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

emyb-20210930x10q

t

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

 

 

 


2


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.


3


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

4


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.

5


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


6


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.

7


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.

8


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.

9


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

10


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.

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 and 1.01% and 0.97%, respectively, of total loans receivable not including PPP loans, which are guaranteed by the SBA. During 2021 and 2020, the Company adjusted certain qualitative factors 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. 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.

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


11


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

12


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


13


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.


14


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


15


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

16


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

$

-


17


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 


18


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.


19


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

20


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

21


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.


22


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)


23


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


24


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).

25


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.

26


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.


27


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

-

-

-

-

-


28


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 entitys 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.

29


 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.

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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 Companys 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

31


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.

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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.


34


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

35


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.


36


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

37


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.


38


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.


39


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.

40


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%.

41


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.

42


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.


43


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.


44


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.


45


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

46