Embassy Bancorp, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020 OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________ TO __________________

Commission file number 000-53528


Embassy Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania	26-3339011
(State of incorporation)	(I.R.S. Employer Identification No.)

One Hundred Gateway Drive, Suite 100 Bethlehem, PA	18017
(Address of principal executive offices)	(Zip Code)

(610) 882-8800
(Registrant’s Telephone Number)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act.) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date:


COMMON STOCK
Number of shares outstanding as of May 1, 2020	($1.00 Par Value)	7,471,976
	(Title Class)	(Outstanding Shares)

Embassy Bancorp, Inc.

Table of Contents


Part I – Financial Information	3

Item 1 – Financial Statements
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Income (Unaudited)	4
Consolidated Statements of Comprehensive Income (Unaudited)	5
Consolidated Statements of Stockholders’ Equity (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	37

Item 4 – Controls and Procedures	37

Part II - Other Information	38

Item 1 - Legal Proceedings	38

Item 1A - Risk Factors	38

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3 - Defaults Upon Senior Securities	39

Item 4 – Mine Safety Disclosures	39

Item 5 - Other Information	39

Item 6 - Exhibits	40

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Current Period Unaudited)



	March 31,		December 31,
ASSETS	2020		2019

	(In Thousands, Except Share Data)
Cash and due from banks	$	14,166	$	5,825
Interest bearing demand deposits with banks		28,023		33,161
Federal funds sold		1,000		1,000
Cash and Cash Equivalents		43,189		39,986
Securities available for sale		87,860		90,829
Restricted investment in bank stock		1,341		1,478
Loans held for sale		659		-
Loans receivable, net of allowance for loan losses of $8,366 in 2020; $8,022 in 2019		1,024,033		1,006,117
Premises and equipment, net of accumulated depreciation		2,220		2,123
Bank owned life insurance		20,232		20,259
Accrued interest receivable		2,079		2,048
Other assets		12,748		13,279
Total Assets	$	1,194,361	$	1,176,119
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	188,431	$	171,815
Interest bearing		859,703		860,153
Total Deposits		1,048,134		1,031,968
Securities sold under agreements to repurchase		10,385		7,208
Short-term borrowings		-		18,067
Long-term borrowings		14,651		-
Accrued interest payable		2,085		3,281
Other liabilities		16,123		15,980
Total Liabilities		1,091,378		1,076,504
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2020 issued 7,577,023 shares; outstanding 7,471,976 shares;
2019 issued 7,543,524 shares; outstanding 7,478,477 shares;		7,577		7,544
Surplus		26,110		25,937
Retained earnings		68,251		65,794
Accumulated other comprehensive income		2,765		1,340
Treasury stock, at cost: 105,047 and 65,047 shares at March 31, 2020 and
December 31, 2019, respectively		(1,720)		(1,000)
Total Stockholders' Equity		102,983		99,615
Total Liabilities and Stockholders' Equity	$	1,194,361	$	1,176,119

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)



	Three Months Ended March 31,

	2020			2019

	(In Thousands, Except Per Share Data)
INTEREST INCOME
Loans, including fees	$	10,190	$	9,584
Securities, taxable		377		366
Securities, non-taxable		212		290
Short-term investments, including federal funds sold		76		144
Total Interest Income		10,855		10,384
INTEREST EXPENSE
Deposits		1,995		1,877
Securities sold under agreements to repurchase		10		25
Short-term borrowings		51		268
Long-term borrowings		8		-
Total Interest Expense		2,064		2,170
Net Interest Income		8,791		8,214
PROVISION FOR LOAN LOSSES		320		130
Net Interest Income after Provision for Loan Losses		8,471		8,084
OTHER NON-INTEREST INCOME
Credit card processing fees		77		80
Debit card interchange fees		133		127
Other service fees		117		116
Bank owned life insurance		(27)		210
Gain on sale of other real estate owned		-		45
Total Other Non-Interest Income		300		578
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits		2,839		2,643
Occupancy and equipment		858		820
Data processing		636		562
Credit card processing		30		33
Advertising and promotion		296		411
Professional fees		236		195
FDIC insurance		51		95
Loan & real estate		68		43
Charitable contributions		289		289
Other		429		463
Total Other Non-Interest Expenses		5,732		5,554

Income Before Income Taxes		3,039		3,108
INCOME TAX EXPENSE		582		556
Net Income	$	2,457	$	2,552

BASIC EARNINGS PER SHARE	$	0.33	$	0.34

DILUTED EARNINGS PER SHARE	$	0.33	$	0.34

See notes to consolidated financial statements

Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
	2020			2019

		(In Thousands)

Net Income	$		2,457	$		2,552
Change in Accumulated Other Comprehensive Income:
Unrealized holding gain on securities available for sale		1,803			2,023
Less: reclassification adjustment for realized gains		-			-
		1,803			2,023
Income tax effect		(378)			(425)
Net unrealized gain		1,425			1,598
Other comprehensive income, net of tax			1,425			1,598
Comprehensive Income	$		3,882	$		4,150

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2020 and 2019



	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2018	$	7,530	$	25,532	$	56,410	$	(1,247)	$	(1,000)	$	87,225
Net income		-		-		2,552		-		-		2,552
Other comprehensive income, net of tax		-		-		-		1,598		-		1,598
Compensation expense recognized on stock options		-		1		-		-		-		1
Common stock grants to directors, 10,799 shares		10		151		-		-		-		161
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $608		-		51		-		-		-		51
Shares issued under employee stock purchase
plan, 894 shares		1		13		-		-		-		14
BALANCE - MARCH 31, 2019	$	7,541	$	25,748	$	58,962	$	351	$	(1,000)	$	91,602

BALANCE - DECEMBER 31, 2019	$	7,544	$	25,937	$	65,794	$	1,340	$	(1,000)	$	99,615
Net income		-		-		2,457		-		-		2,457
Other comprehensive income, net of tax		-		-		-		1,425		-		1,425
Common stock grants to directors, 12,757 shares		13		135		-		-		-		148
Common stock grants to officers, 19,453 shares
and compensation expense recognized on
stock grants, net of unearned compensation
expense of $639		19		25		-		-		-		44
Shares issued under employee stock purchase
plan, 1,289 shares		1		13		-		-		-		14
Purchase of treasury stock, 40,000 shares at $18.00 per share		-		-		-		-		(720)		(720)
BALANCE - MARCH 31, 2020	$	7,577	$	26,110	$	68,251	$	2,765	$	(1,720)	$	102,983

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2020		2019

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,457	$	2,552
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		320		130
Amortization of deferred loan costs		78		63
Depreciation		203		204
Net amortization of investment security premiums and discounts		58		25
Stock compensation expense		192		213
Net realized gain on sale of other real estate owned		-		(45)
Loans originated for sale		(659)		-
Loss (income) on bank owned life insurance		27		(210)
Increase in accrued interest receivable		(31)		(75)
Decrease in other assets		153		226
(Decrease) increase in accrued interest payable		(1,196)		616
Increase (decrease) in other liabilities		143		(319)
Net Cash Provided by Operating Activities		1,745		3,380
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(1,489)		-
Maturities, calls and principal repayments of securities available for sale		6,203		7,392
Net increase in loans		(18,314)		(10,656)
Net redemption of restricted investment in bank stock		137		1,916
Proceeds from sale of other real estate owned		-		180
Purchases of premises and equipment		(300)		(98)
Net Cash Used in Investing Activities		(13,763)		(1,266)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		16,166		69,635
Net increase (decrease) in securities sold under agreements to repurchase		3,177		(7,933)
Proceeds from Employee Stock Purchase Plan		14		14
Decrease in short-term borrowed funds		(18,067)		(53,995)
Proceeds from long-term borrowed funds		14,651		-
Purchase of treasury stock		(720)		-
Net Cash Provided by Financing Activities		15,221		7,721
Net Increase in Cash and Cash Equivalents		3,203		9,835
CASH AND CASH EQUIVALENTS - BEGINNING		39,986		27,576
CASH AND CASH EQUIVALENTS - ENDING	$	43,189	$	37,411

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	3,260	$	1,554

Non-cash Investing and Financing Activities:
Transfer of loans held for investment to held for sale	$	659	$	-
Recognition of operating lease right of use assets	$	-	$	10,908
Recognition of operating lease liabilities	$	-	$	11,014

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

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, 2019, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 11, 2020.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

Certain amounts in the 2019 consolidated financial statements may have been reclassified to conform to 2020 presentation. These reclassifications had no effect on 2019 net income.

Note 2 - Summary of Significant Accounting Policies

The significant accounting policies of the Company as applied in the interim financial statements presented herein 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, 2019.

Note 3 – COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. The economic effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations, though such potential impact is unknown at this time.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

For the three-months ended March 31, 2020, the Company provided certain borrowers affected in a variety of ways by the COVID-19 outbreak with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Payment accommodations were in the form of short-term (six months or less) principal and/or interest deferrals. These payment accommodations were made in accordance with Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and the Company will not be categorizing these modifications as troubled debt restructurings. The following table presents COVID-19 payment accommodations based on loan type and amount for the three-months ended March 31, 2020:


	Number of Loans	Loan Amount
		(In Thousands)
Commercial real estate	31	$	45,878
Commercial construction	1		1,360
Commercial	20		4,389
Residential real estate	15		4,249
	67	$	55,876

Subsequent to March 31, 2020, through April 29, 2020, additional payment accommodations were made on 208 loans with balances of $114.8 million.

As part of the Cares Act, the Company was approved to be a Paycheck Protection Plan (“PPP”) lender. The Company had not previously been an approved Small Business Administration (“SBA”) 7(a) lender. The Company began accepting applications from qualified borrowers on April 3, 2020. As of April 16, 2020, when the first allocation of government funding to the PPP was extinguished, the Company had received SBA loan guarantee approval for 145 business customers totaling $34.0 million. The loan proceeds for these customers were disbursed in full by April 27, 2020. As of May 1, 2020, the Company had received SBA loan guarantee approval for an additional 313 business customers totaling $30.8 million. The Company’s highly experienced team of commercial lenders, with the support of personnel from various departments of the Company, continued to lead the efforts to work closely with borrowers to apply for and obtain the PPP loans.

These PPP loans are 100% guaranteed by the SBA, have up to a two-year maturity and a low interest rate of 1% throughout the term of the loan, with payments deferred over the first six months following the date of disbursement of the loan. The SBA may forgive the PPP loans if certain conditions are met by the borrower, including using at least 75% of the proceeds for payroll costs. The SBA also provides the Company with a processing fee for each loan, with the amount of such fee pre-determined by the SBA dependent upon the size of each loan.

In April 2020, the Company applied to and has been approved by the Federal Reserve Board for both the ability to borrow under its Paycheck Protection Program Liquidity Facility (“PPPLF”) as well as its Discount Window. The Company will consider borrowings under the PPPLF to provide liquidity in order to fund the PPP loans, however, no such borrowings have been made yet. The PPPLF provides term funding to depository institutions that originate loans to small businesses under the PPP. PPP loans that are pledged to secure PPPLF extensions of credit are excluded from leverage ratio calculations.

The Company’s allowance for loan losses increased $344 thousand to $8.4 million at March 31, 2020 compared to $8.0 million at December 31, 2019. At March 31, 2020 and December 31, 2019, the allowance for loan losses represented 0.81% and 0.79%, respectively, of total loans. In the first quarter of 2020, the Company adjusted the allowance for loan losses’ economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of total loans. In determining its allowance for loan loss level at March 31, 2020, the Company considered the health and composition of its loan portfolio going into the COVID-19 pandemic. The Company’s nonperforming loans to total loans receivable was 0.25% at March 31, 2020, down from 0.26% at December 31, 2019. The Company had no charge-offs for the three-months ended March 31, 2020 and for the year ended December 31, 2019. At March 31, 2020, approximately 94% of the Company’s loan portfolio is collateralized by real estate. Less than 5% of the Company’s loan portfolio is to borrowers in the more particularly hard-hit industries (including the travel and hotel industry, the full-service and limited-service restaurant industries, and the assisted living facilities industry) and the Company has no international exposure. The Company was not required to adopt the Current Expected Credit Losses (“CECL”) Financial Accounting Standards Board (“FASB “) accounting standard in the first quarter of 2020, as this guidance will not be effective for the Company until 2023.

In response to the COVID-19 outbreak, the Federal Reserve Board in mid-March 2020 has reduced by 150 basis points the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Approximately 10% of the Company’s loan portfolio is scheduled to mature or reprice within the next year. As a result of the decline in the Federal Reserve Board’s target federal funds rate and yields on treasury notes, the Company’s future net interest margin and spread may be reduced.

Note 4 – Securities Available For Sale

At March 31, 2020 and December 31, 2019, respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
March 31, 2020:
Municipal bonds	$	24,366	$	891	$	(13)	$	25,244
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial		514		-		(2)		512
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		59,480		2,624		-		62,104
Total	$	84,360	$	3,515	$	(15)	$	87,860

December 31, 2019:
Municipal bonds	$	25,586	$	863	$	(5)	$	26,444
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		63,546		877		(38)		64,385
Total	$	89,132	$	1,740	$	(43)	$	90,829

The amortized cost and fair value of securities as of March 31, 2020, 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.



		Amortized		Fair
		Cost		Value

	(In Thousands)
Due in one year or less	$	830	$	831
Due after one year through five years		2,363		2,373
Due after five years through ten years		5,523		5,639
Due after ten years		15,650		16,401
		24,366		25,244
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial		514		512
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		59,480		62,104
Total	$	84,360	$	87,860

There were no sales of securities for the three months ended March 31, 2020 and 2019.

Securities with a carrying value of $77.8 million and $74.0 million at March 31, 2020 and December 31, 2019, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2020 and December 31, 2019, respectively:



		Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

March 31, 2020:	(In Thousands)
Municipal bonds	$	1,096	$	(13)	$	-	$	-	$	1,096	$	(13)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
commercial		512		(2)		-		-		512		(2)
Total Temporarily Impaired Securities	$	1,608	$	(15)	$	-	$	-	$	1,608	$	(15)
		.
December 31, 2019:
Municipal bonds	$	1,295	$	(5)	$	-	$	-	$	1,295	$	(5)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
residential		4,701		(1)		8,528		(37)		13,229		(38)
Total Temporarily Impaired Securities	$	5,996	$	(6)	$	8,528	$	(37)	$	14,524	$	(43)

The Company had three (3) securities in an unrealized loss position at March 31, 2020 and five (5) securities in an unrealized loss position at December 31, 2019. The unrealized losses are due to market interest rate fluctuations. As of March 31, 2020, 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.

Note 5 – Restricted Investment in Bank Stock

Restricted investments in bank stock consist of FHLBank of Pittsburgh (“FHLB”) stock and Atlantic Community 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. The Bank had FHLB stock at a carrying value of $1.3 million as of March 31, 2020 and $1.4 million as of December 31, 2019. The Bank had ACBB stock at a carrying value of $40 thousand at March 31, 2020 and December 31, 2019.

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 or ACBB stock as of March 31, 2020.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 6 – Loans and Credit Quality

Effective March 31, 2020, the Company transferred $659 thousand of loans from loans receivable to loans held for sale, representing the entirety of its commercial credit cards loan portfolio. Subsequent to March 31, 2020, on May 1, 2020, those loans were sold to an unrelated third party for a gain of approximately $59 thousand. These loans were transferred to the held for sale portfolio at their carrying value, which was lower than the estimated fair value at the time of transfer. An allowance for loan losses is not maintained on loans designated as held for sale.

The following table presents the composition of loans receivable at March 31, 2020 and December 31, 2019, respectively:



	March 31, 2020			December 31, 2019
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	439,519	42.60%	$	427,987	42.24%
Commercial construction		12,224	1.18%		12,622	1.25%
Commercial		55,785	5.41%		53,747	5.30%
Residential real estate		523,391	50.74%		518,150	51.13%
Consumer		772	0.07%		820	0.08%
Total loans		1,031,691	100.00%		1,013,326	100.00%
Unearned origination fees		708			813
Allowance for loan losses		(8,366)			(8,022)
Net Loans	$	1,024,033		$	1,006,117

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 March 31, 2020 and December 31, 2019, respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

March 31, 2020		(In Thousands)
Commercial real estate	$	438,060	$	-	$	1,459	$	-	$	439,519
Commercial construction		11,909		-		315		-		12,224
Commercial		55,703		82		-		-		55,785
Residential real estate		522,533		528		330		-		523,391
Consumer		772		-		-		-		772
Total	$	1,028,977	$	610	$	2,104	$	-	$	1,031,691

December 31, 2019
Commercial real estate	$	426,526	$	-	$	1,461	$	-	$	427,987
Commercial construction		12,307		-		315		-		12,622
Commercial		53,656		91		-		-		53,747
Residential real estate		517,281		719		150		-		518,150
Consumer		820		-		-		-		820
Total	$	1,010,590	$	810	$	1,926	$	-	$	1,013,326

At March 31, 2020 and December 31, 2019, the Company had no foreclosed assets or recorded investment in consumer mortgage loans collateralized by residential real estate in the process of foreclosure.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2020 and December 31, 2019, respectively:


	March 31, 2020						December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	888	$	1,128			$	1,626	$	1,890
Commercial construction		315		315				315		315
Commercial		-		-				-		-
Residential real estate		707		777				530		786
Consumer		-		-				-		-
With an allowance recorded:
Commercial real estate	$	700	$	700	$	25	$	-	$	-	$	-
Commercial construction		-		-		-		-		-		-
Commercial		233		233		26		234		234		27
Residential real estate		623		623		134		816		816		175
Consumer		-		-		-		-		-		-
Total:
Commercial real estate	$	1,588	$	1,828	$	25	$	1,626	$	1,890	$	-
Commercial construction		315		315		-		315		315		-
Commercial		233		233		26		234		234		27
Residential real estate		1,330		1,400		134		1,346		1,602		175
Consumer		-		-		-		-		-		-
	$	3,466	$	3,776	$	185	$	3,521	$	4,041	$	202

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize information regarding the average recorded investment and interest income recognized on impaired loans by loan portfolio for the three months ended March 31, 2020 and 2019, respectively:


			Three Months Ended March 31,
		2020				2019
	Average Recorded Investment			Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
			(In Thousands)
With no related allowance recorded:
Commercial real estate	$	1,257		$	13	$	1,724	$	17
Commercial construction		315			3		315		3
Commercial		-			-		-		-
Residential real estate		619			7		702		3
Consumer		-			-		-		-
With an allowance recorded:
Commercial real estate	$	350		$	6	$	-	$	-
Commercial construction		-			-		-		-
Commercial		234			2		239		2
Residential real estate		720			5		844		7
Consumer		-			-		-		-
Total:
Commercial real estate	$	1,607		$	19	$	1,724	$	17
Commercial construction		315			3		315		3
Commercial		234			2		239		2
Residential real estate		1,339			12		1,546		10
Consumer		-			-		-		-
	$	3,495		$	36	$	3,824	$	32

The following table presents non-accrual loans by classes of the loan portfolio:



	March 31, 2020		December 31, 2019

	(In Thousands)
Commercial real estate	$	-	$	-
Commercial construction		-		-
Commercial		-		-
Residential real estate		17		18
Consumer		-		-
Total	$	17	$	18

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2020 and December 31, 2019, respectively:


					Greater								Loan
					than								Receivables >
	30-59 Days		60-89 Days		90 Days		Total				Total Loan		90 Days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing

March 31, 2020	(In Thousands)
Commercial real estate	$	516	$	-	$	-	$	516	$	439,003	$	439,519	$	-
Commercial construction		-		-		-		-		12,224		12,224		-
Commercial		-		139		-		139		55,646		55,785		-
Residential real estate		2,440		119		-		2,559		520,832		523,391		-
Consumer		1		-		-		1		771		772		-
Total	$	2,957	$	258	$	-	$	3,215	$	1,028,476	$	1,031,691	$	-

December 31, 2019
Commercial real estate	$	-	$	-	$	-	$	-	$	427,987	$	427,987	$	-
Commercial construction		-		-		-		-		12,622		12,622		-
Commercial		-		-		-		-		53,747		53,747		-
Residential real estate		951		-		-		951		517,199		518,150		-
Consumer		-		-		-		-		820		820		-
Total	$	951	$	-	$	-	$	951	$	1,012,375	$	1,013,326	$	-

The following tables detail the activity in the allowance for loan losses for the three months ended March 31, 2020 and 2019:



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

Allowance for loan losses	(In Thousands)
Three Months Ending March 31, 2020
Beginning Balance - December 31, 2019	$	3,221	$	121	$	770	$	3,488	$	19	$	403	$	8,022
Charge-offs		-		-		-		-		-		-		-
Recoveries		24		-		-		-		-		-		24
Provisions		108		-		47		139		(1)		27		320
Ending Balance - March 31, 2020	$	3,353	$	121	$	817	$	3,627	$	18	$	430	$	8,366

Three Months Ending March 31, 2019
Beginning Balance - December 31, 2018	$	3,248	$	94	$	574	$	3,179	$	19	$	298	$	7,412
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		4		-		-		-		4
Provisions		17		9		20		19		2		63		130
Ending Balance - March 31, 2019	$	3,265	$	103	$	598	$	3,198	$	21	$	361	$	7,546

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at March 31, 2020 and December 31, 2019:



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

	(In Thousands)
March 31, 2020
Allowance for Loan Losses
Ending Balance	$	3,353	$	121	$	817	$	3,627	$	18	$	430	$	8,366
Ending balance: individually evaluated for impairment	$	25	$	-	$	26	$	134	$	-	$	-	$	185
Ending balance: collectively evaluated for impairment	$	3,328	$	121	$	791	$	3,493	$	18	$	430	$	8,181

Loans receivables:
Ending balance	$	439,519	$	12,224	$	55,785	$	523,391	$	772			$	1,031,691
Ending balance: individually evaluated for impairment	$	1,588	$	315	$	233	$	1,330	$	-			$	3,466
Ending balance: collectively evaluated for impairment	$	437,931	$	11,909	$	55,552	$	522,061	$	772			$	1,028,225

December 31, 2019
Allowance for Loan Losses
Ending Balance	$	3,221	$	121	$	770	$	3,488	$	19	$	403	$	8,022
Ending balance: individually evaluated for impairment	$	-	$	-	$	27	$	175	$	-	$	-	$	202
Ending balance: collectively evaluated for impairment	$	3,221	$	121	$	743	$	3,313	$	19	$	403	$	7,820

Loans receivables:
Ending balance	$	427,987	$	12,622	$	53,747	$	518,150	$	820			$	1,013,326
Ending balance: individually evaluated for impairment	$	1,626	$	315	$	234	$	1,346	$	-			$	3,521
Ending balance: collectively evaluated for impairment	$	426,361	$	12,307	$	53,513	$	516,804	$	820			$	1,009,805

Troubled Debt Restructurings

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider, resulting in a modified loan which is then identified as a 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. Payment accommodations done in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus are described in Note 3.

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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents TDR’s outstanding:



	Accrual Loans		Non-Accrual Loans		Total Modifications

March 31, 2020	(In Thousands)
Commercial real estate	$	1,149	$	-	$	1,149
Commercial construction		260		-		260
Commercial		233		-		233
Residential real estate		970		17		987
Consumer		-		-		-
	$	2,612	$	17	$	2,629

December 31, 2019
Commercial real estate	$	1,188	$	-	$	1,188
Commercial construction		260		-		260
Commercial		233		-		233
Residential real estate		982		18		1,000
Consumer		-		-		-
	$	2,663	$	18	$	2,681

As of March 31, 2020, no available commitments were outstanding on TDRs.

There were no newly restructured loans that occurred during the three months ended March 31, 2020 and 2019.

There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three months ended March 31, 2020 and 2019.

Note 7 – Right of Use Asset and Lease Liability

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 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 2.82%. 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 March 31, 2020, the operating leases overall had a weighted average lease term of 6.49 years, with the branch leases having a weighted average life of 6.54 years and equipment leases having a weighted average life of 2.34 years.

At March 31, 2020, the Company had right of use assets of $9.2 million (included in other assets) and lease liabilities of $9.4 million (included in other liabilities). The cost for operating leases was $427 thousand, including short term lease cost of $5 thousand, for the three months ended March 31, 2020. Operating cash flow paid for lease liabilities was $411 thousand for the three months ended March 31, 2020.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

A reconciliation of operating lease liabilities by minimum lease payments by year and in aggregate and discount amounts in aggregate, as of March 31, 2020, are as follows:


	Branch Leases				Equipment
	Third Parties		Related Parties		Leases		Total
	(In Thousands)
2020	$	704	$	477	$	58	$	1,239
2021		953		647		39		1,639
2022		983		660		33		1,676
2023		1,000		672		4		1,676
2024		854		685		1		1,540
Thereafter		1,247		1,424		-		2,671
Total Payments		5,741		4,565		135		10,441
Less: Discount Amount		563		488		5		1,056
Total Lease Liability	$	5,178	$	4,077	$	130	$	9,385

Note 8 – Deposits

The components of deposits at March 31, 2020 and December 31, 2019 are as follows:



	March 31,		December 31,
	2020		2019
	(In Thousands)

Demand, non-interest bearing	$	188,431	$	171,815
Demand, NOW and money market, interest bearing		184,825		180,869
Savings		432,633		425,284
Time, $250 and over		88,704		92,517
Time, other		153,541		161,483
Total deposits	$	1,048,134	$	1,031,968

At March 31, 2020, the scheduled maturities of time deposits are as follows (in thousands):


2020 (remainder of the year)	$	129,211
2021		76,961
2022		7,940
2023		23,532
2024		3,952
2025		649
	$	242,245

Note 9 – Short-term and Long-term Borrowings

Securities sold under agreements to repurchase, federal funds purchased and 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 March 31, 2020, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $588.2 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term FHLB advances outstanding as of March 31, 2020 and $18.1 million in short-term FHLB advances outstanding as of December 31, 2019.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

There were $14.7 million in long-term FHLB advances outstanding as of March 31, 2020 and none outstanding as of December 31, 2019. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at March 31, 2020 and December 31, 2019. Advances from this line are unsecured.

The components of long-term borrowings with the FHLB at March 31, 2020 were as follows:


	March 31, 2020
	(Dollars in Thousands)
Maturity Date	Interest Rate		Outstanding
March 2022	0.79%	$	10,000
March 2022	0.64%		2,663
March 2022	0.61%		1,988
Total Outstanding Borrowings		$	14,651

Note 10 – Stock Incentive Plan and Employee Stock Purchase Plan

Stock Incentive Plan:

At the Company’s annual meeting on June 20, 2019, the shareholders approved the amendment and restatement of the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”), which was originally adopted by the Company’s shareholders effective June 16, 2010, to replenish the number of shares of common stock available for issuance under the Plan and extend the term of the Plan for another ten (10) years. 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 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 maximum number of shares of common stock authorized for issuance under the Plan increased from 500,000 to 756,356 (in order to replenish the shares that were previously issued). 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 20, 2029. At March 31, 2020, there were 467,790 shares available for issuance under the SIP.

The Company grants shares of restricted stock, under the SIP, to certain members of its Board of Directors as compensation for their services, in accordance with the Company’s Non-employee Directors Compensation program adopted in October 2010. The Company also grants restricted stock to certain officers under individual agreements with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over three to nine service years. Management recognizes compensation expense for the fair value of the restricted stock awards on a straight-line basis over the requisite service period. Since inception of the plan and through the period ended March 31, 2020, there have been 172,323 awards granted. During the three months ended March 31, 2020 and 2019 there were 32,210 and 10,799 awards granted, respectively. The Company recognized compensation expense for restricted stock awards during the three months ended March 31, 2020 and 2019 of $44 thousand and $51 thousand, respectively.

The Company has granted stock options to purchase shares of stock to certain executive officers under individual agreements and/or in accordance with their respective employment agreements. There was no stock compensation expense related to these options for the three months ending March 31, 2020 and $1 thousand in stock compensation expense for the three months ended March 31, 2019.

Employee Stock Purchase Plan:

On January 1, 2017, the Company implemented the Embassy Bancorp, Inc. Employee Stock Purchase Plan (“ESPP”), which was approved by the Company’s shareholders at the annual meeting held on June 16, 2016. Under the ESPP, each employee of the Company and its subsidiaries who is employed on an offering date and customarily is scheduled to work at least twenty (20) hours per week and more than five (5) months in a calendar year is eligible to participate. The purchase price for shares purchased under the

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

ESPP shall initially equal 95% of the fair market value of such shares on the date of purchase. The purchase price may be adjusted from time to time by the Board of Directors; provided, however, that the discount to fair market value shall not exceed 15%. The Company has authorized 350,000 shares of its common stock for the ESPP, of which 11,511 shares have been issued as of March 31, 2020. The Company recognized discount expense in relation to the ESPP of $1 thousand during the three months ended March 31, 2020 and 2019, respectively.

Note 11 – Other Comprehensive Income

US GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income both before tax and net of tax are as follows:



	Three Months Ended March 31,
	2020						2019

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive income:
Unrealized holding gains on securities available for sale	$	1,803	$	(378)	$	1,425	$	2,023	$	(425)	$	1,598
Reclassification adjustments for gains on securities transactions included in net income (A),(B)		-		-		-		-		-		-
Total other comprehensive income	$	1,803	$	(378)	$	1,425	$	2,023	$	(425)	$	1,598

Realized gains on securities transactions included in gain on sales of securities, net, in the accompanying Consolidated Statements of Income.

Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.

There were no realized gains on securities available for sale for the three months ended March 31, 2020 and 2019.

A summary of the accumulated other comprehensive income net of tax, is as follows:



	Securities
	Available
	for Sale
Three Months Ended March 31, 2020 and 2019	(In Thousands)
Balance January 1, 2020	$	1,340
Other comprehensive income before reclassifications		1,425
Amounts reclassified from accumulated other comprehensive income		-
Net other comprehensive income during the period		1,425
Balance March 31, 2020	$	2,765

Balance January 1, 2019	$	(1,247)
Other comprehensive income before reclassifications		1,598
Amounts reclassified from accumulated other comprehensive income		-
Net other comprehensive income during the period		1,598
Balance March 31, 2019	$	351

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – 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.


	Three Months Ended
	March 31,
	2020		2019

	(Dollars In Thousands, Except Share and Per Share Data)
Net income	$	2,457	$	2,552

Weighted average shares outstanding		7,443,875		7,469,950
Dilutive effect of potential common shares, stock options		37,630		58,889
Diluted weighted average common shares outstanding		7,481,505		7,528,839

Basic earnings per share	$	0.33	$	0.34
Diluted earnings per share	$	0.33	$	0.34

Stock options of 4,227 were not considered in computing diluted earnings per common share for the three months ended March 31, 2020 because to do so would have been anti-dilutive. There were no stock options not considered in computing diluted earnings per common share for the three months ended March 31, 2019.

Note 13 – Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at March 31, 2020 and December 31, 2019, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total

		(In Thousands)
Municipal bonds	$	-	$	25,244	$	-	$	25,244
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial		-		512		-		512
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		62,104		-		62,104
March 31, 2020 Securities available for sale	$	-	$	87,860	$	-	$	87,860

Municipal bonds	$	-	$	26,444	$	-	$	26,444
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		64,385		-		64,385
December 31, 2019 Securities available for sale	$	-	$	90,829	$	-	$	90,829

The fair value of securities available for sale are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2020 and December 31, 2019, respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total
		(In Thousands)
March 31, 2020 Impaired loans	$	-	$	-	$	1,371	$	1,371
December 31, 2019 Impaired loans	$	-	$	-	$	848	$	848

Impaired loans are those that are accounted for under existing FASB guidance, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

At March 31, 2020, of the impaired loans having an aggregate balance of $3.5 million, $1.9 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $1.6 million in impaired loans, an aggregate valuation allowance of $185 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets would be included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. At both March 31, 2020 and December 31, 2019, the Company had no real estate properties acquired through, or in lieu of, foreclosure.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



	Quantitative Information about Level 3 Fair Value Measurements
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

		(Dollars In Thousands)
March 31, 2020:
Impaired loans	$	1,371	Appraisal of collateral and pending agreement of sale	Appraisal adjustments (1)	0% to -25% (-15.1%)
				Liquidation expenses (2)	0% to -10.0% (-8.5%)
December 31, 2019:
Impaired loans	$	848	Appraisal of collateral	Appraisal adjustments (1)	0% to -25% (-25%)
				Liquidation expenses (2)	0% to -7.5% (-7.5%)

Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal. The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.

Appraisals and pending agreements of sale are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2020 and December 31, 2019:



						(Level 1)
						Quoted		(Level 2)		(Level 3)
						Prices in Active		Significant Other		Significant
		Carrying		Fair Value		Markets for		Observable		Unobservable
		Amount		Estimate		Identical Assets		Inputs		Inputs

	(In Thousands)
March 31, 2020:
Financial assets:
Cash and cash equivalents	$	43,189	$	43,189	$	43,189	$	-	$	-
Securities available-for-sale		87,860		87,860		-		87,860		-
Loans held for sale		659		659		-		-		659
Loans receivable, net of allowance		1,024,033		1,057,305		-		-		1,057,305
Restricted investments in bank stock		1,341		1,341		-		1,341		-
Accrued interest receivable		2,079		2,079		-		2,079		-
Financial liabilities:
Deposits		1,048,134		1,050,712		-		1,050,712		-
Securities sold under agreements to
repurchase and federal funds purchased		10,385		10,385		-		10,385		-
Long-term borrowings		14,651		14,630		-		-		14,630
Accrued interest payable		2,085		2,085		-		2,085		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2019:
Financial assets:
Cash and cash equivalents	$	39,986	$	39,986	$	39,986	$	-	$	-
Securities available-for-sale		90,829		90,829		-		90,829		-
Loans receivable, net of allowance		1,006,117		1,013,093		-		-		1,013,093
Restricted investments in bank stock		1,478		1,478		-		1,478		-
Accrued interest receivable		2,048		2,048		-		2,048		-
Financial liabilities:
Deposits		1,031,968		1,033,786		-		1,033,786		-
Securities sold under agreements to
repurchase and federal funds purchased		7,208		7,208		-		7,208		-
Short-term borrowings		18,067		18,067		-		18,067		-
Accrued interest payable		3,281		3,281		-		3,281		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

Note 14 – Future Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses”. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

requirements that provide additional information about the amounts recorded in the financial statements. In November 2019, the FASB issued an update to defer the implementation date for smaller reporting companies from 2020 to 2023. The Company currently qualifies as a smaller reporting company under SEC Regulation S-K and, therefore, the guidance is effective for the Company in 2023. The Company has not yet determined the impact this standard will have on its consolidated financial statements or results of operations.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of March 31, 2020 and for the three months ended March 31, 2020 and 2019, respectively. This discussion should be read in conjunction with the preceding consolidated financial statements and related footnotes, as well as with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2019 included in the Company’s Form 10-K filed with the Securities and Exchange Commission. Current performance does not guarantee and may not be indicative of similar performance in the future.

Critical Accounting Policies

Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2019. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses and the valuation of deferred tax assets. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses,” “Credit Risk and Loan Quality,” and “Income Taxes” contained on the following pages.

Caution About Forward-looking Statements

This report contains forward-looking statements, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.

Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Company’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations, (v) changes in accounting policies or procedures as may be required by FASB or regulatory agencies, (vi) risks and uncertainties related to the COVID-19 pandemic and resulting governmental and societal responses, and (vii) other external developments which could materially affect the Company’s business and operations, as well as the risks described in the Company’s Form 10-K for the year ended December 31, 2019, this March 31, 2020 Quarterly Report on Form 10-Q, and subsequent filings with the SEC.

OVERVIEW

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.

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, for the purpose of providing a local community bank to serve Lehigh and Northampton Counties in Pennsylvania.

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.

At March 31, 2020, the Company continued to be in a strong financial and operational condition. The Bank’s March 31, 2020 capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations. The Company’s ratio of non-performing loans to total loans at March 31, 2020 was 0.25% and the ratio of non-performing assets to total assets was 0.22%. We believe the Company is well prepared for the economic and social consequences of the COVID-19 global pandemic.

The Commonwealth of Pennsylvania enacted a “Stay-At-Home” order on April 1, 2020, which will remain in effect until sometime after May 8, 2020. We have implemented temporary personnel policies and procedures in response to COVID-19. Effective March 30, 2020, we temporarily amended our operating hours and the number of open locations in the spirit of making our contribution to the welfare of our community. Four of our offices were temporarily closed. The remaining open locations offer drive-up and by-appointment banking for essential purposes only. ATMs continue to be available and we continue to strongly encourage our customers to utilize our Embassy Bank Online digital solutions for self-service on existing accounts, deposit making and opening of new personal deposit accounts. All business functions continue to be effective and Company team members, systems and processes have managed this extraordinary change with great success.

The Company’s assets increased $18.2 million from $1.18 billion at December 31, 2019 to $1.19 billion at March 31, 2020. The increase was due in part to an increase of $17.9 million in net loans receivable and an increase of $3.2 million in cash and cash equivalents, offset by a decrease of $3.0 million in securities available for sale. The Company's deposits grew $16.2 million from $1.03 billion at December 31, 2019 to $1.05 billion at March 31, 2020. The overall deposit growth is attributable to a highly effective relationship building, sales and marketing effort, which served to further increase the Company’s overall 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. These funds were in part used to fund new loan growth and to purchase securities. The Bank also continues to capitalize on opportunities created by recent merger announcements, name changes, and competitive branch closures in the Company’s market area, attracting customers looking to relocate to a local, reputable community bank.

Loans receivable, net of allowance for loan losses, increased by $17.9 million from $1.01 billion at December 31, 2019 to $1.02 billion at March 31, 2020. Before the onset of the COVID-19 pandemic the market continued 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 credit-worthy customers, the Company continues to expand its market presence 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, although there can be no assurance of this. The Company continues to monitor interest rate exposure of its interest-bearing assets and liabilities and believes that it is well positioned for any anticipated future market rate adjustments.

Net income for the three months ended March 31, 2020 was $2.5 million compared to net income for the three months ended March 31, 2019 of $2.6 million, a decrease of $95 thousand, or 3.7%. Basic and diluted earnings per share decreased to $0.33 for the three months ended March 31, 2020, as compared to $0.34 for the three months ended March 31, 2019. The difference in net income for the three months ended March 31, 2020 and March 31, 2019 resulted, in part, from an increase in the provision for loan losses, a decrease in bank owned life insurance valuation, no gains on the sale of real estate owned and an increase in non-interest expenses primarily caused by the increase in salaries and benefits, occupancy and equipment, data processing and professional fees; offset by an increase in net interest income, a decrease in advertising and promotion expense, a decrease in FDIC insurance expense and decrease in other expenses. The increase in the provision for loan losses for the three months ended March 31, 2020 was primarily a result of adjusting the economic risk factor in the allowance for loan loss methodology from the COVID-19 pandemic and to a lesser extent from ongoing loan growth.

RESULTS OF OPERATIONS

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 a 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 of other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2020 and 2019.

Total interest income for the three months ended March 31, 2020 increased $471 thousand to $10.9 million, as compared to $10.4 million for the three months ended March 31, 2019. Average earning assets were $1.13 billion for the three months ended March 31, 2020 as compared to $1.07 billion for the three months ended March 31, 2019. The tax equivalent yield on average earning assets was 3.88% for the first quarter of 2020 compared to 3.97% for the first quarter of 2019.

Total interest expense for the three months ended March 31, 2020 decreased $106 thousand to $2.1 million, as compared to $2.2 million for the three months ended March 31, 2019. Average interest bearing liabilities were $877.2 million for the three months ended March 31, 2020 as compared to $856.4 million for the three months ended March 31, 2019. The yield on average interest bearing liabilities was 0.95% and 1.03% for the first quarter of 2020 and 2019, respectively, as the mix of the Company's deposit portfolio shifted from higher costing certificates of deposit to lower costing interest bearing demand deposits, NOW and money market deposits.

Net interest income for the three months ended March 31, 2020 was $8.8 million compared to $8.2 million for the three months ended March 31, 2019. The improvement in net interest income for the three months ended March 31, 2020 is primarily the result of an increase in the balances of taxable loans, taxable investments and interest bearing deposits with banks. Also contributing to the improvement in net interest income is a decrease in the balance and rates of savings and securities sold under agreement to repurchase and other borrowings and a decrease in certificate of deposit rates. The improvements are offset by a decrease in the rates of taxable loans, taxable and non-taxable investments, interest bearing deposits with banks, an increase in the balance and rate of interest bearing demand deposits, NOW and money markets, and an increase in the balance of certificate of deposits. The Company’s net interest margin remained the same for the three months ended March 31, 2020 and 2019 at 3.12% on a US GAAP basis and 3.15% on a non-US GAAP basis. In response to the COVID-19 outbreak, the Federal Reserve Board in mid-March 2020 has reduced by 150 basis points the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Approximately 10% of the Company’s loan portfolio is scheduled to mature or reprice within the next year. As a result of the decline in the Federal Reserve Board’s target federal funds rate and yields on treasury notes, the Company’s future net interest margin and spread may be reduced.

The table below sets forth average balances and corresponding yields for the corresponding periods ended March 31, 2020 and 2019, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)


	Three Months Ended March 31,
	2020					2019
					Tax					Tax
	Average				Equivalent	Average				Equivalent
	Balance			Interest	Yield	Balance			Interest	Yield

		(Dollars In Thousands)
ASSETS
Loans - taxable (2)	$	1,016,177	$	10,133	4.01%	$	955,519	$	9,523	4.04%
Loans - non-taxable (1)		7,365		57	3.94%		7,977		61	3.92%
Investment securities - taxable		63,649		377	2.38%		53,858		366	2.76%
Investment securities - non-taxable (1)		25,150		212	4.29%		33,674		290	4.42%
Federal funds sold		533		1	1.02%		332		1	2.22%
Interest bearing deposits with banks		20,247		75	1.49%		17,928		143	3.23%
TOTAL INTEREST EARNING ASSETS		1,133,121		10,855	3.88%		1,069,288		10,384	3.97%
Less allowance for loan losses		(8,080)					(7,452)
Other assets		50,780					51,975
TOTAL ASSETS	$	1,175,821				$	1,113,811

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits, NOW and money market	$	181,871	$	261	0.58%	$	132,902	$	121	0.37%
Savings		426,511		444	0.42%		445,323		569	0.52%
Certificates of deposit		245,617		1,290	2.11%		224,337		1,187	2.15%
Securities sold under agreements to repurchase and other borrowings		23,220		69	1.20%		53,824		293	2.21%
TOTAL INTEREST BEARING LIABILITIES		877,219		2,064	0.95%		856,386		2,170	1.03%

Non-interest bearing demand deposits		178,293					149,615
Other liabilities		18,981					18,345
Stockholders' equity		101,328					89,465
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,175,821				$	1,113,811

Net interest income			$	8,791				$	8,214
Tax equivalent adjustments
Loans				15					16
Investments				56					77
Total tax equivalent adjustments				71					93
Net interest income on a tax equivalent basis			$	8,862				$	8,307
Net interest spread (US GAAP basis)					2.91%					2.91%
Net interest margin (US GAAP basis)					3.12%					3.12%
Net interest spread (non-US GAAP basis) (3)					2.93%					2.94%
Net interest margin (non-US GAAP basis) (3)					3.15%					3.15%

(1)

Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of March 31, 2020 and 2019, 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 calculated on a fully tax equivalent basis at a tax rate of 21% as of March 31, 2020 and 2019, respectively.

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.



	Three Months Ended
	March 31, 2020 compared to March 31, 2019
	(In Thousands)
	Total		Due to change in:
	Change		Volume		Rate		# of Days
Interest-earning assets:
Loans - taxable	$	610	$	610	$	(79)	$	79
Loans - non-taxable		(4)		(4)		0		0
Investment securities - taxable		11		67		(59)		3
Investment securities - non-taxable		(78)		(75)		(6)		3
Federal funds sold		-		1		(1)		0
Interest bearing deposits with banks		(68)		19		(88)		1
Total net change in income on
interest-earning assets		471		618		(233)		86

Interest-bearing liabilities:
Interest bearing demand deposits,
NOW and money market		140		45		94		1
Savings		(125)		(24)		(106)		5
Certificates of deposit		103		114		(20)		9
Total deposits		118		135		(32)		15
Securities sold under agreements to
repurchase and other borrowings		(224)		(168)		(59)		3
Total net change in expense on
interest-bearing liabilities		(106)		(33)		(91)		18
Change in net interest income	$	577	$	651	$	(142)	$	68

Provision for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level management considers to be adequate to provide for losses that can be reasonably anticipated. 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 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 general, specific, qualitative and unallocated components. The general component covers non-classified loans and classified loans not considered impaired, and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are classified as impaired and/or restructured. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. An allowance for loan losses is not maintained on loans designated as held for sale.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of

expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or there is a possible loss expected.

For the three months ended March 31, 2020, the provision for loan losses was $320 thousand, as compared to $130 thousand for the same period ended March 31, 2019. The provision for loan losses is a function of the allowance for loan loss methodology that the Bank uses to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. In the first quarter of 2020, the Bank adjusted the economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic. See further discussion below in the “Credit Risk and Loan Quality” section of the Bank’s considerations of its March 31, 2020 allowance for loan loss levels. In the three months ended March 31, 2020, there were no charge-offs and $24 thousand in recoveries, as compared to no charge-offs and $4 thousand in recoveries for the three months ended March 31, 2019. The allowance for loan losses is $8.4 million as of March 31, 2020, which is 0.81% of outstanding loans receivable, compared to $7.5 million or 0.78% of outstanding loans as of March 31, 2019. At December 31, 2019, the allowance for loan losses was $8.0 million, which represented 0.79% of total outstanding loans. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Bank’s market area, the allowance is believed to be adequate to absorb any losses inherent 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 loan losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate. The Bank has not participated in any sub-prime lending activity.

The activity in the allowance for loan losses is shown in the following table, as well as period end loans receivable and the allowance for loan losses as a percent of the total loans receivable portfolio:



	Three Months Ended
	March 31,
	2020		2019

	(In Thousands)
Loans receivable at end of period	$	1,031,691	$	967,254
Allowance for loan losses:
Balance, beginning	$	8,022	$	7,412
Provision for loan losses		320		130
Loans charged off:
Commercial real estate		-		-
Commercial construction		-		-
Commercial		-		-
Residential real estate		-		-
Consumer		-		-
Total loans charged off		-		-
Recoveries of loans previously charged off:
Commercial real estate		24		-
Commercial construction		-		-
Commercial		-		4
Residential real estate		-		-
Consumer		-		-
Total recoveries		24		4
Net charge offs		24		4
Balance at end of period	$	8,366	$	7,546
Allowance for loan losses to loans receivable at end of period		0.81%		0.78%

Non-interest Income

Total non-interest income was $300 thousand for the three months ended March 31, 2020 compared to $578 thousand for the same period in 2019. The decrease is attributable to a decrease in bank owned life insurance of $237 thousand and no gains on the sale of real estate owned for the three months ended March 31, 2020, compared to a $45 thousand gain on the sale of real estate owned for the three months ended March 31, 2019. The decrease in the bank owned life insurance was driven by the effect market conditions had on underlying life insurance assets, particularly the separate account life insurance assets.

Non-interest Expense

Non-interest expenses increased $178 thousand from $5.6 million for the three months ended March 31, 2019 to $5.7 million for the same period ended March 31, 2020. The increase in non-interest expenses is primarily due to an increase of $196 thousand in salaries and employee benefits due to a 6.5% increase in full-time equivalent employees from ninety-two (92) at March 31, 2019 to ninety-eight (98) at March 31, 2020 as a result of continued growth and annual increases in salaries and benefits. Additional increases in non-interest expenses are attributable to: an increase of $38 thousand in occupancy and equipment, in part due to an increase in rent expense, an increase of $74 thousand in data processing due primarily to an expanding customer base, an increase of $41 thousand in professional fees due primarily to an increase in legal and auditing costs, an increase of $25 thousand in loan and real estate due primarily to loan legal fees and appraisal fees, offset by a $115 thousand decrease in advertising and promotions, a decrease of $44 thousand in FDIC insurance due to remaining FDIC assessment credits applied in the first quarter of 2020, and a decrease of $34 thousand in other expenses due primarily to a decrease in postage expenses.

A breakdown of other expenses can be found in the Consolidated Statements of Income.

Income Taxes

The provision for income taxes for the three months ended March 31, 2020 totaled $582 thousand, or 19.2% of income before taxes, compared to the income taxes for the three months ended March 31, 2019 totaling $556 thousand, or 17.9% of income before taxes. The increase in the tax rate is primarily the result of the change in the mix of taxable and tax free loans and investments and a decrease in income on bank owned life insurance.

FINANCIAL CONDITION

Securities

The Bank’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 Bank 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 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. The Bank holds no high-risk securities or derivatives as of March 31, 2020. The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

Total securities at March 31, 2020 were $87.9 million compared to $90.8 million at December 31, 2019. The decrease in the investment portfolio is the result of principal pay downs on mortgage-backed securities and calls of non-taxable municipal bonds, offset by the purchase of one (1) mortgage-backed security and one (1) taxable municipal bond totaling $1.5 million and an increase in unrealized gains. The carrying value of the securities portfolio as of March 31, 2020 includes a net unrealized gain of $3.5 million, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $1.7 million at December 31, 2019. The current unrealized gain position of the securities portfolio is due to changes in market interest rates since purchase. No securities are deemed to be other than temporarily impaired.

Loans

Effective March 31, 2020, the Company transferred $659 thousand of loans from loans receivable to loans held for sale, representing the entirety of its commercial credit cards loan portfolio. Subsequent to March 31, 2020, on May 1, 2020 these loans were sold to an unrelated third party for a gain of approximately $59 thousand. These commercial credit cards were unsecured. The Company does not anticipate originating and selling commercial credits cards in the future.

The loan portfolio comprises a major component of the Bank’s earning assets. All of the Bank’s loans are to domestic borrowers. Total net loans receivable at March 31, 2020 increased $17.9 million to $1.02 billion from $1.01 billion at December 31, 2019. The gross loan-to-deposit ratio increased from 98% at December 31, 2019 to 99% at March 31, 2020. The Bank’s loan portfolio at March 31, 2020 was comprised of residential real estate and consumer loans of $524.2 million, an increase of $5.2 million from December 31, 2019, and commercial loans of $508.2 million, an increase of $13.8 million from December 31, 2019. The Bank has not originated, nor does it intend to originate, sub-prime mortgage loans. As described in Note 3 to the consolidated financial statements, the Bank is participating in the SBA PPP program to support the needs of its small business clients.

Payment accommodations related to COVID-19 assistance were in the form of short-term (six months or less) principal and/or interest deferrals and the loans were considered current at the time of the accommodation. These payment accommodations were done in accordance with Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and the Company will not be categorizing these modifications as troubled debt restructurings. Through March 31, 2020, the Company had provided payment accommodations on 67 loans with balances of $55.9 million. Subsequent to March 31, 2020, through April 29, 2020, additional payment accommodations were made on 208 loans with balances of $114.8 million.

Credit Risk and Loan Quality

The allowance for loan losses increased $344 thousand to $8.4 million at March 31, 2020 compared to $8.0 million at December 31, 2019. At March 31, 2020 and December 31, 2019, the allowance for loan losses represented 0.81% and 0.79%, respectively, of total loans receivable. In the first quarter of 2020, the Bank adjusted the economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of total loans. In determining its allowance for loan loss level at March 31, 2020, the Bank considered the health and composition of its loan portfolio going into the COVID-19 pandemic. The Bank’s nonperforming loans to total loans receivable was 0.25% at March 31, 2020, down from 0.26% at December 31, 2019. The Bank had no charge-offs for the three-months ended March 31, 2020 and for the year ended December 31, 2019. At March 31, 2020, approximately 94% of the Bank’s loan portfolio is collateralized by real estate. Less than 5% of the Bank’s loan portfolio is to borrowers in the more particularly hard-hit industries (including the travel and hotel industry, the full-service and limited-service restaurant industries, and the assisted living facilities industry) and the Bank has no international exposure. The Bank was not required to adopt the Current Expected Credit Losses (“CECL”) FASB accounting standard in the first quarter of 2020, as this guidance will not be effective for the Bank until 2023. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Bank and comparable institutions in the Bank’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses. The Bank will continue to evaluate the allowance for loan losses as new information becomes available.

At March 31, 2020, December 31, 2019, and March 31, 2019 aggregate balances on non-performing loans are included in the following table. Troubled debt restructurings, included in the following table, represent loans where the Company, for economic or legal reasons related to the debtor’s financial difficulties, has granted a concession to the debtor that it would not otherwise consider. 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 three months ended March 31, 2020.

The details for non-performing loans are included in the following table:



		March 31,		December 31,		March 31,
		2020		2019		2019

	(In Thousands)
Non-accrual - commercial	$	-	$	-	$	-
Non-accrual - consumer		17		18		258
Restructured loans, accruing interest and less than 90 days past due		2,612		2,663		2,898
Loans past due 90 or more days, accruing interest		-		-		-
Total nonperforming loans		2,629		2,681		3,156
Foreclosed assets		-		-		-
Total nonperforming assets	$	2,629	$	2,681	$	3,156
Nonperforming loans to total loans receivable at period-end		0.25%		0.26%		0.33%
Nonperforming assets to total assets		0.22%		0.23%		0.28%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, increased $97 thousand from December 31, 2019 to March 31, 2020. This increase is due to purchases offset by depreciation on existing premises and equipment.

Deposits

Total deposits at March 31, 2020 increased $16.2 million to $1.05 billion from $1.03 billion at December 31, 2019. Demand, NOW and money market deposits increased $20.6 million, savings deposits increased $7.3 million and time deposits decreased $11.8 million. Time deposits decreased due to the maturing of deposits that originated with certain promotions done in the first quarter of 2019. The funds were primarily used to fund new loan growth and purchase securities. The growth was primarily due to a highly effective relationship building, sales and marketing effort, which served to further increase the Company’s overall 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 Bank also continued to capitalize on opportunities created by recent and proposed mergers in the Company’s market area, attracting customers looking to relocate to a local, reputable community bank.

Liquidity

Liquidity represents 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 $43.2 million at March 31, 2020, compared to $40.0 million at December 31, 2019.

Additional asset liquidity sources include principal and interest payments from the investment security 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. At March 31, 2020, the Company had $87.9 million of available for sale securities. Securities with carrying values of approximately $77.8 million and $74.0 million at March 31, 2020 and December 31, 2019, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

At March 31, 2020, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $588.2 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term FHLB advances outstanding as of March 31, 2020 and $18.1 million in short-term FHLB advances outstanding as of December 31, 2019. There were $14.7 million in long-term FHLB advances outstanding as of March 31, 2020 and none outstanding as of December 31, 2019. All FHLB borrowings are secured by qualifying assets of the Bank. The increase in long-term FHLB advances was done in conjunction with the run-off of the certificates of deposit described above.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at March 31, 2020 and December 31, 2019. Advances from this line are unsecured.

In April 2020, the Bank applied to and has been approved by the Federal Reserve Board for both the ability to borrow under its Paycheck Protection Program Liquidity Facility (“PPPLF”) as well as its Discount Window. The Bank will consider borrowings

under the PPPLF to provide liquidity in order to fund the PPP loans described in the above Loans section. The PPPLF provides term funding to depository institutions that originate loans to small businesses under the PPP. PPP loans that are pledged to secure PPPLF extensions of credit are excluded from leverage ratio calculations.

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 off-balance sheet arrangements consist of unfunded loans and commitments, as well as lines of credit made under the same standards as on-balance sheet instruments. These unused commitments totaled $125.9 million at March 31, 2020, compared to $142.4 million at December 31, 2019 as companies advanced additional amounts on their lines of credit due to market conditions. At March 31, 2020 the Company had letters of credit outstanding of $3.3 million and FHLB deposit letters of credit outstanding of $7.6 million. 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. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs. Management will continue to evaluate the Company’s liquidity position for changes caused by the COVID-19 pandemic.

Capital Resources and Adequacy

Total stockholders’ equity was $103.0 million as of March 31, 2020, representing a net increase of $3.4 million from December 31, 2019. The increase in capital was primarily the result of the net income of $2.5 million, an increase of $1.4 million in unrealized gains on available for sale securities, and an increase in surplus of $173 thousand due to stock grants and employee stock purchases with compensation expense, offset by a treasury stock purchase of $720 thousand.

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 effect on the consolidated financial statements.

The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of March 31, 2020, 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.

The following table provides a comparison of the Bank’s risk-based capital ratios and leverage ratios:



Consolidated Bank

	March 31, 2020			December 31, 2019

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	99,957		$	98,230
Tier II, allowable portion of allowance for loan losses		8,366			8,022
Total capital	$	108,323		$	106,252

Common equity tier 1 capital ratio		12.0	%		12.0	%
Tier I risk based capital ratio		12.0	%		12.0	%
Total risk based capital ratio		13.0	%		13.0	%
Tier I leverage ratio		8.5	%		8.4	%

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 would not be 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.

The following table provides the Company’s risk-based capital ratios and leverage ratios:



Consolidated Corporation

	March 31, 2020			December 31, 2019

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	100,218		$	98,275
Tier II, allowable portion of allowance for loan losses		8,366			8,022
Total capital	$	108,584		$	106,297

Common equity tier 1 capital ratio		12.0	%		12.0	%
Tier I risk based capital ratio		12.0	%		12.0	%
Total risk based capital ratio		13.0	%		13.0	%
Tier I leverage ratio		8.5	%		8.4	%

Note: Unrealized gains on securities available for sale are excluded from regulatory capital components of risk-based capital and leverage ratios.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary source of market risk is interest rate risk. 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), included as part of the Board of Directors meetings, oversees this review, which establishes policies to control interest rate sensitivity. 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.

Based on a twelve-month forecast of the balance sheet, the following table sets forth the Company’s interest rate risk profile at March 31, 2020. For income simulation purposes, personal and business savings accounts reprice every three months, personal and business NOW accounts reprice every four months and personal and business money market accounts reprice every two months. 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		0.3%
	Down 200 basis points		-2.0%

	Up 100 basis points		-0.5%
	Up 200 basis points		-1.3%

Item 4 – Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended March 31, 2020, including any corrective actions with regard to significant deficiencies and material weakness.

Part II - Other Information

Item 1 - 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.

Item 1A - Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 2019 Form 10-K. There are no material changes from the risk factors included within the 2019 Form 10-K, other than the risks described below. The risks described within the 2019 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Caution About Forward-looking Statements.”

The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 30 million people have filed claims for unemployment, and stock markets have declined in value and, in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve Board in mid-March 2020 reduced the benchmark fed funds rate 150 basis points to a target range of 0% to 0.25%, and the yields on 10-year and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hotel industry, the restaurant industry and the assisted living facilities industry. Finally, the spread of the coronavirus has caused the Bank to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. Further actions may be required by government authorities or taken as determined in the best interests of the Bank’s employees, customers, community, and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

demand for our products and services may decline, making it difficult to grow assets and income;

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond payment accommodation periods, which will adversely affect our net income;

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

a material decrease in net income or a net loss could result in a decrease in the rate of any potential cash dividend;

a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our clients or other parties regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are a participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans, regarding our process and procedures used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the number of shares of common stock repurchased by the Company, and the average paid for such shares, during the first quarter of 2020. The Company has not publicly announced any purchase plan or program.


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2020	40,000	$	18.00	N/A	N/A
February 1 - 29, 2020	N/A		N/A	N/A	N/A
March 1 - 31, 2020	N/A		N/A	N/A	N/A

Item 3 - Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

None.

Item 5 - Other Information

None.

Item 6 - Exhibits



	Exhibit
	Number		Description
	3.1		Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of Registrant's
			Form 10-Q filed on August 12, 2016).
	3.2		Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's
			Form 10-Q filed on August 12, 2016).
	31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
	31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
	32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350
			of the Sarbanes-Oxley Act of 2002.
	101.1		Interactive Data Files (XBRL)

No.	Description
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		EMBASSY BANCORP, INC.
		(Registrant)

Dated: May 5, 2020	By:	/s/ David M. Lobach, Jr.
		David M. Lobach, Jr.
		President and Chief Executive Officer


Dated: May 5, 2020	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		First Executive Officer,
		Chief Operating Officer, Secretary and
		Chief Financial Officer