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,
2022 and for the three months ended March 31, 2022 and 2021, 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, 2021 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, 2021. 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.
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.
Caution About Forward-looking Statements
This report contains forward-looking statements, including statements of goals,
intentions, and expectations as to future trends, plans, events or results of
Company operations and policies and regarding general economic conditions. These
forward-looking statements are intended to be covered by the safe harbor for
forward-looking statements provided by the Private Securities Litigation Reform
Act of 1995. These statements are based upon current and anticipated economic
conditions, nationally and in the Company's market, interest rates and interest
rate policy, competitive factors and other conditions that, by their nature, are
not susceptible to accurate forecast, and are subject to significant
uncertainty.
Such forward-looking statements can be identified by the use of forward-looking
terminology such as "believes", "expects", "may", "intends", "will", "should",
"anticipates", or the negative of any of the foregoing or other variations
thereon or comparable terminology, or by discussion of strategy.
No assurance can be given that the future results covered by forward-looking
statements will be achieved. Such statements are subject to risks,
uncertainties, and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. Important factors that could impact the Company's operating results
include, but are not limited to, (i) the effects of changing economic conditions
in the 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, (v) changes in accounting policies
or procedures as may be required by FASB or regulatory agencies, (vi) risks and
uncertainties related to the COVID-19 pandemic and its variants and resulting
governmental and societal responses, (vii) geopolitical events in the Ukraine,
and (viii) other external developments which could materially affect the
Company's business and operations, as well as the risks described in the
Company's Form 10-K for the year ended December 31, 2021 and subsequent filings
with the SEC.
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, for the
purpose of providing a local community bank to serve Lehigh and Northampton
Counties in Pennsylvania.
Since its inception, the Board's philosophy has been and continues to be that,
by running the Bank with a view toward the long term, only good things will
happen for the Bank's customers, team members, shareholders and the Lehigh
Valley community.
24
--------------------------------------------------------------------------------
At March 31, 2022, the Company continued to be in a strong financial and
operational condition. The Bank's March 31, 2022 capital ratios exceeded the
amounts required to be considered "well capitalized" as defined in applicable
banking regulations. The Company's ratio of non-performing loans to total loans
at March 31, 2022 was 0.23% and the ratio of non-performing assets to total
assets was 0.15%. The Company had its last Community Reinvestment Act ("CRA")
examination in 2022 and received a "satisfactory" rating.
The Company's assets increased $7.3 million from $1.63 billion at December 31,
2021 to $1.64 billion at March 31, 2022. The increase was due to an increase of
$31.9 million in securities available for sale and an increase of $5.9 million
in other assets; offset by a decrease of $19.4 million in cash and cash
equivalents, a decrease of $3.8 million in net loans receivable (excluding PPP
loans), and a decrease of $6.4 million in net PPP loans receivable due to net
loan forgiveness. The growth in securities available for sale was primarily
funded by deposits. The decrease in cash and cash equivalents was primarily due
to FHLB long term borrowings of $14.7 million maturing and being paid off during
the first quarter of 2022, purchases of available for sale securities, offset,
in part, by the forgiveness of PPP loans, net loan payoffs (excluding PPP), and
an increase in deposits. The Company's deposits grew $39.6 million from
$1.47 billion at December 31, 2021 to $1.51 billion at March 31, 2022. The
overall deposit growth was due to a highly effective relationship building,
sales and marketing effort, which served to further increase the Company's
overall presence in the market it serves, along with deposit relationships
developed as a result of cross-marketing efforts to its loan and other
non-depository banking service customers. Also contributing to the growth is the
increased usage of the Company's online banking platform, competitively offered
rates, and the continued convenience and efficiency of our branch network and
branch personnel. The Company also continues to capitalize on opportunities
created by recent merger announcements, name changes, and competitive branch
hour adjustments and/or closures in the Company's market area, attracting
customers looking to relocate to a local, reputable community bank.
Net loans receivable (excluding PPP loans) decreased by $3.8 million to $1.09
billion at March 31, 2022 from $1.10 billion at December 31, 2021, due in part
to several larger non-PPP loan payoffs during the quarter. The market continues
to be very competitive and the Company is committed to maintaining a
high-quality portfolio that returns a reasonable market rate. While the past and
current economic and competitive conditions in the marketplace have created more
competition for loans to credit-worthy customers, the Company continues to
expand its market presence, its pipeline, and continues to focus on developing a
reputation as being a market leader in both commercial and consumer/mortgage
lending. Management believes that this combination of relationship building,
cross marketing and responsible underwriting will translate into continued
long-term growth of a portfolio of quality loans and core deposit relationships,
although there can be no assurance of this. The Company continues to monitor
interest rate exposure of its interest-bearing assets and liabilities and
believes that it is well positioned for any anticipated future market rate
adjustments. See expanded discussion under the Financial Conditions: Loans
section below.
Net income for the three months ended March 31, 2022 was $4.2 million compared
to net income for the three months ended March 31, 2021 of $4.0 million, an
increase of $157 thousand, or 3.9%. Basic and diluted earnings per share
increased to $0.56 for the three months ended March 31, 2022, as compared to
$0.54 and $0.53, respectively, for the three months ended March 31, 2021. The
difference in net income for the three months ended March 31, 2022 and March 31,
2021 resulted from an increase in non-interest income and decreases in the
provision for loan losses and income tax expense; offset by an increase in
non-interest expenses. The Company's pre-tax net income for the three months
ended March 31, 2021 included $1.1 million of PPP loan interest and fees.
RESULTS OF OPERATIONS
Net Interest Income
Generally, changes in net interest income are measured by net interest rate
spread and net interest margin. Interest rate spread is the mathematical
difference between the average interest earned on earning assets and interest
paid on interest bearing liabilities. Interest margin represents the net
interest yield on earning assets. The interest margin gives a reader a better
indication of asset earning results when compared to peer groups or industry
standards.
The Company determines interest rate spread and margin on both a US GAAP and tax
equivalent basis. The use of tax equivalent basis in determining interest rate
spread and margin is considered a non-US GAAP measure. The Company believes use
of this measure provides meaningful information to the reader of the
consolidated financial statements when comparing taxable and non-taxable assets.
However, it is supplemental to US GAAP which is used to prepare the Company's
consolidated financial statements and should not be read in isolation or relied
upon as a substitute for US GAAP measures. In addition, the non-US GAAP measure
may not be comparable to non-US GAAP measures reported by other companies. The
tax rate used to calculate the tax equivalent adjustments was 21% for 2022 and
2021.
Total interest income for the three months ended March 31, 2022 decreased $200
thousand to $11.6 million, as compared to $11.8 million for the three months
ended March 31, 2021. Average earning assets were $1.59 billion for the three
months ended March 31, 2022 as compared to $1.38 billion for the three months
ended March 31, 2021. The tax equivalent yield on average earning assets was
2.98% for the first quarter of 2022 compared to 3.48% for the first quarter of
2021.
25
--------------------------------------------------------------------------------
Total interest expense for the three months ended March 31, 2022 decreased $241
thousand to $896 thousand, as compared to $1.1 million for the three months
ended March 31, 2021. Average interest bearing liabilities were $1.17 billion
for the three months ended March 31, 2022 as compared to $1.02 billion for the
three months ended March 31, 2021. The yield on average interest bearing
liabilities was 0.31% and 0.45% for the first quarter of 2022 and 2021,
respectively.
Net interest income remained relatively flat at $10.7 million for the three
months ended March 31, 2022 and March 31, 2021. The slight improvement in net
interest income is, in part, the result of an increase in the balances of
taxable loans, an increase in taxable and non-taxable investments due to
purchases of $70.6 million, an increase in interest bearing deposits with banks,
along with an increase in the rate of taxable investments and interest bearing
deposit with banks. Also contributing to the improvement in net interest income
for the three months ended March 31, 2022 was a decrease in the balance and
rates of certificates of deposit, a decrease in interest expense on long term
FHLB borrowings due to being paid off in the first quarter of 2022, and no
interest expense from PPPLF borrowings due to being paid off in the first
quarter of 2021. The improvements were offset, in part, by a decrease in the
interest and fee income from PPP loans, a decrease in the rates of taxable loans
and non-taxable investments, and an increase in the balance of interest bearing
demand deposits, NOW, money market and savings. The Company's net interest
margin is 2.73% on a US GAAP basis and 2.76% on a tax equivalent (non-US GAAP)
basis for the three months ended March 31, 2022, as compared to 3.13% on a US
GAAP basis and 3.15% on a tax equivalent (non-US GAAP) basis for the three
months ended March 31, 2021.
The Company's net interest margin was also affected by the balance of PPP loans,
which bear interest at a rate of 1.0%, and PPPLF borrowings, which bore an
interest rate of 0.35% and were paid off in early February 2021. The net
interest margin on a tax equivalent (non-US GAAP) basis excluding PPP loans and
PPP interest income and PPPLF borrowings interest expense for the three months
ended March 31, 2022 was 2.72%, compared to 2.93% for the three months ended
March 31, 2021.
?
26
--------------------------------------------------------------------------------
The tables below sets forth average balances and corresponding yields for the
corresponding periods ended March 31, 2022 and 2021, respectively:
© Edgar Online, source Glimpses