EDGAR 10-K Filing

Company CIK: 1449794
Filing Year: 2022
Filename: 1449794_10-K_2022_0001449794-22-000005.json

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ITEM 1. BUSINESS
Item 1. BUSINESS.
General
Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania 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 acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. The reorganization enabled the Company to better compete and grow in its competitive and rapidly changing marketplace. 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 Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.
Mission
The Company provides a traditional range of financial products and services to meet the depository and credit needs of individual consumers, small and medium sized businesses, and professionals in its market area. As a locally owned and operated community bank, there is a strong focus on service that is highly personalized, efficient, and responsive to local needs. It is the intention of the Company to deliver its products and services with the care and professionalism expected of a community bank and with a special dedication to personalized service. To create this environment, the Company employs an experienced, well-trained, and highly motivated staff, with interest in building quality client relationships using state-of-the-art delivery systems and client service facilities. The Company’s executive leadership has extensive banking experience and establishes the Company’s goal to serve the financial needs of its clients and provide a profitable return to its investors, consistent with safe and sound banking practices. The Company focuses on obtaining and retaining customer relationships by offering a broad range of financial services, competitively priced and delivered in a responsive manner, with an emphasis on understanding the financial needs of its customers.
Correspondent relationships are utilized where it is cost beneficial. The specific objectives of the Company are: 1) to provide individuals, professionals and local businesses with the highest standard of relationship banking in the local market; 2) to attract deposits and loans by offering state of the art products and services with competitive pricing; 3) to provide a reasonable return to shareholders on capital invested; and 4) to attract, train and retain a happy, motivated and team-oriented group of banking professionals dedicated to meeting the Company’s objectives.
Market “Niche”
The Company provides the traditional array of commercial banking products and services emphasizing a one-on-one, sit down approach, for the delivery of products and services to consumers and businesses located in Lehigh and Northampton Counties in Pennsylvania. In the Company’s primary market area, which is dominated by offices of large statewide, regional and interstate banking institutions, as well as non-bank financial service providers (such as credit unions, financial technology companies, brokerage firms, insurance companies and mortgage companies), the Company’s banking services that are furnished in a friendly and courteous manner with a timely response to customer needs fill a “niche” that arises due to the continued loss of local institutions through merger and acquisitions.
Deposits
In order for the Company to attract and retain stable deposit relationships, the Company offers business cash management solution services to help local companies better manage their cash flow. The expertise and experience of the Company’s management coupled with the latest technology accessed through third party providers enables the Company to maximize the growth of business-related deposits.
Embassy Bancorp, Inc.
As for consumers, deposit growth is driven by a variety of factors including, but not limited to, population growth, bank and non-bank competition, local bank mergers and consolidations, increase in household income, interest rates, accessibility of location and the sales efforts of Company personnel. Time deposits can be attracted and increased by paying an interest rate higher than that offered by competitors, but are the costliest type of deposit. The most profitable type of deposits are non-interest bearing demand (checking) accounts, which can be attracted by offering free checking. However, both high interest rates and free checking accounts generate certain expenses for a bank and the desire to increase deposits must be balanced with the need to be profitable and the extent of banking relationships with the customers. The deposit services of the Company are generally comprised of demand deposits, savings deposits, money market deposits, time deposits and Individual Retirement Accounts.
Loans
The loan portfolio of the Company consists primarily of secured fixed and variable rate loans, with a significant concentration in commercial real estate transaction, consumer residential real estate mortgage, and home equity loans. While most credit facilities are appropriately collateralized, major emphasis is placed upon the financial condition of the borrower and evaluating the borrower’s cash flow versus debt service requirements. The Company has an experienced lending and private banking team. The Company believes that the familiarity of its experienced leadership team and members of the Company’s Loan Committee, in regard to prospective local borrowers, enables the Company to better evaluate the character, integrity, and creditworthiness of the prospective borrowers.
Loan growth is driven by customer demand, which in turn is influenced by individual and business indebtedness and consumer demand for goods. The Company’s loan and private banking officers call upon accountants, financial planners, attorneys, local realtors, and others to generate loans and loan referrals. Again, a balance between growth, credit risk and pricing are required to maintain performing loans for the Company, as lending money will always entail some risk. A performing loan is a loan which is being repaid according to its original terms and is the most desirable type of loan that a bank seeks to make, to support the generation of enough earnings for a bank to be profitable. The risk involved in each loan must, therefore, be carefully evaluated before the loan is made. The interest rate at which the loan is made should always reflect the risk factors involved, including the term of the loan, the value of collateral, if any, the reliability of the projected source of repayment and the amount of the loan requested. Credit quality will always be the Company’s most important factor.
The Company does not sell its mortgages into the secondary market, has not been involved in any “sub-prime” mortgage lending, and has not purchased or invested in any securities backed by or which include sub-prime loans.
As further described in Note 2 to the consolidated financial statements, in 2020, as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, the Company was approved to be a Paycheck Protection Program (“PPP”) lender. The Company had not previously been an approved Small Business Administration (“SBA”) 7(a) lender. The Company participates in the SBA’s PPP under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”).
Commercial Lending
The Company generally targets businesses with annual revenues of less than $10 million, including business owners, legal, and medical professionals. The Company offers responsiveness, flexibility and local decision making for loan applications of small business owners, thereby eliminating delays caused by non-local management. The Company participates in various local, state, and federal loan programs.
Consumer Lending
The Company offers its retail customer base a product line of consumer loan services, including mortgage loans, first time home buyer mortgages, secured home equity loans, lines of credit, auto loans, and, to a much lesser extent, unsecured personal loans.
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Embassy Bancorp, Inc.
Residential Mortgage Loans
The Company offers a range of specialty home equity and mortgage products, including competitively priced first time homeowner loans, which are retained and serviced by the Company. The Company also offers limited mortgage escrow services. The Company seeks to capitalize on its policy of closing loans in a time frame that will meet the needs of its borrowers.
Commercial Mortgage/Construction Loans
The Company originates various types of loans secured by real estate, including, to a limited extent, construction loans. Construction loans are generally priced at floating rates tied to current market rates. Upon completion of construction, these loans may be converted into permanent commercial and residential loans. Construction lending is expected to constitute a minor portion of the Company’s loan portfolio.
In some cases, the Company originates loans larger than its lending limit and enters into participation arrangements for those loans with other banks.
As an independent community bank, the Company serves the special needs of legal, medical, accounting, financial service providers and other professionals. Commercial mortgages, lines of credit, term loans and demand loans are tailored to meet the needs of the Company’s customers in the professional community. In addition to the usual criteria for pricing credit-related products, the Company takes into consideration the overall customer relationship to establish credit pricing. Deposit relationships in demand, savings, money market, and certificate accounts are considered in loan pricing, along with the credit worthiness of the borrower.
Other Services
To further attract and retain customer relationships, the Company currently provides or expects to provide the standard array of financial services expected of a community bank, which include the following:
ACH Origination
Credit/Debit Card Merchant Processing
Person to Person Payments
ATM and Debit Cards
Direct Deposit/ACH Services
Positive Pay
Automated Teller Machines
Escrow Management Services
Remote Deposit Capture
Bank by Mail
Fraud Detection Services
Safe Deposit Boxes
Cash Management Services
Gift Cards
Savings Bond Redemptions
Certified Checks
Mobile Banking
Treasurer Checks
Commercial Credit Cards
Night Depository Services
Wire Transfers
Consumer Credit Cards
On-Line Banking and Bill Pay
Fee Income
Fee income is non-interest related. The Company earns fee income by charging customers for banking services, credit card and merchant processing, treasurer’s checks, overdrafts, wire transfers, check orders, and cash management services, as well as other deposit and loan related fees. Unlike many in the industry, the Company does not sell its mortgages on the secondary market, nor does it offer trust or investment/brokerage services to its customers, all of which would generate additional fee income.
Service/Market Area
The Company is headquartered in Hanover Township, Northampton County, Pennsylvania and draws its primary deposits and business from areas immediately surrounding its principal office and its branch offices in South Whitehall Township, Lower Macungie Township, the City of Bethlehem, Salisbury Township, Lower Saucon Township, Lower Nazareth Township, Borough of Nazareth, Borough of Macungie, and Allentown, Pennsylvania, as well as the remainder of Lehigh and Northampton Counties in Pennsylvania.
Embassy Bancorp, Inc.
According to Federal Deposit Insurance Corporation (“FDIC”) data, as of June 30, 2021, the Company ranks 5th in bank market share in Northampton County with four (4) offices, and 6th in Lehigh County bank market share with five (5) offices, with a combined deposit market share of 7.37% for both counties. The Company believes there is significant room for organic growth in its current market area of Lehigh and Northampton Counties.
The Company continually evaluates strategic locations for branch offices within the Lehigh Valley, which are supplemented by convenient access through electronic banking products and services, for both consumer and commercial customers. The Company currently has ten (10) offices, with its most recent branch opening at 2002 West Liberty Street, Allentown, Lehigh County, Pennsylvania in September of 2021.
Bank Premises
The Company currently leases nine (9) of its bank operations premises and leases the land only at the Borough of Macungie branch, with the building being owned by the Company. The ten (10) offices are situated at the following locations:
Northampton County:
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Hanover Township (includes administrative offices)
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Lower Saucon Township
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Lower Nazareth Township
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Borough of Nazareth
Lehigh County:
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South Whitehall Township
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Salisbury Township
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Lower Macungie Township
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City of Bethlehem
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Borough of Macungie
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City of Allentown
The Company pays certain additional expenses of occupying these spaces including, but not necessarily limited to, real estate taxes, insurance, utilities, and repairs. The Company is obligated under the leases to maintain the premises in good order, condition, and repair.
Employees
As of December 31, 2021, the Company had a total of 106 full-time equivalent employees.
Competition
The geographic market the Company serves is highly competitive for deposits and loans. The Company competes with local, regional and national traditional banking institutions, as well as non-bank financial service providers such as credit unions, financial technology companies, brokerage firms, insurance companies and mortgage companies. In the Company’s primary market area, major regional and super-regional banks generally hold larger market share positions. By virtue of their larger capital bases, these institutions have significantly larger lending limits, more robust advertising campaigns, significantly larger branch networks, and can invest in technology on a larger scale. The industry, as a whole, competes primarily in the area of interest rates, products offered, customer service and convenience.
The Company believes it is able to compete within its market by offering competitive interest rates and a superior level of customer service, as reflected in our continued growth in market share. The Company also continues to capitalize on opportunities created by recent merger announcements, name changes, and competitive branch hour adjustments and/or closures in the Company’s market area, attracting customers looking to relocate to a local, reputable community bank.
Embassy Bancorp, Inc.
Credit unions present a significant competitive challenge to the Company. As credit unions currently enjoy an exemption from income tax, they are able to offer higher deposit rates and lower loan rates than banks can on a comparable basis. Credit unions are also not currently subject to certain regulatory constraints imposed on banks, such as the Community Reinvestment Act (“CRA”), which require the Company to implement procedures to make and monitor loans throughout the communities served. Adhering to such regulatory requirements raises the Company’s compliance costs associated with lending activities and reduces potential operating profits. Accordingly, the Company competes by focusing on building customer relationships and maintaining the commitment to customer service the community has come to expect.
Segments
The Company acts as an independent community financial services provider and offers traditional banking and related financial services to individual, business and government customers. The Company offers a full array of commercial and retail financial services, including the taking of time, savings, and demand deposits; the making of commercial, consumer, residential mortgage, and home equity loans; and the providing of other financial services.
Management does not separately allocate expenses, including the cost of funding loan demand, between commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful.
Seasonality
Management does not feel that the deposits, loans, or the business of the Company are generally seasonal in nature. Deposit and loan generation may, however, vary with local and national economic and market conditions, which should not have a material effect on planning and policy making.
Supervision and Regulation
The Company is subject to extensive regulation under federal and Pennsylvania banking laws, regulations and policies, including prescribed standards relating to capital, earnings, dividends, the repurchase or redemption of shares, loans or extensions of credit to affiliates and insiders, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, asset growth, impaired assets and loan-to-value ratios. The regulatory framework for banks is intended primarily for the protection of depositors, federal deposit insurance funds and the banking systems as a whole, and not for the protection of shareholders.
The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their bank subsidiaries and provides certain specific information about the Company and the Bank. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became law on July 21, 2010, there is additional regulatory oversight and supervision of the Company and the Bank. The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry, and includes provisions affecting large and small financial institutions alike, including several provisions that affect the regulation of community banks and bank holding companies.
The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums.
Embassy Bancorp, Inc.
The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly traded companies and allows financial institutions to pay interest on business checking accounts. The legislation also restricts proprietary trading, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of banks and their affiliates. The Dodd-Frank Act also establishes the Financial Stability Oversight Council to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.
Consumer Financial Protection Bureau
Through the Dodd-Frank Act, the Consumer Financial Protection Bureau (the “CFPB”) was established as an independent entity within the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans, and credit cards. The CFPB’s rules contain provisions on mortgage-related matters such as steering incentives, and determinations as to a borrower’s ability to repay, loan servicing, and prepayment penalties.
On January 10, 2013, the CFPB issued a final regulation defining a “qualified mortgage” for purposes of the Dodd-Frank Act and setting standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. This regulation, which became effective on January 10, 2014, also affords safe harbor legal protections for lenders making qualified loans that are not “higher priced.” On January 17, 2013, the CFPB issued a final regulation containing new mortgage servicing rules applicable to our bank subsidiary, which took effect on January 10, 2014. The announced goal of the CFPB is to bring greater consumer protection to the mortgage servicing market. These changes affect notices to be given to consumers in reference to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers are also prohibited from processing foreclosures when a loan modification is pending and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.
Additionally, the servicer must provide direct and ongoing access to its personnel and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.
Capital Standards
In July 2013, the FDIC and the Federal Reserve Board approved final rules substantially amending the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5%, that effectively results in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement was fully implemented as of January 2019 for the Company. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
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 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%.
Embassy Bancorp, Inc.
The capital ratios to be considered “well capitalized” under current 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%.
Effective in the third quarter of 2018, the Federal 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 the Federal 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 voluntarily elected to continue to report those amounts and ratios.
At December 31, 2021 and December 31, 2020, the Company qualified as “well-capitalized” under the foregoing regulatory capital standards and exceeded the capital conservation buffers. See Note 13 of the Notes to Consolidated Financial Statements included in Item 8 of this Report.
Capital Adequacy and Operations
Enacted in 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) contains provisions limiting activities and business methods of depository institutions. FDICIA required the primary federal banking regulators to promulgate regulations setting forth standards relating to, among other things, internal controls, and audit systems; credit underwriting and loan documentation; interest rate exposure and other off-balance sheet assets and liabilities; and compensation of directors and officers. FDICIA also provided for expanded regulation of depository institutions and their affiliates, including parent holding companies, by such institutions’ primary federal banking regulator. Each primary federal banking regulator is required to specify, by regulation, capital standards for measuring the capital adequacy of the depository institutions it supervises and, depending upon the extent to which a depository institution does not meet such capital adequacy measures, the primary federal banking regulator may prohibit such institution from paying dividends or may require such institution to take other steps to become adequately capitalized.
FDICIA established five capital tiers, ranging from “well capitalized” to “critically under-capitalized”. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, “pass through” insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution’s parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company’s bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment.
At December 31, 2021, the Bank qualified as “well capitalized” under these regulatory capital standards. See Note 13 of the Notes to Consolidated Financial Statements included at Item 8 of this Report.
Federal Deposit Insurance (“FDI”) Act and Part 363 of the FDIC Regulations
Section 36 of the FDI Act and Part 363 of the FDIC's regulations require insured depository institutions with at least $500 million in total assets to file a Part 363 Annual Report with the applicable bank regulatory agencies, which, among other things, requires that the Company establish and maintain an effective internal control structure over financial reporting and provide an assessment by management of the institution's compliance with the designated laws and regulations pertaining to insider loans and dividend restrictions.
Bank Holding Company Regulation
As a bank holding company, the Company is subject to regulation and examination by the Pennsylvania Department of Banking and Securities (the “Pennsylvania Department of Banking”) and the Federal Reserve Board. The Company is required to file with the Federal Reserve Board an annual report and such additional information as the
Embassy Bancorp, Inc.
Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank. Such a transaction may also require approval of the Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks.
Pursuant to the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Company may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto, and the holding company must obtain permission from the Federal Reserve Board prior to engaging in most new business activities.
A bank holding company and its subsidiaries are subject to certain restrictions imposed by the BHC Act on any extensions of credit to the bank or any of its subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
Under the Dodd-Frank Act and Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the “source of strength” doctrine.
Regulation of Embassy Bank for the Lehigh Valley
Embassy Bank for the Lehigh Valley is a Pennsylvania-chartered banking institution and is subject to regulation, supervision and regular examination by the Pennsylvania Department of Banking and the FDIC. Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations, the establishment of branches, and management practices and other aspects of banking operations.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank. Declaration and payment of cash dividends depends upon cash dividend payments to the Company by the Bank, which is the Company’s primary source of revenue and cash flow. Accordingly, the right of the Company, and consequently the right of our creditors and shareholders, to participate in any distribution of the assets or earnings of any subsidiary is necessarily subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company in its capacity as a creditor may be recognized.
As a Pennsylvania chartered bank, the Bank is subject to regulatory restrictions on the payment and amounts of dividends under the Pennsylvania Banking Code. Further, the ability of banking subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements. See Note 13 to the consolidated financial statements included at Item 8 of this Report.
The payment of dividends by the Bank and the Company may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under FDICIA, a depository institution may not pay any dividend if payment would cause
Embassy Bancorp, Inc.
it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.
Community Reinvestment Act
The Company’s Directors and Officers are committed to reaching out to the community in which they live and work. The personal, business and community rewards for helping local residents and businesses are numerous. The Board is dedicated to recognizing an ongoing commitment and understanding of the Company’s responsibility under the CRA. The Company is committed to providing access to credit and deposit products for all members of the communities that it serves.
The Company is currently undergoing an FDIC CRA examination. The Company had its last CRA examination in 2018 and received a “satisfactory” rating.
Restrictions on Transactions with Affiliates and Insiders
The Bank also is subject to the restrictions of Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act and Regulation O adopted by the Federal Reserve Board. Section 23A requires that loans or extensions of credit to an affiliate, purchases of securities issued by an affiliate, purchases of assets from an affiliate (except as may be exempted by order or regulation), the acceptance of securities issued by an affiliate as collateral and the issuance of a guarantee or acceptance of letters of credit on behalf of an affiliate (collectively, “Covered Transactions”) be on terms and conditions consistent with safe and sound banking practices. Section 23A also imposes quantitative restrictions on the amount of and collateralization requirements on such transactions. Section 23B requires that all Covered Transactions and certain other transactions, including the sale of securities or other assets to an affiliate and the payment of money or the furnishing of services to an affiliate, be on terms comparable to those prevailing for similar transactions with non-affiliates.
Section 22(g) and 22(h) of the Federal Reserve Act impose similar limitations on loans and extensions of credit from the Bank to its executive officers, directors, and principal shareholders and any of their related interests. The limitations restrict the terms and aggregate amount of such transactions. Regulation O implements the provisions of Sections 22(g) and 22(h) and requires maintenance of records of such transactions by the Bank and regular reporting of such transactions by insiders. The FDIC also requires the Bank, upon request, to disclose publicly loans and extensions of credit to insiders in excess of certain amounts.
Deposit Insurance and Premiums
As a FDIC member institution, the Bank’s deposits are insured to the maximum of $250,000 per depositor through the Deposit Insurance Fund (“DIF”) that is administered by the FDIC and each institution is required to pay quarterly deposit insurance premium assessments to the FDIC.
Other Federal Laws and Regulations
State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank’s loans are also subject to federal laws applicable to credit transactions, such as the following:
Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibitive factors in extending credit;
Embassy Bancorp, Inc.
Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
Fair Credit Reporting Act, governing the manner in which consumer debts may be collected by collection agencies; and
Various rules and regulations of various federal agencies charged with the implementation of such federal laws.
Additionally, the Company’s operations are subject to additional federal laws and regulations applicable to financial institutions, including, without limitation:
Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require the Company to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to the Company’s customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-Bliley Act; and
USA Patriot Act, which requires financial institutions to take certain actions to help prevent, detect, and prosecute international money laundering and the financing of terrorism.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act represented a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934, including publicly held bank holding companies such as the Company. In particular, the Sarbanes-Oxley Act establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws.
Governmental Policies
The Company’s earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company’s business and earnings.
Other Legislative Initiatives
Proposals may be introduced in the United States Congress and in the Pennsylvania Legislature and before various bank regulatory authorities, which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which
Embassy Bancorp, Inc.
would further regulate, deregulate, or restructure the financial services industry, including proposals to substantially reform the regulatory framework. It is not possible to predict whether these or any other proposals will be enacted into law or, even if enacted, the effect which they may have on the Company’s business and earnings.
Human Capital Management
We believe that outstanding people are the key to the Company’s growth and success. Through the efforts of our team, Embassy has established itself as a leading organization in our Lehigh Valley community. The Company’s philosophy is to strive to maintain simplicity in our policies and efficiency in our procedures. We pride ourselves in creating an open, diverse, and transparent culture that celebrates teamwork and recognizes team members at all levels. We believe that diversity of cultures, thoughts, and experiences results in better outcomes and empowers our team members to make more meaningful contributions within our company and community. This in turn provides an environment in which our team will thrive. The majority of our team are regular full-time employees, and we also employ regular part-time employees and some seasonal/temporary team members.
It is by design that the Company runs a very efficient operation, relying greatly on the knowledge and experience of its leadership team, and, where appropriate, the outsourcing of certain functions to high quality vendors, in order to do so. This level of efficiency requires that individual members of the Company’s leadership team assume roles that are most often held by multiple individuals at banks within the Company’s peer group. For example, David M. Lobach, Jr. serves as Chairman of the Board, as well as President and Chief Executive Officer, Judith A. Hunsicker serves as Chief Operating Officer and Chief Financial Officer, James R. Bartholomew serves as Senior Lending Officer and oversees business banking and business development, Diane M. Cunningham oversees retail banking and consumer lending, as well as marketing, and Lynne M. Neel oversees the finance department, deposit and loan operations and investor relations, to name a few such examples. This multidisciplinary approach is replicated throughout the Company.
The Company has created a group consisting of team members called the “Culture Club.” The club is designed to keep our business culture in the forefront of all we do. This team provides new employees with their first look at the unique Embassy culture through an orientation program created with the individual in mind. In addition, the team actively works on creative activities and educational events to enhance our existing culture for the entire Embassy team. Our culture is truly defined by “us.” The Company family is made up of a diverse group of professionals who share the common goal of making our bank succeed by providing superior customer service through sales, education, technology, and teamwork. Our experience has shown that when employees communicate openly and directly with supervisors, the work environment can be excellent, expectations can be clear, and attitudes will be positive. We believe that the Company amply demonstrates its commitment to employees by responding effectively to employee concerns.
Annually, every team member is asked to complete a team member commitment form, in which he or she describes duties and responsibilities they may face in their day to day work. The Company maintains these forms and uses them to aid in orienting new employees to their jobs, identifying the requirements of each position, balancing responsibilities amongst the team, establishing hiring criteria, setting standards for employee performance evaluations, and establishing a basis for making reasonable accommodations for individuals with disabilities. They are also used for discussion in connection with an existing employee’s review process. Supervisors and employees are strongly encouraged to discuss job performance and goals on an informal, day-to-day basis. Employees are asked to annually participate in the Company's self-assessment process, which includes their Personal Team Member Commitment (which describes positions) and Personal Balance Sheet. Additionally, this Balance Sheet is a formal performance evaluation conducted to provide both supervisors and employees the opportunity to discuss job tasks, identify and correct weaknesses, encourage and recognize strengths, and discuss positive, purposeful approaches for efficiently carrying out the responsibility of each position.
The salary and benefits program at the Company was created to achieve consistent pay practices, comply with federal and state laws, mirror our commitment to Equal Employment Opportunity, and offer competitive salaries and benefits within our labor market. Because recruiting and retaining talented and diverse employees is critical to our success, the Company is committed to paying its team members equitable wages that reflect the requirements and responsibilities of their positions and are competitive with the pay received by similarly situated employees in other banks in the area.
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Compensation for every position is determined by several factors, including the essential duties and responsibilities of the job, and knowledge of pay practices of other employers. The Company periodically reviews its salary and benefits program and restructures it as necessary.
Eligible employees at the Company are provided a wide range of benefits. A number of the programs (such as Social Security, workers' compensation, state disability, and unemployment insurance) cover all employees in the manner prescribed by law. Benefits eligibility is dependent upon a variety of factors, primarily whether the employee is full time or part time.
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic and on March 13, 2020 the United States government declared COVID-19 as a national emergency. Specific to COVID-19, the Company’s top priority is the health and safety of our team, customers, vendors, and the public. Embassy Bank’s Pandemic Officer is responsible for the oversight of the Company’s COVID-19 Program. The COVID-19 Plan Guidance has been distributed to all employees, and when necessary, to on-site workers, and vendors. All team members, onsite workers, visitors, vendors, and customers must comply with local, state, and federal government regulations regarding COVID-19 policies and personal protective equipment (PPE) requirements. The Company has followed, and intends to continue to follow, at minimum, the most recent guidance issued by the Center for Disease Control (“CDC”) and the Pennsylvania Department of Health.
Available Information
The Company’s common stock is registered under Section 12(g) of the Securities Exchange Act of 1934. Trades in Company common stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets under the symbol “EMYB”. The Company is subject to the informational requirements of the Exchange Act, and, accordingly, electronically files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and other information with the U.S. Securities and Exchange Commission (“SEC”). You may obtain these reports and statements, and any amendments, from the SEC’s website at www.sec.gov. You may obtain copies of these reports, and any amendments, through our website at www.embassybank.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC.
The Company’s headquarters are located at 100 Gateway Drive, in Hanover Township, Bethlehem, Pennsylvania 18017, and its telephone number is 1-610-882-8800. The Company has adopted a Code of Conduct/Ethics that applies to all directors and officers of the Company. This document is available in the Investor Relations section on the Company’s website. The information included on the website and the Investor Relations page is not considered a part of this document.
Caution About Forward-looking Statements
This report contains forward-looking statements, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.
Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.
No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the
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Company’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations, and (v) other external developments which could materially affect the Company’s business and operations, including those described in this Report under section Item 1A - Risk Factors or in our other filings with the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS.
Before investing in Embassy Bancorp, Inc. common stock, an investor should carefully consider the risk factors described below, which are not intended to be all inclusive, and review other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that we are not aware of, or that we currently deem less significant, or that we otherwise are not specifically focused on, may also impact our business, results of operations, and our common stock. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and an investor could lose all or part of his or her investment in the Company.
Unless the context otherwise requires, references to “we,” “us,” “our,” “Embassy,” or “Embassy Bancorp, Inc.,” collectively refer to Embassy Bancorp, Inc. and its banking subsidiary, and specific references to the “Bank” refer to Embassy Bank for the Lehigh Valley, the wholly-owned banking subsidiary of Embassy Bancorp, Inc.
Risks Related to Our Business
Changes in interest rates may adversely affect our earnings and financial condition.
Our ability to make a profit, like that of most financial institutions, substantially depends upon our net interest income, which is the difference between the interest income earned on interest earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or reduce net interest income and net income.
Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. When interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. Changes in market interest rates are affected by many factors beyond our control, including inflation, unemployment, money supply, international events, and events in the United States and other financial markets.
We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact and a substantial, unexpected, prolonged, or rapid change in interest rates could adversely affect our financial condition and results of operations.
Interest rate volatility stemming from the COVID-19 pandemic could negatively affect our net interest income, lending activities, deposits, and profitability.
Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from the COVID-19 pandemic. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of the pandemic on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all
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interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
Effects of Inflation
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.
As a participating lender in the SBA’s PPP, we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
The Company participates in the SBA’s PPP under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). Under the PPP, small businesses and other entities and individuals applied for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. We participated as a lender in the PPP and started accepting applications from qualified borrowers on April 3, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition, and results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us. We are not aware of any fraud related to PPP loans originated by the Bank.
As of December 31, 2021, the Company had $8.6 million of PPP loans yet to be forgiven. As of February 28, 2022, the Company had $2.8 million of PPP loans yet to be forgiven.
We are subject to credit risk.
As of December 31, 2021, excluding PPP loans, approximately 44 percent of the Company’s loan portfolio consisted of commercial, commercial construction, and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate or secured consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because our loan portfolio contains a significant number of commercial, commercial construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan and lease losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
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Our allowance for loan and lease losses may be insufficient.
We maintain an allowance for loan and lease losses, which is a reserve established that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The Company has determined, because of the 100% SBA guarantee, that no allowance for loan losses is required on the PPP loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan and lease losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem credits and other factors, both within and outside of our control, may require an increase in the allowance. In addition, bank regulatory agencies periodically review our allowance for possible loan and lease losses and may require an increase in the provision for possible loan and lease losses or the recognition of further loan charge-offs, based on information unavailable to, or judgments different than those of, management. In addition, if charge-offs in future periods exceed the allowance, we may need additional provisions to increase the allowance for possible loan and lease losses. Any increases in the allowance resulting from loan loss provisions will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.
The FASB issued an accounting standard that may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations. This new accounting standard that will be effective for us beginning on January 1, 2023. This standard, referred to as CECL, requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and leases and recognize the expected credit losses as allowances for loan and lease losses. This will change the current method of providing allowances for loan and lease losses that are probable, which may require us to increase our allowance for loan and lease losses, and to greatly increase the types of data we will need to collect and review to determine the appropriate level of the allowance for loan and lease losses. Any increase in our allowance for loan and lease losses or expenses incurred to determine the appropriate level of the allowance for loan and lease losses may have a material adverse effect on our financial condition and results of operations.
Our profitability depends significantly on economic conditions in Pennsylvania.
Unlike larger or regional financial institutions that are more geographically diversified, our success is dependent to a significant degree on economic conditions in Pennsylvania, especially in Lehigh and Northampton Counties, which are the counties and markets primarily served by us in the years up to and including 2021. The banking industry is affected by general economic conditions, including the effects of inflation, recession, unemployment, real estate values, trends in national and global economics, and other factors beyond our control. An economic recession or a delayed recovery over a prolonged period of time in Pennsylvania, or more specific to the areas served by us, could cause an increase in the level of the Bank’s non-performing assets and loan and lease losses, thereby causing operating losses, impairing liquidity, and eroding capital. We can give no assurance that adverse changes in the local economy would not have a material adverse effect on our consolidated financial condition, results of operations, and cash flows.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. The geographic market the Company serves is highly competitive for deposits and loans. The Company competes with local, regional, and national traditional banking institutions, as well as non-bank financial service providers such as credit unions, brokerage firms, insurance companies and mortgage companies. In the Company’s primary market area, major regional and super-regional banks generally hold larger market share positions. By virtue of their larger capital bases and greater financial resources, these institutions have significantly larger lending limits, more robust advertising campaigns, larger branch networks, and can invest in technology on a larger scale. The industry, as a whole, competes primarily in the area of interest
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rates, products offered, customer service and convenience. Our profitability depends upon our ability to successfully compete in our market area.
The Basel III capital rules require us to maintain higher levels of capital, which could reduce our profitability.
Basel III targets higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital. Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. In the future, we may be required to maintain higher levels of capital, thus potentially reducing opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to us, and adversely impact our financial condition and results of operations.
If our information systems are interrupted or sustain a breach in security, those events may negatively affect our financial performance and reputation.
In conducting our business, we rely heavily on our information systems. Maintaining and protecting those systems and data is difficult and expensive, as is dealing with any failure, interruption, or breach in security of these systems, whether due to acts or omissions by us or by a third party, and whether intentional or not. Any such failure, interruption, or breach could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. A breach of our information security may result from fraudulent activity committed against us or our customers, resulting in financial loss to us or our customers, or privacy breaches against our customers. Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering, identity theft, or other deceptive acts. Such fraudulent activity could be heightened by geopolitical events, including the Russia/Ukraine conflict. The policies, procedures, and technical safeguards put in place by us to prevent or limit the effect of any failure, interruption, or security breach of our information systems and data may be insufficient to prevent or remedy the effects of any such occurrences. The occurrence of any failures, interruptions, or security breaches of our information systems, or those of our third party vendors, and data could damage our reputation, cause us to incur additional expenses, result in online services or other businesses becoming inoperable, subject us to regulatory sanctions or additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Our business operations and interaction with customers are increasingly done via electronic means, and this has increased risks related to cyber security.
We are exposed to the risk of cyber-attacks in the ordinary course of our business. In general, cyber incidents can result from deliberate attacks or unintentional events. An increased level of attention in the industry is focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, we have policies and procedures in place to prevent or limit the effect of the possible security breach of our information systems and we have insurance against some cyber-risks and attacks. While we have not incurred any material losses related to cyber-attacks, nor are we aware of any specific or threatened cyber-incidents as of the date of this report, we may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include remediation costs, which may include liability for stolen assets or information and repairing system damage; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision, and examination by federal and state banking authorities. Any change in applicable regulations or federal, state, or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and
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results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our results of operations and financial condition.
We are required to make a number of judgments in applying generally accepted accounting principles and different estimates and assumptions in the application of these standards could result in a decrease in capital and/or other material changes to our reports of financial condition and results of operations.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and reserve for unfunded lending commitments, the fair value of certain financial instruments (securities), income tax assets or liabilities (including deferred tax assets and any related valuation allowance), and share-based compensation. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these standards could result in a decrease to net income and, possibly, capital and may have a material adverse effect on our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC issues changes to or updated interpretations of the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes are beyond our control, can be difficult to predict, and could materially impact how we report our financial condition and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior financial statements by material amounts. The implementation of new or revised guidance could also result in material adverse effects to our reported capital.
Prior levels of market volatility were unprecedented and future volatility may have materially adverse effects on our liquidity and financial condition.
Starting in March 2020 the capital and credit markets have experienced extreme volatility and disruption. In some cases, the markets exerted downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying financial strength. If such levels of market disruption and volatility return, there can be no assurance that we will not experience adverse effects, which may materially affect our liquidity, financial condition, and profitability.
Our banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect our earnings.
Poor economic conditions and the resulting bank failures from the most recent recession have stressed the Deposit Insurance Fund and increased the costs of our FDIC insurance assessments. Additional bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue special assessments. We are generally unable to control the amount of premiums or special assessments that our banking subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and our ability to continue to pay dividends on our common stock at the current rate or at all.
If we conclude that the decline in the value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings.
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value of individual securities or the portfolio as a whole is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings. Due to the complexity of the calculations and assumptions used in determining whether an asset is impaired, the impairment disclosed, or lack thereof, may not accurately reflect the actual impairment in the future.
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Our financial performance may suffer if our information technology is unable to keep pace with our growth or industry developments.
Effective and competitive delivery of our products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors. In addition to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have greater resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for us. Our failure to timely and effectively implement technological advances could adversely affect our financial condition and results of operations.
We are highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. A cybersecurity breach of a vendor’s system may result in theft of our data or disruption of business processes. In most cases, we will remain primarily liable to our customers for losses arising from a breach of a vendor’s data security system. We rely on our outsourced service providers to implement and maintain prudent cybersecurity controls. We have procedures in place to assess a vendor’s cybersecurity controls prior to establishing a contractual relationship and to periodically review assessments of those control systems; however, these procedures are not infallible, and a vendor’s system can be breached despite the procedures we employ. We cannot be sure that we will be able to maintain these relationships on favorable terms. The loss of these vendor relationships could disrupt the services we provide to our customers and cause us to incur expense in connection with replacing these services.
The soundness of other financial institutions may adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be readily realized or liquidated at prices sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
Risks Related to Our Common Stock
The trading volume in our common stock is less than that of larger public companies, which can contribute to volatility in our stock price and adversely affect the liquidity of an investment in our common stock.
Our common stock is not traded on a security exchange. Trades in our stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets, but trading in our stock is sporadic. The trading history of our common stock has been characterized by relatively low trading volume. This lack of an active public market means that the value of a shareholder’s investment in our common stock may be subject to sudden fluctuations, as individual trades have a greater effect on our reported trading price than would be the case in a broad public market with significant daily trading volume.
The market price of our common stock may also be subject to fluctuations in response to numerous other factors, including the factors discussed in this report, regardless of our actual operating performance. The possibility of such fluctuations occurring is increased due to the illiquid nature of the trading market of our common stock. Therefore, a shareholder may be unable to sell our common stock at or above the price at which it was purchased, at or above the current market price, or at the time of his, her or its choosing.
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Our insiders control a substantial percentage of our stock and therefore have the ability to exercise significant control over our affairs.
As of December 31, 2021, our directors and executive officers beneficially owned in excess of 27% of our issued and outstanding common stock on a fully diluted basis. Such persons, as a group, will have sufficient votes to strongly influence the outcome of all matters submitted to our shareholders, including the election of directors. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company.
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Our ability to pay dividends on our common stock, and principal and interest on our debt, depends primarily on dividends from our banking subsidiary, which is subject to regulatory limits.
Embassy Bancorp, Inc. is a bank holding company and its operations are conducted by its direct and indirect subsidiaries, primarily the Bank. Our ability to pay dividends on our common stock and principal and interest on our debt depends on our receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of the Bank to pay dividends is also subject to profitability, financial condition, liquidity, and capital management limits. There is no assurance that our subsidiary will be able to pay dividends in the future or that we will generate adequate cash flow to pay dividends in the future. Federal Reserve policy, which applies to us as a registered bank holding company, also provides that dividends by bank holding companies should generally be paid out of earnings from both the current period and a designated look-back period. Our failure to pay dividends on our common stock could have a material adverse effect on the market price of our common stock.
Provisions of our articles of incorporation and bylaws, Pennsylvania law, state and federal banking regulations, and our significant percentage of insider ownership, could act to delay or prevent a takeover by a third party.
Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire us, even if the acquisition would be advantageous to our shareholders. By incorporating under Pennsylvania law, our board of directors owes its fiduciary duty solely to the corporation. As such, Pennsylvania law does require a director to act solely because of the effect such action might have on an acquisition or potential acquisition of control of the corporation or the consideration that might be offered or paid to shareholders in such an acquisition. Additionally, Pennsylvania law:
expands the factors and groups which a corporation’s board of directors can consider in determining whether an action is in the best interests of the corporation, including the effect of such action on its shareholders, employees, suppliers, customers, creditors and communities;
provides that a corporation’s board of directors need not consider the interests of any particular group (including the shareholders) as dominant or controlling;
provides that a corporation’s directors, in order to satisfy the presumption that they have acted in the best interests of the corporation, need not satisfy any greater obligation or higher burden of proof with respect to actions relating to an acquisition or potential acquisition of control; and
provides that actions relating to acquisitions of control that are approved by a majority of “disinterested directors” are presumed to satisfy the directors’ standard, unless it is proven by clear and convincing evidence that the directors did not assent to such action in good faith after reasonable investigation.
In addition, we have various anti-takeover measures in place under our articles of incorporation and bylaws, including a supermajority vote requirement for mergers, advance notice requirements for nominations for election of directors and the presentation of shareholder proposals at meetings of shareholders, a staggered Board of Directors, and the absence of cumulative voting.
Further, federal and state banking laws and regulations generally require filings and approvals prior to certain transactions that would result in a party acquiring control of our company.
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Any one or more of these laws or measures, particularly when coupled with the fact that our insiders hold approximately 27% of our voting shares, may impede the takeover of the Company and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.
General Risk Factors
Our controls and procedures may fail or could be circumvented.
Management has implemented a series of internal controls, disclosure controls and procedures, and corporate governance policies and procedures in order to ensure accurate financial control and reporting. However, any system of controls, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure or circumvention of our controls and/or procedures could have a material adverse effect on our business and results of operation and financial condition.
Loss of our senior executive officers or other key employees could impair our relationship with our customers and adversely affect our business.
We have assembled a leadership management team which has substantial background and experience in banking and financial services in the markets we serve. Loss of these key personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them.
Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on our business and operations.
Acts of war or terrorism, natural disasters, global climate change, pandemics, global conflicts, geopolitical events, including the military tensions between Russia and Ukraine, or other similar events, or a combination of these factor or other factors, could have a negative impact on our business and operations. While we have in place business continuity plans, such events could still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict.
Negative public opinion could damage our reputation and adversely affect our earnings.
Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including banking operations, our management of actual or potential conflicts of interest and ethical issues, and our protection of confidential client information. Negative public opinion can adversely affect our ability to keep and attract customers and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in the way we conduct our business activities and deal with our customers, communities and vendors, these steps may not be effective.
If we need to, or are compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
Federal banking regulators require us and our bank subsidiary to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation, and bank regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that they believe are necessary to support our business operations. As of December 31, 2021, all three capital ratios for us and our banking subsidiary were above “well capitalized” levels under current bank regulatory guidelines.
Embassy Bancorp, Inc.
Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital on terms and time frames acceptable to us or to raise additional capital at all. If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition, and results of operating. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through issuance of additional shares of common stock may have an adverse impact on our stock price.
In October 2021, the Company obtained a $5.0 million unsecured revolving line of credit facility from the Atlantic Community Bankers Bank, in which funds can be down streamed to support the Bank.
Our common stock is equity and is subordinate to all of our existing and future indebtedness.
Shares of our common stock are equity interests in our company and do not constitute indebtedness. As such, shares of our common stock rank junior to all indebtedness and other non-equity claims on us with respect to assets available to satisfy claims on us, including in a liquidation of us. Also, our right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors, including the preferred claims of the Bank’s depositors.
Our common stock is not insured by any governmental entity.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section. As a result, if you acquire our common stock, you may lose some or all of your investment.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. UNRESOLVED STAFF COMMENTS.
None.

---

ITEM 2. PROPERTIES
Item 2. PROPERTIES.
The Company, through the Bank, occupies ten (10) full-service banking offices in the Lehigh Valley:
Northampton County:

Hanover Township (includes administrative offices)

Lower Saucon Township

Lower Nazareth Township

Borough of Nazareth
Lehigh County:

South Whitehall Township

Salisbury Township

Lower Macungie Township

City of Bethlehem

Borough of Macungie

City of Allentown
Embassy Bancorp, Inc.
The Company currently leases nine (9) of its bank premises and leases the land at Borough of Macungie branch. The Borough of Macungie branch building is owned by the Company.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. LEGAL PROCEEDINGS.
The Company and the Bank are an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Company’s operations or financial position.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
‎
Embassy Bancorp, Inc.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a)Shares of Company common stock are traded over-the-counter and in privately negotiated transactions. The Company’s common stock is not listed on any national securities exchange.
Trades in Company common stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets under the symbol “EMYB”. The following table reflects high and low bid prices for shares of the Company’s common stock for the periods indicated, based upon information derived from www.otcmarkets.com.
High
Low
High
Low
First Quarter
$
16.75
$
14.25
$
19.15
$
10.10
Second Quarter
$
20.01
$
16.50
$
13.33
$
10.10
Third Quarter
$
21.20
$
19.00
$
13.00
$
11.50
Fourth Quarter
$
20.69
$
19.16
$
14.60
$
12.09
The above quotations may not reflect inter-dealer prices and should not be considered over-the-counter market quotations as that term is customarily used.
(b)As of March 11, 2022, there are approximately 888 owners of record of the common stock of the Company.
(c)On July 16, 2021, the Company paid $2,252,429 or $0.30 per share, in an annual cash dividend on its common stock. On September 30, 2020, the Company paid $1,644,063 or $0.22 per share, in an annual cash dividend on its common stock. As a general matter, cash available for dividend distribution to shareholders of the Company may come from dividends paid to the Company by the Bank, depending upon existing cash levels at the Company. See “Supervision and Regulation - Dividend Restrictions” in Item 1 of this report for a description of restrictions that may limit the Company’s ability to pay dividends on its common stock.
(d)The following table sets forth information about options outstanding under the Company’s shareholder approved Stock Incentive Plan, as of December 31, 2021:
Number of Shares
to be issued upon exercise of
outstanding options
Weighted average
exercise price of
outstanding options
Number of Shares
remaining available
for future issuance
Equity Compensation Plans and
Individual Employment Agreements
33,890
$ 8.15
430,507
(e)Sales of Securities.
None.
‎
Embassy Bancorp, Inc.
(f)Repurchase of Equity Securities.
The following table sets forth the number of shares of common stock repurchased by the Company, and the average paid for such shares, during the fourth quarter of 2021. The Company has not publicly announced any purchase plan or program.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 - 31, 2021
N/A
N/A
N/A
N/A
November 1 - 30, 2021
N/A
N/A
N/A
N/A
December 1 - 31, 2021
3,494
$
20.00
N/A
N/A

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis provides an overview of the consolidated financial condition and results of operations of the Company for the years ended December 31, 2021 and 2020. This discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report.
Critical Accounting Estimates and Judgements
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which require the Company to make estimates and assumptions. The Company believes that its determination of the allowance for loan losses involves a higher degree of judgment and complexity than the Company’s other significant accounting policies. Further, this estimate can be materially impacted by changes in market conditions or the actual or perceived financial condition of the Company’s borrowers, subjecting the Company to significant volatility of earnings.
A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Company maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is established through the provision for loan losses, which is a charge against earnings. Provision for loan losses is made to reserve for estimated probable losses on loans. The allowance for loan losses is a significant estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in actual and forecasted credit quality, including delinquency, charge-off and bankruptcy rates, and current economic conditions that may affect a borrower’s ability to pay. The use of different estimates or assumptions could produce different provision for loan losses. Management believes the allowance for loan losses is adequate and reasonable. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Provision for Loan Losses” and “Allowance for Loan Losses” in Notes 1 and 4 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 Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Embassy Bancorp, Inc.
GENERAL
The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the BHC Act. The Company was formed for purposes of acquiring the Bank in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow.
The Bank, which is the Company’s primary operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.
Since its inception, the Board’s philosophy has been that, by running the Bank with a view toward the long term, only good things will happen for the Bank’s customers, team members, shareholders, and the Lehigh Valley community.
OVERVIEW
The Company’s assets grew $191.2 million from $1.4 billion at December 31, 2020 to $1.6 billion at December 31, 2021. The increase was due to an increase of $37.8 million in cash and cash equivalents, a $179.3 million increase in securities available for sale, and an increase of $17.2 million in net loans receivable (excluding PPP loans); offset by a decrease of $45.8 million in net PPP loans receivable due to net loan forgiveness. The growth in securities available for sale and net loans receivable was primarily funded by deposits. The increase in cash and cash equivalents was primarily due to the forgiveness of PPP loans and an increase in deposits offset, in part, by Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings of $50.8 million paid off in full during the first quarter of 2021, purchases of available for sale securities, and funding of new loans.
Net loans receivable (excluding PPP loans) increased by $17.2 million to $1.10 billion at December 31, 2021 from $1.08 billion at December 31, 2020. 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 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.
The Company's deposits grew $234.6 million from $1.2 billion at December 31, 2020 to $1.5 billion at December 31, 2021. 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, the opening of a permanent branch office in Macungie and the opening of an office at 2002 West Liberty Street in Allentown, the continued convenience and efficiency of our branch network and branch personnel, and the injection of federal stimulus money into the economy from PPP funds and consumer stimulus payments. The Company also continues to capitalize on opportunities created by recent merger announcements, name changes, and competitive branch hour adjustments and/or closures in the Company’s market area, attracting customers looking to relocate to a local, reputable community bank.
The Company’s net income increased $4.0 million, or 31.0%, to $16.8 million in 2021 from $12.8 million in 2020. Diluted earnings per share increased to $2.22 in 2021 from $1.70 in 2020, and basic earnings per share increased to $2.23 in 2021 from $1.71 in 2020, respectively. The difference in net income for the year ended December 31, 2021 and December 31, 2020 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.
Embassy Bancorp, Inc.
The Company’s pre-tax net income for 2021 included $2.7 million of PPP loan interest and fees. At December 31, 2021, the Company had $165 thousand of PPP origination fees not yet recognized into income.
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 2021 and 2020.
2021 Compared to 2020
Total interest income for the year ended December 31, 2021 was $47.5 million, compared to $44.3 million for the year ended December 31, 2020. Average earning assets were $1.5 billion for the year ended December 31, 2021 as compared to $1.3 billion for the year ended December 31, 2020. The tax equivalent yield on average earning assets was 3.25% for the year ended December 31, 2021 compared to 3.54% for the year ended December 31, 2020.
Total interest expense for the year ended December 31, 2021 decreased $2.4 million to $4.0 million, as compared to $6.4 million for the year ended December 31, 2020. Average interest bearing liabilities were $1.1 billion for the year ended December 31, 2021 as compared to $948.6 million for the year ended December 31, 2020. The yield on average interest bearing liabilities was 0.37% and 0.68% for the year ended December 31, 2021 and December 31, 2020, respectively.
Net interest income increased $5.6 million, or 14.7%, to $43.5 million for the year ended December 31, 2021 as compared to $37.9 million for the year ended December 31, 2020. The improvement in net interest income is primarily the result of an increase in the interest and fee income from PPP loans, a decrease in the balance and rates of certificates of deposit and money markets, a decrease in the rates of interest bearing demand deposits, NOW, savings, and securities sold under agreement to repurchase. Also contributing to the improvement in net interest income for the year ended December 31, 2021 was an increase in the balances of taxable loans, taxable and non-taxable investments, federal funds sold, and interest bearing deposits with banks, and a decrease in interest expense from PPPLF borrowings. The improvements were offset, in part, by a decrease in the rates of taxable loans, taxable and non-taxable investments, fed funds sold and interest bearing deposits with banks, and an increase in the balance of interest bearing demand deposits, NOW, savings, securities sold under agreement to repurchase, and long-term FHLB borrowings. The Company’s net interest margin for the year ended December 31, 2021 was 2.96% on a US GAAP basis and 2.98% on a non-US GAAP basis, compared to 3.01% on a US GAAP basis and 3.03% on a non-US GAAP basis for the year ended December 31, 2020.
Embassy Bancorp, Inc.
The Company’s net interest margin was also affected by the balance of PPP loans, which bear interest at a rate of 1.0%, and PPPLF borrowings, which bore an interest rate of 0.35% and were paid off in early February 2021. The net interest margin on a tax equivalent (non-US GAAP) basis excluding PPP loans and PPP interest income and PPPLF borrowings interest expense for the year ended December 31, 2021 was 2.86%, compared to 3.04% for the year ended December 31, 2020.
‎
Embassy Bancorp, Inc.
The following table includes the average balances, interest income and expense and the average rates earned and paid for assets and liabilities for the periods presented. All average balances are daily average balances.
Average Balances, Rates and Interest Income and Expense
Year Ended December 31, 2021
Year Ended December 31, 2020
Average
Tax Equivalent
Average
Tax Equivalent
Balance
Interest
Yield
Balance
Interest
Yield
(Dollars in Thousands)
ASSETS
Loans - taxable (2)
$
1,101,030
$
40,633
3.69%
$
1,036,362
$
40,473
3.91%
Loans - Paycheck Protection Program
34,058
2,747
8.07%
42,930
1,307
3.04%
Loans - non-taxable (1)
6,302
3.88%
6,856
3.88%
Investment securities - taxable
177,719
2,765
1.56%
85,091
1,353
1.59%
Investment securities - non-taxable (1)
37,374
1,014
3.43%
27,698
3.77%
Federal funds sold
1,000
-
0.04%
0.19%
Interest bearing deposits with banks
111,115
0.14%
60,234
0.26%
TOTAL INTEREST EARNING ASSETS
1,468,598
47,506
3.25%
1,260,055
44,329
3.54%
Less allowance for loan losses
(11,096)
(8,959)
Other assets
61,315
54,253
TOTAL ASSETS
$
1,518,817
$
1,305,349
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
‎NOW and money market
$
225,658
$
0.06%
$
186,735
$
0.24%
Savings
635,626
1,775
0.28%
471,403
1,508
0.32%
Certificates of deposit
187,255
1,962
1.05%
227,907
4,177
1.83%
Securities sold under agreements to
‎ repurchase and other borrowings
27,520
0.43%
25,696
0.62%
Paycheck Protection Program Liquidity
‎ Facility borrowings
4,256
0.35%
36,837
0.35%
TOTAL INTEREST BEARING LIABILITIES
1,080,315
4,012
0.37%
948,578
6,413
0.68%
Non-interest bearing demand deposits
301,800
231,384
Other liabilities
18,794
19,229
Stockholders' equity
117,908
106,158
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$
1,518,817
$
1,305,349
Net interest income
$
43,494
$
37,916
Tax equivalent adjustments:
Loans
Investments
Total tax equivalent adjustments
Net interest income on a tax equivalent basis
$
43,815
$
38,191
Net interest spread (US GAAP basis)
2.86%
2.84%
Net interest margin (US GAAP basis)
2.96%
3.01%
Net interest spread (non-US GAAP basis) (3)
2.88%
2.86%
Net interest margin (non-US GAAP basis) (3)
2.98%
3.03%
(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, 2021 and 2020, 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, 2021 and 2020, respectively.
Embassy Bancorp, Inc.
The table below demonstrates the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.
2021 vs. 2020
Increase (decrease) due to changes in:
(In Thousands)
Volume
Rate
Total
Interest-earning assets:
Loans - taxable
$
2,525
$
(2,365)
$
Loans - Paycheck Protection Program
(270)
1,710
1,440
Loans - non-taxable
(17)
-
(17)
Investment securities - taxable
1,473
(61)
1,412
Investment securities - non-taxable
(101)
Federal funds sold
-
(2)
(2)
Interest bearing deposits with banks
(137)
(4)
Total net change in income on
interest-earning assets
4,133
(956)
3,177
Interest-bearing liabilities:
Interest bearing demand deposits,
NOW and money market
(390)
(298)
Savings
(258)
Certificates of deposit
(745)
(1,470)
(2,215)
Total deposits
(128)
(2,118)
(2,246)
Securities sold under agreements to
repurchase and other borrowings
(52)
(41)
Paycheck Protection Program
Liquidity Facility borrowings
(114)
-
(114)
Total net change in expense on
interest-bearing liabilities
(231)
(2,170)
(2,401)
Change in net interest income
$
4,364
$
1,214
$
5,578
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.
Embassy Bancorp, Inc.
The allowance consists of general, specific, qualitative, and unallocated components. The general component covers non-classified loans and classified loans not considered impaired, and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are classified as impaired and/or restructured. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. An allowance for loan losses is not maintained on loans designated as held for sale.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral-dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or there is a possible loss expected.
For the year ended December 31, 2021, the provision for loan losses was $915 thousand, compared to $2.5 million for the year ended December 31, 2020. Gross loans, excluding PPP loans, grew $18.4 million, or 1.7%, in 2021 over 2020. During the year ended December 31, 2021, there were $4 thousand in charge-offs and $3 thousand in recoveries, as compared to no charge-offs and $28 thousand in recoveries for the year ended December 31, 2020. The provision for loan losses is a function of the allowance for loan loss methodology that the Bank uses to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. During the years ending December 31, 2021 and 2020, the Company adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic. See further discussion following in the “Credit Risk and Loan Quality” section of the Bank’s considerations of its December 31, 2021 allowance for loan loss levels. The allowance for loan losses as of December 31, 2021 was $11.5 million representing 1.04% of outstanding loans receivable (excluding PPP loans), as compared to $10.6 million as of December 31, 2020, representing 0.97% 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 remained relatively flat at $2.4 million for the year ended December 31, 2021 and December 31, 2020. The slight decrease is, in part, attributable to a decrease in bank owned life insurance income of $323 thousand. The decrease in the bank owned life insurance income was driven by the effect market conditions had
Embassy Bancorp, Inc.
on underlying life insurance assets, particularly the separate account life insurance assets, offset by income on the $4.0 million of additional bank owned life insurance purchased during the fourth quarter of 2020. Additional decreases in non-interest income are attributable to a decrease of $104 thousand in gain on the sale of securities and a decrease of $59 thousand on the gain on sale of loans. The decrease was offset by an increase in merchant and credit card processing fees of $56 thousand, an increase in debit card interchange fees of $219 thousand, in part, due to less activity in the second quarter of 2020 from the COVID-19 pandemic and an expanding customer base, and an increase of $63 thousand in other service fees, in part, due to the Company waiving overdraft fees during part of the second quarter of 2020 due to the COVID-19 pandemic, wire fees, and an expanding customer base. There was also a gain on the sale of other real estate owned of $103 thousand during the year ended December 31, 2021. As the deposit customer account base continues to grow and the Company continues to mature and develop additional sources of fee income, non-interest income is expected to become a more significant contributor to the overall profitability of the Company. Currently, and unlike many in the industry, the Company does not derive additional non-interest fee income by selling its mortgages in the secondary market, nor does it offer trust or investment/brokerage services to its customers.
Non-interest Expense
Non-interest expenses represent the normal operating expenses of the Company. These expenses include salaries, employee benefits, occupancy, equipment, data processing, advertising and other expenses related to the overall operation of the Company.
Non-interest expenses for the year ended December 31, 2021 was $24.1 million, compared to $22.1 million for the year ended December 31, 2020. The increase in non-interest expenses is primarily due to an increase of $1.1 million, or 9.5%, over 2020, in salaries and employee benefits. The Company had a 10.4% increase in full-time equivalent employees from ninety-six (96) at December 31, 2020 to one hundred six (106) at December 31, 2021, respectively. The increase in the number of employees, together with the annual increases in salaries and benefits, increase in contributions to employee retirement plans, increase in employee taxes, increase in health insurance cost, increase in stock grant expense, and a decrease in deferred loan costs primarily associated with fewer PPP loan originations, 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 $357 thousand in occupancy and equipment due in part to the opening of the Macungie permanent branch in November 2020 and the opening and rent for the Company’s new branch office at 2002 West Liberty Street in Allentown, Pennsylvania, along with an increase in building repair and maintenance and equipment expense, an increase of $356 thousand in data processing due primarily to e-commerce, the expanding customer base, fees associated with PPP loan forgiveness and the implementation fees for the Company’s upcoming transition to a new online banking platform, an increase of $166 thousand in FDIC insurance due, in part, to FDIC credits applied in the first quarter of 2020 and an increase in the Company’s assessment base, a $51 thousand increase in loan and real estate expenses, and a $155 thousand increase in other expenses due, in part, to an increase in operating expenses, bank shares tax, director compensation, and debit card losses. These increases in non-interest expenses were offset, in part, by a decrease of $109 thousand in advertising and promotions from shifts in marketing strategies and less website and social media expense, less promotions, and less public relations expense.
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 $4.1 million and $2.9 million for December 31, 2021 and December 31, 2020, respectively. The effective rate on income taxes for the years ended December 31, 2021 and 2020 was 19.5% and 18.6%, respectively. The increase in the tax rate is, in part, the result of change in the mix of taxable and tax free loans and investments and the decrease in income on bank owned life insurance.
‎
Embassy Bancorp, Inc.
FINANCIAL CONDITION
Securities
The Company’s securities portfolio is classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the management of 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 structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. The Company holds no high-risk, non-investment grade, securities or derivatives as of December 31, 2021.
The Company’s securities portfolio was $310.3 million at December 31, 2021, a $179.3 million increase from securities of $130.9 million at December 31, 2020. The Company’s securities have increased primarily due to purchases in the amount of $236.2 million, offset by a combination of investment principal pay-downs, maturities, and calls totaling $48.2 million, the sale of securities totaling $3.3 million, including a realized gain of $24 thousand, and a decrease in unrealized gains of $5.2 million. The carrying value of the securities portfolio as of December 31, 2021 includes a net unrealized loss of $1.5 million, which is recorded to accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $3.7 million at December 31, 2020. The current unrealized loss position of the securities portfolio is due to changes in market interest rates since purchase. No securities are deemed to be other than temporarily impaired.
The following table sets forth the composition of the securities portfolio at fair value as of December 31, 2021 and 2020.
(In Thousands)
U.S. Treasury securities
$
-
$
9,998
U.S. Government agency obligations
28,858
39,036
Municipal securities
61,104
39,376
U.S. Government sponsored enterprise (GSE)
- Mortgage-backed securities - commercial
U.S. Government sponsored enterprise (GSE)
- Mortgage-backed securities - residential
219,772
41,987
Total Securities Available for Sale
$
310,264
$
130,940
‎
Embassy Bancorp, Inc.
The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2021 at fair value. Maturities of mortgage-backed securities are based on estimated life. Yields are based on amortized cost.
Securities by Maturities
1 year or Less
1-5 Years
5-10 Years
Over 10 Years
Total
Average
Average
Average
Average
Average
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars In Thousands)
U.S. Government agency
obligations
$
-
-
$
28,858
0.20%
$
-
-
$
-
-
$
28,858
0.20%
Municipal securities
3.35%
1,233
2.90%
6,983
3.18%
52,202
2.99%
61,104
3.01%
U.S. GSE - Mortgage-
backed securities-
commercial
-
-
-
-
2.39%
-
-
2.39%
U.S. GSE - Mortgage-
backed securities-
residential
-
-
22,145
2.73%
36,979
1.54%
160,648
1.65%
219,772
1.74%
Total Debt Securities
$
3.35%
$
52,236
1.34%
$
44,492
1.81%
$
212,850
1.98%
$
310,264
1.85%
Loans
The loan portfolio comprises a major component of the Company’s earning assets. All of the Company’s loans are to domestic borrowers. Total net loans receivable (excluding PPP loans) at December 31, 2021 increased $17.2 million to $1.10 billion from $1.08 billion at December 31, 2020. The gross loan-to-deposit ratio (excluding PPP loans) decreased from 88% at December 31, 2020 to 76% at December 31, 2021. The Company’s loan portfolio (excluding PPP loans) at December 31, 2021 was comprised of residential real estate and consumer loans of $619.3 million, an increase of $42.3 million from December 31, 2020, and commercial loans of $488.7 million, a decrease of $23.9 million from December 31, 2020. The commercial loan decrease was caused, in large part, by several large non-PPP loan payoffs, in the month of December 2021, consisting of seven (7) loans totaling $15.3 million, due primarily to real estate investors taking advantage of favorable real estate values. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans. As described in Note 2 to the consolidated financial statements, the Company is participating in the SBA PPP program to support the needs of its small business clients. PPP loans receivable at December 31, 2021 and December 31, 2020 was $8.6 million and $54.3 million, respectively. Including PPP loans receivable, the gross loan-to-deposit ratio was 76% and 93% at December 31, 2021 and December 31, 2020.
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 Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and the Company will not be categorizing these modifications as troubled debt restructurings. As of December 31, 2021, there are one hundred ninety-nine (199) loans totaling $116.4 million, for which the payment accommodation period has ended and have resumed payments under their original contractual terms.
‎
Embassy Bancorp, Inc.
The following table sets forth information on the composition of the loan portfolio by type at December 31, 2021 and 2020. All of the Company’s loans are to domestic borrowers.
December 31, 2021
December 31, 2020
Percentage of
Percentage of
Balance
total Loans
Balance
total Loans
(Dollars in Thousands)
Commercial real estate
$
440,655
39.77%
$
452,251
41.51%
Commercial construction
6,100
0.55%
12,176
1.12%
Commercial
41,923
3.78%
48,114
4.42%
Residential real estate
618,694
55.84%
576,437
52.90%
Consumer
0.06%
0.05%
Gross loans
1,108,014
100.00%
1,089,618
100.00%
Unearned origination costs
Allowance for loan losses
(11,484)
(10,570)
Net Loans
$
1,096,555
$
1,079,339
The following table shows the maturities of the commercial and consumer loan portfolios and the loans subject to interest rate fluctuations at December 31, 2021.
One Year or Less
After One Year Through Five Years
After Five Years Through Fifteen Years
After Fifteen Years
Total
(In Thousands)
Commercial real estate
$
32,069
$
257,088
$
151,305
$
$
440,655
Commercial construction
6,083
-
-
6,100
Commercial
8,895
24,020
8,544
41,923
Residential Real Estate
2,685
15,452
353,533
247,024
618,694
Consumer
$
49,768
$
297,108
$
513,396
$
247,742
$
1,108,014
Fixed Rates
$
26,983
$
293,690
$
513,382
$
232,930
$
1,066,985
Variable Rates
22,785
3,418
14,812
41,029
$
49,768
$
297,108
$
513,396
$
247,742
$
1,108,014
Credit Risk and Loan Quality
The allowance for loan losses increased $914 thousand to $11.5 million at December 31, 2021 from $10.6 million at December 31, 2020. At December 31, 2021 and December 31, 2020, the allowance for loan losses represented 1.03% and 0.92% of total loans receivable, respectively. At December 31, 2021 and December 31, 2020, the allowance for loan losses represented 1.04% and 0.97%, respectively, of total loans receivable excluding PPP loans, which are guaranteed by the SBA. During 2020, the Company adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of non-PPP loans. During 2021, the Company again adjusted the other external factor methodology, due to uncertainty with the post COVID-19 pandemic economy, leading to a further increase in the allowance for loan losses as a percentage of non-PPP loans. In determining its allowance for loan loss level at December 31, 2021, the Company considered the health and composition of its loan portfolio going into and during the COVID-19 pandemic.
Embassy Bancorp, Inc.
All loans that received a CARES Act Section 4013 modification are provided additional qualitative reserve in the Company’s allowance for loan loss calculation. At December 31, 2021, approximately 96% of the Company’s loan portfolio is collateralized by real estate. Less than 5% of the Company’s loan portfolio is to borrowers in the more particularly hard-hit industries (including the travel and hotel industry, the full-service and limited-service restaurant industries, and the assisted living facilities industry) and the Company has no direct international exposure. The Company is not required to adopt the Current Expected Credit Losses (“CECL”) FASB accounting standard until 2023. 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.
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 restructuring loans, which are considered non-performing loans, outstanding at December 31, 2021 and December 31, 2020 totaled $2.4 million and $2.6 million, respectively. Generally, a loan is classified as nonaccrual when it is determined that the collection of all or a portion of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection. A non-performing loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. Non-accrual loans outstanding as of December 31, 2021 and December 31, 2020 totaled $242 thousand and $274 thousand, respectively. The Company’s non-performing loans to total loans receivable was 0.23% at December 31, 2021, compared to 0.25% at December 31, 2020. The Company’s nonperforming loans to total loans receivable excluding PPP loans was 0.23% at December 31, 2021, compared to 0.26% at December 31, 2020. During the year ended December 31, 2021, there were $4 thousand in charge-offs and $3 thousand in recoveries, as compared to no charge-offs and $28 thousand in recoveries for the year ended December 31, 2020. At December 31, 2021 and December 31, 2020 the Company had $217 thousand and zero, respectively, in recorded investment in consumer mortgage loans collateralized by residential real estate property that is in the process of foreclosure.
As of December 31, 2021 and 2020, the Company had no foreclosed assets. The details for the non-performing loans and assets are included in the following table:
December 31,
(Dollars In Thousands)
Non-accrual - commercial
$
-
$
-
Non-accrual - consumer
Restructured, accruing interest
2,337
2,559
Loans past due 90 or more days, accruing interest
-
-
Total nonperforming loans
2,579
2,833
Foreclosed assets
-
-
Total nonperforming assets
$
2,579
$
2,833
Nonperforming loans to total loans (excluding
PPP loans)
0.23%
0.26%
Nonperforming assets to total assets
0.16%
0.20%
Non-accrual loans to total loans (excluding PPP
loans)
0.02%
0.03%
Allowance to non-accrual loans
4745.45%
3857.66%
Net charge-offs (recoveries) to average loans
(excluding PPP loans)
0.00%
0.00%
‎
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 1.04% of outstanding loans receivable (excluding PPP loans). Based on its knowledge of the portfolio and current economic conditions, management believes that, as of December 31, 2021, the allowance is adequate to absorb reasonably anticipated losses. As of December 31, 2021, the Company had $3.5 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 $3.6 million at December 31, 2020. Most of the Company’s impaired loans required no specific reserves due to adequate collateral. As of December 31, 2021, the Company had impaired loans of $1.1 million requiring a specific reserve of $164 thousand. As of December 31, 2020, the Company had impaired loans of $1.5 million requiring a specific reserve of $169 thousand.
The activity in the allowance for loan losses is shown in the following table, as well as period end loans receivable and the allowance for loan losses as a percent of the total loan portfolio (excluding PPP loans):
December 31,
(Dollars In Thousands)
Loans receivable at end of year
$
1,108,039
$
1,089,909
Allowance for loan losses:
Balance, beginning
$
10,570
$
8,022
Provision for loan losses
2,520
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
Consumer
-
-
Total recoveries
Net charged off
(1)
Balance at end of year
$
11,484
$
10,570
Allowance for loan losses to loans
receivable at end of year
1.04%
0.97%
‎
Embassy Bancorp, Inc.
Allocation of the Allowance for Loan Losses
The following table details the allocation of the allowance for loan losses to various loan categories (excluding PPP loans) and the related percent of total loans in each category. While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb losses in any category.
December 2021
% of Total Loans
December 2020
% of Total Loans
(Dollars in Thousands)
Commercial real estate
$
4,400
39.77%
$
4,379
41.51%
Commercial construction
0.55%
1.12%
Commercial
1,328
3.78%
4.42%
Residential real estate
4,718
55.84%
4,485
52.90%
Consumer
0.06%
0.05%
Unallocated
Total Allowance for Loan Losses
$
11,484
100.00%
$
10,570
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, 2021 were $1.5 billion, an increase of $234.6 million, or 19.0%, over total deposits of $1.2 billion as of December 31, 2020. The increase in the Company’s deposits was due to an increase of $102.1 million in demand, NOW and money market deposits and a $192.9 million increase in savings deposits; offset by a decrease of $60.3 million in time deposits. The growth in total deposits was due to organic growth of new and existing customers and the injection of federal stimulus money into the economy from PPP funds and consumer stimulus payments. The shift out of time deposits was primarily due to promotions rolling off into lower yielding demand and savings deposit accounts due to the current rate environment. The funds were primarily used to fund new loan growth, purchase securities, and to pay off PPPLF borrowings. The following table reflects the Company’s deposits by category for the periods indicated. All deposits are domestic deposits.
December 31, 2021
December 31, 2020
(In Thousands)
Demand, non-interest bearing
$
323,513
$
269,996
Demand, NOW and money market, interest bearing
248,401
199,845
Savings
739,637
546,784
Time, $250 and over
54,739
85,272
Time, other
100,735
130,482
Total deposits
$
1,467,025
$
1,232,379
‎
Embassy Bancorp, Inc.
The following table sets forth the average balance of the Company’s deposits and the average rates paid on those deposits:
December 31, 2021
December 31, 2020
Average
Average
Average
Average
Amount
Rate
Amount
Rate
(Dollars In Thousands)
Demand, NOW and money market,
interest bearing deposits
$
225,658
0.06%
$
186,735
0.24%
Savings
635,626
0.28%
471,403
0.32%
Certificates of deposit
187,255
1.05%
227,907
1.83%
Total interest bearing deposits
1,048,539
0.37%
886,045
0.69%
Non-interest bearing demand deposits
301,800
231,384
Total
$
1,350,339
$
1,117,429
The following table displays the maturities and the amounts of the Company’s certificates of deposit of $250,000 or more:
December 31, 2021
December 31, 2020
(In Thousands)
3 months or less
$
10,640
$
20,942
Over 3 through 6 months
17,170
28,162
Over 6 through 12 months
10,382
22,357
Over 12 months
16,547
13,811
Total
$
54,739
$
85,272
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 $169.7 million at December 31, 2021, compared to $131.9 million at December 31, 2020. 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. At December 31, 2021, the Company had $310.3 million of available for sale securities, compared to $130.9 million at December 31, 2020. Securities with carrying values of approximately $114.0 million and $98.7 million at December 31, 2021 and December 31, 2020, 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, 2021, the Bank had a maximum borrowing capacity for short-term and long-term advances from the FHLB of approximately $717.6 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term FHLB advances outstanding as of December 31, 2021 and December 31, 2020. There were $14.7 million in long-term FHLB advances outstanding as of December 31, 2021 and December 31, 2020. All FHLB borrowings are secured by qualifying assets of the Bank.
Embassy Bancorp, Inc.
The Bank has a federal funds line of credit with the Atlantic Community Bankers Bank (“ACBB”) of $10.0 million, of which none was outstanding at December 31, 2021 and December 31, 2020. Advances from this line are unsecured.
As further described in Note 9, in October 2021, the Company obtained a $5.0 million unsecured revolving line of credit facility from the ACBB, of which none was outstanding at December 31, 2021.
As described in Note 2, the Bank had long-term PPPLF borrowings, term funding to depository institutions that originate loans to small businesses under the PPP, through the Federal Reserve Bank of Philadelphia of $50.8 million as of December 31, 2020. These borrowings were repaid in full in February 2021. All PPPLF borrowings were secured by PPP loans. PPP loans that were pledged to secure PPPLF extensions of credit are excluded from leverage ratio calculations.
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, lines of credit, and letters of credit made under the same standards as on-balance sheet loan instruments. These off-balance sheet arrangements at December 31, 2021 and December 31, 2020 totaled $164.7 million and $140.8 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 5. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs. Management will continue to evaluate the Company’s liquidity position for changes caused by the COVID-19 pandemic.
Capital Resources and Adequacy
Total stockholders’ equity was $122.5 million as of December 31, 2021, representing a net increase of $10.3 million from December 31, 2020. The increase in capital was primarily the result of the net income of $16.8 million and an increase in common stock of $51 thousand and an increase in surplus of $558 thousand due to restricted stock grants, the exercise of stock options, and employee stock purchases with compensation expense, offset by dividends paid of $2.3 million, a decrease of $4.1 million in unrealized gains on available for sale securities, and treasury stock repurchases of $670 thousand.
The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material adverse effect on the consolidated financial statements.
The regulations require that banks maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and Tier 1 capital to average assets (as defined). As of December 31, 2021, 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.
‎
Embassy Bancorp, Inc.
The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:
December 31, 2021
December 31, 2020
(Dollars In Thousands)
Tier 1, common stockholders' equity
$
123,520
$
109,013
Tier 2, allowable portion of allowance for loan losses
11,484
10,570
Total capital
$
135,004
$
119,583
Common equity tier 1 capital ratio
12.8%
11.9%
Tier 1 risk based capital ratio
12.8%
11.9%
Total risk based capital ratio
14.0%
13.1%
Tier 1 leverage ratio
7.7%
8.1%
Note: Unrealized gains 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 leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.
The capital ratios to be considered “well capitalized” under the new capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and Total Risk-Based capital of 10%.
The Company qualifies as a small bank holding company and is not subject to the Federal Reserve’s consolidated capital rules, although an institution that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios.
The following table provides the Company’s risk-based capital ratios and leverage ratios:
December 31, 2021
December 31, 2020
(Dollars In Thousands)
Tier 1, common stockholders' equity
$
123,709
$
109,237
Tier 2, allowable portion of allowance for loan losses
11,484
10,570
Total capital
$
135,193
$
119,807
Common equity tier 1 capital ratio
12.9%
12.0%
Tier 1 risk based capital ratio
12.9%
12.0%
Total risk based capital ratio
14.0%
13.1%
Tier 1 leverage ratio
7.7%
8.1%
Note: Unrealized gains on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.
Embassy Bancorp, Inc.
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.
‎
Embassy Bancorp, Inc.
GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. NOW and savings accounts are categorized by their respective estimated decay rates. The Company is asset sensitive, which means that if interest rates fall, interest income will fall faster than interest expense and net interest income will likely decrease. If interest rates rise, interest income will rise faster than interest expense and net interest income will likely increase. 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
$
154,448
$
-
$
-
$
-
$
-
$
154,448
Investment securities
8,989
17,825
65,234
35,636
184,004
311,688
Loans receivable, gross
64,147
130,633
247,269
196,823
469,167
1,108,039
Loans receivable - PPP, gross
8,217
-
8,568
Total interest-earning assets
227,613
148,547
312,736
240,676
653,171
1,582,743
Interest-bearing liabilities
NOW and money market accounts
15,907
41,135
74,740
49,502
67,117
248,401
Savings
47,388
124,676
233,181
137,232
197,160
739,637
Certificates of deposit
26,290
76,197
49,264
3,723
-
155,474
Other borrowed funds
14,651
-
-
-
-
14,651
Repurchase agreements
and federal funds purchased
11,252
-
-
-
-
11,252
Total interest-bearing liabilities
115,488
242,008
357,185
190,457
264,277
1,169,415
GAP
$
112,125
$
(93,461)
$
(44,449)
$
50,219
$
388,894
$
413,328
CUMULATIVE GAP
$
112,125
$
18,664
$
(25,785)
$
24,434
$
413,328
GAP TO INTEREST EARNING
ASSETS
7.08%
-5.91%
-2.81%
3.17%
24.57%
CUMULATIVE GAP TO
INTEREST EARNING ASSETS
7.08%
1.18%
-1.63%
1.54%
26.11%
‎
Embassy Bancorp, Inc.
Based on a twelve-month forecast of the balance sheet, the following table sets forth our interest rate risk profile at December 31, 2021. 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. 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
-1.3%
Down 200 basis points
-2.7%
Up 100 basis points
1.6%
Up 200 basis points
3.1%
Return on Assets and Equity
For the year ended December 31, 2021, the return on average assets was 1.11% the return on average equity was 14.24% and the ratio of average shareholders’ equity to average total assets was 7.76%.
For the year ended December 31, 2020, the return on average assets was 0.98% the return on average equity was 12.07% and the ratio of average shareholders’ equity to average total assets was 8.13%.
Dividend Payout Ratio
For the years ended December 31, 2021 and 2020, the dividend payout ratio was 13.42% and 12.83%, respectively.
Effects of Inflation
The majority of assets and liabilities of the Company are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Company is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Company’s assets. Inflation may also affect the general level of interest rates, which can have a direct bearing on the Company.
‎
Embassy Bancorp, Inc.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Number
Management Report on Internal Controls Over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID: 23)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statement of Cash Flows
Notes to Financial Statements
‎
Embassy Bancorp, Inc.
Management Report on Internal Controls Over Financial Reporting
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures, as defined in SEC Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting is effective based on those criteria.
/s/
/s/ David M. Lobach, Jr.
/s/ Judith A. Hunsicker
David M. Lobach, Jr.
Judith A. Hunsicker
Chairman, President and
First Executive Officer, Chief Operating
Chief Executive Officer
Officer, Secretary and Chief Financial
March 18, 2022
Officer
March 18, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Embassy Bancorp, Inc. and Subsidiary:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Embassy Bancorp, Inc. and Subsidiary (Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - General Component Qualitative Factors
As discussed in Notes 1 and 4 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. The Company’s allowance for loan losses was $11.5 million at December 31, 2021 and consists of specific and general components of $164 thousand and $11.3 million, respectively. 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 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 and testing such controls for design and operating effectiveness, 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.
Analytically reviewing the qualitative factors to prior periods for directional consistency.
Testing of the mathematical accuracy of the allowance calculation, including the calculation of the qualitative factor component.
Evaluating the reasonableness of management’s conclusions regarding the appropriateness of the qualitative factor adjustments when compared to the underlying internal and external source data
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2001.
Allentown, Pennsylvania
March 18, 2022
Embassy Bancorp, Inc.
Consolidated Balance Sheets
December 31,
December 31,
ASSETS
(In Thousands, Except Share Data)
Cash and due from banks
$
15,244
$
14,528
Interest bearing demand deposits with banks
153,448
116,379
Federal funds sold
1,000
1,000
Cash and Cash Equivalents
169,692
131,907
Securities available for sale
310,264
130,940
Restricted investment in bank stock
1,424
1,330
Loans receivable, net of allowance for loan losses of $11,484 in 2021; $10,570 in 2020
1,096,555
1,079,339
Paycheck Protection Program loans receivable
8,568
54,334
Premises and equipment, net of accumulated depreciation
3,994
3,346
Bank owned life insurance
25,796
25,189
Accrued interest receivable
2,603
3,136
Other assets
14,298
12,509
Total Assets
$
1,633,194
$
1,442,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
$
323,513
$
269,996
Interest bearing
1,143,512
962,383
Total Deposits
1,467,025
1,232,379
Securities sold under agreements to repurchase
11,252
13,612
Long-term borrowings
14,651
14,651
Paycheck Protection Program Liquidity Facility borrowings
-
50,794
Accrued interest payable
1,640
Other liabilities
17,099
16,780
Total Liabilities
1,510,679
1,329,856
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2021 issued 7,687,919 shares; outstanding 7,541,776 shares;
2020 issued 7,637,216 shares; outstanding 7,528,967 shares
7,688
7,637
Surplus
26,963
26,405
Retained earnings
91,493
76,960
Accumulated other comprehensive (loss) income
(1,194)
2,937
Treasury stock, at cost: 146,143 and 108,249 shares at December 31, 2021 and
December 31, 2020, respectively
(2,435)
(1,765)
Total Stockholders' Equity
122,515
112,174
Total Liabilities and Stockholders' Equity
$
1,633,194
$
1,442,030
See notes to consolidated financial statements.
‎
Embassy Bancorp, Inc.
Consolidated Statements of Income
Year Ended December 31,
INTEREST INCOME
(In Thousands, Except Per Share Data)
Loans, including fees
$
40,826
$
40,683
Paycheck Protection Program loans, including fees
2,747
1,307
Securities, taxable
2,765
1,353
Securities, non-taxable
1,014
Short-term investments, including federal funds sold
Total Interest Income
47,506
44,329
INTEREST EXPENSE
Deposits
3,879
6,125
Securities sold under agreements to repurchase and
federal funds purchased
Short-term borrowings
-
Long-term borrowings
Paycheck Protection Program Liquidity Facility borrowings
Total Interest Expense
4,012
6,413
Net Interest Income
43,494
37,916
PROVISION FOR LOAN LOSSES
2,520
Net Interest Income after
‎ Provision for Loan Losses
42,579
35,396
OTHER NON-INTEREST INCOME
Merchant and credit card processing fees
Debit card interchange fees
Other service fees
Bank owned life insurance
Gain on sale of securities
Gain on sale of other real estate owned
-
Gain on sale of loans
-
Total Other Non-Interest Income
2,400
2,445
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits
12,149
11,098
Occupancy and equipment
3,680
3,323
Data processing
2,941
2,585
Advertising and promotion
1,096
Professional fees
FDIC insurance
Loan & real estate
Charitable contributions
Other
1,808
1,653
Total Other Non-Interest Expenses
24,127
22,110
Income before Income Taxes
20,852
15,731
INCOME TAX EXPENSE
4,066
2,921
Net Income
$
16,786
$
12,810
BASIC EARNINGS PER SHARE
$
2.23
$
1.71
DILUTED EARNINGS PER SHARE
$
2.22
$
1.70
DIVIDENDS PER SHARE
$
0.30
$
0.22
See notes to consolidated financial statements.
‎
Embassy Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(In Thousands)
Net Income
$
16,786
$
12,810
Change in Accumulated Other Comprehensive (Loss) Income:
Unrealized holding (loss) gain
on securities available for sale
(5,205)
2,149
Less: reclassification adjustment
for realized gains
(24)
(128)
(5,229)
2,021
Income tax effect
1,098
(424)
Net unrealized (loss) gain
(4,131)
1,597
Other comprehensive (loss) income, net of tax
(4,131)
1,597
Comprehensive Income
$
12,655
$
14,407
See notes to consolidated financial statements.
Embassy Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2021 and 2020
Common Stock
Surplus
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Treasury Stock
Total
(In Thousands, Except Share and Per Share Data)
BALANCE - DECEMBER 31, 2019
$
7,544
$
25,937
$
65,794
$
1,340
$
(1,000)
$
99,615
Net income
-
-
12,810
-
-
12,810
Other comprehensive income, net of tax
-
-
-
1,597
-
1,597
Dividend declared and paid, $0.22 per share
-
-
(1,644)
-
-
(1,644)
Exercise of stock options, 52,611 shares
-
-
-
Stock tendered for funding exercise of
stock options, 11,144 shares
(11)
(145)
-
-
-
(156)
Common stock grants to directors,
12,757 shares
-
-
-
Common stock grants to officers, 34,429 shares
and compensation expense recognized on
stock grants, net of unearned compensation
expense of $758
-
-
-
Shares issued under employee stock purchase
‎ plan, 5,039 shares
-
-
-
Purchase treasury stock, 40,000 shares
at $18.00 per share and 3,202 shares at
$14.00 per share
-
-
-
-
(765)
(765)
BALANCE - DECEMBER 31, 2020
$
7,637
$
26,405
$
76,960
$
2,937
$
(1,765)
$
112,174
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
-
-
-
Stock tendered for funding exercise of
stock options, 4,600 shares
(4)
(88)
-
-
-
(92)
Common stock grants to directors,
12,009 shares
-
-
-
Common stock grants to officers, 10,298 shares
and compensation expense recognized on
stock grants, net of unearned compensation
expense of $718
-
-
-
Shares issued under employee stock purchase
‎ plan, 3,254 shares
-
-
-
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 - DECEMBER 31, 2021
$
7,688
$
26,963
$
91,493
$
(1,194)
$
(2,435)
$
122,515
See notes to consolidated financial statements.
‎
Embassy Bancorp, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
16,786
$
12,810
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
2,520
Amortization of deferred loan costs
Accretion of deferred Paycheck Protection Program loan fees
(2,388)
(862)
Depreciation
Net amortization of investment security premiums and discounts
Stock compensation expense
Net realized gain on sale of other real estate owned
(103)
-
Income on bank owned life insurance
(607)
(930)
Deferred income taxes
(258)
(558)
Realized gain on sale of securities available for sale
(24)
(128)
Loans originated for sale
-
(689)
Proceeds from sale of loans
-
Realized gain on sale of loans
-
(59)
Decrease (increase) in accrued interest receivable
(1,088)
Decrease in other assets
1,827
Decrease in accrued interest payable
(988)
(1,641)
Decrease in other liabilities
(914)
(123)
Net Cash Provided by Operating Activities
15,249
13,634
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale
(236,159)
(144,744)
Maturities, calls and principal repayments of securities available for sale
48,232
102,267
Proceeds from sales of securities available for sale
3,333
4,023
Net increase in loans
(18,279)
(76,011)
Net decrease (increase) in Paycheck Protection Program loans
48,154
(53,472)
Net (purchase) redemption of restricted investment in bank stock
(94)
Purchase of bank owned life insurance
-
(4,000)
Proceeds from sale of other real estate owned
-
Purchases of premises and equipment
(1,512)
(1,983)
Net Cash Used in Investing Activities
(156,210)
(173,772)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
234,646
200,411
Net (decrease) increase in securities sold under agreements to repurchase
(2,360)
6,404
Proceeds from Employee Stock Purchase Plan
Decrease in short-term borrowed funds
-
(18,067)
Proceeds from long-term borrowed funds
-
14,651
Proceeds from Paycheck Protection Program Liquidity Facility borrowed funds
-
62,039
Repayment of Paycheck Protection Program Liquidity Facility borrowed funds
(50,794)
(11,245)
Purchase of treasury stock
(670)
(765)
Exercise of stock options, net of payment for stock tendered
Dividends paid
(2,253)
(1,644)
Net Cash Provided by Financing Activities
178,746
252,059
Net Increase in Cash and Cash Equivalents
37,785
91,921
CASH AND CASH EQUIVALENTS - BEGINNING
131,907
39,986
CASH AND CASH EQUIVALENTS - ENDING
$
169,692
$
131,907
Embassy Bancorp, Inc.
Consolidated Statements of Cash Flows
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid
$
5,000
$
8,054
Income taxes paid
$
4,634
$
3,242
Non-cash Investing and Financing Activities:
Other real estate acquired in settlement of loans
$
$
-
Right of use assets obtained in exchange for new operating lease liabilities
$
1,233
$
See notes to consolidated financial statements.
‎
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
Not e 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania 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 acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow.
The Bank, which is the Company’s principal operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the 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 the Lehigh Valley area of Pennsylvania. Note 3 discusses the types of securities in which the Company invests. The concentrations of credit by type of loan are set forth in Note 4. 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 the Lehigh 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 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.
Embassy Bancorp, Inc.
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 ended December 31, 2021 and 2020.
Restricted Investments in Bank Stock
Restricted investments in bank stock consist of FHLBank Pittsburgh (“FHLB”) stock and Atlantic 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 of December 31, 2021. No impairment charge was taken related to the FHLB or ACBB restricted stock as of December 31, 2020.
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 2, the Company originated Paycheck Protection Program (“PPP”) loans as part of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). 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.
Embassy Bancorp, Inc.
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 2, because of the 100% 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
Embassy Bancorp, Inc.
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 2020 and 2021, the Bank adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of total loans. 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
Embassy Bancorp, Inc.
prospects. Loans classified substandard have a well-defined weakness and borrowers are highly leveraged. They 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 of December 31, 2021 and 2020.
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. Subsequent to the December 31, 2021 balance sheet date, in January 2022, a former Company employee in which the Company had purchased BOLI policies, passed away. The Company expects to collect approximately $720 thousand of death proceeds on those policies, for an estimated net gain of approximately $435 thousand.
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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Embassy Bancorp, Inc.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income T axes
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.
Earn ings 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,
(Dollars In Thousands, Except Per Share Data)
Net income
$
16,786
$
12,810
Weighted average shares outstanding
7,517,669
7,469,952
Dilutive effect of potential common
shares, stock options
37,116
53,643
Diluted weighted average common
shares outstanding
7,554,785
7,523,595
Basic earnings per share
$
2.23
$
1.71
Diluted earnings per share
$
2.22
$
1.70
There were no stock options not considered in computing diluted earnings per common share for the years ended December 31, 2021 and December 31, 2020.
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 ended December 31, 2021 and 2020 were $278 thousand and $228 thousand, respectively.
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Embassy Bancorp, Inc.
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 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 December 31, 2021 through the date these consolidated financial statements were available for issuance for items that should potentially be recognized or disclosed in these consolidated financial statements.
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Embassy Bancorp, Inc.
Future Accounting Standards
In June 2016, the Financial 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. In November 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. The Company has not yet determined the impact this standard will have on its financial statements or results of operations. Management has gathered all necessary data and reviewed potential methods to calculate the expected credit losses. Management is currently calculating sample expected loss computations and developing the allowance methodology and assumptions that will be used under the new standard. Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.
Reclassification
Certain amounts in the 2020 consolidated financial statements may have been reclassified to conform to 2021 presentation. These reclassifications had no effect on 2020 net income.
Note 2 - COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic and on March 13, 2020 the United States government declared COVID-19 as a national emergency. The continuing effects of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. The economic effects of COVID-19 may adversely affect the Company’s financial condition and results of operations as further described below. The full future potential impact is unknown at this time.
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 facilitate their ability to work through the immediate impact of the virus. Payment accommodations were in the form of short-term principal and/or interest deferrals. These payment accommodations were made in accordance with Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. Section 4013 of the CARES Act, enacted on March 27, 2020, provided that the Company may elect to suspend US GAAP for loan modifications related to the pandemic which would otherwise be categorized as troubled debt restructurings and suspend any determination of a loan modified as a result of the effects of the pandemic as being a troubled debt restructuring, including impairment for accounting purposes. Interest income continued to be recognized during the accommodation period.
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Embassy Bancorp, Inc.
The following table presents COVID-19 CARES Act Section 4013 loans based on loan type, payment accommodation status, and amount at December 31, 2021 and December 31, 2020:
December 31, 2021
Number of Loans - Payment Accommodation Period Ended
Number of Loans - Payment Accommodation Period Active
Total Number of Loans
Loan Amount - Payment Accommodation Period Ended
Loan Amount - Payment Accommodation Period Active
Total Loan Amount
(Dollars In Thousands)
Commercial real estate
-
$
101,545
$
-
$
101,545
Commercial
-
4,107
-
4,107
Residential real estate
-
10,702
-
10,702
Consumer
-
-
Total
-
$
116,378
$
-
$
116,378
December 31, 2020
Number of Loans - Payment Accommodation Period Ended
Number of Loans - Payment Accommodation Period Active
Total Number of Loans
Loan Amount - Payment Accommodation Period Ended
Loan Amount - Payment Accommodation Period Active
Total Loan Amount
(Dollars In Thousands)
Commercial real estate
$
112,016
$
16,830
$
128,846
Commercial
7,445
8,197
Residential real estate
13,517
14,234
Consumer
-
-
Total
$
133,009
$
18,299
$
151,308
The Company participates in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). As of December 31, 2021, the Company had a total of forty-eight (48) PPP loans outstanding with a receivable balance of $8.6 million, net of $165 thousand of unearned origination fees and costs. At December 31, 2020, the Company had a total of four hundred seventy (470) PPP loans outstanding with a receivable balance of $54.3 million, net of $1.2 million of unearned origination fees and costs. From January 1, 2021 to December 31, 2021, the Company originated three hundred thirty-three (333) new PPP loans with a balance of $31.6 million, net of $1.4 million of unearned origination fees and costs. From January 1, 2021 to December 31, 2021, the Company received forgiveness payments from the SBA on PPP loan principal balances of $79.8 million.
These PPP loans are 100% guaranteed by the SBA, have a two year or up to five year maturity and an interest rate of 1% throughout the term of the loan, with payments deferred until forgiveness proceeds are received from the SBA or ten months after the end of the covered period. The SBA may forgive the PPP loans if certain conditions are met by the borrower, including using at least 60% of the proceeds for payroll costs. The SBA also provided the Company with a processing fee for each loan, with the amount of such fee pre-determined by the SBA dependent upon the size of each loan. As of December 31, 2021 and December 31, 2020, the Company has net deferred PPP loan fees and costs of $165 thousand and $1.2 million, respectively, which will be recognized through interest income over the life of the related PPP loans. In accordance with the 100% SBA guarantee and the Company’s opinion that the majority of the PPP loans will be forgiven, the Company has determined that no allowance for loan losses is required on the PPP loans. All PPP loans have a pass rating and none are past due under their contractual terms.
Embassy Bancorp, Inc.
In April 2020, the Company applied and was approved by the Federal Reserve Board for both the ability to borrow under its Paycheck Protection Program Liquidity Facility (“PPPLF”), as well as its Discount Window. The PPPLF provides term funding to depository institutions that originate loans to small businesses under the PPP. PPP loans that are pledged to secure PPPLF extensions of credit are excluded from leverage ratio calculations. The Company had PPPLF borrowings of $50.8 million at December 31, 2020. As of February 3, 2021, the PPPLF borrowings have been paid off in full.
Note 3 - Securities Available For Sale
The amortized cost and approximate fair values of securities available-for-sale were as follows at December 31, 2021 and 2020, respectively:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
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
-
U.S. Government Sponsored Enterprise (GSE) -
‎ Mortgage-backed securities - residential
222,101
(3,214)
219,772
Total
$
311,775
$
2,368
$
(3,879)
$
310,264
December 31, 2020:
U.S. Treasury securities
$
9,998
$
-
$
-
$
9,998
U.S. Government agency obligations
39,059
(24)
39,036
Municipal bonds
37,409
1,967
-
39,376
U.S. Government Sponsored Enterprise (GSE) -
‎ Mortgage-backed securities - commercial
-
U.S. Government Sponsored Enterprise (GSE) -
‎ Mortgage-backed securities - residential
40,244
1,743
-
41,987
Total
$
127,222
$
3,742
$
(24)
$
130,940
The amortized cost and fair value of securities as of December 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.
Amortized
Fair
Cost
Value
(In Thousands)
Due in one year or less
$
$
Due after one year through five years
30,376
30,091
Due after five years through ten years
6,707
6,983
Due after ten years
51,395
52,202
89,163
89,962
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential
222,101
219,772
$
311,775
$
310,264
Embassy Bancorp, Inc.
Gross gains of $24 thousand and $128 thousand were realized on the sales of securities for the year ended December 31, 2021 and December 31, 2020, respectively. There were no gross losses on the sales of securities for the year ended December 31, 2021 and December 31, 2020.
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, 2021 and December 31, 2020, respectively:
Less Than 12 Months
12 Months or More
Total
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
December 31, 2021:
(In Thousands)
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
$
(204)
$
240,015
$
(3,879)
December 31, 2020:
U.S. Government agency obligations
$
31,369
$
(24)
$
-
$
-
$
31,369
$
(24)
Total Temporarily Impaired Securities
$
31,369
$
(24)
$
-
$
-
$
31,369
$
(24)
The Company had seventy (70) securities in an unrealized loss position at December 31, 2021 and five (5) securities in an unrealized loss position at December 31, 2020. Unrealized losses are due only to market interest rate fluctuations. As of December 31, 2021, 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 represents temporary impairment of the securities. None of the individual losses are significant.
Securities with a carrying value of $114.0 million and $98.7 million at December 31, 2021 and December 31, 2020, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.
Note 4 - Loans Receivable and Credit Quality
The Company has presented PPP loans of $8.6 million at December 31, 2021 and $54.3 million at December 31, 2020 separately from loans receivable on the Consolidated Balance Sheet. As described in Note 2, 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 and considered current for payment status purpose. PPP loans are not included in the following composition and credit quality tables.
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Embassy Bancorp, Inc.
The following table presents the composition of loans receivable (excluding PPP loans):
December 31,
(In Thousands)
Commercial real estate
$
440,655
$
452,251
Commercial construction
6,100
12,176
Commercial
41,923
48,114
Residential real estate
618,694
576,437
Consumer
Total Loans
1,108,014
1,089,618
Unearned net loan origination costs
Allowance for Loan Losses
(11,484)
(10,570)
Net Loans
$
1,096,555
$
1,079,339
The following table summarizes information in regard to the allowance for loan losses (excluding PPP loans) as of December 31, 2021 and 2020, respectively:
Commercial Real Estate
Commercial Construction
Commercial
Residential Real Estate
Consumer
Unallocated
Total
(In Thousands)
Allowance for loan losses
Year Ending December 31, 2021
Beginning Balance - December 31, 2020
$
4,379
$
$
$
4,485
$
$
$
10,570
Charge-offs
-
-
-
(2)
(2)
-
(4)
Recoveries
-
-
-
-
-
Provisions
(79)
Ending Balance - December 31, 2021
$
4,400
$
$
1,328
$
4,718
$
$
$
11,484
Year Ending December 31, 2020
Beginning Balance - December 31, 2019
$
3,221
$
$
$
3,488
$
$
$
8,022
Charge-offs
-
-
-
-
-
-
-
Recoveries
-
-
-
-
Provisions
1,134
(5)
2,520
Ending Balance - December 31, 2020
$
4,379
$
$
$
4,485
$
$
$
10,570
‎
Embassy Bancorp, Inc.
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 at December 31, 2021 and December 31, 2020, respectively:
Commercial Real Estate
Commercial Construction
Commercial
Residential Real Estate
Consumer
Unallocated
Total
(In Thousands)
December 31, 2021
Allowance for Loan Losses
Ending Balance
$
4,400
$
$
1,328
$
4,718
$
$
$
11,484
Ending balance: individually evaluated for impairment
$
-
$
$
$
$
-
$
-
$
Ending balance: collectively evaluated for impairment
$
4,400
$
$
1,287
$
4,602
$
$
$
11,320
Loans receivables:
Ending balance
$
440,655
$
6,100
$
41,923
$
618,694
$
$
1,108,014
Ending balance: individually evaluated for impairment
$
1,433
$
$
$
1,508
$
-
$
3,500
Ending balance: collectively evaluated for impairment
$
439,222
$
5,789
$
41,675
$
617,186
$
$
1,104,514
December 31, 2020
Allowance for Loan Losses
Ending Balance
$
4,379
$
$
$
4,485
$
$
$
10,570
Ending balance: individually evaluated for impairment
$
$
-
$
$
$
-
$
-
$
Ending balance: collectively evaluated for impairment
$
4,358
$
$
$
4,360
$
$
$
10,401
Loans receivables:
Ending balance
$
452,251
$
12,176
$
48,114
$
576,437
$
$
1,089,618
Ending balance: individually evaluated for impairment
$
1,547
$
$
$
1,548
$
-
$
3,640
Ending balance: collectively evaluated for impairment
$
450,704
$
11,861
$
47,884
$
574,889
$
$
1,085,978
‎
Embassy Bancorp, Inc.
The following table summarizes information in regard to impaired loans (excluding PPP loans) by loan portfolio class as of December 31, 2021 and 2020, respectively:
Year to Date
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
December 31, 2021
(In Thousands)
With no related allowance recorded:
Commercial real estate
$
1,433
$
1,673
$
$
Commercial construction
Commercial
-
-
-
-
Residential real estate
1,002
1,283
Consumer
-
-
-
-
With an allowance recorded:
Commercial real estate
$
-
$
-
$
-
$
$
-
Commercial construction
Commercial
Residential real estate
Consumer
-
-
-
-
-
Total:
Commercial real estate
$
1,433
$
1,673
$
-
$
1,494
$
Commercial construction
Commercial
Residential real estate
1,508
1,578
1,869
Consumer
-
-
-
-
-
$
3,500
$
3,810
$
$
3,908
$
December 31, 2020
With no related allowance recorded:
Commercial real estate
$
$
1,091
$
$
Commercial construction
Commercial
-
-
-
-
Residential real estate
1,014
Consumer
-
-
-
-
With an allowance recorded:
Commercial real estate
$
$
$
$
$
Commercial construction
-
-
-
-
-
Commercial
Residential real estate
Consumer
-
-
-
-
Total:
Commercial real estate
$
1,547
$
1,787
$
$
1,569
$
Commercial construction
-
Commercial
Residential real estate
1,548
1,618
1,487
Consumer
-
-
-
-
$
3,640
$
3,950
$
$
3,604
$
‎
Embassy Bancorp, Inc.
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 of December 31, 2021 and December 31, 2020, respectively:
Pass
Special Mention
Substandard
Doubtful
Total
December 31, 2021
(In Thousands)
Commercial real estate
$
439,280
$
-
$
1,375
$
-
$
440,655
Commercial construction
5,789
-
-
6,100
Commercial
41,899
-
-
41,923
Residential real estate
617,533
-
618,694
Consumer
-
-
-
Total
$
1,105,143
$
$
2,358
$
-
$
1,108,014
December 31, 2020
Commercial real estate
$
450,823
$
-
$
1,428
$
-
$
452,251
Commercial construction
11,861
-
-
12,176
Commercial
48,114
-
-
-
48,114
Residential real estate
575,344
-
576,437
Consumer
-
-
-
Total
$
1,086,782
$
$
2,324
$
-
$
1,089,618
The following table presents nonaccrual loans by classes of the loan portfolio:
December 31,
(In Thousands)
Commercial real estate
$
-
$
-
Commercial construction
-
-
Commercial
-
-
Residential real estate
Consumer
-
-
Total
$
$
‎
Embassy Bancorp, Inc.
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 of December 31, 2021 and 2020, respectively:
30-59 Days Past Due
60-89 Days Past Due
Greater than 90 Days Past Due
Total Past Due
Current
Total Loan
‎Receivables
Loan Receivables > 90 Days and Accruing
December 31, 2021
(In Thousands)
Commercial real estate
$
-
$
-
$
-
$
-
$
440,655
$
440,655
$
-
Commercial construction
-
-
-
-
6,100
6,100
-
Commercial
-
-
-
-
41,923
41,923
-
Residential real estate
-
618,465
618,694
-
Consumer
-
-
-
-
-
Total
$
-
$
$
$
$
1,107,785
$
1,108,014
$
-
December 31, 2020
Commercial real estate
$
$
-
$
-
$
$
451,737
$
452,251
$
-
Commercial construction
-
-
-
-
12,176
12,176
-
Commercial
-
-
-
-
48,114
48,114
-
Residential real estate
-
576,059
576,437
-
Consumer
-
-
-
Total
$
$
-
$
$
$
1,088,724
$
1,089,618
$
-
At December 31, 2021, the Company had $217 thousand in recorded investment in consumer loans collateralized by residential real estate property that is in the process of foreclosure.
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. Payment accommodations completed since the COVID-19 outbreak reported 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 are described in Note 2 and are not considered a TDR.
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.
‎
Embassy Bancorp, Inc.
The following table presents TDRs outstanding at December 31, 2021 and 2020, respectively:
Accrual Loans
Non-Accrual Loans
Total Modifications
(In Thousands)
December 31, 2021
Commercial real estate
$
1,027
$
-
$
1,027
Commercial construction
-
Commercial
-
Residential real estate
Consumer
-
-
-
Total
$
2,337
$
$
2,350
December 31, 2020
Commercial real estate
$
1,125
$
-
$
1,125
Commercial construction
-
Commercial
-
Residential real estate
Consumer
-
-
-
Total
$
2,559
$
$
2,574
There were no new TDRs during the year ended December 31, 2020. The following table presents new TDRs during the year ended December 31, 2021:
Number of Loans
Pre-Modification Outstanding Balance
Post- Modification Outstanding Balance
(Dollars In Thousands)
Year Ending December 31, 2021
Commercial
$
$
$
$
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, 2021 and 2020, 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, 2021 and December 31, 2020.
Note 5 - 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.
‎
Embassy Bancorp, Inc.
The following financial instruments were outstanding whose contract amounts represent credit risk:
December 31,
(In Thousands)
Commitments to grant loans, fixed
$
1,877
$
5,080
Commitments to grant loans, variable
-
Unfunded commitments under lines of credit, fixed
17,618
6,833
Unfunded commitments under lines of credit, variable
135,660
123,430
Standby letters of credit
9,522
5,412
Total
$
164,677
$
140,830
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 at December 31, 2021 and 2020 was $9.5 million and $5.4 million, respectively, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $7.3 million and $3.4 million, respectively. The current amount of the liability as of December 31, 2021 and 2020 for guarantees under standby letters of credit issued is not considered material.
Note 6 - Bank Premises and Equipment
The components of premises and equipment are as follows:
December 31,
(In Thousands)
Furniture, fixtures and equipment
$
4,190
$
3,902
Leasehold improvements
4,129
3,419
Buildings
1,163
1,141
Computer equipment and data processing software
1,509
4,083
Automobiles
11,141
12,817
Accumulated depreciation
(7,147)
(9,471)
$
3,994
$
3,346
Embassy Bancorp, Inc.
Note 7 - Deposits
The components of deposits:
December 31,
(In Thousands)
Demand, non-interest bearing
$
323,513
$
269,996
Demand, NOW and money market, interest bearing
248,401
199,845
Savings
739,637
546,784
Time, $250 and over
54,739
85,272
Time, other
100,735
130,482
Total deposits
$
1,467,025
$
1,232,379
At December 31, 2021, the scheduled maturities of time deposits are as follows (in thousands):
$
103,300
41,791
6,667
1,460
2,256
$
155,474
Note 8 - 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:
(Dollars In Thousands)
Balance outstanding at December 31
$
11,252
$
13,612
Weighted average interest rate at the end of the year
0.068
%
0.058
%
Average daily balance during the year
$
12,869
$
11,027
Weighted average interest rate during the year
0.065
%
0.159
%
Maximum month-end balance during the year
$
15,741
$
14,430
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.
Embassy Bancorp, Inc.
The right of setoff 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 December 31, 2021 and December 31, 2020:
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, 2021
Repurchase Agreements:
Corporate Institutions
$
11,252
$
-
$
11,252
$
(11,252)
$
-
$
-
December 31, 2020
Repurchase Agreements:
Corporate Institutions
$
13,612
$
-
$
13,612
$
(13,612)
$
-
$
-
As of December 31, 2021 and December 31, 2020, the fair value of securities pledged was $20.3 million and $17.5 million, respectively.
Note 9 - 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. At December 31, 2021, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $717.6 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term FHLB advances outstanding as of December 31, 2021 and December 31, 2020. There were $14.7 million in long-term FHLB advances outstanding as of December 31, 2021 and December 31, 2020. All FHLB borrowings are secured by qualifying assets of the Bank.
The components of long-term borrowings with the FHLB at December 31, 2021 were as follows:
(Dollars in Thousands)
Maturity Date
Interest
‎Rate
Outstanding
March 2022
0.79%
$
10,000
March 2022
0.64%
2,663
March 2022
0.61%
1,988
Total Outstanding Borrowings
$
14,651
Embassy Bancorp, Inc.
Subsequent to December 31, 2021, in March 2022, each of the above FHLB borrowings was repaid in full by the Bank.
The Bank also has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at December 31, 2021 and December 31, 2020. Advances from this line are unsecured.
In October 2021, the Company obtained a $5.0 million unsecured revolving line of credit facility (the “Line”) from the ACBB, of which none is outstanding at December 31, 2021. Under the terms of the Line, the Company can borrow under the facility in an amount not to exceed $5.0 million, with borrowing proceeds used to support general corporate expenses and liquidity requirements. Funds can be down streamed to support the Bank. The Line has a one year maturity, a floating interest rate at the Wall Street Journal Prime rate, and is unsecured. Interest on outstanding borrowings will be payable monthly, with the entire outstanding principal balance together with all unpaid, accrued interest due on the maturity date.
As described in Note 2, the Bank had no long-term PPPLF borrowings through the Federal Reserve Bank of Philadelphia as of December 31, 2021 and had $50.8 million, at an interest rate of 0.35%, as of December 31, 2020. All PPPLF borrowings were secured by PPP loans.
Note 10 - Employment Agreements and Supplemental Executive Retirement Plans
The Company has entered into employment agreements with its Chief Executive Officer, Chief Financial Officer and Senior Loan Officer.
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, 2021 and December 31, 2020, other liabilities include $6.7 million and $6.0 million, respectively, accrued under these plans. For the years ended December 31, 2021 and December 31, 2020, $688 thousand and $712 thousand, respectively, were expensed under these plans.
Note 11 - Stock Incentive Plan and Employee Stock Purchase Plan
Stock Incentive Plan:
At the Company’s annual meeting on June 20, 2019, the shareholders approved the amendment and restatement of the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”), which was originally adopted by the Company’s shareholders effective June 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 on June 20, 2029. At December 31, 2021, there were 430,507 shares available for issuance under the SIP.
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 in October 2010. The Company also grants restricted stock to certain officers under individual agreements
Embassy Bancorp, Inc.
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 ended December 31, 2021, there have been 209,606 awards granted. During the years ended December 31, 2021 and 2020 there were 22,307 and 47,186 awards granted, respectively. During the years ended December 31, 2021 and 2020 the Company recognized $432 thousand and $286 thousand in compensation expense for the restricted stock awards.
Information regarding the Company’s restricted stock grants activity for the years ended December 31, 2021 and 2020 are as follows:
Restricted Stock Awards
Weighted Average Grant Date Fair Value
Non-Vested at December 31, 2019
35,254
$
13.63
Granted
47,186
12.45
Vested
(20,656)
12.82
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
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 ended December 31, 2021 and December 31, 2020. At December 31, 2021, there was no unrecognized cost to the stock options.
Activities under the SIP, related to stock options, is summarized as follows:
Number of
‎Options
Weighted
‎Average Exercise Price
Outstanding, December 31, 2019
116,243
$
7.34
Granted
-
-
Exercised
(52,611)
7.00
Forfeited
-
-
Outstanding, December 31, 2020
63,632
$
7.61
Granted
-
-
Exercised
(29,742)
7.00
Forfeited
-
-
Outstanding, December 31, 2021
33,890
$
8.15
Exercisable, December 31, 2021
33,890
$
8.15
Embassy Bancorp, Inc.
Stock options outstanding at December 31, 2021 are exercisable at prices ranging from $6.01 to $14.03 per share. The weighted-average remaining contractual life of options outstanding and exercisable at December 31, 2021 is 1.41 years. The weighted-average remaining contractual life of options outstanding and exercisable at December 31, 2020 was 1.82 years, respectively. At December 31, 2021, the aggregate intrinsic value of options outstanding and exercisable was $408 thousand. The intrinsic value was determined by using the latest known sales price of the Company’s common stock.
The following table summarizes information about the range of exercise prices for stock options outstanding at December 31, 2021:
Range of Exercise
‎Price
Weighted
‎Average
‎Exercise Price
Number
‎Outstanding
Weighted Average Remaining Contractual Life (Years)
Number
‎Exercisable
$6.01 to $8.02
$
7.51
29,663
1.05
29,663
$12.03 to $14.03
$
12.64
4,227
3.98
4,227
33,890
1.41
33,890
Employee Stock Purchase Plan:
On January 1, 2017, the Company implemented the Embassy Bancorp, Inc. Employee Stock Purchase Plan, which was approved by the Company’s shareholders at the annual meeting held on June 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 18,515 shares have been issued as of December 31, 2021. The Company recognized discount expense in relation to the employee stock purchase plan of $3 thousand during the years ending December 31, 2021 and 2020.
Note 12 - Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income, both before tax and net of tax, are as follows:
Year Ended December 31,
(In Thousands)
Before
Tax
Net of
Before
Tax
Net of
Tax
Effect
Tax
Tax
Effect
Tax
Change in accumulated other comprehensive (loss) income:
Unrealized holding (losses) gains on securities
‎ available for sale
$
(5,205)
$
1,093
$
(4,112)
$
2,149
$
(451)
$
1,698
Reclassification adjustments for gains on securities
‎ transactions included in net income (A),(B)
(24)
(19)
(128)
(101)
Total other comprehensive (loss) income
$
(5,229)
$
1,098
$
(4,131)
$
2,021
$
(424)
$
1,597
(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.
‎
Embassy Bancorp, Inc.
A summary of the realized gains on securities available for sale for the years ended December 31, 2021 and 2020, net of tax, is as follows:
Year Ended
Year Ended December 31,
(In Thousands)
Securities available for sale:
Realized gains on securities transactions
$
(24)
$
(128)
Income taxes
Net of tax
$
(19)
$
(101)
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, 2021 and 2020
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)
Balance January 1, 2020
$
1,340
Other comprehensive income before reclassifications
1,698
Amounts reclassified from accumulated other
‎ comprehensive income
(101)
Net other comprehensive income during the period
1,597
Balance December 31, 2020
$
2,937
Note 13 - Regulatory Matters
The Company is required to maintain cash reserve balances in vault cash and with the Federal Reserve Bank. As of December 31, 2021, due to the reserve requirement ratios being set at 0% effective March 26, 2020, the Company had no minimum reserve requirement.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under the BASEL 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 of December 31, 2021, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Embassy Bancorp, Inc.
Effective in 2018, the Federal 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 the Federal 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 of December 31, 2021, 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 at December 31, 2021 and 2020 are presented below:
Actual
For Capital Adequacy
‎Purposes
To be Well Capitalized under
‎Prompt Corrective Action
‎Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollar Amounts in Thousands)
December 31, 2021:
Total capital (to risk-weighted assets)
$
135,004
14.0
%
$
≥
77,045
≥
8.0
%
$
≥
96,306
≥
10.0
%
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
December 31, 2020:
Total capital (to risk-weighted assets)
$
119,583
13.1
%
$
≥
73,119
≥
8.0
%
$
≥
91,399
≥
10.0
%
Tier 1 common capital (to risk-weighted assets)
109,013
11.9
≥
41,130
≥
4.5
≥
59,409
≥
6.5
Tier 1 capital (to risk-weighted assets)
109,013
11.9
≥
54,839
≥
6.0
≥
73,119
≥
8.0
Tier 1 capital (to average assets)
109,013
8.1
≥
53,721
≥
4.0
≥
67,152
≥
5.0
The Company’s actual capital amounts and ratios at December 31, 2021 and 2020 are presented below:
Actual
For Capital Adequacy
‎Purposes
Amount
Ratio
Amount
Ratio
(Dollar Amounts in Thousands)
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
≥
6.0
Tier 1 capital (to average assets)
123,709
7.7
≥
64,092
≥
4.0
December 31, 2020:
Total capital (to risk-weighted assets)
$
119,807
13.1
%
$
≥
73,122
≥
8.0
%
Tier 1 common capital (to risk-weighted assets)
109,237
12.0
≥
41,131
≥
4.5
Tier 1 capital (to risk-weighted assets)
109,237
12.0
≥
54,841
≥
6.0
Tier 1 capital (to average assets)
109,237
8.1
≥
53,722
≥
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.
Embassy Bancorp, Inc.
Note 14 - 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).
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.
‎
Embassy Bancorp, Inc.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at December 31, 2021 and 2020 are as follows:
Description
(Level 1) Quoted Prices in Active Markets for Identical Assets
(Level 2) Significant Other Observable Inputs
(Level 3) Significant Unobservable Inputs
Total
(In Thousands)
U.S. Government agency obligations
$
-
$
28,858
$
-
$
28,858
Municipal bonds
-
61,104
-
61,104
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial
-
-
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential
-
219,772
-
219,772
December 31, 2021 Securities available for sale
$
-
$
310,264
$
-
$
310,264
U.S. Treasury securities
$
-
$
9,998
$
-
$
9,998
U.S. Government agency obligations
-
39,036
-
39,036
Municipal bonds
-
39,376
-
39,376
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial
-
-
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential
-
41,987
-
41,987
December 31, 2020 Securities available for sale
$
-
$
130,940
$
-
$
130,940
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, the U.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 at December 31, 2021 and 2020 are as follows:
Description
(Level 1) Quoted Prices in Active Markets for Identical Assets
(Level 2) Significant Other Observable Inputs
(Level 3) Significant Unobservable Inputs
Total
(In Thousands)
December 31, 2021 Impaired loans
$
-
$
-
$
$
December 31, 2020 Impaired loans
$
-
$
-
$
1,361
$
1,361
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 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.
Embassy Bancorp, Inc.
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 both December 31, 2021 and December 31, 2020, 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
Description
Fair Value
‎Estimate
Valuation Techniques
Unobservable Input
Range
‎(Weighted Average)
(Dollars In Thousands)
December 31, 2021:
Impaired loans
$
Appraisal of collateral and
‎
Appraisal adjustments (1)
0% to -25% (-22.8%)
pending agreement of sale
Liquidation expenses (2)
0% to -8.5% (-7.7%)
December 31, 2020:
Impaired loans
$
1,361
Appraisal of collateral and
‎
Appraisal adjustments (1)
0% to -25% (-15.1%)
pending agreement of sale
Liquidation expenses (2)
0% to -10.0% (-8.5%)
(1)
Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal.
The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.
(2)
Appraisals and pending agreements of sale are adjusted by management for liquidation expenses. The range and weighted average
of liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.
‎
Embassy Bancorp, Inc.
The estimated fair values of the Company’s financial instruments were as follows at December 31, 2021 and 2020:
(Level 1)
Quoted
(Level 2)
Prices in
Significant
(Level 3)
Active
Other
Significant
Carrying
Fair Value
Markets for
Observable
Unobservable
Amount
Estimate
Identical Assets
Inputs
Inputs
(In Thousands)
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
-
-
Off-balance sheet financial instruments:
Commitments to grant loans
-
-
-
-
-
Unfunded commitments under lines of credit
-
-
-
-
-
Standby letters of credit
-
-
-
-
-
December 31, 2020:
Financial assets:
Cash and cash equivalents
$
131,907
$
131,907
$
131,907
$
-
$
-
Securities available-for-sale
130,940
130,940
-
130,940
-
Loans receivable, net of allowance
1,079,339
1,158,545
-
-
1,158,545
Paycheck Protection Program loans receivable
54,334
54,632
-
54,632
Restricted investments in bank stock
1,330
1,330
-
1,330
-
Accrued interest receivable
3,136
3,136
-
3,136
-
Financial liabilities:
Deposits
1,232,379
1,235,483
-
1,235,483
-
Securities sold under agreements to
repurchase and federal funds purchased
13,612
13,612
-
13,612
-
Long-term borrowings
14,651
14,707
-
-
14,707
Paycheck Protection Program
Liquidity Facility
50,794
50,810
-
-
50,810
Accrued interest payable
1,640
1,640
-
1,640
-
Off-balance sheet financial instruments:
Commitments to grant loans
-
-
-
-
-
Unfunded commitments under lines of credit
-
-
-
-
-
Standby letters of credit
-
-
-
-
-
Note 15 - 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).
Embassy Bancorp, Inc.
Related parties were indebted to the Company for loans totaling $15.3 million and $16.2 million at December 31, 2021 and 2020, respectively. During 2021, loans totaling $857 thousand were disbursed and loan repayments totaled $1.8 million.
Deposits with related parties were $17.1 million and $18.4 million at December 31, 2021 and 2020, respectively.
Fees paid to related parties for legal services for the years ended December 31, 2021 and 2020 were approximately $59 thousand and $29 thousand, respectively. The Company leases its main banking office from an investment group comprised of related parties and its West Broad Street office also from a related party, as disclosed in Note 16.
Note 16 - 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. At December 31, 2021 and 2020 the weighted average discount rate for all operating leases was 2.90% and 3.00%, respectively, with branch leases having a weighted average discount rate of 2.93% and 3.04%, respectively, and equipment leases having a weighted average discount rate of 1.08% and 1.20%, respectively. These leases expire at various dates through October 2030. All operating equipment leases do not have renewal language in their contracts and therefore use the current term. As of December 31, 2021, the operating leases overall had a weighted average lease term of 5.78 years, with the branch leases having a weighted average life of 5.83 years and equipment leases having a weighted average life of 3.19 years.
At December 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) and at December 31, 2020, the Company had right of use assets of $9.0 million (included in other assets) and lease liabilities of $9.2 million (included in other liabilities), respectively. The cost for operating leases was $1.8 million for the year ended December 31, 2020 and the cost of operating leases was $1.7 million, including short-term lease cost of $18 thousand, for the year ended December 31, 2020, respectively. Operating cash flow paid for lease liabilities was $1.8 million for the year ended December 31, 2021 and $1.6 million for the year ended December 31, 2020, 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.
‎
Embassy Bancorp, Inc.
A reconciliation of operating lease liabilities by minimum lease payments by year and in aggregate and discount amounts in aggregate, as of December 31, 2021, are as follows:
Branch Leases
Equipment
Third Parties
Related Parties
Leases
Total
(In Thousands)
$
1,118
$
$
$
1,833
1,135
1,848
1,065
1,789
1,481
-
1,411
Thereafter
1,231
-
1,286
Total Payments
6,050
3,441
9,648
Less: Discount Amount
Total Lease Liability
$
5,619
$
3,161
$
$
8,935
Rent expense to related parties was $661 thousand for the years ended December 31, 2021 and 2020, respectively, as described in Note 15.
Note 17 - Federal Income Taxes
The components of income tax expense are as follows:
Year Ended December 31,
(In Thousands)
Current
$
4,324
$
3,479
Deferred
(258)
(558)
Income Tax Expense
$
4,066
$
2,921
A reconciliation of the statutory federal income tax at a rate of 21% as of December 31, 2021 and December 31, 2020 to the income tax expense included in the consolidated statements of income is as follows:
Years Ended December 31,
(In Thousands)
Dollar
%
Dollar
%
Federal income tax at statutory rate
$
4,379
21.0
%
$
3,303
21.0
%
Tax-exempt interest
(243)
(1.2)
%
(208)
(1.3)
%
Bank owned life insurance
(104)
(0.5)
%
(171)
(1.1)
%
Other
0.2
%
(3)
0.0
%
Income Tax Expense
$
4,066
19.5
%
$
2,921
18.6
%
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, 2021 and 2020, the Company had no material unrecognized tax benefits or accrued interest and penalties. The
Embassy Bancorp, Inc.
Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.
The components of the net deferred tax asset (included in other assets) are as follows:
December 31,
(In Thousands)
Deferred tax assets:
Allowance for loan losses
$
2,412
$
2,220
Deferred compensation
1,406
1,261
Lease liability
1,876
1,938
Unrealized loss on securities available for sale
-
Other
Total Deferred Tax Assets
6,030
5,423
Deferred tax liabilities:
Premises and equipment
Prepaid assets
Deferred loan costs
Right of use asset
1,834
1,896
Unrealized gain on securities available for sale
-
Total Deferred Tax Liabilities
$
2,831
$
3,580
Net Deferred Tax Asset
$
3,199
$
1,843
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.
‎
Embassy Bancorp, Inc.
Note 18 - Parent Company Only Financial
Condensed financial information pertaining only to the parent company, Embassy Bancorp, Inc., is as follows:
BALANCE SHEETS
December 31,
(In Thousands)
ASSETS
Cash
$
$
Other assets
Investment in subsidiary
122,325
111,950
Total Assets
$
122,849
$
112,456
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities
$
$
Stockholders’ equity
122,515
112,174
Total Liabilities and Stockholders’ Equity
$
122,849
$
112,456
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ending December 31,
(In Thousands)
Other expenses
$
(482)
$
(449)
Equity in net income of banking subsidiary
17,171
13,169
Income before income taxes
16,689
12,720
Income tax benefit
Net income
$
16,786
$
12,810
Equity in other comprehensive (loss) gain of banking subsidiary
(4,131)
1,597
Comprehensive income
$
12,655
$
14,407
‎
Embassy Bancorp, Inc.
STATEMENT OF CASH FLOWS
Years Ending December 31,
(In Thousands)
Cash Flows from Operating Activities:
Net income
$
16,786
$
12,810
Adjustments to reconcile net income to net cash used in
operating activities:
Stock compensation expense
Net change in other assets and liabilities
Equity in net income of banking subsidiary
(17,171)
(13,169)
Net Cash Provided By (Used in) Operating Activities
(34)
Cash Flows Provided By Investing Activities:
Dividend from banking subsidiary
2,665
2,385
Cash Flows from Financing Activities:
Exercise of stock options, net of payment for stock tendered,
and proceeds from employee stock purchase plan
Purchase of treasury stock
(670)
(765)
Dividends paid
(2,253)
(1,644)
Net Cash Used in Financing Activities
(2,746)
(2,134)
Net Increase in Cash
Cash - Beginning
Cash - Ending
$
$
‎
Embassy Bancorp, Inc.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of December 31, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded, as of December 31, 2021, that the Company’s disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed by the Company within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
A Report of Management’s Assessment of Internal Control Over Financial Reporting is located on page 48 of this report, and incorporated herein by reference.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. OTHER INFORMATION.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by Part III, Item 10, is incorporated herein by reference to the information under the captions “Governance of the Company,” “Board of Directors,” “Information as to Nominees and Directors,” “Executive Officers,” “Nominating Process,” “Code of Conduct (Ethics),” “Committees of the Board of Directors”, “Report of Audit Committee” and “Delinquent Section 16(a) Reports” in the Company’s definitive proxy statement to be filed with the SEC in connection with the Company’s 2022 annual meeting of shareholders.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. EXECUTIVE COMPENSATION.
The information required by Part III, Item 11, is incorporated herein by reference to the information under the captions “Director Compensation,” “Executive Compensation” and “Agreements with Executive Officers” in the Company’s definitive proxy statement to be filed with the SEC in connection with the Company’s 2022 annual meeting of shareholders.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Part III, Item 12, is incorporated herein by reference to the information under Item 5 of this report and the information under the caption “Information Concerning Share Ownership” in the Company’s definitive proxy statement to be filed with the SEC in connection with the Company’s 2022 annual meeting of shareholders.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by Part III, Item 13, is incorporated herein by reference to the information under the captions “Certain Relationships and Related Transactions” and “Director Independence” in the Company’s definitive proxy statement to be filed with the SEC in connection with the Company’s 2022 annual meeting of shareholders.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by Part III, Item 14, is incorporated herein by reference to the information under the captions “Independent Registered Public Accounting Firm”, “Fees of Independent Accountants” and “Report of Audit Committee” in the Company’s definitive proxy statement to be filed with the SEC in connection with the Company’s 2022 annual meeting of shareholders.
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Embassy Bancorp, Inc.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
Financial Statement Schedules can be found under Item 8 of this report.
(b)
Exhibits required by Item 601 of Regulation S-K:
Exhibit
Number
Description
3.1
Articles of Incorporation, as amended (conformed).
3.2
By-Laws.
4.1
Description of the Company's Securities.
10.1
Amended and Restated Embassy Bancorp, Inc. 2010 Stock Incentive Plan (Incorporated by reference to Annex A of Registrant's definitive proxy statement filed on May 1, 2019).
10.2
Form of Stock Option Grant Agreement - Directors.
10.3
Form of Stock Option Grant Agreement - Executive Officers.
10.4
Lease Agreement dated June 11, 2001 for the Rte. 512 Bethlehem office, Bethlehem, PA (Incorporated by reference to Exhibit 10.4 of Registrant’s Form 10-K filed on March 12, 2021).
10.5
Lease Addendum dated January 1, 2005 for additional space in Rte. 512 Bethlehem office, Bethlehem, PA (Incorporated by reference to Exhibit 10.6 of Registrant’s Form 10-K filed on March 12, 2021).
10.6
Second Lease Expansion Addendum dated October 21, 2011 by and between Embassy Bank for the Lehigh Valley and Red Bird Associates, LLC (Incorporated by reference to Exhibit 10.13 of Registrant’s Form 10-K filed on March 30, 2017).
10.7
Lease Renewal and Modification Agreement dated May 4, 2012 by and between Embassy Bank for the Lehigh Valley and Red Bird Associates LLC (Incorporated by reference to Exhibit 10.14 of Registrant’s Form 10-K filed on March 15, 2018).
10.8
Lease Renewal dated February 17, 2017 by and between Embassy Bank for the Lehigh Valley and Red Bird Associates, LLC (Incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on February 21, 2017).
10.9
Lease Expansion Agreement dated June 15, 2018 by and between Embassy Bank for the Lehigh Valley and Red Bird Associates, LLC (Incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on June 19, 2018).
10.10
Amended and Restated Employment Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated May 24, 2018 (Incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed on May 29, 2018).
10.11
Amended and Restated Employment Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated May 24, 2018 (Incorporated by reference to Exhibit 10.2 of Registrant's Form 8-K filed on May 29, 2018).
10.12
Employment Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated February 20, 2009 (Incorporated by reference to Exhibit 10.21 of Registrant’s Form 10-K filed on March 12, 2021).
10.13
Amendment to Employment Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated November 19, 2010.
10.14
Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated November 19, 2010.
10.15
Amendment No. 1 to Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated November 21, 2011 (Incorporated by reference to Exhibit 10.23 of Registrant’s Form 10-K filed on March 30, 2017).
10.16
Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated November 19, 2010.
10.17
Amendment No. 2 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated January 1, 2013 (Incorporated by reference to Exhibit 10.27 of Registrant’s Form 10-K filed on March 13, 2019).
10.18
Amendment No. 3 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and David M. Lobach, Jr., dated January 23, 2014 (Incorporated by reference to Exhibit 10.29 of Registrant’s Form 10-K filed on March 11, 2020).
‎
Embassy Bancorp, Inc.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (Continued)
Exhibit
Number
Description
10.19
Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated November 19, 2010.
10.20
Amendment No. 2 to Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated January 1, 2013 (Incorporated by reference to Exhibit 10.30 of Registrant’s Form 10-K filed on March 13, 2019).
10.21
Amendment No. 3 to Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated January 23, 2014 (Incorporated by reference to Exhibit 10.32 of Registrant’s Form 10-K filed on March 11, 2020).
10.22
Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated November 19, 2010.
10.23
Amendment No. 2 to Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated January 1, 2013 (Incorporated by reference to Exhibit 10.33 of Registrant’s Form 10-K filed on March 13, 2019).
10.24
Amendment No. 3 to Amended and Restated Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated January 23, 2014 (Incorporated by reference to Exhibit 10.35 of Registrant’s Form 10-K filed on March 11, 2020).
10.25
Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated December 23, 2015 (Incorporated by reference to Exhibit 10.34 of Registrant’s Form 10-K filed on March 12, 2021).
10.26
Amendment No. 1 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated December 21, 2016.
10.27
Amendment No. 2 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated December 20, 2017 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed on December 20, 2017).
10.28
Amendment No. 3 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated December 21, 2018 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed on December 21, 2018).
10.29
Amendment No. 4 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and Judith A. Hunsicker, dated December 18, 2020 (Incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed on December 21, 2020).
10.30
Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated December 23, 2015 (Incorporated by reference to Exhibit 10.39 of Registrant’s Form 10-K filed on March 12, 2021).
10.31
Amendment No. 1 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated December 21, 2016.
10.32
Amendment No. 2 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated December 20, 2017 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed on December 20, 2017).
10.33
Amendment No. 3 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated December 21, 2018 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed on December 21, 2018).
10.34
Amendment No. 4 to Supplemental Executive Retirement Plan Agreement between Embassy Bank for the Lehigh Valley and James R. Bartholomew, dated December 18, 2020 (Incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed on December 21, 2020).
10.35
Embassy Bancorp, Inc. Employee Stock Purchase Plan.
11.1
The statement regarding computation of per share earnings required by this exhibit is contained in Note 1 to the financial statements captions “Earnings Per Share.”
Embassy Bancorp, Inc.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (Continued)
Exhibit
Number
Description
21.1
Subsidiaries of the Registrant.
23.1
Consent of Baker Tilly US, LLP.
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002.
101.1
XBRL - Related Documents
No. Description
101. INS
XBRL Instance Document. *
101. SCH
XBRL Taxonomy Extension Schema Document.
101. CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101. LAB
XBRL Taxonomy Extension Label Linkbase Document.
101. PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
101. DEF
XBRL Taxonomy Extension Definitions Linkbase Document.
Cover Page Interactive Data File (formatted as inline XBRL
and contained in Exhibit 101)
* This instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL.