10-K: Embassy Bancorp Reports Lower 2024 Earnings Amidst Rising Interest Expenses

Embassy Bancorp's 2024 net income decreased by 17.5% due to increased interest expenses, despite growth in deposits and loans.

Summary

• Embassy Bancorp's assets increased by $47.9 million, reaching $1.70 billion at the end of 2024.
• Net loans receivable grew by $14.7 million to $1.26 billion.
• Deposits increased by $76.8 million, totaling $1.55 billion.
• Net income decreased by $2.2 million, or 17.5%, to $10.4 million in 2024.
• Basic and diluted earnings per share decreased to $1.37 in 2024 from $1.67 in 2023.
• The decrease in net income was primarily due to a $10.7 million increase in interest expense.
• The company purchased Treasury and government agency bonds totaling $66.4 million subsequent to year end.
• The company paid off $15.6 million in FHLB short-term borrowings in January 2025.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there is growth in assets, loans, and deposits, the decrease in net income and earnings per share, coupled with rising interest expenses, tempers the positive aspects. The overall sentiment is neutral, reflecting both positive and negative developments.

Positives

• The company's assets increased by $47.9 million.
• Net loans receivable increased by $14.7 million.
• Deposits increased by $76.8 million.
• The company's net interest margin is 2.26% on a US GAAP basis and 2.29% on a tax equivalent (non-US GAAP) basis for the year ended December 31, 2024.
• The company purchased Treasury and government agency bonds totaling $66.4 million subsequent to year end.
• The company paid off $15.6 million in FHLB short-term borrowings in January 2025.

Negatives

• Net income decreased by $2.2 million, or 17.5%, to $10.4 million in 2024.
• Basic and diluted earnings per share decreased to $1.37 in 2024 from $1.67 in 2023.
• Interest expense increased by $10.7 million, impacting net income.
• The company's efficiency ratio was 69.3% for the year ending December 31, 2024.

Risks

• Changes in interest rates may adversely affect earnings and financial condition.
• Interest rate volatility could negatively affect net interest income, lending activities, deposits, and profitability.
• Changes in the estimated fair value of the securities portfolio may reduce shareholders' equity and net income.
• The company is subject to lending risk, particularly with commercial real estate, commercial construction and commercial loans.
• The allowance for credit losses may be insufficient.
• Strong competition within the market area may limit growth and profitability.
• A lack of liquidity could adversely affect the company's financial condition and results of operations.
• If information systems are interrupted or sustain a breach in security, those events may negatively affect financial performance and reputation.
• The company operates in a highly regulated environment and may be adversely affected by changes in laws and regulations.
• Prior levels of market volatility were unprecedented and future volatility may have materially adverse effects on the market price of the company's common stock, liquidity and financial condition.
• The banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect earnings.
• The company is highly reliant on third party vendors and the ability to manage the operational risks associated with outsourcing those services.
• The soundness of other financial institutions may adversely affect the company.
• The trading volume in the company's common stock is less than that of larger public companies, which can contribute to volatility in the stock price and adversely affect the liquidity of an investment in the common stock.
• Insiders control a substantial percentage of the company's stock and therefore have the ability to exercise significant control over affairs.
• The ability to pay dividends on common stock, and principal and interest on debt, depends primarily on dividends from the banking subsidiary, which is subject to regulatory limits.
• Provisions of the articles of incorporation and bylaws, Pennsylvania law, state and federal banking regulations, and the significant percentage of insider ownership, could act to delay or prevent a takeover by a third party.
• If the company needs to, or are compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
• The company's common stock is equity and is subordinate to all of existing and future indebtedness.
• The company's common stock is not insured by any governmental entity.
• The company's controls and procedures may fail or could be circumvented.
• Loss of senior executive officers or other key employees could impair the relationship with customers and adversely affect business.
• Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on business and operations.
• Negative public opinion could damage reputation and adversely affect earnings.

Future Outlook

The Company expects non-interest income to become a larger contributor to overall profitability as the deposit customer account base continues to grow and the Company continues to mature and develop additional sources of fee income.

Management Comments

• 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.
• Management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell securities in an unrealized loss position at December 31, 2024.
• Based principally on loan growth, economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Company's market area, the allowance is believed to be adequate to absorb any losses expected in the portfolio.

Industry Context

The geographic market the Company serves is highly competitive for deposits and loans, with competition from local, regional, and national traditional banking institutions, as well as non-bank financial service providers.

Comparison to Industry Standards

• The company monitors its rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity.
• The company's team productivity benchmarks or employee ratios were in the very top quartile of performance in comparison to those institutions that the company considers its peers (e.g., a total of 20 Pennsylvania financial institutions with total assets ranging from $750 million to $1.125 billion).
• Those financial institutions the company considers its peers have 56.91% greater overall average salary and benefit costs as a percent of average assets than that of the company's.

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.

Related Party Transactions

• Related parties were indebted to the Company for loans totaling $14.7 million and $15.1 million at December 31, 2024 and 2023.
• Deposits with related parties were $14.8 million and $14.3 million at December 31, 2024 and 2023.
• Fees paid to related parties for legal services for the years ended December 31, 2024 and 2023 were approximately $112 thousand and $54 thousand.
• The Company leases its main banking office from an investment group comprised of related parties and its West Broad Street office also from a related party.

Stakeholder Impact

• The company's performance impacts shareholders through earnings per share and dividend payouts.
• Employees are affected by compensation and benefits programs.
• Customers are impacted by the availability of financial products and services.
• The company's lending and deposit activities affect businesses and individuals in the Lehigh Valley community.

Next Steps

• The Company will continue to evaluate the allowance for credit losses as new information becomes available.
• 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.

Key Dates