EMYB Embassy Bancorp Inc (QX)







UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 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





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

 

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



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



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



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



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



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



 

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Table of Contents

 



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Part I – Financial Information



Item 1 – Fi nan cial Statements



Consolidated Balance Sheets (Unaudited)







	March 31,			December 31,
ASSETS	2019			2018

	(In Thousands, Except Share Data)
Cash and due from banks	$	16,292		$	14,103
Interest bearing demand deposits with banks		20,119			13,473
Federal funds sold		1,000			-
Cash and Cash Equivalents		37,411			27,576
Securities available for sale		85,354			90,748
Restricted investment in bank stock		878			2,794
Loans receivable, net of allowance for loan losses of $7,546 in 2019; $7,412 in 2018		960,407			949,944
Premises and equipment, net of accumulated depreciation		2,068			2,174
Right of u se a sset		10,610			-
Bank owned life insurance		19,778			19,568
Accrued interest receivable		2,253			2,178
Other real estate owned		-			135
Other assets		3,917			4,270
Total Assets	$	1,122,676		$	1,099,387
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	159,860		$	148,609
Interest bearing		841,290			782,906
Total Deposits		1,001,150			931,515
Securities sold under agreements to repurchase		10,950			18,883
Short-term borrowings		-			53,995
Accrued interest payable		2,305			1,689
Lease l iability		10,694			-
Other liabilities		5,975			6,080
Total Liabilities		1,031,074			1,012,162
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2019 issued 7,541,260 shares; outstanding 7,476,213 shares;
2018 issued 7,529,567 shares; outstanding 7,464,520 shares;		7,541			7,530
Surplus		25,748			25,532
Retained earnings		58,962			56,410
Accumulated other comprehensive income (loss)		351			(1,247)
Treasury stock, at cost:  65,047 shares		(1,000)			(1,000)
Total Stockholders' Equity		91,602			87,225
Total Liabilities and Stockholders' Equity	$	1,122,676		$	1,099,387





See notes to consolidated financial statements.

3

 

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Embassy Bancorp, Inc.

 

Consolidated Statements of Income (Unaudited)  







	Three Months Ended March 31,

	2019				2018

	(In Thousands, Except Per Share Data)
INTEREST INCOME
Loans receivable, including fees	$	9,584		$	8,261
Securities, taxable		366			292
Securities, non-taxable		290			317
Short-term investments, including federal funds sold		144			64
Total Interest Income		10,384			8,934
INTEREST EXPENSE
Deposits		1,877			1,099
Securities sold under agreements to repurchase		25			4
Short-term borrowings		268			18
Total Interest Expense		2,170			1,121
Net Interest Income		8,214			7,813
PROVISION FOR LOAN LOSSES		130			215
Net Interest Income after    Provision for Loan Losses		8,084			7,598
OTHER NON-INTEREST INCOME
Credit card processing fees		80			96
Debit card interchange fees		127			125
Other service fees		116			108
Bank owned life insurance		210			74
Gain (loss) on sale of other real estate owned		45			(8)
Total Other Non-Interest Income		578			395
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits		2,643			2,471
Occupancy and equipment		820			690
Data processing		562			537
Credit card processing		33			44
Advertising and promotion		411			349
Professional fees		195			195
FDIC insurance		95			110
Insurance		14			14
Loan & real estate		43			87
Charitable contributions		306			273
Other real estate owned expenses		12			28
Other		420			287
Total Other Non-Interest Expenses		5,554			5,085

Income before Income Taxes		3,108			2,908
INCOME TAX EXPENSE		556			531
Net Income	$	2,552		$	2,377

BASIC EARNINGS PER SHARE	$	0.34		$	0.32

DILUTED EARNINGS PER SHARE	$	0.34		$	0.32



See notes to consolidated financial statements

4

 

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Embassy Bancorp, Inc.

 

Consolidated Statements of Comprehensive Income (Unaudited)












	Three Months Ended March 31,
	2019					2018

		(In Thousands)

Net Income	$			2,552		$			2,377
Change in Accumulated Other Comprehensive Income (Loss):
Unrealized holding gain (loss) on securities available for sale		2,023					(1,632)
Less: reclassification adjustment for realized gains		-					-
		2,023					(1,632)
Income tax effect		(425)					343
Net unrealized gain (loss)		1,598					(1,289)
Other comprehensive income (loss), net of tax				1,598					(1,289)
Comprehensive Income	$			4,150		$			1,088



See notes to consolidated financial statements.



 

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Consolidated Statements of Stockholders’ Equity (Unaudited)



Three Months Ended March 31, 2019 and 2018  





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

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2017	$	7,492		$	24,998		$	47,602		$	19		$	(342)		$	79,769
Net income		-			-			2,377			-			-			2,377
Other comprehensive loss, net of tax		-			-			-			(1,289)			-			(1,289)
Compensation expense recognized on     stock options		-			1			-			-			-			1
Common stock grants to directors,    6,731 shares		6			105			-			-			-			111
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $546		-			64			-			-			-			64
Shares issued under employee stock purchase
plan, 927 shares		1			13			-			-			-			14
BALANCE - MARCH 31, 2018	$	7,499		$	25,181		$	49,979		$	(1,270)		$	(342)		$	81,047

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


See notes to consolidated financial statements.



 

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Consolidated Statements of Cash Flows (Unaudited)





	Three Months Ended March 31,
	2019			2018

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,552		$	2,377
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		130			215
Amortization of deferred loan costs		63			53
Amortization of right of use asset		298			-
Depreciation		204			177
Net amortization of investment security premiums and discounts		25			48
Stock compensation expense		213			176
Net realized (gain) loss on sale of other real estate owned		(45)			8
Income on bank owned life insurance		(210)			(74)
(Increase) decrease in accrued interest receivable		(75)			76
Increase in other assets		(72)			(145)
Increase (decrease) in accrued interest payable		616			(81)
Decrease in lease liability		(320)			-
Increase in other liabilities		1			142
Net Cash Provided by Operating Activities		3,380			2,972
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		-			(9,793)
Maturities, calls and principal repayments of securities available for sale		7,392			4,485
Net increase in loans		(10,656)			(28,216)
Net redemption (purchase) of restricted investment in bank stock		1,916			(302)
Proceeds from sale of other real estate owned		180			91
Purchases of premises and equipment		(98)			(62)
Net Cash Used in Investing Activities		(1,266)			(33,797)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		69,635			13,101
Net (decrease) increase in securities sold under agreements to repurchase		(7,933)			7,427
Proceeds from Employee Stock Purchase Plan		14			14
(Decrease) increase in short-term borrowed funds		(53,995)			1,950
Net Cash Provided by Financing Activities		7,721			22,492
Net Increase (Decrease) in Cash and Cash Equivalents		9,835			(8,333)
CASH AND CASH EQUIVALENTS - BEGINNING		27,576			33,534
CASH AND CASH EQUIVALENTS - ENDING	$	37,411		$	25,201

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	1,554		$	1,202

Deferral of gain from sale of other real estate sold through bank financing	$	-		$	2

Other real estate acquired in settlement of loans	$	-		$	100

Non-cash Investing and Financing Activities:
Recognition of operating lease right of use assets	$	10,908		$	-
Recognition of operating lease liabilities	$	11,014		$	-



See notes to consolidated financial statements.

 

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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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 9 .



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, 2018 , included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13 , 201 9.  



In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2019 through the date these consolidated financial statements were issued.



Certain amounts in the 201 8   consolidated financial statements may have been reclassified to conform to 201 9 presentation. These reclassifications had no effect on 201 8 net income.





Note 2 - Summary of Significant Accounting Policies



The Company adopted ASU No. 2016-02, “Leases (Topic 842) ” on January 1, 2019, described in Note 7 – Right of Use Asset and Lease Liabilities.   Besides the adoption of Topic 842 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, 2018 .

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Note 3 – Securities Available For Sale



At March 31, 2019 and December 31, 2018, respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:



The amortized cost and fair value of securities as of March 31, 2019, 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.



There were no sales of securities for the three months ended March 31, 2019 and 2018.



Securities with a carrying value of $ 85.4 million and $85.8 million at March 31, 2019 and December 31, 2018, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.



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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, 2019 and December 31, 2018, respectively:







The Company had twenty-eight (28) securities in an unrealized loss position at March 31, 2019. The unrealized losses are due to market interest rate fluctuations. As of March 31, 2019, the Company either has the intent and ability to hold the securities until maturity or market price recovery, or believes that it is more likely than not that it will not be required to sell such securities.  Management believes that the unrealized loss only represents temporary impairment of the securities.



Note 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 $2.6 million and $889 thousand repurchased during the three months ended March 31, 2019 and 2018, respectively. Stock purchases of $677 thousand and $1.2 million were made during the three months ended March 31, 2019 and 2018, respectively. Dividend payments of $43 thousand and $5 thousand were received during the three months ended March 31, 2019 and 2018, respectively. The Bank had no ACBB stock purchases or repurchases during the three months ended March 31, 2019 and 2018. The Bank had ACBB stock at a carrying value of $40 thousand for the three months ended March 31, 2019 and 2018, respectively. Dividend payments of $1 thousand were received during the three months ended March 31, 2019 and 2018, respectively.

 

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, 2019.

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Note 5 – Loans Receivable and Credit Quality



The following table presents the composition of loans receivable at March 31, 2019 and December 31, 2018, respectively:





The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of March 31, 2019 and December 31, 2018, respectively:





The Company had no foreclosed assets as of March 31, 2019.  At March 31, 2019 and December 31, 2018, the Company had $236 thousand and $246 thousand, respectively, in recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure.





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The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2019 and December 31, 2018, respectively:





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The following table summarizes information regarding the average recorded investment and interest income recognized on impaired loans by loan portfolio for the three months ended March 31, 2019 and 2018, respectively:









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







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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, 2019 and December 31, 2018, respectively:







The following tables detail the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018:



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The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at March 31, 2019 and December 31, 2018:



Troubled Debt Restructurings



The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider, resulting in a modified loan which is then identified as a   troubled debt restructuring (“TDR”).  The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations.  Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.  TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.



The Company identifies loans for potential restructure primarily through direct communication with the borrower and the evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports.  Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

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The following table presents TDR’s outstanding:





As of March 31, 2019, no available commitments were outstanding on TDRs.



There were no newly restructured loans that occurred during the three months ended March 31, 2019 and 2018.

e



There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three months ended March 31, 2019 and 2018.



Note 6 – Guarantees



The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Company had $4.6 million of standby letters of credit outstanding as of March 31, 2019. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $4.0 million. Management does not consider the current amount of the liability as of March 31, 2019 for guarantees under standby letters of credit issued to be material.



Note 7 – Right of Use Asset and Lease Liability



In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which superseded the lease requirements in Topic 840. The ASU required lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases are classified as either finance or operating, with the classification affecting the pattern of expense recognition in the consolidated statement of income. Previously, leases were classified as either capital or operating, with only capital leases recognized on the consolidated balance sheets. The reporting of lease related expenses in the statements of income and cash flows are generally consistent with the current guidance. The new guidance became effective for the Company on January 1, 2019. The standard was applied using the optional transition method in accordance with the July 2018 issued ASU No. 2018-11 allowing the Company to choose the optional transition method, instead of the modified retrospective transition method previously considered. The Company has made an accounting policy election to not apply the recognition requirements in ASU 2016-02 to short-term leases. The Company has also elected to use the practical expedients allowed by the new standard as follows: 1) forego an assessment of whether any existing contracts are or contain leases, 2) forego an assessment of the classification of existing leases as to whether they are operating leases or capital leases, and 3) forego an assessment of direct costs for any existing leases.



The Company’s leases are all classified as operating leases with no short-term leases. Currently, many of these leases contain renewal options. The Company has reviewed and based the right of use assets and lease liabilities, primarily, on the present value of unpaid future minimum lease payments. Additionally, the amounts, for the branch leases, were impacted by assumptions around renewals and/or extensions and the interest rate used to discount those future lease obligations. Impact to the consolidated income statements was not material in the current period. All operating equipment leases do not have renewal language in their contracts and therefore

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use the current term. In accordance with the guidance, the Company had an increase on its consolidated balance sheets as of March 31, 2019 for the right of use asset of $10.6 million offset by lease liabilities of $10.7 million, with the difference attributable to a transition adjustment required by ASC Topic 842 relating to previously recognized amounts. The cost for operating leases was $386 thousand for the three months ended March 31, 2019. Operating cash flow paid for lease liabilities was $408 thousand for the three months ended March 31, 2019. As of March 31, 2019, the operating leases overall had a weighted average lease term of 7.42 years, with the branch leases having a weighted average life of 7.50 years and equipment leases having a weighted average life of 3.06 years. The Company used the FHLB advance rates to calculate the discount rate in their review because none of the Company’s leases provided an implicit rate. The Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The present value of all existing operating leases was determined using the incremental collateralized borrowing rate on January 1, 2019. The weighted average discount rate for all operating leases was 3.17% , with branch leases having a weighted average discount rate of 3.17% and equipment leases having a weighted average discount rate of 2.82% .



A reconciliation of operating lease liabilities by minimum lease payments by year and in aggregate and discount amounts in aggregate, as of March 31, 2019, are as follows:











Note 8 – Deposits



The components of deposits at March 31, 2019 and December 31, 2018 are as follows:























The $65.9 million increase in the Company’s time deposits was primarily due to time deposit promotions. Most of the funds attracted were new deposits. There was also a modest shift of $15.6 million in savings deposits to higher yielding accounts. The new deposit relationships contributed to the $11.3 million increase in non-interest bearing deposits. The funds were mainly used to pay down FHLB short-term borrowings and to fund new loan growth.



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Note 9 – Offsetting Assets and Liabilities



The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal ownership over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities.  The obligation to repurchase the securities is reflected as a liability in the Company's consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.



The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty's custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company in a segregated custodial account under a tri-party agreement.



The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2019 and December 31, 2018:







As of March 31, 2019 and December 31, 2018, the fair value of securities pledged was $14.1 million and $23.8 million, respectively.



Note 10 – 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, 2019, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $549.8 million.  This borrowing capacity with the FHLB includes a line of credit of $ 150.0 million. There were no short-term FHLB advances outstanding as of March 31, 2019 and $54.0 million short-term FHLB advances were outstanding as of December 31, 2018. The decrease in short-term borrowings from prior year end was primarily the result of growth in the Company’s time deposit portfolio due to   advertised promotions. There were no long-term FHLB advances outstanding as of March 31, 2019 and December 31, 2018. 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, 2019 and December 31, 2018. Advances from this line are unsecured.













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Note 1 1 – Stock Incentive Plan and Employee Stock Purchase Plan



Stock Incentive Plan:



At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”).  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. At inception, the aggregate number of shares available for issuance under the SIP was 500,000 . The SIP provides for appropriate adjustments in the number and kind of shares available for grant or subject to outstanding awards under the SIP to avoid dilution in the event of merger, stock splits, stock dividends or other changes in the capitalization of the Company. The SIP expires on June 15, 2020. At March 31, 2019 there were 243, 644   shares available for issuance under the SIP.  

The Company grants shares of restricted stock, under the SIP, to certain members of its Board of Directors as compensation for their services, in accordance with the Company’s Non-employee Directors Compensation program adopted in October 2010. The Company also grants restricted stock to certain officers under individual agreements with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over three to nine service years. Management recognizes compensation expense for the fair value of the restricted stock awards on a straight-line basis over the requisite service period. Since inception of the plan and through the period ended March 31, 2019 , there have been 140,113 awards granted. During the three months ended   March 31, 2019 and 201 8 there were 10,799 and 6,731 awards granted, respectively. The Company recognized compensation expense for restricted stock awards during the three months ended March 31, 2019   and 2018 of $ 51 thousand and $ 64 thousand , respectively.



The Company has granted stock options to purchase shares of stock to certain executive officers under individual agreements and/or in accordance with their respective employment agreements.  Stock compensation expense related to these options was $ 1 thousand for the three months ended March 31, 2019 and 2018, respectively.  At March 31, 201 9 , approximately $ 3 thousand of unrecognized cost to the stock options will be recognized over the next year.



Employee Stock Purchase Plan:



On January 1, 2017, the Company implemented the Embassy Bancorp, Inc. Employee Stock Purchase Plan, which was approved by the Company’s shareholders at the annual meeting held on June 16, 2016. Under the plan, 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 plan shall initially equal 95% of the fair market value of such shares on the date of purchase.  The purchase price may be adjusted from time to time by the Board of Directors; provided, however, that the discount to fair market value shall not exceed 15% .  The Company has authorized 350,000 shares of its common stock for the plan, of which 7,958 shares have been issued as of March 31, 2019 . The Company recognized discount expense in relation to the employee stock purchase plan of $1 thousand during the three months ended March  3 1 , 201 9 and 201 8 , respectively.



Note 1 2 – Other Comprehensive Income (Loss)

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



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









There were no realized gains on securities available for sale for the three months ended March 31, 2019 and 2018.

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















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No te 1 3 – 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.



There were no stock options not considered in computing diluted earnings per common share for the three months ended   March 31, 2019 and 2018 .



Note 1 4 – 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.

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).

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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, 2019 and December 31, 2018, respectively, are as follows:  







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, 2019 and December 31, 2018, respectively, are as follows:



Fair value is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 input which are not identifiable. Fair values may also include qualitative adjustments by management based on economic conditions and liquidation expenses.



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



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At March 31, 2019, of the impaired loans having an aggregate balance of $ 3.8 million, $ 2.7 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $ 1. 1 million in impaired loans, an aggregate valuation allowance of $ 21 5 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 are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.



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:





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The estimated fair values of the Company’s financial instruments were as follows at March 31, 2019 and December 31, 2018 :





















Note 1 5 – Future Accounting Standards  



In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This guidance is effective for the Company in 2020. The Company has gathered information and is reviewing various methodologies. The Company will be testing the models in the

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second and third quarters, and therefore have not yet determined the impact it will have on financial statements and results of operations.