Note 1 – Basis of Presentation

 

Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008.  Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted.  As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC. All significant intercompany transactions and balances have been eliminated.

 

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

 

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2011, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2012.

 

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2012 through the date these consolidated financial statements were issued.

 

Certain amounts in the 2011 financial statements may have been reclassified to conform to 2012 presentation. These reclassifications had no effect on 2011 net income.

Note 2 - Summary of Significant Accounting Policies

 

The significant accounting policies of the Company as applied in the interim financial statements presented are substantially the same as those followed on an annual basis as presented in the Company’s Form 10-K for the year ended December 31, 2011.

Note 3 – Stockholders’ Equity

 

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

 

Note 4 – Stock Incentive Plan

 

At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”).  The SIP authorizes the Board of Directors, or a committee authorized by the Board of Directors, to award a stock based incentive to (i) designated officers (including officers who are directors) and other designated employees at the Company and its subsidiaries, and (ii) non-employee members of the Board of Directors and advisors and consultants to the Company and its subsidiaries.  The Board of Directors believes that the SIP will encourage the designated participants to contribute materially to the growth of the Company. The SIP provides for stock based incentives in the form of incentive stock options as provided in Section 422 of the Internal Revenue Code of 1986, non-qualified stock options, stock appreciation rights, restricted stock and deferred stock awards.  The term of the option, the amount of time for the option to vest after grant, if any, and other terms and limitations will be determined at the time of grant. Options granted under the SIP may not have an exercise period that is more than ten years from the time the option is granted. 

The aggregate number of shares available for issuance under the SIP is 500,000.  The SIP provides for appropriate adjustments in the number and kind of shares available for grant or subject to outstanding awards under the SIP to avoid dilution in the event of merger, stock splits, stock dividends or other changes in the capitalization of the Company.  The SIP expires on June 15, 2020.  There were no awards granted under the SIP for the years ended December 31, 2011 and 2010.  In February 2012, the Company granted 7,992 shares of restricted stock to certain members of its Board of Directors as compensation for their service in 2011 in accordance with the Company’s Non-employee Directors Compensation program adopted in October of 2010.  Such compensation was accrued for as of December 31, 2011.  In February 2012, the Company also granted stock options to purchase 52,611 shares of stock to certain executive officers in accordance with their respective employment agreements.  Stock compensation expense related to these options was $11 thousand and $28 thousand for the three and nine months ended September 30, 2012, respectively.  At September 30, 2012, approximately $107 thousand unrecognized cost related to these stock options will be recognized over the next 2.4 years.

 

Note 5 – Basic and Diluted Earnings per Share

 

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

 

 

 

 

Stock options of 122,200 and 72,439 for the three and nine months ended September 30, 2012 and 2011, respectively, were not considered in computing diluted earnings per common share because they are not dilutive to earnings.

Note 6 – Guarantees

 

The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Company had $5.0 million of standby letters of credit outstanding as of September 30, 2012. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $4.6 million. Management does not consider the current amount of the liability as of September 30, 2012 for guarantees under standby letters of credit issued to be material.

Note 7 – Short-term and Long-term Borrowings

 

Securities sold under agreements to repurchase, federal funds purchased and Federal Home Loan Bank of Pittsburgh (“FHLB”) short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for periods of twelve months or more and are generally less than sixty months. The Bank has an agreement with the FHLB which allows for borrowings up to a percentage of qualifying assets. At September 30, 2012, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $228.5 million, of which $7.9 million were outstanding in long-term loans.  This borrowing capacity with the FHLB includes a line of credit of $25.0 million. Long-term loans with FHLB of $7.9 million were outstanding at December 31, 2011. There were no short-term advances outstanding from the FHLB at September 30, 2012 and December 31, 2011. All FHLB borrowings are secured by qualifying assets of the Bank.

 

The Bank has a federal funds line of credit with the Atlantic Central Bankers Bank (“ACBB”) of approximately $6.0 million, of which none was outstanding at September 30, 2012 and December 31, 2011. Advances from this line are unsecured.

 

The Company has two lines of credit with Univest Bank and Trust Co. (“Univest”) totaling $10 million. As of September 30, 2012 and December 31, 2011, the outstanding balance was $4.9 million and $5.2 million, respectively. Advances from these lines of credit are secured by 833,333 shares of Bank common stock. Under the terms of the loan agreement, the Bank is required to remain well capitalized. The proceeds of the loan were primarily used for the holding company’s investment in the Bank, thus providing additional capital to support the Bank’s growth.

Note 8 – Securities Available For Sale                                                

 

At September 30, 2012 and December 31, 2011, respectively, the amortized cost and fair values of securities available-for-sale were as follows:

 

 

 

Note 8 – Securities Available For Sale (Continued)

 

The amortized cost and fair value of securities as of September 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.

 

Proceeds from the sales of securities for the three and nine months ended September 30, 2012 totaled $4.3 million, with gross gains of $633 thousand and gross losses of $0.  Proceeds from the sales of securities for the three and nine months ended September 30, 2011 totaled $7 million, with gross gains of $487 thousand and gross losses of $0.   

 

Securities with a carrying value of $50 million and $47.7 million at September 30, 2012 and December 31, 2011, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

 

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011, respectively:

 

 

The Company had eight (8) securities in an unrealized loss position at September 30, 2012. The unrealized losses are due only to market rate fluctuations. As of September 30, 2012, the Company either has the intent and ability to hold the securities until maturity or market price recovery, or believes that it is more likely than not that it will not be required to sell such securities. Management believes that the unrealized loss only represents temporary impairment of the securities.  None of the individual losses are significant.

Note 9 – Restricted Investment in Bank Stock

 

Restricted investments in bank stock consist of Federal Home Loan Bank of Pittsburgh (“FHLB”) stock and Atlantic Central Bankers Bank (“ACBB”) stock.  The restricted stocks are carried at cost.  Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula.

In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock, and any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases.  During 2012, 2011 and 2010, the FHLB conducted limited excess capital stock repurchases based upon positive quarterly net income.  Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases.  In connection with this program, the Bank had stock at a carrying value of $187 thousand and $281 thousand repurchased during the nine months ended September 30, 2012 and 2011, respectively. Any future capital stock repurchases are expected to be made on a quarterly basis if conditions warrant such repurchases.  In February 2012, the FHLB announced that dividend payments would resume in 2012.

 

Management evaluates the FHLB and ACBB restricted stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer.

 

Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB stock as of September 30, 2012.

Note 10 – Loans Receivable and Credit Quality

 

The following table presents the composition of loans receivable at September 30, 2012 and December 31, 2011, respectively:

 

 

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of September 30, 2012 and December 31, 2011, respectively:

 

 

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following table summarizes information in regards to impaired loans by loan portfolio class as of, and for the periods ended, September 30, 2012 and December 31, 2011, respectively:

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2012 and December 31, 2011, respectively:

 

 

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2012 and December 31, 2011, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following tables detail the activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following tables represent the allocation of the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at September 30, 2012 and December 31, 2011.

 

 

 

 

Troubled Debt Restructurings

 

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition than it would not otherwise consider, resulting in a modified loan which is then identified as troubled debt restructuring (“TDR”).  The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations.  Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.  TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

 

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

 

 

 

Note 10 – Loans Receivable and Credit Quality (Continued)

 

The following table presents TDRs outstanding  as of September 30, 2012:

 

 

                          As of September 30, 2012,  no available commitments were outstanding on TDRs.

 

 

The following table presents newly restructured loans that occurred during the nine months ended September 30, 2012:

 

 

Of the TDRs described above, two loans required an impairment reserve of $206 thousand recorded in the allowance for loan losses for the nine months ended September 30, 2012.  For the three months ended September 30, 2012 there were no newly restructured loans.

 

There were no loans that were modified and classified as  a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) for the period ended September 30, 2012.