Embassy Bancorp, Inc. - Quarter Report: 2021 September (Form 10-Q)

emyb-20210930x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021 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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 x

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 November 5, 2021	($1.00 Par Value)	7,508,966
	(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)	8
Notes to Consolidated Financial Statements (Unaudited)	9

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	42

Item 4 – Controls and Procedures	42

Part II - Other Information	44

Item 1 - Legal Proceedings	44

Item 1A - Risk Factors	44

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3 - Defaults Upon Senior Securities	44

Item 4 – Mine Safety Disclosures	44

Item 5 - Other Information	44

Item 6 - Exhibits	45

‎

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Current Period Unaudited)



	September 30,		December 31,
ASSETS	2021		2020

	(In Thousands, Except Share Data)
Cash and due from banks	$	16,973	$	14,528
Interest bearing demand deposits with banks		112,752		116,379
Federal funds sold		1,000		1,000
Cash and Cash Equivalents		130,725		131,907
Securities available for sale		264,199		130,940
Restricted investment in bank stock		1,424		1,330
Loans receivable, net of allowance for loan losses of $11,308 in 2021; $10,570 in 2020		1,106,996		1,079,339
Paycheck Protection Program loans receivable		16,214		54,334
Premises and equipment, net of accumulated depreciation		3,887		3,346
Bank owned life insurance		25,608		25,189
Accrued interest receivable		2,752		3,136
Other assets		14,315		12,509
Total Assets	$	1,566,120	$	1,442,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	310,938	$	269,996
Interest bearing		1,089,752		962,383
Total Deposits		1,400,690		1,232,379
Securities sold under agreements to repurchase		12,789		13,612
Long-term borrowings		14,651		14,651
Paycheck Protection Program Liquidity Facility borrowings		-		50,794
Accrued interest payable		665		1,640
Other liabilities		18,035		16,780
Total Liabilities		1,446,830		1,329,856
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2021 issued 7,651,615 shares; outstanding 7,508,966 shares;
2020 issued 7,637,216 shares; outstanding 7,528,967 shares;		7,652		7,637
Surplus		26,802		26,405
Retained earnings		87,298		76,960
Accumulated other comprehensive (loss) income		(97)		2,937
Treasury stock, at cost: 142,649 and 108,249 shares at September 30, 2021 and
December 31, 2020, respectively		(2,365)		(1,765)
Total Stockholders' Equity		119,290		112,174
Total Liabilities and Stockholders' Equity	$	1,566,120	$	1,442,030

See notes to consolidated financial statements.

‎

Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,

	2021		2020		2021			2020

	(In Thousands, Except Per Share Data)
INTEREST INCOME
Loans, including fees	$	10,264	$	10,196	$	30,600	$	30,460
Paycheck Protection Program loans, including fees		867		420		2,425		658
Securities, taxable		822		339		1,777		1,074
Securities, non-taxable		270		210		714		617
Short-term investments, including federal funds sold		41		26		101		129
Total Interest Income		12,264		11,191		35,617		32,938
INTEREST EXPENSE
Deposits		908		1,350		2,995		4,939
Securities sold under agreements to repurchase and federal
funds purchased		2		2		6		15
Short-term borrowings		-		-		-		51
Long-term borrowings		28		28		82		63
Paycheck Protection Program Liquidity Facility borrowings		-		54		15		78
Total Interest Expense		938		1,434		3,098		5,146
Net Interest Income		11,326		9,757		32,519		27,792
PROVISION FOR LOAN LOSSES		150		700		740		1,670
Net Interest Income after ‎ Provision for Loan Losses		11,176		9,057		31,779		26,122
OTHER NON-INTEREST INCOME
Merchant and credit card processing fees		84		47		234		167
Debit card interchange fees		222		182		635		460
Other service fees		126		116		349		300
Bank owned life insurance		76		257		419		554
Gain on sale of securities		-		-		24		128
Gain on sale of loans		-		-		-		59
Total Other Non-Interest Income		508		602		1,661		1,668
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits		3,042		2,726		8,880		8,234
Occupancy and equipment		911		821		2,730		2,474
Data processing		773		654		2,171		1,913
Merchant and credit card processing		1		5		5		48
Advertising and promotion		284		261		715		831
Professional fees		191		192		628		638
FDIC insurance		147		119		410		267
Loan & real estate		58		73		230		192
Charitable contributions		279		194		670		666
Other		465		402		1,347		1,214
Total Other Non-Interest Expenses		6,151		5,447		17,786		16,477

Income Before Income Taxes		5,533		4,212		15,654		11,313
INCOME TAX EXPENSE		1,093		788		3,063		2,115
Net Income	$	4,440	$	3,424	$	12,591	$	9,198

BASIC EARNINGS PER SHARE	$	0.59	$	0.46	$	1.67	$	1.23

DILUTED EARNINGS PER SHARE	$	0.59	$	0.46	$	1.67	$	1.22

DIVIDENDS PER SHARE	$	-	$	-	$	0.30	$	0.22

See notes to consolidated financial statements
‎

Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,
	2021			2020

		(In Thousands)
Net Income	$		4,440	$		3,424
Change in Accumulated Other Comprehensive (Loss) Income:
Unrealized holding loss on securities available for sale		(1,404)			(48)
Less: reclassification adjustment for realized gains		-			-
		(1,404)			(48)
Income tax effect		295			10
Net unrealized loss		(1,109)			(38)
Other comprehensive loss, net of tax			(1,109)			(38)
Comprehensive Income	$		3,331	$		3,386



	Nine Months Ended September 30,
	2021			2020

		(In Thousands)

Net Income	$		12,591	$		9,198
Change in Accumulated Other Comprehensive (Loss) Income:
Unrealized holding (loss) gain on securities available for sale		(3,817)			2,168
Less: reclassification adjustment for realized gains		(24)			(128)
		(3,841)			2,040
Income tax effect		807			(428)
Net unrealized (loss) gain		(3,034)			1,612
Other comprehensive (loss) income, net of tax			(3,034)			1,612
Comprehensive Income	$		9,557	$		10,810

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)


	Nine Months Ended September 30, 2021
	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2020	$	7,637	$	26,405	$	76,960	$	2,937	$	(1,765)	$	112,174
Net income		-		-		4,044		-		-		4,044
Other comprehensive loss, net of tax		-		-		-		(2,030)		-		(2,030)
Common stock grants to directors, ‎ 12,009 shares		12		174		-		-		-		186
Compensation expense recognized on stock
grants, net of unearned compensation expense
of $698		-		60		-		-		-		60
Shares issued under employee stock purchase
plan, 807 shares		1		12		-		-		-		13
Purchase of treasury stock, 25,000 shares ‎ at $16.65 per share		-		-		-		-		(416)		(416)
BALANCE - MARCH 31, 2021	$	7,650	$	26,651	$	81,004	$	907	$	(2,181)	$	114,031

Net income		-		-		4,107		-		-		4,107
Other comprehensive income, net of tax		-		-		-		105		-		105
Dividend declared, $0.30 per share		-		-		(2,253)		-		-		(2,253)
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $637		-		61		-		-		-		61
Shares issued under employee stock purchase
plan, 713 shares		1		13		-		-		-		14
Purchase of treasury stock, 9,400 shares ‎ at $19.60 per share		-		-		-		-		(184)		(184)
BALANCE - JUNE 30, 2021	$	7,651	$	26,725	$	82,858	$	1,012	$	(2,365)	$	115,881

Net income		-		-		4,440		-		-		4,440
Other comprehensive loss, net of tax		-		-		-		(1,109)		-		(1,109)
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $576		-		61		-		-		-		61
Shares issued under employee stock purchase
plan, 870 shares		1		16		-		-		-		17
BALANCE - SEPTEMBER 30, 2021	$	7,652	$	26,802	$	87,298	$	(97)	$	(2,365)	$	119,290

‎

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)


	Nine Months Ended September 30, 2020
	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock		Total

	(In Thousands, Except Share Data)
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

Net income		-		-		3,317		-		-		3,317
Other comprehensive income, net of tax		-		-		-		225		-		225
Dividend declared, $0.22 per share		-		-		(1,644)		-		-		(1,644)
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $641		-		(3)		-		-		-		(3)
Shares issued under employee stock purchase
plan, 1,038 shares		1		12		-		-		-		13
BALANCE - JUNE 30, 2020	$	7,578	$	26,119	$	69,924	$	2,990	$	(1,720)	$	104,891

Net income		-		-		3,424		-		-		3,424
Other comprehensive loss, net of tax		-		-		-		(38)		-		(38)
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $600		-		41		-		-		-		41
Shares issued under employee stock purchase
plan, 1,607 shares		2		18		-		-		-		20
BALANCE - SEPTEMBER 30, 2020	$	7,580	$	26,178	$	73,348	$	2,952	$	(1,720)	$	108,338

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2021		2020

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	12,591	$	9,198
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		740		1,670
Amortization of deferred loan costs		111		208
Accretion of deferred Paycheck Protection Program loan fees		(2,097)		(372)
Depreciation		620		567
Net amortization of investment security premiums and discounts		126		341
Stock compensation expense		368		230
Income on bank owned life insurance		(419)		(554)
Realized gain on sale of securities available for sale		(24)		(128)
Loans originated for sale		-		(689)
Proceeds from sale of loans		-		748
Net realized gain on sale of loans		-		(59)
Decrease (increase) in accrued interest receivable		384		(1,188)
Decrease in other assets		230		762
Decrease in accrued interest payable		(975)		(1,611)
Increase in other liabilities		26		674
Net Cash Provided by Operating Activities		11,681		9,797
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(179,901)		(83,121)
Maturities, calls and principal repayments of securities available for sale		39,366		50,873
Proceeds from sales of securities available for sale		3,333		4,023
Net increase in loans		(28,508)		(44,646)
Net decrease (increase) in Paycheck Protection Program loans		40,217		(66,648)
Net (purchase) redemption of restricted investment in bank stock		(94)		148
Purchases of premises and equipment		(1,161)		(1,474)
Net Cash Used in Investing Activities		(126,748)		(140,845)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		168,311		117,482
Net (decrease) increase in securities sold under agreements to repurchase		(823)		3,973
Proceeds from employee stock purchase plan		44		47
Decrease in short-term borrowed funds		-		(18,067)
Proceeds from long-term borrowed funds		-		14,651
Proceeds from Paycheck Protection Program Liquidity Facility borrowed funds		-		62,039
Repayment of Paycheck Protection Program Liquidity Facility borrowed funds		(50,794)		-
Purchase of treasury stock		(600)		(720)
Dividends paid		(2,253)		(1,644)
Net Cash Provided by Financing Activities		113,885		177,761
Net (Decrease) Increase in Cash and Cash Equivalents		(1,182)		46,713
CASH AND CASH EQUIVALENTS - BEGINNING		131,907		39,986
CASH AND CASH EQUIVALENTS - ENDING	$	130,725	$	86,699

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	4,073	$	6,757

Income taxes paid	$	3,329	$	2,242


Non-cash Investing and Financing Activities:

Right of use assets obtained in exchange for new operating lease liabilities	$	1,229	$	181
Unsettled trades to purchase securities	$	-	$	(765)

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 and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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, 2020, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2021.

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 2020 consolidated financial statements may have been reclassified to conform to 2021 presentation. These reclassifications had no effect on 2020 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, 2020.

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 and on March 13, 2020 the United States government declared COVID-19 as a national emergency. The continuing effects 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 COVID-19 may adversely affect the Company’s financial condition and results of operations as further described below. The full future potential impact is unknown at this time.

During the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company provided certain borrowers affected in a variety of ways by COVID-19 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 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. Section 4013 of the CARES Act, enacted on March 27, 2020, provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020, subsequently extended until December 31, 2021, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates, the Company may elect to suspend US GAAP for loan modifications related to the pandemic which would otherwise be categorized as troubled debt restructurings and suspend any determination of a loan modified as a result of the effects of the pandemic as being a troubled debt restructuring, including impairment for accounting purposes. Interest income is continuing to be recognized during the accommodation period.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents COVID-19 CARES Act Section 4013 loans based on loan type, payment accommodation status, and amount at September 30, 2021 and December 31, 2020:


	September 30, 2021
	Number of Loans - Payment Accommodation Period Ended	Number of Loans - Payment Accommodation Period Active	Total Number of Loans		Loan Amount - Payment Accommodation Period Ended		Loan Amount - Payment Accommodation Period Active	Total Loan Amount
	(Dollars In Thousands)
Commercial real estate	117	-	117	$	102,950	$	-	$	102,950
Commercial	31	-	31		4,308		-		4,308
Residential real estate	53	-	53		11,278		-		11,278
Consumer	2	-	2		25		-		25
Total	203	-	203	$	118,561	$	-	$	118,561

	December 31, 2020
	Number of Loans - Payment Accommodation Period Ended	Number of Loans - Payment Accommodation Period Active	Total Number of Loans		Loan Amount - Payment Accommodation Period Ended		Loan Amount - Payment Accommodation Period Active	Total Loan Amount
	(Dollars In Thousands)
Commercial real estate	130	7	137	$	112,016	$	16,830	$	128,846
Commercial	43	1	44		7,445		752		8,197
Residential real estate	68	4	72		13,517		717		14,234
Consumer	2	-	2		31		-		31
Total	243	12	255	$	133,009	$	18,299	$	151,308

Included in the September 30, 2021 totals above are two hundred two (202) loans totaling $118.1 million in which the payment accommodation period has ended and the loan payments have resumed under their original contractual terms. Also included in the September 30, 2021 totals above is one (1) residential real estate loan totaling $415 thousand that, after its payment accommodation period ended in late March 2021, was taken to non-accrual and downgraded to substandard. No loss is anticipated on the loan. Between October 1, 2021 and October 31, 2021 there were no new Section 4013 modifications made.

The Company participates in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). As of September 30, 2021, the Company had a total of one hundred twenty-two (122) PPP loans outstanding with a receivable balance of $16.2 million, net of $457 thousand of unearned origination fees and costs. At December 31, 2020, the Company had a total of four hundred seventy (470) PPP loans outstanding with a receivable balance of $54.3 million, net of $1.2 million of unearned origination fees and costs. From January 1, 2021 to September 30, 2021, the Company originated three hundred thirty-three (333) new PPP loans with a balance of $31.6 million, net of $1.4 million of unearned origination fees and costs. From January 1, 2021 to September 30, 2021, the Company received forgiveness payments from the SBA on PPP loan principal balances of $71.3 million. From October 1, 2021 to October 31, 2021 the Company received forgiveness payments from the SBA on PPP loan principal balances of $2.3 million.

These PPP loans are 100% guaranteed by the SBA, have a two year or up to five year maturity and an interest rate of 1% throughout the term of the loan, with payments deferred until forgiveness proceeds are received from the SBA or ten months after the end of the covered period. The SBA may forgive the PPP loans if certain conditions are met by the borrower, including using at least 60% of the proceeds for payroll costs. The SBA also provided 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. As of September 30, 2021 and December 31, 2020, the Company has net deferred PPP loan fees and costs of $457 thousand and $1.2 million, respectively, which will be recognized through interest income over the life of the related PPP loans. In accordance with the 100% SBA guarantee and the Company’s opinion that the

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

majority of the PPP loans will be forgiven, the Company has determined that no allowance for loan losses is required on the PPP loans. All PPP loans have a pass rating and none are past due under their contractual terms.

In April 2020, the Company applied and was 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 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 had PPPLF borrowings of $50.8 million at December 31, 2020. As of February 3, 2021, the PPPLF borrowings have been paid off in full.

Note 4 – Securities Available For Sale

At September 30, 2021 and December 31, 2020, 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)
September 30, 2021:
U.S. Government agency obligations	$	29,149	$	-	$	(88)	$	29,061
Municipal bonds		58,409		1,515		(508)		59,416
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - commercial		511		21		-		532
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - residential		176,253		1,126		(2,189)		175,190
Total	$	264,322	$	2,662	$	(2,785)	$	264,199

December 31, 2020:
U.S. Treasury securities	$	9,998	$	-	$	-	$	9,998
U.S. Government agency obligations		39,059		1		(24)		39,036
Municipal bonds		37,409		1,967		-		39,376
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - commercial		512		31		-		543
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - residential		40,244		1,743		-		41,987
Total	$	127,222	$	3,742	$	(24)	$	130,940

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of securities as of September 30, 2021, 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	$	1,050	$	1,051
Due after one year through five years		30,063		29,981
Due after five years through ten years		8,353		8,701
Due after ten years		48,092		48,744
		87,558		88,477
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial		511		532
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		176,253		175,190
Total	$	264,322	$	264,199

Gross gains of $24 thousand and $128 thousand were realized on sales of securities for the nine months ended September 30, 2021 and September 30, 2020, respectively. There were no sales of securities for the three months ended September 30, 2021 and September 30, 2020 and no gross losses on the sales of securities for the three months and nine months ended September 30, 2021 and September 30, 2020.

Securities with a carrying value of $116.1 million and $98.7 million at September 30, 2021 and December 31, 2020, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

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 September 30, 2021 and December 31, 2020:



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

September 30, 2021:	(In Thousands)
U.S. Government agency obligations	$	29,061	$	(88)	$	-	$	-	$	29,061	$	(88)
Municipal bonds		19,872		(508)		-		-		19,872		(508)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
residential		150,249		(2,189)		-		-		150,249		(2,189)
Total Temporarily Impaired Securities	$	199,182	$	(2,785)	$	-	$	-	$	199,182	$	(2,785)

December 31, 2020:
U.S. Government agency obligations	$	31,369	$	(24)	$	-	$	-	$	31,369	$	(24)
Total Temporarily Impaired Securities	$	31,369	$	(24)	$	-	$	-	$	31,369	$	(24)

The Company had fifty-eight (58) securities in an unrealized loss position at September 30, 2021 and five (5) securities in an unrealized loss position at December 31, 2020. As of September 30, 2021, 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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

securities. Management believes that the unrealized loss only represents temporary impairment of the securities. None of the individual losses are significant.

Note 5 – Restricted Investment in Bank Stock

Restricted investments in bank stock consist of FHLBank of Pittsburgh (“FHLB”) stock and 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 $1.4 million as of September 30, 2021 and $1.3 million at December 31, 2020, respectively. The Bank had ACBB stock at a carrying value of $40 thousand at September 30, 2021 and December 31, 2020.

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 September 30, 2021.

Note 6 – Loans and Credit Quality

The Company has presented PPP loans of $16.2 million at September 30, 2021 and $54.3 million at December 31, 2020, respectively, separately from loans receivable on the Consolidated Balance Sheet. As described in Note 3, PPP loans are 100% SBA guaranteed and the Company has determined that no allowance for loan losses is required on PPP loans. All PPP loans are risk rated as pass. PPP loans are not included in the following composition and credit quality tables.

The following table presents the composition of loans receivable at September 30, 2021 and December 31, 2020, respectively:



	September 30, 2021			December 31, 2020
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	453,597	40.56%	$	452,251	41.51%
Commercial construction		8,211	0.73%		12,176	1.12%
Commercial		43,263	3.87%		48,114	4.42%
Residential real estate		612,335	54.77%		576,437	52.90%
Consumer		807	0.07%		640	0.05%
Total loans		1,118,213	100.00%		1,089,618	100.00%
Unearned origination fees		91			291
Allowance for loan losses		(11,308)			(10,570)
Net Loans	$	1,106,996		$	1,079,339

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2021 and December 31, 2020, respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

September 30, 2021		(In Thousands)
Commercial real estate	$	452,208	$	-	$	1,389	$	-	$	453,597
Commercial construction		7,899		-		312		-		8,211
Commercial		43,263		-		-		-		43,263
Residential real estate		610,755		495		1,085		-		612,335
Consumer		807		-		-		-		807
Total	$	1,114,932	$	495	$	2,786	$	-	$	1,118,213

December 31, 2020
Commercial real estate	$	450,823	$	-	$	1,428	$	-	$	452,251
Commercial construction		11,861		-		315		-		12,176
Commercial		48,114		-		-		-		48,114
Residential real estate		575,344		512		581		-		576,437
Consumer		640		-		-		-		640
Total	$	1,086,782	$	512	$	2,324	$	-	$	1,089,618

At September 30, 2021, the Company had no foreclosed assets and had $632 thousand in recorded investment in two (2) substandard residential real estate mortgage loans collateralized by residential real estate in the process of foreclosure. At December 31, 2020, 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 September 30, 2021 and December 31, 2020, respectively:


	September 30, 2021						December 31, 2020
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	821	$	1,061			$	851	$	1,091
Commercial construction		312		312				315		315
Commercial		-		-				-		-
Residential real estate		1,352		1,422				944		1,014
Consumer		-		-				-		-
With an allowance recorded:
Commercial real estate	$	678	$	678	$	3	$	696	$	696	$	21
Commercial construction		-		-		-		-		-		-
Commercial		225		225		19		230		230		23
Residential real estate		583		583		118		604		604		125
Consumer		-		-		-		-		-		-
Total:
Commercial real estate	$	1,499	$	1,739	$	3	$	1,547	$	1,787	$	21
Commercial construction		312		312		-		315		315		-
Commercial		225		225		19		230		230		23
Residential real estate		1,935		2,005		118		1,548		1,618		125
Consumer		-		-		-		-		-		-
	$	3,971	$	4,281	$	140	$	3,640	$	3,950	$	169

‎

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 and nine months ended September 30, 2021 and 2020, respectively:


	Three Months Ended September 30,
	2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	825	$	12	$	870	$	13
Commercial construction		313		3		315		3
Commercial		-		-		-		-
Residential real estate		1,425		8		920		7
Consumer		-		-		-		-
With an allowance recorded:
Commercial real estate	$	681	$	5	$	700	$	5
Commercial construction		-		-		-		-
Commercial		226		2		232		2
Residential real estate		586		5		614		5
Consumer		-		-		1		-
Total:
Commercial real estate	$	1,506	$	17	$	1,570	$	18
Commercial construction		313		3		315		3
Commercial		226		2		232		2
Residential real estate		2,011		13		1,534		12
Consumer		-		-		1		-
	$	4,056	$	35	$	3,652	$	35


	Nine Months Ended September 30,
	2021				2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	835	$	36	$	1,063	$	37
Commercial construction		314		8		315		8
Commercial		-		-		-		-
Residential real estate		1,286		32		769		23
Consumer		-		-		-		-
With an allowance recorded:
Commercial real estate	$	687	$	15	$	525	$	16
Commercial construction		-		-		-		-
Commercial		228		7		233		7
Residential real estate		593		16		667		16
Consumer		-		-		1		-
Total:
Commercial real estate	$	1,522	$	51	$	1,588	$	53
Commercial construction		314		8		315		8
Commercial		228		7		233		7
Residential real estate		1,879		48		1,436		39
Consumer		-		-		1		-
	$	3,943	$	114	$	3,573	$	107

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



	September 30, 2021		December 31, 2020

	(In Thousands)
Commercial real estate	$	-	$	-
Commercial construction		-		-
Commercial		-		-
Residential real estate		793		274
Consumer		-		-
Total	$	793	$	274

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 September 30, 2021 and December 31, 2020, 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

September 30, 2021	(In Thousands)
Commercial real estate	$	352	$	-	$	-	$	352	$	453,245	$	453,597	$	-
Commercial construction		-		-		-		-		8,211		8,211		-
Commercial		-		-		-		-		43,263		43,263		-
Residential real estate		157		148		632		937		611,398		612,335		-
Consumer		-		-		-		-		807		807		-
Total	$	509	$	148	$	632	$	1,289	$	1,116,924	$	1,118,213	$	-

December 31, 2020
Commercial real estate	$	514	$	-	$	-	$	514	$	451,737	$	452,251	$	-
Commercial construction		-		-		-		-		12,176		12,176		-
Commercial		-		-		-		-		48,114		48,114		-
Residential real estate		336		-		42		378		576,059		576,437		-
Consumer		2		-		-		2		638		640		-
Total	$	852	$	-	$	42	$	894	$	1,088,724	$	1,089,618	$	-

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables detail the activity in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020:



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

Allowance for loan losses	(In Thousands)
Three Months Ending September 30, 2021
Beginning Balance - June 30, 2021	$	4,542	$	116	$	1,345	$	4,587	$	25	$	545	$	11,160
Charge-offs		-		-		-		(2)		-		-		(2)
Recoveries		-		-		-		-		-		-		-
Provisions		(50)		(29)		(57)		88		-		198		150
Ending Balance - September 30, 2021	$	4,492	$	87	$	1,288	$	4,673	$	25	$	743	$	11,308

Nine Months Ending September 30, 2021
Beginning Balance - December 31, 2020	$	4,379	$	150	$	848	$	4,485	$	14	$	694	$	10,570
Charge-offs		-		-		-		(2)		(2)		-		(4)
Recoveries		-		-		-		2		-		-		2
Provisions		113		(63)		440		188		13		49		740
Ending Balance - September 30, 2021	$	4,492	$	87	$	1,288	$	4,673	$	25	$	743	$	11,308

Three Months Ending September 30, 2020
Beginning Balance - June 30, 2020	$	3,574	$	113	$	762	$	3,618	$	16	$	934	$	9,017
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		1		-		-		1
Provisions		743		25		33		183		(1)		(283)		700
Ending Balance - September 30, 2020	$	4,317	$	138	$	795	$	3,802	$	15	$	651	$	9,718

Nine Months Ending September 30, 2020
Beginning Balance - December 31, 2019	$	3,221	$	121	$	770	$	3,488	$	19	$	403	$	8,022
Charge-offs		-		-		-		-		-		-		-
Recoveries		24		-		-		2		-		-		26
Provisions		1,072		17		25		312		(4)		248		1,670
Ending Balance - September 30, 2020	$	4,317	$	138	$	795	$	3,802	$	15	$	651	$	9,718

‎

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 September 30, 2021 and December 31, 2020:



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

	(In Thousands)
September 30, 2021
Allowance for Loan Losses
Ending Balance	$	4,492	$	87	$	1,288	$	4,673	$	25	$	743	$	11,308
Ending balance: individually evaluated for impairment	$	3	$	-	$	19	$	118	$	-	$	-	$	140
Ending balance: collectively evaluated for impairment	$	4,489	$	87	$	1,269	$	4,555	$	25	$	743	$	11,168

Loans receivables:
Ending balance	$	453,597	$	8,211	$	43,263	$	612,335	$	807			$	1,118,213
Ending balance: individually evaluated for impairment	$	1,499	$	312	$	225	$	1,935	$	-			$	3,971
Ending balance: collectively evaluated for impairment	$	452,098	$	7,899	$	43,038	$	610,400	$	807			$	1,114,242

December 31, 2020
Allowance for Loan Losses
Ending Balance	$	4,379	$	150	$	848	$	4,485	$	14	$	694	$	10,570
Ending balance: individually evaluated for impairment	$	21	$	-	$	23	$	125	$	-	$	-	$	169
Ending balance: collectively evaluated for impairment	$	4,358	$	150	$	825	$	4,360	$	14	$	694	$	10,401

Loans receivables:
Ending balance	$	452,251	$	12,176	$	48,114	$	576,437	$	640			$	1,089,618
Ending balance: individually evaluated for impairment	$	1,547	$	315	$	230	$	1,548	$	-			$	3,640
Ending balance: collectively evaluated for impairment	$	450,704	$	11,861	$	47,884	$	574,889	$	640			$	1,085,978

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 completed since the COVID-19 outbreak are reported 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 as described in Note 3 and are not considered a TDR.

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

September 30, 2021	(In Thousands)
Commercial real estate	$	1,089	$	-	$	1,089
Commercial construction		257		-		257
Commercial		225		-		225
Residential real estate		817		13		830
Consumer		-		-		-
	$	2,388	$	13	$	2,401

December 31, 2020
Commercial real estate	$	1,125	$	-	$	1,125
Commercial construction		260		-		260
Commercial		230		-		230
Residential real estate		944		15		959
Consumer		-		-		-
	$	2,559	$	15	$	2,574

As of September 30, 2021, no available commitments were outstanding on TDRs.

There were no newly restructured loans that occurred during the three and nine months ended September 30, 2021 and 2020.

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 and nine months ended September 30, 2021 and 2020.

Note 7 – Deposits

The components of deposits at September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021		December 31, 2020
	(In Thousands)

Demand, non-interest bearing	$	310,938	$	269,996
Demand, NOW and money market, interest bearing		240,045		199,845
Savings		682,279		546,784
Time, $250 and over		61,518		85,272
Time, other		105,910		130,482
Total deposits	$	1,400,690	$	1,232,379

At September 30, 2021, the scheduled maturities of time deposits are as follows (in thousands):


2021 (remainder of the year)	$	35,510
2022		80,479
2023		41,486
2024		6,753
2025		1,587
2026		1,613
	$	167,428

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 8 – 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 September 30, 2021, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $707.2 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 September 30, 2021 and December 31, 2020. There were $14.7 million in long-term FHLB advances outstanding as of September 30, 2021 and December 31, 2020. All FHLB borrowings are secured by qualifying assets of the Bank.

The components of long-term borrowings with the FHLB were as follows:


	September 30, 2021
	(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 FHLB Outstanding Borrowings		$	14,651

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at September 30, 2021 and December 31, 2020. Advances from this line are unsecured.

In October 2021, the Company entered into a $5.0 million unsecured revolving line of credit facility (the “Line”) with the ACBB. Under the terms of the Line, the Company can borrow under the facility in an amount not to exceed $5.0 million, with borrowing proceeds used to support general corporate expenses and liquidity requirements. Funds can be downstreamed to support the Bank. The Line has a one year maturity, a floating interest rate at the Wall Street Journal Prime rate, and is unsecured. Interest on outstanding borrowings will be payable monthly, with the entire outstanding principal balance together with all unpaid, accrued interest due on the maturity date. As of the date of the issuance of this Quarterly Report on Form 10-Q, the Company has not borrowed any amounts under this Line.

As described in Note 3, the Bank had no long-term PPPLF borrowings through the Federal Reserve Bank of Philadelphia as of September 30, 2021 and had $50.8 million, at an interest rate of 0.35%, as of December 31, 2020. All PPPLF borrowings were secured by PPP loans.

Note 9 – Stock Incentive Plan and Employee Stock Purchase Plan

Stock Incentive Plan:

The Company maintains the Embassy Bancorp, Inc. Stock Incentive Plan (the “SIP”), originally adopted by the Company’s shareholders effective June 16, 2010 and subsequently amended, restated, and approved on June 20, 2019. 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 SIP is 756,356. 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 a merger, stock splits, stock dividends or other changes in the capitalization of the Company. The SIP expires on June 20, 2029. At September 30, 2021, there were 440,805 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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

vest immediately, while the remainder vest over the service period of three years to nine 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 September 30, 2021, there have been 199,308 awards granted. There were no awards granted during the three months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021 and 2020 there were 12,009 and 32,210 awards granted, respectively. During the three and nine months ended September 30, 2021, the Company recognized compensation expense for restricted stock awards of $61 thousand and $368 thousand, respectively. During the three and nine months ended September 30, 2020, the Company recognized $41 thousand and $230 thousand in compensation expense for restricted stock awards, respectively.

Historically, 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 were no stock options granted for the three and nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, there was no unrecognized cost remaining for these unexercised options and all outstanding options are fully vested.

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 ESPP is 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 17,651 shares have been issued as of September 30, 2021. The Company recognized discount expense in relation to the ESPP of $1 thousand and $2 thousand for the three and nine months ended September 30, 2021 and 2020, respectively.

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Other Comprehensive (Loss) 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 (loss) income both before tax and net of tax are as follows:



	Three Months Ended September 30,
	2021						2020

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive (loss) income:
Unrealized holding losses on securities ‎ available for sale	$	(1,404)	$	295	$	(1,109)	$	(48)	$	10	$	(38)
Reclassification adjustments for gains on securities ‎ transactions included in net income (A),(B)		-		-		-		-		-		-
Total other comprehensive loss	$	(1,404)	$	295	$	(1,109)	$	(48)	$	10	$	(38)



	Nine Months Ended September 30,
	2021						2020

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive (loss) income:
Unrealized holding (losses) gains on securities ‎ available for sale	$	(3,817)	$	802	$	(3,015)	$	2,168	$	(455)	$	1,713
Reclassification adjustments for gains on securities ‎ transactions included in net income (A),(B)		(24)		5		(19)		(128)		27		(101)
Total other comprehensive (loss) income	$	(3,841)	$	807	$	(3,034)	$	2,040	$	(428)	$	1,612

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

B.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 September 30, 2021 and 2020. A summary of the realized gains on securities available for sale for the nine months ended September 30, 2021 and 2020, net of tax, is as follows:



	Nine Months Ended
	September 30,
		2021		2020

		(In Thousands)
Securities available for sale:
Realized gains on securities transactions	$	(24)	$	(128)
Income taxes		5		27
Net of tax	$	(19)	$	(101)

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



	Securities
	Available
	for Sale
Three Months Ended September 30, 2021 and 2020	(In Thousands)
Balance June 30, 2021	$	1,012
Other comprehensive loss before reclassifications		(1,109)
Amounts reclassified from accumulated other ‎ comprehensive income		-
Net other comprehensive loss during the period		(1,109)
Balance September 30, 2021	$	(97)

Balance June 30, 2020	$	2,990
Other comprehensive loss before reclassifications		(38)
Amounts reclassified from accumulated other ‎ comprehensive income		-
Net other comprehensive loss during the period		(38)
Balance September 30, 2020	$	2,952


Nine Months Ended September 30, 2021 and 2020
Balance January 1, 2021	$	2,937
Other comprehensive loss before reclassifications		(3,015)
Amounts reclassified from accumulated other ‎ comprehensive income		(19)
Net other comprehensive loss during the period		(3,034)
Balance September 30, 2021	$	(97)

Balance January 1, 2020	$	1,340
Other comprehensive income before reclassifications		1,713
Amounts reclassified from accumulated other ‎ comprehensive income		(101)
Net other comprehensive income during the period		1,612
Balance September 30, 2020	$	2,952

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – 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				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
	(Dollars In Thousands, Except Share and Per Share Data)
Net income	$	4,440	$	3,424	$	12,591	$	9,198

Weighted average shares outstanding		7,508,105		7,473,032		7,517,788		7,463,002
Dilutive effect of potential common shares, stock options		37,364		45,964		37,364		45,963
Diluted weighted average common shares outstanding		7,545,469		7,518,996		7,555,152		7,508,965

Basic earnings per share	$	0.59	$	0.46	$	1.67	$	1.23
Diluted earnings per share	$	0.59	$	0.46	$	1.67	$	1.22

There were no stock options not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2021. Stock options of 4,227 were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2020 because to do so would have been anti-dilutive.

Note 12 – 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 September 30, 2021 and December 31, 2020, 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)
U.S. Government agency obligations	$	-	$	29,061	$	-	$	29,061
Municipal bonds		-		59,416		-		59,416
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial		-		532		-		532
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		175,190		-		175,190
September 30, 2021 Securities available for sale	$	-	$	264,199	$	-	$	264,199

U.S. Treasury securities	$	-	$	9,998	$	-	$	9,998
U.S. Government agency obligations		-		39,036		-		39,036
Municipal bonds		-		39,376		-		39,376
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial		-		543		-		543
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		41,987		-		41,987
December 31, 2020 Securities available for sale	$	-	$	130,940	$	-	$	130,940

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 September 30, 2021 and December 31, 2020, 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)
September 30, 2021 Impaired loans	$	-	$	-	$	1,346	$	1,346
December 31, 2020 Impaired loans	$	-	$	-	$	1,361	$	1,361

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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2021, of the impaired loans having an aggregate balance of $4.0 million, $2.5 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 $1.5 million in impaired loans, an aggregate valuation allowance of $140 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.

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 September 30, 2021 and December 31, 2020, respectively, 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)
September 30, 2021:
Impaired loans	$	1,346	Appraisal of collateral and	Appraisal adjustments (1)	0% to -25% (-15.1%)
			pending agreement of sale	Liquidation expenses (2)	0% to -10.0% (-8.5%)
December 31, 2020:
Impaired loans	$	1,361	Appraisal of collateral and	Appraisal adjustments (1)	0% to -25% (-15.1%)
			pending agreement of sale	Liquidation expenses (2)	0% to -10.0% (-8.5%)

1.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.

2.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 September 30, 2021 and December 31, 2020:



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

	(In Thousands)
September 30, 2021:
Financial assets:
Cash and cash equivalents	$	130,725	$	130,725	$	130,725	$	-	$	-
Securities available-for-sale		264,199		264,199		-		264,199		-
Loans receivable, net of allowance		1,106,996		1,150,834		-		-		1,150,834
Paycheck Protection Program loans receivable		16,214		16,230		-		-		16,230
Restricted investments in bank stock		1,424		1,424		-		1,424		-
Accrued interest receivable		2,752		2,752		-		2,752		-
Financial liabilities:
Deposits		1,400,690		1,402,487		-		1,402,487		-
Securities sold under agreements to
repurchase and federal funds purchased		12,789		12,789		-		12,789		-
Long-term borrowings		14,651		14,679		-		-		14,679
Accrued interest payable		665		665		-		665		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2020:
Financial assets:
Cash and cash equivalents	$	131,907	$	131,907	$	131,907	$	-	$	-
Securities available-for-sale		130,940		130,940		-		130,940		-
Loans receivable, net of allowance		1,079,339		1,158,545		-		-		1,158,545
Paycheck Protection Program loans receivable		54,334		54,632				-		54,632
Restricted investments in bank stock		1,330		1,330		-		1,330		-
Accrued interest receivable		3,136		3,136		-		3,136		-
Financial liabilities:
Deposits		1,232,379		1,235,483		-		1,235,483		-
Securities sold under agreements to
repurchase and federal funds purchased		13,612		13,612		-		13,612		-
Long-term borrowings		14,651		14,707		-		-		14,707
Paycheck Protection Program
Liquidity Facility		50,794		50,810				-		50,810
Accrued interest payable		1,640		1,640		-		1,640		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 13 – 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 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 its 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 September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, 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, 2020 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, 2020. 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, 2020 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 September 30, 2021, the Company continued to be in a strong financial and operational condition. The Bank’s September 30, 2021 capital ratios exceeded the amounts required to be considered “well capitalized” as defined in applicable banking regulations. The Company’s ratio of non-performing loans to total loans and the ratio of non-performing loans to total loans not including PPP loans at September 30, 2021 were both 0.28% and the ratio of non-performing assets to total assets was 0.20%. Management believes the Company continues to be well prepared for the ongoing economic and social consequences of the COVID-19 global pandemic.

The Company’s assets increased $124.1 million from $1.44 billion at December 31, 2020 to $1.57 billion at September 30, 2021. The increase was due to an increase of $133.3 million in securities available for sale and an increase of $27.7 million in net loans receivable (not including PPP loans); offset by a decrease of $1.2 million in cash and cash equivalents and a decrease of $38.1 million in net PPP loans receivable due to net loan forgiveness. The growth in securities available for sale and net loans receivable was primarily funded by deposits. The slight decrease in cash and cash equivalents was primarily due to PPPLF borrowings of $50.8 million being paid off in full during the first quarter of 2021, purchases of available for sale securities, and funding of new loans, offset, in part, by the forgiveness of PPP loans and an increase in deposits. The Company's deposits grew $168.3 million from $1.23 billion at December 31, 2020 to $1.40 billion at September 30, 2021. The overall deposit growth was 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. Also contributing to the growth is the increased usage of the Company’s online banking platform, competitively offered rates, the opening of a permanent branch office in Macungie and the opening of an office at 2002 West Liberty Street in Allentown, the continued convenience and efficiency of our branch network and branch personnel, and the injection of federal stimulus money into the economy from PPP funds and consumer stimulus payments. The Company also continues to capitalize on opportunities created by recent merger announcements, name changes, and competitive branch hour adjustments and/or closures in the Company’s market area, attracting customers looking to relocate to a local, reputable community bank.

Net loans receivable (not including PPP loans) increased by $27.7 million to $1.11 billion at September 30, 2021 from $1.08 billion at December 31, 2020. The market continues to be very competitive and the Company is committed to maintaining a high-quality portfolio that returns a reasonable market rate. While the past and current economic and competitive conditions in the marketplace have created more competition for loans to 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 September 30, 2021 was $4.4 million compared to net income for the three months ended September 30, 2020 of $3.4 million, an increase of $1.0 million, or 29.7%. Basic and diluted earnings per share increased to $0.59 for the three months ended September 30, 2021, as compared to $0.46, respectively, for the three months ended September 30, 2020. The difference in net income for the three months ended September 30, 2021 and September 30, 2020 resulted from an increase in net interest income and a decrease in the provision for loan losses; offset by a decrease in non-interest income and an increase in non-interest expenses and income tax expense.

Net income for the nine months ended September 30, 2021 was $12.6 million compared to net income for the nine months ended September 30, 2020 of $9.2 million, an increase of $3.4 million, or 36.9%. Basic and diluted earnings per share increased to $1.67 for the nine months ended September 30, 2021, as compared to $1.23 and $1.22, respectively, for the nine months ended September 30, 2020. The difference in net income for the nine months ended September 30, 2021 and September 30, 2020 resulted from increases in net interest income and a decrease in the provision for loan losses; offset by a slight decrease in non-interest income and an increase in non-interest expenses and income tax expense.

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 reported by other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2021 and 2020.

Total interest income for the three months ended September 30, 2021 increased $1.1 million to $12.3 million, as compared to $11.2 million for the three months ended September 30, 2020. Average earning assets were $1.50 billion for the three months ended September 30, 2021 as compared to $1.31 billion for the three months ended September 30, 2020. The tax equivalent yield on average earning assets was 3.27% for the third quarter of 2021 compared to 3.42% for the third quarter of 2020.

Total interest expense for the three months ended September 30, 2021 decreased $496 thousand to $938 thousand, as compared to $1.4 million for the three months ended September 30, 2020. Average interest bearing liabilities were $1.10 billion for the three months ended September 30, 2021 as compared to $977.6 million for the three months ended September 30, 2020. The yield on average interest bearing liabilities was 0.34% and 0.58% for the third quarter of 2021 and 2020.

Net interest income for the three months ended September 30, 2021 was $11.3 million, compared to $9.8 million for the three months ended September 30, 2020. The improvement in net interest income is, in part, the result of an increase in the interest and fee income from PPP loans and an increase in the balances of taxable loans, taxable and non-taxable investments, and interest bearing deposits with banks, along with an increase in the rate of taxable investments. Also contributing to the improvement in net interest income for the three months ended September 30, 2021 was a decrease in the balance and rates of certificates of deposit and money markets, a decrease in the rates of interest bearing demand deposits, NOW, savings, securities sold under agreement to repurchase, and no interest expense from PPPLF borrowings due to being paid off in the first quarter of 2021. The improvements were offset, in part, by a decrease in the rates of taxable loans, non-taxable investments, and interest bearing deposits with banks, an increase in the balance of interest bearing demand deposits, NOW, savings, and securities sold under agreement to repurchase. The Company’s net interest margin is 3.00% on a US GAAP basis and 3.02% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2021, as compared to 2.96% on a US GAAP basis and 2.98% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2020.

Total interest income for the nine months ended September 30, 2021 increased $2.7 million to $35.6 million, as compared to $32.9 million for the nine months ended September 30, 2020. Average earning assets were $1.44 billion for the nine months ended September 30, 2021 as compared to $1.23 billion for the nine months ended September 30, 2020. The tax equivalent yield on average earning assets was 3.33% for the nine months ended September 30, 2021 compared to 3.60% for the nine months ended September 30, 2020.

Total interest expense for the nine months ended September 30, 2021 decreased $2.0 million to $3.1 million, as compared to $5.1 million for the nine months ended September 30, 2020. Average interest bearing liabilities were $1.06 billion for the nine months ended September 30, 2021 as compared to $930.2 million for the nine months ended September 30, 2020. The yield on average interest bearing liabilities was 0.39% and 0.74% for the nine months ended September 30, 2021 and September 30, 2020.

Net interest income for the nine months ended September 30, 2021 was $32.5 million compared to $27.8 million for the nine months ended September 30, 2020. The improvement in net interest income is primarily the result of an increase in the interest and fee income from PPP loans, a decrease in the balance and rates of certificates of deposit and money markets, a decrease in the rates of interest bearing demand deposits, NOW, savings, securities sold under agreement to repurchase and other borrowings. Also contributing to the improvement in net interest income for the nine months ended September 30, 2021 was an increase in the balances of taxable loans, taxable and non-taxable investments, federal funds sold, and interest bearing deposits with banks, and a decrease in interest expense from PPPLF borrowings. The improvements were offset, in part, by a decrease in the rates of taxable loans, taxable and non-taxable investments, fed funds sold and interest bearing deposits with banks, and an increase in the balance of interest bearing demand deposits, NOW, savings, securities sold under agreement to repurchase, and long-term FHLB borrowings. The Company’s net interest margin remained flat on a US GAAP basis and a tax equivalent (non-US GAAP) basis. The Company’s net interest margin is 3.02% on a US GAAP basis and 3.04% on a tax equivalent (non-US GAAP) basis for the nine months ended September 30, 2021 and September 30, 2020.

In response to the COVID-19 outbreak, the Federal Reserve Board in mid-March 2020 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 had declined to historic lows. Less than 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 further reduced. The Company’s net interest margin was also affected by the balance of PPP loans, which bear interest at a rate of 1.0%, and PPPLF borrowings, which bore an interest rate of 0.35% and were paid off in early February 2021. The net interest margin on a tax equivalent (non-US GAAP) basis excluding PPP loans and PPP interest income and PPPLF borrowings interest expense for the three and nine months ended September 30, 2021 was 2.85% and 2.90%, compared to 3.02% and 3.07% for the three and nine months ended September 30, 2020.

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The tables below sets forth average balances and corresponding yields for the corresponding periods ended September 30, 2021 and 2020, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)


	Three Months Ended September 30,
	2021					2020
					Tax					Tax
	Average				Equivalent	Average				Equivalent
	Balance			Interest	Yield	Balance			Interest	Yield

		(Dollars In Thousands)
ASSETS
Loans - taxable (2)	$	1,105,444	$	10,215	3.67%	$	1,038,531	$	10,146	3.89%
Loans - Paycheck Protection Program		29,258		867	11.76%		66,327		420	2.52%
Loans - non-taxable (1)		6,282		49	3.92%		6,523		50	3.86%
Investment securities - taxable		203,875		822	1.60%		104,162		339	1.29%
Investment securities - non-taxable (1)		42,238		270	3.21%		29,767		210	3.55%
Federal funds sold		1,000		-	0.00%		1,000		-	0.00%
Interest bearing deposits with banks		109,135		41	0.15%		63,705		26	0.16%
TOTAL INTEREST EARNING ASSETS		1,497,232		12,264	3.27%		1,310,015		11,191	3.42%
Less allowance for loan losses		(11,210)					(9,256)
Other assets		62,211					54,364
TOTAL ASSETS	$	1,548,233				$	1,355,123

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits, ‎ NOW and money market	$	232,109	$	37	0.06%	$	185,460	$	39	0.08%
Savings		660,953		464	0.28%		483,656		352	0.29%
Certificates of deposit		178,106		407	0.91%		220,048		959	1.73%
Securities sold under agreements to repurchase ‎and other borrowings		27,958		30	0.43%		26,357		30	0.45%
Paycheck Protection Program Liquidity
Facility borrowings		-		-	0.00%		62,039		54	0.35%
TOTAL INTEREST BEARING LIABILITIES		1,099,126		938	0.34%		977,560		1,434	0.58%

Non-interest bearing demand deposits		310,242					249,902
Other liabilities		19,360					20,257
Stockholders' equity		119,505					107,404
TOTAL LIABILITIES AND ‎STOCKHOLDERS' EQUITY	$	1,548,233				$	1,355,123

Net interest income			$	11,326				$	9,757
Tax equivalent adjustments
Loans				13					13
Investments				72					56
Total tax equivalent adjustments				85					69
Net interest income on a tax equivalent basis			$	11,411				$	9,826
Net interest spread (US GAAP basis)					2.91%					2.81%
Net interest margin (US GAAP basis)					3.00%					2.96%
Net interest spread (non-US GAAP basis) (3)					2.93%					2.84%
Net interest margin (non-US GAAP basis) (3)					3.02%					2.98%

(1)Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of September 30, 2021 and 2020, 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 September 30, 2021 and 2020, respectively.

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)


		Nine Months Ended September 30,

	2021						2020

					Tax					Tax
	Average				Equivalent	Average				Equivalent
	Balance		Interest		Yield	Balance		Interest		Yield

		(Dollars In Thousands)
ASSETS
Loans - taxable (2)	$	1,098,022	$	30,454	3.71%	$	1,027,335	$	30,300	3.94%
Loans - Paycheck Protection Program		41,435		2,425	7.82%		36,521		658	2.41%
Loans - non-taxable (1)		6,343		146	3.89%		6,988		160	3.87%
Investment securities - taxable		157,647		1,777	1.51%		82,130		1,074	1.75%
Investment securities - non-taxable (1)		35,729		714	3.38%		27,041		617	3.86%
Federal funds sold		1,000		-	0.00%		845		2	0.25%
Interest bearing deposits with banks		100,597		101	0.13%		48,101		127	0.35%
TOTAL INTEREST EARNING ASSETS		1,440,773		35,617	3.33%		1,228,961		32,938	3.60%
Less allowance for loan losses		(11,008)					(8,631)
Other assets		60,914					52,899
TOTAL ASSETS	$	1,490,679				$	1,273,229

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market	$	219,191	$	106	0.06%	$	186,543	$	404	0.29%
Savings		611,919		1,285	0.28%		455,227		1,138	0.33%
Certificates of deposit		195,446		1,604	1.10%		233,831		3,397	1.94%
Securities sold under agreements to repurchase ‎and other borrowings		27,471		88	0.43%		24,877		129	0.69%
Paycheck Protection Program Liquidity
Facility borrowings		5,690		15	0.35%		29,749		78	0.35%
TOTAL INTEREST BEARING LIABILITIES		1,059,717		3,098	0.39%		930,227		5,146	0.74%

Non-interest bearing demand deposits		294,765					218,948
Other liabilities		19,119					19,449
Stockholders' equity		116,998					104,605
TOTAL LIABILITIES AND ‎STOCKHOLDERS' EQUITY	$	1,490,679				$	1,273,229

Net interest income			$	32,519				$	27,792
Tax equivalent adjustments
Loans				39					43
Investments				190					164
Total tax equivalent adjustments				229					207
Net interest income on a tax equivalent basis			$	32,748				$	27,999
Net interest spread (US GAAP basis)					2.92%					2.84%
Net interest margin (US GAAP basis)					3.02%					3.02%
Net interest spread (non-US GAAP basis) (3)					2.94%					2.86%
Net interest margin (non-US GAAP basis) (3)					3.04%					3.04%

(1)Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of September 30, 2021 and 2020, 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 September 30, 2021 and 2020, respectively.

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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									Nine Months Ended
	September 30, 2021								September 30, 2021
	compared to September 30, 2020									compared to September 30, 2020
	(In Thousands)
			Due to change in:								Due to change in:
	Total						# of		Total						# of
	Change		Volume		Rate		Days		Change		Volume		Rate		Days

Interest-earning assets:
Loans - taxable	$	69	$	654	$	(613)	$	28	$	154	$	2,085	$	(1,903)	$	(28)
Loans - Paycheck Protection Program		447		(235)		680		2		1,767		88		1,681		(2)
Loans - non-taxable		(1)		(2)		1		-		(14)		(15)		1		-
Investment securities - taxable		483		325		156		2		703		987		(283)		(1)
Investment securities - non-taxable		60		88		(29)		1		97		198		(100)		(1)
Federal funds sold		-		-		-		-		(2)		-		(2)		-
Interest bearing deposits with banks		15		19		(4)		-		(26)		139		(165)		-
Total net change in income on
interest-earning assets		1,073		849		191		33		2,679		3,482		(771)		(32)

Interest-bearing liabilities:
Interest bearing demand deposits,
NOW and money market		(2)		10		(12)		-		(298)		70		(368)		-
Savings		112		129		(18)		1		147		391		(243)		(1)
Certificates of deposit		(552)		(183)		(370)		1		(1,793)		(558)		(1,233)		(2)
Total deposits		(442)		(44)		(400)		2		(1,944)		(97)		(1,844)		(3)
Securities sold under agreements to
repurchase and other borrowings		-		2		(2)		-		(41)		13		(54)		-
Paycheck Protection Program
Liquidity Facility borrowings		(54)		(54)		-		-		(63)		(63)		-		-
Total net change in expense on
interest-bearing liabilities		(496)		(96)		(402)		2		(2,048)		(147)		(1,898)		(3)
Change in net interest income	$	1,569	$	945	$	593	$	31	$	4,727	$	3,629	$	1,127	$	(29)

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.

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 September 30, 2021, the provision for loan losses was $150 thousand, as compared to $700 thousand for the same period ended September 30, 2020. In the three months ended September 30, 2021 there were $2 thousand in charge-offs and no recoveries, as compared to no charge-offs and $1 thousand in recoveries for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the provision for loan losses was $740 thousand, as compared to $1.7 million for the same period ended September 30, 2020. In the nine months ended September 30, 2021, there were $4 thousand in charge-offs and $2 thousand in recoveries, as compared to no charge-offs and $26 thousand in recoveries for the nine months ended September 30, 2020. The provision for loan losses is a function of the allowance for loan loss methodology that the Company uses to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted. During 2020 and during the nine months ending September 30, 2021, the Company adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic. See the discussion below under “Credit Risk and Loan Quality” regarding the Company’s considerations of its September 30, 2021 allowance for loan loss levels. The allowance for loan losses is $11.3 million as of September 30, 2021, which is 1.00% of total loans receivable and 1.01% of loans receivable not including PPP loans, compared to $9.7 million or 0.86% of total loans receivable and 0.92% of loans receivable not including PPP loans as of September 30, 2020. At December 31, 2020, the allowance for loan losses was $10.6 million, which represented 0.92% of total loans receivable and 0.97% of loans receivable not including PPP loans. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Company’s market area, the allowance is believed to be adequate to absorb any losses 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 Company has not participated in any sub-prime lending activity.

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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 (not including PPP loans) portfolio:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

	(In Thousands)
Loans receivable at end of period	$	1,118,213	$	1,058,139	$	1,118,213	$	1,058,139
Allowance for loan losses:
Balance, beginning	$	11,160	$	9,017	$	10,570	$	8,022
Provision for loan losses		150		700		740		1,670
Loans charged off:
Commercial real estate		-		-		-		-
Commercial construction		-		-		-		-
Commercial		-		-		-		-
Residential real estate		(2)		-		(2)		-
Consumer		-		-		(2)		-
Total loans charged off		(2)		-		(4)		-
Recoveries of loans previously charged off:
Commercial real estate		-		-		-		24
Commercial construction		-		-		-		-
Commercial		-		-		-		-
Residential real estate		-		1		2		2
Consumer		-		-		-		-
Total recoveries		-		1		2		26
Net charge offs		(2)		1		(2)		26
Balance at end of period	$	11,308	$	9,718	$	11,308	$	9,718
Allowance for loan losses to loans receivable at end of period		1.01%		0.92%		1.01%		0.92%

Non-interest Income

Total non-interest income was $508 thousand for the three months ended September 30, 2021 compared to $602 thousand for the same period in 2020. The decrease is, in part, attributable to a decrease in bank owned life insurance income of $181 thousand. The decrease in the bank owned life insurance income was driven by the effect market conditions had on underlying life insurance assets, particularly the separate account life insurance assets, offset by income on the $4.0 million of additional bank owned life insurance purchased during the fourth quarter of 2020. The decrease was offset by an increase in merchant and credit card processing fees of $37 thousand, an increase in debit card interchange fees of $40 thousand, and an increase of $10 thousand in other service fees, in part, due to an expanding customer base.

Total non-interest income remained relatively flat at $1.7 million for the nine months ended September 30, 2021 and September 30, 2020. The slight decrease is, in part, attributable to a decrease in bank owned life insurance income of $135 thousand. The decrease in the bank owned life insurance income was driven by the effect market conditions had on underlying life insurance assets, particularly the separate account life insurance assets, offset by income on the $4.0 million of additional bank owned life insurance purchased during the fourth quarter of 2020. Additional decreases in non-interest expenses are attributable to a decrease of $104 thousand in gain on the sale of securities and a decrease of $59 thousand on the gain on sale of loans. The decrease was offset by an increase in merchant and credit card processing fees of $67 thousand and an increase in debit card interchange fees of $175 thousand, in part, due to less activity in the second quarter of 2020 from the COVID-19 pandemic and an expanding customer base. There was also an increase of $49 thousand in other service fees, in part, due to the Company waiving overdraft fees during part of the second quarter of 2020 due to the COVID-19 pandemic, wire fees, and an expanding customer base.

Non-interest Expense

Non-interest expenses increased $704 thousand from $5.4 million for the three months ended September 30, 2020 to $6.2 million for the three months ended September 30, 2021. The increase in non-interest expenses is primarily due to an increase of $316 thousand in salaries and employee benefits. The Company had a 4.2% increase in full-time equivalent employees from ninety-six (96) at September 30, 2020 to one hundred (100) at September 30, 2021, respectively. The increase in the number of employees, together with the annual increases in salaries and benefits, increase in employee taxes, increase in health insurance cost, increase in stock grant expense, and a decrease in deferred compensation costs primarily associated with fewer PPP loan originations, resulted in an increase in overall salary and benefits. Additional increases in non-interest expenses are attributable to an increase of $90 thousand in

occupancy and equipment due in part to the opening of the Macungie permanent branch and the opening and rent for the Company’s new branch office at 2002 West Liberty Street in Allentown, Pennsylvania, an increase of $119 thousand in data processing due primarily to e-commerce, the expanding customer base, fees associated with PPP loan forgiveness and the implementation fees for the Company’s upcoming transition to a new online banking platform, an increase of $23 thousand in advertising and promotions, an increase of $28 thousand in FDIC insurance, an increase of $85 thousand in charitable contributions due to EITC contributions made in the third quarter of 2021, and a $63 thousand increase in other expenses due, in part, to an increase in operating expenses, customer entertainment expenses, bank shares tax and debit card losses.

Non-interest expenses increased $1.3 million from $16.5 million for the nine months ended September 30, 2020 to $17.8 million for the nine months ended September 30, 2021. The increase in non-interest expenses is attributable to an increase of $646 thousand in salaries and employee benefits, in part, due to the increase in the number of employees, annual increases in salaries and benefits, increase in health insurance cost, increase in contributions to retirement plans, and increase in stock grant expense; offset by a decrease in non-qualified pension expense. Additional increases in non-interest expenses are attributable to an increase of $256 thousand in occupancy and equipment due in part to the opening of the Macungie permanent branch in November 2020 and the opening and rent for the Company’s new branch office at 2002 West Liberty Street in Allentown, Pennsylvania, along with an increase in building repair and maintenance, an increase of $258 thousand in data processing due primarily to e-commerce, the expanding customer base, fees associated with PPP loan forgiveness and the implementation fees for the Company’s upcoming transition to a new online banking platform, an increase of $143 thousand in FDIC insurance due, in part, to FDIC credits applied in the first quarter of 2020 and increase in the Company’s assessment base, and a $133 thousand increase in other expenses due, in part, to an increase in operating expenses, bank shares tax, director compensation, and debit card losses. These increases in non-interest expenses were offset, in part, by a decrease of $116 thousand in advertising and promotions from shifts in marketing strategies and less website and social media expense, less promotions, and less public relations expense.

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 September 30, 2021 totaled $1.1 million, or 19.8% of income before taxes, compared to income taxes for the three months ended September 30, 2020 totaling $788 thousand, or 18.7% of income before taxes. The increase in the tax rate is, in part, the result of change in the mix of taxable and tax free loans and investments and the decrease in income on bank owned life insurance.

The provision for income taxes for the nine months ended September 30, 2021 totaled $3.1 million, or 19.6% of income before taxes, compared to income taxes for the nine months ended September 30, 2020 totaling $2.1 million, or 18.7% of income before taxes. The increase in the tax rate is, in part, the result of change in the mix of taxable and tax free loans and investments and the decrease in income on bank owned life insurance.

FINANCIAL CONDITION

Securities

The Company’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Company intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is 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, and government agency bonds. The Company holds no high-risk securities or derivatives as of September 30, 2021. The Company has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

Total securities at September 30, 2021 were $264.2 million compared to $130.9 million at December 31, 2020. The increase in the investment portfolio resulted from the purchase of twenty-six (26) mortgage-backed securities, twenty-six (26) tax-free municipal bonds, and eight (8) taxable municipal bonds totaling $179.9 million; offset by principal pay downs on mortgage-backed securities, calls of eight (8) non-taxable municipal bonds, the maturity of one (1) non-taxable municipal bond, the maturity of five (5) government agency bonds, the maturity of one (1) Treasury security totaling $39.4 million, the sale of two (2) mortgage backed securities totaling $3.3 million, including a realized gain of $24 thousand, and a decrease in unrealized gains of $3.8 million. The carrying value of the securities portfolio as of September 30, 2021 includes a net unrealized loss of $123 thousand, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $3.7 million at December 31, 2020. The current unrealized loss 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.

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Loans

The loan portfolio comprises a major component of the Company’s earning assets. All of the Company’s loans are to domestic borrowers. Total net loans receivable (not including PPP loans) at September 30, 2021 increased $27.7 million to $1.11 billion from $1.08 billion at December 31, 2020. The gross loan-to-deposit ratio (not including PPP loans) decreased from 88% at December 31, 2020 to 80% at September 30, 2021. The Company’s loan portfolio at September 30, 2021 was comprised of residential real estate and consumer loans of $613.1 million, an increase of $36.1 million from December 31, 2020, and commercial loans of $505.1 million, a decrease of $7.5 million from December 31, 2020. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans. As described in Note 3 to the consolidated financial statements, the Company is participating in the SBA PPP program to support the needs of its small business clients. PPP loans receivable at September 30, 2021 and December 31, 2020 was $16.2 million and $54.3 million, respectively. Including PPP loans receivable, the gross loan-to-deposit ratio was 81% and 93% at September 30, 2021 and December 31, 2020.

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 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. As of September 30, 2021, two hundred two (202) loans totaling $118.1 million, for which the payment accommodation period has ended, have resumed payments under their original contractual terms and one (1) residential real estate loan totaling $415 thousand was taken to non-accrual and downgraded to substandard after its payment accommodation period ended in late March 2021. No loss is anticipated on the loan. Between October 1, 2021 and October 31, 2021, there were no new Section 4013 modifications made.

Credit Risk and Loan Quality

The Company’s allowance for loan losses increased $738 thousand to $11.3 million at September 30, 2021 compared to $10.6 million at December 31, 2020. At September 30, 2021 and December 31, 2020, the allowance for loan losses represented 1.00% and 0.92% of total loans receivable. At September 30, 2021 and December 31, 2020, the allowance for loan losses represented 1.01% and 0.97%, respectively, of total loans receivable not including PPP loans, which are guaranteed by the SBA. During 2020, the Company adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of non-PPP loans. During the nine months ending September 30, 2021, the Company again adjusted the other external factor methodology, due to uncertainty with the post COVID-19 pandemic economy, leading to a further increase in the allowance for loan losses as a percentage of non-PPP loans. In determining its allowance for loan loss level at September 30, 2021, the Company considered the health and composition of its loan portfolio going into and during the COVID-19 pandemic. All loans that have the CARES Act Section 4013 modification are provided additional qualitative reserve in the Company’s allowance for loan loss calculation. The Company’s non-performing loans to total loans receivable was 0.28% at September 30, 2021, compared to 0.26% at September 30, 2020 and 0.25% at December 31, 2020. The Company’s nonperforming loans to total loans receivable not including PPP loans was 0.28% at September 30, 2021, compared to 0.28% at September 30, 2020 and 0.26% at December 31, 2020. In the three months ended September 30, 2021, there were $2 thousand in charge-offs and no recoveries, as compared to no charge-offs and $1 thousand in recoveries for the three months ended September 30, 2020. In the nine months ended September 30, 2021, there were $4 thousand in charge-offs and $2 thousand in recoveries, as compared to no charge-offs and $26 thousand in recoveries for the nine months ended September 30, 2020. At September 30, 2021, approximately 95% of the Company’s loan portfolio is collateralized by real estate. Less than 6% 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 direct international exposure. The Company was not required to adopt the Current Expected Credit Losses (“CECL”) FASB accounting standard in 2020 or 2021. This guidance will not be effective for the Company 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 Company and comparable institutions in the Company’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses. The Company will continue to evaluate the allowance for loan losses as new information becomes available.

The 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 and nine months ended September 30, 2021.

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



		September 30,		December 31,		September 30,
		2021		2020		2020

	(In Thousands)
Non-accrual - commercial	$	-	$	-	$	-
Non-accrual - consumer		793		274		236
Restructured loans, accruing interest and less than 90 days past due		2,388		2,559		2,580
Loans past due 90 or more days, accruing interest		-		-		117
Total nonperforming loans		3,181		2,833		2,933
Foreclosed assets		-		-		-
Total nonperforming assets	$	3,181	$	2,833	$	2,933
Nonperforming loans to total loans (not including PPP loans)		0.28%		0.26%		0.28%
Nonperforming assets to total assets		0.20%		0.20%		0.21%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, increased $541 thousand from December 31, 2020 to September 30, 2021. This increase is due to purchases, in part due to the Company’s new branch office at 2002 West Liberty Street in Allentown, Pennsylvania, offset by depreciation on existing premises and equipment.

Deposits

Total deposits at September 30, 2021 increased $168.3 million to $1.40 billion from $1.23 billion at December 31, 2020. The increase in the Company’s deposits was due to an increase of $81.1 million in demand, NOW and money market deposits and a $135.5 million increase in savings deposits; offset by a decrease of $48.3 million in time deposits. The growth in total deposits was due to organic growth of new and existing customers and the injection of federal stimulus money into the economy from PPP funds and consumer stimulus payments. The shift out of time deposits was primarily due to promotions rolling off into lower yielding deposits due to the current rate environment. The funds were primarily used to fund new loan growth, purchase securities, and to pay off PPPLF borrowings.

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 $130.7 million at September 30, 2021, compared to $131.9 million at December 31, 2020.

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 September 30, 2021, the Company had $264.2 million of available for sale securities. Securities with carrying values of approximately $116.1 million and $98.7 million at September 30, 2021 and December 31, 2020, 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 September 30, 2021, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $707.2 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 September 30, 2021 and December 31, 2020. There were $14.7 million in long-term FHLB advances outstanding as of September 30, 2021 and December 31, 2020. 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 September 30, 2021 and December 31, 2020. Advances from this line are unsecured.

As further described in Note 8, in October 2021, the Company entered into a $5.0 million unsecured revolving line of credit facility with the ACBB. As of the date of this Quarterly Report on Form 10-Q, the Company has not borrowed any amounts under this Loan.

As described in Note 3, the Bank had long-term PPPLF borrowings, term funding to depository institutions that originate loans to small businesses under the PPP, through the Federal Reserve Bank of Philadelphia of $50.8 million as of December 31, 2020. These borrowings were repaid in full in February 2021. All PPPLF borrowings were secured by PPP loans. PPP loans that were 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 $145.8 million and $135.4 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had letters of credit outstanding of $6.9 million and $5.4 million, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. 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 $119.3 million as of September 30, 2021, representing a net increase of $7.1 million from December 31, 2020. The increase in capital was primarily the result of the net income of $12.6 million and an increase in surplus of $397 thousand due to stock grants and employee stock purchases with compensation expense, offset by dividends paid of $2.3 million, a decrease of $3.0 million in unrealized gains on available for sale securities and treasury stock purchases of $600 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 in the regulations), and Tier I capital to average assets (as defined in the regulations). As of September 30, 2021, 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

	September 30, 2021			December 31, 2020

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	119,291		$	109,013
Tier II, allowable portion of allowance for loan losses		11,308			10,570
Total capital	$	130,599		$	119,583

Common equity tier 1 capital ratio		12.3	%		11.9	%
Tier I risk based capital ratio		12.3	%		11.9	%
Total risk based capital ratio		13.5	%		13.1	%
Tier I leverage ratio		7.7	%		8.1	%

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

In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

The capital ratios to be considered “well capitalized” under the new capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and Total Risk-Based capital of 10%.

The Company qualifies as a small bank holding company and is not subject to the Federal Reserve’s consolidated capital rules, although an institution that so qualifies may continue to file reports that include such capital amounts and ratios. The Company has elected to continue to report those amounts and ratios.

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



Consolidated Corporation

	September 30, 2021			December 31, 2020

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	119,387		$	109,237
Tier II, allowable portion of allowance for loan losses		11,308			10,570
Total capital	$	130,695		$	119,807

Common equity tier 1 capital ratio		12.3	%		12.0	%
Tier I risk based capital ratio		12.3	%		12.0	%
Total risk based capital ratio		13.5	%		13.1	%
Tier I leverage ratio		7.7	%		8.1	%

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 September 30, 2021. 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		-3.3%
	Down 200 basis points		-5.9%

	Up 100 basis points		3.0%
	Up 200 basis points		5.7%

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 September 30, 2021, 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 September 30, 2021, including any corrective actions with regard to significant deficiencies and material weakness.

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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, the Reader should carefully consider the factors discussed in “Risk Factors” included within the Company’s 2020 Form 10-K and subsequent filings with the SEC. There are no material changes from such risk factors. Such risks are not the only risks facing the Company. 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.”

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

None.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

None.

Item 5 - Other Information

None.

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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.
104	Cover Page Interactive Data File (formatted as inline XBRL
	and contained in Exhibit 101)

* This instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL.

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SIGNATURES

Pursuant to 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: November 12, 2021	By:	/s/ David M. Lobach, Jr.
		David M. Lobach, Jr.
		President and Chief Executive Officer


Dated: November 12, 2021	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		First Executive Officer,
		Chief Operating Officer, Secretary and
		Chief Financial Officer