Embassy Bancorp, Inc.

Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on our business and operations.

Acts of terrorism, natural disasters, global climate change, pandemics, global conflicts or other similar events could have a negative impact on our business and operations. While we have in place business continuity plans, such events could still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict.

The Company determines interest rate spread and margin on both a GAAP and tax equivalent basis. The use of tax equivalent basis in determining interest rate spread and margin is considered a non-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 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 GAAP measures. In addition, the non-GAAP measure may not be comparable to non-GAAP measures of other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2019 and 2018, and 34% for 2017.

Total non-interest income was $2.2 million for the year ended December 31, 2019 compared to $1.7 million for the year ended December 31, 2018.  This increase in non-interest income is mainly due to a $309 thousand, or 80.9%, increase in bank owned life insurance, in part, due to the purchase of an additional $6.0 million of bank owned life insurance in the third quarter of 2018. Also contributing to the improvement in non-interest income was an increase of $70 thousand, or 12.9%, in debit card processing fees and an increase of $43 thousand, or 9.3%, in other service fees due primarily to the growing customer base. A gain of $45 thousand was recognized on the sale of other real estate owned with no impairment write down taken in 2019, compared to gains of $94 thousand and write downs of $84 thousand in 2018. 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. Currently, and unlike many in the industry, the Company does not derive additional non-interest fee income by selling its mortgages in the secondary market, nor does it offer trust or investment/brokerage services to its customers. 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation, Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 was issued to require share-based payment transactions for acquiring goods and services from non-employees be accounted for under the same guidance as those issued to employees. Among other things, the guidance requires non-employee share-based payments be measured at grant-date fair value of the equity instrument received. The Company adopted this guidance effective January 1, 2019. There was no effect on the consolidated financial statements upon adoption. The Company follows this guidance when measuring the share-based payments to non-employee directors as described in Note 10.

The Company’s leases are all classified as operating leases, with one lease being short term. Currently, many of these leases contain renewal options. The Company has reviewed and based the right of use assets and lease liabilities, primarily, on the present value of unpaid future minimum lease payments. Additionally, the amounts for the branch leases were impacted by assumptions around renewals and/or extensions and the interest rate used to discount those future lease obligations. The Company used the FHLB advance rates to calculate the discount rate in their review because none of the Company’s leases provided an implicit rate. The Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments at December 31, 2019. The weighted average discount rate for all operating leases was 3.17%, with branch leases having a weighted average discount rate of 3.18% and equipment leases having a weighted average discount rate of 2.81%. These leases expire at various dates through August 2030. All operating equipment leases do not have renewal language in their contracts and therefore use the current term. As of December 31, 2019, the operating leases overall had a weighted average lease term of 6.72 years, with the branch leases having a weighted average life of 6.78 years and equipment leases having a weighted average life of 2.49 years.

At December 31, 2019, the Company had right of use assets of $9.6 million (included in other assets) and lease liabilities of $9.7 million (included in other liabilities). The cost for operating leases was $1.7 million, including short-term lease cost of $3 thousand, for the year ended December 31, 2019. Operating cash flow paid for lease liabilities was $1.6 million for the year ended December 31, 2019.