Embassy Bancorp, Inc. - Quarter Report: 2023 September (Form 10-Q)

emyb-20230930x10q

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, 2023 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 3, 2023	($1.00 Par Value)	7,604,191
	(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 ComprehensiveLoss (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	29

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	42

Item 4 – Controls and Procedures	42

Part II - Other Information	43

Item 1 - Legal Proceedings	43

Item 1A - Risk Factors	43

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3 - Defaults Upon Senior Securities	43

Item 4 – Mine Safety Disclosures	43

Item 5 - Other Information	43

Item 6 - Exhibits	44

Signatures	45

‎

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Current Period Unaudited)



	September 30,		December 31,
ASSETS	2023		2022

	(In Thousands, Except Share Data)
Cash and due from banks	$	15,754	$	21,927
Interest bearing demand deposits with banks		61,491		44,368
Federal funds sold		417		1,000
Cash and Cash Equivalents		77,662		67,295
Securities available for sale		295,022		316,992
Restricted investment in bank stock		4,360		995
Loans receivable, net of allowance for credit losses of $12,449 in 2023; $12,449 in 2022		1,237,310		1,196,164
Paycheck Protection Program loans receivable		4		286
Premises and equipment, net of accumulated depreciation		3,779		3,843
Bank owned life insurance		26,065		25,603
Accrued interest receivable		3,257		2,926
Other assets		28,521		26,123
Total Assets	$	1,675,980	$	1,640,227
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	320,679	$	381,811
Interest bearing		1,151,580		1,139,296
Total Deposits		1,472,259		1,521,107
Securities sold under agreements to repurchase		11,340		13,384
Short-term borrowings		82,542		-
Accrued interest payable		7,332		986
Other liabilities		16,889		16,474
Total Liabilities		1,590,362		1,551,951
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2023 issued 7,756,985 shares; outstanding 7,604,191 shares;
2022 issued 7,739,785 shares; outstanding 7,586,991 shares;		7,757		7,740
Surplus		28,153		27,627
Retained earnings		113,198		106,551
Accumulated other comprehensive loss		(60,955)		(51,107)
Treasury stock, at cost: 152,794 shares at September 30, 2023 and
December 31, 2022, respectively		(2,535)		(2,535)
Total Stockholders' Equity		85,618		88,276
Total Liabilities and Stockholders' Equity	$	1,675,980	$	1,640,227

See notes to consolidated financial statements (unaudited).

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Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)



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

	2023		2022		2023			2022

	(In Thousands, Except Per Share Data)
INTEREST INCOME
Loans, including fees	$	12,523	$	10,723	$	35,889	$	30,667
Paycheck Protection Program loans, including fees		-		2		1		183
Securities, taxable		1,548		1,571		4,650		4,364
Securities, non-taxable		305		307		915		891
Short-term investments, including federal funds sold		137		398		936		679
Total Interest Income		14,513		13,001		42,391		36,784
INTEREST EXPENSE
Deposits		4,956		905		11,824		2,666
Securities sold under agreements to repurchase and federal
funds purchased		66		5		209		9
Short-term borrowings		91		-		98		-
Long-term borrowings		-		-		-		19
Total Interest Expense		5,113		910		12,131		2,694
Net Interest Income		9,400		12,091		30,260		34,090
(CREDIT) PROVISION FOR CREDIT LOSSES		(300)		275		(190)		625
Net Interest Income after (Credit) ‎ Provision for Credit Losses		9,700		11,816		30,450		33,465
OTHER NON-INTEREST INCOME
Merchant and credit card processing fees		91		88		273		267
Debit card interchange fees		222		221		671		654
Other service fees		158		157		468		411
Bank owned life insurance		99		117		491		347
Total Other Non-Interest Income		570		583		1,903		1,679
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits		3,487		3,376		10,805		9,961
Occupancy and equipment		979		930		2,915		2,819
Data processing		694		828		2,224		2,566
Advertising and promotion		257		243		824		594
Professional fees		310		250		809		690
FDIC insurance		192		116		569		347
Loan & real estate		58		46		155		166
Charitable contributions		208		209		721		724
Other		416		494		1,309		1,489
Total Other Non-Interest Expenses		6,601		6,492		20,331		19,356

Income Before Income Taxes		3,669		5,907		12,022		15,788
INCOME TAX EXPENSE		667		1,158		2,186		3,067
Net Income	$	3,002	$	4,749	$	9,836	$	12,721

BASIC EARNINGS PER SHARE	$	0.39	$	0.63	$	1.29	$	1.68

DILUTED EARNINGS PER SHARE	$	0.39	$	0.63	$	1.29	$	1.68

DIVIDENDS PER SHARE	$	-	$	-	$	0.40	$	0.35

See notes to consolidated financial statements (unaudited).
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Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive Loss (Unaudited)



	Three Months Ended September 30,
	2023			2022

		(In Thousands)
Net Income	$		3,002	$		4,749
Change in Accumulated Other Comprehensive Loss:
Unrealized holding loss on securities available for sale		(15,833)			(19,911)
Less: reclassification adjustment for realized gains		-			-
		(15,833)			(19,911)
Income tax effect		3,325			4,181
Net unrealized loss		(12,508)			(15,730)
Other comprehensive loss, net of tax			(12,508)			(15,730)
Comprehensive Loss	$		(9,506)	$		(10,981)



	Nine Months Ended September 30,
	2023			2022

		(In Thousands)

Net Income	$		9,836	$		12,721
Change in Accumulated Other Comprehensive Loss:
Unrealized holding loss on securities available for sale		(12,466)			(72,280)
Less: reclassification adjustment for realized gains		-			-
		(12,466)			(72,280)
Income tax effect		2,618			15,179
Net unrealized loss		(9,848)			(57,101)
Other comprehensive loss, net of tax			(9,848)			(57,101)
Comprehensive Loss	$		(12)	$		(44,380)

See notes to consolidated financial statements (unaudited).

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)


	Nine Months Ended September 30, 2023
	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2022	$	7,740	$	27,627	$	106,551	$	(51,107)	$	(2,535)	$	88,276
Net income		-		-		3,787		-		-		3,787
Other comprehensive income, net of tax		-		-		-		3,356		-		3,356
Common stock grants to directors, ‎ 13,877 shares		14		243		-		-		-		257
Compensation expense recognized on stock ‎grants, net of unearned compensation expense ‎ of $560		-		82		-		-		-		82
Shares issued under employee stock purchase ‎plan, 939 shares		1		15		-		-		-		16
Cumulative effect from change in accounting ‎ principle - CECL		-		-		(148)		-		-		(148)
BALANCE - MARCH 31, 2023	$	7,755	$	27,967	$	110,190	$	(47,751)	$	(2,535)	$	95,626

Net income		-		-		3,047		-		-		3,047
Other comprehensive loss, net of tax		-		-		-		(696)		-		(696)
Dividend declared, $0.40 per share		-		-		(3,041)		-		-		(3,041)
Compensation expense recognized on ‎stock grants, net of unearned compensation ‎ expense of $484		-		76		-		-		-		76
Shares issued under employee stock purchase ‎plan, 1,357 shares		1		18		-		-		-		19
BALANCE - JUNE 30, 2023	$	7,756	$	28,061	$	110,196	$	(48,447)	$	(2,535)	$	95,031

Net income		-		-		3,002		-		-		3,002
Other comprehensive loss, net of tax		-		-		-		(12,508)		-		(12,508)
Compensation expense recognized on ‎stock grants, net of unearned compensation ‎ expense of $407		-		77		-		-		-		77
Shares issued under employee stock purchase ‎plan, 1,027 shares		1		15		-		-		-		16
BALANCE - SEPTEMBER 30, 2023	$	7,757	$	28,153	$	113,198	$	(60,955)	$	(2,535)	$	85,618

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Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)


	Nine Months Ended September 30, 2022
	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2021	$	7,688	$	26,963	$	91,493	$	(1,194)	$	(2,435)	$	122,515
Net income		-		-		4,201		-		-		4,201
Other comprehensive loss, net of tax		-		-		-		(24,055)		-		(24,055)
Common stock grants to directors, ‎ 10,701 shares		10		213		-		-		-		223
Compensation expense recognized on stock ‎grants, net of unearned compensation expense ‎of $649		-		69		-		-		-		69
Shares issued under employee stock purchase ‎plan, 706 shares		1		14		-		-		-		15
Purchase of treasury stock, 883 shares ‎ at $20.79 per share		-		-		-		-		(18)		(18)
BALANCE - MARCH 31, 2022	$	7,699	$	27,259	$	95,694	$	(25,249)	$	(2,453)	$	102,950

Net income		-		-		3,771		-		-		3,771
Other comprehensive loss, net of tax		-		-		-		(17,316)		-		(17,316)
Dividend declared, $0.35 per share		-		-		(2,644)		-		-		(2,644)
Compensation expense recognized on ‎ stock grants, net of unearned compensation ‎expense of $579		-		70		-		-		-		70
Shares issued under employee stock purchase ‎plan, 958 shares		1		17		-		-		-		18
BALANCE - JUNE 30, 2022	$	7,700	$	27,346	$	96,821	$	(42,565)	$	(2,453)	$	86,849

Net income		-		-		4,749		-		-		4,749
Other comprehensive loss, net of tax		-		-		-		(15,730)		-		(15,730)
Compensation expense recognized on ‎ stock grants, net of unearned compensation ‎expense of $509		-		71		-		-		-		71
Shares issued under employee stock purchase ‎plan, 757 shares		1		15		-		-		-		16
BALANCE - SEPTEMBER 30, 2022	$	7,701	$	27,432	$	101,570	$	(58,295)	$	(2,453)	$	75,955

See notes to consolidated financial statements (unaudited).

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2023		2022

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,836	$	12,721
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) Provision for credit losses		(190)		625
Amortization of deferred loan costs		169		141
Accretion of deferred Paycheck Protection Program loan fees		-		(165)
Depreciation		663		666
Net accretion of investment security premiums and discounts		(431)		(285)
Stock compensation expense		492		433
Income on bank owned life insurance		(491)		(347)
Increase in accrued interest receivable		(331)		(184)
Decrease in other assets		260		896
Increase (decrease) in accrued interest payable		6,346		(135)
Increase in other liabilities		415		395
Net Cash Provided by Operating Activities		16,738		14,761
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(4,874)		(93,347)
Maturities, calls and principal repayments of securities available for sale		14,809		19,726
Net increase in loans		(41,313)		(74,027)
Net decrease in Paycheck Protection Program loans		282		8,443
Net (purchase) redemption of restricted investment in bank stock		(3,365)		429
Purchases of premises and equipment		(599)		(668)
Proceeds on bank owned life insurance		29		717
Net Cash Used in Investing Activities		(35,031)		(138,727)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits		(48,848)		40,042
Net (decrease) increase in securities sold under agreements to repurchase		(2,044)		3,695
Increase in short-term borrowed funds		82,542		-
Repayments of long-term borrowed funds		-		(14,651)
Proceeds from Employee Stock Purchase Plan		51		49
Purchase of treasury stock		-		(18)
Dividends paid		(3,041)		(2,644)
Net Cash Provided by Financing Activities		28,660		26,473
Net Increase (Decrease) in Cash and Cash Equivalents		10,367		(97,493)
CASH AND CASH EQUIVALENTS - BEGINNING		67,295		169,692
CASH AND CASH EQUIVALENTS - ENDING	$	77,662	$	72,199

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	5,785	$	2,829
Income taxes paid	$	3,000	$	2,962

See notes to consolidated financial statements (unaudited).

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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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, 2022, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 17, 2023.

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 2022 consolidated financial statements may have been reclassified to conform to 2023 presentation. These reclassifications had no effect on 2022 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, 2022, except for the accounting pronouncements described below which were adopted on January 1, 2023.

On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The Company adopted ASU 2016-13 using a modified retrospective approach. Results for reporting periods beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable US GAAP. At adoption, the Company increased its allowance for credit losses by $188 thousand, comprised of $113 thousand for loans receivable and $75 thousand for unfunded commitments. Upon adoption the Company recorded a cumulative effect adjustment that reduced stockholders’ equity by $148 thousand, net of tax.

Allowance for Credit Losses

The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is reported separately as a contra-asset on the Consolidated Balance Sheets. The expected credit loss for unfunded lending commitments and unfunded loan commitments, if required, is reported on the Consolidated Balance Sheets in other liabilities while the provision for credit losses related to unfunded commitments is reported in other non-interest expense.

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Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Credit Losses on Loans Receivable

The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics. If the loan does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis. The Company evaluates the pooling methodology at least annually. Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off.

The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk. Such segments include commercial real estate, commercial construction, commercial, residential real estate and consumer. The Company estimates the allowance for credit losses on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company utilizes the Open Pool method in determining expected future credit losses. This technique considers losses over the full life cycle of loan pools. The loss rate method measures the amount of loan charge–offs, net of recoveries (“credit losses”), recognized over the life of a pool by loan segment and vintage and compares those credit losses to the original loan balance of that pool as of a similar vintage. A vintage is a group of loans originated in the same annual time period. To estimate a CECL loss rate for the pool, management first identifies the credit losses recognized between the pool date and the reporting date for the pool and determines which credit losses were related to loans outstanding at the pool date. The loss rate method then divides the credit losses recognized on loans outstanding as of the pool date by the outstanding loan balance as of the pool date. The Company’s expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data.

The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors that the Company considers include changes in lending policies and procedures, national and local economic conditions, experience, ability and depth of lenders and staff, quality of the loan review system and Board oversight, the volume and severity of past due loans and non-accrual loans, business conditions, portfolio concentrations, and the effect of external factors such as competition, legal and regulatory requirements, among others. Furthermore, the Company considers the inherent uncertainty in quantitative models that are built upon historical data.

Individually Evaluated Loans

On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

Allowance for Credit Losses on Off-Balance Sheet Commitments

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. To determine the expected funding rate, the Company uses a historical utilization rate for each segment. As noted above, the allowance for credit losses on unfunded loan commitments, if required, is included in other liabilities on the Consolidated Balance Sheets and the related credit expense is recorded in other non-interest expense in the consolidated statements of income. There was no allowance required for credit losses on off-balance sheet commitments as of September 30, 2023.

Allowance for Credit Losses on Available for Sale Securities

For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more than likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale (“AFS”) that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

amortized cost, any changes to the rating by a rating agency, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax. The Company did not record an allowance for AFS securities on January 1, 2023 and year to date September 30, 2023 as the investment portfolio consists primarily of mortgage-backed securities issued by FHLMC or FNMA, taxable and non-taxable municipal bonds, government agency bonds and Treasury bonds in which credit risk is deemed minimal. The securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses. The impact going forward will depend on the composition, characteristics, and credit quality of the loan and securities portfolios, as well as the economic conditions at future reporting periods. See Note 3 – Securities Available For Sale.

Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued Interest Receivable

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans and available for sale securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Balance Sheets, totaled $2.2 million at September 30, 2023 and is excluded from the estimate of credit losses. Accrued interest receivable on available for sale securities, also a component of accrued interest receivable on the Consolidated Balance Sheets, totaled $1.0 million at September 30, 2023 and is excluded from the estimate of credit losses.

Note 3 – Securities Available For Sale

At September 30, 2023 and December 31, 2022, respectively, the amortized cost and fair values of securities available-for-sale were as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
September 30, 2023:
U.S. Treasury securities	$	19,811	$	-	$	(466)	$	19,345
U.S. Government agency obligations		34,083		-		(482)		33,601
Municipal bonds		73,644		5		(18,820)		54,829
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - commercial		509		-		(94)		415
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - residential		244,133		-		(57,301)		186,832
Total	$	372,180	$	5	$	(77,163)	$	295,022

December 31, 2022:
U.S. Treasury securities	$	17,217	$	-	$	(446)	$	16,771
U.S. Government agency obligations		34,069		-		(1,518)		32,551
Municipal bonds		73,958		112		(15,453)		58,617
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - commercial		510		-		(76)		434
U.S. Government Sponsored Enterprise (GSE) - ‎ Mortgage-backed securities - residential		255,930		2		(47,313)		208,619
Total	$	381,684	$	114	$	(64,806)	$	316,992

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The amortized cost and fair value of securities as of September 30, 2023, 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	$	41,947	$	41,532
Due after one year through five years		14,698		13,968
Due after five years through ten years		5,947		5,310
Due after ten years		64,946		46,965
		127,538		107,775
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial		509		415
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		244,133		186,832
Total	$	372,180	$	295,022

There were no sales of securities for the three and nine months ended September 30, 2023 and 2022.

Securities with a carrying value of $135.3 million and $147.2 million at September 30, 2023 and December 31, 2022, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022:



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

September 30, 2023:	(In Thousands)
U.S. Treasury securities	$	4,976	$	(4)	$	14,369	$	(462)	$	19,345	$	(466)
U.S. Government agency obligations		-		-		33,601		(482)		33,601		(482)
Municipal bonds		9,404		(1,168)		44,224		(17,652)		53,628		(18,820)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
commercial		-		-		415		(94)		415		(94)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
residential		104		(1)		186,728		(57,300)		186,832		(57,301)
Total Temporarily Impaired Securities	$	14,484	$	(1,173)	$	279,337	$	(75,990)	$	293,821	$	(77,163)
		.
December 31, 2022:
U.S. Treasury securities	$	16,771	$	(446)	$	-	$	-	$	16,771	$	(446)
U.S. Government agency obligations		-		-		32,551		(1,518)		32,551		(1,518)
Municipal bonds		32,103		(6,308)		22,099		(9,145)		54,202		(15,453)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
commercial		434		(76)		-		-		434		(76)
U.S. Government Sponsored Enterprise
(GSE) - Mortgage -backed securities -
residential		32,203		(3,166)		176,281		(44,147)		208,484		(47,313)
Total Temporarily Impaired Securities	$	81,511	$	(9,996)	$	230,931	$	(54,810)	$	312,442	$	(64,806)

The Company had two hundred fourteen (214) securities in an unrealized loss position at September 30, 2023 and one hundred ninety-four (194) securities in an unrealized loss position at December 31, 2022. The Company reviews its investment portfolio on a quarterly basis for indications of impairment due to credit-related factors or noncredit-related factors and the Company does not intend to sell the securities and has the intent and ability to hold them for a period of time sufficient for recovery of their amortized cost basis. This review includes analyzing the extent to which the fair value has been lower than the cost, the market liquidity for the investment, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Management believes that the unrealized loss only represents temporary impairment of the securities, which are predominantly backed by credit of government agencies, and are a result of the increased market interest rates due to the current economic conditions, and not the credit quality of the issuer. As such, no allowance for credit losses was required on securities available for sale in an unrealized loss position at September 30, 2023.

Note 4 – Restricted Investment in Bank Stock

Restricted investments in bank stock consist of FHLBank of Pittsburgh (“FHLB”) stock and Atlantic Community Bankers Bank (“ACBB”) stock. The restricted stocks are carried at cost. Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula. The Bank had FHLB stock at a carrying value of $4.3 million and $955 thousand as of September 30, 2023 and December 31, 2022, respectively. The Bank had ACBB stock at a carrying value of $40 thousand at September 30, 2023 and December 31, 2022.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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, 2023.

Note 5 – Loans and Credit Quality

The Company has presented Paycheck Protection Program (“PPP”) loans of $4 thousand, representing only one (1) loan, at September 30, 2023 and $286 thousand at December 31, 2022, respectively, separately from loans receivable on the Consolidated Balance Sheets. PPP loans are 100% SBA guaranteed and the Company has determined that no allowance for credit losses is required on PPP loans. All PPP loans are risk rated as pass. PPP loans are excluded in the following composition and credit quality tables.

The following table presents the composition of loans receivable at September 30, 2023 and December 31, 2022, respectively:



	September 30, 2023			December 31, 2022
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	519,260	41.57%	$	507,300	41.98%
Commercial construction		33,634	2.69%		16,761	1.39%
Commercial		36,921	2.96%		39,520	3.27%
Residential real estate		658,954	52.74%		643,975	53.30%
Consumer		520	0.04%		782	0.06%
Total loans		1,249,289	100.00%		1,208,338	100.00%
Unearned origination fees		470			275
Allowance for credit losses		(12,449)			(12,449)
Net Loans	$	1,237,310		$	1,196,164

‎

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 weakness), substandard (well defined weakness) and doubtful (full collection unlikely) within the Company's internal risk rating system as of September 30, 2023 by year of origination:


		2023		2022		2021		2020		2019		Prior		Revolving		Total

September 30, 2023		(In Thousands)
Commercial
real estate
	Pass	$	50,555	$	142,391	$	59,182	$	65,124	$	27,402	$	162,428	$	10,907	$	517,989
	Special Mention		-		-		-		-		-		-		-		-
	Substandard		-		-		-		-		-		1,271		-		1,271
	Total		50,555		142,391		59,182		65,124		27,402		163,699		10,907		519,260

Commercial
construction
	Pass		1,927		25,291		5,637		-		451		30		-		33,336
	Special Mention		-		-		-		-		-		-		-		-
	Substandard		-		-		-		-		-		243		55		298
	Total		1,927		25,291		5,637		-		451		273		55		33,634

Commercial
	Pass		1,747		8,137		2,530		3,480		6,087		10,588		4,330		36,899
	Special Mention		-		-		-		-		22		-		-		22
	Substandard		-		-		-		-		-		-		-		-
	Total		1,747		8,137		2,530		3,480		6,109		10,588		4,330		36,921

Residential
real estate
	Pass		58,868		96,971		160,991		145,383		46,998		127,023		21,141		657,375
	Special Mention		-		-		-		-		-		450		-		450
	Substandard		-		-		-		-		176		953		-		1,129
	Total		58,868		96,971		160,991		145,383		47,174		128,426		21,141		658,954

Consumer
	Pass		95		127		26		1		21		14		236		520
	Special Mention		-		-		-		-		-		-		-		-
	Substandard		-		-		-		-		-		-		-		-
	Total		95		127		26		1		21		14		236		520
Total
Loans Receivable		$	113,192	$	272,917	$	228,366	$	213,988	$	81,157	$	303,000	$	36,669	$	1,249,289

The Company had no loans that were charged off during the three and nine months ending September 30, 2023 and therefore no gross charge-off information is presented in the above table.

‎

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 December 31, 2022.



	Pass		Special Mention		Substandard		Doubtful		Total

		(In Thousands)
December 31, 2022
Commercial real estate	$	505,983	$	-	$	1,317	$	-	$	507,300
Commercial construction		16,458		-		303		-		16,761
Commercial		39,498		22		-		-		39,520
Residential real estate		642,913		467		595		-		643,975
Consumer		782		-		-		-		782
Total	$	1,205,634	$	489	$	2,215	$	-	$	1,208,338

At September 30, 2023, the Company had no foreclosed assets and had one (1) recorded investment in a mortgage loan collateralized by residential real estate property in the process of foreclosure in the amount of $121 thousand. At December 31, 2022, the Company had no foreclosed assets or recorded investment in mortgage loans collateralized by residential real estate property in the process of foreclosure.

The following table presents the carrying value and related allowance for credit losses of individually analyzed loans as of September 30, 2023:


	September 30, 2023
	Recorded Investment		Unpaid Principal Balance		Related Allowance for Credit Losses
	(In Thousands)
With no related allowance recorded:
Commercial real estate (1)	$	1,322	$	1,563
Commercial construction (1)		55		55
Commercial		-		-
Residential real estate (1)		1,222		1,225
Consumer		-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	-
Commercial construction (1)		243		243		24
Commercial (2)		22		22		22
Residential real estate (1)		523		523		152
Consumer		-		-		-
Total:
Commercial real estate	$	1,322	$	1,563	$	-
Commercial construction		298		298		24
Commercial		22		22		22
Residential real estate		1,745		1,748		152
Consumer		-		-		-
	$	3,387	$	3,631	$	198

1.All loans are real estate collateral dependent.

2.All loans are non-collateral dependent loans.

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table, presented under previously applicable US GAAP, summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2022:


	December 31, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
	(In Thousands)
With no related allowance recorded:
Commercial real estate	$	1,371	$	1,611
Commercial construction		55		55
Commercial		-		-
Residential real estate		768		772
Consumer		-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	-
Commercial construction		248		248		29
Commercial		240		240		33
Residential real estate		549		549		107
Consumer		-		-		-
Total:
Commercial real estate	$	1,371	$	1,611	$	-
Commercial construction		303		303		29
Commercial		240		240		33
Residential real estate		1,317		1,321		107
Consumer		-		-		-
	$	3,231	$	3,475	$	169

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



	September 30, 2023		December 31, 2022

	(In Thousands)
Commercial real estate	$	-	$	-
Commercial construction		-		-
Commercial		-		-
Residential real estate		297		192
Consumer		-		-
Total	$	297	$	192

As of September 30, 2023, there were two (2) loans in non-accrual status in the amount of $297 thousand. There was no required related allowance for these collateral dependent non-accrual loans. No interest income was recognized on the $297 thousand in non-accrual loans for the three months ending September 30, 2023 and interest income was recognized of $1 thousand for the nine months ending September 30, 2023.
‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2023 and December 31, 2022, 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, 2023	(In Thousands)
Commercial real estate	$	640	$	-	$	-	$	640	$	518,620	$	519,260	$	-
Commercial construction		-		-		-		-		33,634		33,634		-
Commercial		-		-		-		-		36,921		36,921		-
Residential real estate		175		-		193		368		658,586		658,954		73
Consumer		-		-		-		-		520		520		-
Total	$	815	$	-	$	193	$	1,008	$	1,248,281	$	1,249,289	$	73
December 31, 2022
Commercial real estate	$	-	$	-	$	-	$	-	$	507,300	$	507,300	$	-
Commercial construction		-		-		-		-		16,761		16,761		-
Commercial		32		-		-		32		39,488		39,520		-
Residential real estate		138		-		192		330		643,645		643,975		-
Consumer		-		-		-		-		782		782		-
Total	$	170	$	-	$	192	$	362	$	1,207,976	$	1,208,338	$	-

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables detail the activity in the allowance for credit losses for the three and nine months ended September 30, 2023 and the allowance for loan losses for the three and nine months ended September 30, 2022:


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

Allowance for credit losses	(In Thousands)
Three Months Ending September 30, 2023
Beginning Balance - June 30, 2023	$	5,941	$	317	$	973	$	5,299	$	23	$	195	$	12,748
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		1		-		-		1
Provisions (Credit)		(158)		46		(37)		29		3		(183)		(300)
Ending Balance - September 30, 2023	$	5,783	$	363	$	936	$	5,329	$	26	$	12	$	12,449

Nine Months Ending September 30, 2023
Beginning Balance - December 31, 2022	$	5,113	$	200	$	1,289	$	4,960	$	13	$	874	$	12,449
January 1, 2023 adoption of ASU 2016-13		492		77		(172)		522		19		(750)		188
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		2		-		-		2
Provisions (Credit)		178		86		(181)		(155)		(6)		(112)		(190)
Ending Balance - September 30, 2023	$	5,783	$	363	$	936	$	5,329	$	26	$	12	$	12,449

Allowance for loan losses
Three Months Ending September 30, 2022
Beginning Balance - June 30, 2022	$	4,815	$	106	$	1,272	$	4,873	$	13	$	757	$	11,836
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		67		-		-		67
Provisions		169		13		23		(6)		1		75		275
Ending Balance - September 30, 2022	$	4,984	$	119	$	1,295	$	4,934	$	14	$	832	$	12,178

Nine Months Ending September 30, 2022
Beginning Balance - December 31, 2021	$	4,400	$	71	$	1,328	$	4,718	$	14	$	953	$	11,484
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		69		-		-		69
Provisions		584		48		(33)		147		-		(121)		625
Ending Balance - September 30, 2022	$	4,984	$	119	$	1,295	$	4,934	$	14	$	832	$	12,178

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables represent the allocation for credit losses (September 30, 2023) and for loan losses (December 31, 2022) and the related loan portfolio disaggregated based on impairment methodology at September 30, 2023 and December 31, 2022:



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

	(In Thousands)
September 30, 2023
Allowance for Credit Losses
Ending Balance	$	5,783	$	363	$	936	$	5,329	$	26	$	12	$	12,449
Ending balance: individually evaluated for impairment - real estate collateral dependent	$	-	$	24	$	-	$	152	$	-	$	-	$	176
Ending balance: individually evaluated for impairment - non-collateral dependent	$	-	$	-	$	22	$	-	$	-	$	-	$	22
Ending balance: collectively evaluated for impairment	$	5,783	$	339	$	914	$	5,177	$	26	$	12	$	12,251

Loans receivables:
Ending balance	$	519,260	$	33,634	$	36,921	$	658,954	$	520			$	1,249,289
Ending balance: individually evaluated for impairment - real estate collateral dependent	$	1,322	$	298	$	-	$	1,745	$	-			$	3,365
Ending balance: individually evaluated for impairment - non-collateral dependent	$	-	$	-	$	22	$	-	$	-			$	22
Ending balance: collectively evaluated for impairment	$	517,938	$	33,336	$	36,899	$	657,209	$	520			$	1,245,902

December 31, 2022
Allowance for Loan Losses
Ending Balance	$	5,113	$	200	$	1,289	$	4,960	$	13	$	874	$	12,449
Ending balance: individually evaluated for impairment	$	-	$	29	$	33	$	107	$	-	$	-	$	169
Ending balance: collectively evaluated for impairment	$	5,113	$	171	$	1,256	$	4,853	$	13	$	874	$	12,280

Loans receivables:
Ending balance	$	507,300	$	16,761	$	39,520	$	643,975	$	782			$	1,208,338
Ending balance: individually evaluated for impairment	$	1,371	$	303	$	240	$	1,317	$	-			$	3,231
Ending balance: collectively evaluated for impairment	$	505,929	$	16,458	$	39,280	$	642,658	$	782			$	1,205,107

The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in the ASU were applied prospectively, and therefore, loan modification and charge off information is provided for only those items occurring after the January 1, 2023 adoption date.

Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restricting their loans and the modification to the terms of the loan are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

There are additional disclosures for modification of loans with borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is principal forgiveness, interest rate reductions, other than insignificant payment delays, term extensions, or a combination of any of these items. If the Company modifies any loans to borrowers in financial distress that involves principal forgiveness, the amount of principal that is forgiven is charged off against the allowance for credit losses. The Company had no loan modifications to borrowers experiencing financial difficulties in the nine months ending September 30, 2023 and there were no modifications to borrowers experiencing financial difficulties that were outstanding at September 30, 2023.

Note 6 – Deposits

The components of deposits at September 30, 2023 and December 31, 2022 are as follows:


	September 30, 2023		December 31, 2022
	(In Thousands)

Demand, non-interest bearing	$	320,679	$	381,811
Demand, NOW and money market, interest bearing		248,728		244,629
Savings		522,523		681,394
Time, $250 and over		134,474		82,916
Time, other		245,855		130,357
Total deposits	$	1,472,259	$	1,521,107

At September 30, 2023, the scheduled maturities of time deposits are as follows (in thousands):


2023 (remainder of the year)	$	65,178
2024		280,454
2025		26,214
2026		6,365
2027		995
2028		1,123
	$	380,329

Note 7 – 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, 2023, the Bank had a maximum borrowing capacity for short-term and long-term FHLB advances of approximately $785.5 million, of which $702.7 million is available for borrowing at September 30, 2023 due to an outstanding short-term FHLB advance of $82.5 million with an interest rate of 5.722% which matured and was repaid on October 2, 2023, as well as a letter of credit in the amount of $135 thousand. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no long-term FHLB advances outstanding as of September 30, 2023. There were no short-term or long-term FHLB advances outstanding as of December 31, 2022. 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, 2023 and December 31, 2022. Advances from this line are unsecured.

The Bank is also eligible to borrow under the Federal Reserve Bank’s discount window borrowing programs.

The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at September 30, 2023 and December 31, 2022. Advances from this line are unsecured. Subsequent to September 30, 2023, in October 2023, this $7.5 million revolving line of credit with ACBB was renewed for a period of one year. Under the terms of this renewed facility, availability under the revolving line of credit would be reduced to $5.0 million should the Company’s net tangible ratio drop below 5% and

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

availability would be reduced to $2.0 million should the Company’s net tangible ratio drop below 2%. If the Company’s net tangible ratio drops below 0%, the commitment is canceled.

Note 8 – 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, 2023, there were 393,998 shares available for issuance under the SIP.

The Company grants shares of restricted stock, under the SIP, to certain members of its Board of Directors as compensation for their services, in accordance with the Company’s Non-employee Directors Compensation program adopted in October 2010. The Company also grants restricted stock to certain officers under individual agreements with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over the service period of two 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, 2023, there have been 246,115 awards granted. There were no awards granted during the three months ended September 30, 2023 and 2022. During the nine months ended September 30, 2023 and 2022 there were 13,877 and 10,701 awards granted, respectively. During the three and nine months ended September 30, 2023, the Company recognized compensation expense for restricted stock awards of $77 thousand and $492 thousand, respectively. During the three and nine months ended September 30, 2022, the Company recognized compensation expense for restricted stock awards of $71 thousand and $433 thousand, 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, 2023 and 2022. At September 30, 2023 there were no outstanding options.

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 25,230 shares have been issued as of September 30, 2023. The Company recognized discount expense in relation to the ESPP of $1 thousand and $3 thousand for the three and nine months ended September 30, 2023, respectively, and $1 thousand and $2 thousand for the three and nine months ended September 30, 2022, respectively.

Note 9 – Other Comprehensive Loss

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 (loss). Management believes that the unrealized losses on securities available for sale are primarily a result of the increasing market interest rates and the overall current market conditions.

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



	Three Months Ended September 30,
	2023						2022

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive loss:
Unrealized holding losses on securities ‎ available for sale	$	(15,833)	$	3,325	$	(12,508)	$	(19,911)	$	4,181	$	(15,730)
Reclassification adjustments for gains on securities ‎ transactions included in net income (A),(B)		-		-		-		-		-		-
Total other comprehensive loss	$	(15,833)	$	3,325	$	(12,508)	$	(19,911)	$	4,181	$	(15,730)



	Nine Months Ended September 30,
	2023						2022

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive loss:
Unrealized holding losses on securities ‎ available for sale	$	(12,466)	$	2,618	$	(9,848)	$	(72,280)	$	15,179	$	(57,101)
Reclassification adjustments for gains on securities ‎ transactions included in net income (A),(B)		-		-		-		-		-		-
Total other comprehensive loss	$	(12,466)	$	2,618	$	(9,848)	$	(72,280)	$	15,179	$	(57,101)

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

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 and nine months ended September 30, 2023 and 2022.

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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


	Securities
	Available
	for Sale
Three Months Ended September 30, 2023 and 2022	(In Thousands)
Balance June 30, 2023	$	(48,447)
Other comprehensive loss before reclassifications		(12,508)
Amounts reclassified from accumulated other ‎ comprehensive loss		-
Net other comprehensive loss during the period		(12,508)
Balance September 30, 2023	$	(60,955)

Balance June 30, 2022	$	(42,565)
Other comprehensive loss before reclassifications		(15,730)
Amounts reclassified from accumulated other ‎ comprehensive loss		-
Net other comprehensive loss during the period		(15,730)
Balance September 30, 2022	$	(58,295)

Nine Months Ended September 30, 2023 and 2022
Balance January 1, 2023	$	(51,107)
Other comprehensive loss before reclassifications		(9,848)
Amounts reclassified from accumulated other ‎ comprehensive loss		-
Net other comprehensive loss during the period		(9,848)
Balance September 30, 2023	$	(60,955)

Balance January 1, 2022	$	(1,194)
Other comprehensive loss before reclassifications		(57,101)
Amounts reclassified from accumulated other ‎ comprehensive loss		-
Net other comprehensive loss during the period		(57,101)
Balance September 30, 2022	$	(58,295)

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – 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,
	2023		2022		2023		2022

	(Dollars In Thousands, Except Share and Per Share Data)
Net income	$	3,002	$	4,749	$	9,836	$	12,721

Weighted average shares outstanding		7,603,175		7,553,266		7,598,968		7,550,600
Dilutive effect of potential common shares, stock options		-		19,716		-		19,716
Diluted weighted average common shares outstanding		7,603,175		7,572,982		7,598,968		7,570,316

Basic earnings per share	$	0.39	$	0.63	$	1.29	$	1.68
Diluted earnings per share	$	0.39	$	0.63	$	1.29	$	1.68

There were no stock options not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2023 and September 30, 2022.

Note 11 – Fair Value Measurements

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

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

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

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

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

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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at September 30, 2023 and December 31, 2022, 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. Treasury securities	$	-	$	19,345	$	-	$	19,345
U.S. Government agency obligations		-		33,601		-		33,601
Municipal bonds		-		54,829		-		54,829
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial		-		415		-		415
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		186,832		-		186,832
September 30, 2023 Securities available for sale	$	-	$	295,022	$	-	$	295,022

U.S. Treasury securities	$	-	$	16,771	$	-	$	16,771
U.S. Government agency obligations		-		32,551		-		32,551
Municipal bonds		-		58,617		-		58,617
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - commercial		-		434		-		434
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		208,619		-		208,619
December 31, 2022 Securities available for sale	$	-	$	316,992	$	-	$	316,992

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, 2023 and December 31, 2022, 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, 2023 Loans Individually evaluated for credit losses	$	-	$	-	$	590	$	590
December 31, 2022 Impaired loans	$	-	$	-	$	868	$	868

Loans individually evaluated for credit losses are those that are accounted for under existing Financial Accounting Standards Board (“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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

proceeds. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

At September 30, 2023, of the loans individually evaluated for credit losses having an aggregate balance of $3.4 million, $2.6 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 $788 thousand in loans individually evaluated for credit losses, an aggregate valuation allowance of $198 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, 2023 and December 31, 2022, 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, 2023:
Loans Individually evaluated for credit losses	$	590	Appraisal of real estate collateral	Appraisal adjustments (1)	0% to -25% (-24.8%)
			and pending agreement of sale	Liquidation expenses (2)	0% to -10.0% (-7.5%)
December 31, 2022:
Impaired loans	$	868	Appraisal of collateral and	Appraisal adjustments (1)	0% to -25% (-25.0%)
			pending agreement of sale	Liquidation expenses (2)	0% to -7.5% (-7.5%)

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

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

‎

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The estimated fair values of the Company’s financial instruments were as follows at September 30, 2023 and December 31, 2022:



						(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, 2023:
Financial assets:
Cash and cash equivalents	$	77,662	$	77,662	$	77,662	$	-	$	-
Securities available-for-sale		295,022		295,022		-		295,022		-
Loans receivable, net of allowance		1,237,310		1,114,773		-		-		1,114,773
Paycheck Protection Program loans receivable		4		3		-		-		3
Restricted investments in bank stock		4,360		4,360		-		4,360		-
Accrued interest receivable		3,257		3,257		-		3,257		-
Financial liabilities:
Deposits		1,472,259		1,466,006		-		1,466,006		-
Securities sold under agreements to
repurchase and federal funds purchased		11,340		11,340		-		11,340		-
Short-term borrowings		82,542		82,555		-		82,555		-
Accrued interest payable		7,332		7,332		-		7,332		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2022:
Financial assets:
Cash and cash equivalents	$	67,295	$	67,295	$	67,295	$	-	$	-
Securities available-for-sale		316,992		316,992		-		316,992		-
Loans receivable, net of allowance		1,196,164		1,163,947		-		-		1,163,947
Paycheck Protection Program loans receivable		286		255		-		-		255
Restricted investments in bank stock		995		995		-		995		-
Accrued interest receivable		2,926		2,926		-		2,926		-
Financial liabilities:
Deposits		1,521,107		1,516,911		-		1,516,911		-
Securities sold under agreements to
repurchase and federal funds purchased		13,384		13,384		-		13,384		-
Accrued interest payable		986		986		-		986		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

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, 2023 and for the three and nine months ended September 30, 2023 and 2022, 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, 2022 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, 2022. 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 credit losses and the appropriate level of the allowance for credit losses and the valuation of deferred tax assets. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Credit 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 and related deposit flows, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations including policies of the U.S. Department of Treasury and Federal Reserve System, (v) changes in accounting policies or procedures as may be required by FASB or regulatory agencies, (vi) geopolitical events in Ukraine and the Middle East (vii) adverse developments in the financial industry generally, such as the recent bank failures and related responsive measures to manage such developments, and (viii) 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, 2022 and subsequent filings with the SEC.

OVERVIEW

The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted. As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC.

The Bank, which is the Company’s primary operating subsidiary, was originally incorporated as a Pennsylvania bank on May 11, 2001 and opened its doors on November 6, 2001. It was formed by a group of local business persons and professionals with significant prior experience in community banking in the Lehigh Valley area of Pennsylvania, the Bank’s primary market area, for the purpose of providing a local community bank to serve Lehigh and Northampton Counties in Pennsylvania.

Since its inception, the Board’s philosophy has been that, by running the Bank with a view toward the long term, only good things will happen for the Bank’s customers, team members, shareholders and the Lehigh Valley community.

At September 30, 2023, the Company continued to be in a strong financial and operational condition. The Bank’s September 30, 2023 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 at September 30, 2023 was 0.03% and the ratio of non-performing assets to total assets was 0.02%. The Company had its last Community Reinvestment Act (“CRA”) examination in 2022 and received a “satisfactory” rating.

The Company’s assets increased by $35.8 million from $1.64 billion at December 31, 2022 to $1.68 billion at September 30, 2023. The increase was due to a $10.4 million increase in cash and cash equivalents, an increase of $41.1 million in net loans receivable (excluding PPP loans), offset by a decrease of $22.0 million in securities available for sale. The increase in cash and cash equivalents was primarily due to the increase in short term borrowings of $82.5 million and $14.8 million in principal pay downs on mortgage-backed securities and maturities within the securities available for sale portfolio, offset by a decrease of $48.8 million in deposits, the purchases of available for sale securities of $4.9 million, net loan growth (excluding PPP), and a decrease in securities sold under agreement to repurchase. The $22.0 million decrease in securities was net of an increase in unrealized losses of $12.5 million. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in response to economic conditions since purchase and not due to the credit quality of the investment portfolio. The Company's deposits decreased by $48.8 million from $1.52 billion at December 31, 2022 to $1.47 billion at September 30, 2023. The decrease in deposits was due to a $61.1 million decrease in non-interest bearing deposits, offset by an increase of $12.3 million in interest bearing deposits. The shift out of non-interest bearing deposits and savings into time deposits is primarily due to time deposits currently yielding higher rates due to the current rate environment. The Company continues to seek deposits using 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 Company’s success to attract new deposit relationships is the increased usage of the Company’s online banking platform, competitively offered rates, and the continued convenience and efficiency of our branch network and branch personnel. The Company continues to gain new deposit opportunities created by recent merger announcements, name changes, competitive branch hour and service adjustments and/or closures in the Company’s market area, and attracting new customers looking to relocate to a local, reputable community bank.

Net loans receivable (excluding PPP loans) increased by $41.1 million to $1.24 billion at September 30, 2023, as compared to $1.20 billion at December 31, 2022. 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 pipeline, and continues to focus on developing a reputation as being a market leader in both commercial and consumer/mortgage lending. Management believes that this combination of relationship building, cross marketing and responsible underwriting will translate into continued long-term growth of a portfolio of quality loans and core deposit relationships, although there can be no assurance of this. The Company continues to monitor the interest rate exposure of its interest-bearing assets and liabilities. See expanded discussion under the Financial Condition: Loans section below.

Net income for the three months ended September 30, 2023 was $3.0 million compared to net income for the three months ended September 30, 2022 of $4.7 million, a decrease of $1.7 million, or 36.8%. Basic and diluted earnings per share decreased to $0.39 for the three months ended September 30, 2023, as compared to $0.63 for the three months ended September 30, 2022. The difference in net income for the three months ended September 30, 2023 and September 30, 2022 resulted primarily from an increase in interest expense of $4.2 million, or 461.9%, due to the rising rate environment, an increase in non-interest expenses, and a decrease in non-interest income; offset by an increase in interest income and a decrease in the (credit) provision for credit losses.

Net income for the nine months ended September 30, 2023 was $9.8 million compared to net income for the nine months ended September 30, 2022 of $12.7 million, a decrease of $2.9 million, or 22.7%. Basic and diluted earnings per share decreased to $1.29 for the nine months ended September 30, 2023, as compared to $1.68 for the nine months ended September 30, 2022. The difference in net income for the nine months ended September 30, 2023 and September 30, 2022 resulted primarily from an increase in interest expense of $9.4 million, or 350.3%, due to the rising rate environment, and an increase in non-interest expenses; offset by an increase in interest income, an increase in non-interest income, and a decrease in the (credit) provision for credit losses.

The Company believes that there may be future compressions to the net interest margin over the next six to nine months as older time deposits mature at higher interest rates, although this compression could be less significant than prior compression experienced. The Company continues to evaluate and consider implementing various strategies to mitigate the potential impact of future market rate increases. This includes interest rate swaps, adjustments to the investment portfolio, and BOLI transactions. In addition, in order to mitigate against rising non-interest expenses, management is in the process of evaluating the availability and feasibility of various potential operational efficiencies.

‎

RESULTS OF OPERATIONS

Net Interest Income

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 the use of this measure provides meaningful information to the reader of the consolidated financial statements when comparing taxable and nontaxable assets. However, it is supplemental to US GAAP which is used to prepare the Company’s consolidated financial statements and should not be read in isolation or relied upon as a substitute for US GAAP measures. In addition, the non-US GAAP measure may not be comparable to non-US GAAP measures reported by other companies. The tax rate used to calculate the tax equivalent adjustments was 21% for 2023 and 2022.

Total interest income for the three months ended September 30, 2023 increased $1.5 million to $14.5 million, as compared to $13.0 million for the three months ended September 30, 2022. Average earning assets were $1.57 billion for the three months ended September 30, 2023 as compared to $1.58 billion for the three months ended September 30, 2022. The tax equivalent yield on average earning assets was 3.71% for the third quarter of 2023 compared to 3.29% for the third quarter of 2022.

Total interest expense for the three months ended September 30, 2023 increased $4.2 million to $5.1 million, as compared to $910 thousand for the three months ended September 30, 2022. Average interest bearing liabilities were $1.18 billion for the three months ended September 30, 2023 as compared to $1.16 billion for the three months ended September 30, 2022. The yield on average interest bearing liabilities was 1.72% and 0.31% for the third quarter of 2023 and 2022, respectively.

Net interest income for the three months ended September 30, 2023 was $9.4 million, compared to $12.1 million for the three months ended September 30, 2022. The decrease in net interest income is, in part, the result of a decrease in the balances of taxable and non-taxable investments, a decrease in the balance of interest bearing deposits with banks and fed funds sold, an increase in the balance of certificates of deposit and FHLB short-term borrowings, along with an increase in the rates of interest bearing demand deposits, NOW, money market, savings, certificates of deposit, securities under agreements to repurchase, and FHLB short-term borrowings. The decrease in net interest income was offset by an increase in the balances of taxable and non-taxable loans, along with an increase in the rate of taxable and non-taxable loans, taxable and non-taxable investments, federal funds sold, and interest bearing deposits with banks. Also, offsetting the decrease in net interest income was a decrease in the balance of interest bearing demand deposits, NOW, money markets, and savings. The Company’s net interest margin is 2.38% on a US GAAP basis and 2.42% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2023, as compared to 3.04% on a US GAAP basis and 3.06% on a tax equivalent (non-US GAAP) basis for the three months ended September 30, 2022.

Total interest income for the nine months ended September 30, 2023 increased $5.6 million to $42.4 million, as compared to $36.8 million for the nine months ended September 30, 2022. Average earning assets were $1.57 billion for the nine months ended September 30, 2023 as compared to $1.58 billion for the nine months ended September 30, 2022. The tax equivalent yield on average earning assets was 3.64% for nine months ended September 30, 2023 compared to 3.13% for nine months ended September 30, 2022.

Total interest expense for the nine months ended September 30, 2023 increased $9.4 million to $12.1 million, as compared to $2.7 million for the nine months ended September 30, 2022. Average interest bearing liabilities were $1.17 billion for the nine months ended September 30, 2023 as compared to $1.17 billion for the nine months ended September 30, 2022. The yield on average interest bearing liabilities was 1.39% and 0.31% for the nine months ended September 30, 2023 and 2022, respectively.

Net interest income for the nine months ended September 30, 2023 was $30.3 million, compared to $34.1 million for the nine months ended September 30, 2022. The decrease in net interest income is, in part, the result of a decrease in the interest and fee income from PPP loans, a decrease in the balances of taxable and non-taxable investments, a decrease in the balance of interest bearing deposits with banks and fed funds sold, an increase in the balance of certificates of deposit, and an increase in short-term FHLB borrowings, along with an increase in the rates of interest bearing demand deposits, NOW, money market, savings, and certificates of deposit. The decrease in net interest income was offset by an increase in the balances of taxable and non-taxable loans, along with an increase in the rate of taxable and non-taxable loans, taxable and non-taxable investments, federal funds sold, and interest bearing deposits with banks. Also, offsetting the decrease in net interest income was a decrease in the balance of interest bearing demand deposits, NOW, money markets, savings, and long term FHLB borrowings. The Company’s net interest margin is 2.58% on a US GAAP basis and 2.61% on a tax equivalent (non-US GAAP) basis for the nine months ended September 30, 2023, as compared to 2.88% on a US GAAP basis and 2.90% on a tax equivalent (non-US GAAP) basis for the nine months ended September 30, 2022.

‎

The tables below sets forth average balances and corresponding yields for the corresponding periods ended September 30, 2023 and 2022, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)


	Three Months Ended September 30,
	2023					2022
					Tax					Tax
	Average				Equivalent	Average				Equivalent
	Balance			Interest	Yield	Balance			Interest	Yield

		(Dollars In Thousands)
ASSETS
Loans - taxable (2)	$	1,218,901	$	12,295	4.00%	$	1,159,240	$	10,677	3.65%
Loans - Paycheck Protection Program		4		-	0.00%		779		2	1.02%
Loans - non-taxable (1)		27,184		228	4.21%		5,980		46	3.86%
Investment securities - taxable		269,704		1,548	2.28%		296,161		1,571	2.10%
Investment securities - non-taxable (1)		40,612		305	3.77%		42,247		307	3.65%
Federal funds sold		666		9	5.36%		1,000		6	2.38%
Interest bearing deposits with banks		9,210		128	5.51%		72,854		392	2.13%
TOTAL INTEREST EARNING ASSETS		1,566,281		14,513	3.71%		1,578,261		13,001	3.29%
Less allowance for credit losses		(12,745)					(11,992)
Other assets		74,247					72,425
TOTAL ASSETS	$	1,627,783				$	1,638,694

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits, ‎ NOW and money market	$	244,771	$	507	0.82%	$	250,901	$	46	0.07%
Savings		545,059		881	0.64%		764,306		541	0.28%
Certificates of deposit		368,947		3,568	3.84%		129,133		318	0.98%
Securities sold under agreements to repurchase ‎and other borrowings		18,085		157	3.44%		12,636		5	0.16%
TOTAL INTEREST BEARING LIABILITIES		1,176,862		5,113	1.72%		1,156,976		910	0.31%

Non-interest bearing demand deposits		333,367					369,784
Other liabilities		23,073					18,075
Stockholders' equity		94,481					93,859
TOTAL LIABILITIES AND ‎STOCKHOLDERS' EQUITY	$	1,627,783				$	1,638,694

Net interest income			$	9,400				$	12,091
Tax equivalent adjustments
Loans				61					12
Investments				81					82
Total tax equivalent adjustments				142					94
Net interest income on a tax equivalent basis			$	9,542				$	12,185
Net interest spread (US GAAP basis)					1.95%					2.96%
Net interest margin (US GAAP basis)					2.38%					3.04%
Net interest spread (non-US GAAP basis) (3)					1.99%					2.98%
Net interest margin (non-US GAAP basis) (3)					2.42%					3.06%

(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, 2023 and 2022, 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, 2023 and 2022, respectively.

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)


		Nine Months Ended September 30,

	2023						2022

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

		(Dollars In Thousands)
ASSETS
Loans - taxable (2)	$	1,206,754	$	35,376	3.92%	$	1,129,806	$	30,529	3.61%
Loans - Paycheck Protection Program		115		1	1.16%		2,380		183	10.28%
Loans - non-taxable (1)		20,699		513	4.19%		6,048		138	3.86%
Investment securities - taxable		275,132		4,650	2.26%		295,867		4,364	1.97%
Investment securities - non-taxable (1)		41,017		915	3.77%		42,953		891	3.51%
Federal funds sold		885		33	4.99%		1,000		8	1.07%
Interest bearing deposits with banks		24,445		903	4.94%		105,540		671	0.85%
TOTAL INTEREST EARNING ASSETS		1,569,047		42,391	3.64%		1,583,594		36,784	3.13%
Less allowance for credit losses		(12,674)					(11,721)
Other assets		74,385					69,409
TOTAL ASSETS	$	1,630,758				$	1,641,282

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market	$	239,379	$	1,034	0.58%	$	248,798	$	120	0.06%
Savings		588,538		2,339	0.53%		762,343		1,592	0.28%
Certificates of deposit		324,291		8,451	3.48%		141,973		954	0.90%
Securities sold under agreements to repurchase ‎and other borrowings		14,881		307	2.76%		15,993		28	0.23%
TOTAL INTEREST BEARING LIABILITIES		1,167,089		12,131	1.39%		1,169,107		2,694	0.31%

Non-interest bearing demand deposits		348,087					350,839
Other liabilities		20,585					17,862
Stockholders' equity		94,997					103,474
TOTAL LIABILITIES AND ‎STOCKHOLDERS' EQUITY	$	1,630,758				$	1,641,282

Net interest income			$	30,260				$	34,090
Tax equivalent adjustments
Loans				136					37
Investments				243					237
Total tax equivalent adjustments				379					274
Net interest income on a tax equivalent basis			$	30,639				$	34,364
Net interest spread (US GAAP basis)					2.23%					2.81%
Net interest margin (US GAAP basis)					2.58%					2.88%
Net interest spread (non-US GAAP basis) (3)					2.25%					2.82%
Net interest margin (non-US GAAP basis) (3)					2.61%					2.90%

(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, 2023 and 2022, 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, 2023 and 2022, respectively.

‎

The table below demonstrates the relative impact on net interest income of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in rates earned and paid by the Company on such assets and liabilities:


	Three Months Ended							Nine Months Ended
	September 30, 2023						September 30, 2023
	compared to September 30, 2022							compared to September 30, 2022
	(In Thousands)
	Due to change in:						Due to change in:
	Total						Total
	Change		Volume		Rate		Change		Volume		Rate

Interest-earning assets:
Loans - taxable	$	1,618	$	549	$	1,069	$	4,847	$	2,079	$	2,768
Loans - Paycheck Protection Program		(2)		(2)		-		(182)		(175)		(7)
Loans - non-taxable		182		163		19		375		335		40
Investment securities - taxable		(23)		(140)		117		286		(306)		592
Investment securities - non-taxable		(2)		(12)		10		24		(40)		64
Federal funds sold		3		(2)		5		25		(1)		26
Interest bearing deposits with banks		(264)		(342)		78		232		(515)		747
Total net change in income on
interest-earning assets		1,512		214		1,298		5,607		1,377		4,230

Interest-bearing liabilities:
Interest bearing demand deposits,
NOW and money market		461		(1)		462		914		(4)		918
Savings		340		(155)		495		747		(363)		1,110
Certificates of deposit		3,250		591		2,659		7,497		1,225		6,272
Total deposits		4,051		435		3,616		9,158		858		8,300
Securities sold under agreements to
repurchase and other borrowings		152		2		150		279		(2)		281
Total net change in expense on
interest-bearing liabilities		4,203		437		3,766		9,437		856		8,581
Change in net interest income	$	(2,691)	$	(223)	$	(2,468)	$	(3,830)	$	521	$	(4,351)

Provision for Credit Losses

The Company adopted ASC Topic 326 on January 1, 2023, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings, as of January 1, 2023 (i.e., modified retrospective approach). Upon adoption of the standard, the Company recorded a $188 thousand increase to the allowance for credit losses, which resulted in a $148 thousand after-tax decrease to retained earnings as of January 1, 2023. The tax effect resulted in a $40 thousand increase to deferred tax assets.

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

The allowance for credit losses is maintained at a level management considers to be adequate to provide for losses that can be reasonably anticipated over the expected life of the loans. Management’s periodic evaluation of the adequacy of the allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current and forecasted economic conditions and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

The allowance consists of general, specific, and unallocated components. The general component covers non-classified loans and classified loans not considered loans individually evaluated for credit losses, and is based on historical loss experience adjusted for forecasting factors and qualitative factors. The specific component relates to loans that are classified as loans individually evaluated

for credit losses and/or restructured. For loans that are classified as loans individually evaluated for credit losses, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loans individually evaluated for credit losses is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of expected 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.

For additional information on ASU 2016-13, see Note 2 “Summary of Significant Accounting Policies.”

For the three months ended September 30, 2023, the credit for credit losses was $300 thousand, compared to the provision for credit losses of $275 thousand for the three months ended September 30, 2022. In the three months ended September 30, 2023, there were no charge-offs and $1 thousand in recoveries. In the three months ended September 30, 2022, there were no charge-offs and $67 thousand in recoveries. For the nine months ended September 30, 2023, the credit for credit losses was $190 thousand, compared to the provision for credit losses of $625 thousand for the nine months ended September 30, 2022. In the nine months ended September 30, 2023, there were no charge-offs and $2 thousand in recoveries, compared to no charge-offs and $69 thousand in recoveries for the nine months ended September 30, 2022. The (credit) provision for credit losses is a function of the allowance for credit loss methodology that the Company uses to determine the appropriate level of the allowance for inherent credit losses after net charge-offs have been deducted. See the discussion below under “Credit Risk and Loan Quality” regarding the Company’s considerations of its September 30, 2023 allowance for credit loss levels. The allowance for credit losses is $12.4 million as of September 30, 2023, which is 1.00% of total loans receivable, compared to $12.2 million or 1.03% of total loans receivable as of September 30, 2022. At December 31, 2022, the allowance for loan losses was $12.4 million, which represented 1.03% of total loans receivable. Based principally on loan growth, economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Company’s market area, the allowance is believed to be adequate to absorb any losses expected in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for credit 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.

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022

	(In Thousands)
Loans receivable at end of period	$	1,249,289	$	1,181,783	$	1,249,289	$	1,181,783
Allowance for credit losses:
Balance, beginning	$	12,748	$	11,836	$	12,449	$	11,484
Cumulative effect of change in accounting principle		-		-		188		-
(Credit) provision for credit losses		(300)		275		(190)		625
Loans charged off:
Commercial real estate		-		-		-		-
Commercial construction		-		-		-		-
Commercial		-		-		-		-
Residential real estate		-		-		-		-
Consumer		-		-		-		-
Total loans charged off		-		-		-		-
Recoveries of loans previously charged off:
Commercial real estate		-		-		-		-
Commercial construction		-		-		-		-
Commercial		-		-		-		-
Residential real estate		1		67		2		69
Consumer		-		-		-		-
Total recoveries		1		67		2		69
Net recoveries		1		67		2		69
Balance at end of period	$	12,449	$	12,178	$	12,449	$	12,178
Allowance for credit losses to loans receivable at end of period		1.00%		1.03%		1.00%		1.03%

‎

Non-interest Income

Total non-interest income was $570 thousand for the three months ended September 30, 2023 compared to $583 thousand for the same period in 2022. The decrease is, in part, attributable to a decrease in bank owned life insurance of $18 thousand primarily due to a decrease in separate account life insurance assets driven by the effect market conditions had on underlying life insurance assets.

Total non-interest income was $1.9 million for the nine months ended September 30, 2023 compared to $1.7 million for the same period in 2022. The increase is, in part, attributable to an increase in bank owned life insurance of $144 thousand primarily due to an increase in separate account life insurance assets driven by the effect market conditions had on underlying life insurance assets, offset by death benefit proceeds during the nine months ended September 30, 2022. Also, contributing to the increase in non-interest income is an increase of $17 thousand in debit card interchange fees and an increase of $57 thousand in other service fees due, in part, to an expanding customer base, overdraft fees, and early withdrawal time deposit penalties.

Non-interest Expense

Non-interest expenses increased $109 thousand from $6.5 million for the three months ended September 30, 2022 to $6.6 million for the three months ended September 30, 2023. The increase in non-interest expenses is, in part, attributable to a $111 thousand increase in salaries and employee benefits due to annual increases in salaries and benefits, increase in health insurance cost, increase in life and disability insurance, and an 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 $49 thousand in occupancy and equipment, an increase of $60 thousand in professional fees, and an increase of $76 thousand in FDIC insurance. These increases in non-interest expenses were offset, in part, by a $134 thousand decrease in data processing costs due to switching to a new online platform provider and a decrease in escrow manager servicing costs due to switching to a new vendor, offset by an increase in data processing maintenance contracts. Additional decreases in non-interest expenses were due to a decrease of $78 thousand in other expenses primarily due to a decrease in bank shares tax. The Company’s efficiency ratio, a non-GAAP measure, was 66.2% and 51.2% for the three months ending September 30, 2023 and 2022, respectively.

Non-interest expenses increased $975 thousand from $19.4 million for the nine months ended September 30, 2022 to $20.3 million for the nine months ended September 30, 2023. The increase in non-interest expenses is, in part, attributable to a $844 thousand increase in salaries and employee benefits due to annual increases in salaries and benefits, increase in retirement contributions, increase in employee taxes, increase in health insurance cost, and an 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 $96 thousand in occupancy and equipment, an increase of $230 thousand in advertising and promotion expenses, an increase of $119 thousand in professional fees, and an increase of $222 thousand in FDIC insurance. These increases in non-interest expenses were offset, in part, by a $342 thousand decrease in data processing due to switching to a new online platform provider and a decrease in data communication costs, offset by an increase in escrow management services due to the implementation costs of transitioning to a new vendor and an increase in data processing maintenance contracts. Additional decreases in non-interest expenses were due to a decrease of $180 thousand in other expenses due to a decrease in telephone expenses, a decrease in correspondent bank fees, a decrease in key man life insurance expense, and a decrease in bank shares tax, offset by an increase in other operating expenses, an increase in debit card production expense, an increase in debit card, check fraud, and wire fraud losses. The Company’s efficiency ratio, a non-GAAP measure, was 63.2% and 54.1% for the nine months ending September 30, 2023 and 2022, respectively.

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, 2023 totaled $667 thousand, or 18.2% of income before taxes, compared to income taxes for the three months ended September 30, 2022 totaling $1.2 million, or 19.6% of income before taxes. The decrease in the tax rate is, in part, the result of the change in the mix of taxable and tax free loans and investments; offset by the decrease in income on bank owned life insurance.

The provision for income taxes for the nine months ended September 30, 2023 totaled $2.2 million, or 18.2% of income before taxes, compared to income taxes for the nine months ended September 30, 2022 totaling $3.1 million, or 19.4% of income before taxes. The decrease in the tax rate is, in part, the result of an increase in income on bank owned life insurance and the result of the change in the mix of taxable and tax free loans and investments.

‎

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, government agency bonds, and Treasury bonds. The Company holds no high-risk or direct internationally exposed securities or derivatives as of September 30, 2023. The Company has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans. The current liquidity of the portfolio has been impacted by the increase in market interest rates. The Company has $36.7 million of securities maturing in the fourth quarter of 2023 which will provide for additional liquidity. Selling of securities would not be expected as a primary source of short term liquidity given the unrealized losses currently in the portfolio.

Total securities at September 30, 2023 were $295.0 million compared to $317.0 million at December 31, 2022. The decrease in the investment portfolio resulted from principal pay downs on mortgage-backed securities, the maturity of one (1) taxable municipal bond, and the maturity of two (2) Treasury bonds totaling $14.8 million, as well as an increase in unrealized losses of $12.5 million; offset by the purchase of four (4) Treasury bonds totaling $4.9 million. The carrying value of the securities portfolio as of September 30, 2023 includes a net unrealized loss of $77.2 million, which is recorded as accumulated other comprehensive loss in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $64.7 million at December 31, 2022. The current unrealized loss position of the securities portfolio is due to increasing market interest rates in 2022 through 2023 in response to economic conditions since purchase. Management determined the Company does not have the intent to sell, nor is it more likely than not that it will be required to sell securities in an unrealized loss position at September 30, 2023. Further, management reviewed the Company's securities as of September 30, 2023 and concluded there were no credit-related declines in fair value. The effective duration of the securities portfolio remains between 6 to 7 years at September 30, 2023.

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 (excluding PPP loans) increased by $41.1 million to $1.24 billion at September 30, 2023 from $1.20 billion at December 31, 2022. The gross loan-to-deposit ratio increased to 85% at September 30, 2023, compared to 79% at December 31, 2022. The Company’s loan portfolio at September 30, 2023 was comprised of residential real estate and consumer loans of $659.5 million, an increase of $14.7 million from December 31, 2022, and commercial loans of $589.8 million, an increase of $26.2 million from December 31, 2022. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans. The Company was a participant in the SBA PPP to support the needs of its small business clients. PPP loans receivable at September 30, 2023 and December 31, 2022 was $4 thousand and $286 thousand, respectively.

Credit Risk and Loan Quality

The Company’s allowance for credit losses stayed flat at $12.4 million at September 30, 2023 and December 31, 2022. At September 30, 2023 and December 31, 2022, the allowance for credit losses represented 1.00% and 1.03% of total loans receivable, respectively. The Company’s non-performing loans to total loans receivable were 0.03% at September 30, 2023, compared to 0.19% at September 30, 2022, and 0.20% at December 31, 2022. At September 30, 2023, approximately 94% of the Company’s loan portfolio is collateralized by real estate. The Company adopted the Current Expected Credit Losses (“CECL”) FASB accounting standard on January 1, 2023. The cumulative effect from the adoption of CECL accounting standard was a $188 thousand increase to the allowance for credit losses. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Company and comparable institutions in the Company’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses. The Company will continue to evaluate the allowance for credit losses as new information becomes available.

The aggregate balances on non-performing loans are included in the following table. Troubled debt restructurings for periods prior to January 1, 2023, 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.

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



		September 30,		December 31,		September 30,
		2023		2022		2022

	(In Thousands)
Non-accrual - commercial	$	-	$	-	$	-
Non-accrual - consumer		297		192		-
Restructured loans, accruing interest and less than 90 days past due		-		2,182		2,208
Loans past due 90 or more days, accruing interest		73		-		-
Total nonperforming loans		370		2,374		2,208
Foreclosed assets		-		-		-
Total nonperforming assets	$	370	$	2,374	$	2,208
Nonperforming loans to total loans (excluding PPP loans)		0.03%		0.20%		0.19%
Nonperforming assets to total assets		0.02%		0.14%		0.14%
Non-accrual loans to total loans (excluding PPP loans)		0.02%		0.02%		0.00%
Allowance to non-accrual loans		4191.58%		6483.85%		0.00%
Net charge-offs (recoveries) to average loans (excluding PPP loans)		0.00%		0.00%		-0.01%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, decreased $64 thousand from December 31, 2022 to September 30, 2023. This decrease is due to depreciation on existing premises and equipment, offset by new purchases.

Deposits

Total deposits at September 30, 2023 decreased by $48.8 million to $1.47 billion from $1.52 billion at December 31, 2022. The decrease in the Company’s deposits was due to a decrease of $57.0 million in demand, NOW and money market deposits and a $158.9 million decrease in savings deposits; offset by an increase of $167.1 million in time deposits. The shift from savings and demand deposits to time deposits is primarily due to higher yielding rates on time deposits, due to the current rate environment. Included in the above mentioned decrease was a $20.4 million decrease in non-interest bearing demand personal deposits and a $40.8 million decrease in non-interest bearing demand business deposits. Included in total deposits at September 30, 2023 were personal deposits of $1.08 billion, business deposits of $288.6 million, and municipal deposits of $102.6 million. Included in total deposits at December 31, 2022 were personal deposits of $1.09 billion, business deposits of $324.1 million, and municipal deposits of $102.6 million. The estimated amount of uninsured assessable deposits, including related interest accrued and unpaid, at September 30, 2023 and December 31, 2022 was $464.3 million and $578.8 million, respectively.

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 $77.7 million at September 30, 2023, compared to $67.3 million at December 31, 2022.

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. As noted above, selling of securities would not be a primary source of short term liquidity given the unrealized losses currently in the portfolio. At September 30, 2023, the Company had $295.0 million of available for sale securities. Securities with carrying values of approximately $135.3 million and $147.2 million at September 30, 2023 and December 31, 2022, 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, 2023, the Bank had a maximum borrowing capacity for short-term and long-term FHLB advances of approximately $785.5 million, of which $702.7 million is available for borrowing at September 30, 2023 due to an outstanding short-term FHLB advance of $82.5 million with an interest rate of 5.722% which matured and was repaid on October 2, 2023, as well as a letter of credit in the amount of $135 thousand. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no long-term FHLB advances outstanding as of September 30, 2023. There were no short-term or long-term FHLB advances outstanding as of December 31, 2022. 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, 2023 and December 31, 2022. Advances from this line are unsecured.

The Bank is also eligible to borrow under the Federal Reserve Bank’s discount window borrowing programs.

The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at September 30, 2023 and December 31, 2022. Advances from this line are unsecured.

The Bank is a member of the Certificate of Deposit Account Registry Services (CDARS) program and the Insured Cash Sweep (ICS) program offered by Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. ICS provides liquidity similar to a money market or savings account. Both programs enable financial institutions to provide customers with full FDIC insurance on deposits over $250 thousand that are placed in the program. The Bank also has access to other brokered deposits as a source of liquidity.

Because of the composition of the Company’s balance sheet, its strong capital base, ability to attract new deposit relationships, access to brokered deposits, and borrowing capacity, the Company believes that it remains well positioned with respect to liquidity. The majority of the Company’s funds are invested in loans with a portion invested in investment securities that generally carry a lower yield. While it is desirable to be liquid, it has the effect of a lower interest margin.The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.

Off-Balance Sheet Arrangements

The Company’s consolidated financial statements do not reflect the 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 $170.5 million and $189.2 million at September 30, 2023 and December 31, 2022, respectively. At September 30, 2023 there was no allowance for credit losses required for off -balance sheet arrangements. At September 30, 2023 and December 31, 2022, the Company had letters of credit outstanding of $9.2 million and $9.1 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.

Capital Resources and Adequacy

Total stockholders’ equity was $85.6 million as of September 30, 2023, representing a net decrease of $2.7 million from December 31, 2022. The decrease in capital was primarily the result of an increase of $9.8 million in accumulated other comprehensive loss, a decrease in retained earnings of $148 thousand from the cumulative effect of the adoption of the CECL accounting principle, and a decrease in retained earnings from dividends paid of $3.0 million, offset by net income of $9.8 million, an increase in common stock of $17 thousand, and an increase in surplus of $526 thousand due to employee stock purchases and stock grants with compensation expense. The accumulated other comprehensive losses are excluded from both the Bank’s and the Company’s Tier 1 regulatory capital calculations.

The Company’s tangible book value per share, calculated as total stockholders’ equity divided by outstanding common stock shares, was $11.26 and $11.64 at September 30, 2023 and December 31, 2022, respectively. The Company’s tangible book value per share not including accumulated other comprehensive loss in the total stockholders’ equity numerator (a non-GAAP measure) was $19.28 and $18.38 at September 30, 2023 and December 31, 2022, respectively. The Company believes this non-GAAP measurement enhances the overall understanding of Company performance and increases comparability of period to period results, but should not be viewed as a substitute for the measure as determined in accordance with GAAP or an inference that future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

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The following table presents the computation of this non-GAAP based measure shown together with its most directly comparable GAAP measure:


	September 30, 2023		December 31, 2022
	(Dollars In Thousands Except Per Share Data)
Tangible Book Value Per Share
Total stockholders' equity	$	85,618	$	88,276
Addback: accumulated other comprehensive loss ("AOCL")		60,955		51,107
Total stockholders' equity not included AOCL (non-GAAP)	$	146,573	$	139,383

Common stock shares outstanding		7,604,191		7,586,991
Book value per share (most directly comparable GAAP based measure)	$	11.26	$	11.64
AOCL per share		8.02		6.74
Book value per share not including AOCL (non-GAAP)	$	19.28	$	18.38

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 1 capital (as defined in the regulations) to risk weighted assets (as defined in the regulations), and Tier 1 capital to average assets (as defined in the regulations). As of September 30, 2023, 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, 2023			December 31, 2022

	(Dollars In Thousands)
Tier 1, common stockholders' equity	$	146,407		$	139,175
Tier 2, allowable portion of allowance for credit losses		12,449			12,449
Total capital	$	158,856		$	151,624

Common equity tier 1 capital ratio		12.9	%		12.9	%
Tier 1 risk based capital ratio		12.9	%		12.9	%
Total risk based capital ratio		14.0	%		14.1	%
Tier 1 leverage ratio		8.7	%		8.3	%

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 capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and total risk-based capital of 10%.

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

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



Consolidated Corporation

	September 30, 2023			December 31, 2022

	(Dollars In Thousands)
Tier 1, common stockholders' equity	$	146,573		$	139,383
Tier 2, allowable portion of allowance for credit losses		12,449			12,449
Total capital	$	159,022		$	151,832

Common equity tier 1 capital ratio		12.9	%		12.9	%
Tier 1 risk based capital ratio		12.9	%		12.9	%
Total risk based capital ratio		14.0	%		14.1	%
Tier 1 leverage ratio		8.7	%		8.3	%

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

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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. In 2022 and 2023, the Federal Reserve has been raising its key interest rate in an attempt to tame inflation. 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.

Because income simulations assume that the Company’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that management could implement in response to rate shifts. Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results. Assets and liabilities may react differently than projected to changes in market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates. Interest rate shifts may not be parallel.

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, 2023. For income simulation purposes, personal and business savings accounts reprice every two months, personal and business NOW accounts reprice every two months and personal and business money market accounts reprice every month. Management reviews all assumptions on a periodic basis, adjusts assumptions and deposit betas as necessary, and believes current assumptions support market conditions. The impact on net interest income, illustrated in the following table, would vary if different assumptions were used or if actual experience differs from that indicated by the assumptions.



	Change in Interest Rates		Percentage Change in Net Interest Income

	Down 100 basis points		2.1%
	Down 200 basis points		2.5%

	Up 100 basis points		-2.6%
	Up 200 basis points		-5.5%

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, 2023, 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. Effective January 1, 2023, the Company adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. Except for this change related to CECL adoption, 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, 2023, including any corrective actions with regard to significant deficiencies and material weakness.

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Part II - Other Information

Item 1 - Legal Proceedings

The Company and the Bank are an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Company has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Company’s operations or financial position.

Item 1A - Risk Factors

In addition to the other information set forth in this Quarterly Report, the reader should carefully consider the factors discussed in “Risk Factors” included within the Company’s 2022 Form 10-K and subsequent filings with the SEC. There are no material changes to 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.

‎

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-K filed on March 18, 2022).
	3.2		Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's
			Form 10-K filed on March 18, 2022).
	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.

‎

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 13, 2023	By:	/s/ David M. Lobach, Jr.
		David M. Lobach, Jr.
		President and Chief Executive Officer


Dated: November 13, 2023	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		First Executive Officer,
		Chief Operating Officer, Secretary and
		Chief Financial Officer