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t

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024 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 May 10, 2024

($1.00 Par Value)

7,616,471

 

(Title Class)

(Outstanding Shares)

Embassy Bancorp, Inc.

 

Table of Contents

 

Part I – Financial Information

3

 

 

Item 1 – Financial Statements

Consolidated Balance Sheets (Unaudited)

3

Consolidated Statements of Income (Unaudited)

4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

5

Consolidated Statements of Stockholders’ Equity (Unaudited)

6

Consolidated Statements of Cash Flows (Unaudited)

7

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

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

24

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Item 4 – Controls and Procedures

36

 

 

Part II - Other Information

37

 

 

Item 1 - Legal Proceedings

37

 

 

Item 1A - Risk Factors

37

 

 

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

37

 

 

Item 3 - Defaults Upon Senior Securities

37

 

 

Item 4 – Mine Safety Disclosures

37

 

 

Item 5 - Other Information

37

 

 

Item 6 - Exhibits

38

 

Signatures

39

 


‎

2

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Current Period Unaudited)

March 31,

December 31,

ASSETS

2024

2023

(In Thousands, Except Share Data)

Cash and due from banks

$

14,563

$

16,133

Interest bearing demand deposits with banks

43,946

61,790

Federal funds sold

1,000

1,000

Cash and Cash Equivalents

59,509

78,923

Securities available for sale

266,158

276,060

Restricted investment in bank stock

1,058

2,458

Loans receivable, net of allowance for credit losses of $12,543 in 2024; $12,461 in 2023

1,258,962

1,241,578

Premises and equipment, net of accumulated depreciation

3,739

3,734

Bank owned life insurance

35,631

26,310

Accrued interest receivable

3,460

3,298

Other assets

24,430

24,135

Total Assets

$

1,652,947

$

1,656,496

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Deposits:

Non-interest bearing

$

337,325

$

328,669

Interest bearing

1,171,992

1,147,564

Total Deposits

1,509,317

1,476,233

Securities sold under agreements to repurchase

17,221

15,237

Short-term borrowings

-

35,000

Accrued interest payable

6,405

7,844

Other liabilities

16,219

16,527

Total Liabilities

1,549,162

1,550,841

Stockholders' Equity:

Common stock, $1 par value; authorized 20,000,000 shares;

2024 issued 7,778,482 shares; outstanding 7,616,471 shares;

2023 issued 7,758,247 shares; outstanding 7,596,236 shares;

7,778

7,758

Surplus

28,578

28,246

Retained earnings

118,554

116,018

Accumulated other comprehensive loss

(48,458)

(43,700)

Treasury stock, at cost: 162,011 shares at March 31, 2024 and

December 31, 2023, respectively

(2,667)

(2,667)

Total Stockholders' Equity

103,785

105,655

Total Liabilities and Stockholders' Equity

$

1,652,947

$

1,656,496

See notes to consolidated financial statements (unaudited).


‎

3

Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited) 

Three Months Ended March 31,

2024

2023

INTEREST INCOME

Loans, including fees

$

13,086

$

11,403

Securities, taxable

1,416

1,543

Securities, non-taxable

298

305

Short-term investments, including federal funds sold

297

470

Total Interest Income

15,097

13,721

INTEREST EXPENSE

Deposits

6,268

2,814

Securities sold under agreements to repurchase and federal

funds purchased

105

57

Short-term borrowings

5

-

Total Interest Expense

6,378

2,871

Net Interest Income

8,719

10,850

(CREDIT) PROVISION FOR CREDIT LOSSES

(72)

-

Net Interest Income after (Credit)
‎   Provision for Credit Losses

8,791

10,850

OTHER NON-INTEREST INCOME

Merchant and credit card processing fees

84

88

Debit card interchange fees

207

217

Other service fees

151

153

Bank owned life insurance

291

200

Total Other Non-Interest Income

733

658

OTHER NON-INTEREST EXPENSES

Salaries and employee benefits

3,450

3,726

Occupancy and equipment

1,016

987

Data processing

615

771

Advertising and promotion

187

287

Professional fees

272

238

FDIC insurance

188

177

Loan & real estate

49

52

Charitable contributions

207

223

Other

517

407

Total Other Non-Interest Expenses

6,501

6,868

Income Before Income Taxes

3,023

4,640

INCOME TAX EXPENSE

487

853

Net Income

$

2,536

$

3,787

BASIC EARNINGS PER SHARE

$

0.33

$

0.50

DILUTED EARNINGS PER SHARE

$

0.33

$

0.50

See notes to consolidated financial statements (unaudited).
‎

4

Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

Three Months Ended March 31,

2024

2023

(In Thousands)

Net Income

$

2,536

$

3,787

Change in Accumulated Other Comprehensive Loss:

Unrealized holding (loss) gain on securities available for sale

(6,023)

4,248

Less: reclassification adjustment for realized gains

-

-

(6,023)

4,248

Income tax effect

1,265

(892)

Net unrealized (loss) gain

(4,758)

3,356

Other comprehensive (loss) income, net of tax

(4,758)

3,356

Comprehensive (Loss) Income

$

(2,222)

$

7,143

See notes to consolidated financial statements (unaudited).

5

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2024

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive Loss

Treasury Stock

Total

(In Thousands, Except Share Data)

BALANCE - DECEMBER 31, 2023

$

7,758

$

28,246

$

116,018

$

(43,700)

$

(2,667)

$

105,655

Net income

-

-

2,536

-

-

2,536

Other comprehensive loss, net of tax

-

-

-

(4,758)

-

(4,758)

Common stock grants to directors,
‎   18,843 shares

19

248

-

-

-

267

Compensation expense recognized on stock
‎grants, net of unearned compensation expense
‎   of $265

-

67

-

-

-

67

Shares issued under employee stock purchase
‎plan, 1,393 shares

1

17

-

-

-

18

BALANCE - MARCH 31, 2024

$

7,778

$

28,578

$

118,554

$

(48,458)

$

(2,667)

$

103,785

Three Months Ended March 31, 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

See notes to consolidated financial statements (unaudited).

6

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

Three Months Ended March 31,

2024

2023

(In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

2,536 

$

3,787 

Adjustments to reconcile net income to net cash provided by operating activities:

Credit for credit losses

(72)

-

Amortization of deferred loan costs

69 

49 

Depreciation

269 

212 

Net accretion of investment security premiums and discounts

(100)

(121)

Stock compensation expense

334 

339 

Income on bank owned life insurance

(291)

(200)

Increase in accrued interest receivable

(162)

(92)

Decrease in other assets

970 

1,301 

(Decrease) increase in accrued interest payable

(1,439)

1,402 

Decrease in other liabilities

(308)

(125)

Net Cash Provided by Operating Activities

1,806 

6,552 

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of securities available for sale

-

(4,874)

Maturities, calls and principal repayments of securities available for sale

3,979 

6,175 

Net increase in loans

(17,381)

(8,997)

Net redemption of restricted investment in bank stock

1,400 

-

Purchase of bank owned life insurance

(9,030)

-

Purchases of premises and equipment

(274)

(84)

Proceeds on bank owned life insurance

-

29 

Net Cash Used in Investing Activities

(21,306)

(7,751)

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits

33,084 

10,857 

Net increase (decrease) in securities sold under agreements to repurchase

1,984 

(1,859)

Decrease in short-term borrowings

(35,000)

-

Proceeds from Employee Stock Purchase Plan

18 

16 

Net Cash Provided by Financing Activities

86 

9,014 

Net (Decrease) Increase in Cash and Cash Equivalents

(19,414)

7,815 

CASH AND CASH EQUIVALENTS - BEGINNING

78,923 

67,295 

CASH AND CASH EQUIVALENTS - ENDING

$

59,509 

$

75,110 

SUPPLEMENTARY CASH FLOWS INFORMATION

Interest paid

$

7,817 

$

1,469 

See notes to consolidated financial statements (unaudited).

7

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

 

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

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

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

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, 2023, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 28, 2024.

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 2023 consolidated financial statements may have been reclassified to conform to 2024 presentation. These reclassifications had no effect on 2023 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, 2023.


‎

8

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 3 – Securities Available For Sale

At March 31, 2024 and December 31, 2023, 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)

March 31, 2024:

U.S. Treasury securities

$

14,903

$

-

$

(259)

$

14,644

U.S. Government agency obligations

2,469

-

(119)

2,350

Municipal bonds

72,735

49

(13,553)

59,231

U.S. Government Sponsored Enterprise (GSE) -
‎   Mortgage-backed securities - commercial

509

-

(73)

436

U.S. Government Sponsored Enterprise (GSE) -
‎   Mortgage-backed securities - residential

236,881

2

(47,386)

189,497

Total

$

327,497

$

51

$

(61,390)

$

266,158

December 31, 2023:

U.S. Treasury securities

$

14,867

$

-

$

(277)

$

14,590

U.S. Government agency obligations

2,463

-

(124)

2,339

Municipal bonds

73,128

73

(12,405)

60,796

U.S. Government Sponsored Enterprise (GSE) -
‎   Mortgage-backed securities - commercial

509

-

(67)

442

U.S. Government Sponsored Enterprise (GSE) -
‎   Mortgage-backed securities - residential

240,409

2

(42,518)

197,893

Total

$

331,376

$

75

$

(55,391)

$

276,060

The amortized cost and fair value of securities as of March 31, 2024, 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

$

9,907

$

9,774

Due after one year through five years

9,812

9,446

Due after five years through ten years

6,876

6,601

Due after ten years

63,512

50,404

90,107

76,225

U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - commercial

509

436

U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential

236,881

189,497

Total

$

327,497

$

266,158

There were no sales of securities for the three months ended March 31, 2024 and 2023.

Securities with a carrying value of $142.1 million and $145.7 million at March 31, 2024 and December 31, 2023, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.


‎

9

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023:

Less Than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

March 31, 2024:

(In Thousands)

U.S. Treasury securities

$

-

$

-

$

14,644

$

(259)

$

14,644

$

(259)

U.S. Government agency obligations

-

-

2,350

(119)

2,350

(119)

Municipal bonds

11,417

(925)

45,748

(12,628)

57,165

(13,553)

U.S. Government Sponsored Enterprise

(GSE) - Mortgage -backed securities -

commercial

-

-

436

(73)

436

(73)

U.S. Government Sponsored Enterprise

(GSE) - Mortgage -backed securities -

residential

13

-

189,409

(47,386)

189,422

(47,386)

Total Temporarily Impaired Securities

$

11,430

$

(925)

$

252,587

$

(60,465)

$

264,017

$

(61,390)

.

December 31, 2023:

U.S. Treasury securities

$

-

$

-

$

14,590

$

(277)

$

14,590

$

(277)

U.S. Government agency obligations

-

-

2,339

(124)

2,339

(124)

Municipal bonds

5,561

(201)

52,267

(12,204)

57,828

(12,405)

U.S. Government Sponsored Enterprise

(GSE) - Mortgage -backed securities -

commercial

-

-

442

(67)

442

(67)

U.S. Government Sponsored Enterprise

(GSE) - Mortgage -backed securities -

residential

-

-

197,796

(42,518)

197,796

(42,518)

Total Temporarily Impaired Securities

$

5,561

$

(201)

$

267,434

$

(55,190)

$

272,995

$

(55,391)

The Company had one hundred ninety three (193) securities in an unrealized loss position at March 31, 2024 and one hundred eighty nine (189) securities in an unrealized loss position at December 31, 2023. 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 March 31, 2024.

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 $1.0 million and $2.4 million as of March 31, 2024 and December 31, 2023, respectively. The Bank had ACBB stock at a carrying value of $40 thousand at March 31, 2024 and December 31, 2023.


‎

10

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 March 31, 2024.

Note 5 – Loans and Credit Quality

The following table presents the composition of loans receivable at March 31, 2024 and December 31, 2023, respectively:

March 31, 2024

December 31, 2023

Percentage of

Percentage of

Balance

total Loans

Balance

total Loans

(Dollars in Thousands)

Commercial real estate

$

551,222

43.37%

$

539,034

43.00%

Commercial construction

20,107

1.58%

16,840

1.34%

Commercial

37,974

2.99%

33,951

2.71%

Residential real estate

661,146

52.02%

663,127

52.90%

Consumer

538

0.04%

565

0.05%

Total loans

1,270,987

100.00%

1,253,517

100.00%

Unearned origination fees

518

522

Allowance for credit losses

(12,543)

(12,461)

Net Loans

$

1,258,962

$

1,241,578


‎

11

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 March 31, 2024 by year of origination:

2024

2023

2022

2021

2020

Prior

Revolving

Total

March 31, 2024

(In Thousands)

Commercial

real estate

Pass

$

21,617

$

61,942

$

158,429

$

55,993

$

63,638

$

180,087

$

8,274

$

549,980

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

1,242

-

1,242

Total

21,617

61,942

158,429

55,993

63,638

181,329

8,274

551,222

Commercial

construction

Pass

3,308

2,649

8,591

5,235

-

29

-

19,812

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

240

55

295

Total

3,308

2,649

8,591

5,235

-

269

55

20,107

Commercial

Pass

3,106

2,157

4,565

2,068

3,154

14,511

8,392

37,953

Special Mention

-

-

-

-

-

21

-

21

Substandard

-

-

-

-

-

-

-

-

Total

3,106

2,157

4,565

2,068

3,154

14,532

8,392

37,974

Residential

real estate

Pass

14,950

71,565

94,587

155,349

139,517

162,767

20,942

659,677

Special Mention

-

-

-

-

-

438

-

438

Substandard

-

-

45

-

-

986

-

1,031

Total

14,950

71,565

94,632

155,349

139,517

164,191

20,942

661,146

Consumer

Pass

32

114

109

24

-

13

246

538

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

Total

32

114

109

24

-

13

246

538

Total

Loans Receivable

$

43,013

$

138,427

$

266,326

$

218,669

$

206,309

$

360,334

$

37,909

$

1,270,987

The Company had no loans that were charged off during the three months ending March 31, 2024 and therefore no gross charge-off information is presented in the above table.


‎

12

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 December 31, 2023 by year of origination:

2023

2022

2021

2020

2019

Prior

Revolving

Total

December 31, 2023

(In Thousands)

Commercial

real estate

Pass

$

62,467

$

160,257

$

58,094

$

64,146

$

26,835

$

157,888

$

8,094

$

537,781

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

1,253

-

1,253

Total

62,467

160,257

58,094

64,146

26,835

159,141

8,094

539,034

Commercial

construction

Pass

2,071

8,591

5,412

-

440

30

-

16,544

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

241

55

296

Total

2,071

8,591

5,412

-

440

271

55

16,840

Commercial

Pass

2,236

4,851

2,260

3,312

5,388

9,311

6,572

33,930

Special Mention

-

-

-

-

21

-

-

21

Substandard

-

-

-

-

-

-

-

-

Total

2,236

4,851

2,260

3,312

5,409

9,311

6,572

33,951

Residential

real estate

Pass

75,372

96,032

158,135

142,318

46,035

122,252

21,423

661,567

Special Mention

-

-

-

-

-

443

-

443

Substandard

-

-

-

-

173

944

-

1,117

Total

75,372

96,032

158,135

142,318

46,208

123,639

21,423

663,127

Consumer

Pass

130

118

22

1

13

11

270

565

Special Mention

-

-

-

-

-

-

-

-

Substandard

-

-

-

-

-

-

-

-

Total

130

118

22

1

13

11

270

565

Total

Loans Receivable

$

142,276

$

269,849

$

223,923

$

209,777

$

78,905

$

292,373

$

36,414

$

1,253,517

The Company had no loans that were charged off during the year ended December 31, 2023 and therefore no gross charge-off information is presented in the above table.

At March 31, 2024, the Company had no foreclosed assets or recorded investment in mortgage loans collateralized by residential real estate property in the process of foreclosure. At December 31, 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.


‎

13

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the carrying value and related allowance for credit losses of individually analyzed loans at March 31, 2024 and December 31, 2023, respectively:

March 31, 2024

December 31, 2023

Recorded Investment

Unpaid Principal Balance

Related Allowance for Credit Losses

Recorded Investment

Unpaid Principal Balance

Related Allowance for Credit Losses

(In Thousands)

With no related allowance recorded:

Commercial real estate (1)

$

1,242

$

1,242

$

1,303

$

1,543

Commercial construction (1)

55

55

55

55

Commercial

-

-

-

-

Residential real estate (1)

1,114

1,117

1,202

1,206

Consumer

-

-

-

-

With an allowance recorded:

Commercial real estate

$

-

$

-

$

-

$

-

$

-

$

-

Commercial construction (1)

240

240

20

241

241

22

Commercial (2)

21

21

21

21

21

21

Residential real estate (1)

509

509

149

516

516

152

Consumer

-

-

-

-

-

-

Total:

Commercial real estate

$

1,242

$

1,242

$

-

$

1,303

$

1,543

$

-

Commercial construction

295

295

20

296

296

22

Commercial

21

21

21

21

21

21

Residential real estate

1,623

1,626

149

1,718

1,722

152

Consumer

-

-

-

-

-

-

$

3,181

$

3,184

$

190

$

3,338

$

3,582

$

195

1.All loans are real estate collateral dependent.

2.All loans are non-collateral dependent loans.

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

March 31, 2024

December 31, 2023

(In Thousands)

Commercial real estate

$

-

$

-

Commercial construction

-

-

Commercial

-

-

Residential real estate

244

366

Consumer

-

-

Total

$

244

$

366

As of March 31, 2024, there were two (2) loans in non-accrual status in the amount of $244 thousand. There was a required related allowance of $64 thousand for these collateral dependent non-accrual loans. Interest income of $1 thousand was recognized for the three months ended March 31, 2024. As of December 31, 2023, there were three (3) loans in non-accrual status in the amount of $366 thousand. There was a required related allowance of $66 thousand for these collateral dependent non-accrual loans. Interest income of $7 thousand was recognized for the year ended December 31, 2023.
‎

14

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2024 and December 31, 2023, respectively:

Greater

Loan

than

Receivables >

30-59 Days

60-89 Days

90 Days

Total

Total Loan

90 Days and

Past Due

Past Due

Past Due

Past Due

Current

Receivables

Accruing

March 31, 2024

(In Thousands)

Commercial real estate

$

136

$

622

$

-

$

758

$

550,464

$

551,222

$

-

Commercial construction

-

-

-

-

20,107

20,107

-

Commercial

-

-

-

-

37,974

37,974

-

Residential real estate

598

45

244

887

660,259

661,146

-

Consumer

-

5

-

5

533

538

-

Total

$

734

$

672

$

244

$

1,650

$

1,269,337

$

1,270,987

$

-

December 31, 2023

Commercial real estate

$

630

$

-

$

-

$

630

$

538,404

$

539,034

$

-

Commercial construction

-

-

-

-

16,840

16,840

-

Commercial

-

-

-

-

33,951

33,951

-

Residential real estate

344

-

193

537

662,590

663,127

-

Consumer

-

-

-

-

565

565

-

Total

$

974

$

-

$

193

$

1,167

$

1,252,350

$

1,253,517

$

-

The following tables detail the activity in the allowance for credit losses for the three months ended March 31, 2024 and March 31, 2023, respectively:

Commercial Real Estate

Commercial Construction

Commercial

Residential Real Estate

Consumer

Unallocated

Total

Allowance for credit losses

(In Thousands)

Three Months Ending March 31, 2024

Beginning Balance - December 31, 2023

$

6,108 

$

195 

$

920 

$

5,224 

$

14 

$

-

$

12,461 

Charge-offs

-

-

-

-

-

-

-

Recoveries

240 

-

-

-

-

-

240 

Provisions (credits) on loans

(132)

42 

(367)

284 

15 

-

(158)

Ending Balance - March 31, 2024

$

6,216 

$

237 

$

553 

$

5,508 

$

29 

$

-

$

12,543 

Allowance for credit losses

Three Months Ending March 31, 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

-

-

-

-

-

-

-

Provisions (credits) on loans

-

-

-

-

-

-

-

Ending Balance - March 31, 2023

$

5,605 

$

277 

$

1,117 

$

5,482 

$

32 

$

124 

$

12,637 


‎

15

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables represent the allocation for credit losses and the related loan portfolio disaggregated based on impairment methodology at March 31, 2024 and December 31, 2023:

Commercial Real Estate

Commercial Construction

Commercial

Residential Real Estate

Consumer

Unallocated

Total

(In Thousands)

March 31, 2024

Allowance for Credit Losses

Ending Balance

$

6,216

$

237

$

553

$

5,508

$

29

$

-

$

12,543

Ending balance: individually evaluated for impairment - real estate collateral dependent

$

-

$

20

$

-

$

149

$

-

$

-

$

169

Ending balance: individually evaluated for impairment - non-collateral dependent

$

-

$

-

$

21

$

-

$

-

$

-

$

21

Ending balance: collectively evaluated for impairment

$

6,216

$

217

$

532

$

5,359

$

29

$

-

$

12,353

Loans receivables:

Ending balance

$

551,222

$

20,107

$

37,974

$

661,146

$

538

$

1,270,987

Ending balance: individually evaluated for impairment - real estate collateral dependent

$

1,242

$

295

$

-

$

1,623

$

-

$

3,160

Ending balance: individually evaluated for impairment - non-collateral dependent

$

-

$

-

$

21

$

-

$

-

$

21

Ending balance: collectively evaluated for impairment

$

549,980

$

19,812

$

37,953

$

659,523

$

538

$

1,267,806

December 31, 2023

Allowance for Credit Losses

Ending Balance

$

6,108

$

195

$

920

$

5,224

$

14

$

-

$

12,461

Ending balance: individually evaluated for impairment - real estate collateral dependent

$

-

$

22

$

-

$

152

$

-

$

-

$

174

Ending balance: individually evaluated for impairment - non-collateral dependent

$

-

$

-

$

21

$

-

$

-

$

-

$

21

Ending balance: collectively evaluated for impairment

$

6,108

$

173

$

899

$

5,072

$

14

$

-

$

12,266

Loans receivables:

Ending balance

$

539,034

$

16,840

$

33,951

$

663,127

$

565

$

1,253,517

Ending balance: individually evaluated for impairment - real estate collateral dependent

$

1,303

$

296

$

-

$

1,718

$

-

$

3,317

Ending balance: individually evaluated for impairment - non-collateral dependent

$

-

$

-

$

21

$

-

$

-

$

21

Ending balance: collectively evaluated for impairment

$

537,731

$

16,544

$

33,930

$

661,409

$

565

$

1,250,179


‎

16

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Based on the guidance in ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, 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.

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 new loan modifications to borrowers experiencing financial difficulties in the three months ending March 31, 2024 and March 31, 2023, and there were no modifications to borrowers experiencing financial difficulties that were outstanding at March 31, 2024 and March 31, 2023.

Note 6 – Deposits

The components of deposits at March 31, 2024 and December 31, 2023 are as follows:

March 31, 2024

December 31, 2023

(In Thousands)

Demand, non-interest bearing

$

337,325

$

328,669

Demand, NOW and money market, interest bearing

261,159

252,400

Savings

480,136

493,129

Time, $250 and over

150,134

138,765

Time, other

280,563

263,270

Total deposits

$

1,509,317

$

1,476,233

At March 31, 2024, the scheduled maturities of time deposits are as follows (in thousands):

2024 (remainder of the year)

$

322,698

2025

86,776

2026

18,569

2027

1,273

2028

1,344

2029

37

$

430,697

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 March 31, 2024, the Bank had a maximum borrowing capacity for short-term and long-term FHLB advances of approximately $797.3 million, of which $797.1 million is available for borrowing at March 31, 2024 due to an outstanding 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 short-term or long-term FHLB advances outstanding as of March 31, 2024. There were $35.0 million short-term FHLB advances outstanding and no long-term FHLB advances outstanding as of December 31, 2023. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at March 31, 2024 and December 31, 2023. Advances from this line are unsecured.

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

17

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at March 31, 2024 and December 31, 2023. Advances from this line are unsecured. 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 equity ratio drop below 5% and availability would be reduced to $2.0 million should the Company’s net tangible equity ratio drop below 2%. If the Company’s net tangible equity 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 March 31, 2024, there were 375,155 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 March 31, 2024, there have been 264,958 awards granted. During the three months ended March 31, 2024 and March 31, 2023, there were 18,843 and 13,877 awards granted, respectively. During the three months ended March 31, 2024 and March 31, 2023, the Company recognized compensation expense for restricted stock awards of $334 thousand and $339 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 months ended March 31, 2024 and March 31, 2023. At March 31, 2024 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 27,885 shares have been issued as of March 31, 2024. The Company recognized discount expense in relation to the ESPP of $1 thousand for the three months ended March 31, 2024 and March 31, 2023, respectively.

Note 9 – Other Comprehensive (Loss) Income

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


‎

18

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

Three Months Ended March 31,

2024

2023

(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

$

(6,023)

$

1,265

$

(4,758)

$

4,248

$

(892)

$

3,356

Reclassification adjustments for gains on securities
‎   transactions included in net income (A),(B)

-

-

-

-

-

-

Total other comprehensive (loss) income

$

(6,023)

$

1,265

$

(4,758)

$

4,248

$

(892)

$

3,356

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 months ended March 31, 2024 and 2023.

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

Securities

Available

for Sale

Three Months Ended March 31, 2024 and 2023

(In Thousands)

Balance January 1, 2024

$

(43,700)

Other comprehensive loss before reclassifications

(4,758)

Amounts reclassified from accumulated other
‎   comprehensive loss

-

Net other comprehensive loss during the period

(4,758)

Balance March 31, 2024

$

(48,458)

Balance January 1, 2023

$

(51,107)

Other comprehensive income before reclassifications

3,356

Amounts reclassified from accumulated other
‎   comprehensive loss

-

Net other comprehensive income during the period

3,356

Balance March 31, 2023

$

(47,751)


‎

19

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

March 31,

2024

2023

(Dollars In Thousands, Except Share and Per Share Data)

Net income

$

2,536

$

3,787

Weighted average shares outstanding

7,602,670

7,591,781

Dilutive effect of potential common shares, stock options

-

-

Diluted weighted average common shares outstanding

7,602,670

7,591,781

Basic earnings per share

$

0.33

$

0.50

Diluted earnings per share

$

0.33

$

0.50

There were no stock options not considered in computing diluted earnings per common share for the three months ended March 31, 2024 and March 31, 2023.

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).
‎

20

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at March 31, 2024 and December 31, 2023, 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

$

-

$

14,644

$

-

$

14,644

U.S. Government agency obligations

-

2,350

-

2,350

Municipal bonds

-

59,231

-

59,231

U.S. Government Sponsored Enterprise (GSE) -

Mortgage-backed securities - commercial

-

436

-

436

U.S. Government Sponsored Enterprise (GSE) -

Mortgage-backed securities - residential

-

189,497

-

189,497

March 31, 2024 Securities available for sale

$

-

$

266,158

$

-

$

266,158

U.S. Treasury securities

$

-

$

14,590

$

-

$

14,590

U.S. Government agency obligations

-

2,339

-

2,339

Municipal bonds

-

60,796

-

60,796

U.S. Government Sponsored Enterprise (GSE) -

Mortgage-backed securities - commercial

-

442

-

442

U.S. Government Sponsored Enterprise (GSE) -

Mortgage-backed securities - residential

-

197,893

-

197,893

December 31, 2023 Securities available for sale

$

-

$

276,060

$

-

$

276,060

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

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2024 and December 31, 2023, respectively, are as follows:

(Level 1)

(Level 2)

Quoted

Significant

(Level 3)

Prices in Active

Other

Significant

Markets for

Observable

Unobservable

Description

Identical Assets

Inputs

Inputs

Total

(In Thousands)

March 31, 2024 Loans Individually evaluated for credit losses

$

-

$

-

$

580

$

580

December 31, 2023 Loans Individually evaluated for credit losses

$

-

$

-

$

583

$

583

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

21

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 March 31, 2024, of the loans individually evaluated for credit losses having an aggregate balance of $3.2 million, $2.4 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 $770 thousand in loans individually evaluated for credit losses, an aggregate valuation allowance of $190 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 March 31, 2024 and December 31, 2023, 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)

March 31, 2024:

Loans Individually evaluated for credit losses

$

580

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, 2023:

Loans Individually evaluated for credit losses

$

583

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%)

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.


‎

22

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2024 and December 31, 2023:

(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)

March 31, 2024:

Financial assets:

Cash and cash equivalents

$

59,509

$

59,509

$

59,509

$

-

$

-

Securities available-for-sale

266,158

266,158

-

266,158

-

Loans receivable, net of allowance

1,258,962

1,149,281

-

-

1,149,281

Restricted investments in bank stock

1,058

1,058

-

1,058

-

Accrued interest receivable

3,460

3,460

-

3,460

-

Financial liabilities:

Deposits

1,509,317

1,504,760

-

1,504,760

-

Securities sold under agreements to

repurchase and federal funds purchased

17,221

17,221

-

17,221

-

Accrued interest payable

6,405

6,405

-

6,405

-

Off-balance sheet financial instruments:

Commitments to grant loans

-

-

-

-

-

Unfunded commitments under lines of credit

-

-

-

-

-

Standby letters of credit

-

-

-

-

-

December 31, 2023:

Financial assets:

Cash and cash equivalents

$

78,923

$

78,923

$

78,923

$

-

$

-

Securities available-for-sale

276,060

276,060

-

276,060

-

Loans receivable, net of allowance

1,241,578

1,150,233

-

-

1,150,233

Restricted investments in bank stock

2,458

2,458

-

2,458

-

Accrued interest receivable

3,298

3,298

-

3,298

-

Financial liabilities:

Deposits

1,476,233

1,472,497

-

1,472,497

-

Securities sold under agreements to

repurchase and federal funds purchased

15,237

15,237

-

15,237

-

Short-term borrowings

35,000

35,000

-

35,000

-

Accrued interest payable

7,844

7,844

-

7,844

-

Off-balance sheet financial instruments:

Commitments to grant loans

-

-

-

-

-

Unfunded commitments under lines of credit

-

-

-

-

-

Standby letters of credit

-

-

-

-

-

23

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

 

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of March 31, 2024 and for the three months ended March 31, 2024 and 2023, 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, 2023 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, 2023. 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. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Credit Losses” and “Credit Risk and Loan Quality,” 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:

the impact of adverse conditions in the economy and financial markets, including increasing or elevated interest rates, on the performance of the Company's loan portfolio and demand for the Company's products and services;

the potential impacts of recent events affecting the financial services industry on the Company, including increased competition for, and costs of, deposits and other funding sources, more stringent regulatory requirements relating to liquidity and interest rate risk management and capital adequacy and increased FDIC insurance expenses;

the effects of actions by the federal government, including those of the Federal Reserve Board and other government agencies, that impact the money supply and market interest rates;

the effects of market interest rates, and the relative balances of interest rate-sensitive assets to interest rate-sensitive liabilities, on net interest margin and net interest income;

the composition of the Company's loan portfolio, including commercial real estate and residential real estate, which collectively represent a majority of the loan portfolio, may expose the Company to increased credit risk;

the effects of changes in interest rates on demand for the Company's products and services;

investment securities gains and losses, including declines in the fair value of securities which may result in changes to earnings or shareholders' equity;

the effects of changes in interest rates or disruptions in liquidity markets on the Company's sources of funding;

capital and liquidity strategies, including the Company's ability to comply with applicable capital and liquidity requirements, and the Company's ability to generate capital internally or raise capital on favorable terms;

the effects of competition on deposit rates and growth, loan rates and growth and net interest margin;

the impact of operational risks, including the risk of human error, inadequate or failed internal processes and systems, computer and telecommunications systems failures, faulty or incomplete data and an inadequate risk management framework;

the loss of, or failure to safeguard, confidential or proprietary information;

the Company's failure to identify and adequately and promptly address cybersecurity risks, including data breaches and cyberattacks;

the impact of failures from third-party vendors upon which the Company relies to perform in accordance with contractual arrangements and the effects of concerns about other financial institutions on the Company;
‎

24

the potential effects of increases in non-performing assets, which may require the Company to increase the allowance for credit losses, charge-off loans and incur elevated collection and carrying costs related to such non-performing assets;

the determination of the allowance for credit losses, which depends significantly upon assumptions and judgments with respect to a variety of factors, including the performance of the loan portfolio, the weighted-average remaining lives of different classifications of loans within the loan portfolio and current and forecasted economic conditions, among other factors;

the effects of the extensive level of regulation and supervision to which the Company and Bank are subject;

changes in regulation and government policy, which could result in significant changes in banking and financial services regulation;

the continuing impact of the Dodd-Frank Act on the Company’s business and results of operations;

the potential for negative consequences resulting from regulatory violations, investigations and examinations, including potential supervisory actions, the assessment of fines and penalties, the imposition of sanctions, the need to undertake remedial actions and possible damage to the Company’s reputation;

the effects of adverse outcomes in litigation and governmental or administrative proceedings;

the effects of changes in U.S. federal, state or local tax laws;

the effects of the significant amounts of time and expense associated with regulatory compliance and risk management;

geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

public health crises and pandemics and their effects on the economic and business environments in which the Company operates, including on the Company’s credit quality and business operations, as well as the impact on general economic and financial market conditions;

the Company’s ability to achieve its growth plans;

the Company’s ability to attract and retain talented personnel;

the effects of competition from financial service companies and other companies offering bank services;

the Company’s ability to keep pace with technological changes;

the effects of negative publicity on the Company’s reputation; and

other factors that may affect future results of the Company, as well as the risks described in the Company’s Form 10-K for the year ended December 31, 2023 and subsequent filings with the SEC.

OVERVIEW

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

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

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

At March 31, 2024, the Company continued to be in a strong financial and operational condition. The Bank’s March 31, 2024 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 March 31, 2024 was 0.02% and the ratio of non-performing assets to total assets was 0.01%. The Company had its last Community Reinvestment Act (“CRA”) examination in 2022 and received a “satisfactory” rating.

 

The Company’s assets decreased by $3.5 million from $1.66 billion at December 31, 2023 to $1.65 billion at March 31, 2024. The decrease was due to a $19.4 million decrease in cash and cash equivalents, a decrease of $9.9 million in securities available for sale, and a decrease of $1.4 million in restricted investment in bank stock, offset by an increase of $17.4 million in net loans receivable and an increase of $9.3 million in bank owned life insurance. The $19.4 million decrease in cash and cash equivalents was due to a decrease in short term borrowings of $35.0 million, the net loan growth of $17.4 million, and the purchase of $9.0 million of bank owned life insurance policies in the first quarter of 2024, offset by an increase in deposits of $33.1 million, an increase in securities

25

sold under agreement to repurchase of $2.0 million, $4.0 million in principal pay downs on mortgage-backed securities and a maturity within the securities available for sale portfolio, and the repurchase of $1.4 million in restricted investment of bank stock. The $9.9 million decrease in securities was net of an increase in unrealized losses of $6.0 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 increased by $33.1 million from $1.48 billion at December 31, 2023 to $1.51 billion at March 31, 2024. The increase in deposits was due to an $8.7 million increase in non-interest bearing deposits and an increase of $24.4 million in interest bearing deposits. The slight shift out of 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 serves to further increase the Company’s overall presence in the market it serves, along with deposit relationships developed as a result of cross-marketing efforts to its loan and other non-depository banking service customers. The Company’s success to attract new deposit relationships is, in part, due to 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 mergers in prior years, 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 increased by $17.4 million to $1.26 billion at March 31, 2024, as compared to $1.24 billion at December 31, 2023. 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 March 31, 2024 was $2.5 million compared to net income for the three months ended March 31, 2023 of $3.8 million, a decrease of $1.3 million, or 33.0%. Basic and diluted earnings per share decreased to $0.33 for the three months ended March 31, 2024, as compared to $0.50 for the three months ended March 31, 2023. The difference in net income for the three months ended March 31, 2024 and March 31, 2023 resulted primarily from an increase in interest expense of $3.5 million, or 122.2%, due to the rapid increased rate environment; offset by an increase in interest income, an increase in non-interest income, a decrease in non-interest expenses, 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 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 or no future market rate decreases. This includes interest rate swaps, and adjustments to the investment portfolio. 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.


‎

26

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 2024 and 2023.

Total interest income for the three months ended March 31, 2024 increased $1.4 million to $15.1 million, as compared to $13.7 million for the three months ended March 31, 2023. Average earning assets were $1.55 billion for the three months ended March 31, 2024 as compared to $1.57 billion for the three months ended March 31, 2023. The tax equivalent yield on average earning assets was 3.95% for the first quarter of 2024 compared to 3.58% for the first quarter of 2023.

Total interest expense for the three months ended March 31, 2024 increased $3.5 million to $6.4 million, as compared to $2.9 million for the three months ended March 31, 2023. Average interest bearing liabilities were $1.16 billion for both the three months ended March 31, 2024 and for the three months ended March 31, 2023. The yield on average interest bearing liabilities was 2.21% and 1.01% for the first quarter of 2024 and 2023, respectively.

Net interest income for the three months ended March 31, 2024 was $8.7 million, compared to $10.9 million for the three months ended March 31, 2023. The decrease in net interest income is, in part, the result of a decrease in the average balance of taxable investments, a decrease in the average balances of interest bearing deposits with banks and fed funds sold, an increase in the average balance of certificates of deposit, an increase in the average balance of money markets, and an increase in the average balances of securities under the agreement to repurchase and FHLB short-term borrowings, along with a decrease in the rate of non-taxable investments and 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 average balances of taxable and non-taxable loans, an increase in the average balance of non-taxable investments, along with an increase in the rate of taxable and non-taxable loans, taxable investments, federal funds sold, and interest bearing deposits with banks. Also, offsetting the decrease in net interest income was a decrease in the average balances of interest bearing demand deposits, NOW, and savings. The Company’s net interest margin is 2.25% on a US GAAP basis and 2.29% on a tax equivalent (non-US GAAP) basis for the three months ended March 31, 2024, as compared to 2.80% on a US GAAP basis and 2.83% on a tax equivalent (non-US GAAP) basis for the three months ended March 31, 2023.


‎

27

The tables below sets forth average balances and corresponding yields for the corresponding periods ended March 31, 2024 and 2023, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)

Three Months Ended March 31,

2024

2023

Tax

Tax

Average

Equivalent

Average

Equivalent

Balance

Interest

Yield

Balance

Interest

Yield

(Dollars In Thousands)

ASSETS

Loans - taxable (2)

$

1,234,552

$

12,857

4.19%

$

1,191,853

$

11,276

3.84%

Loans - non-taxable (1)

27,324

229

4.27%

15,570

127

4.19%

Investment securities - taxable

227,927

1,416

2.50%

279,280

1,543

2.24%

Investment securities - non-taxable (1)

41,406

298

3.66%

41,276

305

3.79%

Federal funds sold

974

13

5.37%

1,000

12

4.87%

Interest bearing deposits with banks

20,789

284

5.49%

39,956

458

4.65%

TOTAL INTEREST EARNING ASSETS

1,552,972

15,097

3.95%

1,568,935

13,721

3.58%

Less allowance for credit losses

(12,570)

(12,637)

Other assets

79,612

74,137

TOTAL ASSETS

$

1,620,014

$

1,630,435

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest bearing demand deposits,
‎   NOW and money market

$

247,556

$

851

1.38%

$

233,951

$

170

0.29%

Savings

483,047

954

0.79%

643,565

709

0.45%

Certificates of deposit

415,988

4,463

4.32%

267,060

1,935

2.94%

Securities sold under agreements to repurchase
‎and other borrowings

14,598

110

3.03%

13,335

57

1.73%

TOTAL INTEREST BEARING LIABILITIES

1,161,189

6,378

2.21%

1,157,911

2,871

1.01%

Non-interest bearing demand deposits

332,138

360,874

Other liabilities

23,397

17,922

Stockholders' equity

103,290

93,728

TOTAL LIABILITIES AND
‎STOCKHOLDERS' EQUITY

$

1,620,014

$

1,630,435

Net interest income

$

8,719

$

10,850

Tax equivalent adjustments

Loans

61

34

Investments

79

81

Total tax equivalent adjustments

140

115

Net interest income on a tax equivalent basis

$

8,859

$

10,965

Net interest spread (US GAAP basis)

1.70%

2.54%

Net interest margin (US GAAP basis)

2.25%

2.80%

Net interest spread (non-US GAAP basis) (3)

1.74%

2.57%

Net interest margin (non-US GAAP basis) (3)

2.29%

2.83%

(1)Yields on tax exempt assets have been calculated on a fully tax equivalent basis at a tax rate of 21% as of March 31, 2024 and 2023, respectively.

(2)The average balance of taxable loans includes loans in which interest is no longer accruing.

(3)Non-US GAAP net interest spread and net interest margin calculated on a fully tax equivalent basis at a tax rate of 21% as of March 31, 2024 and 2023, respectively.


‎

28

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

Three Months Ended March 31, 2024

compared to March 31, 2023

(In Thousands)

Total

Due to change in:

Change

Volume

Rate

# of Days

Interest-earning assets:

Loans - taxable

$

1,581

$

407

$

1,078

$

96

Loans - non-taxable

102

97

4

1

Investment securities - taxable

(127)

(286)

146

13

Investment securities - non-taxable

(7)

1

(10)

2

Federal funds sold

1

-

1

-

Interest bearing deposits with banks

(174)

(222)

44

4

Total net change in income on

interest-earning assets

1,376

(3)

1,263

116

Interest-bearing liabilities:

Interest bearing demand deposits,

NOW and money market

681

10

670

1

Savings

245

(178)

417

6

Certificates of deposit

2,528

1,088

1,424

16

Total deposits

3,454

920

2,511

23

Securities sold under agreements to

repurchase and other borrowings

53

5

47

1

Total net change in expense on

interest-bearing liabilities

3,507

925

2,558

24

Change in net interest income

$

(2,131)

$

(928)

$

(1,295)

$

92

Provision for Credit Losses and Reserve for Unfunded Loan Committments

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 measurement of expected credit losses also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit.

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 a collectively evaluated component and an individually evaluated component. The collectively evaluated 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 individually evaluated component relates to loans that are classified as loans individually evaluated for credit losses and/or restructured. For loans that are classified as loans

29

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.

For the three months ended March 31, 2024, the credit for credit losses on loans was $158 thousand and the provision for credit losses on unused commitments was $86 thousand, compared to no provision for credit losses for the three months ended March 31, 2023. In the three months ended March 31, 2024, there were no charge-offs and $240 thousand in recoveries. In the three months ended March 31, 2023, there were no charge-offs or recoveries. 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 March 31, 2024 allowance for credit loss levels. The allowance for credit losses is $12.5 million as of March 31, 2024, which is 0.99% of total loans receivable, compared to $12.6 million or 1.04% of total loans receivable as of March 31, 2023. At December 31, 2023, the allowance for credit losses was $12.5 million, which represented 0.99% 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 portfolio:

3

Three Months Ended

March 31,

2024

2023

(In Thousands)

Loans receivable at end of period

$

1,270,987

$

1,217,259

Allowance for credit losses:

Balance, beginning

$

12,461

$

12,449

Cumulative effect of change in accounting principle

-

188

(Credit) provision for credit losses

(158)

-

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

240

-

Commercial construction

-

-

Commercial

-

-

Residential real estate

-

-

Consumer

-

-

Total recoveries

240

-

Net recoveries

240

-

Balance at end of period

$

12,543

$

12,637

Allowance for credit losses to loans receivable at end of period

0.99%

1.04%

In addition to the allowance for credit losses, the Company maintains a reserve for unfunded commitments at a level that management believes is adequate to absorb probable losses. At March 31, 2024 and December 31, 2023, a $86 thousand and $0 commitment reserve was reported, respectfully, on the Consolidated Balance Sheets in other liabilities and reported on the Consolidated Statements of Income in provision for credit losses.

Non-interest Income

Total non-interest income was $733 thousand for the three months ended March 31, 2024 compared to $658 thousand for the same period in 2023. The increase is, in part, attributable to an increase in bank owned life insurance of $91 thousand primarily due to the purchase of $9.0 million of new bank owned life insurance policies and the conversion of $2.0 million in previous BOLI policies to

30

higher yielding BOLI products through a 1035 exchange transaction in the first quarter of 2024. Offsetting this increase is a decrease in debit card interchange fees of $10 thousand.

Non-interest Expense

Non-interest expenses decreased $367 thousand from $6.9 million for the three months ended March 31, 2023 to $6.5 million for the three months ended March 31, 2024. The decrease in non-interest expenses is, in part, attributable to a $276 thousand decrease in salaries and employee benefits due to decreases in employee taxes, health insurance cost, stock grant expense, and non-qualified pension expense, offset by an increase in team compensation due to annual increases in salaries. Additional decreases in non-interest expenses are attributable to a decrease of $156 thousand in data processing expense due to credits applied in the first quarter of 2024 and a decrease in escrow management services due to implementation costs of transitioning to a new vendor in the first quarter of 2023, and a decrease of $100 thousand in advertising and promotion expense. The decreases in non-interest expenses were offset, in part, by an increase of $29 thousand in occupancy and equipment expense, an increase of $34 thousand in professional fees primarily due to legal expenses, and an increase of $110 thousand in other expenses. The increase of $110 thousand in other expenses is due, in part, to increases in customer check printing expense, bank shares tax, check fraud, and cash over and short, offset by decreases in debit card losses and copier expense. The Company’s efficiency ratio, a non-GAAP measure, was 68.8% and 59.7% for three months ending March 31, 2024 and 2023, 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 March 31, 2024 totaled $487 thousand, or 16.1% of income before taxes, compared to income taxes for the three months ended March 31, 2023 totaling $853 thousand, or 18.4% 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.


‎

31

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 March 31, 2024. 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. 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 March 31, 2024 were $266.2 million compared to $276.1 million at December 31, 2023. The decrease in the investment portfolio resulted from principal pay downs on mortgage-backed securities and the maturity of one (1) non-taxable municipal bond totaling $4.0 million, as well as an increase in unrealized losses of $6.0 million. The carrying value of the securities portfolio as of March 31, 2024 includes a net unrealized loss of $61.3 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 $55.3 million at December 31, 2023. 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 initial 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 March 31, 2024. Further, management reviewed the Company's securities as of March 31, 2024 and concluded there were no credit-related declines in fair value. The effective duration of the securities portfolio remains between approximately 7 to 8 years at March 31, 2024.

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 increased by $17.4 million to $1.26 billion at March 31, 2024 from $1.24 billion at December 31, 2023. The gross loan-to-deposit ratio decreased slightly to 84% at March 31, 2024, compared to 85% at December 31, 2023. The Company’s loan portfolio at March 31, 2024 was comprised of residential real estate and consumer loans of $661.7 million, a decrease of $2.0 million from December 31, 2023, and commercial loans of $609.3 million, an increase of $19.5 million from December 31, 2023. The Company has not originated, nor does it intend to originate, sub-prime mortgage loans.

Credit Risk and Loan Quality

The Company’s allowance for credit losses stayed flat at $12.5 million at March 31, 2024 and December 31, 2023. At March 31, 2024 and December 31, 2023, the allowance for credit losses represented 0.99% of total loans receivable, respectively. The Company’s non-performing loans to total loans receivable were 0.02% at March 31, 2024, compared to 0.02% at March 31, 2023, and 0.03% at December 31, 2023. In the three months ended March 31, 2024, there were no charge-offs and $240 thousand in recoveries. In the three months ended March 31, 2023, there were no charge-offs or recoveries. The aggregate balances on non-performing loans are included in the following table.

At March 31, 2024 approximately 95% of the Company’s loan portfolio is collateralized by real estate. Our loan portfolio includes a large amount of commercial real estate loans. Management believes the commercial real estate loan portfolio is well-diversified. At March 31, 2024 and December 31, 2023, high volatility commercial real estate exposures were $10.3 million and $7.4 million, respectively. Commercial real estate loans are originated primarily within Lehigh and Northampton counties, are within the Company’s underwriting criteria, and generally include the guarantee of one or more of the borrowers’ affiliates. At March 31, 2024, the Company’s office space portfolio included no exposure to properties in major metropolitan markets. Commercial real estate loans have drawn the attention of the regulators in recent years as a potential source of risk. The Company monitors these types of loans closely, obtaining updated appraisals on loans when required. As detailed in the Allowance for Credit Losses table, the Company had no charge-offs in this category in 2024 or 2023. The Company believes it has taken the appropriate steps to implement appropriate risk management practices for its commercial real estate loan portfolio, which are subject to regulatory examination.


‎

32

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

March 31, 2024

December 31, 2023

March 31, 2023

(In Thousands)

Non-accrual - commercial

$

-

$

-

$

-

Non-accrual - consumer

244 

366 

183 

Loans past due 90 or more days, accruing interest

-

-

-

Total nonperforming loans

244 

366 

183 

Foreclosed assets

-

-

-

Total nonperforming assets

$

244 

$

366 

$

183 

Nonperforming loans to total loans

0.02%

0.03%

0.02%

Nonperforming assets to total assets

0.01%

0.02%

0.01%

Non-accrual loans to total loans

0.02%

0.03%

0.02%

Allowance to non-accrual loans

5,140.57%

3,404.64%

6,905.46%

Net charge-offs (recoveries) to average loans

-0.02%

0.00%

0.00%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, increased $5 thousand from December 31, 2023 to March 31, 2024. This increase is due to new purchases, offset by depreciation on existing premises and equipment.

Deposits

Total deposits at March 31, 2024 increased by $33.1 million to $1.51 billion from $1.48 billion at December 31, 2023. The increase in the Company’s deposits was due to an increase of $17.4 million in demand, NOW and money market deposits and an increase of $28.7 million in time deposits, offset by a $13.0 million decrease in savings deposits. The slight shift from savings to time deposits is primarily due to higher yielding rates on time deposits, due to the current rate environment. Included in the above mentioned increase was a $1.7 million increase in non-interest bearing demand personal deposits and a $6.9 million increase in non-interest bearing demand business deposits. Included in total deposits at March 31, 2024 were personal deposits of $1.10 billion, business deposits of $313.0 million, and municipal deposits of $93.0 million. Included in total deposits at December 31, 2023 were personal deposits of $1.09 billion, business deposits of $293.6 million, and municipal deposits of $89.5 million. The estimated amount of uninsured assessable deposits, including related interest accrued and unpaid, at March 31, 2024 and December 31, 2023 was $482.1 million and $464.3 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 $59.5 million at March 31, 2024, compared to $78.9 million at December 31, 2023.

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 March 31, 2024, the Company had $266.2 million of available for sale securities. Securities with carrying values of approximately $142.1 million and $145.7 million at March 31, 2024 and December 31, 2023, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

At March 31, 2024, the Bank had a maximum borrowing capacity for short-term and long-term FHLB advances of approximately $797.3 million, of which $797.1 million is available for borrowing at March 31, 2024 due to an outstanding 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 short-term or long-term FHLB advances outstanding as of March 31, 2024. There were $35.0 million short-term FHLB advances outstanding and no long-term FHLB advances outstanding as of December 31, 2023. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at March 31, 2024 and December 31, 2023. Advances from this line are unsecured.

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

33

The Company has a revolving line of credit facility with the ACBB of $7.5 million, of which none was outstanding at March 31, 2024 and December 31, 2023. 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 $174.7 million and $182.7 million at March 31, 2024 and December 31, 2023, respectively. At March 31, 2024 there was a $86 thousand allowance for credit losses required for off -balance sheet arrangements. At March 31, 2024 and December 31, 2023, the Company had letters of credit outstanding of $9.4 million and $9.0 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 $103.8 million as of March 31, 2024, representing a net decrease of $1.9 million from December 31, 2023. The decrease in capital was primarily the result of an increase of $4.8 million in accumulated other comprehensive loss, offset by net income of $2.5 million, an increase in common stock of $20 thousand, and an increase in surplus of $332 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 $13.63 and $13.91 at March 31, 2024 and December 31, 2023, 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 $19.99 and $19.66 at March 31, 2024 and December 31, 2023, 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.

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

March 31, 2024

December 31, 2023

(Dollars In Thousands Except Per Share Data)

Tangible Book Value Per Share

Total stockholders' equity

$

103,785

$

105,655

Addback: accumulated other comprehensive loss ("AOCL")

48,458

43,700

Total stockholders' equity not included AOCL (non-GAAP)

$

152,243

$

149,355

Common stock shares outstanding

7,616,471

7,596,236

Book value per share (most directly comparable GAAP based measure)

$

13.63

$

13.91

AOCL per share

6.36

5.75

Book value per share not including AOCL (non-GAAP)

$

19.99

$

19.66


‎

34

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 March 31, 2024, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

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

Consolidated Bank

March 31, 2024

December 31, 2023

(Dollars In Thousands)

Tier 1, common stockholders' equity

$

151,886

$

149,299

Tier 2, allowable portion of allowance for credit losses

12,629

12,461

Total capital

$

164,515

$

161,760

Common equity tier 1 capital ratio

13.4

%

13.3

%

Tier 1 risk based capital ratio

13.4

%

13.3

%

Total risk based capital ratio

14.5

%

14.5

%

Tier 1 leverage ratio

9.1

%

8.9

%

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.


‎

35

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

Consolidated Corporation

March 31, 2024

December 31, 2023

(Dollars In Thousands)

Tier 1, common stockholders' equity

$

152,243

$

149,355

Tier 2, allowable portion of allowance for credit losses

12,629

12,461

Total capital

$

164,872

$

161,816

Common equity tier 1 capital ratio

13.4

%

13.3

%

Tier 1 risk based capital ratio

13.4

%

13.3

%

Total risk based capital ratio

14.5

%

14.5

%

Tier 1 leverage ratio

9.1

%

8.9

%

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

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary source of market risk is interest rate risk. A principal objective of the Company’s asset/liability management policy is to minimize the Company’s exposure to changes in interest rates by an ongoing review of the maturity and repricing of interest earning assets and interest bearing liabilities. The Asset Liability Committee (ALCO), included as part of the Board of Directors meetings, oversees this review, which establishes policies to control interest rate sensitivity. Interest rate sensitivity is the volatility of a company’s earnings resulting from a movement in market interest rates. The Company monitors rate sensitivity in order to reduce vulnerability to interest rate fluctuations while maintaining adequate capital levels and acceptable levels of liquidity. Beginning in 2022 thru 2023, the Federal Reserve raised 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 March 31, 2024. 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 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

3.3%

Down 200 basis points

5.0%

Up 100 basis points

-4.1%

Up 200 basis points

-8.7%

Item 4 – Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be

36

disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act. There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended March 31, 2024, including any corrective actions with regard to significant deficiencies and material weakness.

Part II - Other Information

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

In addition to the other information set forth in this Quarterly Report, the reader should carefully consider the factors discussed in “Risk Factors” included within the Company’s 2023 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.


‎

37

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.


‎

38

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: May 15, 2024

By:

/s/ David M. Lobach, Jr.

 

 

 

David M. Lobach, Jr.

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

Dated: May 15, 2024

By:

/s/ Judith A. Hunsicker

 

 

Judith A. Hunsicker

 

 

 

First Executive Officer,

 

 

 

Chief Operating Officer, Secretary and

 

Chief Financial Officer


‎

39