $
18,947
The Company had one hundred ninety four (194) securities in an unrealized loss position atDecember 31, 2022 and seventy (70) securities in an unrealized loss position atDecember 31, 2021 . As ofDecember 31, 2022 , the Company either has the intent and ability to hold the securities until maturity or market price recovery or believes that it is more likely than not that it will not be required to sell such securities. Management believes that the unrealized loss only 65
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represents temporary impairment of the securities, which are predominantly backed by credit of government agencies, and are a result of the increasing market interest rates in 2022 due to the current economic conditions, and not the credit quality of the issuer.
Securities with a carrying value of
Note 3 - Loans Receivable and Credit Quality
The Company has presented PPP loans of$286 thousand atDecember 31, 2022 and$8.6 million , net of$165 thousand of unearned origination fees and costs, atDecember 31, 2021 , respectively, separately from loans receivable on the Consolidated Balance Sheets. PPP loans are 100% SBA guaranteed and the Company has determined that no allowance for loan losses is required on PPP loans. All PPP loans are risk rated as pass. The Company has only two (2) PPP loans remaining atDecember 31, 2022 . PPP loans are excluded in the following composition and credit quality tables. The following table presents the composition of loans receivable (excluding PPP loans): December 31, 2022 2021 (In Thousands) Commercial real estate$ 507,300 $ 440,655 Commercial construction 16,761 6,100 Commercial 39,520 41,923 Residential real estate 643,975 618,694 Consumer 782 642 Total Loans 1,208,338 1,108,014 Unearned net loan origination costs 275 25 Allowance for Loan Losses (12,449) (11,484) Net Loans$ 1,196,164 $ 1,096,555 The following table summarizes information in regard to the allowance for loan losses (excluding PPP loans) as ofDecember 31, 2022 and 2021, respectively: Commercial Commercial Residential Real Estate Construction
(In Thousands)
Allowance for loan losses Year EndingDecember 31, 2022 Beginning Balance - December 31, 2021$ 4,400 $ 71$ 1,328 $ 4,718 $ 14 $ 953 $ 11,484 Charge-offs - - - - - - - Recoveries - - - 70 - - 70 Provisions 713 129 (39) 172 (1) (79) 895
Ending Balance - December
31, 2022$ 5,113 $ 200 $
1,289
Year Ending
2021 Beginning Balance - December 31, 2020$ 4,379 $ 150$ 848 $ 4,485 $ 14 $ 694 $ 10,570 Charge-offs - - - (2) (2) - (4) Recoveries - - - 3 - - 3 Provisions 21 (79) 480 232 2 259 915
Ending Balance - December
31, 2021$ 4,400 $ 71$ 1,328 $ 4,718 $ 14 $ 953 $ 11,484 66
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The following tables represent the allocation of the allowance for loan losses and the related loan portfolio, (excluding PPP loans), disaggregated based on impairment methodology atDecember 31, 2022 andDecember 31, 2021 , respectively: Commercial Commercial Residential Real Estate Construction Commercial Real Estate Consumer Unallocated Total (In Thousands) December 31, 2022 Allowance for Loan Losses Ending Balance$ 5,113 $ 200$ 1,289 $ 4,960 $ 13 $ 874 $ 12,449 Ending balance: individually evaluated for impairment $ - $ 29 $ 33 $ 107 $ - $ -$ 169 Ending balance: collectively evaluated for impairment$ 5,113 $ 171$ 1,256 $ 4,853 $ 13 $ 874 $ 12,280 Loans receivable: Ending balance$ 507,300 $ 16,761 $ 39,520 $ 643,975 $ 782 $ 1,208,338 Ending balance: individually evaluated for impairment$ 1,371 $ 303$ 240 $ 1,317 $ -$ 3,231 Ending balance: collectively evaluated for impairment$ 505,929 $ 16,458 $ 39,280 $ 642,658 $ 782 $ 1,205,107 December 31, 2021 Allowance for Loan Losses Ending Balance$ 4,400 $ 71$ 1,328 $ 4,718 $ 14 $ 953 $ 11,484 Ending balance: individually evaluated for impairment $ - $ 7 $ 41 $ 116 $ - $ -$ 164 Ending balance: collectively evaluated for impairment$ 4,400 $ 64$ 1,287 $ 4,602 $ 14 $ 953 $ 11,320 Loans receivable: Ending balance$ 440,655 $ 6,100$ 41,923 $ 618,694 $ 642 $ 1,108,014 Ending balance: individually evaluated for impairment$ 1,433 $ 311$ 248 $ 1,508 $ -$ 3,500 Ending balance: collectively evaluated for impairment$ 439,222 $ 5,789$ 41,675 $ 617,186 $ 642 $ 1,104,514 ? 67
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The following table summarizes information in regard to impaired loans (excluding PPP loans) by loan portfolio class as ofDecember 31, 2022 and 2021, respectively: Year to Date Unpaid Recorded Principal Related Average Recorded Interest Income Investment Balance Allowance Investment Recognized
December 31, 2022 (In Thousands) With no related allowance recorded: Commercial real estate$ 1,371 $ 1,611 $ 1,395 $ 66 Commercial construction 55 55 55 3 Commercial - - - - Residential real estate 768 772 719 30 Consumer - - - - With an allowance recorded: Commercial real estate $ - $ - $ - $ - $ - Commercial construction 248 248 29 251 8 Commercial 240 240 33 243 10 Residential real estate 549 549 107 560 20 Consumer - - - - - Total: Commercial real estate$ 1,371 $ 1,611 $ - $ 1,395 $ 66 Commercial construction 303 303 29 306 11 Commercial 240 240 33 243 10 Residential real estate 1,317 1,321 107 1,279 50 Consumer - - - - -$ 3,231 $ 3,475 $ 169 $ 3,223 $ 137 December 31, 2021 With no related allowance recorded: Commercial real estate$ 1,433 $ 1,673 $ 981 $ 69 Commercial construction 55 55 249 2 Commercial - - - - Residential real estate 932 1,002 1,283 36 Consumer - - - - With an allowance recorded: Commercial real estate $ - $ - $ - $ 513 $ - Commercial construction 256 256 7 64 8 Commercial 248 248 41 232 10 Residential real estate 576 576 116 586 21 Consumer - - - - - Total: Commercial real estate$ 1,433 $ 1,673 $ - $ 1,494 $ 69 Commercial construction 311 311 7 313 10 Commercial 248 248 41 232 10 Residential real estate 1,508 1,578 116 1,869 57 Consumer - - - - -$ 3,500 $ 3,810 $ 164 $ 3,908 $ 146 ? 68
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The following table presents the classes of the loan portfolio (excluding PPP loans), summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as ofDecember 31, 2022 andDecember 31, 2021 , respectively: Pass Special Mention Substandard
Doubtful Total
December 31, 2022 (In Thousands) Commercial real estate$ 505,983 $ -$ 1,317 $ -$ 507,300 Commercial construction 16,458 - 303 - 16,761 Commercial 39,498 22 - - 39,520 Residential real estate 642,913 467 595 - 643,975 Consumer 782 - - - 782 Total$ 1,205,634 $ 489$ 2,215 $ -$ 1,208,338 December 31, 2021 Commercial real estate$ 439,280 $ -$ 1,375 $ -$ 440,655 Commercial construction 5,789 - 311 - 6,100 Commercial 41,899 24 - - 41,923 Residential real estate 617,533 489 672 - 618,694 Consumer 642 - - - 642 Total$ 1,105,143 $ 513$ 2,358 $ -$ 1,108,014 The following table presents nonaccrual loans by classes of the loan portfolio: December 31, 2022 2021 (In Thousands)
Commercial real estate $ - $ - Commercial construction - - Commercial - - Residential real estate 192 242 Consumer - - Total$ 192 $ 242 ? 69
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The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio (excluding PPP loans) summarized by the past due status as ofDecember 31, 2022 and 2021, respectively: Greater than 90 Loan Receivables 30-59 Days 60-89 Days Days Past Total Past Total Loan > 90 Days and Past Due Past Due Due Due Current ?Receivables Accruing December 31, (In Thousands)
2022
Commercial real estate $ - $ - $ - $ -$ 507,300 $ 507,300 $ - Commercial construction - - - - 16,761 16,761 - Commercial 32 - - 32 39,488 39,520 - Residential real estate 138 - 192 330 643,645 643,975 - Consumer - - - - 782 782 - Total$ 170 $ -$ 192 $ 362 $ 1,207,976 $ 1,208,338 $ - December 31, 2021 Commercial real estate $ - $ - $ - $ -$ 440,655 $ 440,655 $ - Commercial construction - - - - 6,100 6,100 - Commercial - - - - 41,923 41,923 - Residential real estate - 12 217 229 618,465 618,694 - Consumer - - - - 642 642 - Total $ -$ 12 $ 217 $ 229 $ 1,107,785 $ 1,108,014 $ - AtDecember 31, 2022 , the Company had no foreclosed assets or recorded investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure. AtDecember 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. InApril 2022 , the borrower repaid the loan in full with no loss to the Company.
Troubled Debt Restructurings
The Company may grant a concession or modification for economic or legal reasons
related to a borrower's financial condition that it would not otherwise
consider, resulting in a modified loan which is then identified as a troubled
debt restructuring ("TDR"). The Company may modify loans through rate
reductions, extensions to maturity, interest only payments, or payment
modifications to better coincide the timing of payments due under the modified
terms with the expected timing of cash flows from the borrowers' operations.
Loan modifications are intended to minimize the economic loss and to avoid
foreclosure or repossession of the collateral. TDRs are considered impaired
loans for purposes of calculating the Company's allowance for loan losses.
The Company identifies loans for potential restructure primarily through direct
communication with the borrower and the evaluation of the borrower's financial
statements, revenue projections, tax returns, and credit reports. Even if the
borrower is not presently in default, management will consider the likelihood
that cash flow shortages, adverse economic conditions, and negative trends may
result in a payment default in the near future.
?
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The following table presents TDRs outstanding atDecember 31, 2022 and 2021, respectively: Accrual Loans Non-Accrual Loans Total Modifications (In Thousands) December 31, 2022 Commercial real estate $ 986 $ - $ 986 Commercial construction 248 - 248 Commercial 240 - 240 Residential real estate 708 - 708 Consumer - - - Total $ 2,182 $ - $ 2,182 December 31, 2021 Commercial real estate $ 1,027 $ - $ 1,027 Commercial construction 256 - 256 Commercial 248 - 248 Residential real estate 806 13 819 Consumer - - - Total $ 2,337 $ 13 $ 2,350
There were no new TDRs during the year ended
Post- Modification
Number Pre-Modification Outstanding
of Loans Outstanding Balance Balance
(Dollars In Thousands)
Year Ending December
31, 2021
Commercial 1 $ 24 $ 24
1 $ 24 $ 24
The TDR listed above, consisting of a six-month interest only period, required
an impairment reserve of $24 thousand recorded in the allowance for loan losses
at December 31, 2021 . As December 31, 2022 and 2021, no available commitments
were outstanding on TDRs.
There were no loans that were modified and classified as a TDR within the prior
twelve months that experienced a payment default (loans ninety or more days past
due) during the years ended December 31, 2022 and December 31, 2021 .
Beginning in 2020 and through early 2021, the Company provided certain borrowers
affected in a variety of ways by COVID-19 with payment accommodations that
facilitated their ability to work through the immediate impact of the virus.
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 had ended and the
loans had resumed payments under their original contractual terms. As of
December 31, 2021 , the Company had one hundred ninety-nine (199) loans totaling
$116.4 million , for which the payment accommodation period had ended and the
loans had resumed payments under their original contractual terms.
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Note 4 - Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit. Such commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
The following financial instruments were outstanding whose contract amounts
represent credit risk:
December 31,
2022 2021
(In Thousands)
Commitments to grant loans, fixed $ 4,302 $ 1,877
Commitments to grant loans, variable 1,500 -
Unfunded commitments under lines of credit, fixed 50,359 17,618
Unfunded commitments under lines of credit, variable 133,065 135,660
Standby letters of credit 9,124 9,522 Total$ 198,350 $ 164,677 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation.
Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral supporting these letters of credit as deemed necessary. The maximum undiscounted exposure related to these commitments atDecember 31, 2022 and 2021 was$9.1 million and$9.5 million , respectively, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was$7.6 million and$7.3 million , respectively. The current amount of the liability as ofDecember 31, 2022 and 2021 for guarantees under standby letters of credit issued is not considered material. ? 72
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Note 5 - Bank Premises and Equipment
The components of premises and equipment are as follows:
December 31,
2022 2021
(In Thousands)
Furniture, fixtures and equipment $ 4,226 $ 4,190
Leasehold improvements 4,266 4,129
Buildings 1,169 1,163
Computer equipment and data processing software 2,015 1,509
Automobiles 170 150
11,846 11,141
Accumulated depreciation (8,003) (7,147)
$ 3,843 $ 3,994
Note 6 - Deposits
The components of deposits:
December 31,
2022 2021
(In Thousands)
Demand, non-interest bearing $ 381,811 $ 323,513
Demand, NOW and money market, interest bearing 244,629 248,401
Savings 681,394 739,637
Time, $250 and over 82,916 54,739
Time, other 130,357 100,735
Total deposits $ 1,521,107 $ 1,467,025
At December 31, 2022 , the scheduled maturities of time deposits are as follows
(in thousands):
2023 $ 133,521
2024 71,659
2025 5,331
2026 1,758
2027 1,004
$ 213,273
?
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Note 7 - Securities Sold under Agreements to Repurchase and Offsetting Assets and Liabilities
Securities sold under agreements to repurchase generally mature within a few
days from the transaction date and are reflected at the amount of cash received
in connection with the transaction. The securities are retained under the
Company's control at its safekeeping agent. The Company adjusts collateral based
on the fair value of the underlying securities, on a monthly basis. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
2022 2021
(Dollars In Thousands)
Balance outstanding at December 31 $ 13,384 $ 11,252
Weighted average interest rate at the end of the year 1.038 %
0.068 %
Average daily balance during the year$ 12,879 $
12,869
Weighted average interest rate during the year 0.182 %
0.065 %
Maximum month-end balance during the year$ 14,947 $
15,741
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company's consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third-party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement.
The following table presents the liabilities subject to an enforceable master
netting arrangement or repurchase agreements as of
Net Amounts
Gross Gross Amounts of Liabilities
Amounts of Offset in the Presented in the
Recognized Consolidated Consolidated Financial Cash Collateral
Liabilities Balance Sheet Balance Sheet Instruments Pledged Net Amount
(In Thousands)
December 31,
2022
Repurchase
Agreements:
Corporate
Institutions $ 13,384 $ - $ 13,384 $ (13,384) $ - $ -
December 31,
2021
Repurchase
Agreements:
Corporate
Institutions $ 11,252 $ - $ 11,252 $ (11,252) $ - $ -
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As of
Note 8 - Short-term and Long-term Borrowings
Federal funds purchased and FHLB short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for periods of twelve months or more and are generally less than sixty months. The Bank has an agreement with the FHLB, which allows for borrowings up to a percentage of qualifying assets. AtDecember 31, 2022 , the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately$763.5 million , of which$763.4 million is available for borrowing atDecember 31, 2022 due to an outstanding letter of credit in amount of$90 thousand . This borrowing capacity with the FHLB includes a line of credit of$150.0 million . There were no short-term FHLB advances outstanding as ofDecember 31, 2022 andDecember 31, 2021 . There were no long term FHLB advances outstanding as ofDecember 31, 2022 and$14.7 million in long-term FHLB advances outstanding as ofDecember 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
The Company has a revolving line of credit facility with the ACBB of
Note 9 - Employment Agreements and Supplemental Executive Retirement Plans
The Company has an unfunded, non-qualified Supplemental Executive Retirement
Plan ("SERP") for certain executive officers that provides for payments upon
retirement, death, or disability. As of December 31, 2022 and 2021, other
liabilities include $7.3 million and $6.7 million , respectively, accrued under
these plans. For the years ended December 31, 2022 and 2021, $637 thousand and
$688 thousand , respectively, were expensed under these plans.
Note 10 - Stock Incentive Plan and Employee Stock Purchase Plan Stock Incentive Plan:
At the Company's annual meeting onJune 20, 2019 , the shareholders approved the amendment and restatement of theEmbassy Bancorp, Inc. 2010 Stock Incentive Plan (the "SIP"), which was originally adopted by the Company's shareholders effectiveJune 16, 2010 , to replenish the number of shares of common stock available for issuance under the SIP and extend the term of the SIP for another ten (10) years. The SIP authorizes the Board of Directors, or a committee authorized by the Board of Directors, to award a stock based incentive to (i) designated officers (including officers who are directors) and other designated employees at the Company and its subsidiaries, and (ii) non-employee members of the Board of Directors and advisors and consultants to the Company and its subsidiaries. The SIP provides for stock based incentives in the form of incentive stock options as provided in Section 422 of the Internal Revenue Code of 1986, non-qualified stock options, stock appreciation rights, restricted stock, and deferred stock awards. The term of the option, the amount of time for the option to vest after grant, if any, and other terms and limitations will be determined at the time of grant. Options granted under the SIP may not have an exercise period that is more than ten years from the time the option is granted. The maximum number of shares of common stock authorized for issuance under the SIP increased from 500,000 to 756,356 (in order to replenish the shares that were previously issued). The SIP provides for appropriate adjustments in the number and kind of shares available for grant or subject to outstanding awards under the SIP to avoid dilution in the event of merger, stock splits, stock dividends or other changes in the capitalization of the Company. The SIP expires onJune 20, 2029 . AtDecember 31, 2022 , there were 407,875 shares available for issuance under the SIP. 75
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The Company grants shares of restricted stock, under the SIP, to certain members of its Board of Directors as compensation for their services, in accordance with the Company's Non-employee Directors Compensation program adopted inOctober 2010 . The Company also grants restricted stock to certain officers under individual agreements with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over a service period of two years to nine years. Management recognizes compensation expense for the fair value of the restricted stock awards on a straight-line basis over the requisite service period. Since inception of the SIP and through the Company's restricted stock grants activity for the year endedDecember 31, 2022 , there have been 232,238 awards granted. During the years endedDecember 31, 2022 and 2021 there were 22,632 and 22,307 awards granted, respectively. During the years endedDecember 31, 2022 and 2021 the Company recognized$527 thousand and$432 thousand in compensation expense for the restricted stock awards.
Information regarding the Company's restricted stock grants activity for the
years ended
Weighted
Average Grant
Restricted Date Fair
Stock Awards Value
Non-Vested at December 31, 2020 61,784 $ 13.13
Granted 22,307 17.60
Vested (30,367) 14.19
Non-Vested at December 31, 2021 53,724 $ 14.38
Granted 22,632 19.93
Vested (20,590) 13.77
Forfeited (1,415) 14.55
Non-Vested at December 31, 2022 54,351 $ 14.85
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The Company has granted stock options to purchase shares of stock to certain executive officers under individual agreements and/or in accordance with their respective employment agreements. There was no stock compensation expense related to these options for the year endedDecember 31, 2022 andDecember 31, 2021 . AtDecember 31, 2022 , there was no unrecognized cost to the stock options. Activities under the SIP, related to stock options, is summarized as follows: Number of Weighted ?Options ?Average Exercise Price Outstanding, December 31, 2020 63,632 $ 7.61 Granted - - Exercised (29,742) 7.00 Forfeited - - Outstanding, December 31, 2021 33,890 $ 8.15 Granted - - Exercised (33,890) 8.15 Forfeited - - Outstanding, December 31, 2022 - $ - Exercisable, December 31, 2022 - $ -
There were no remaining stock options outstanding as of
Employee Stock Purchase Plan:
OnJanuary 1, 2017 , the Company implemented theEmbassy Bancorp, Inc. Employee Stock Purchase Plan, which was approved by the Company's shareholders at the annual meeting held onJune 16, 2016 . Under the plan, each employee of the Company and its subsidiaries who is employed on an offering date and customarily is scheduled to work at least twenty (20) hours per week and more than five (5) months in a calendar year is eligible to participate. The purchase price for shares purchased under the plan shall initially equal 95% of the fair market value of such shares on the date of purchase. The purchase price may be adjusted from time to time by the Board of Directors; provided, however, that the discount to fair market value shall not exceed 15%. The Company has authorized 350,000 shares of its common stock for the plan, of which 21,905 shares have been issued as ofDecember 31, 2022 . The Company recognized discount expense in relation to the employee stock purchase plan of$3 thousand during the years endingDecember 31, 2022 and 2021. ? 77
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Note 11 - Other Comprehensive Loss
The components of other comprehensive loss, both before tax and net of tax, are
as follows:
Year Ended December 31,
2022 2021
(In Thousands)
Before Tax Net of Before Tax Net of
Tax Effect Tax Tax Effect Tax
Change in accumulated other
comprehensive loss:
Unrealized holding losses on
securities
? available for sale $ (63,181) $ 13,268 $ (49,913) $ (5,205) $ 1,093 $ (4,112)
Reclassification adjustments for
gains on securities
? transactions included in net
income (A),(B) - - - (24) 5 (19)
Total other comprehensive loss $ (63,181) $ 13,268 $ (49,913) (A) Realized gains on securities transactions included in gain on sales of securities in the accompanying Consolidated Statements of Income. (B) Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.
A summary of the realized gains on securities available for sale for the years
ended
Year Ended
Year Ended December 31,
2022 2021
(In Thousands)
Securities available for sale:
Realized gains on securities transactions $ - $ (24)
Income taxes - 5
Net of tax $ - $ (19)
A summary of the accumulated other comprehensive (loss) income, net of tax, is
as follows:
Securities
Available
for Sale
(In Thousands)
Year Ended December 31, 2022 and 2021
Balance January 1, 2022 $ (1,194) Other comprehensive loss before reclassifications (49,913) Amounts reclassified from accumulated other ? comprehensive income
-
Net other comprehensive loss during the period (49,913)
Balance December 31, 2022 $ (51,107)
Balance January 1, 2021 $ 2,937
Other comprehensive loss before reclassifications (4,112)
Amounts reclassified from accumulated other
? comprehensive income (19)
Net other comprehensive loss during the period (4,131)
Balance December 31, 2021 $ (1,194)
Note 12 - Regulatory Matters
The Company is required to maintain cash reserve balances in vault cash and with
the Federal Reserve Bank . As of December 31, 2022 , due to the reserve
requirement ratios being set at 0% effective March 26, 2020 , the Company had no
minimum reserve requirement.
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The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under theBASEL III rules the Company and the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. The net unrealized gain or losses on available-for-sale securities are not included in computing regulatory capital amounts. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth below) of total, Tier 1 common capital, and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as ofDecember 31, 2022 , that the Company and the Bank meet all capital adequacy requirements to which they are subject. Effective in 2018, theFederal Reserve raised the consolidated asset limit to be considered a small bank holding company from$1 billion to$3 billion . A company that qualifies as a small bank holding company is not subject to theFederal Reserve's consolidated capital rules, although a company that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios. As ofDecember 31, 2022 , the most recent notification from the regulatory agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios atDecember 31, 2022 and 2021 are presented below: To be Well Capitalized under ?Prompt Corrective For Capital Adequacy Action Actual ?Purposes ?Provisions Amount Ratio Amount Ratio Amount Ratio (Dollar Amounts in Thousands)December 31, 2022 : Total capital (to
risk-weighted assets)
Tier 1 common capital (to
risk-weighted assets) 139,175 12.9 ? 48,465 ? 4.5 ? 70,004 ? 6.5
Tier 1 capital (to
risk-weighted assets) 139,175 12.9 ? 64,619 ? 6.0 ? 86,159 ? 8.0
Tier 1 capital (to average
assets) 139,175 8.3 ? 66,976 ? 4.0 ? 83,720 ? 5.0
Total capital (to
risk-weighted assets)
Tier 1 common capital (to
risk-weighted assets) 123,520 12.8 ? 43,338 ? 4.5 ? 62,599 ? 6.5
Tier 1 capital (to
risk-weighted assets) 123,520 12.8 ? 57,784 ? 6.0 ? 77,045 ? 8.0
Tier 1 capital (to average
assets) 123,520 7.7 ? 64,091 ? 4.0 ? 80,114 ? 5.0
?
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The Company's actual capital amounts and ratios atDecember 31, 2022 and 2021 are presented below: For Capital Adequacy Actual ?Purposes Amount Ratio Amount Ratio (Dollar Amounts in Thousands)December 31, 2022 : Total capital (to risk-weighted assets)$ 151,832 14.1 % $ ? 86,142 ? 8.0 %
Tier 1 common capital (to
risk-weighted assets) 139,383 12.9 ? 48,455 ? 4.5
Tier 1 capital (to
risk-weighted assets) 139,383 12.9 ? 64,606 ? 6.0Tier 1 capital (to average
assets) 139,383 8.3 ? 66,978 ? 4.0
December 31, 2021 :
Total capital (to
risk-weighted assets) $ 135,193 14.0 % $ ? 76,991 ? 8.0 %Tier 1 common capital (to
risk-weighted assets) 123,709 12.9 ? 43,307 ? 4.5
Tier 1 capital (to
risk-weighted assets) 123,709 12.9 ? 57,743 ? 6.0Tier 1 capital (to average
assets) 123,709 7.7 ? 64,092 ? 4.0
The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings.
Note 13 - Fair Value of Financial Instruments
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
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An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized atDecember 31, 2022 and 2021 are as follows: (Level 1) Quoted Prices in Active (Level 3) Markets for (Level 2) Significant Identical Significant Other Unobservable Description Assets Observable Inputs Inputs Total (In Thousands) U.S. Treasury securities $ - $ 16,771 $ -$ 16,771 U.S. Government agency obligations - 32,551 - 32,551 Municipal bonds - 58,617 - 58,617U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial - 434 - 434U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential - 208,619 - 208,619December 31, 2022 Securities available for sale $ - $ 316,992 $ -$ 316,992 U.S. Government agency obligations $ - $ 28,858 $ -$ 28,858 Municipal bonds - 61,104 - 61,104U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial - 530 - 530U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential - 219,772 - 219,772December 31, 2021 Securities available for sale $ - $ 310,264 $ -$ 310,264 The fair value of securities available for sale are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted prices. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, theU.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security's terms and conditions, among other things. For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used atDecember 31, 2022 and 2021 are as follows: (Level 1) Quoted Prices (Level 2) in Active Significant (Level 3) Markets for Other Significant Identical Observable Unobservable Description Assets Inputs Inputs Total (In Thousands)
December 31, 2022 Impaired loans $ - $ - $ 868$ 868 December 31, 2021 Impaired loans $ - $ - $ 916$ 916 Impaired loans are those that are accounted for under existing FASB guidance, in which the Bank has measured impairment generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation 81
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expenses. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets would be included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. At bothDecember 31, 2022 andDecember 31, 2021 , the Company had no real estate properties acquired through, or in lieu of, foreclosure. The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value: Quantitative Information about Level 3 Fair Value Measurements Fair Value Valuation Unobservable Range Description ?Estimate Techniques Input
?(Weighted Average)
(Dollars In Thousands)
December 31, 2022 :
Impaired loans $ 868 Appraisal of Appraisal 0% to -25% (-25.0%)
collateral and adjustments (1)
?
pending agreement Liquidation 0% to -7.5% (-7.5%)
of sale expenses (2)
December 31, 2021:
Impaired loans $ 916 Appraisal of Appraisal 0% to -25% (-22.8%)
collateral and adjustments (1)
?
pending agreement Liquidation 0% to -8.5% (-7.7%)
of sale expenses (2)
Appraisals may be adjusted by management for qualitative factors including economic
(1) conditions and the age of the appraisal.
The range and weighted average of appraisal adjustments are presented as a percent of the
appraisal.
Appraisals and pending agreements of sale are adjusted by management for liquidation
(2) expenses. The range and weighted average
of liquidation expense adjustments are presented as a percent of the appraisal or pending
agreement of sale.
?
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The estimated fair values of the Company's financial instruments were as follows
at
(Level 1)
Quoted (Level 2)
Prices in Significant (Level 3)
Active Other Significant
Carrying Fair Value Markets Observable Unobservable
for
Identical
Amount Estimate Assets Inputs Inputs
(In Thousands)
December 31, 2022:
Financial assets:
Cash and cash equivalents $ 67,295 $ 67,295 $ 67,295 $ - $ -
Securities available-for-sale 316,992 316,992 - 316,992 -
Loans receivable, net of
allowance 1,196,164 1,163,947 - - 1,163,947
Paycheck Protection Program
loans receivable 286 255 - - 255
Restricted investments in
bank stock 995 995 - 995 -
Accrued interest receivable 2,926 2,926 - 2,926 -
Financial liabilities:
Deposits 1,521,107 1,516,911 - 1,516,911 -
Securities sold under
agreements to
repurchase and federal funds
purchased 13,384 13,384 - 13,384 -
Accrued interest payable 986 986 - 986 -
Off-balance sheet financial
instruments:
Commitments to grant loans - - - - -
Unfunded commitments under
lines of credit - - - - -
Standby letters of credit - - - - -
December 31, 2021:
Financial assets:
Cash and cash equivalents $ 169,692 $ 169,692 $ 169,692 $ - $ -
Securities available-for-sale 310,264 310,264 - 310,264 -
Loans receivable, net of
allowance 1,096,555 1,141,467 - - 1,141,467
Paycheck Protection Program
loans receivable 8,568 8,163 - 8,163
Restricted investments in
bank stock 1,424 1,424 - 1,424 -
Accrued interest receivable 2,603 2,603 - 2,603 -
Financial liabilities:
Deposits 1,467,025 1,467,938 - 1,467,938 -
Securities sold under
agreements to
repurchase and federal funds
purchased 11,252 11,252 - 11,252 -
Long-term borrowings 14,651 14,665 - - 14,665
Accrued interest payable 652 652 - 652 -
Off-balance sheet financial
instruments:
Commitments to grant loans - - - - -
Unfunded commitments under
lines of credit - - - - -
Standby letters of credit - - - - -
Note 14 - Transactions with Executive Officers, Directors and Principal Stockholders
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families, and affiliated companies (commonly referred to as related parties).
Related parties were indebted to the Company for loans totaling
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Deposits with related parties were
Fees paid to related parties for legal services for the years endedDecember 31, 2022 and 2021 were approximately$51 thousand and$59 thousand , respectively. The Company leases its main banking office from an investment group comprised of related parties and itsWest Broad Street office also from a related party, as disclosed in Note 15. Note 15 - Lease Commitments The Company's leases are all classified as operating leases. Currently, many of these leases contain renewal options. The Company has reviewed and based the right of use assets and lease liabilities on the present value of unpaid future minimum lease payments. Additionally, the amounts for the branch leases were impacted by assumptions around renewals and/or extensions and the interest rate used to discount those future lease obligations. The Company used the FHLB advance rates to calculate the discount rate in their review because none of the Company's leases provided an implicit rate. AtDecember 31, 2022 and 2021 the weighted average discount rate for all operating leases was 2.89% and 2.90%, respectively, with branch leases having a weighted average discount rate of 2.91% and 2.93%, respectively, and equipment leases having a weighted average discount rate of 0.89% and 1.08%, respectively. These leases expire at various dates throughOctober 2030 . All operating equipment leases do not have renewal language in their contracts and therefore use the current term. As ofDecember 31, 2022 and 2021, the operating leases overall had a weighted average lease term of 4.95 and 5.78 years, respectively, with the branch leases having a weighted average life of 4.98 and 5.83 years, respectively, and equipment leases having a weighted average life of 2.52 and 3.19 years, respectively. AtDecember 31, 2022 , the Company had right of use assets of$7.2 million (included in other assets) and lease liabilities of$7.3 million (included in other liabilities) and atDecember 31, 2021 , the Company had right of use assets of$8.7 million (included in other assets) and lease liabilities of$8.9 million (included in other liabilities), respectively. The cost for operating leases was$1.8 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. Operating cash flow paid for lease liabilities was$1.8 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. In addition to fixed rentals, the leases require the Company to pay certain additional expenses of occupying these spaces, including real estate taxes, insurance, utilities, and repairs. These additional expenses, along with depreciation on leasehold improvements, are included in occupancy and equipment expense in the Consolidated Statements of Income. A portion of these leases are with related parties as noted in the following table.
A reconciliation of operating lease liabilities by minimum lease payments by
year and in aggregate and discount amounts in aggregate, as of
Branch Leases Equipment
Third Parties Related Parties Leases Total
(In Thousands)
2023 $ 1,137 $ 672 $ 41 $ 1,850
2024 1,067 685 39 1,791
2025 763 698 22 1,483
2026 741 671 - 1,412
2027 374 55 - 429
Thereafter 864 - - 864
Total Payments 4,946 2,781 102 7,829
Less: Discount Amount 303 185 1 489
Total Lease Liability $ 4,643 $ 2,596 $ 101 $ 7,340 Rent expense to related parties was
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Note 16 - Federal Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
2022 2021
(In Thousands)
Current $ 4,639 $ 4,324
Deferred (348) (258)
Income Tax Expense $ 4,291 $ 4,066 A reconciliation of the statutory federal income tax at a rate of 21% as of
Years Ended December 31,
2022 2021
(In Thousands)
Dollar % Dollar %
Federal income tax at statutory rate $ 4,619 21.0 % $ 4,379 21.0 %
Tax-exempt interest (281) (1.3) % (243) (1.2) %
Bank owned life insurance (90) (0.4) % (104) (0.5) %
Other 43 0.2 % 34 0.2 %
Income Tax Expense $ 4,291 19.5 % $ 4,066 19.5 %
The Company evaluates its tax positions which is recognized as a benefit only if
it is "more likely than not" that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that has a likelihood of being
realized on examination of more than 50 percent. For tax positions not meeting
the "more likely than not" test, no tax benefit is recorded. Under the "more
likely than not" threshold guidelines, the Company believes no significant
uncertain tax positions exist, either individually or in the aggregate, that
would give rise to the non-recognition of an existing tax benefit. As of
December 31, 2022 and 2021, the Company had no material unrecognized tax
benefits or accrued interest and penalties. The Company's policy is to account
for interest as a component of interest expense and penalties as a component of
other expense.
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The components of the net deferred tax asset (included in other assets) are as
follows:
December 31,
2022 2021
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 2,614 $ 2,412
Deferred compensation 1,540 1,406
Lease liability 1,541 1,876
Unrealized loss on securities available for sale 13,585 317
Other 17 19
Total Deferred Tax Assets 19,297 6,030
Deferred tax liabilities:
Premises and equipment 73 87
Prepaid assets 287 321
Deferred loan costs 617 589
Right of use asset 1,505 1,834
Total Deferred Tax Liabilities $ 2,482 $ 2,831
Net Deferred Tax Asset $ 16,815 $ 3,199
Based upon the level of historical taxable income and projections for future
taxable income over periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
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Note 17 - Parent Company Only Financial
Condensed financial information pertaining only to the parent company,
BALANCE SHEETS
December 31,
2022 2021
(In Thousands)
ASSETS
Cash $ 548 $ 481
Other assets 49 43
Investment in subsidiary 88,067 122,325
Total Assets $ 88,664 $ 122,849 LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities$ 388 $ 334 Stockholders' equity 88,276 122,515
Total Liabilities and Stockholders' Equity
STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
Years Ending December 31,
2022 2021
(In Thousands)
Other expenses $ (560) $ (482)
Equity in net income of banking subsidiary 18,150 17,171
Income before income taxes 17,590
16,689
Income tax benefit 112 97
Net income $ 17,702 $ 16,786 Equity in other comprehensive loss of
banking subsidiary (49,913) (4,131)
Comprehensive (loss) income $ (32,211) $
12,655
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Embassy Bancorp, Inc. STATEMENT OF CASH FLOWS Years EndingDecember 31, 2022 2021 (In Thousands)
Cash Flows from Operating Activities:
Net income $ 17,702 $16,786
Adjustments to reconcile net income to net cash
provided by
operating activities:
Stock compensation expense 527 432
Net change in other assets and liabilities 48 42
Equity in net income of banking subsidiary (18,150) (17,171)
Net Cash Provided By Operating Activities 127 89
Cash Flows Provided By Investing Activities:
Dividend from banking subsidiary 2,495 2,665
Cash Flows from Financing Activities:
Exercise of stock options, net of payment for
stock
tendered, and proceeds from employee stock
purchase plan 189 177
Purchase of treasury stock (100) (670)
Dividends paid (2,644) (2,253)
Net Cash Used in Financing Activities (2,555)
(2,746)
Net Increase in Cash 67 8
Cash - Beginning 481 473
Cash - Ending $ 548 $ 481
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