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, 2025 and 2024. 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 Estimates and Judgements
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which require the Company to make estimates and assumptions. The Company believes that its determination of the allowance for credit losses (“ACL”) involves a higher degree of judgment and complexity than the Company’s other significant accounting policies. Further, this estimate 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.
A material estimate that is particularly susceptible to significant change is the determination of the allowance for credit losses. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. Management believes the allowance for credit losses is adequate and reasonable. For additional discussion concerning the Company’s allowance for credit losses and related matters, see “Provision for Credit Losses” and “Allowance for Credit Losses” in Notes 1 and 3 to
Embassy Bancorp, Inc.
the consolidated financial statements. Given the very subjective nature of identifying and valuing credit losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for credit losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
GENERAL
The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the BHC Act. The Company was formed for purposes of acquiring 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.
Since its inception, the Board’s philosophy has been 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.
OVERVIEW
The Company’s assets increased by $96.2 million from $1.70 billion at December 31, 2024 to $1.80 billion at December 31, 2025. The increase was due to a $16.3 million increase in cash and cash equivalents, an increase of $61.1 million in securities available for sale, an increase of $22.9 million in net loans receivable, and an increase of $1.3 million in bank owned life insurance, offset by a decrease of $5.2 million in other assets. The $16.3 million increase in cash and cash equivalents was due to an increase in deposits of $87.3 million, $64.7 million in principal pay downs on mortgage-backed securities and maturities within the securities available for sale portfolio, an increase in securities sold under agreement to repurchase of $5.0 million, offset by a decrease in short term borrowings of $15.6 million, the net loan growth of $22.9 million, and the purchase of $108.9 million in securities available for sale. The $61.1 million increase in securities available for sale was net of a decrease in unrealized losses of $15.9 million. The current unrealized loss position of the securities portfolio is due to the increase in market interest rates in response to economic conditions since purchase and not due to the credit quality of the investment portfolio.
Net loans receivable increased by $22.9 million to $1.28 billion at December 31, 2025, as compared to $1.26 billion at December 31, 2024. 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 creditworthy customers and less demand for commercial real estate financing or refinancing. The Company continues to expand its market presence and 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. The Company continues to monitor the interest rate exposure of its interest-bearing assets and liabilities. See the expanded discussion under the Financial Condition: Loans section below.
The Company's deposits increased by $87.3 million from $1.55 billion at December 31, 2024 to $1.64 billion at December 31, 2025. The increase in deposits was due to a $5.8 million increase in non-interest bearing deposits and an increase of $81.4 million in interest bearing deposits. The Company continues to seek deposits using a highly effective relationship building, sales and marketing effort, which serves to further increase the Company’s overall
Embassy Bancorp, Inc.
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. The Company’s success in attracting new deposit relationships is, in part, due to 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 continues to take advantage of deposit opportunities created by mergers, name changes, competitive branch hour and service adjustments and/or closures in the Company’s market area, and by attracting new customers looking to relocate to a local, reputable community bank.
The Company’s net income increased $3.3 million, or 31.2%, to $13.7 million in 2025 from $10.4 million in 2024. Basic and diluted earnings per share increased to $1.79 in 2025, as compared to $1.37 in 2024. The difference in net income for the year ended December 31, 2025 and December 31, 2024 resulted primarily from an increase in interest income and an increase in non-interest income, offset by an increase in interest expense, an increase in non-interest expenses, and an increase in the provision for credit losses.
Subsequent to the December 31, 2025 balance sheet date, in January 2026 the Company purchased two (2) government agency bonds and one (1) mortgage-backed security totaling $7.5 million and in February 2026 the Company purchased two (2) Treasury bonds and one (1) mortgage-backed security totaling $7.0 million.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The majority of the Company’s earnings derives from net interest income, which is the difference between income earned on assets and the cost supporting those assets. The net interest margin is the ratio of net interest income to average earning assets. Earning assets are composed primarily of loans and investments, along with interest-bearing deposits with other banks. 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 and net interest margin. The timing of deposit and loan growth also impacts 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 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 2025 and 2024.
2025 Compared to 2024
Total interest income for the year ended December 31, 2025 increased $6.5 million to $71.5 million, as compared to $65.0 million for the year ended December 31, 2024. Average earning assets were $1.68 billion for the year ended December 31, 2025, as compared to $1.60 billion for the year ended December 31, 2024. The tax equivalent yield on average earning assets was 4.28%, or an increase of 19 basis points, for the year ended December 31, 2025, compared to 4.09% for the year ended December 31, 2024.
Embassy Bancorp, Inc.
Total interest expense for the year ended December 31, 2025 increased $251 thousand to $29.0 million, as compared to $28.8 million for the year ended December 31, 2024. Average interest bearing liabilities were $1.27 billion for the year ended December 31, 2025, as compared to $1.20 billion for the year ended December 31, 2024. The yield on average interest bearing liabilities was 2.29%, or a decrease of 10 basis points, for the year ended December 31, 2025, compared to 2.39% for the year ended December 31, 2024. The Company’s overall cost of funds for the year ended December 31, 2025 decreased to 1.80% from 1.87% for the year ended December 31, 2024.
Net interest income for the year ended December 31, 2025 was $42.4 million, compared to $36.2 million for the year ended December 31, 2024. The increase in net interest income is, in part, the result of an increase in the average balances of taxable loans, an increase in the average balances of taxable investments, and an increase in the average balance of interest bearing deposits with banks, along with an increase in the rates of taxable and non-taxable loans and taxable and non-taxable investments. Also contributing to the increase in net interest income was a decrease in the average balance of savings, a decrease in the average balance of securities sold under agreement to repurchase, and a decrease in the average balance of other borrowings, along with a decrease in the rates of interest bearing demand deposits, NOW and money markets, savings, certificates of deposits, and securities sold under agreement to repurchase and other borrowings. The increase in net interest income was offset by a decrease in the average balance of non-taxable loans, a decrease in the average balance of non-taxable investments, an increase in the average balances of NOW accounts, money markets, and certificates of deposit, along with a decrease in the rate of fed funds sold and interest bearing deposits with banks. The Company’s net interest margin is 2.52% on a US GAAP basis and 2.55% on a tax equivalent (non-US GAAP) basis for the year ended December 31, 2025, an improvement, as compared to 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.
For the fourth quarter of 2025, the Company’s net interest margin is 2.61% on a US GAAP basis and 2.65% on a tax equivalent (non-US GAAP) basis, respectively. These are both increases from the quarter ended December 31, 2024, when the net interest margin was 2.24% on a US GAAP basis and 2.28% on a tax equivalent (non-US GAAP) basis, respectively. The quarterly results for the fourth quarter of 2025 were consistent with the quarter ended September 30, 2025, when the net interest margin was 2.54% on a US GAAP basis and 2.58% on a tax equivalent (non-US GAAP) basis, respectively.
For the fourth quarter of 2025, the Company’s overall cost of funds decreased to 1.75% from 1.81% for the third quarter of 2025.
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, 2025
Year Ended December 31, 2024
Average
Tax Equivalent
Average
Tax Equivalent
Balance
Interest
Yield
Balance
Interest
Yield
(Dollars in Thousands)
ASSETS
Loans - taxable (2)
Loans - non-taxable (1)
Investment securities - taxable
Investment securities - non-taxable (1)
Federal funds sold
Interest bearing deposits with banks
TOTAL INTEREST EARNING ASSETS
Less allowance for credit losses
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market
Savings
Certificates of deposit
Securities sold under agreements to
repurchase and other borrowings
TOTAL INTEREST BEARING LIABILITIES
Non-interest bearing demand deposits
Other liabilities
Stockholders' equity
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
Net interest income
Tax equivalent adjustments:
Loans
Investments
Total tax equivalent adjustments
Net interest income on a tax equivalent basis
Net interest spread (US GAAP basis)
Net interest margin (US GAAP basis)
Net interest spread (non-US GAAP basis) (3)
Net interest margin (non-US GAAP basis) (3)
(1) Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of December 31, 2025 and 2024, respectively.
(2) The average balance of taxable loans includes loans in which interest is no longer accruing.
(3) Non-US GAAP net interest spread and net interest margin are calculated on a fully tax equivalent basis at a tax rate of 21% as of December 31, 2025 and 2024, respectively.
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.
Increase (decrease) due to changes in:
(In Thousands)
Volume
Rate
Total
Interest-earning assets:
Loans - taxable
Loans - non-taxable
Investment securities - taxable
Investment securities - non-taxable
Federal funds sold
Interest bearing deposits with banks
Total net change in income on
interest-earning assets
Interest-bearing liabilities:
Interest bearing demand deposits,
NOW and money market
Savings
Certificates of deposit
Total deposits
Securities sold under agreements to
repurchase and other borrowings
Total net change in expense on
interest-bearing liabilities
Change in net interest income
Provision for Credit Losses
The allowance for credit losses is established through provisions for credit losses charged against income. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for credit losses is maintained at a level management considers to be adequate to provide for losses that can be reasonably anticipated over the expected life of the loans. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current and forecasted economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.
The allowance consists of a collectively evaluated component and an individually evaluated component. The collectively evaluated component covers non-classified loans and classified loans not considered loans individually evaluated for credit losses, and is based on historical loss experience adjusted for forecasting factors and qualitative factors. The individually evaluated component relates to loans that are classified as loans individually evaluated for
Embassy Bancorp, Inc.
credit losses and/or restructured. For loans that are classified as loans individually evaluated for credit losses, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loans individually evaluated for credit losses is lower than the carrying value of that loan.
For additional information on ASC Topic 326, see Note 1 “Summary of Significant Accounting Policies.”
For the year ended December 31, 2025, the provision for credit losses was $25 thousand, compared to the credit for credit losses of $525 thousand for the year ended December 31, 2024. In the year ended December 31, 2025, there were $152 thousand in charge-offs and no recoveries, compared to $11 thousand in charge-offs and $241 thousand in recoveries for the year ended December 31, 2024. The provision (credit) for credit losses is a function of the allowance for credit loss methodology that the Company uses to determine the appropriate level of the allowance for inherent credit losses after net charge-offs have been deducted. See the discussion below under “ Credit Risk and Loan Quality ” regarding the Company’s considerations of its December 31, 2025 allowance for credit loss levels. The allowance for credit losses is $12.0 million as of December 31, 2025, which is 0.93% of total loans receivable, compared to $12.2 million or 0.96% of total loans receivable as of 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 expected in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for credit is adequate, or that material increases will not be necessary should the quality of the loans . The Company has not participated in any sub-prime lending activity.
Non-interest Income
Non-interest income is derived from the Company’s operations and represents primarily merchant and credit card processing fees, debit card interchange fees, service fees on deposit and loan relationships and income from bank owned life insurance. Non-interest income also may include net gains and losses from the sale of available for sale securities, loans, and other real estate owned.
Total non-interest income was $3.3 million for the year ended December 31, 2025, compared to $3.2 million for the same period in 2024. The increase is, in part, attributable to an increase of $19 thousand in debit card interchange fees, an increase of $10 thousand in bank owned life insurance, an increase of $29 thousand from the gain on the sale of other real estate owned, and an increase in other service fees of $82 thousand primarily due to overdraft fees, wire fees, and certificate of deposit penalty fees. Offsetting this increase is a decrease in merchant and credit card processing fees of $66 thousand.
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 larger 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, that traditionally increase non-interest income.
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, 2025 was $29.0 million, compared to $27.3 million for the year ended December 31, 2024. The increase in non-interest expenses is, in part, attributable to a $857 thousand increase in salaries and employee benefits due to annual increases in salaries and benefits, incentives and bonuses, employee taxes, and health insurance cost, offset by an increase in deferred loan costs, a decrease in stock grant expense, and a decrease in non-qualified pension expense. Additional increases in non-interest expenses are attributable to an increase of $91 thousand in occupancy and equipment expenses due in part to an increase in rent
Embassy Bancorp, Inc.
expense, building maintenance, and utility expenses, as well as an increase of $629 thousand in data processing expenses due, in part, to the implementation of a new content management software and general ledger system and an increase in maintenance contracts, an increase of $59 thousand in loan and real estate expenses, an increase of $51 thousand in charitable contributions, and an increase of $71 thousand in other expenses. These increases in non-interest expenses were offset, in part, by a $81 thousand decrease in advertising and promotion expenses. The Company’s efficiency ratio improved to 63.4% from 69.3% for the years ending December 31, 2025 and 2024, respectively.
A breakdown of other non-interest expenses is included in the Consolidated Statements of Income included in Item 8 of this Report.
Income Taxes
The provision for income taxes was $2.9 million and $2.1 million for December 31, 2025 and December 31, 2024, respectively. The effective rate on income taxes for the years ended December 31, 2025 and 2024 was 17.5% and 16.5%, respectively. The increase in the tax rate is, in part, the result of the change in the mix of taxable and tax free loans and investments; offset by a slight increase in income on bank owned life insurance.
On July 4, 2025, the President signed H.R. 1, the “One Big Beautiful Bill Act,” into law. The legislation includes several changes to federal tax law that generally allows for more favorable deductibility of certain business expenses beginning in 2025, including the restoration of immediate expensing of domestic R&D expenditures, reinstatement of 100 percent bonus depreciation, and more favorable rules for determining the limitation on business interest expense. The Company is currently evaluating the impact on future periods.
FINANCIAL CONDITION
Securities
The Company’s securities portfolio continues to be 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 generally structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. Investment securities consist primarily of mortgage-backed securities issued by FHLMC or FNMA, taxable and non-taxable municipal bonds, government agency bonds, and Treasury bonds. The Company holds no high-risk or direct internationally exposed securities or derivatives as of December 31, 2025. The Company has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans. The current liquidity of the portfolio has been impacted by the increase in market interest rates during 2022 and 2023. Selling of securities would not be expected as a primary source of short term liquidity given the unrealized losses currently in the portfolio.
The Company’s securities portfolio was $341.9 million at December 31, 2025, a $61.1 million increase from securities of $280.8 million at December 31, 2024. The increase in the investment portfolio resulted from the purchase of twenty-five (25) Treasury bonds, seven (7) government agency bonds, and seven (7) mortgage-backed securities totaling $108.9 million and a decrease in unrealized losses of $15.9 million, offset by principal pay downs on mortgage-backed securities, the maturity of three (3) government agency bonds, and the maturity of ten (10) Treasury bonds totaling $64.7 million. The carrying value of the securities portfolio as of December 31, 2025 includes a net unrealized loss of $48.2 million, which is recorded as accumulated other comprehensive loss in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $64.1 million at December 31, 2024. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in 2022 through 2023 in response to economic conditions since initial purchase. 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, 2025. Further, management reviewed the Company's securities as of December 31, 2025 and concluded
Embassy Bancorp, Inc.
there were no credit-related declines in fair value. The effective duration of the securities portfolio is approximately 5 to 6 years at December 31, 2025. The Company remains focused on strategically assessing and managing the portfolio to address the unrealized losses.
The following table sets forth the composition of the securities portfolio at fair value as of December 31, 2025 and December 31, 2024.
(In Thousands)
U.S. Treasury securities
U.S. Government agency obligations
Municipal securities
U.S. Government sponsored enterprise (GSE)
- Mortgage-backed securities - commercial
U.S. Government sponsored enterprise (GSE)
- Mortgage-backed securities - residential
Total Securities Available for Sale
The following table presents the maturities and average weighted yields of the debt securities portfolio as of December 31, 2025. 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. Treasury securities
U.S. Government agency
obligations
Municipal securities
U.S. GSE - Mortgage-
backed securities-
residential
Total Debt Securities
Loans
The loan portfolio comprises a major component of the Company’s earning assets. All of the Company’s loans are to domestic borrowers. Total net loans receivable increased by $22.9 million to $1.28 billion at December 31, 2025 from $1.26 billion at December 31, 2024. The gross loan-to-deposit ratio decreased to 79% at December 31, 2025, compared to 82% at December 31, 2024. The Company’s loan portfolio at December 31, 2025 was comprised of residential real estate and consumer loans of $688.3 million, an increase of $19.1 million from December 31, 2024, and commercial loans of $602.0 million, an increase of $3.4 million from December 31, 2024. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans.
Embassy Bancorp, Inc.
The following table sets forth information on the composition of the loan portfolio by type at December 31, 2025 and 2024. All of the Company’s loans are to domestic borrowers.
December 31, 2025
December 31, 2024
Percentage of
Percentage of
Balance
total Loans
Balance
total Loans
(Dollars in Thousands)
Commercial real estate
Commercial construction
Commercial
Residential real estate
Consumer
Gross loans
Unearned origination costs
Allowance for credit losses
Net Loans
The following table shows the maturities of the commercial and consumer loan portfolios and the loans subject to interest rate fluctuations at December 31, 2025.
One Year or Less
After One Year Through Five Years
After Five Years Through Fifteen Years
After Fifteen Years
Total
(In Thousands)
Commercial real estate
Commercial construction
Commercial
Residential Real Estate
Consumer
Fixed Rates
Variable Rates
Credit Risk and Loan Quality
The Company’s allowance for credit losses decreased slightly to $12.0 million at December 31, 2025 from $12.2 million at December 31, 2024. At December 31, 2025 and December 31, 2024, the allowance for credit losses represented 0.93% and 0.96% of total loans receivable, respectively. The Company’s non-performing loans to total loans receivable were 0.04% at both December 31, 2025 and December 31, 2024. At December 31, 2025, approximately 97% of the Company’s loan portfolio is collateralized by real estate.
The aggregate balances on non-performing loans are included in the following table. At December 31, 2025, the Company had no foreclosed assets and no recorded investments in mortgage loans collateralized by residential real estate property in the process of foreclosure. At December 31, 2024, the Company had no foreclosed assets and had
Embassy Bancorp, Inc.
two (2) recorded investments in mortgage loans collateralized by residential real estate property in the process of foreclosure in the amount of $216 thousand.
The details for the non-performing loans and assets are included in the following table:
December 31,
(Dollars In Thousands)
Non-accrual - commercial
Non-accrual - consumer
Restructured, accruing interest
Loans past due 90 or more days, accruing interest
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Nonperforming loans to total loans
Nonperforming assets to total assets
Non-accrual loans to total loans
Allowance to non-accrual loans
Net charge-offs (recoveries) to average loans
In the year ended December 31, 2025, there were $152 thousand in charge-offs and no recoveries, compared to $11 thousand in charge-offs and $241 thousand in recoveries for the year ended December 31, 2024.
Our loan portfolio includes a large amount of commercial real estate loans. Management believes the commercial real estate loan portfolio is well-diversified. At December 31, 2025 and 2024, high volatility commercial real estate exposures were $3.5 million and $11.0 million, respectively. Commercial real estate loans are originated primarily within Lehigh and Northampton counties, are within the Company’s underwriting criteria, and generally include the guarantee of one or more of the borrowers’ affiliates. At December 31, 2025, the Company’s office space portfolio included no exposure to properties in major metropolitan markets. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. The Company monitors these types of loans closely, obtaining updated appraisals on loans when required. As detailed in the Allowance for Credit Losses table, the Company had $136 thousand and no charge-offs in this category in 2025 or 2024, respectively. The Company believes it has taken the appropriate steps to implement appropriate risk management practices for its commercial real estate loan portfolio, which are subject to regulatory examination.
Allowance for Credit Losses
Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Company and comparable institutions in the Company’s market area, management feels, as of December 31, 2025, the allowance is adequate to absorb reasonably anticipated losses. The Company will continue to evaluate the allowance for credit losses as new information becomes available.
As of December 31, 2025, the Company had $2.4 million of individually evaluated loans (defined as those loans that do not share the same risk characteristics as the remaining pooled portfolio and legacy debt restructurings) compared to $3.0 million at December 31, 2024. Most of the Company’s individually evaluated loans required no specific reserves due to adequate collateral. As of December 31, 2025, the Company had individually evaluated loans of $577 thousand requiring a specific reserve of $115 thousand. As of December 31, 2024, the Company had individually evaluated loans of $691 thousand requiring a specific reserve of $134 thousand.
Embassy Bancorp, Inc.
The activity in the allowance for credit losses is shown in the following table, as well as period end loans receivable and the allowance for credit losses as a percent of the total loans receivable portfolio:
December 31,
(Dollars In Thousands)
Loans receivable at end of year
Allowance for credit losses:
Balance, beginning
Provision (credit) for credit losses
Loans charged off:
Commercial real estate
Commercial construction
Commercial
Residential real estate
Consumer
Total charged off
Recoveries of loans previously charged-off:
Commercial real estate
Commercial construction
Commercial
Residential real estate
Consumer
Total recoveries
Net charged off
Balance at end of year
Allowance for credit losses to loans
receivable at end of year
Allocation of the Allowance for Credit Losses
The following table details the allocation of the allowance for credit losses to various loan categories. While allocations have been established for particular loan categories, management considers the entire allowance to be available to absorb losses in any category.
December 2025
December 2024
(Dollars in Thousands)
Commercial real estate
Commercial construction
Commercial
Residential real estate
Consumer
Total Allowance for Credit Losses
Embassy Bancorp, Inc.
Deposits
As growth continues, the Company expects that the principal sources of its funds will be deposits, consisting of demand deposits, NOW accounts, money market accounts, savings accounts, and certificates of deposit from the local market areas surrounding the Company’s offices. These accounts provide the Company with a source of fee income and a relatively stable source of funds.
Total deposits at December 31, 2025 were $1.64 billion, an increase of $87.3 million, or 5.6%, from total deposits of $1.55 billion as of December 31, 2024. The increase in the Company’s deposits was due to an increase of $5.8 million in non-interest bearing demand, an increase of $10.5 million in interest bearing demand, NOW and money market deposits, an increase of $5.8 million in savings deposits, and a $65.2 million increase in time deposits. The increase in time deposits is primarily due to higher yielding rates, due to the competitive pressure and current rate environment. Included in the above mentioned increase was an $8.9 million increase in non-interest bearing demand business deposits, offset by a $3.0 million decrease in non-interest bearing demand personal deposits. Included in total deposits at December 31, 2025 were personal deposits of $1.15 billion, business deposits of $397.1 million, and municipal deposits of $95.7 million. Included in total deposits at December 31, 2024 were personal deposits of $1.11 billion, business deposits of $351.9 million, and municipal deposits of $93.4 million. The estimated amount of uninsured assessable deposits, including related interest accrued and unpaid, at December 31, 2025 and December 31, 2024 was $554.9 million and $514.1 million, respectively.
The following table reflects the Company’s deposits by category for the periods indicated. All deposits are domestic deposits.
December 31, 2025
December 31, 2024
(In Thousands)
Demand, non-interest bearing
Demand, NOW and money market, interest bearing
Savings
Time, $250 and over
Time, other
Total deposits
The following table sets forth the average balance of the Company’s deposits and the average rates paid on those deposits:
December 31, 2025
December 31, 2024
Average
Average
Average
Average
Amount
Rate
Amount
Rate
(Dollars In Thousands)
Demand, NOW and money market,
interest bearing deposits
Savings
Certificates of deposit
Total interest bearing deposits
Non-interest bearing demand deposits
Total
Embassy Bancorp, Inc.
The following table displays the maturities and the amounts of the Company’s certificates of deposit of $250,000 or more:
December 31, 2025
December 31, 2024
(In Thousands)
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
As a FDIC member institution, the Company’s deposits are insured to a maximum of $250,000 per depositor through the DIF that is administered by the FDIC and each institution is required to pay quarterly deposit insurance premium assessments to the FDIC.
Liquidity
Liquidity is a measure of the Company’s ability to meet the demands required for the funding of loans and to meet depositors’ requirements for use of their funds. The Company’s sources of liquidity are cash balances, due from banks, and federal funds sold. Cash and cash equivalents were $112.9 million at December 31, 2025, compared to $96.5 million at December 31, 2024. There are other sources of liquidity that are available to the Company, as well, including those described below.
Additional asset liquidity sources include principal and interest payments from investment securities, unpledged investment securities, and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling or participating loans, or raising additional capital. Currently, selling of securities would not be a primary source of short term liquidity needs given the unrealized losses in the portfolio. At December 31, 2025, the Company had $341.9 million of available for sale securities, compared to $280.8 million at December 31, 2024. Securities with a carrying value of $141.4 million and $152.4 million at December 31, 2025 and December 31, 2024, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.
At December 31, 2025, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $711.4 million, of which $711.2 million is available for borrowing at December 31, 2025 due to an outstanding letter of credit in amount of $160 thousand. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no FHLB short-term or long term advances outstanding as of December 31, 2025. There were $15.6 million short-term FHLB advances outstanding and no long-term FHLB advances outstanding as of December 31, 2024. All FHLB borrowings are secured by qualifying assets of the Bank.
The Bank also has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at December 31, 2025 and December 31, 2024. Advances from this line are unsecured.
The Bank is also eligible to borrow under the Federal Reserve Bank’s discount window borrowing programs.
The Bank is a member of the Certificate of Deposit Account Registry Services (CDARS) program and the Insured Cash Sweep (ICS) program offered by Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. ICS provides liquidity similar to a money market or savings account. Both programs enable financial institutions to provide customers with full FDIC insurance on deposits over $250 thousand that are placed in the program. The Bank also has access to other brokered deposits as a source of liquidity.
Embassy Bancorp, Inc.
The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at December 31, 2025 and December 31, 2024. Advances from this line are unsecured. Under the terms of this facility, availability under the revolving line of credit would be reduced to $5.0 million should the Company’s net tangible ratio drop below 5% and availability would be reduced to $2.0 million should the Company’s net tangible ratio drop below 2%. If the Company’s net tangible ratio drops below 0%, the commitment is cancelled .
Because of the composition of the Company’s balance sheet, its strong capital base, ability to attract new deposit relationships, access to brokered deposits, and borrowing capacity, the Company believes that it remains well positioned with respect to liquidity. The majority of the Company’s funds are invested in loans with a portion invested in investment securities that generally carry a lower yield. While it is desirable to be liquid, it has the effect of a lower interest margin. The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.
Off-Balance Sheet Arrangements
The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These commitments consist of unfunded loans and commitments, lines of credit, and letters of credit made under the same standards as on-balance sheet loan instruments. These off-balance sheet arrangements at December 31, 2025 and December 31, 2024 totaled $204.8 million and $180.5 million, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. For further information see Note 4, in Item 8 of this report. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.
Capital Resources and Adequacy
Total stockholders’ equity was $127.6 million as of December 31, 2025, representing a net increase of $21.1 million from December 31, 2024. The increase in capital was the result of net income of $13.7 million, an increase in common stock of $30 thousand, an increase in surplus of $421 thousand due to stock grants with compensation expense and employee stock purchases, and a decrease of $12.5 million in accumulated other comprehensive loss, offset by dividends paid of $3.7 million and treasury stock purchases of $1.9 million. The accumulated other comprehensive losses are excluded from both the Bank’s and the Company’s Tier 1 regulatory capital calculations.
The Company’s tangible book value per share, calculated as total stockholders’ equity divided by outstanding common stock shares, was $16.90 and $13.96 at December 31, 2025 and December 31, 2024, respectively.
The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material adverse effect on the consolidated financial statements.
The regulations require that banks maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and Tier 1 capital to average assets (as defined). As of December 31, 2025, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.
Embassy Bancorp, Inc.
The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:
December 31, 2025
December 31, 2024
(Dollars In Thousands)
Tier 1, common stockholders' equity
Tier 2, allowable portion of allowance for credit losses
Total capital
Common equity tier 1 capital ratio
Tier 1 risk based capital ratio
Total risk based capital ratio
Tier 1 leverage ratio
Note: Unrealized gains and losses on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.
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%.
The capital ratios to be considered “well capitalized” under the new 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%.
The Company qualifies as a small bank holding company and is not subject to the Federal Reserve’s consolidated capital rules, although an institution that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios.
Embassy Bancorp, Inc.
The following table provides the Company’s risk-based capital ratios and leverage ratios:
December 31, 2025
December 31, 2024
(Dollars In Thousands)
Tier 1, common stockholders' equity
Tier 2, allowable portion of allowance for credit losses
Total capital
Common equity tier 1 capital ratio
Tier 1 risk based capital ratio
Total risk based capital ratio
Tier 1 leverage ratio
Note: Unrealized gains and losses on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.
Interest Rate Risk Management
A principal objective of the Company’s asset/liability management policy is to minimize the Company’s exposure to changes in interest rates by an ongoing review of the maturity and repricing of interest-earning assets and interest-bearing liabilities. The Asset Liability Committee (ALCO), which meets as part of the Board of Directors meeting, oversees this review, which establishes policies to control interest rate sensitivity. The Company also has an internal ALCO committee consisting of members of management that supplements the work of the Board ALCO Committee. Interest rate sensitivity is the volatility of a company’s earnings resulting from a movement in market interest rates. The Company monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. The Company’s asset/liability management policy, monthly and quarterly financial reports, along with simulation modeling, supplies management with guidelines to evaluate and manage rate sensitivity.
Embassy Bancorp, Inc.
GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. NOW and savings accounts are categorized by their respective estimated decay rates. The Company is liability sensitive, which means that if interest rates fall, interest income will fall slower than interest expense and net interest income will likely increase. If interest rates rise, interest income will rise slower than interest expense and net interest income will likely decrease. 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.
Over 3
Over 1
Over 3
Months to
Year to
Years to
Over 5
Months
12 Months
3 Years
5 Years
Years
Total
(In Thousands)
Interest-earning assets
Federal funds sold and interest-
bearing deposits
Investment securities
Loans receivable, gross
Total interest-earning assets
Interest-bearing liabilities
NOW and money market accounts
Savings
Certificates of deposit
Repurchase agreements
and federal funds purchased
Total interest-bearing liabilities
GAP
CUMULATIVE GAP
GAP TO INTEREST EARNING
ASSETS
CUMULATIVE GAP TO
INTEREST EARNING ASSETS
Embassy Bancorp, Inc.
Based on a twelve-month forecast of the balance sheet, the following table sets forth our interest rate risk profile at December 31, 2025. For income simulation purposes, personal and business savings accounts reprice every two months, personal and business NOW accounts reprice every two months, and personal and business money market accounts reprice every month. Management reviews all assumptions on a periodic basis and believe current assumptions support market conditions. The impact on net interest income, illustrated in the following table, would vary if different assumptions were used or if actual experience differs from that indicated by the assumptions.
Change in Interest Rates
Percentage Change in Net Interest Income
Down 100 basis points
Down 200 basis points
Up 100 basis points
Up 200 basis points
Return on Assets and Equity
For the year ended December 31, 2025, the return on average assets was 0.78%, the return on average equity was 11.71%, and the ratio of average shareholders’ equity to average total assets was 6.67%.
For the year ended December 31, 2024, the return on average assets was 0.62%, the return on average equity was 9.86%, and the ratio of average shareholders’ equity to average total assets was 6.33%.
Dividend Payout Ratio
For the years ended December 31, 2025 and 2024, the dividend payout ratio was 26.79% and 30.64%, respectively.
Effects of Inflation
The majority of assets and liabilities of the Company are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. The precise impact of inflation upon the Company is difficult to measure. Inflation may affect the borrowing needs of consumers, thereby impacting the growth rate of the Company’s assets. Inflation may also affect the general level of interest rates, which can have a direct bearing on the Company.
Embassy Bancorp, Inc.
