10-K 1 emyb-20161231x10k.htm 10-K emby-20161231 10K FY

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



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

For the fiscal year end    December 31, 2016    



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

(Issuer’s Telephone Number)

 

Securities registered under Section 12(b) of the Exchange Act:

 

None

None

(Title of each class)

(Name of each exchange on which registered)



Securities registered under section 12(g) of the Exchange Act:

 

Common Stock, Par Value $1.00 per share



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ]   No [ X ]



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [   ]   No [ X ]



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 [ X ]  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 [ X ] No [  ]



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
















 



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



 

Large accelerated filer 

Accelerated filer

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

Smaller reporting company



 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2016, the registrant’s most recently completed second fiscal quarter was $57,196,552.



(APPLICABLE ONLY TO CORPORATE REGISTRANTS)



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 March 24, 2017

($1.00 Par Value)

       7,448,628

 

  (Title Class)

(Outstanding Shares)





DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrant’s definitive proxy statement for the 2017 annual meeting of shareholders are incorporated by reference into Part III of this report.




 

Embassy Bancorp, Inc.                                                                                                                          

 

 





 

 

 

 



 

 

 

 

Table of Contents

 

 



 

 

 

 

Part I

 

 

 

 



Item 1

Business                        

4

 



Item 1A

Risk Factors

15

 



Item 1B

Unresolved Staff Comments

15

 



Item 2

Properties

15

 



Item 3

Legal Proceedings

15

 



Item 4

Mine Safety Disclosures

15

 



 

      

 

 

Part II 

 

 

 

 



Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and

16

 



 

Issuer Purchases of Equity Securities

 

 



Item 6

Selected Financial Data

16

 



Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 



Item 7A

Quantitative and Qualitative Disclosures About Market Risk

35

 



Item 8

Financial Statements and Supplementary Data

35

 



 

Report of Independent Registered Public Accounting Firm    

36

 



 

Consolidated Balance Sheets    

37

 



 

Consolidated Statements of Income    

38

 



 

Consolidated Statements of Comprehensive Income

39

 



 

Consolidated Statements of Stockholders’ Equity  

40

 



 

Consolidated Statements of Cash Flows   

41

 



 

Notes to Financial Statements

42

 



Item 9

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

76

 



Item 9A

Controls and Procedures

76

 



Item 9B

Other Information

76

 



 

 

 

 

Part III

 

 

 

 



Item 10

Directors, Executive Officers and Corporate Governance

77

 



Item 11

Executive Compensation

77

 



Item 12

Security Ownership of Certain Beneficial Owners and Management and

77

 



 

Related Stockholder Matters

 

 



Item 13

Certain Relationships and Related Transactions, and Director Independence

77

 



Item 14

Principal Accounting Fees and Services

77

 



 

 

 

 

Part IV

 

 

 

 



Item 15

Exhibits and Financial Statement Schedules

78

 



 

 

 

 



 

Signatures

81

 



 

 

 

 



 

 

 

 







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Embassy Bancorp, Inc.                                                                                                                          

 

PART I



Item 1. BUSINESS.



General



Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow.



The Bank, which is the Company’s principal operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area.



Mission



The Company provides a traditional range of financial products and services to meet the depository and credit needs of individual consumers, small and medium sized businesses and professionals in its market area. As a locally owned and operated community bank, there is a strong focus on service that is highly personalized, efficient and responsive to local needs. It is the intention of the Company to deliver its products and services with the care and professionalism expected of a community bank and with a special dedication to personalized service. To create this environment, the Company employs an experienced, well-trained, highly motivated staff, with interest in building quality client relationships using state-of-the-art delivery systems and client service facilities. The Company’s senior management has extensive banking experience and establishes the Company’s goal to serve the financial needs of its clients and provide a profitable return to its investors, consistent with safe and sound banking practices.    The Company focuses on obtaining and retaining customer relationships by offering a broad range of financial services, competitively-priced and delivered in a responsive manner, with emphasis to understand the financial needs of its customers.



Correspondent relationships are utilized where it is cost beneficial. The specific objectives of the Company are: 1) to provide individuals, professionals and local businesses with the highest standard of relationship banking in the local market; 2) to attract deposits and loans by offering state of the art products and services with competitive pricing; 3) to provide a reasonable return to shareholders on capital invested; and 4) to attract, train and retain a happy, motivated and team oriented group of banking professionals dedicated to meeting the Company’s objectives.



Market “Niche”



The Company provides the traditional array of commercial banking products and services emphasizing a  one-on-one, sit down approach, for the delivery of products and services to consumers and businesses located in Lehigh and Northampton Counties in Pennsylvania. In the Company’s primary market area, which is dominated by offices of large statewide, regional and interstate banking institutions, banking services that are furnished in a friendly and courteous manner with a timely response to customer needs fill a “niche” that arises due to the loss of local institutions through merger and acquisitions. 



Deposits



The Company offers small business cash management services to help local companies better manage their cash flow, in order for the Company to attract and retain stable deposit relationships. The expertise and experience of the Company’s management coupled with the latest technology accessed through third party providers enables the Company to maximize the growth of business-related deposits.



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Embassy Bancorp, Inc.                                                                                                                          

 

As for consumers, deposit growth is driven by a variety of factors including, but not limited to, population growth, bank and non-bank competition, local bank mergers and consolidations, increase in household income, interest rates, accessibility of location and the sales efforts of Company personnel. Time deposits can be attracted and/or increased by paying an interest rate higher than that offered by competitors, but they are the most costly type of deposit. The most profitable type of deposits are non-interest bearing demand (checking) accounts which can be attracted by offering free checking. However, both high interest rates and free checking accounts generate certain expenses for a bank and the desire to increase deposits must be balanced with the need to be profitable. The deposit services of the Company are generally comprised of demand deposits, savings deposits, money market deposits, time deposits and Individual Retirement Accounts.



Loans



The loan portfolio of the Company consists primarily of secured fixed-rate and variable-rate loans, with a significant concentration in commercial real estate transactions and consumer residential real estate mortgage and home equity loans. While most credit facilities are appropriately collateralized, major emphasis is placed upon the financial condition of the borrower and evaluating the borrower’s cash flow versus debt service requirements. The Company has an experienced lending and private banking team. The Company believes that the familiarity of its experienced management team and members of the Company’s Loan Committee with prospective local borrowers enables the Company to better evaluate the character, integrity and creditworthiness of the prospective borrowers.



Loan growth is driven by customer demand, which in turn is influenced by individual and business indebtedness and consumer demand for goods. The Company’s loan and private banking officers call upon accountants, financial planners, attorneys, local realtors and others to generate loan referrals. Again, a balance between growth, credit risk and pricing is required to maintain performing loans for the Company, as lending money will always entail some risk. A performing loan is a loan which is being repaid according to its original terms and is the most desirable type of loan that a bank seeks to make. Without loans a bank cannot generate enough earnings to be profitable. The risk involved in each loan must, therefore, be carefully evaluated before the loan is made. The interest rate at which the loan is made should always reflect the risk factors involved, including the term of the loan, the value of collateral, if any, the reliability of the projected source of repayment and the amount of the loan requested. Credit quality will always be the Company’s most important factor.



The Company does not sell its mortgages into the secondary market, has not been involved in any “sub-prime” mortgage lending, and has not purchased or invested in any securities backed by or which include sub-prime loans. 



Business Lending



The Company generally targets businesses with annual revenues of less than $10 million, including business owners, legal, and medical professionals. The Company offers responsiveness, flexibility and local decision making for loan applications of small business owners thereby eliminating delays caused by non-local management. The Company participates in local, state and federal loan programs.



Consumer Lending



The Company offers its retail customer base a product line of consumer loan services including mortgage loans, secured home equity loans, lines of credit, auto loans, and to a much lesser extent, unsecured personal loans.



Residential Mortgage Loans



The Company offers a range of specialty home equity and mortgage products at competitive rates, which are retained and serviced by the Company. The Company seeks to capitalize on its policy of closing loans in a time frame that will meet the needs of its borrowers. 









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Embassy Bancorp, Inc.                                                                                                                          

 

Commercial Mortgage/Construction Loans



The Company originates various types of loans secured by real estate, including, to a limited extent, construction loans. Construction loans are generally priced at floating rates tied to current market rates. Upon completion of construction, these loans may be converted into permanent commercial and residential loans. Construction lending is expected to constitute a minor portion of the Company’s loan portfolio.



In some cases, the Company originates loans larger than its lending limit and enters into participation arrangements for those loans with other banks.



As an independent community bank, the Company serves the special needs of legal, medical, accounting, financial service providers and other professionals. Commercial mortgages, lines of credit, term loans and demand loans are tailored to meet the needs of the Company’s customers in the professional community. In addition to the usual criteria for pricing credit-related products, the Company takes into consideration the overall customer relationship to establish credit pricing. Deposit relationships in demand, savings, money market, and certificate accounts are considered in loan pricing along with the credit worthiness of the borrower.



Other Services



To further attract and retain customer relationships, the Company provides or will provide the standard array of financial services expected of a community bank, which include the following:





 

Treasurer Checks

Remote Deposit Capture

Certified Checks

Mobile Banking

Gift Cards

Night Depository Services

Wire Transfers

Bond Coupon Redemptions

Savings Bond Redemptions

Bank by Mail

Credit/Debit Card Merchant Processing

Automated Teller Machines

Direct Deposit/ACH Services

On-Line Banking and Bill Pay

Cash Management Services

Commercial Credit Cards

Escrow Management Services

Safe Deposit Boxes

ATM and Debit Cards

Fraud Detection Services



Fee Income



Fee income is non-interest related. The Company earns fee income by charging customers for banking services, credit card and merchant processing, treasurer’s checks, overdrafts, wire transfers, bond coupon redemptions, and check orders, as well as other deposit and loan related fees. Unlike many in the industry, the Company does not sell its mortgages on the secondary market, nor does it offer trust or investment/brokerage services to its customers to generate fee income.



Community Reinvestment Act



The Community Reinvestment Act of 1977 (“CRA”) is designed to create a system for bank regulatory agencies to evaluate a depository institution’s record in meeting the credit needs of its community. The Company had its last CRA examination in 2015 and received a “satisfactory” rating.



The Company’s Directors and Officers are committed to reaching out to the community in which they live and work. The personal, business and community rewards for helping local residents and businesses are numerous. The Board is dedicated to recognizing an ongoing commitment and understanding of the Company’s responsibility under the CRA. The Company is committed to providing access to credit and deposit products for all members of the communities that it serves.





6

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Service/Market Area



The Company is headquartered in Hanover Township, Northampton County, Pennsylvania and draws its primary deposits and business from areas immediately surrounding its principal office and its branch offices in South Whitehall Township, Lower Macungie Township, the City of Bethlehem, Salisbury Township, Lower Saucon Township, Lower Nazareth Township and Borough of Nazareth, Pennsylvania, as well as the remainder of Lehigh and Northampton Counties in Pennsylvania.



According to FDIC data the Company ranks 6th in market share in Northampton County, with four (4) offices, and 7th in Lehigh County with four (4) offices, with  a combined deposit market share of 5.94% for both counties. The Company believes there is significant room for organic growth in its current market area of Lehigh and Northampton Counties. The Company continually evaluates strategic locations for branch offices within the Lehigh Valley, which are supplemented by convenient access through electronic banking products and services, for both consumer and commercial customers.



Bank Premises



The Company leases each of its bank operations premises, situated at the following locations:





 

 

Northampton County:



  ·

Hanover Township (includes administrative offices)



  ·

Lower Saucon Township



  ·

Lower Nazareth Township



  ·

Borough of Nazareth



 

 

Lehigh County:



  ·

South Whitehall Township



  ·

Salisbury Township



  ·

Lower Macungie Township



  ·

City of Bethlehem



The Company pays certain additional expenses of occupying these spaces including, but not necessarily limited to, real estate taxes, insurance, utilities and repairs. The Company is obligated under the leases to maintain the premises in good order, condition and repair.



Employees



As of December 31, 2016, the Company had a total of 83 full-time equivalent employees.



Competition



The banking business is highly competitive. The Company competes with local banks as well as numerous regionally based commercial banks, most of which have assets, capital and lending limits far larger than those of the Company. The Company also competes with savings banks, savings and loan associations, money market funds, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and with the issuers of commercial paper and other securities. The industry competes primarily in the area of interest rates, products offered, customer service and convenience.



Among the advantages many of the Company’s competitors have over the Company are larger asset and capital bases, the ability to finance wide-ranging advertising campaigns and to allocate their investment assets to regions of highest yield and demand. Larger companies have market presence in the form of more branch offices. The Company’s growth in number of offices has improved its ability to compete in the market. The Company believes it is able to compete with the market in terms of interest rate and level of customer service, as reflected in growth in market share. Many competitors offer certain services such as trust services, investment services and international banking that are

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Embassy Bancorp, Inc.                                                                                                                          

 

not offered directly by the Company and, by virtue of their greater capital, most competitors will have substantially higher lending limits than those of the Company. The recent consolidation of banks in the Company’s market, due to mergers and acquisitions, has provided additional opportunities for the Company to build new customer relationships.



Segments



The Company acts as an independent community financial services provider and offers traditional banking and related financial services to individual, business and government customers. The Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer, residential mortgage and home equity loans; and the providing of other financial services.



Management does not separately allocate expenses, including the cost of funding loan demand, between commercial and retail operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful.



Seasonality



Management does not feel that the deposits, loans, or the business of the Company are seasonal in nature. Deposit and loan generation may, however, vary with local and national economic and market conditions which should not have a material effect on planning and policy making.



Supervision and Regulation



The Company is subject to extensive regulation under federal and Pennsylvania banking laws, regulations and policies, including prescribed standards relating to capital, earnings, dividends, the repurchase or redemption of shares, loans or extensions of credit to affiliates and insiders, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, asset growth, impaired assets and loan-to-value ratios. The Bank regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking systems as a whole, and not for the protection of security holders.



The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their bank subsidiaries and provides certain specific information about the Company and the Bank. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company.

   

Dodd-Frank Wall Street Reform and Consumer Protection Act



As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which became law on July 21, 2010, there is additional regulatory oversight and supervision of the Company and the Bank.  The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes, and the regulations being developed thereunder will include, provisions affecting large and small financial institutions alike, including several provisions that affect the regulations of community banks and bank holding companies.

The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums.  The legislation also calls for the FDIC to raise its ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion.

The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly-traded companies and allows financial institutions to pay interest on business checking accounts.  The

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Embassy Bancorp, Inc.                                                                                                                          

 

legislation also restricts proprietary trading, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of banks and their affiliates.  The Dodd-Frank Act also establishes the Financial Stability Oversight Council to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.

Consumer Financial Protection Bureau

The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau (the “CFPB”) as an independent entity within the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s rules contain provisions on mortgage-related matters such as steering incentives, and determinations as to a borrower’s ability to repay, loan servicing, and prepayment penalties.

On January 10, 2013, the CFPB issued a final regulation defining a “qualified mortgage” for purposes of the Dodd-Frank Act, and setting standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. This regulation, which became effective on January 10, 2014, also affords safe harbor legal protections for lenders making qualified loans that are not “higher priced.” On January 17, 2013, the CFPB issued a final regulation containing new mortgage servicing rules applicable to our bank subsidiary, which took effect on January 10, 2014. The announced goal of the CFPB is to bring greater consumer protection to the mortgage servicing market. These changes affect notices to be given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers are prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.

The servicer must provide direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred. We expect these new standards to add to the cost of conducting our mortgage servicing business.

Capital Adequacy

In July 2013, the FDIC and the Federal Reserve approved a new rule substantially amending the regulatory risk based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.



The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also 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 new 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%.



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Embassy Bancorp, Inc.                                                                                                                          

 

The capital ratios to be considered “well capitalized” under current capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and Total Risk-Based capital of 10%.

   

At December 31, 2016, the Company qualified as “well-capitalized” under the foregoing regulatory capital standards.  See Note 16 of the Notes to Consolidated Financial Statements included in Item 8 of this Report.



Federal Deposit Insurance (“FDI”) Act and Part 363 of the FDIC Regulations

 

Section 36 of the FDI Act and Part 363 of the FDIC's regulations require insured depository institutions with at least $500 million in total assets to file a Part 363 Annual Report with the applicable bank regulatory agencies, which, among other things, requires that the Company establish and maintain an effective internal control structure over financial reporting and provide an assessment by management of the institution's compliance with the designated laws and regulations pertaining to insider loans and dividend restrictions.



Bank Holding Company Regulation



As a bank holding company, the Company is subject to regulation and examination by the Pennsylvania Department of Banking and Securities (the “Pennsylvania Department of Banking”) and the Federal Reserve Board.  The Company is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of the voting shares of such bank. Such a transaction may also require approval of the Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank holding companies to control an unlimited number of banks.



Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Company may only engage in or own companies that engage in activities deemed by the Federal Reserve Board to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto, and the holding company must obtain permission from the Federal Reserve Board prior to engaging in most new business activities.



A bank holding company and its subsidiaries are subject to certain restrictions imposed by the BHC Act on any extensions of credit to the bank or any of its subsidiaries, investments in the stock or securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.



Under the Dodd-Frank Act and Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.  In addition, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations or both. This doctrine is commonly known as the “source of strength” doctrine.



Regulation of Embassy Bank for the Lehigh Valley



Embassy Bank for the Lehigh Valley is a Pennsylvania-chartered banking institution and is subject to regulation, supervision and regular examination by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (“FDIC”). Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of

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Embassy Bancorp, Inc.                                                                                                                          

 

a bank with respect to mergers and consolidations, and the establishment of branches, and management practices and other aspects of banking operations.



Dividend Restrictions



The Company is a legal entity separate and distinct from the Bank. Declaration and payment of cash dividends depends upon cash dividend payments to the Company by the Bank, which is the Company’s primary source of revenue and cash flow. Accordingly, the right of the Company, and consequently the right of our creditors and shareholders, to participate in any distribution of the assets or earnings of any subsidiary is necessarily subject to the prior claims of creditors of the subsidiary, except to the extent that claims of the Company in its capacity as a creditor may be recognized.



As a Pennsylvania chartered bank, the Bank is subject to regulatory restrictions on the payment and amounts of dividends under the Pennsylvania Banking Code. Further, the ability of banking subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements. See Note 16 to the consolidated financial statements included at Item 8 of this Report.



The payment of dividends by the Bank and the Company may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.



Capital Adequacy and Operations



Enacted in 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) contains provisions limiting activities and business methods of depository institutions. FDICIA required the primary federal banking regulators to promulgate regulations setting forth standards relating to, among other things, internal controls and audit systems; credit underwriting and loan documentation; interest rate exposure and other off-balance sheet assets and liabilities; and compensation of directors and officers. FDICIA also provided for expanded regulation of depository institutions and their affiliates, including parent holding companies, by such institutions’ primary federal banking regulator. Each primary federal banking regulator is required to specify, by regulation, capital standards for measuring the capital adequacy of the depository institutions it supervises and, depending upon the extent to which a depository institution does not meet such capital adequacy measures, the primary federal banking regulator may prohibit such institution from paying dividends or may require such institution to take other steps to become adequately capitalized.



FDICIA established five capital tiers, ranging from “well capitalized” to “critically under-capitalized”. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, “pass through” insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution’s parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company’s bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment.



At December 31, 2016, the Bank qualified as “well capitalized” under these regulatory capital standards. See Note 16 of the Notes to Consolidated Financial Statements included at Item 8 of this Report.

11

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Community Reinvestment Act



Under the Community Reinvestment Act of 1977 (“CRA”), the FDIC is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Bank has a current CRA rating of “Satisfactory.”

   

Restrictions on Transactions with Affiliates and Insiders



The Bank also is subject to the restrictions of Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act and Regulation O adopted by the Federal Reserve Board. Section 23A requires that loans or extensions of credit to an affiliate, purchases of securities issued by an affiliate, purchases of assets from an affiliate (except as may be exempted by order or regulation), the acceptance of securities issued by an affiliate as collateral and the issuance of a guarantee or acceptance of letters of credit on behalf of an affiliate (collectively, “Covered Transactions”) be on terms and conditions consistent with safe and sound banking practices. Section 23A also imposes quantitative restrictions on the amount of and collateralization requirements on such transactions. Section 23B requires that all Covered Transactions and certain other transactions, including the sale of securities or other assets to an affiliate and the payment of money or the furnishing of services to an affiliate, be on terms comparable to those prevailing for similar transactions with non-affiliates.



Section 22(g) and 22(h) of the Federal Reserve Act impose similar limitations on loans and extensions of credit from the bank to its executive officers, directors and principal shareholders and any of their related interests. The limitations restrict the terms and aggregate amount of such transactions. Regulation O implements the provisions of Sections 22(g) and 22(h) and requires maintenance of records of such transactions by the bank and regular reporting of such transactions by insiders. The FDIC also requires the bank, upon request, to disclose publicly loans and extensions of credit to insiders in excess of certain amounts.

 

Deposit Insurance and Premiums



The deposits of the Bank are insured up to applicable limits per insured depositor by the FDIC. In October 2008, the FDIC increased FDIC deposit insurance coverage per separately insured depositor for all account types to $250,000. This increase was extended permanently through the Dodd-Frank Act.



As a FDIC member institution, the Bank’s deposits are insured to the maximum of $250,000 per depositor through the Deposit Insurance Fund (“DIF”) that is administered by the FDIC and each institution is required to pay quarterly deposit insurance premium assessments to the FDIC.



The Deposit Insurance Funds Act of 1996 recapitalized the Savings Association Insurance Fund (“SAIF”) and provided that DIF deposits would be subject to one-fifth of the assessment to which SAIF deposits are subject for FICO bond payments. Beginning in 2000, DIF deposits and SAIF deposits were subject to the same assessment for FICO bonds. The FICO assessment for the Bank for 2016 was less than $0.01 for each $100 of DIF deposits.



In February 2011, the FDIC adopted final rules to implement changes required by the Dodd-Frank Act with respect to the FDIC assessment rules.  In particular, the definition of an institution’s deposit insurance assessment base changed from total deposits to total assets less tangible equity.  In addition, the FDIC decreased deposit insurance assessment rates, effective April 1, 2011.  The revised initial base assessment rates range from 5 to 9 basis points for Risk Category I banks to 35 basis points for risk category IV banks.  Risk Category II and III banks will have an initial base assessment rate of 14 or 23 basis points, respectively.  The revised rates and assessment base had a positive effect by lowering the FDIC insurance assessment rate paid by the Bank.  However, if the risk category of the Bank changes adversely, FDIC insurance premiums paid by the Bank could increase.



On April 26, 2016, the FDIC adopted a rule amending small institution pricing for the Deposit Insurance Fund Reserve Ratio, (“DIF”), which would be effective the quarter following the date on which the DIF reserve ratio

12

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

reaches 1.15%. On June 30, 2016, the DIF rose to 1.17%. FDIC regulations provide for changes in deposit insurance assessments the quarter after the reserve ratio first reaches or surpasses 1.15%, or the third quarter 2016 which will be reflected in the Company’s December 2016 assessment payable March 30th, 2017.



Other Federal Laws and Regulations



State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank’s loans are also subject to federal laws applicable to credit transactions, such as the following:





·

Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;

·

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;

·

Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;

·

Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;

·

Fair Credit Reporting Act governing the manner in which consumer debts may be collected by collection agencies; and

·

Various rules and regulations of various federal agencies charged with the implementation of such federal laws.



Additionally, the Company’s operations are subject to additional federal laws and regulations applicable to financial institutions, including, without limitation:



·

Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require the Company to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to the Company’s customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;

·

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

·

Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuant to the requirements of the Gramm-Leach-Bliley Act; and

·

USA Patriot Act, which requires financial institutions to take certain actions to help prevent, detect and prosecute international money laundering and the financing of terrorism.



Effective July 1, 2010, a federal banking rule under the Electronic Fund Transfer Act prohibited financial institutions from charging consumers fees for paying overdrafts on automated teller machines (“ATM”) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those type of transactions. If a consumer does not opt in, any ATM transaction or debit that overdraws the consumer’s account will be denied. Overdrafts on the payment of checks and regular electronic bill payments are not covered by this new rule. Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. Financial institutions must provide consumers who do not opt in with the same account terms, conditions and features (including pricing) that they provide to consumers who do opt in.  The Company did not charge customers for these transactions, nor provide these types of services.



Sarbanes-Oxley Act of 2002



Enacted in 2002, the Sarbanes-Oxley Act represented a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting.  The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934, including publicly held bank holding companies such as the Company. In particular, the Sarbanes-Oxley Act establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding

13

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. 



Governmental Policies



The Company’s earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company’s business and earnings.

   

Other Legislative Initiatives



Proposals may be introduced in the United States Congress and in the Pennsylvania Legislature and before various bank regulatory authorities which would alter the powers of, and restrictions on, different types of banking organizations and which would restructure part or all of the existing regulatory framework for banks, bank holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the regulatory framework. It is not possible to predict whether these or any other proposals will be enacted into law or, even if enacted, the effect which they may have on the Company’s business and earnings.



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.

14

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Item 1A. RISK FACTORS.  



    Not required of a smaller reporting company.



Item 1B.  UNRESOLVED STAFF COMMENTS.



    None.



Item 2. PROPERTIES.



The Company, through the Bank, occupies eight full-service banking offices in the Lehigh Valley:



Northampton County:



  ·

Hanover Township (includes administrative offices)



  ·

Lower Saucon Township



  ·

Lower Nazareth Township



  ·

Borough of Nazareth



 

 

Lehigh County:



  ·

South Whitehall Township



  ·

Salisbury Township



  ·

Lower Macungie Township



  ·

City of Bethlehem



All properties are leased.



Item 3. LEGAL PROCEEDINGS.



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



Item 4. MINE SAFETY DISCLOSURES.



Not applicable.



15

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

PART II



Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a)Shares of Company common stock are traded over-the-counter and in privately negotiated transactions. The Company’s common stock is not listed on any national securities exchange.

Trades in Company common stock made by certain brokerage firms are reported on the OTCQX Market Tier of the OTC Markets under the symbol “EMYB”. The following table reflects high and low bid prices for shares of the Company’s common stock for the periods indicated, based upon information derived from www.otcmarkets.com.





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

2016

 

2015

 



 

 

High

 

Low

 

High

 

Low

 



First Quarter

 

$

11.10 

 

$

10.15 

 

$

10.85 

 

$

10.21 

 



Second Quarter

 

$

10.70 

 

$

10.39 

 

$

10.85 

 

$

10.30 

 



Third Quarter

 

$

10.90 

 

$

10.50 

 

$

10.92 

 

$

10.50 

 



Fourth Quarter

 

$

14.05 

 

$

10.65 

 

$

11.11 

 

$

10.45 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

The above quotations may not reflect inter-dealer prices and should not be considered over-the-counter market quotations as that term is customarily used.



(b)As of March 24, 2017, there are approximately 952 owners of record of the common stock of the Company.



(c)On September 30, 2016, the Company paid $962,584, or $0.13 per share, in an annual cash dividend on its common stock. On September 30, 2015, the Company paid $736,687 or $0.10 per share, in an annual cash dividend on its common stock.  As a general matter, cash available for dividend distribution to shareholders of the Company may come from dividends paid to the Company by the Bank, depending upon existing cash levels at the Company.  See “Supervision and Regulation – Dividend Restrictions” in Item 1 of this report for a description of restrictions that may limit the Company’s ability to pay dividends on its common stock.



(d)The following table sets forth information about options outstanding under the Company’s Stock Incentive Plan, as of December 31, 2016:





 

 

 



 

 

 



Number of Shares

to be issued upon exercise of

outstanding options

Weighted average

exercise price of

outstanding options

Number of Shares

remaining available

for future issuance

Equity Compensation Plans and

Individual Employment Agreements

116,243

$      7.34

298,778

(e)Sales of Securities.

None.

(f)Repurchase of Equity Securities.

None.



Item 6.  SELECTED FINANCIAL DATA.



Not required of a smaller reporting company.

16

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This discussion and analysis provides an overview of the consolidated financial condition and results of operations of the Company for the years ended December 31, 2016 and 2015. This discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements appearing elsewhere in this report.



Critical Accounting Policies



Note 1 to the Company’s consolidated financial statements lists significant accounting policies used in the development and presentation of its financial statements. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.



The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the Company to make estimates and assumptions. The Company believes that its determination of the allowance for loan losses and the valuation of deferred tax assets involve a higher degree of judgment and complexity than the Company’s other significant accounting policies. Further, these estimates can be materially impacted by changes in market conditions or the actual or perceived financial condition of the Company’s borrowers, subjecting the Company to significant volatility of earnings.



Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Securities available for sale are carried at fair value. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.



Other than temporary accounting guidance specifies that (a) if a company does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more likely than not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Company recognized no other-than-temporary impairment charges during the years ended December 31, 2016 and 2015.



The allowance for loan losses is established through the provision for loan losses, which is a charge against earnings. Provision for loan losses is made to reserve for estimated probable losses on loans. The allowance for loan losses is a significant estimate and is regularly evaluated by the Company for adequacy by taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in actual and forecasted credit quality, including delinquency, charge-off and bankruptcy rates, and current economic conditions that may affect a borrower’s ability to pay. The use of different estimates of assumptions could produce different provision for loan losses. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Provision for Loan Losses” and “Allowance for Loan Losses.”

   

Real estate acquired through foreclosure, or deed-in-lieu of foreclosure is recorded at fair value less estimated selling costs at the date of acquisition or transfer, and subsequently at the lower of its new cost or fair value less estimated selling costs.  Adjustments to the carrying value at the date of acquisition or transfer are charged to the allowance for loan losses.  The carrying value of the individual properties is subsequently adjusted to the extent it exceeds estimated fair value less the estimated selling costs, at which time a provision for loan losses on such real estate is charged to operations.  Appraisals are critical in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property.  The assumptions supporting such

17

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

appraisals are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable.



Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carryforwards and their tax basis. Deferred tax assets are reduced by a valuations allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Based upon the level of historical taxable income and projections for future taxable income over periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

GENERAL



The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow.



The Bank, which is the Company’s 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.



OVERVIEW



The Company’s assets grew $120.2 million from $804.0 million at December 31, 2015 to $924.2 million at December 31, 2016. The Company’s deposits grew $173.1 million from $660.3 million at December 31, 2015 to $833.4 million at December 31, 2016.  The significant growth in the Company’s deposits resulted primarily from market disruption due to recent mergers of two regional banks in the Company’s market area, and customers migrating to local community banks. Additional deposit growth was achieved through a concentrated effort to expand business relationships with local municipalities. During the same period, loans receivable, net of the allowance for loan losses, increased $108.6 million to $792.6 million at December 31, 2016 from $684.0 million at December 31, 2015, with a significant portion of such loans originating in the fourth quarter. 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 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.



The Company reported net income of $7.1 million for the year ended December 31, 2016 as compared to net income of $7.4 million for the year ended December 31, 2015, a decrease of $261 thousand, or 3.5%.  Diluted earnings per share decreased to $0.96 in 2016 from $1.00 in 2015.  The difference in net income for the year ended December 31, 2016 and December 31, 2015 resulted, in part, from the costs associated with opening a new branch in December 2015, an increase in provision for loan losses of $238 thousand due to loan growth in the year ending December 31, 2016 and a commercial loan recovery of $169 thousand in interest income during the year ended December 31, 2015. In addition, the Company experienced a 9.2% increase in full-time equivalent employees from seventy-six (76) at December 31, 2015 to eighty-three (83) at December 31, 2016, due to the strategic additions of team members to various rolls within the Company.  This increase in the number of employees, together with a full year of salaries attributable to the new branch location and the annual increases in salaries, generally, resulted in an increase in overall salary and benefits costs of $981 thousand.

18

 


 

Embassy Bancorp, Inc.                                                                                                                          

 



RESULTS OF OPERATIONS



Net Interest Income and Net Interest Margin



Net interest income is the difference between income on assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investments.  Interest-bearing deposits and borrowings make up the cost of funds. Non-interest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. The timing of deposit and loan growth also impacted net interest income.  Deposit and consumer loan growth occurred each quarter throughout the year, however a significant portion of commercial loan growth occurred in the fourth quarter where interest income will be recognized in these balances moving forward.  



2016 Compared to 2015



Total interest income for the year ended December 31, 2016 was $30.3 million, compared to $28.3 million for the year ended December 31, 2015. Total interest expense for the year ended December 31, 2016 was $3.9 million, compared to $3.1 million for the year ended December 31, 2015.  The increase in interest income is due to the growth in loan balances, offset by lower yields in this interest rate environment.  The increase in interest expense is primarily due to growth in savings and certificate of deposits due to the opening of the Nazareth branch, expansion of existing deposit relationships, growth in the number of deposit relationships with municipalities, and significant growth in the number of accounts resulting from customer migration due to recent merger activity in the Company’s local marketplace, offset by a decrease in short-term and long-term borrowings.  Net interest income increased 5.2% to $26.4 million for the year ended December 31, 2016 as compared to $25.1 million for the year ended December 31, 2015.



Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Interest rate spread is the mathematical difference between the average interest earned on earning assets and interest paid on interest bearing liabilities. Interest margin represents the net interest yield on earning assets and is derived by dividing net interest income by average earning assets. The interest margin gives a reader a better indication of asset earning results when compared to peer groups or industry standards.



The Company’s net interest margin for the year ended December 31, 2016 was 3.25% compared to 3.48% for the year ended December 31, 2015. The decrease in the 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 short-term and long term borrowings and coupled with the significant growth in the loan, 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.

19

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

The following table includes the average balances, interest income and expense and the average rates earned and paid for assets and liabilities for the periods presented. All average balances are daily average balances.



Average Balances, Rates and Interest Income and Expense







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31, 2016

 

 

Year Ended December 31, 2015

 

 

Year Ended December 31, 2014



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Average

 

 

 

 

Tax Equivalent

 

 

Average

 

 

 

 

Tax Equivalent

 

 

Average

 

 

 

 

Tax Equivalent



 

Balance

 

 

Interest

 

Yield

 

 

Balance

 

 

Interest

 

Yield

 

 

Balance

 

 

Interest

 

Yield



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans - taxable (2)

$

722,480 

 

$

27,951 

 

3.87% 

 

$

643,774 

 

$

25,823 

 

4.01% 

 

$

579,496 

 

$

23,708 

 

4.09% 

Loans - non-taxable (1)

 

9,635 

 

 

295 

 

4.63% 

 

 

9,887 

 

 

315 

 

4.83% 

 

 

8,353 

 

 

230 

 

4.17% 

Investment securities - taxable (3)

 

51,853 

 

 

764 

 

1.47% 

 

 

49,280 

 

 

795 

 

1.61% 

 

 

45,675 

 

 

753 

 

1.65% 

Investment securities - non-taxable (1) (3)

 

33,031 

 

 

1,176 

 

5.39% 

 

 

33,264 

 

 

1,193 

 

5.43% 

 

 

34,698 

 

 

1,269 

 

5.54% 

Federal funds sold

 

708 

 

 

 

0.47% 

 

 

680 

 

 

 

0.29% 

 

 

955 

 

 

 

0.22% 

Time deposits

 

 -

 

 

 -

 

-

 

 

185 

 

 

 

0.54% 

 

 

1,025 

 

 

11 

 

1.07% 

Interest bearing deposits with banks

 

18,224 

 

 

133 

 

0.73% 

 

 

6,728 

 

 

124 

 

1.84% 

 

 

10,738 

 

 

77 

 

0.72% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST EARNING ASSETS

 

835,931 

 

 

30,322 

 

3.72% 

 

 

743,798 

 

 

28,253 

 

3.90% 

 

 

680,940 

 

 

26,050 

 

3.94% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

(6,238)

 

 

 

 

 

 

 

(5,769)

 

 

 

 

 

 

 

(5,440)

 

 

 

 

 

Other assets

 

34,451 

 

 

 

 

 

 

 

32,107 

 

 

 

 

 

 

 

28,006 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

864,144 

 

 

 

 

 

 

$

770,136 

 

 

 

 

 

 

$

703,506 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits,
NOW and money market

$

78,707 

 

$

67 

 

0.09% 

 

$

60,401 

 

$

41 

 

0.07% 

 

$

60,603 

 

$

32 

 

0.05% 

Savings

 

467,846 

 

 

2,294 

 

0.49% 

 

 

406,642 

 

 

1,978 

 

0.49% 

 

 

404,196 

 

 

1,953 

 

0.48% 

Certificates of deposit

 

120,587 

 

 

1,488 

 

1.23% 

 

 

83,278 

 

 

859 

 

1.03% 

 

 

74,385 

 

 

721 

 

0.97% 

Securities sold under agreements to
   repurchase and other borrowings

 

21,221 

 

 

49 

 

0.23% 

 

 

72,892 

 

 

257 

 

0.35% 

 

 

39,634 

 

 

293 

 

0.74% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INTEREST BEARING LIABILITIES

 

688,361 

 

 

3,898 

 

0.57% 

 

 

623,213 

 

 

3,135 

 

0.50% 

 

 

578,818 

 

 

2,999 

 

0.52% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

 

97,555 

 

 

 

 

 

 

 

76,062 

 

 

 

 

 

 

 

62,161 

 

 

 

 

 

Other liabilities

 

6,356 

 

 

 

 

 

 

 

5,730 

 

 

 

 

 

 

 

4,374 

 

 

 

 

 

Stockholders' equity

 

71,872 

 

 

 

 

 

 

 

65,131 

 

 

 

 

 

 

 

58,153 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

$

864,144 

 

 

 

 

 

 

$

770,136 

 

 

 

 

 

 

$

703,506 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

26,424 

 

 

 

 

 

 

$

25,118 

 

 

 

 

 

 

$

23,051 

 

 

Net interest spread

 

 

 

 

 

 

3.15% 

 

 

 

 

 

 

 

3.40% 

 

 

 

 

 

 

 

3.42% 

Net interest margin

 

 

 

 

 

 

3.25% 

 

 

 

 

 

 

 

3.48% 

 

 

 

 

 

 

 

3.50% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Yields on tax exempt assets have been calculated on a fully tax equivalent basis.

(2) The average balance of taxable loans includes loans in which interest is no longer accruing.

(3) Investment security yields do not give effect to changes in fair value.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



20

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

The table below demonstrates the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016 vs. 2015

 

 

2015 vs. 2014



Increase (decrease) due to changes in:

 

Increase (decrease) due to changes in:



 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 



Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans - taxable

$

3,157 

 

$

(1,029)

 

$

2,128 

 

$

2,630 

 

$

(515)

 

$

2,115 

Loans - non-taxable

 

(8)

 

 

(12)

 

 

(20)

 

 

42 

 

 

43 

 

 

85 

Investment securities - taxable

 

42 

 

 

(73)

 

 

(31)

 

 

59 

 

 

(17)

 

 

42 

Investment securities - non-taxable

 

(8)

 

 

(9)

 

 

(17)

 

 

(52)

 

 

(24)

 

 

(76)

Federal funds sold

 

 -

 

 

 

 

 

 

(1)

 

 

 

 

 -

Time deposits

 

(1)

 

 

 -

 

 

(1)

 

 

(9)

 

 

(1)

 

 

(10)

Interest bearing deposits with banks

 

212 

 

 

(203)

 

 

 

 

(29)

 

 

76 

 

 

47 

Total net change in income on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-earning assets

 

3,394 

 

 

(1,325)

 

 

2,069 

 

 

2,640 

 

 

(437)

 

 

2,203 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

12 

 

 

14 

 

 

26 

 

 

 -

 

 

 

 

Savings

 

298 

 

 

18 

 

 

316 

 

 

12 

 

 

13 

 

 

25 

Certificates of deposit

 

385 

 

 

244 

 

 

629 

 

 

86 

 

 

52 

 

 

138 

Total deposits

 

695 

 

 

276 

 

 

971 

 

 

98 

 

 

74 

 

 

172 

Securities sold under agreements to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

repurchase and other borrowings

 

(182)

 

 

(26)

 

 

(208)

 

 

246 

 

 

(282)

 

 

(36)

Total net change in expense on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest-bearing liabilities

 

513 

 

 

250 

 

 

763 

 

 

344 

 

 

(208)

 

 

136 

Change in net interest income

$

2,881 

 

$

(1,575)

 

$

1,306 

 

$

2,296 

 

$

(229)

 

$

2,067 



Provision for Loan Losses



The provision for loan losses represents the expense recognized to fund the allowance for loan losses. This amount is based on many factors that reflect management’s assessment of the risk in its loan portfolio. Those factors include economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company.



For the year ended December 31, 2016, the provision for loan losses was $770 thousand, compared to $532 thousand for the year ended December 31, 2015. The increase in the provision for loan losses was primarily due to the volume of loan growth in 2016 over 2015.  Loans grew $108.6 million in 2016 compared to $79.0 million in 2015.  The allowance for loan losses as of December 31, 2016 was $6.5 million, which represents 0.82% of outstanding loans, which is comparable to the $6.1 million as of December 31, 2015, representing 0.88% of outstanding loans. Based principally on current economic conditions, perceived asset quality, and loan-loss experience of comparable institutions in the Company’s market area, the allowance is believed to be adequate. 



Non-interest Income



Non-interest income is derived from the Company’s operations and represents primarily credit card processing fees, service fees on deposit and loan relationships and income from bank owned life insurance. Non-interest income also

21

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

may include net gains and losses from the sale of available for sale securities. Total non-interest income was $3.2 million for the year ended December 31, 2016 compared to $2.8 million for the year ended December 31, 2015.  This increase in non-interest income is due to fees from credit card processing services in the amount of $104 thousand, or 6.2%, over 2015, as well as an increase in deposit service fees in the amount of $70 thousand, or 10.4%, over 2015,  the gain on sales of securities realized of $350 thousand in 2016 compared to $165 thousand in 2015, an increase of $33 thousand in gains on sale of other real estate owned and a decrease of $24 thousand in impairment of other real estate owned, offset by a $20 thousand, or 4.9%, decrease in bank owned life insurance from 2015. As the deposit customer account base continues to grow and the Company continues to mature and develop additional sources of fee income, non-interest income is expected to become a more significant contributor to the overall profitability of the Company. Unlike many in the industry, the Company does not sell mortgages in the secondary market, nor does it offer trust or investment/brokerage services to its customers.    



Non-interest Expense



Non-interest expenses represent the normal operating expenses of the Company. These expenses include salaries, employee benefits, occupancy, equipment, data processing, advertising and other expenses related to the overall operation of the Company.



Non-interest expenses for the year ended December 31, 2016 was $18.8 million, compared to $17.0 million for the year ended December 31, 2015.  The increase in non-interest expenses is primarily due to an increase of $981 thousand, or 14.0%, over 2015, in salaries and employee benefits due to the strategic additions of team members to various rolls within the Company. The Company had eighty-three (83) compared to seventy-six (76) full-time equivalent employees at December 31, 2016 and December 31, 2015, respectivelyThis increase in the number of employees, together with a full year of salaries attributable to the new branch location and the 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 $224 thousand, or 9.1%, over 2015, in occupancy and equipment due primarily to the expense associated with a full year in operation of the Nazareth branch; an increase of $112 thousand, or 8.4%, over 2015 in advertising and promotion expenses due primarily to new advertising campaigns to capitalize on the market merger activity and increased deposit campaigns;  an increase of $78 thousand, or 4.9%, over 2015, in credit card/merchant processing expense due to increased volume;  an increase of $79 thousand, or 5.1%, over 2015, in data processing expense; an increase of $87 thousand, or 17.3%, over 2015, in professional fees; and an increase of $156 thousand, or 13.3%, over 2015, in other expenses.  



A breakdown of other non-interest expenses is included in the Consolidated Statements of Income in the Consolidated Financial Statements included in Item 8 of this Report.



Income Taxes



The provision for income taxes was $2.9 million for the years ended December 31, 2016 and 2015.  The effective rate on income taxes for the years ended December 31, 2016 and 2015 was 28.5%.

FINANCIAL CONDITION



Securities



The Company’s securities portfolio is classified, in its entirety, as “available for sale.”  Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Company intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. The Company holds no high-risk securities or derivatives as of December 31, 2016.  

22

 


 

Embassy Bancorp, Inc.                                                                                                                          

 

The Company’s securities portfolio was $85.6 million at December 31, 2016, a $8.3 million increase from securities of $77.3 million at December 31, 2015. The Company’s securities have increased primarily due to purchases in the amount of $29.3 million, offset by a combination of investment principal pay-downs, maturities and sales totaling $19.0 million and a $1.9 million decrease in unrealized gains. The carrying value of the securities portfolio as of December 31, 2016 includes a net unrealized loss of $38 thousand, as compared to a net unrealized gain of $1.9 million as of December 31, 2015, which is recorded to accumulated other comprehensive income in stockholders’ equity. This decrease in the unrealized gain is due primarily to the changes in market conditions from 2015 to 2016.  No securities are deemed to be other than temporarily impaired.    



The following table sets forth the composition of the securities portfolio at fair value as of December 31, 2016,  2015 and 2014.







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

(In Thousands)



 

 

 

 

 

 

 

 

 

 



U.S. Government agency obligations

$

32,488 

 

$

34,570 

 

$

30,076 

 



Municipal securities

 

38,808 

 

 

41,204 

 

 

38,624 

 



U.S. Government sponsored enterprise (GSE)

 

 

 

 

 

 

 

 

 



- Mortgage-backed securities - residential

 

14,302 

 

 

1,479 

 

 

7,501 

 



Corporate bonds

 

 -

 

 

 -

 

 

996 

 



Total Securities Available for Sale

$

85,598 

 

$

77,253 

 

$

77,197 

 



 

 

 

 

 

 

 

 

 

 



The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2016.  Maturities of mortgage-backed securities are based on estimated life. Yields are based on amortized cost.



Securities by Maturities







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



1 year or Less

 

1-5 Years

 

5-10 Years

 

Over 10 Years

 

Total



 

 

 

Average

 

 

 

 

Average

 

 

 

 

Average

 

 

 

 

Average

 

 

 

 

Average



Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



(Dollars In Thousands)

U.S. Government agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    obligations

$

11,031 

 

0.87%

 

$

21,457 

 

1.29%

 

$

 -

 

-

 

$

 -

 

 

$

32,488 

 

1.15%

Municipal securities

 

505 

 

4.24%

 

 

6,145 

 

4.45%

 

 

11,579 

 

5.06%

 

 

20,579 

 

5.24%

 

 

38,808 

 

5.05%

U.S. GSE - Mortgage-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     backed securities-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      residential

 

72 

 

4.01%

 

 

7,144 

 

4.23%

 

 

7,086 

 

2.08%

 

 

 -

 

 

 

14,302 

 

2.13%

Total Debt Securities

$

11,608 

 

1.03%

 

$

34,746 

 

2.03%

 

$

18,665 

 

3.93%

 

$