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EX-32 - EXHIBIT 32 - Embassy Bancorp, Inc.ex32.htm
EX-31.2 - EXHIBIT 31.2 - Embassy Bancorp, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Embassy Bancorp, Inc.ex31_1.htm


 
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 JUNE 30, 2010 OR 

o 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 000-1449794

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
(Issuer’s Telephone Number)

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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 or the Exchange Act.)  Yes o  No x
 
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o  No o                                                       Not applicable.

APPLICABLE ONLY TO CORPORATE REGISTRANTS:
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 August 11, 2010
($1.00 Par Value)
7,049,316
  (Title Class)
(Outstanding Shares)
 
 


 
 

 
 
 
3
   
3
3
4
5
6
7
   
19
   
28
   
28
   
29
   
29
   
29
   
29
   
29
   
29
   
29
   
30
EXHIBIT 31.1
 
EXHIBIT 31.2
 
EXHIBIT 32
 
 
     
Embassy Bancorp, Inc.
Part I – Financial Information
 
Item 1 – Financial Statements

Consolidated Balance Sheets (Unaudited)

   
June 30,
   
December 31,
 
ASSETS  
2010
   
2009
 
   
(In Thousands, Except Share and Per Share Data)
 
Cash and due from banks
  $ 4,034     $ 4,108  
Interest bearing demand deposits with banks
    9,661       13,981  
Federal funds sold
    17,210       8,375  
                 
Cash and Cash Equivalents     30,905       26,464  
                 
Interest bearing time deposits
    7,461       10,724  
Securities available for sale
    76,825       72,795  
Restricted investment in bank stock
    2,109       2,109  
Loans receivable, net of allowance for loan losses of $4,034 in 2010; $3,598 in 2009
    368,140       346,320  
Premises and equipment, net of accumulated depreciation
    2,622       2,465  
Deferred income taxes
    87       199  
Accrued interest receivable
    1,676       1,615  
Other assets
    2,347       2,498  
                 
Total Assets   $ 492,172     $ 465,189  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Liabilities:
               
Deposits:                
Non-interest bearing   $ 27,217     $ 25,785  
Interest bearing     378,845       355,499  
                 
Total Deposits     406,062       381,284  
                 
Securities sold under agreements to repurchase and federal funds purchased
    34,722       30,964  
Long-term borrowings
    13,586       17,016  
Accrued interest payable
    1,000       1,457  
Other liabilities
    1,186       791  
                 
Total Liabilities     456,556       431,512  
                 
Stockholders' Equity:
               
Common stock, $1 par value; authorized 20,000,000 shares;
               
2010 issued 7,041,615 shares; outstanding 7,041,262 shares;                
2009 issued 6,940,663 shares; outstanding 6,940,310 shares     7,042       6,941  
Surplus
    22,668       22,900  
Accumulated earnings
    4,308       2,455  
Accumulated other comprehensive income
    1,601       1,384  
Treasury stock, at cost, 353 shares
    (3 )     (3 )
                 
Total Stockholders' Equity     35,616       33,677  
                 
Total Liabilities and Stockholders' Equity   $ 492,172     $ 465,189  
 
See notes to consolidated financial statements.
 
Embassy Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
INTEREST INCOME   (In Thousands, Except Per Share Data)     (In Thousands, Except Per Share Data)  
                         
Loans receivable, including fees   $ 5,104     $ 4,843     $ 10,043     $ 9,514  
Securities, taxable     571       681       1,152       1,308  
Securities, non-taxable     232       106       449       125  
Federal funds sold, and other     8       9       15       17  
Interest on time deposits     30       71       73       117  
Total Interest Income     5,945       5,710       11,732       11,081  
                                 
INTEREST EXPENSE
                               
                                 
Deposits     1,237       2,080       2,557       4,297  
Securities sold under agreements to repurchase and federal funds purchased
    105       127       222       296  
Short-term borrowings     -       -       -       17  
Long-term borrowings     195       281       391       519  
Total Interest Expense     1,537       2,488       3,170       5,129  
                                 
Net Interest Income     4,408       3,222       8,562       5,952  
                                 
PROVISION FOR LOAN LOSSES
    303       195       483       367  
                                 
Net Interest Income after Provision for Loan Losses
    4,105       3,027       8,079       5,585  
                                 
OTHER INCOME
                               
                                 
Credit card processing fees     200       126       370       244  
Other service fees     92       81       174       149  
Total Other Income     292       207       544       393  
                                 
OTHER EXPENSES
                               
                                 
Salaries and employee benefits     1,249       1,009       2,456       2,019  
Occupancy and equipment     525       384       1,007       703  
Data processing     207       174       438       337  
Credit card processing     187       116       348       224  
Advertising and promotion     194       114       351       235  
Professional fees     97       136       192       221  
FDIC insurance     170       283       339       446  
Insurance     8       13       19       23  
Loan department     36       35       61       67  
Charitable contributions     77       63       186       153  
Other     264       119       413       268  
Total Other Expenses     3,014       2,446       5,810       4,696  
                                 
Income before Income Taxes     1,383       788       2,813       1,282  
                                 
INCOME TAX EXPENSE
    402       234       819       404  
                                 
Net Income   $ 981     $ 554     $ 1,994     $ 878  
                                 
BASIC EARNINGS PER SHARE
  $ 0.14     $ 0.08     $ 0.29     $ 0.13  
                                 
DILUTED EARNINGS PER SHARE
  $ 0.13     $ 0.08     $ 0.27     $ 0.12  
                                 
 DIVIDENDS PER SHARE   0.02     -     0.02     -  
 
See notes to consolidated financial statements.
  
Embassy Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity (Unaudited)
Six Months Ended June 30, 2010 and 2009
 
   
Common
Stock
   
Surplus
   
Accumulated
Earnings (Deficit)
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
 
   
(In Thousands, Except Share and Per Share Data)
 
                                     
BALANCE - DECEMBER 31, 2008
    6,891       22,787       (278 )     974       (3 )     30,371  
                                                 
Comprehensive income:
                                               
Net income     -       -       878       -       -       878  
Net change in unrealized gain on securities available for sale, net of income tax effects
    -       -       -       137       -       137  
                                                 
Total Comprehensive Income                                             1,015  
                                                 
Exercise of stock options, 21,032 shares
    21       60       -       -       -       81  
                                                 
BALANCE - JUNE 30, 2009
  $ 6,912     $ 22,847     $ 600     $ 1,111     $ (3 )   $ 31,467  
                                                 
BALANCE - DECEMBER 31, 2009
    6,941       22,900       2,455       1,384       (3 )     33,677  
                                                 
Comprehensive income:
                                               
Net income     -       -       1,994       -       -       1,994  
Net change in unrealized gain on securities available for sale, net of income tax effects
    -       -       -       217       -       217  
                                                 
Total Comprehensive Income                                             2,211  
                                                 
Dividend declared, $0.02 per share
                    (141 )                     (141 )
Exercise of stock options, 258,021 shares
    258       475       -       -       -       733  
Stock tendered for funding exercise of stock options and tax expense, 157,069 shares
    (157 )     (707 )     -       -       -       (864 )
                                                 
BALANCE - JUNE 30, 2010
  $ 7,042     $ 22,668     $ 4,308     $ 1,601     $ (3 )   $ 35,616  

See notes to consolidated financial statements.

Embassy Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
   
Six Months ended June 30,
 
   
2010
   
2009
 
   
(In Thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income   $ 1,994     $ 878  
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for loan losses     483       367  
(Accretion) amortization of deferred loan costs     (50 )     89  
Depreciation and amortization     301       208  
Net amortization of investment security premiums and discounts     45       14  
Increase in accrued interest receivable     (61 )     (287 )
Decrease (increase) in other assets     151       (78 )
(Decrease) increase in accrued interest payable     (457 )     27  
Increase (decrease) in other liabilities     395       (101 )
                 
Net Cash Provided by Operating Activities     2,801       1,117  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of securities available for sale     (8,489 )     (21,158 )
Maturities, calls and principal repayments of securities available for sale     4,743       5,679  
Net increase in loans     (22,253 )     (21,344 )
Increase in restricted investment in bank stock     -       (34 )
Net maturities (purchases) of interest bearing time deposits     3,263       (9,775 )
Purchases of premises and equipment     (458 )     (203 )
                 
Net Cash Used in Investing Activities     (23,194 )     (46,835 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposits     24,778       57,289  
Net increase in securities sold under agreements to repurchase and federal funds purchased     3,758       1,469  
Proceeds from long-term borrowed funds     -       2,800  
Payment of long-term borrowed funds     (3,430 )     (1,850 )
Net payment of stock tendered     (131 )     -  
Proceeds from the exercise of stock options     -       81  
Dividends paid     (141 )     -  
                 
Net Cash Provided by Financing Activities     24,834       59,789  
                 
Net Increase in Cash and Cash Equivalents
    4,441       14,071  
                 
CASH AND CASH EQUIVALENTS - BEGINNING
    26,464       12,054  
                 
CASH AND CASH EQUIVALENTS - ENDING
  $ 30,905     $ 26,125  
                 
SUPPLEMENTARY CASH FLOWS INFORMATION
               
Interest paid   $ 3,627     $ 5,102  
                 
Income taxes paid   $ 876     $ 601  

See notes to consolidated financial statements.
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Embassy Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and section 225.15 of Regulation Y. 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. As such, the consolidated financial statements contained herein include the accounts of the Company and the Bank. All significant intercompany transactions and balances have been eliminated.

The Bank 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 US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

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, 2009, included in the Form 10-K of Embassy Bancorp, Inc. filed with the Securities and Exchange Commission (“SEC”).

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2010 through the date those consolidated financial statements were issued.

Note 2 - Summary of Significant Accounting Policies

The significant accounting policies of the Company as applied in the interim financial statements presented 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, 2009.
 
Note 3 – Stockholders Equity
 
On November 11, 2008, the Company consummated its acquisition of Embassy Bank For The Lehigh Valley pursuant to a Plan of Merger and Reorganization dated April 18, 2008, pursuant to which the Bank was reorganized into a bank holding company structure. At the effective time of the reorganization, each share of common stock of Embassy Bank For The Lehigh Valley issued and outstanding was automatically converted into one share of Company common stock. The issuance of Company common stock in connection with the reorganization was exempt from registration pursuant to Section 3(a)(12) of the Securities Act of 1933, as amended.

See notes to consolidated financial statements.
 
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 4 – Comprehensive Income

The only other comprehensive income item that the Company presently has is unrealized gains on securities available for sale. The components of the change in unrealized gains for the three and six months ended June 30, 2010 and 2009, respectively, are as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
   
(In thousands)
 
                         
Change in unrealized holding gains on securities available for sale
  $ 57     $ 10     $ 329     $ 207  
Less: Reclassification adjustment for realized gains
    -       -       -       -  
      57       10       329       207  
Tax effect
    (20 )     (3 )     (112 )     (70 )
Change in net unrealized gains
  $ 37     $ 7     $ 217     $ 137  
 
Note 5 – 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 June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Dollars In Thousands, except per share data)
   
(Dollars In Thousands, except per share data)
 
                         
 Net income
  $ 981     $ 554     $ 1,994     $ 878  
                                 
 Weighted average shares outstanding
    7,000       6,902       6,971       6,897  
 Dilutive effect of potential common shares, stock options
    272       378       311       390  
 
                               
 Diluted weighted average common shares outstanding
    7,272       7,280       7,282       7,287  
 Basic earnings per share
  $ 0.14     $ 0.08     $ 0.29     $ 0.13  
 Diluted earnings per share
  $ 0.13     $ 0.08     $ 0.27     $ 0.12  
 
Stock options for 72,739 and 73,339 shares of common stock were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2010 and 2009, respectively, because they are not dilutive to earnings.

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 $3.4 million of standby letters of credit outstanding as of June 30, 2010. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $3.1 million. The current amount of the liability as of June 30, 2010 for guarantees under standby letters of credit issued is not considered material.
 
See notes to consolidated financial statements.
 
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 7 – Short-term and Long-term Borrowings

Securities sold under agreements to repurchase, federal funds purchased and Federal Home Loan Bank of Pittsburgh (“FHLB”) short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for proceeds 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 June 30, 2010, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $190.0 million, of which $7.9 million was outstanding in long-term loans. Long-term loans with FHLB of $11.4 million were outstanding at December 31, 2009. There were no short-term advances outstanding at June 30, 2010. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the Atlantic Central Bankers Bank (“ACBB”) of approximately $6.0 million, of which none was outstanding at June 30, 2010 and December 31, 2009. Advances from this line are unsecured.

The Company has two lines of credit with Univest National Bank and Trust Company (“Univest”) totaling $10 million. As of June 30, 2010 and December 31, 2009, the outstanding balance was $5.7 million and $5.6 million, respectively. Advances from these lines of credit are secured by 833,333 shares of Bank Common stock. Under the terms of the loan agreement, the Bank is required to remain well capitalized. The proceeds of the loan were primarily used for the holding company’s investment in the Bank, thus providing additional capital to support the Bank’s growth.
 
Note 8 – Securities Available For Sale

At June 30, 2010 and December 31, 2009, respectively, the amortized cost and fair values of securities available-for-sale were as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
 June 30, 2010:  
(In Thousands)
 
                         
U.S. Government agencies
  $ 18,557     $ 551     $ -     $ 19,108  
Municipal bonds
    32,683       740       (20 )     33,403  
Mortgage-backed securities - residential
    19,374       941       -       20,315  
Corporate Bonds
    3,784       215       -       3,999  
Total
  $ 74,398     $ 2,447     $ (20 )   $ 76,825  
                                 
 December 31, 2009:                                
                                 
U.S. Government agencies
  $ 16,583     $ 500     $ -     $ 17,083  
Municipal bonds
    28,157       514       (97 )     28,574  
Mortgage-backed securities - residential
    22,170       949       -       23,119  
Corporate Bonds
    3,787       232       -       4,019  
Total
  $ 70,697     $ 2,195     $ (97 )   $ 72,795  
 
See notes to consolidated financial statements.
 

Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 8 – Securities Available For Sale (Continued)

The amortized cost and fair value of securities as of June 30, 2010, 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
Cost
   
Fair
Value
 
   
(In Thousands)
 
             
Due in one year or less
  $ 10,253     $ 10,402  
Due after one year through five years
    13,179       13,722  
Due after five years through ten years
    6,676       6,995  
Due after ten years
    24,916       25,391  
      55,024       56,510  
                 
Mortgage-backed securities
    19,374       20,315  
    $ 74,398     $ 76,825  
 
There were no sales of securities for the six months ended June 30, 2010 and 2009. Sales of securities for the year ended December 31, 2009 totaled $3.1 million with net gains of $174 thousand; the proceeds were used, in part, to pay down FHLB debt.
 
Securities with a carrying value of $53.2 million and $49.2 million at June 30, 2010 and December 31, 2009, respectively, were pledged to secure securities sold under agreements to repurchase, public deposits and for other purposes required or permitted by law.

The following tables show 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 June 30, 2010 and December 31, 2009, respectively:
 
   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
   
(In Thousands)
   
(In Thousands)
   
(In Thousands)
 
June 30, 2010:
                                   
                                     
  Municipal bonds   $ 1,790     $ (20 )   $ -     $ -     $ 1,790     $ (20 )
Total Temporarily Impaired Securities
  $ 1,790     $ (20 )   $ -     $ -     $ 1,790     $ (20 )
                                                 
December 31, 2009:
                                               
                                                 
  Municipal bonds   $ 2,860     $ (97 )   $ -     $ -     $ 2,860     $ (97 )
  Total Temporarily Impaired Securities   $ 2,860     $ (97 )   $ -     $ -     $ 2,860     $ (97 )

See notes to consolidated financial statements.
 

Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 8 – Securities Available For Sale (Continued)

The Company had six (6) securities in an unrealized loss position at June 30, 2010. Unrealized losses detailed above relate to municipal securities and the decline in fair value is due only to interest rate fluctuations. As of June 30, 2010, the Company does not intend to sell, or more likely than not, expect to be required to sell, such securities. None of the individual unrealized losses are significant.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available-for-sale are evaluated for OTTI under ASC Topic 320, Accounting for Certain Investments in Debt and Equity Securities.

In determining OTTI under the ASC Topic 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs under the model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

As of June 30, 2010 the Company has the intent and ability to hold the aforementioned six (6) securities until maturity or market price recovery. Management believes that the unrealized losses represent temporary impairment of the securities.

Note 9 – Restricted Investment In Bank Stock

As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), the Company is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants. As of June 30, 2010 and December 31, 2009, the value of the Company’s FHLB stock totaled $2.1 million.
 
In December 2008, the FHLB voluntarily suspended dividend payments on its stock, as well as the repurchase of excess stock from members. The FHLB cited a significant reduction in the level of core earnings resulting from lower short-term interest rates, the increased cost of liquidity, and constrained access to the debt markets at

See notes to consolidated financial statements.
 
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 9 – Restricted Investment In Bank Stock (Continued)
 
attractive rates and maturities as the main reasons for the decision to suspend dividends and the repurchase of excess capital stock. The FHLB last paid a dividend in the third quarter of 2008.
 
FHLB stock is held as a long-term investment and its value is determined based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:
 
 
·  
its operating performance;
 
 
·  
the severity and duration of declines in the fair value of its net assets related to its capital stock amount;
 
 
·  
its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;
 
 
·  
the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and
 
 
·  
its liquidity and funding position.
 
After evaluating all of these considerations, the Company concluded that the par value of its investment in FHLB stock will be recovered. Accordingly, no impairment charge was recorded on these securities for the three and six months ended June 30, 2010. Our evaluation of the factors described above in future periods could result in the recognition of impairment charges on FHLB stock.

Note 10 – 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. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, 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.
 
The recent 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.
 
See notes to consolidated financial statements.


Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 10 – Fair Value Measurements (Continued)

ASC Topic 860 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 under ASC Topic 860 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).
 
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 used at June 30, 2010 and December 31, 2009, respectively are as follows:

Description
 
(Level 1) Quoted
Prices in Active
Markets for
Identical Assets
   
(Level 2)
 Significant
 Other
Observable
Inputs
   
(Level 3) Significant Unobservable Inputs
   
Total
 
   
(In Thousands)
 
                         
June 30, 2010 Securities available for sale
  $ -     $ 76,825     $ -     $ 76,825  
December 31, 2009 Securities available for sale
  $ -     $ 72,795     $ -     $ 72,795  

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2010 and December 31, 2009, respectively are as follows:
 
Description
 
(Level 1) Quoted
Prices in Active
 Markets for
 Identical Assets
   
(Level 2)
 Significant
 Other
 Observable
Inputs
   
(Level 3)
 Significant
Unobservable
Inputs
   
Total
 
   
(In Thousands)
 
                         
June 30, 2010 Securities available for sale
  $ -     $ -     $ 1,147     $ 1,147  
December 31, 2009 Securities available for sale
  $ -     $ -     $ 328     $ 328  

See notes to consolidated financial statements.
 
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 10 – Fair Value Measurements (Continued)

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2010:
 
Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Interest Bearing Time Deposits (Carried at Cost)

Fair values for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.
 
Securities (Carried at Fair Value)

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or 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 certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use, along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

Loans Receivable (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses and market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates and projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those that are accounted for under ASC Topic 310, Accounting by Creditors for Impairment of a Loan. Under this topic, impairment is generally measured based on the fair value of the collateral securing the loan. Fair value of the collateral is generally determined based upon independent third-party appraisals or discounted cash flows based upon expected proceeds from the liquidation of such collateral.
 
At June 30, 2010, of the impaired loans having an aggregate balance of $5.4 million, $3.6 million did not require a valuation allowance because the value of the collateral securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $1.8 million in impaired loans, an aggregate valuation allowance of $628 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. This valuation allowance required an increase in the allowance for loan losses of $628 thousand.
 
See notes to consolidated financial statements.
 
 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 10 – Fair Value Measurements (Continued)

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities Sold Under Agreements to Repurchase and Federal Funds Purchased (Carried at Cost)

These borrowings are short term and the carrying amount approximates the fair value.

Short-Term Borrowings (Carried at Cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-Term Debt (Carried at Cost)

Fair values of FHLB and Univest advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB and Univest advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

See notes to consolidated financial statements.


Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements

Note 10 – Fair Value Measurements (Continued)

Off-Balance Sheet Financial Instruments (Disclosed at Cost)

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
 
The estimated fair values of the Company’s financial instruments were as follows at June 30, 2010 and December 31, 2009 (in thousands):
 
   
June 30, 2010
   
December 31, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
                         
Financial assets:
                       
Cash and cash equivalents   $ 30,905     $ 30,905     $ 26,464     $ 26,464  
Interest bearing time deposits     7,461       7,601       10,724       10,857  
Securities available-for-sale     76,825       76,825       72,795       72,795  
Loans receivable, net of allowance     368,140       374,572       346,320       351,075  
Restricted investments in bank stock     2,109       2,109       2,109       2,109  
Accrued interest receivable     1,676       1,676       1,615       1,615  
                                 
Financial liabilities:
                               
Deposits     406,062       403,635       381,284       373,087  
Securities sold under agreements to repurchase and federal funds purchased
    34,722       34,731       30,964       30,974  
Long-term borrowings     13,586       14,096       17,016       17,197  
Accrued interest payable     1,000       1,000       1,457       1,457  
                                 
Off-balance sheet finanacial instruments:
                               
Commitments to grant loans     -       -       -       -  
Unfunded commitments under lines of credit     -       -       -       -  
Standby letters of credit     -       -       -       -  

Note 11 – New Accounting Standards

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2010-08, Technical Corrections to Various Topics, thereby amending the Codification. This ASU resulted from a review by the FASB of its standards to determine if any provisions are outdated, contain inconsistencies, or need clarifications to reflect the FASB’s original intent. The FASB believes the amendments do not fundamentally change U.S. Generally Accepted Accounting Principles (“GAAP”). However, certain clarifications on embedded derivatives and hedging reflected in Topic 815, Derivatives and Hedging, may cause a change in the application of the guidance in Subtopic 815-15. Accordingly, the FASB provided special transition provisions for those amendments.

The ASU contains various effective dates. The clarifications of the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income taxes in a reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are effective as of the first reporting period (including interim periods) beginning after the date this ASU was issued (February 2, 2010). The Company does not believe this new guidance will have a material effect on its consolidated financial statements.
 
See notes to consolidated financial statements.
 

Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 11 – New Accounting Standards (Continued)

The FASB has issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

In addition, the amendments in the ASU require an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date.

All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The new pronouncement had no effect on the Company’s consolidated financial statements.

ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Company is currently reviewing the effect the new pronouncement will have on its consolidated financial statements.

ASU 20100-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators.  Both new and existing disclosures must be disaggregated by portfolio segment or class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables.  Financing receivables include loans and trade accounts receivable.  However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

See notes to consolidated financial statements.

 
Embassy Bancorp, Inc.
Notes to Consolidated Financial Statements
 
Note 11 – New Accounting Standards (Continued)

The effective date of ASU 2010-20 differs for public and nonpublic companies.  For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011. The Company is currently reviewing the effect the new pronouncement will have on its consolidated financial statements.
 
See notes to consolidated financial statements.
 
 
 
This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of June 30, 2010 and for the three and six month periods ended June 30, 2010 and 2009, 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, 2009, 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, 2009. Some of these policies are particularly sensitive, requiring significant judgments, estimates and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses and the valuation of deferred tax assets. Additional information is contained in this Form 10-Q under the paragraphs titled “Provision for Loan Losses,” “Credit Risk and Loan Quality,” and “Income Taxes” contained on the following pages.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of the Company’s operations and policies and regarding general economic conditions. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.

Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Company's market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations, and (v) other external developments which could materially affect the Company’s business and operations.

OVERVIEW

The Company is a Pennsylvania corporation organized in 2008 and registered as a bank holding company pursuant to section 3(a)(1) of the Bank Holding Company Act of 1956, as amended (the “BHC Act”) and section 225.15 of Regulation Y. 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. As such, the consolidated financial statements contained herein include the accounts of the Company and the Bank.
 
The Bank 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 Company’s assets grew $27.0 million from $465.2 million at December 31, 2009 to $492.2 million at June 30, 2010 due to the purchase of short and long term investment securities and loan growth, which were funded through strong deposit growth as well as securities purchased under agreements to repurchase.

Net income for the three months ended June 30, 2010 was $1.0 million compared to a net income for the three months ended June 30, 2009 of $554 thousand. Net income for the six months ended June 30, 2010 was $2.0 million compared to a net income for the six months ended June 30, 2009 of $878 thousand. Due to the current interest rate environment, the cost of deposits has decreased. Furthermore, due to the current competitive nature of lending, loan yields have decreased as well. Loan yields, however, have decreased at a slower pace than the cost of deposits. The result has been an increase in the net interest margins as compared to 2009. Net income is anticipated to increase as the Bank increases its deposit base and generates additional loan volume. The additional branch locations opened in 2009 and 2010 are expected to add expenses which, over time, should be offset by the increase in net interest income generated by branch activities.
 
RESULTS OF OPERATIONS

Net Interest Income

Total interest income for the three months ended June 30, 2010 increased $235 thousand to $5.9 million, as compared with $5.7 million for the three months ended June 30, 2009, as a result of growth in the loan and investment portfolios. Average earning assets were $470.9 million for the three months ended June 30, 2010 compared to $437.4 million for the three months ended June 30, 2009. The yield on average earning assets was 5.16% for the second quarter of 2010 compared to 5.28% for the second quarter of 2009.

Total interest expense for the three months ended June 30, 2010 decreased $1.0 million to $1.5 million as compared with $2.5 million for the three months ended June 30, 2009, primarily due to decreases in deposit rates. Average interest bearing liabilities were $422.6 million for the three months ended June 30, 2010 compared to $391.8 million for the three months ended June 30, 2009. The yield on average interest bearing liabilities was 1.46% for the second quarter of 2010 compared to 2.55% for the second quarter of 2009. This decrease was the result of market conditions, deposit mix, competition, and management’s resulting adjustments to the interest rates provided to depositors.

Net interest income for the three months ended June 30, 2010 was $4.4 million compared to $3.2 million for the three months ended June 30, 2009. The improvement in net interest income for the three months ended June 30, 2010 is a result of growth in the loan and investment portfolios and decreases in the interest expense associated with deposits and other borrowed funds. The Company’s net interest margin for the three months ended June 30, 2010 increased 85 basis points to 3.85% as compared to 3.00% for the three months ended June 30, 2009, due to the current interest rate environment, including the decreased cost of deposits and borrowed funds and the competitive interest rate pressure of lending, which kept loan rates relatively level in relation to overall market rate reductions.

Total interest income for the six months ended June 30, 2010 increased $600 thousand to $11.7 million as compared with $11.1 million for the six months ended June 30, 2009 as a result of growth in the loan and investment portfolios. Average earning assets were $463.8 million for the six months ended June 30, 2010 compared to $419.9 million for the six months ended June 30, 2009. The yield on average earning assets was 5.19% for the six months ended June 30, 2010 compared to 5.35% for the six months ended June 30, 2009.

Total interest expense for the six months ended June 30, 2010 decreased $1.9 million to $3.2 million as compared with $5.1 million for the six months ended June 30, 2009, primarily due to decreases in deposit rates. Average interest bearing liabilities were $416.5 million for the six months ended June 30, 2010 compared to $376.2 million for the six months ended June 30, 2009. The yield on average interest bearing liabilities was 1.54% for the six months ended June 30, 2010 compared to 2.75% for the six months ended June 30, 2009. This decrease was the result of market conditions, deposit mix, competition, and management’s resulting adjustments to the interest rates provided to depositors.
 
 
Net interest income for the six months ended June 30, 2010 was $8.6 million compared to $6.0 million for the six months ended June 30, 2009. The improvement in net interest income for the six months ended June 30, 2010 is a result of growth in the loan and investment portfolios and decreases in the interest expense associated with deposits and other borrowed funds. The Company’s net interest margin for the six months ended June 30, 2010 increased 93 basis points to 3.81% as compared to 2.88% for the six months ended June 30, 2009, due to the current interest rate environment, including the decreased cost of deposits and borrowed funds and the competitive interest rate pressure of lending, which kept loan rates relatively level in relation to overall market rate reductions.

Below is a table which sets forth average balances and corresponding yields for the three and six month periods ended June 30, 2010 and June 30, 2009, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:
Interest Rates and Interest Differential (quarter to date)

   
Three Months Ended June 30,
 
   
2010
     
2009
 
   
Average
Balance
   
Interest
   
Tax
Equivalent
Yield
     
Average
Balance
   
Interest
   
Tax
Equivalent
Yield
 
   
(Dollars In Thousands)
 
ASSETS
                                     
Loans - taxable
  $ 365,612     $ 5,103       5.60 %     $ 336,349     $ 4,843       5.78 %
Loans - non-taxable
    216       1       2.69 %       -       -       -  
Investment securities - taxable
    55,278       571       4.13 %       60,659       681       4.49 %
Investment securities - non-taxable
    23,580       232       5.89 %       10,456       106       6.11 %
Federal funds sold
    8,337       3       0.14 %       14,781       8       0.22 %
Time deposits
    7,459       30       1.61 %       11,619       71       2.45 %
Interest bearing deposits with banks
    10,384       5       0.19 %       3,501       1       0.11 %
                                                   
TOTAL INTEREST EARNING ASSETS
    470,866       5,945       5.16 %       437,365       5,710       5.28 %
                                                   
Less allowance for loan losses
    (3,810 )                       (3,150 )                
Other assets
    19,249                         11,771                  
                                                   
TOTAL ASSETS
  $ 486,305                       $ 445,986                  
                                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
                                                 
Interest bearing demand deposits, NOW and money market
  $ 32,747     $ 43       0.53 %     $ 34,698     $ 86       0.97 %
Savings
    218,681       625       1.15 %       151,478       690       1.83 %
Certificates of deposit
    120,911       570       1.89 %       155,255       1,304       3.37 %
Securities sold under agreements to repurchase and other borrowings
    50,306       299       2.38 %       50,373       408       3.25 %
                                                   
TOTAL INTEREST BEARING LIABILITIES
    422,645       1,537       1.46 %       391,804       2,488       2.55 %
                                                   
Non-interest bearing demand deposits
    24,297                         18,319                  
Other liabilities
    2,318                         3,826                  
Stockholders' equity
    37,045                         32,037                  
                                                   
TOTAL LIABILITIES AND
                                                 
STOCKHOLDERS' EQUITY
  $ 486,305                       $ 445,986                  
                                                   
Net interest income
          $ 4,408                       $ 3,222          
Net interest spread
                    3.70 %                       2.73 %
Net interest margin
                    3.85 %                       3.00 %


Distribution of Assets, Liabilities and Stockholders’ Equity:
Interest Rates and Interest Differential (year to date)

   
Six Months Ended June 30,
 
   
2010
     
2009
 
                                       
               
Tax
                 
Tax
 
   
Average
         
Equivalent
     
Average
         
Equivalent
 
   
Balance
   
Interest
   
Yield
     
Balance
   
Interest
   
Yield
 
   
(Dollars In Thousands)
 
ASSETS
                                     
Loans - taxable
  $ 360,827     $ 10,042       5.61 %     $ 330,547     $ 9,514       5.80 %
Loans - non-taxable
    108       1       2.70 %       -       -       -  
Investment securities - taxable
    55,522       1,152       4.15 %       58,339       1,308       4.48 %
Investment securities - non-taxable
    22,798       449       5.90 %       6,216       125       6.04 %
Federal funds sold
    5,963       5       0.17 %       13,514       17       0.25 %
Time deposits
    8,504       73       1.73 %       9,338       116       2.51 %
Interest bearing deposits with banks
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