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EX-32 - EX-32 - Embassy Bancorp, Inc.emyb-20170331xex32.htm
EX-31.2 - EX-31.2 - Embassy Bancorp, Inc.emyb-20170331xex31_2.htm
EX-31.1 - EX-31.1 - Embassy Bancorp, Inc.emyb-20170331xex31_1.htm









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017 OR



 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________ TO __________________



Commission file number 000-53528





 

Embassy Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

Pennsylvania

26-3339011

(State of incorporation)

(I.R.S. Employer Identification No.)

 

 

One Hundred Gateway Drive, Suite 100

Bethlehem, PA

 

18017

(Address of principal executive offices)

(Zip Code)

 

 

(610) 882-8800

(Registrant’s Telephone Number)



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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No



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

Large accelerated filer 

Accelerated filer

Non-accelerated filer  (Do not check if a smaller reporting company) 

Smaller reporting company

Emerging growth company    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act.)  Yes  No

 

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date:



 

 



COMMON STOCK

 

 

Number of shares outstanding as of May 5, 2017

($1.00 Par Value)

      7,449,621

 

  (Title Class)

(Outstanding Shares)



 

 

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

 

Table of Contents

 



 

Part I – Financial Information

 

 

Item 1 – Financial Statements

 

Consolidated Balance Sheets (Unaudited)

Consolidated Statements of Income (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Statements of Stockholders’ Equity (Unaudited)

Consolidated Statements of Cash Flows (Unaudited)

Notes to Consolidated Financial Statements (Unaudited)

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

27 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

36 

 

 

Item 4 – Controls and Procedures

36 

 

 

Part II - Other Information

37 

 

 

Item 1 - Legal Proceedings

37 

 

 

Item 1A - Risk Factors

37 

 

 

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

37 

 

 

Item 3 - Defaults Upon Senior Securities

37 

 

 

Item 4 – Mine Safety Disclosures

37 

 

 

Item 5 - Other Information

37 

 

 

Item 6 - Exhibits

38 



   



   



   



2

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Part I – Financial Information



Item 1 – Financial Statements



Consolidated Balance Sheets (Unaudited)







 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,

ASSETS

2017

 

2016



(In Thousands, Except Share Data)

Cash and due from banks

$

12,907 

 

$

14,574 

Interest bearing demand deposits with banks

 

27,841 

 

 

8,644 

Federal funds sold

 

1,000 

 

 

1,000 

Cash and Cash Equivalents

 

41,748 

 

 

24,218 

Securities available for sale

 

95,292 

 

 

85,598 

Restricted investment in bank stock

 

521 

 

 

624 

Loans receivable, net of allowance for loan losses of $6,619 in 2017; $6,517 in 2016

 

804,669 

 

 

792,598 

Premises and equipment, net of accumulated depreciation

 

2,046 

 

 

2,109 

Bank owned life insurance

 

12,829 

 

 

12,728 

Accrued interest receivable

 

1,810 

 

 

1,749 

Other real estate owned

 

480 

 

 

480 

Other assets

 

3,813 

 

 

4,129 

Total Assets

$

963,208 

 

$

924,233 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

$

122,629 

 

$

117,208 

Interest bearing

 

747,561 

 

 

716,176 

Total Deposits

 

870,190 

 

 

833,384 

Securities sold under agreements to repurchase

 

11,780 

 

 

11,889 

Accrued interest payable

 

726 

 

 

813 

Other liabilities

 

4,902 

 

 

4,869 

Total Liabilities

 

887,598 

 

 

850,955 

Stockholders' Equity:

 

 

 

 

 

Common stock, $1 par value; authorized 20,000,000 shares;

 

 

 

 

 

2017 issued 7,458,611 shares; outstanding 7,449,621 shares;

 

 

 

 

 

2016 issued 7,452,462 shares; outstanding 7,443,472 shares;

 

7,459 

 

 

7,453 

Surplus

 

24,705 

 

 

24,603 

Retained earnings

 

43,246 

 

 

41,344 

Accumulated other comprehensive income (loss)

 

298 

 

 

(24)

Treasury stock, at cost:  8,990 shares

 

(98)

 

 

(98)

Total Stockholders' Equity

 

75,610 

 

 

73,278 

Total Liabilities and Stockholders' Equity

$

963,208 

 

$

924,233 









See notes to consolidated financial statements.

3

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Income (Unaudited) 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Three Months Ended March 31,

 

 



 

 

 

 

 

 

 

 



 

2017

 

 

2016

 

 



 

 

 

 

 

 

 

 



 

(In Thousands, Except Per Share Data)

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

7,531 

 

$

6,809 

 

 

Securities, taxable

 

 

177 

 

 

179 

 

 

Securities, non-taxable

 

 

315 

 

 

285 

 

 

Federal funds sold, and other

 

 

34 

 

 

41 

 

 

Total Interest Income

 

 

8,057 

 

 

7,314 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

1,028 

 

 

857 

 

 

Securities sold under agreements to repurchase

 

 

 

 

 

 

Short-term borrowings

 

 

 

 

30 

 

 

Long-term borrowings

 

 

 -

 

 

 

 

Total Interest Expense

 

 

1,034 

 

 

896 

 

 

Net Interest Income

 

 

7,023 

 

 

6,418 

 

 

PROVISION FOR LOAN LOSSES

 

 

180 

 

 

185 

 

 

Net Interest Income after
   Provision for Loan Losses

 

 

6,843 

 

 

6,233 

 

 

OTHER NON-INTEREST INCOME

 

 

 

 

 

 

 

 

Credit card processing fees

 

 

460 

 

 

414 

 

 

Other service fees

 

 

205 

 

 

161 

 

 

Bank owned life insurance

 

 

101 

 

 

48 

 

 

Gain on sale of other real estate owned

 

 

 

 

10 

 

 

Total Other Non-Interest Income

 

 

771 

 

 

633 

 

 

OTHER NON-INTEREST EXPENSES

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

2,235 

 

 

1,970 

 

 

Occupancy and equipment

 

 

650 

 

 

675 

 

 

Data processing

 

 

437 

 

 

389 

 

 

Credit card processing

 

 

434 

 

 

402 

 

 

Advertising and promotion

 

 

293 

 

 

324 

 

 

Professional fees

 

 

151 

 

 

127 

 

 

FDIC insurance

 

 

119 

 

 

102 

 

 

Insurance

 

 

16 

 

 

13 

 

 

Loan & real estate

 

 

53 

 

 

64 

 

 

Charitable contributions

 

 

258 

 

 

237 

 

 

Other real estate owned expenses

 

 

12 

 

 

37 

 

 

Other

 

 

292 

 

 

273 

 

 

Total Other Non-Interest Expenses

 

 

4,950 

 

 

4,613 

 

 



 

 

 

 

 

 

 

 

Income before Income Taxes

 

 

2,664 

 

 

2,253 

 

 

INCOME TAX EXPENSE

 

 

762 

 

 

645 

 

 

Net Income

 

$

1,902 

 

$

1,608 

 

 



 

 

 

 

 

 

 

 

BASIC EARNINGS PER SHARE

 

$

0.26 

 

$

0.22 

 

 



 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

0.25 

 

$

0.22 

 

 



 

 

 

 

 

 

 

 



See notes to consolidated financial statements

4

 


 

Embassy Bancorp, Inc.                                                                                                                          

 



Consolidated Statements of Comprehensive Income (Unaudited)





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



2017

 

2016



 

 

 

 

 

 

 

 

 



 

(In Thousands)



 

 

 

 

 

 

 

 

 

Net Income

$

 

 

1,902 

 

$

 

 

1,608 

Change in Accumulated Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

Unrealized holding gain on securities available for sale

 

488 

 

 

 

 

431 

 

 

Less: reclassification adjustment for realized gains

 

 -

 

 

 

 

 -

 

 



 

488 

 

 

 

 

431 

 

 

Income tax effect

 

(166)

 

 

 

 

(147)

 

 

Net unrealized gain

 

322 

 

 

 

 

284 

 

 

Other comprehensive gain, net of tax

 

 

 

322 

 

 

 

 

284 

Comprehensive Income

$

 

 

2,224 

 

$

 

 

1,892 



See notes to consolidated financial statements.



 

5

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Stockholders’ Equity (Unaudited)



Three Months Ended March 31, 2017 and 2016 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Surplus

 

Retained Earnings

 

Accumulated Other Comprehensive Income  (Loss)

 

Treasury Stock

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(In Thousands, Except Share Data)

BALANCE - DECEMBER 31, 2015

$

7,408 

 

$

24,299 

 

$

35,158 

 

$

1,236 

 

$

 -

 

$

68,101 

Net income

 

 -

 

 

 -

 

 

1,608 

 

 

 -

 

 

 -

 

 

1,608 

Other comprehensive income, net of tax

 

 -

 

 

 -

 

 

 -

 

 

284 

 

 

 -

 

 

284 

Compensation expense recognized on 
   stock options

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

Common stock grants to directors,
   5,934 shares

 

 

 

57 

 

 

 -

 

 

 -

 

 

 -

 

 

62 

Compensation expense recognized on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 stock grants, net of unearned compensation   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 expense of $248

 

 -

 

 

12 

 

 

 -

 

 

 -

 

 

 -

 

 

12 

BALANCE - MARCH 31, 2016

$

7,413 

 

$

24,377 

 

$

36,766 

 

$

1,520 

 

$

 -

 

$

70,076 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - DECEMBER 31, 2016

$

7,453 

 

$

24,603 

 

$

41,344 

 

$

(24)

 

$

(98)

 

$

73,278 

Net income

 

 -

 

 

 -

 

 

1,902 

 

 

 -

 

 

 -

 

 

1,902 

Other comprehensive income, net of tax

 

 -

 

 

 -

 

 

 -

 

 

322 

 

 

 -

 

 

322 

Compensation expense recognized on 
   stock options

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

Common stock grants to directors,
   5,156 shares

 

 

 

63 

 

 

 -

 

 

 -

 

 

 -

 

 

68 

Compensation expense recognized on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 stock grants, net of unearned compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  expense of $427                                                               

 

 -

 

 

24 

 

 

 -

 

 

 

 

 

 -

 

 

24 

Shares issued under employee stock purchase

 

 

 

13 

 

 

 

 

 

 

 

 

 

 

 

14 

  plan, 992 shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE - MARCH 31, 2017

$

7,459 

 

$

24,705 

 

$

43,246 

 

$

298 

 

$

(98)

 

$

75,610 



See notes to consolidated financial statements.



 

6

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Consolidated Statements of Cash Flows (Unaudited)





 

 

 

 

 



 

 

 

 

 



Three Months Ended March 31,



2017

 

2016



 

 

 

 

 



(In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

$

1,902 

 

$

1,608 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

180 

 

 

185 

Amortization of deferred loan costs

 

40 

 

 

21 

Depreciation and amortization

 

161 

 

 

184 

Net amortization of investment security premiums and discounts

 

81 

 

 

57 

Stock compensation expense

 

26 

 

 

21 

Net realized gain on sale of other real estate owned

 

(5)

 

 

(10)

Income on bank owned life insurance

 

(101)

 

 

(48)

Increase in accrued interest receivable

 

(61)

 

 

(54)

Decrease (increase) in other assets

 

150 

 

 

(758)

(Decrease) increase in accrued interest payable

 

(87)

 

 

124 

Increase (decrease) in other liabilities

 

106 

 

 

(10)

Net Cash Provided by Operating Activities

 

2,392 

 

 

1,320 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of securities available for sale

 

(10,826)

 

 

 -

Maturities, calls and principal repayments of securities available for sale

 

1,539 

 

 

2,413 

Net increase in loans

 

(12,291)

 

 

(20,818)

Net redemption of restricted investment in bank stock

 

103 

 

 

1,643 

Purchases of premises and equipment

 

(98)

 

 

(240)

Net Cash Used in Investing Activities

 

(21,573)

 

 

(17,002)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in deposits

 

36,806 

 

 

91,823 

Net decrease in securities sold under agreements to repurchase

 

(109)

 

 

(1,783)

Proceeds from Employee Stock Purchase Plan

 

14 

 

 

 -

Decrease in short-term borrowed funds

 

 -

 

 

(39,306)

Payments of long-term borrowed funds

 

 -

 

 

(3,820)

Net Cash Provided by Financing Activities

 

36,711 

 

 

46,914 

Net Increase in Cash and Cash Equivalents

 

17,530 

 

 

31,232 

CASH AND CASH EQUIVALENTS - BEGINNING

 

24,218 

 

 

19,526 

CASH AND CASH EQUIVALENTS - ENDING

$

41,748 

 

$

50,758 



 

 

 

 

 

SUPPLEMENTARY CASH FLOWS INFORMATION

 

 

 

 

 

Interest paid

$

1,121 

 

$

760 

Income taxes paid

$

 

$

705 

Other real estate sold through bank financing

$

 -

 

$

522 

Deferral of gain from sale of other real estate sold through bank financing

$

 

$

11 



See notes to consolidated financial statements.

 

7

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1 – Basis of Presentation

 

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. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted.  As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC. All significant intercompany transactions and balances have been eliminated.



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.



The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.



The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2017.  



In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2017 through the date these consolidated financial statements were issued.



Certain amounts in the 2016 financial statements may have been reclassified to conform to 2017 presentation. These reclassifications had no effect on 2016 net income.





Note 2 - Summary of Significant Accounting Policies



The significant accounting policies of the Company as applied in the interim financial statements presented are substantially the same as those followed on an annual basis as presented in the Company’s Form 10-K for the year ended December 31, 2016.

 

Note 3 – Stockholders’ Equity

 

On November 11, 2008, the Company consummated its acquisition of Embassy Bank For The Lehigh Valley pursuant to a Plan of Merger and Reorganization dated April 18, 2008, pursuant to which the Bank was reorganized into a bank holding company structure. At the effective time of the reorganization, each share of common stock of Embassy Bank For The Lehigh Valley issued and outstanding was automatically converted into one share of Company common stock. The issuance of Company common stock in connection with the reorganization was exempt from registration pursuant to Section 3(a)(12) of the Securities Act of 1933, as amended.

 

Note 4 – Stock Incentive Plan and Employee Stock Purchase Plan



Stock Incentive Plan:



At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”).  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

8

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

is granted. At inception, the aggregate number of shares available for issuance under the SIP was 500,000. 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 15, 2020. At March 31, 2017 there were 293,622 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 with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over three to nine service 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 plan and through the period ended March 31, 2017, there have been 90,135 awards granted. During the three months ended March 31, 2017 and 2016 there were 5,156 and 5,934 awards granted, respectively. During the three months ended March 31, 2017 and 2016 the Company recognized $24 thousand and $12 thousand, respectively, in compensation expense for the restricted stock awards.



In December 2016, January 2014, February 2013 and 2012, the Company granted stock options to purchase 4,227, 29,663, 29,742 and 52,611 shares of stock to certain executive officers under individual agreements and/or in accordance with their respective employment agreements.  No stock options were granted in 2015. Stock compensation expense related to these options was $2 thousand and $9 thousand for the three months ended March 31, 2017 and 2016, respectively.  At March 31, 2017, approximately $13 thousand unrecognized cost to these stock options granted in 2016 will be recognized over the next 2.72 years, respectively.   The fair value of the options granted in 2016, 2014, 2013 and 2012 was determined with the following weighted average assumptions: dividend yield of 1.03% in 2016 and 0.00% in 2014, 2013 and 2012, respectively, risk free interest rate of 2.35%, 2.30%, 1.34% and 1.43%, respectively, expected life of 6.0 years, 6.0 years, 6.0 years and 7.5 years, respectively, and expected volatility of 25.58%, 28.93%, 28.79% and 31.10%, respectively.  The weighted average fair value of options granted in 2016, 2014, 2013 and 2012 was $3.28, $2.46, $2.14 and $2.56 per share, respectively.



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 992 shares have been issued as of March 31, 2017.



9

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5 – Other Comprehensive Income (Loss)

Accounting principles generally require 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 balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income, both before tax and net of tax, are as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended March 31,



 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(In Thousands)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Before

 

Tax

 

Net of

 

Before

 

Tax

 

Net of



 

Tax

 

Effect

 

Tax

 

Tax

 

Effect

 

Tax

Change in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities
   available for sale

 

$

488 

 

$

(166)

 

$

322 

 

$

431 

 

$

(147)

 

$

284 

Reclassification adjustments for gains on securities
   transactions included in net income (A),(B)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total other comprehensive income

 

$

488 

 

$

(166)

 

$

322 

 

$

431 

 

$

(147)

 

$

284 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A.

Realized gains on securities transactions included in gain on sales of securities, net, in the accompanying Consolidated Statements of Income.

B.

Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.





There were no realized gains on securities available for sale for the three months ended March 31, 2017 and 2016.







A summary of the accumulated other comprehensive income (loss), net of tax, is as follows:























 

 

 



 

 

 



 

Securities



 

Available



 

for Sale

Three Months Ended March 31, 2017 and 2016

 

(In Thousands)

Balance January 1, 2017

 

$

(24)

Other comprehensive income before reclassifications

 

 

322 

Amounts reclassified from accumulated other
   comprehensive income

 

 

 -

Net other comprehensive income during the period

 

 

322 

Balance March 31, 2017

 

$

298 



 

 

 

Balance January 1, 2016

 

$

1,236 

Other comprehensive income before reclassifications

 

 

284 

Amounts reclassified from accumulated other
   comprehensive income

 

 

 -

Net other comprehensive income during the period

 

 

284 

Balance March 31, 2016

 

$

1,520 



 

 

 



 

 

 



 

 

 











10

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 



Note 6 – Basic and Diluted Earnings per Share



Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period, as adjusted for stock dividends and splits. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.





 

 

 

 

 

 

 

 

 



 

 

Three Months Ended

 

 



 

 

March 31,

 

 



 

 

2017

 

2016

 

 



 

 

 

 

 

 

 

 

 



 

 

(Dollars In Thousands, Except Share and Per Share Data)

 



Net income

 

$

1,902 

 

$

1,608 

 

 



 

 

 

 

 

 

 

 

 



Weighted average shares outstanding

 

 

7,445,949 

 

 

7,411,395 

 

 



Dilutive effect of potential common shares, stock options

 

 

53,593 

 

 

34,098 

 

 



Diluted weighted average common shares outstanding

 

 

7,499,542 

 

 

7,445,493 

 

 



 

 

 

 

 

 

 

 

 



Basic earnings per share

 

$

0.26 

 

$

0.22 

 

 



Diluted earnings per share

 

$

0.25 

 

$

0.22 

 

 



 

 

 

 

 

 

 

 

 

Stock options of 4,227 were not considered in computing diluted earnings per common share for the three months ended March 31, 2017. There were no stock options not considered in computing diluted earnings per common share for the three months ended March 31, 2016.



Note 7 – Guarantees



The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit and FHLBank of Pittsburgh (“FHLB”) deposit letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Company had $4.2 million of standby letters of credit outstanding as of March 31, 2017. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $3.8 million. Management does not consider the current amount of the liability as of March 31, 2017 for guarantees under standby letters of credit issued to be material.



FHLB deposit letters of credit are standby letters of credit commitments issued by the Bank for the benefit of a third party (the “Beneficiary”), which secure public deposits in the Bank. FHLB deposit letters of credit are secured by qualifying assets of the Bank. The Company, through the Bank, had $2.3 million of FHLB deposit letters of credit outstanding as of March 31, 2017.



Note 8 – Short-term and Long-term Borrowings



Securities sold under agreements to repurchase, 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 March 31, 2017, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $462.4 million.  This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term or long-term FHLB advances outstanding as of March 31, 2017 and December 31, 2016. All FHLB borrowings are secured by qualifying assets of the Bank.



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 March 31, 2017 and December 31, 2016. Advances from this line are unsecured.





















11

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 9 – Securities Available For Sale



At March 31, 2017 and December 31, 2016, respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Gross

 

Gross

 

 

 



Amortized

 

Unrealized

 

Unrealized

 

Fair



Cost

 

Gains

 

Losses

 

Value



 

 

 

 

 

 

 

 

 

 

 



(In Thousands)

March 31, 2017 :

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

31,544 

 

$

19 

 

$

(67)

 

$

31,496 

Municipal bonds

 

41,911 

 

 

1,291 

 

 

(624)

 

 

42,578 

U.S. Government Sponsored Enterprise (GSE) -
   Mortgage-backed securities - residential

 

21,387 

 

 

165 

 

 

(334)

 

 

21,218 

Total

$

94,842 

 

$

1,475 

 

$

(1,025)

 

$

95,292 



 

 

 

 

 

 

 

 

 

 

 

December 31, 2016 :

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

32,581 

 

$

12 

 

$

(105)

 

$

32,488 

Municipal bonds

 

38,410 

 

 

1,161 

 

 

(763)

 

 

38,808 

U.S. Government Sponsored Enterprise (GSE) -
   Mortgage-backed securities - residential

 

14,645 

 

 

114 

 

 

(457)

 

 

14,302 

Total

$

85,636 

 

$

1,287 

 

$

(1,325)

 

$

85,598 





The amortized cost and fair value of securities as of March 31, 2017, 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

 

$

12,978 

 

$

12,988 

 

Due after one year through five years

 

 

27,429 

 

 

27,690 

 

Due after five years through ten years

 

 

10,111 

 

 

10,373 

 

Due after ten years

 

 

22,937 

 

 

23,023 

 



 

 

73,455 

 

 

74,074 

 

U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential

 

 

21,387 

 

 

21,218 

 



 

$

94,842 

 

$

95,292 

 



 

 

 

 

 

 

 



There were no sales of securities for the three months ended March 31, 2017 and 2016.

 

Securities with a carrying value of $83.1 million and $71.8 million at March 31, 2017 and December 31, 2016, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.





















12

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

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 March 31, 2017 and December 31, 2016, respectively:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Less Than 12 Months

 

 

12 Months or More

 

 

Total



Fair Value

 

Unrealized Losses

 

Fair Value

 

Unrealized Losses

 

Fair Value

 

Unrealized Losses



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017 :

(In Thousands)

U.S. Government agency obligations

$

20,394 

 

$

(67)

 

$

 -

 

$

 -

 

$

20,394 

 

$

(67)

Municipal bonds

 

9,054 

 

 

(624)

 

 

 -

 

 

 -

 

 

9,054 

 

 

(624)

U.S. Government Sponsored Enterprise

 

12,807 

 

 

(334)

 

 

 -

 

 

 -

 

 

12,807 

 

 

(334)

  (GSE) - Mortgage -backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  residential 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Temporarily Impaired Securities

$

42,255 

 

$

(1,025)

 

$

 -

 

$

 -

 

$

42,255 

 

$

(1,025)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016 :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency obligations

$

20,388 

 

$

(105)

 

$

 -

 

$

 -

 

$

20,388 

 

$

(105)

Municipal bonds

 

8,595 

 

 

(763)

 

 

 -

 

 

 -

 

 

8,595 

 

 

(763)

U.S. Government Sponsored Enterprise

 

13,206 

 

 

(457)

 

 

 -

 

 

 -

 

 

13,206 

 

 

(457)

  (GSE) - Mortgage -backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Temporarily Impaired Securities

$

42,189 

 

$

(1,325)

 

$

 -

 

$

 -

 

$

42,189 

 

$

(1,325)



The Company had forty-two (42) securities in an unrealized loss position at March 31, 2017. The unrealized losses are due only to market rate fluctuations. As of March 31, 2017, 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.



Note 10 – Restricted Investment in Bank Stock



Restricted investments in bank stock consist of FHLBank of Pittsburgh (“FHLB”) stock and Atlantic Community Bankers Bank (“ACBB”) stock.  The restricted stocks 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.  The Bank had FHLB stock at a carrying value of $657 thousand and $1.8 million repurchased during the three months ended March 31, 2017 and 2016, respectively.  Stock purchases of $554 thousand and $185 thousand were made during the three months ended March 31, 2017 and 2016, respectively.  Dividend payments of $3 thousand and $25 thousand were received during the three months ended March 31, 2017 and 2016, respectively.

 

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.



Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB or ACBB stock as of March 31, 2017.



13

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 11 – Loans Receivable and Credit Quality



The following table presents the composition of loans receivable at March 31, 2017 and December 31, 2016, respectively:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



March 31, 2017

 

December 31, 2016



 

 

Percentage of

 

 

 

Percentage of



Balance

 

total Loans

 

Balance

 

total Loans



 

 

 

 

 

 

 

 

 



 

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

Commercial real estate

$

321,588 

 

39.65% 

 

$

321,730 

 

40.27% 

Commercial construction

 

37,103 

 

4.57% 

 

 

28,606 

 

3.58% 

Commercial

 

37,673 

 

4.64% 

 

 

39,045 

 

4.89% 

Residential real estate

 

414,092 

 

51.05% 

 

 

408,872 

 

51.17% 

Consumer

 

655 

 

0.09% 

 

 

718 

 

0.09% 

Total loans

 

811,111 

 

100.00% 

 

 

798,971 

 

100.00% 

Unearned origination fees

 

177 

 

 

 

 

144 

 

 

Allowance for loan losses

 

(6,619)

 

 

 

 

(6,517)

 

 



$

804,669 

 

 

 

$

792,598 

 

 





The following table presents the classes of the loan portfolio 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 March 31, 2017 and December 31, 2016, respectively:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

(In Thousands)

Commercial real estate

$

315,869 

 

$

 -

 

$

5,719 

 

$

 -

 

$

321,588 

Commercial construction

 

36,788 

 

 

 -

 

 

315 

 

 

 -

 

 

37,103 

Commercial

 

37,573 

 

 

 -

 

 

100 

 

 

 -

 

 

37,673 

Residential real estate

 

413,092 

 

 

 -

 

 

1,000 

 

 

 -

 

 

414,092 

Consumer

 

655 

 

 

 -

 

 

 -

 

 

 -

 

 

655 

            Total

$

803,977 

 

$

 -

 

$

7,134 

 

$

 -

 

$

811,111 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

315,579 

 

$

20 

 

$

6,131 

 

$

 -

 

$

321,730 

Commercial construction

 

28,291 

 

 

 -

 

 

315 

 

 

 -

 

 

28,606 

Commercial

 

38,916 

 

 

29 

 

 

100 

 

 

 -

 

 

39,045 

Residential real estate

 

407,787 

 

 

 -

 

 

1,085 

 

 

 -

 

 

408,872 

Consumer

 

718 

 

 

 -

 

 

 -

 

 

 -

 

 

718 

            Total

$

791,291 

 

$

49 

 

$

7,631 

 

$

 -

 

$

798,971 



14

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 



The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2017 and December 31, 2016, respectively:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Year to Date

 



 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

March 31, 2017

 

 

(In Thousands)

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

7,728 

 

$

8,011 

 

 

 

 

$

7,943 

 

$

61 

 

  Commercial construction

 

 

315 

 

 

315 

 

 

 

 

 

315 

 

 

 

  Commercial

 

 

100 

 

 

160 

 

 

 

 

 

100 

 

 

 -

 

  Residential real estate

 

 

1,428 

 

 

1,626 

 

 

 

 

 

1,472 

 

 

 

  Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

 -

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

  Commercial construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

  Commercial

 

 

249 

 

 

249 

 

 

43 

 

 

264 

 

 

 

  Residential real estate

 

 

800 

 

 

800 

 

 

221 

 

 

806 

 

 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

7,728 

 

$

8,011 

 

$

 -

 

$

7,943 

 

$

61 

 

  Commercial construction

 

 

315 

 

 

315 

 

 

 -

 

 

315 

 

 

 

  Commercial

 

 

349 

 

 

409 

 

 

43 

 

 

364 

 

 

 

  Residential real estate

 

 

2,228 

 

 

2,426 

 

 

221 

 

 

2,278 

 

 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 



 

$

10,620 

 

$

11,161 

 

$

264 

 

$

10,900 

 

$

72 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

8,159 

 

$

8,463 

 

 

 

 

$

5,924 

 

$

255 

 

  Commercial construction

 

 

315 

 

 

315 

 

 

 

 

 

565 

 

 

19 

 

  Commercial

 

 

100 

 

 

160 

 

 

 

 

 

50 

 

 

 

  Residential real estate

 

 

1,516 

 

 

1,723 

 

 

 

 

 

1,050 

 

 

23 

 

  Consumer

 

 

 -

 

 

 -

 

 

 

 

 

 -

 

 

 -

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

  Commercial construction

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

  Commercial

 

 

279 

 

 

279 

 

 

64 

 

 

263 

 

 

12 

 

  Residential real estate

 

 

811 

 

 

811 

 

 

232 

 

 

914 

 

 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial real estate

 

$

8,159 

 

$

8,463 

 

$

 -

 

$

5,924 

 

$

255 

 

  Commercial construction

 

 

315 

 

 

315 

 

 

 -

 

 

565 

 

 

19 

 

  Commercial

 

 

379 

 

 

439 

 

 

64 

 

 

313 

 

 

14 

 

  Residential real estate

 

 

2,327 

 

 

2,534 

 

 

232 

 

 

1,964 

 

 

28 

 

  Consumer

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 



 

$

11,180 

 

$

11,751 

 

$

296 

 

$

8,766 

 

$

316 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







15

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

The following table presents non-accrual loans by classes of the loan portfolio:





 

 

 

 

 

 



 

 

 

 

 

 



March 31, 2017

 

December 31, 2016

 



 

 

 

 

 

 



(In Thousands)

 

  Commercial real estate

$

108 

 

$

180 

 

  Commercial construction

 

 -

 

 

 -

 

  Commercial

 

100 

 

 

100 

 

  Residential real estate

 

849 

 

 

874 

 

  Consumer

 

 -

 

 

 -

 

      Total

$

1,057 

 

$

1,154 

 





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 summarized by the past due status as of March 31, 2017 and December 31, 2016, respectively:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

 

 

 

Loan



 

 

 

 

than

 

 

 

 

 

 

 

Receivables >



30-59 Days

 

60-89 Days

 

90 Days

 

Total

 

 

 

Total Loan

 

90 Days and



Past Due

 

Past Due

 

Past Due

 

Past Due

 

Current

 

Receivables

 

Accruing



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

(In Thousands)

Commercial real estate

$

2,337 

 

$

 -

 

$

108 

 

$

2,445 

 

$

319,143 

 

$

321,588 

 

$

 -

Commercial construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

37,103 

 

 

37,103 

 

 

 -

Commercial

 

360 

 

 

 -

 

 

100 

 

 

460 

 

 

37,213 

 

 

37,673 

 

 

 -

Residential real estate

 

802 

 

 

 -

 

 

849 

 

 

1,651 

 

 

412,441 

 

 

414,092 

 

 

 -

Consumer

 

 

 

 -

 

 

 -

 

 

 

 

653 

 

 

655 

 

 

 -

            Total

$

3,501 

 

$

 -

 

$

1,057 

 

$

4,558 

 

$

806,553 

 

$

811,111 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

$

123 

 

$

 -

 

$

180 

 

$

303 

 

$

321,427 

 

$

321,730 

 

$

 -

Commercial construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

28,606 

 

 

28,606 

 

 

 -

Commercial

 

196 

 

 

 -

 

 

100 

 

 

296 

 

 

38,749 

 

 

39,045 

 

 

 -

Residential real estate

 

595 

 

 

155 

 

 

929 

 

 

1,679 

 

 

407,193 

 

 

408,872 

 

 

55 

Consumer

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

718 

 

 

718 

 

 

 -

            Total

$

914 

 

$

155 

 

$

1,209 

 

$

2,278 

 

$

796,693 

 

$

798,971 

 

$

55 



16

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 



The following tables detail the activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Commercial Real Estate

 

Commercial Construction

 

Commercial

 

Residential Real Estate

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Allowance for loan losses

(In Thousands)



Three Months Ending March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Beginning Balance - December 31, 2016

$

2,349 

 

$

516 

 

$

423 

 

$

2,937 

 

$

15 

 

$

277 

 

$

6,517 



  Charge-offs

 

 -

 

 

 -

 

 

(29)

 

 

(62)

 

 

 -

 

 

 -

 

 

(91)



  Recoveries

 

13 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13 



  Provisions

 

(9)

 

 

154 

 

 

(31)

 

 

93 

 

 

 

 

(28)

 

 

180 



Ending Balance - March 31, 2017

$

2,353 

 

$

670 

 

$

363 

 

$

2,968 

 

$

16 

 

$

249 

 

$

6,619 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ending March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Beginning Balance - December 31, 2015

$

2,132 

 

$

294 

 

$

402 

 

$

2,529 

 

$

29 

 

$

682 

 

$

6,068 



  Charge-offs

 

(35)

 

 

 -

 

 

 -

 

 

(9)

 

 

 -

 

 

 -

 

 

(44)



  Recoveries

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -



  Provisions

 

60 

 

 

77 

 

 

(6)

 

 

61 

 

 

 

 

(8)

 

 

185 



Ending Balance - March 31, 2016

$

2,157 

 

$

371 

 

$

396 

 

$

2,581 

 

$

30 

 

$

674 

 

$

6,209 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



17

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 



The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Commercial Real Estate

 

Commercial Construction

 

Commercial

 

Residential Real Estate

 

Consumer

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(In Thousands)

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

$

2,353 

 

$

670 

 

$

363 

 

$

2,968 

 

$

16 

 

$

249 

 

$

6,619 

Ending balance: individually evaluated for impairment

$

 -

 

$

 -

 

$

43 

 

$

221 

 

$

 -

 

$

 -

 

$

264 

Ending balance: collectively evaluated for impairment

$

2,353 

 

$

670 

 

$

320 

 

$

2,747 

 

$

16 

 

$

249 

 

$

6,355 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

321,588 

 

$

37,103 

 

$

37,673 

 

$

414,092 

 

$

655 

 

 

 

 

$

811,111 

Ending balance: individually evaluated  for impairment

$

7,728 

 

$

315 

 

$

349 

 

$

2,228 

 

$

 -

 

 

 

 

$

10,620 

Ending balance: collectively evaluated for impairment

$

313,860 

 

$

36,788 

 

$

37,324 

 

$

411,864 

 

$

655 

 

 

 

 

$

800,491 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

$

2,349 

 

$

516 

 

$

423 

 

$

2,937 

 

$

15 

 

$

277 

 

$

6,517 

Ending balance: individually evaluated for impairment

$

 -

 

$

 -

 

$

64 

 

$

232 

 

$

 -

 

$

 -

 

$

296 

Ending balance: collectively evaluated for impairment

$

2,349 

 

$

516 

 

$

359 

 

$

2,705 

 

$

15 

 

$

277 

 

$

6,221 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

321,730 

 

$

28,606 

 

$

39,045 

 

$

408,872 

 

$

718 

 

 

 

 

$

798,971 

Ending balance: individually evaluated  for impairment

$

8,159 

 

$

315 

 

$

379 

 

$

2,327 

 

$

 -

 

 

 

 

$

11,180 

Ending balance: collectively evaluated for impairment

$

313,571 

 

$

28,291 

 

$

38,666 

 

$

406,545 

 

$

718 

 

 

 

 

$

787,791 





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 troubled debt restructuring (“TDR”).  The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations.  Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.  TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.



The Company identifies loans for potential restructure primarily through direct communication with the borrower and the evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports.  Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.









18

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

The following table presents TDRs outstanding:



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Accrual Loans

 

Non-Accrual Loans

 

Total Modifications



 

 

 

 

 

 

 

 

March 31, 2017

(In Thousands)

Commercial real estate

$

3,059 

 

$

 -

 

$

3,059 

Commercial construction

 

260 

 

 

 -

 

 

260 

Commercial

 

249 

 

 

 -

 

 

249 

Residential real estate

 

1,228 

 

 

 -

 

 

1,228 

Consumer

 

 -

 

 

 -

 

 

 -



$

4,796 

 

$

 -

 

$

4,796 



 

 

 

 

 

 

 

 

December 31, 2016

 

Commercial real estate

$

3,078 

 

$

 -

 

$

3,078 

Commercial construction

 

260 

 

 

 -

 

 

260 

Commercial

 

250 

 

 

 -

 

 

250 

Residential real estate

 

1,243 

 

 

 -

 

 

1,243 

Consumer

 

 -

 

 

 -

 

 

 -



$

4,831 

 

$

 -

 

$

4,831 





As of March 31, 2017,  no available commitments were outstanding on TDRs.



There were no newly restructured loans that occurred during the three months ended March 31, 2017 and 2016.  



There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three months ended March 31, 2017 and 2016.



Note 12 – Fair Value Measurements 



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.

19

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

ASC Topic 860 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 under ASC Topic 860 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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at March 31, 2017 and December 31, 2016, respectively, are as follows: 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

(Level 1)

 

 

(Level 2)

 

 

 

 

 

 



 

 

Quoted

 

 

Significant

 

 

(Level 3)

 

 

 



 

 

Prices in Active

 

 

Other

 

 

Significant

 

 

 



 

 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 



Description

  Identical Assets

 

 Inputs

 

Inputs

 

Total



 

 

 

 

 

 

 

 

 

 

 

 



 

 

(In Thousands)



U.S. Government agency obligations

$

 -

 

$

31,496 

 

$

 -

 

$

31,496 



Municipal bonds

 

 -

 

 

42,578 

 

 

 -

 

 

42,578 



U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 



  Mortgage-backed securities - residential

 

 -

 

 

21,218 

 

 

 -

 

 

21,218 



March 31, 2017 Securities available for sale

$

 -

 

$

95,292 

 

$

 -

 

$

95,292 



 

 

 

 

 

 

 

 

 

 

 

 



U.S. Government agency obligations

$

 -

 

$

32,488 

 

$

 -

 

$

32,488 



Municipal bonds

 

 -

 

 

38,808 

 

 

 -

 

 

38,808 



U.S. Government Sponsored Enterprise (GSE) -

 

 

 

 

 

 

 

 

 

 

 



  Mortgage-backed securities - residential

 

 -

 

 

14,302 

 

 

 -

 

 

14,302 



December 31, 2016 Securities available for sale

$

 -

 

$

85,598 

 

$

 -

 

$

85,598 



20

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2017 and December 31, 2016, respectively, are as follows:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

(Level 1)

 

 

(Level 2)

 

 

 

 

 

 



 

Quoted

 

 

Significant

 

 

(Level 3)

 

 

 



 

Prices in Active

 

 

Other

 

 

Significant

 

 

 



 

Markets for

 

 

Observable

 

 

Unobservable

 

 

 

Description

  Identical Assets

 

 Inputs

 

Inputs

 

Total



 

(In Thousands)

March 31, 2017 Impaired loans (1)

$

 -

 

$

 -

 

$

785 

 

$

785 

March 31, 2017 Other real estate owned (1)

$

 -

 

$

 -

 

$

480 

 

$

480 

December 31, 2016 Impaired loans (1)

$

 -

 

$

 -

 

$

794 

 

$

794 

December 31, 2016 Other real estate owned (1)

$

 -

 

$

 -

 

$

480 

 

$

480 



 

 

 

 

 

 

 

 

 

 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 input which

    are not identifiable.  Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses.



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. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.



At March 31, 2017, of the impaired loans having an aggregate balance of $10.6 million, $9.6 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $1.0 million in impaired loans, an aggregate valuation allowance of $264 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

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 are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.





21

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

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)

 

March 31, 2017:

 

 

 

 

 

 

 

 

 

Impaired loans

$

785 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

0% to -25%  (-25.0%)

 



 

 

 

 

 

Liquidation expenses (3)

 

0% to -10.0%  (-7.5%)

 

Other real estate owned

$

480 

 

Listings, Letters of Intent

 

Liquidation expenses (3)

 

-5%  (-5%)

 



 

 

 

& Third Party Evaluations (4)

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

Impaired loans

$

794 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

0% to -25%  (-24.8%)

 



 

 

 

 

 

Liquidation expenses (3)

 

0% to -10.0%  (-7.5%)

 

Other real estate owned

$

480 

 

Listings, Letters of Intent

 

Liquidation expenses (3)

 

-5%  (-5%)

 



 

 

 

& Third Party Evaluations (4)

 

 

 

 

 



1.

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 inputs which are not identifiable.

2.

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.

3.

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.

4.

Fair value is determined by listings, letters of intent or third-party evaluations.



The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2017 and December 31, 2016:



Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Interest Bearing Time Deposits (Carried at Cost)

Fair values for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.

Securities Available for Sale (Carried at Fair Value)

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.



Loans Receivable (Carried at Cost)

The fair values of loans, excluding impaired loans carried at fair value of collateral, are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, and projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

22

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreements to Repurchase, Federal Funds Purchased and Short-Term Borrowings (Carried at Cost)

These borrowings are short term and the carrying amount approximates the fair value.

Long-Term Borrowings (Carried at Cost)

Fair values of FHLB and Univest advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB and Univest advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.



23

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

Off-Balance Sheet Financial Instruments (Disclosed at Cost)



Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.



The estimated fair values of the Company’s financial instruments were as follows at March 31, 2017 and December 31, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(Level 1)

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Quoted

 

 

(Level 2)

 

 

(Level 3)

 



 

 

 

 

 

 

 

 

Prices in Active

 

 

Significant Other

 

 

Significant

 



 

 

Carrying

 

 

Fair Value

 

 

Markets for

 

 

Observable

 

 

Unobservable

 



 

 

Amount

 

 

Estimate

 

 

Identical Assets

 

 

Inputs

 

 

Inputs

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

(In Thousands)

 

March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,748 

 

$

41,745 

 

$

41,745 

 

$

 -

 

$

 -

 

Interest bearing time deposits

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Securities available-for-sale

 

 

95,292 

 

 

95,292 

 

 

 -

 

 

95,292 

 

 

 -

 

Loans receivable, net of allowance

 

 

804,669 

 

 

797,475 

 

 

 -

 

 

 -

 

 

797,475 

 

Restricted investments in bank stock

 

 

521 

 

 

521 

 

 

 -

 

 

521 

 

 

 -

 

Accrued interest receivable

 

 

1,810 

 

 

1,810 

 

 

 -

 

 

1,810 

 

 

 -

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

870,190 

 

 

870,310 

 

 

 -

 

 

870,310 

 

 

 -

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  repurchase and federal funds purchased

 

 

11,780 

 

 

11,775 

 

 

 -

 

 

11,775 

 

 

 -

 

Short-term borrowings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Long-term borrowings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Accrued interest payable

 

 

726 

 

 

726 

 

 

 -

 

 

726 

 

 

 -

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to grant loans

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Unfunded commitments under lines of credit

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Standby letters of credit

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,218 

 

$

24,218 

 

$

24,218 

 

$

 -

 

$

 -

 

Interest bearing time deposits

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Securities available-for-sale

 

 

85,598 

 

 

85,598 

 

 

 -

 

 

85,598 

 

 

 -

 

Loans receivable, net of allowance

 

 

792,598 

 

 

790,326 

 

 

 -

 

 

 -

 

 

790,326 

 

Restricted investments in bank stock

 

 

624 

 

 

624 

 

 

 -

 

 

624 

 

 

 -

 

Accrued interest receivable

 

 

1,749 

 

 

1,749 

 

 

 -

 

 

1,749 

 

 

 -

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

833,384 

 

 

833,627 

 

 

 -

 

 

833,627 

 

 

 -

 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  repurchase and federal funds purchased

 

 

11,889 

 

 

11,886 

 

 

 -

 

 

11,886 

 

 

 -

 

Short-term borrowings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Long-term borrowings

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Accrued interest payable

 

 

813 

 

 

813 

 

 

 -

 

 

813 

 

 

 -

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to grant loans

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Unfunded commitments under lines of credit

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Standby letters of credit

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 



24

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 

















Note 13 – Offsetting Assets and Liabilities



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 ownership 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 statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.



The right of 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 March 31, 2017 and December 31, 2016:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Net Amounts

 

 

 

 

 

 

 

 

 



 

 

Gross

 

 

Gross Amounts

 

 

of Liabilities

 

 

 

 

 

 

 

 

 



 

 

Amounts of

 

 

Offset in the

 

 

Presented in the

 

 

 

 

 

Cash

 

 

 



 

 

Recognized

 

 

Consolidated

 

 

Consolidated

 

 

Financial

 

 

Collateral

 

 

 



 

 

Liabilities

 

 

Balance Sheet

 

 

Balance Sheet

 

 

Instruments

 

 

Pledged

 

 

Net Amount



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

(In Thousands)

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Institutions

 

$

11,780 

 

$

 -

 

$

11,780 

 

$

(11,780)

 

$

 -

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Institutions

 

$

11,889 

 

$

 -

 

$

11,889 

 

$

(11,889)

 

$

 -

 

$

 -



As of March 31, 2017 and December 31, 2016, the fair value of securities pledged was $14.5 million, respectively.







Note 14  –  Deposits



The components of deposits at March 31, 2017 and December 31, 2016 are as follows:





 

 

 

 

 

 



 

 

 

 

 

 



March 31,

 

December 31,

 



2017

 

2016

 



(In Thousands)

 



 

 

 

 

 

 

Demand, non-interest bearing

$

122,629 

 

$

117,208 

 

Demand, NOW and money market, interest bearing

 

104,906 

 

 

97,687 

 

Savings

 

510,187 

 

 

488,701 

 

Time, $100 and over

 

91,857 

 

 

89,020 

 

Time, other

 

40,611 

 

 

40,768 

 

Total deposits

$

870,190 

 

$

833,384 

 



25

 


 

 

Embassy Bancorp, Inc.                                                                                                                          

 

Notes to Consolidated Financial Statements (Unaudited)

 



Note 15  – New Accounting Standards



In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year.  The new guidance will be effective for public companies for periods beginning after December 15, 2017 with private companies provided a one-year deferral until periods beginning after December 15, 2018. The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods. The Company has not yet determined which application method it will use or the potential effects of the new standard on the financial statements, if any. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, the Company does not expect it to have a material impact on the consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, the Company does believe the new standard will result in new disclosure requirements. The Company currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance, included in non-interest income such as service charges and payment processing. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on our financial position and consolidated results of operations.



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for years beginning after December 15, 2018 for public companies and for years beginning after December 15, 2019 for private companies. Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impact this new standard will have on its consolidated financial statements.



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. For public business entities that are U.S. Securities and Exchange Commission filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations, however due to the significant differences in the revised guidance from existing U.S. GAAP, the implementation of this guidance may result in material changes to the Company’s accounting for credit losses on financial instruments.



In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)” (“ASU 2017-08”). ASU 2017-08 will amend the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2018 for all public business entities. Early application is permitted for any interim period. The Company is currently assessing the impact this new standard will have on its consolidated financial statements.



 

26

 


 

 

 Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of March 31, 2017 and for the three months ended March 31, 2017  and 2016, respectively. This discussion should be read in conjunction with the preceding consolidated financial statements and related footnotes, as well as with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission. Current performance does not guarantee and may not be indicative of similar performance in the future.



Critical Accounting Policies



Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2016. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses and the valuation of deferred tax assets. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses,” “Credit Risk and Loan Quality,” and “Income Taxes” contained on the following pages.



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 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.



OVERVIEW



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. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted.  As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC.



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.

 

The Company’s assets increased $39.0 million from $924.2 million at December 31, 2016 to $963.2 million at March 31, 2017.  The Company's deposits grew $36.8 million from $833.4 million at December 31, 2016 to $870.2 million at March 31, 2017. The significant growth in deposits resulted primarily from recent mergers in the Company’s market area, customers migrating to local community banks, and through a concentrated effort to expand customer relationships. During the same period, loans receivable, net of allowance for loan losses, increased $12.1 million to $804.7 million at March 31, 2017 from $792.6 million at December 31, 2016. The market is very competitive and the Company is committed to maintaining a high quality portfolio that returns a reasonable market rate. The Company expects increased lending activity, as the Company expands its presence in the market and continues to become

27

 


 

 

more widely known.  The past and current economic conditions have created lower demand for loans by credit-worthy customers.  The lending staff has been active in contacting new prospects and promoting the Company’s name in the community. Management believes that this will translate into continued 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 future market rate adjustments.



Net income for the three months ended March 31, 2017 was $1.9 million compared to net income for the three months ended March 31, 2016 of $1.6 million, an increase of $294 thousand, or 18.3%.  Diluted earnings per share increased to $0.25 for the three months ended March 31, 2017, as compared to $0.22 for the three months ended March 31, 2016. The difference in net income for the three months ended March 31 2017 and March 31, 2016 resulted, in part, from an increase in interest income due to the Company’s growing loan portfolio and an increase in non-interest income due to the expansion of the Company’s customer base, offset by interest expense from the growth in deposits and a 5.1% increase in full time equivalent employees from seventy-eight (78) at March 31, 2016 to eighty-two (82) at March 31, 2017, due to strategic additions of team members to various rolls within the Company. 

 

RESULTS OF OPERATIONS



Net Interest Income



Total interest income for the three months ended March 31, 2017 and 2016 totaled $8.1 million and $7.3 million, respectively.  Average earning assets were $906.4 million for the three months ended March 31, 2017 compared to $792.2 million for the three months ended March 31, 2016. The tax equivalent yield on average earning assets was 3.69% for the first quarter of 2017 compared to 3.81% for the first quarter of 2016.



Total interest expense for the three months ended March 31, 2017 increased $138 thousand to $1.0 million as compared to $896 thousand for the three months ended March 31, 2016. Average interest bearing liabilities were $742.1 million for the three months ended March 31, 2017 compared to $657.4 million for the three months ended March 31, 2016.  The yield on average interest bearing liabilities was 0.57% and 0.55% for the first quarter of 2017 and 2016, respectively.  



Net interest income for the three months ended March 31, 2017 was $7.0 million compared to $6.4 million for the three months ended March 31, 2016. The improvement in net interest income for the three months ended March 31, 2017 is a result of the growth in the loan portfolio, growth in the investment portfolio and decrease in securities sold under agreements to repurchase balances and FHLB borrowings, offset by growth in savings and certificates of deposit. The Company’s net interest margin for the three months ended March 31, 2017 decreased twelve (12) basis points to 3.23% as compared to 3.35% for the three months ended March 31, 2016. The decrease in the net interest margin is due primarily to the decrease in loan and investment rates and increase in certificate of deposit rates associated with the current market conditions, offset by the decrease in securities sold under agreements to repurchase balances and FHLB borrowings and coupled with the significant growth in the loan, investments, interest bearing deposits, savings and certificate of deposit balances. During this difficult market environment, the Company continued to grow and attract deposits and loans at competitive rates.

28

 


 

 

The table below sets forth average balances and corresponding yields for the corresponding periods ended March 31, 2017 and 2016, respectively:



Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)





 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,

 



2017

 

2016

 



 

 

 

 

Tax

 

 

 

 

 

Tax

 



Average

 

 

 

Equivalent

 

Average

 

 

 

Equivalent

 



Balance

 

Interest

 

Yield

 

Balance

 

Interest

 

Yield

 



 

 

 

 

 

 

 

 

 

 

 

 



(Dollars In Thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Loans - taxable

$      795,034

 

$     7,462

 

3.81%

 

$       690,599

 

$     6,735

 

3.92%

 

Loans - non-taxable

9,163 

 

69 

 

4.63%

 

9,747 

 

74 

 

4.63%

 

Investment securities - taxable

49,795 

 

177 

 

1.43%

 

45,639 

 

179 

 

1.58%

 

Investment securities - non-taxable

36,808 

 

315 

 

5.26%

 

31,218 

 

285 

 

5.56%

 

Federal funds sold

828 

 

 

0.78%

 

720 

 

 

0.47%

 

Interest bearing deposits with banks

14,809 

 

32 

 

0.88%

 

14,280 

 

40 

 

1.13%

 

TOTAL INTEREST EARNING ASSETS

906,437 

 

8,057 

 

3.69%

 

792,203 

 

7,314 

 

3.81%

 

Less allowance for loan losses

(6,534)

 

 

 

 

 

(6,133)

 

 

 

 

 

Other assets

34,478 

 

 

 

 

 

33,759 

 

 

 

 

 

TOTAL ASSETS

$      934,381

 

 

 

 

 

$       819,829

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits,
   NOW and money market

$        97,219

 

$          20

 

0.08%

 

$         72,460

 

$          16

 

0.09%

 

Savings

501,478 

 

605 

 

0.49%

 

423,113 

 

515 

 

0.49%

 

Certificates of deposit

130,357 

 

403 

 

1.25%

 

110,886 

 

326 

 

1.18%

 

Securities sold under agreements to
   repurchase, and short & long-term borrowings

13,030 

 

 

0.19%

 

50,939 

 

39 

 

0.31%

 

TOTAL INTEREST BEARING LIABILITIES

742,084 

 

1,034 

 

0.57%

 

657,398 

 

896 

 

0.55%

 



 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

111,466 

 

 

 

 

 

87,023 

 

 

 

 

 

Other liabilities

5,944 

 

 

 

 

 

5,675 

 

 

 

 

 

Stockholders' equity

74,887 

 

 

 

 

 

69,733 

 

 

 

 

 

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY

$      934,381

 

 

 

 

 

$       819,829

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

$     7,023

 

 

 

 

 

$     6,418

 

 

 

Net interest spread

 

 

 

 

3.12%

 

 

 

 

 

3.26%

 

Net interest margin

 

 

 

 

3.23%

 

 

 

 

 

3.35%

 





29

 


 

 

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 allowance consists of general, specific, qualitative and unallocated components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  The specific component relates to loans that are classified as watch, other assets especially mentioned, substandard, doubtful or loss. Such loans may also be classified as impaired and/or restructured.  For loans that are further 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. 



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 three months ended March 31, 2017, the provision for loan losses was $180 thousand, as compared to $185 thousand for the same period ended March 31, 2016In the three months ended March 31, 2017, there were charge-offs in the amount of $91 thousand and recoveries of $13 thousand, as compared to $44 thousand in charge-offs and no recoveries for the three months ended March 31, 2016. The allowance for loan losses is $6.6 million as of March 31, 2017, which is 0.82% of outstanding loans, compared to $6.2 million or 0.87% of outstanding loans as of March 31, 2016. At December 31, 2016, the allowance for loan losses was  $6.5 million, which represented 0.82% of total outstanding loans. 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.



30

 


 

 

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:









 

 

 

 

 

 



 

 

 

 

 

 



Three Months Ended

 



March 31,

 



2017

 

2016

 



 

 

 

 

 

 



(In Thousands)

Loans receivable at end of period

$

811,111 

 

$

711,330 

 

Allowance for loan losses:

 

 

 

 

 

 

Balance, beginning

$

6,517 

 

$

6,068 

 

  Provision for loan losses

 

180 

 

 

185 

 

  Loans charged off:

 

 

 

 

 

 

     Commercial real estate

 

 -

 

 

(35)

 

     Commercial construction

 

 -

 

 

 -

 

     Commercial

 

(29)

 

 

 -

 

     Residential real estate

 

(62)

 

 

(9)

 

     Consumer

 

 -

 

 

 -

 

  Total loans charged off

 

(91)

 

 

(44)

 

  Recoveries of loans previously charged off:

 

 

 

 

 

 

     Commercial real estate

 

13 

 

 

 -

 

     Commercial construction

 

 -

 

 

 -

 

     Commercial

 

 -

 

 

 -

 

     Residential real estate

 

 -

 

 

 -

 

     Consumer

 

 -

 

 

 -

 

  Total recoveries

 

13 

 

 

 -

 

  Net charge offs

 

(78)

 

 

(44)

 

Balance at end of period

$

6,619 

 

$

6,209 

 

Allowance for loan losses to loans receivable at end of period

 

0.82% 

 

 

0.87% 

 



Non-interest Income



Total non-interest income was $771 thousand for the three months ended March 31, 2017 compared to $633 thousand for the same period in 2016.  The increase is due primarily to an increase of $53 thousand in income associated with bank owned life insurance, an increase of $46 thousand in credit card processing fees due to growth in the Bank’s credit card and merchant processing customer base and an increase in other service fees of $44 thousand, due to growth in the deposit customer base.  



Non-interest Expense



Non-interest expenses increased $337 thousand from $4.6 million for the three months ended March 31, 2016 to $5.0 million for the same period ended March 31, 2017.  The increase in non-interest expenses is primarily due to an increase of $265 thousand, or 13.5%, over the three months ended March 31, 2016, in salaries and employee benefits. The Company had eighty-two (82) compared to seventy-eight (78) full-time equivalent employees at March 31, 2017 and March 31, 2016, respectively. This increase in the number of employees, together with annual increases in salaries, generally, resulted in an increase in overall salary and benefits costs. Additional increases in non-interest expenses are attributable to:  an increase of $48 thousand in data processing mainly due to our expanding customer base; an increase of $32 thousand in credit card processing due to increased transaction volume; an increase of $24 thousand in professional fees; an increase of $17 thousand in FDIC insurance expense due to growth in deposits; an increase of $21 thousand in charitable contributions due to EITC contributions and an increase of $19 thousand in other expenses; offset by a decrease of $25 thousand in occupancy and equipment expense, a decrease of $25 thousand in other real estate owned expenses, and a decrease of $31 thousand in advertising and promotion expense.



A breakdown of other expenses can be found in the statements of income.



Income Taxes



The allocated provision for income taxes for the three months ended March 31, 2017 totaled $762 thousand, or 28.6% of income before taxes. The provision for income taxes for the three months ended March 31, 2016 totaled $645 thousand, or 28.6% of income before taxes. 



The Company uses currently enacted tax rates to value deferred tax assets and liabilities. The current Administration and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in U.S. corporate income tax rates. If

31

 


 

 

corporate tax rates were reduced, management expects the Company would record an initial charge against earnings to lower the carrying amount of the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.



FINANCIAL CONDITION



Securities



The Bank’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Bank 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. Investment securities consist primarily of U.S. government agency securities, mortgage-backed securities issued by FHLMC or FNMA, and taxable and non-taxable municipal bonds. The Bank holds no high-risk securities or derivatives as of March 31, 2017. The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.



Total securities at March 31, 2017 were $95.3 million compared to $85.6 million at December 31, 2016. The increase in the investment portfolio is the result of the purchase of three  (3) mortgage-backed securities totaling $7.3 million, the purchase of six  (6) municipal obligations totaling $3.5 million, and an increase in unrealized gains, offset by pay downs on mortgage-backed securities and a maturity. The carrying value of the securities portfolio as of March 31, 2017 includes a net unrealized gain of $450 thousand, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $38 thousand at December 31, 2016. The current unrealized gain position of the securities portfolio is due to changes in market rates since purchase. No securities are deemed to be other than temporarily impaired.



Loans



The loan portfolio comprises a major component of the Bank’s earning assets. All of the Bank’s loans are to domestic borrowers. Total net loans at March 31, 2017 increased $12.1 million to $804.7 million from $792.6 million at December 31, 2016. The loan-to-deposit ratio decreased from 96% at December 31, 2016 to 93% at March 31, 2017. The Bank’s loan portfolio at March 31, 2017 was comprised of residential real estate and consumer loans of $414.7 million, an increase of $5.2 million from December 31, 2016, and commercial loans of $396.4 million, an increase of $7.0 million from December 31, 2016.  The Bank has not originated, nor does it intend to originate, sub-prime mortgage loans.

 

Credit Risk and Loan Quality



The allowance for loan losses increased $102 thousand to $6.6 million at March 31, 2017 compared to $6.5 million at December 31, 2016. At March 31, 2017 and December 31, 2016, the allowance for loan losses represented 0.82%, respectively, of total loans. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Bank and comparable institutions in the Bank’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses.



At March 31, 2017,  December 31, 2016, and March 31, 2016 aggregate balances on non-performing loans equaled $5.9 million, $6.0 million and $5.5 million, respectively, representing 0.72%,  0.76% and 0.77% of total loans at March 31, 2017,  December 31, 2016 and March 31, 2016, respectively. Troubled debt restructurings, included in the following table, represent loans where the Company, for economic or legal reasons related to the debtor’s financial difficulties, has granted a concession to the debtor that it would not otherwise consider.  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) for the three months ended March 31, 2017.  The Company had  two  (2) foreclosed assets in the amount of $480 thousand as of March 31, 2017 and December 31, 2016, of which none is residential real estate.  At March 31, 2017 and December 31, 2016, the Company had $464 thousand and $482 thousand, respectively, in recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. 

























32

 


 

 

The details for non-performing loans are included in the following table:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

March 31,

 

 

 

December 31,

 

 

 

March 31,

 



 

2017

 

 

 

2016

 

 

 

2016

 



 

 

 

 

 

 

 

 

 

 

 



(In Thousands)

Non-accrual - commercial

$

208 

 

 

$

280 

 

 

$

221 

 

Non-accrual - consumer

 

849 

 

 

 

874 

 

 

 

594 

 

Restructured loans, accruing interest and less than 90 days past due

 

4,796 

 

 

 

4,831 

 

 

 

4,695 

 

Loans past due 90 or more days, accruing interest

 

 -

 

 

 

55 

 

 

 

 -

 

Total nonperforming loans

 

5,853 

 

 

 

6,040 

 

 

 

5,510 

 

Foreclosed assets

 

480 

 

 

 

480 

 

 

 

701 

 

Total nonperforming assets

$

6,333 

 

 

$

6,520 

 

 

$

6,211 

 

Nonperforming loans to total loans at period-end

 

0.72 

%

 

 

0.76 

%

 

 

0.77 

%

Nonperforming assets to total assets

 

0.66 

%

 

 

0.71 

%

 

 

0.73 

%

 

Premises and Equipment



Company premises and equipment, net of accumulated depreciation, decreased  $63 thousand from December 31, 2016 to March 31, 2017. This decrease is due primarily to depreciation on existing premises and equipment, offset by increases related to purchases.



Deposits



Total deposits at March 31, 2017 increased $36.8 million to $870.2 million from $833.4 million at December 31, 2016. Demand, NOW and money market deposits increased $12.6 million, time deposits increased $2.7 million, and savings deposits increased $21.5 million. The Company continues to see deposit growth driven by a variety of factors including but not limited to, population growth, local bank mergers and consolidations, the accessibility of location and the sales efforts of the Company personnel.



Liquidity



Liquidity represents 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 $41.7 million at March 31, 2017, compared to $24.2 million at December 31, 2016. The $17.5 million increase in cash and cash equivalents was primarily due to growth in deposits.



Additional asset liquidity sources include principal and interest payments from the investment security and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling loans or raising additional capital. At March 31, 2017, the Company had $95.3 million of available for sale securities. Securities with carrying values of approximately $83.1 million and $71.8 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $462.4 million.  This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term or long-term FHLB advances outstanding as of March 31, 2017 and December 31, 2016. All FHLB borrowings are secured by qualifying assets of the Bank.



The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at March 31, 2017 and December 31, 2016. Advances from this line are unsecured.



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 off-balance sheet arrangements consist of unfunded loans and commitments, as well as lines of credit made under the same standards as on-balance sheet instruments. These unused commitments totaled $101.1 million  at  March 31, 2017.  At March 31, 2017 the Company also had letters of credit outstanding of $4.2 million and FHLB deposit letters of credit outstanding of $2.3 million. 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. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.

33

 


 

 

Capital Resources and Adequacy



Total stockholders’ equity was $75.6 million as of March 31, 2017, representing a net increase of $2.3 million from December 31, 2016.  The increase in capital was primarily the result of the net income of $1.9 million and an increase of $322 thousand in unrealized gains on available for sale securities.



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 effect on the consolidated financial statements.

The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of March 31, 2017, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Consolidated Bank

 



 

 

 

 

 

 

 



March 31, 2017

 

 

December 31, 2016

 



 

 

 

 

 

 

 



(Dollars In Thousands)

 

Tier I, common stockholders' equity

$

75,064 

 

 

$

73,061 

 

Tier II, allowable portion of allowance for loan losses

 

6,619 

 

 

 

6,517 

 

Total capital

$

81,683 

 

 

$

79,578 

 



 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

11.2 

%

 

 

11.2 

%

Tier I risk based capital ratio

 

11.2 

%

 

 

11.2 

%

Total risk based capital ratio

 

12.2 

%

 

 

12.2 

%

Tier I leverage ratio

 

8.0 

%

 

 

8.0 

%



 

 

 

 

 

 

 

Note: Unrealized gains on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.



In July 2013, the FDIC and the Federal Reserve approved a new rule that substantially amended 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 revised 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 establishes a “capital conservation buffer” of 2.5%, and will result 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%. In January 2016, the capital conservation buffer requirement started being phased in at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. 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%.

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%.



34

 


 

 

The following table provides the Company’s risk-based capital ratios and leverage ratios:



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Consolidated Corporation

 



 

 

 

 

 

 

 



March 31, 2017

 

 

December 31, 2016

 



 

 

 

 

 

 

 



(Dollars In Thousands)

 

Tier I, common stockholders' equity

$

75,299 

 

 

$

73,302 

 

Tier II, allowable portion of allowance for loan losses

 

6,619 

 

 

 

6,517 

 

Total capital

$

81,918 

 

 

$

79,819 

 



 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

11.2 

%

 

 

11.2 

%

Tier I risk based capital ratio

 

11.2 

%

 

 

11.2 

%

Total risk based capital ratio

 

12.2 

%

 

 

12.2 

%

Tier I leverage ratio

 

8.1 

%

 

 

8.1 

%



35

 


 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk



Not Applicable.



Item 4 – Controls and Procedures



The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.



There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended March 31, 2017, including any corrective actions with regard to significant deficiencies and material weakness.

36

 


 

 

Part II - Other Information



Item 1 - Legal Proceedings



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



Item 1A - Risk Factors



Not Applicable.



Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds



Not Applicable.



Item 3 - Defaults Upon Senior Securities



Not Applicable.



Item 4 – Mine Safety Disclosures



Not Applicable.



Item 5 - Other Information



None.

37

 


 

 

Item 6 - Exhibits





 

 

 

 



 

 

 

 



Exhibit

 

 

 



Number

 

Description

 



3.1

 

Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of Registrant's

 



 

 

Form 10-Q filed on August 12, 2016).

 



3.2

 

Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's

 



 

 

Form 10-Q filed on August 12, 2016).

 



10.1

 

Lease Renewal Agreement 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).

 



11.1

 

The statement regarding computation of per share earnings required by this exhibit is contained in Note 6

 



 

 

to the financial statements under the caption “Basic and Diluted Earnings Per Share.”

 



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

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350

 



 

 

of the Sarbanes-Oxley Act of 2002.

 



101.1

 

Interactive Data Files (XBRL)

 





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.

38

 


 

 

SIGNATURES

 In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 



 

 

 

 

 

EMBASSY BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

 

Dated: May 12, 2017

By:

/s/ David M. Lobach, Jr.

 

 

 

David M. Lobach, Jr.

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

Dated: May 12, 2017

By:

/s/ Judith A. Hunsicker

 

 

 

Judith A. Hunsicker

 

 

 

Senior Executive Vice President,

 

 

 

Chief Operating Officer, Secretary and

 



 

Chief Financial Officer

 



 

 

39

 


 

 

EXHIBIT INDEX





 

 

 

 



 

 

 

 



Exhibit

 

 

 



Number

 

Description

 



3.1

 

Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of Registrant's

 



 

 

Form 10-Q filed on August 12, 2016).

 



3.2

 

Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's

 



 

 

Form 10-Q filed on August 12, 2016).

 



10.1

 

Lease Renewal Agreement 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).

 



11.1

 

The statement regarding computation of per share earnings required by this exhibit is contained in Note 6

 



 

 

to the financial statements under the caption “Basic and Diluted Earnings Per Share.”

 



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

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350

 



 

 

of the Sarbanes-Oxley Act of 2002.

 



101.1

 

Interactive Data Files (XBRL)

 





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.



40