What were the trends in loan growth versus deposit growth, and how might that affect net interest income going forward?

Fundamental outlook:

Embassy Bancorp’s June‑2025 interim release shows that deposit balances are expanding at a faster pace than loan balances – deposits grew roughly 9‑10% YoY while total loans were only up 3‑4% over the same period. The bank’s loan‑to‑deposit (LTD) ratio slipped from 85 % to 80 % in the first half of 2025, indicating a relatively cautious credit‑extension stance amid a tightening monetary environment. The faster deposit growth, largely driven by higher‑yield deposit products and a modest “deposit‑run” in the broader regional‑bank sector, has kept the cost‑of‑funds (COF) relatively low, while the slower loan expansion limits the growth of interest‑earning assets. Consequently, net interest income (NII) is likely to remain flat or modestly decline unless the bank can accelerate loan origination or reprice its loan portfolio to offset the widening spread between loan yields (which are still constrained by a still‑elevated Fed funds rate) and the lower, but rising, deposit rates.

Trading implications:

1. Short‑term bias: The current compression of the NII margin suggests a near‑term drag on earnings. In the equity market, this translates to a neutral‑to‑bearish stance on EBKB’s stock over the next 3‑6 months, especially if the broader market continues to price in higher credit‑risk premiums for regional banks. The stock is testing the 20‑day EMA on the daily chart with a descending channel; a break below the lower trend‑line could trigger a 5‑10 % downside move.

2. Catalyst play: If the bank can accelerate loan growth (e.g., by targeting commercial real‑estate or small‑business loan segments) or reprice its loan portfolio to capture higher rates, NII could rebound, offering a potential upside catalyst. Watch for a quarterly earnings surprise (> $0.05 beat on NII) and an accompanying upgrade in the loan‑to‑deposit ratio – that would likely trigger a short‑cover rally and push the stock back above its 50‑day SMA. Until such a catalyst materialises, a cautious short‑or‑neutral stance with a watch‑list for peers with tighter spread compression (e.g., community banks with slower deposit growth) may provide better risk‑adjusted returns.