Embassy Bancorp, Inc. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013 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 000-1449794


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 

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 x No 

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 12b-2 of the Exchange Act.

Large accelerated filer 	Accelerated filer 
Non-accelerated filer  (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  No x

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


COMMON STOCK
Number of shares outstanding as of November 8, 2013	($1.00 Par Value)	7,302,488
	(Title Class)	(Outstanding Shares)

Embassy Bancorp, Inc.

Table of Contents


Part I – Financial Information	3

Item 1 – Financial Statements
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Income (Unaudited)	4
Consolidated Statements of Comprehensive Income (Unaudited)	5
Consolidated Statements of Stockholders’ Equity (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	40

Item 4 – Controls and Procedures	40

Part II - Other Information	41

Item 1 - Legal Proceedings	41

Item 1A - Risk Factors	41

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3 - Defaults Upon Senior Securities	41

Item 4 – Mine Safety Disclosures	41

Item 5 - Other Information	41

Item 6 - Exhibits	41
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Unaudited)



	September 30,		December 31,
ASSETS	2013		2012

	(In Thousands, Except Share and Per Share Data)
Cash and due from banks	$	17,015	$	16,116
Interest bearing demand deposits with banks		304		12,824
Federal funds sold		1,000		1,000

Cash and Cash Equivalents		18,319		29,940

Interest bearing time deposits		1,819		5,945
Securities available for sale		80,763		91,857
Restricted investment in bank stock		1,835		1,454
Loans receivable, net of allowance for loan losses of $5,291 in 2013; $5,147 in 2012		546,067		500,072
Premises and equipment, net of accumulated depreciation		1,829		2,095
Bank owned life insurance		5,161		4,976
Accrued interest receivable		1,520		1,578
Other real estate owned		2,091		3,038
Other assets		1,996		2,054

Total Assets	$	661,400	$	643,009

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Deposits:
Non-interest bearing	$	55,750	$	51,741
Interest bearing		502,873		501,279

Total Deposits		558,623		553,020

Securities sold under agreements to repurchase		30,091		24,452
Short-term borrowings		14,000		-
Long-term borrowings		4,100		12,586
Accrued interest payable		252		327
Other liabilities		2,159		2,597

Total Liabilities		609,225		592,982

Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2013 issued 7,302,487 shares; outstanding 7,302,487 shares;
2012 issued 7,238,823 shares; outstanding 7,238,823 shares		7,302		7,239
Surplus		23,561		23,146
Retained earnings		20,844		17,360
Accumulated other comprehensive income		468		2,282

Total Stockholders' Equity		52,175		50,027

Total Liabilities and Stockholders' Equity	$	661,400	$	643,009

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012

INTEREST INCOME	(In Thousands, Except Per Share Data)

Loans receivable, including fees	$	5,697	$	5,490	$	16,776		$	16,196
Securities, taxable		195		329		628			969
Securities, non-taxable		290		344		868			1,000
Federal funds sold, and other		4		26		10			79
Interest on time deposits		6		23		29			76
Total Interest Income		6,192		6,212		18,311			18,320

INTEREST EXPENSE

Deposits		601		790		1,814			2,658
Securities sold under agreements to repurchase and federal funds purchased		4		10		13			53
Short-term borrowings		2		-		3			-
Long-term borrowings		101		176		413			528
Total Interest Expense		708		976		2,243			3,239

Net Interest Income		5,484		5,236		16,068			15,081

PROVISION FOR LOAN LOSSES		310		235		842			810

Net Interest Income after
Provision for Loan Losses		5,174		5,001		15,226			14,271

OTHER INCOME

Credit card processing fees		333		282		1,010			848
Other service fees		157		119		430			337
Bank owned life insurance		86		-		185			-
Gain on sale of securities, net		-		633		-			633
Profit (loss) on sale of other real estate owned		6		-		16			(8)
Impairment on other real estate owned		(23)		(100)		(103)			(200)
Total Other Income		559		934		1,538			1,610

OTHER EXPENSES

Salaries and employee benefits		1,711		1,406		5,158			4,320
Occupancy and equipment		603		579		1,777			1,736
Data processing		289		300		920			839
Credit card processing		302		258		904			751
Advertising and promotion		253		241		704			665
Professional fees		128		149		383			398
FDIC insurance		102		101		318			289
Insurance		13		14		40			38
Loan & real estate		50		58		141			161
Charitable contributions		130		112		410			365
Other real estate owned expenses		14		14		58			58
Other		199		132		641			474
Total Other Expenses		3,794		3,364		11,454			10,094

Income before Income Taxes		1,939		2,571		5,310			5,787

INCOME TAX EXPENSE		535		750		1,464			1,615

Net Income	$	1,404	$	1,821	$	3,846	$		4,172

BASIC EARNINGS PER SHARE	$	0.19	$	0.25	$	0.53	$		0.58

DILUTED EARNINGS PER SHARE	$	0.19	$	0.25	$	0.53	$		0.58

DIVIDENDS PER SHARE	$	0.05	$	0.04	$	0.05	$		0.04

Embassy Bancorp, Inc.

See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,
	2013			2012

		(In Thousands)

Net Income	$		1,404	$		1,821
Other Comprehensive Loss:
Unrealized holding (loss) gains on securities available for sale		(224)			523
Less: reclassification adjustment for realized gains		-			(633)
		(224)			(110)
Income tax effect		76			37
Net unrealized loss		(148)			(73)

Other comprehensive loss, net of tax			(148)			(73)

Comprehensive Income	$		1,256	$		1,748



	Nine Months Ended September 30,
	2013			2012

		(In Thousands)

Net Income	$		3,846	$		4,172
Other Comprehensive Income (Loss):
Unrealized holding (loss) gains on securities available for sale		(2,748)			988
Less: reclassification adjustment for realized gains		-			(633)
		(2,748)			355
Income tax effect		934			(121)
Net unrealized (loss) gains		(1,814)			234

Other comprehensive (loss) income, net of tax			(1,814)			234

Comprehensive Income	$		2,032	$		4,406

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2013 and 2012



							Accumulated
							Other
	Common				Retained		Comprehensive		Treasury
	Stock		Surplus		Earnings		Income		Stock		Total

	(In Thousands, Except Share Data)

BALANCE - DECEMBER 31, 2011	$	7,171	$	22,872	$	11,905	$	2,388	$	(3)	$	44,333

Net income		-		-		4,172		-		-		4,172
Other comprehensive income		-		-		-		234		-		234
Dividend declared, $.04 per share		-		-		(288)		-		-		(288)
Exercise of stock options, 40,432 shares		41		115		-		-		-		156
Exercise of stock options,
Treasury issued 353 shares		-		-		-		-		3		3
Tax benefit of stock options exercised		-		14		-		-		-		14
Stock tendered for funding exercise of												-
stock options, 10,481 shares		(10)		(63)		-		-		-		(73)
Compensation expense recognized on												-
stock options		-		28		-		-		-		28
Common stock grants to directors,												-
7,992 shares		8		48		-		-		-		56
Shares issued under Dividend Reinvestment												-
and Stock Purchase Plan, 20,385 shares		20		86		-		-		-		106


BALANCE - SEPTEMBER 30, 2012	$	7,230	$	23,100	$	15,789	$	2,622	$	-	$	48,741

BALANCE - DECEMBER 31, 2012	$	7,239	$	23,146	$	17,360	$	2,282	$	-	$	50,027

Net income		-		-		3,846		-		-		3,846
Other comprehensive loss		-		-		-		(1,814)		-		(1,814)
Dividend declared, $.05 per share		-		-		(362)		-		-		(362)
Compensation expense recognized on
stock options		-		45		-		-		-		45
Common stock grants to directors,
8,764 shares		9		53		-		-		-		62
Shares issued under Dividend Reinvestment
and Stock Purchase Plan, 54,900 shares		54		317		-		-		-		371


BALANCE - SEPTEMBER 30, 2013	$	7,302	$	23,561	$	20,844	$	468	$	-	$	52,175

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2013		2012

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,846	$	4,172
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		842		810
Accretion of deferred loan costs		(65)		(50)
Depreciation and amortization		454		466
Net amortization of investment security premiums and discounts		236		302
Stock compensation expense		45		28
(Gain) loss on sale of other real estate owned		(16)		8
Impairment on other real estate owned		103		200
Income on bank owned life insurance		(185)		-
Net realized gain on sale of securities available for sale		-		(633)
Decrease (increase) in accrued interest receivable		58		(179)
Decrease (increase) in other assets		58		(279)
Decrease in accrued interest payable		(75)		(191)
Increase in other liabilities		454		668

Net Cash Provided by Operating Activities		5,755		5,322

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of securities available for sale		(10,866)		(19,670)
Maturities, calls and principal repayments of securities available for sale		18,976		9,520
Proceeds from sales of securities available for sale		-		4,285
Net increase in loans		(45,808)		(60,593)
Net (purchases) redemption of restricted investment in bank stock		(381)		187
Net maturities of interest bearing time deposits		4,126		1,792
Proceeds from sale of other real estate owned		-		311
Purchases of premises and equipment		(188)		(493)

Net Cash Used in Investing Activities		(34,141)		(64,661)

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in deposits		5,603		61,632
Net increase in securities sold under agreements to repurchase and federal funds purchased		5,639		3,018
Increase in short-term borrowed funds		14,000		-
Payment of long-term borrowed funds		(8,486)		(300)
Exercise of stock options, net payment for stock tendered		-		86
Proceeds from Dividend Reinvestment Plan		371		106
Tax benefit of stock options exercised		-		14
Dividends paid		(362)		(288)


Net Cash Provided by Financing Activities		16,765		64,268

Net (Decrease) Increase in Cash and Cash Equivalents		(11,621)		4,929

CASH AND CASH EQUIVALENTS - BEGINNING		29,940		46,135

CASH AND CASH EQUIVALENTS - ENDING	$	18,319	$	51,064

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	2,318	$	3,430

Income taxes paid	$	1,925	$	1,850

Other real estate sold through bank financing	$	964	$	-

Deferral of gain from sale of other real estate sold through bank financing	$	103	$	-

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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, 2012, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 28, 2013.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2013 through the date these 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, 2012.

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.

Note 4 – 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 Board of Directors believes that the SIP will encourage the designated participants to contribute materially to the growth of the Company. 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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 4 – Stock Incentive Plan (Continued)

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. There were no awards granted under the SIP for the years ended December 31, 2011 and 2010. In February 2013 and 2012, the Company granted 8,764 and 7,992 shares of restricted stock, respectively, to certain members of its Board of Directors as compensation for their service in 2012 and 2011, respectively, in accordance with the Company’s Non-employee Directors Compensation program adopted in October of 2010. Such compensation was accrued for as of December 31, 2012 and 2011. In February 2013 and 2012, the Company also granted stock options to purchase 29,742 and 52,611 shares of stock, respectively to certain executive officers in accordance with their respective employment agreements. Stock compensation expense related to these options was $16 thousand and $45 thousand for the three and nine months ended September 30, 2013 and $11 thousand and $17 thousand for the three and nine months ended September 30, 2012, respectively. At September 30, 2013, approximately $108 thousand unrecognized cost related to stock options granted in 2013 and 2012 will be recognized over the next 2.3 and 1.4 years, respectively. The fair value of the options granted in 2013 and 2012 was determined with the following weighted average assumptions: dividend yield of 0%, risk free interest rate of 1.34% and 1.43%, respectively, expected life of 6.0 years and 7.5 years, respectively, and expected volatility of 28.79% and 31.10%, respectively. The weighted average fair value of options granted in 2013 and 2012 was $2.14 per share and $2.56 per share, respectively. At September 30, 2013, there were 400,891 shares available for issuance under the SIP.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 5 – Other Comprehensive Income

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).

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



	Three Months Ended September 30,
	2013						2012

	(In Thousands)

	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Other comprehensive loss:
Unrealized holding (losses) gains on securities
available for sale	$	(224)	$	76	$	(148)	$	523	$	(178)	$	345
Reclassification adjustments for
gains on securities transactions included
in net income (A),(B)		-		-		-		(633)		215		(418)
Total other comprehensive loss	$	(224)	$	76	$	(148)	$	(110)	$	37	$	(73)



		Nine Months Ended September 30,
		2013						2012

		(In Thousands)

		Before		Tax		Net of		Before		Tax		Net of
		Tax		Effect		Tax		Tax		Effect		Tax
Other comprehensive (loss) income:
Unrealized holding (losses) gains on securities
available for sale		$	(2,748)	$	934	$	(1,814)	$	988	$	(336)	$	652
Reclassification adjustments for
gains on securities transactions included
in net income (A),(B)			-		-		-		(633)		215		(418)
Total other comprehensive (loss) income		$	(2,748)	$	934	$	(1,814)	$	355	$	(121)	$	234

(A)	Realized gains on securities transactions included in gain on sales of securities, net, in the accompanying
	Consolidated Statements of Income.
(B)	Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 5 – Other Comprehensive Income (Continued)

A summary of the realized gains on securities available for sale, net of tax, is as follows:



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

			2013		2012		2013		2012

			(In Thousands)				(In Thousands)
Securities available for sale:
	Realized gains on
	securities transactions	$	-	$	(633)	$	-	$	(633)
	Income taxes		-		215		-		215
	Net of tax	$	-	$	(418)	$	-	$	(418)

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


			Securities
			Available
			for Sale

Three Months Ended September 30, 2013			(In Thousands)

	Balance June 30, 2013		$	616
		Other comprehensive loss before reclassifications		(148)
		Amounts reclassified from accumulated other
		comprehensive income		-
		Net other comprehensive loss during the period		(148)

	Balance September 30, 2013		$	468

	Balance June 30, 2012		$	2,695
		Other comprehensive loss before reclassifications		(73)
		Amounts reclassified from accumulated other
		comprehensive income		-
		Net other comprehensive loss during the period		(73)

	Balance September 30, 2012		$	2,622



Nine Months Ended September 30, 2013
	Balance January 1, 2013		$	2,282
		Other comprehensive loss before reclassifications		(1,814)
		Amounts reclassified from accumulated other
		comprehensive income		-
		Net other comprehensive loss during the period		(1,814)

	Balance September 30, 2013		$	468

	Balance January 1, 2012		$	2,388
		Other comprehensive income before reclassifications		234
		Amounts reclassified from accumulated other
		comprehensive income		-
		Net other comprehensive income during the period		234

	Balance September 30, 2012		$	2,622

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 6 – 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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012

	(Dollars In Thousands, Except Per Share Data)

Net income	$	1,404	$	1,821	$	3,846	$	4,172

Weighted average shares outstanding		7,248		7,192		7,246		7,183
Dilutive effect of potential common shares, stock options		5		22		5		26

Diluted weighted average common shares outstanding		7,253		7,214		7,251		7,209
Basic earnings per share	$	0.19	$	0.25	$	0.53	$	0.58
Diluted earnings per share	$	0.19	$	0.25	$	0.53	$	0.58

Stock options of 149,692 and 122,200 for the three and nine months ended September 30, 2013 and 2012, respectively, were not considered in computing diluted earnings per common share because they are not dilutive to earnings.

Note 7 – 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 $4.7 million of standby letters of credit outstanding as of September 30, 2013. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $4.1 million. Management does not consider the current amount of the liability as of September 30, 2013 for guarantees under standby letters of credit issued to be material.

Note 8 – 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 periods of twelve months or more and are generally less than sixty months. The Bank has an agreement with the FHLB which allows for borrowings up to a percentage of qualifying assets. At September 30, 2013, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $303.8 million, of which $14.0 million were outstanding in short-term loans, and there were no outstanding long-term loans. This borrowing capacity with the FHLB includes a line of credit of $25.0 million. Long-term loans with FHLB of $7.9 million were outstanding at December 31, 2012, and there were no short-term advances outstanding from the FHLB at December 31, 2012. 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 September 30, 2013 and December 31, 2012. Advances from this line are unsecured.

The Company has two lines of credit with Univest Bank and Trust Co. (“Univest”) totaling $10 million. As of September 30, 2013 and December 31, 2012, the outstanding balance was $4.1 million and $4.7 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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 9 – Securities Available For Sale

At September 30, 2013 and December 31, 2012, respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
September 30, 2013 :
U.S. Government agency obligations	$	31,219	$	127	$	(277)	$	31,069
Municipal bonds		37,112		886		(364)		37,634
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		9,725		331		(2)		10,054
Corporate bonds		1,998		9		(1)		2,006
Total	$	80,054	$	1,353	$	(644)	$	80,763

December 31, 2012 :
U.S. Government agency obligations	$	40,386	$	237	$	(18)	$	40,605
Municipal bonds		36,273		2,696		(17)		38,952
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		8,487		530		-		9,017
Corporate bonds		3,254		29		-		3,283
Total	$	88,400	$	3,492	$	(35)	$	91,857

The amortized cost and fair value of securities as of September 30, 2013, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.



		Amortized		Fair
		Cost		Value

	(In Thousands)

Due in one year or less	$	6,519	$	6,546
Due after one year through five years		30,375		30,311
Due after five years through ten years		19,070		19,287
Due after ten years		14,365		14,565
		70,329		70,709
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		9,725		10,054
	$	80,054	$	80,763

There were no sales of securities for the three and nine months ended September 30, 2013. Proceeds from the sales of securities for the three and nine months ended September 30, 2012 totaled $4.3 million, with gross gains of $633 thousands and gross losses of $0.

Securities with a carrying value of $44.3 million and $45.8 million at September 30, 2013 and December 31, 2012, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 9 – Securities Available For Sale (Continued)

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012, respectively:



		Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2013 :	(In Thousands)

U.S. Government agency obligations	$	16,938	$	(277)	$	-	$	-	$	16,938	$	(277)
Municipal bonds		8,441		(364)		-		-		8,441		(364)
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		1,994		(2)		-		-		1,994		(2)
Corporate Bonds		996		(1)		-		-		996		(1)
Total Temporarily Impaired Securities	$	28,369	$	(644)	$	-	$	-	$	28,369	$	(644)

December 31, 2012 :

U.S. Government agency obligations	$	9,163	$	(18)	$	-	$	-	$	9,163	$	(18)
Municipal bonds		1,057		(17)		-		-		1,057		(17)
Total Temporarily Impaired Securities	$	10,220	$	(35)	$	-	$	-	$	10,220	$	(35)

The Company had thirty-one (31) securities in an unrealized loss position at September 30, 2013. The unrealized losses are due only to market rate fluctuations. As of September 30, 2013, 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. None of the individual losses are significant.

Note 10 – Restricted Investment in Bank Stock

Restricted investments in bank stock consist of Federal Home Loan Bank of Pittsburgh (“FHLB”) stock and Atlantic Central 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.

In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock, and any future capital stock repurchases would be made on a quarterly basis if conditions warrant such repurchases. During 2012, 2011 and 2010, the FHLB conducted limited excess capital stock repurchases based upon positive quarterly net income. Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases. In connection with this program, the Bank had stock at a carrying value of $470 thousand and $187 thousand repurchased during the nine months ended September 30, 2013 and 2012, respectively. The Bank was required to purchase additional stock during the three and nine months ended September 30, 2013 in the amount of $419 and $850 thousand, respectively. No stock purchases were made in the three and nine months ended September 30, 2012. In February 2012, the FHLB announced that dividend payments would resume in 2012, and $4 and $6 thousand was received during the three and nine months ended September 30, 2013, respectively. There were no dividends in the three months ended September 30, 2012, and $1 thousand in the nine months ended September 30, 2012.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Restricted Investment in Bank Stock (Continued)

Management evaluates the FHLB and ACBB restricted stock for impairment. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the issuer as compared to the capital stock amount for the issuer and the length of time this situation has persisted, (2) commitments by the issuer to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuer, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the issuer.

Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB or ACBB stock as of September 30, 2013.

Note 11 – Loans Receivable and Credit Quality

The following table presents the composition of loans receivable at September 30, 2013 and December 31, 2012, respectively:



	September 30, 2013			December 31, 2012
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	225,149	40.80%	$	204,904	40.53%
Commercial construction		18,067	3.27%		19,717	3.90%
Commercial		29,822	5.40%		28,696	5.68%
Residential real estate		277,776	50.34%		250,854	49.62%
Consumer		973	0.19%		1,382	0.27%

Total loans		551,787	100.00%		505,553	100.00%
Unearned origination fees		(429)			(334)
Allowance for loan losses		(5,291)			(5,147)

	$	546,067		$	500,072

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of September 30, 2013 and December 31, 2012, respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

September 30, 2013		(In Thousands)

Commercial real estate	$	219,300	$	703	$	5,085	$	61	$	225,149
Commercial construction		14,649		902		2,516		-		18,067
Commercial		29,298		486		38		-		29,822
Residential real estate		276,525		761		490		-		277,776
Consumer		973		-		-		-		973
Total	$	540,746	$	2,852	$	8,129	$	61	$	551,787

December 31, 2012

Commercial real estate	$	197,879	$	748	$	6,277	$	-	$	204,904
Commercial construction		16,102		341		3,274		-		19,717
Commercial		28,066		530		100		-		28,696
Residential real estate		249,737		156		660		301		250,854
Consumer		1,382		-		-		-		1,382
Total	$	493,166	$	1,775	$	10,311	$	301	$	505,553

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2013 and December 31, 2012, respectively:


							Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2013		(In Thousands)
With no related allowance recorded:
Commercial real estate	$	6,586	$	6,939			$	6,407	$	90	$	6,221	$	232
Commercial construction		3,417		3,615				2,767		53		2,767		91
Commercial		284		284				252		5		271		7
Residential real estate		630		630				392		13		425		19
Consumer		-		-				-		-		-		-

With an allowance recorded:
Commercial real estate	$	723	$	723	$	83	$	838	$	24	$	1,134	$	90
Commercial construction		-		-		-		650		-		700		-
Commercial		-		-		-		6		-		8		-
Residential real estate		999		1,028		285		1,085		2		872		28
Consumer		-		-		-		-		-		-		-

Total:
Commercial real estate	$	7,309	$	7,662	$	83	$	7,245	$	114	$	7,355	$	322
Commercial construction		3,417		3,615		-		3,417		53		3,467		91
Commercial		284		284		-		258		5		279		7
Residential real estate		1,629		1,658		285		1,477		15		1,297		47
Consumer		-		-		-		-		-		-		-
	$	12,639	$	13,219	$	368	$	12,397	$	186	$	12,398	$	467


December 31, 2012
With no related allowance recorded:
Commercial real estate	$	5,985	$	5,985			$	6,031	$	301
Commercial construction		2,117		2,117				3,218		77
Commercial		291		291				302		7
Residential real estate		458		458				377		23
Consumer		-		-				-		-

With an allowance recorded:
Commercial real estate	$	1,635	$	1,635	$	411	$	1,899	$	161
Commercial construction		1,498		1,498		198		749		44
Commercial		11		60		11		5		-
Residential real estate		660		660		130		689		18
Consumer		-		-		-		-		-

Total:
Commercial real estate	$	7,620	$	7,620	$	411	$	7,930	$	462
Commercial construction		3,615		3,615		198		3,967		121
Commercial		302		351		11		307		7
Residential real estate		1,118		1,118		130		1,066		41
Consumer		-		-		-		-		-
	$	12,655	$	12,704	$	750	$	13,270	$	631

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following table presents non-accrual loans by classes of the loan portfolio as of September 30, 2013 and December 31, 2012, respectively:



	September 30, 2013		December 31, 2012

	(In Thousands)

Commercial real estate	$	1,913	$	2,104
Commercial construction		-		-
Commercial		38		39
Residential real estate		490		301
Consumer		-		-
Total	$	2,441	$	2,444

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2013 and December 31, 2012, respectively:



September 30, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loan Receivables		Loan Receivables > 90 Days and Accruing

		(In Thousands)
Commercial real estate	$	436	$	765	$	1,907	$	3,108	$	222,041	$	225,149	$	350
Commercial construction		-		1,321		-		1,321		16,746		18,067		-
Commercial		46		150		38		234		29,588		29,822		-
Residential real estate		-		-		490		490		277,286		277,776		-
Consumer		5		-		-		5		968		973		-
Total	$	487	$	2,236	$	2,435	$	5,158	$	546,629	$	551,787	$	350

December 31, 2012

Commercial real estate	$	831	$	-	$	1,809	$	2,640	$	202,264	$	204,904	$	351
Commercial construction		2,559		-		-		2,559		17,158		19,717		-
Commercial		-		39		10		49		28,647		28,696		10
Residential real estate		301		-		301		602		250,252		250,854		-
Consumer		13		-		-		13		1,369		1,382		-
Total	$	3,704	$	39	$	2,120	$	5,863	$	499,690	$	505,553	$	361

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following tables detail the activity in the allowance for loan losses for the three and nine months ended September 30, 2013 and 2012:



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

Allowance for credit losses		(In Thousands)

Three Months Ending September 30, 2013
Beginning Balance - June 30, 2013	$	1,690	$	659	$	423	$	1,967	$	32	$	298	$	5,069
Charge-offs		(42)		-		(13)		(29)		(5)		-		(89)
Recoveries		-		-		1		-		-		-		1
Provisions		76		(233)		(33)		70		(3)		433		310
Ending Balance - September 30, 2013	$	1,724	$	426	$	378	$	2,008	$	24	$	731	$	5,291

Nine Months Ending September 30, 2013
Beginning Balance - December 31, 2012	$	2,007	$	660	$	394	$	1,677	$	33	$	376	$	5,147
Charge-offs		(423)		(197)		(13)		(103)		(5)		-		(741)
Recoveries		13		-		2		28		-		-		43
Provisions		127		(37)		(5)		406		(4)		355		842
Ending Balance - September 30, 2013	$	1,724	$	426	$	378	$	2,008	$	24	$	731	$	5,291

Three Months Ending September 30, 2012
Beginning Balance - June 30, 2012	$	1,951	$	440	$	408	$	1,886	$	50	$	25	$	4,760
Charge-offs		(176)		-		-		(4)		-		-		(180)
Recoveries		1		-		-		4		-		-		5
Provisions		187		167		(5)		(245)		(17)		148		235
Ending Balance - September 30, 2012	$	1,963	$	607	$	403	$	1,641	$	33	$	173	$	4,820

Nine Months Ending September 30, 2012
Beginning Balance - December 31, 2011	$	1,264	$	352	$	423	$	1,691	$	40	$	445	$	4,215
Charge-offs		(179)		-		-		(39)		-		-		(218)
Recoveries		1		-		-		12		-		-		13
Provisions		877		255		(20)		(23)		(7)		(272)		810
Ending Balance - September 30, 2012	$	1,963	$	607	$	403	$	1,641	$	33	$	173	$	4,820

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at September 30, 2013 and December 31, 2012.



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

	(In Thousands)
September 30, 2013
Allowance for Loan Losses
Ending Balance	$	1,724	$	426	$	378	$	2,008	$	24	$	731	$	5,291
Ending balance: individually evaluated for impairment	$	83	$	-	$	-	$	285	$	-	$	-	$	368
Ending balance: collectively evaluated for impairment	$	1,641	$	426	$	378	$	1,723	$	24	$	731	$	4,923

Loans receivables:
Ending balance	$	225,149	$	18,067	$	29,822	$	277,776	$	973			$	551,787
Ending balance: individually evaluated for impairment	$	7,309	$	3,417	$	284	$	1,629	$	-			$	12,639
Ending balance: collectively evaluated for impairment	$	217,840	$	14,650	$	29,538	$	276,147	$	973			$	539,148


December 31, 2012
Allowance for Loan Losses
Ending Balance	$	2,007	$	660	$	394	$	1,677	$	33	$	376	$	5,147
Ending balance: individually evaluated for impairment	$	411	$	198	$	11	$	130	$	-	$	-	$	750
Ending balance: collectively evaluated for impairment	$	1,596	$	462	$	383	$	1,547	$	33	$	376	$	4,397

Loans receivables:
Ending balance	$	204,904	$	19,717	$	28,696	$	250,854	$	1,382			$	505,553
Ending balance: individually evaluated for impairment	$	7,620	$	3,615	$	302	$	1,118	$	-			$	12,655
Ending balance: collectively evaluated for impairment	$	197,284	$	16,102	$	28,394	$	249,736	$	1,382			$	492,898

Troubled Debt Restructurings

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition than it would not otherwise consider, resulting in a modified loan which is then identified as 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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following table presents TDRs outstanding:



	September 30, 2013
	Accrual Loans		Non-Accrual Loans		Total Modifications

	(In Thousands)
Commercial real estate	$	5,018	$	357	$	5,375
Commercial construction		1,901		-		1,901
Commercial		174		-		174
Residential real estate		1,026		-		1,026
Consumer		-		-		-

	$	8,119	$	357	$	8,476

As of September 30, 2013, no available commitments were outstanding on TDRs.

The following table presents newly restructured loans that occurred during the three and nine months ended September 30, 2013 and the nine months ended September 30, 2012



	Number of Loans	Pre-Modification Outstanding Balance		Post- Modification Outstanding Balance
Three Months Ending September 30, 2013	(Dollars In Thousands)
Residential real estate	2	$	226	$	226

	2	$	226	$	226


Nine Months Ending September 30, 2013
Residential real estate	2	$	226	$	226

	2	$	226	$	226


Nine Months Ending September 30, 2012
Commercial real estate	4	$	1,259	$	1,259
Commercial construction	1		341		341
Residential real estate	1		670		670

	6	$	2,270	$	2,270

There was no impairment reserve on the TDRs described above for the three and nine months ended September 30, 2013. Two (2) loans required an impairment reserve of $206 thousand recorded in the allowance for loan losses for the nine months ended September 30, 2012. For the three months ended September 30, 2012 there were no newly restructured loans.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality (Continued)

The following table presents loans that were classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the nine month period ended September 30, 2013 and 2012, respectively.



	Number of Loans		Recorded Investment

	(Dollars In Thousands)

Nine Months Ending September 30, 2013
Commercial real estate	1	$	3

	1	$	3



Nine Months Ending September 30, 2012
Commercial real estate	3	$	999

	3	$	999

There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more past due) for the three months ended September 30, 2013 and 2012.

Note 12 – Fair Value Measurements

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

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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – 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 utilized at September 30, 2013 and December 31, 2012, 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)
U.S. Government agency obligations	$	-	$	31,069	$	-	$	31,069
Municipal bonds		-		37,634		-		37,634
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		10,054		-		10,054
Corporate bonds		-		2,006		-		2,006

September 30, 2013 Securities available for sale	$	-	$	80,763	$	-	$	80,763

U.S. Government agency obligations	$	-	$	40,605	$	-	$	40,605
Municipal bonds		-		38,952		-		38,952
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		9,017		-		9,017
Corporate bonds		-		3,283		-		3,283

December 31, 2012 Securities available for sale	$	-	$	91,857	$	-	$	91,857

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – Fair Value Measurements (Continued)

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2013 and December 31, 2012, 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)
September 30, 2013 Impaired loans (1)	$	-	$	-	$	851	$	851
September 30, 2013 Impaired loans (2)	$	-	$	-	$	504	$	504
September 30, 2013 Other real estate owned (1)	$	-	$	-	$	2,091	$	2,091
December 31, 2012 Impaired loans (1)	$	-	$	-	$	2,006	$	2,006
December 31, 2012 Impaired loans (2)	$	-	$	-	$	1,048	$	1,048
December 31, 2012 Other real estate owned (1)	$	-	$	-	$	3,038	$	3,038

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

(2) Fair Value determined using the debt service of the borrower.

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.

At September 30, 2013, of the impaired loans having an aggregate balance of $12.6 million, $10.9 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 $1.7 million in impaired loans, an aggregate valuation allowance of $368 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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – Fair Value Measurements (Continued)

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



		Quantitative Information about Level 3 Fair Value Measurements
Description		Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)

			(Dollars In Thousands)
September 30, 2013:

Impaired loans		$	851	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to -25% (-16.4%)
					Liquidation expenses (3)	0 to -10% (-7.9%)

Impaired loans		$	504	Discounted Cash Flows (5)

Other real estate owned		$	2,091	Listings, Letters of Intent & Third Party Evaluations (4)	Liquidation expenses (3)	-5% (-5%)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various
	Level 3 inputs which are not identifiable.
(2)	Appraisals may be adjusted by management for qualitative factors including economic conditions and the age of the appraisal.
	The range and weighted average of appraisal adjustments are presented as a percent of the appraisal.
(3)	Appraisals and pending agreements of sale are adjusted by management for liquidation expenses. The range and weighted average of
	liquidation expense adjustments are presented as a percent of the appraisal or pending agreement of sale.
(4)	Fair value is determined by listings, letters of intent or third-party evaluations.
(5)	Fair value is determined using the debt service of the borrower.

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 September 30, 2013 and December 31, 2012:

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 Available for Sale (Carried at Fair Value)

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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – Fair Value Measurements (Continued)

Loans Receivable (Carried at Cost)

The fair values of loans, excluding impaired loans carried at fair value of collateral, are estimated using discounted cash flow analyses, using 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.

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, Federal Funds Purchased and Short-Term Borrowings (Carried at Cost)

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

Long-Term Borrowings (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.

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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – Fair Value Measurements (Continued)

The estimated fair values of the Company’s financial instruments were as follows at September 30, 2013 and December 31, 2012:



			Carrying Amount		Fair Value Estimate		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs

		(In Thousands)
September 30, 2013:
	Financial assets:
	Cash and cash equivalents	$	18,319	$	18,319	$	18,319	$	-	$	-
	Interest bearing time deposits		1,819		1,829		-		1,829		-
	Securities available-for-sale		80,763		80,763		-		80,763		-
	Loans receivable, net of allowance		546,067		548,044		-		-		548,044
	Restricted investments in bank stock		1,835		1,835		-		1,835		-
	Accrued interest receivable		1,520		1,520		-		1,520		-

	Financial liabilities:
	Deposits		558,623		558,954		502,813		56,141		-
	Securities sold under agreements to
	repurchase and federal funds purchased		30,091		30,089		30,089		-		-
	Short-term borrowings		14,000		14,000		-		-		14,000
	Long-term borrowings		4,100		4,094		-		-		4,094
	Accrued interest payable		252		252		-		252		-

	Off-balance sheet financial instruments:
	Commitments to grant loans		-		-		-		-		-
	Unfunded commitments under lines of credit		-		-		-		-		-
	Standby letters of credit		-		-		-		-		-

December 31, 2012:
	Financial assets:
	Cash and cash equivalents	$	29,940	$	29,940	$	29,940	$	-	$	-
	Interest bearing time deposits		5,945		5,977		-		5,977		-
	Securities available-for-sale		91,857		91,857		-		91,857		-
	Loans receivable, net of allowance		500,072		508,053		-		-		508,053
	Restricted investments in bank stock		1,454		1,454		-		1,454		-
	Accrued interest receivable		1,578		1,578		-		1,578		-

	Financial liabilities:
	Deposits		553,020		553,756		-		553,756		-
	Securities sold under agreements to
	repurchase and federal funds purchased		24,452		24,452		-		24,452		-
	Long-term borrowings		12,586		12,708		-		-		12,708
	Accrued interest payable		327		327		-		327		-

	Off-balance sheet financial instruments:
	Commitments to grant loans		-		-		-		-		-
	Unfunded commitments under lines of credit		-		-		-		-		-
	Standby letters of credit		-		-		-		-		-

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 13 – 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 control 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 statements of condition, 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 September 30, 2013 and December 31, 2012:



						Net Amounts
		Gross		Gross Amounts		of Liabilities
		Amounts of		Offset in the		Presented in the
		Recognized		Consolidated		Consolidated		Financial		Cash Collateral
		Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount

		(In Thousands)
September 30, 2013
Repurchase Agreements:
Corporate Institutions	$	30,091	$	-	$	30,091	$	(30,091)	$	-	$	-

December 31, 2012
Repurchase Agreements:
Corporate Institutions	$	24,452	$	-	$	24,452	$	(24,452)	$	-	$	-

As of September 30, 2013 and December 31, 2012, the fair value of securities pledged was $40.2 million and $45.8 million, respectively.

Note 14 – New Accounting Standards

Accounting Standards Update (ASU) No. 2011-11, “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities,” and ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet”, to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and did not have a material impact on the Company’s financial statements. See Note 13 – Offsetting Assets and Liabilities.

Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 became effective for the Company on January 1, 2013 and did not have a material impact on the Company’s financial statements. See Note 5 - Other Comprehensive Income.

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

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012, 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, 2012, 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, 2012. 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 report contains forward-looking statements, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions that, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty.

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

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Company’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Company’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Company’s operations, and (iv) 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 the Bank Holding Company Act of 1956, as amended (the “BHC Act). The Company was formed for purposes of acquiring Embassy Bank For The Lehigh Valley (the “Bank”) in connection with the reorganization of the Bank into a bank holding company structure, which was consummated on November 11, 2008. Accordingly, the Company owns all of the capital stock of the Bank, giving the organization more flexibility in meeting its capital needs as the Company continues to grow. Embassy Holdings, LLC (the “LLC”) is a wholly-owned subsidiary of the Bank organized to engage in the holding of property acquired by the Bank in satisfaction of debts previously contracted. As such, the consolidated financial statements contained herein include the accounts of the Company, the Bank and the LLC.

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

The Company’s assets increased $18.4 million from $643.0 million at December 31, 2012 to $661.4 million at September 30, 2013 due primarily to an increase in loans receivable, offset by a decrease in cash and cash equivalents and other real estate owned.

Net income for the three months ended September 30, 2013 was $1.4 million compared to a net income for the three months ended September 30, 2012 of $1.8 million. Net income for the nine months ended September 30, 2013 was $3.8 million compared to a net income for the nine months ended September 30, 2012 of $4.2 million, due primarily to to the gain on sale of available-for-sale securities realized in 2012. Loans receivable, net of the allowance for loan losses, increased $46.0 million to $546.1 million at

September 30, 2013 from $500.1 million at December 31, 2012. The market is very competitive and the Company is committed to maintaining a high quality portfolio that returns a reasonable market rate. The Company expects to increase lending activity, as the Company expands its presence in its market and becomes more widely known. The past and current economic conditions have created lower demand for loans by credit-worthy customers. The lending staff has been active in contacting new prospects and promoting the Company’s name in the community. Management believes that this will translate into continued growth of a portfolio of quality loans and core deposit relationships, although there can be no assurance of this.

RESULTS OF OPERATIONS

Net Interest Income

Total interest income for the three months ended September 30, 2013 and 2012 totaled $6.2 million. Average earning assets were $628.6 million for the three months ended September 30, 2013 compared to $622.6 million for the three months ended September 30, 2012. The tax equivalent yield on average earning assets was 4.01% for the third quarter of 2013 compared to 4.07% for the third quarter of 2012.

Total interest expense for the three months ended September 30, 2013 decreased $268.0 thousand to $708.0 thousand as compared to $976.0 thousand for the three months ended September 30, 2012, primarily due to decreases in deposit rates offset by an increase in average deposits. Average interest bearing liabilities were $542.6 million for the three months ended September 30, 2013 compared to $546.0 million for the three months ended September 30, 2012. The yield on average interest bearing liabilities was 0.52% for the third quarter of 2013 compared to 0.71% for the third quarter of 2012. 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 September 30, 2013 was $5.5 million compared to $5.2 million for the three months ended September 30, 2012. The improvement in net interest income for the three months ended September 30, 2013 is a result of decreases in the interest expense associated with deposits and other borrowed funds and growth in interest earning assets, offset by a reduction in rates received on a higher level of interest earning assets. The Company’s net interest margin for the three months ended September 30, 2013 increased eleven (11) basis points to 3.59% as compared to 3.48% for the three months ended September 30, 2012, due to the current interest rate environment, including decreased cost of deposits offset by decreased interest rates on the investment securities portfolio and the competitive interest rate pressure of lending.

Total interest income for the nine months ended September 30, 2013 and 2012 totaled $18.3 million. Average earning assets were $620.6 million for the nine months ended September 30, 2013 compared to $602.6 million for the nine months ended September 30, 2012. The tax equivalent yield on average earning assets was 4.06% for the third quarter of 2013 compared to 4.05% for the third quarter of 2012.

Total interest expense for the nine months ended September 30, 2013 decreased $996.0 thousand to $2.2 million as compared to $3.2 million for the nine months ended September 30, 2012, primarily due to decreases in deposit rates offset by an increase in average deposits. Average interest bearing liabilities were $537.3 million for the nine months ended September 30, 2013 compared to $530.1 million for the nine months ended September 30, 2012. The yield on average interest bearing liabilities was 0.56% for the nine months ended September 30, 2013 compared to 0.82% for the September 30, 2012. 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 nine months ended September 30, 2013 was $16.1 million compared to $15.1 million for the nine months ended September 30, 2012. The improvement in net interest income for the nine months ended September 30, 2013 is a result of decreases in the interest expense associated with deposits and other borrowed funds and growth in interest earning assets, offset by a reduction in rates received on a higher level of interest earning assets. The Company’s net interest margin for the nine months ended September 30, 2013 increased ten (10) basis points to 3.58% as compared to 3.48% for the nine months ended September 30, 2012, due to the current interest rate environment, including decreased cost of deposits offset by decreased interest rates on the investment securities portfolio and the competitive interest rate pressure of lending.

Below are tables which set forth average balances and corresponding yields for the corresponding periods ended September 30, 2013 and 2012, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)


	Three Months Ended September 30,
	2013			2012

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

	(Dollars In Thousands)
ASSETS
Loans - taxable	$ 536,475	$ 5,661	4.19%	$ 467,512	$ 5,452	4.64%
Loans - non-taxable	3,631	36	6.10%	3,868	38	5.91%
Investment securities - taxable	46,190	195	1.69%	59,015	329	2.24%
Investment securities - non-taxable	32,004	290	5.51%	39,831	344	5.26%
Federal funds sold	916	-	0.02%	919	-	0.02%
Time deposits	2,951	6	0.81%	6,871	23	1.31%
Interest bearing deposits with banks	6,472	4	0.25%	44,598	26	0.23%

TOTAL INTEREST EARNING ASSETS	628,639	6,192	4.01%	622,614	6,212	4.07%

Less allowance for loan losses	(5,167)			(4,807)
Other assets	29,246			27,829

TOTAL ASSETS	$ 652,718			$ 645,636

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market	$ 58,910	$ 12	0.08%	$ 55,823	$ 13	0.09%
Savings	388,553	454	0.46%	380,747	587	0.61%
Certificates of deposit	56,097	135	0.95%	63,026	190	1.20%
Securities sold under agreements to
repurchase, federal funds purchased and
short & long-term borrowings	38,999	107	1.09%	46,426	186	1.60%

TOTAL INTEREST BEARING LIABILITIES	542,559	708	0.52%	546,022	976	0.71%

Non-interest bearing demand deposits	51,612			43,943
Other liabilities	3,948			4,150
Stockholders' equity	54,599			51,521

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$ 652,718			$ 645,636

Net interest income		$ 5,484			$ 5,236
Net interest spread			3.49%			3.36%
Net interest margin			3.59%			3.48%

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)


	Nine Months Ended September 30,
	2013			2012

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

	(Dollars In Thousands)
ASSETS
Loans - taxable	$ 521,888	$ 16,670	4.28%	$ 446,209	$ 16,084	4.81%
Loans - non-taxable	3,650	106	5.85%	3,839	112	5.92%
Investment securities - taxable	51,427	628	1.64%	60,054	969	2.16%
Investment securities - non-taxable	33,414	868	5.24%	38,292	1,000	5.23%
Federal funds sold	784	1	0.20%	1,448	3	0.17%
Time deposits	4,049	29	0.96%	7,426	76	1.36%
Interest bearing deposits with banks	5,400	9	0.22%	45,291	76	0.22%

TOTAL INTEREST EARNING ASSETS	620,613	18,311	4.06%	602,559	18,320	4.05%

Less allowance for loan losses	(5,087)			(4,505)
Other assets	27,651			24,809

TOTAL ASSETS	$ 643,177			$ 622,863

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market	$ 57,950	$ 29	0.07%	$ 54,112	$ 55	0.14%
Savings	382,345	1,357	0.48%	365,500	1,964	0.72%
Certificates of deposit	56,963	428	1.01%	66,269	639	1.29%
Securities sold under agreements to
repurchase, federal funds purchased and
short & long-term borrowings	40,000	429	1.44%	44,216	581	1.76%

TOTAL INTEREST BEARING LIABILITIES	537,258	2,243	0.56%	530,097	3,239	0.82%

Non-interest bearing demand deposits	48,937			40,143
Other liabilities	3,754			3,888
Stockholders' equity	53,228			48,735

TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY	$ 643,177			$ 622,863

Net interest income		$ 16,068			$ 15,081
Net interest spread			3.50%			3.23%
Net interest margin			3.58%			3.48%

Provision for Loan Losses

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

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

The allowance consists of general, specific, qualitative and unallocated components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are classified as watch, other assets especially mentioned, substandard, doubtful or loss. For such loans they may also be classified as impaired or restructured. For loans that are further classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and home equity loans for impairment disclosures, unless such loans are the subject of a restructuring agreement or there is a possible loss expected.

For the three months ended September 30, 2013, the provision for loan losses was $310 thousand, as compared to $235 thousand, for the same period ended September 30, 2012. In the three months ended September 30, 2013, there were charge-offs in the amount of $89 thousand; however principal in the amount of $1 thousand was recovered. For the nine months ended September 30, 2013, the provision for loan losses was $842 thousand, as compared to $810 thousand, for the same period ended September 30, 2012. In the nine months ended September 30, 2013, there were charge-offs in the amount of $741 thousand, however principal in the amount of $43 thousand was recovered. The allowance for loan losses is $5.3 million as of September 30, 2013, which is 0.96% of outstanding loans, compared to $4.8 million or 1.00% of outstanding loans as of September 30, 2012. At December 31, 2012, the allowance for loan losses of $5.1 million represented 1.00% of total outstanding loans. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Bank’s market area, the allowance is believed to be adequate to absorb any losses inherent in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate. The Bank has not participated in any sub-prime lending activity.

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

	(In Thousands)
Loans receivable at end of period	$	551,787	$	483,779	$	551,787	$	483,779

Allowance for loan losses:
Balance, beginning	$	5,069	$	4,760	$	5,147	$	4,215
Provision for loan losses		310		235		842		810
Loans charged off:
Commercial real estate		(42)		(176)		(423)		(179)
Commercial construction		-		-		(197)		-
Commercial		(13)		-		(13)		-
Residential real estate		(29)		(4)		(103)		(39)
Consumer		(5)				(5)
Total loans charged off		(89)		(180)		(741)		(218)
Recoveries of loans previously charged off:
Commercial real estate		-		1		13		1
Commercial		1		-		2		-
Residential real estate		-		4		28		12
Total recoveries		1		5		43		13
Net charge offs		(88)		(175)		(698)		(205)
Balance at end of period	$	5,291	$	4,820	$	5,291	$	4,820

Allowance for loan losses to loans
receivable at end of period		0.96%		1.00%		0.96%		1.00%

Non-interest Income

Total non-interest income was $559 thousand for the three months ended September 30, 2013 compared to $934 thousand for the same period in 2012, and $1.5 million for the nine months ended September 30, 2013 compared to $1.6 million for the same period in 2012. The decrease is primarily due to the $633 thousand gain on sale of securities realized in 2012, offset by the growth in the Bank’s credit card and merchant processing customer base and an increase in income associated with bank owned life insurance.

Non-interest Expense

Non-interest expenses increased $430.0 thousand, or 12.8%, from $3.4 million for the three months ended September 30, 2012 to $3.8 million for the same period ended September 30, 2013. The increase is due to: an increase of $305 thousand in salary and employee benefits, the majority of which are in conjunction with increased non-qualified pension expense, insurance benefits and salary adjustments; an increase of $44 thousand in credit card processing expense due to an increase in volume; an increase of $18 thousand in charitable contributions; and an increase of $67 thousand in other operating expenses due primarily to the change in valuation of officer’s life insurance; offset by a decrease of $21 thousand in professional fees due to greater compliance costs to implement XBRL reporting in 2012; and a decrease of $8 thousand in loan and real estate expenses.

Non-interest expenses increased $1.4 million, or 13.5%, from $10.1 million for the nine months ended September 30, 2012 to $11.5 million for the same period ended September 30, 2013. The increase is due to: an increase of $838 thousand in salary and employee benefits, the majority of which are in conjunction with increased non-qualified pension expense, insurance benefits and salary adjustments; an increase of $153 thousand in credit card processing expense due to an increase in volume; an increase of $29 thousand in FDIC insurance expense; an increase of $45 thousand in charitable contributions; and an increase of $167 thousand in other operating expenses due primarily to the change in valuation of officer’s life insurance; offset by a decrease of $20 thousand in loan and real estate expenses.

A breakdown of other expenses can be found in the statements of income.

Income Taxes

The allocated provision for income taxes for the three months ended September 30, 2013 totaled $535 thousand, or 27.6% of income before taxes. The provision for income taxes for the three months ended September 30, 2012 totaled $750 thousand, or 29.2% of income before taxes. The allocated provision for income taxes for the nine months ended September 30, 2013 totaled $1.5 million, or 27.6% of income before taxes. The provision for income taxes for the nine months ended September 30, 2012 totaled $1.6 million, or 27.9% of income before taxes. The slight increase in the tax rate is a result of the change in the mix of taxable and tax free loans and investments.

FINANCIAL CONDITION

Securities

The Bank’s securities portfolio continues to be classified, in its entirety, as “available for sale.” Management believes that a portfolio classification of available for sale allows complete flexibility in the investment portfolio. Using this classification, the Bank intends to hold these securities for an indefinite amount of time, but not necessarily to maturity. Such securities are carried at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. The portfolio is structured to provide maximum return on investments while providing a consistent source of liquidity and meeting strict risk standards. Investment securities consist primarily of U.S. government agency securities, mortgage-backed securities issued by FHLMC or FNMA, corporate bonds, and taxable and non-taxable municipal bonds. The Bank holds no high-risk securities or derivatives as of September 30, 2013. The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

Total securities at September 30, 2013 were $80.8 million compared to $91.9 million at December 31, 2012. The decrease in the investment portfolio is the result of principal payments on U.S. GSEs and the maturity of U.S. agency bonds. The carrying value of the securities portfolio as of September 30, 2013 includes a net unrealized gain of $709 thousand, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $3.5 million at December 31, 2012. The current unrealized gain position of the securities portfolio is due to the changes in market rates since purchase. No securities are deemed to be other than temporarily impaired.

Loans

The loan portfolio comprises a major component of the Bank’s earning assets. All of the Bank’s loans are to domestic borrowers. Total net loans at September 30, 2013 increased $46.0 million to $546.1 million from $500.1 million at December 31, 2012. The loan to deposit ratio increased from 91% at December 31, 2012 to 99% at September 30, 2013. The Bank’s loan portfolio at September 30, 2013 was comprised of residential real estate and consumer loans of $278.7 million, an increase of $26.5 million from December 31, 2012, and commercial loans of $273.0 million, an increase of $19.7 million from December 31, 2012. The Bank has not originated, nor does it intend to originate, sub-prime mortgage loans.

Credit Risk and Loan Quality

The allowance for loan losses increased $144 thousand totaling $5.3 million at September 30, 2013 compared to $5.2 million at December 31, 2012. At September 30, 2013 and December 31, 2012, the allowance for loan losses represented 0.96% and 1.00%, respectively of total loans. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of comparable institutions in the Bank’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses.

At September 30, 2013 and December 31, 2012 aggregate balances on non-performing loans equaled $10.6 million, and $10.9 million at September 30, 2012, representing 1.91%, 2.11% and 2.25% of total loans at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. Troubled debt restructurings, included in the following table, represent loans where the Company, for economic or legal reasons related to the debtor’s financial difficulties, has granted a concession to the debtor that it would not otherwise consider. There was one loan totaling $3 thousand that was modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) for the nine months ended September 30, 2013. The Company has one foreclosed asset in the amount of $2.1 million as of September 30, 2013, as compared to three foreclosed assets at December 31, 2012 in the amount of $3.0 million. The net change is a result of the sale of two assets with a deferred gain totaling $109 thousand, along with a write down totaling $103 thousand on the remaining foreclosed asset.

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



		September 30,			December 31,			September 30,
		2013			2012			2012

	(In Thousands)
Non-accrual - commercial	$	1,951		$	2,143		$	2,373
Non-accrual - consumer		490			301			301
Restructured loans (still accruing interest and less than 90 days past due)		8,119			7,841			8,221
Loans past due 90 or more days, accruing interest					361			-

Total nonperforming loans		10,560			10,646			10,895
Foreclosed assets		2,091			3,038			2,869
Total nonperforming assets	$	12,651		$	13,684		$	13,764
Nonperforming loans to total loans at period-end		1.91	%		2.11	%		2.25	%
Nonperforming assets to total assets		1.91	%		2.13	%		2.13	%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, decreased $266.0 thousand from December 31, 2012 to September 30, 2013. This decrease is due primarily to depreciation on existing premises and equipment, offset by increases related to purchases.

Deposits

Total deposits at September 30, 2013 increased $5.6 million to $558.6 million from $553.0 million at December 31, 2012. Savings deposits increased by $8.0 million and demand deposits increased by $463 thousand, offset by time deposits which decreased $2.8 million.

Liquidity

Liquidity represents the Company’s ability to meet the demands required for the funding of loans and to meet depositors’ requirements for use of their funds. The Company’s sources of liquidity are cash balances, due from banks, and federal funds sold. Cash and cash equivalents were $18.3 million at September 30, 2013, compared to $29.9 million at December 31, 2012, primarily due to the increase in loan growth and bank owned life insurance, offset by the increase in deposits and overnight repurchase agreements.

Additional asset liquidity sources include principal and interest payments from the investment security and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling loans or raising additional capital. At September 30, 2013, the Company had $80.8 million of available for sale securities. Securities with carrying values of approximately $40.2 million and $45.8 million at September 30, 2013 and December 31, 2012, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

The Bank also has borrowing capacity with the FHLB of approximately $303.8 million, which includes a line of credit for $25.0 million. There were no outstanding long-term loans at September 30, 2013 and $7.9 million outstanding as of December 31, 2012. There were $14 million of short-term advances outstanding at September 30, 2013 and none outstanding as of December 31, 2012. All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank also has a line of credit with ACBB of approximately $6.0 million, of which none was outstanding at September 30, 2013. Advances from this line are unsecured.

The Company has two lines of credit totaling an aggregate of $10 million with Univest, of which an aggregate of $4.1 million was outstanding at September 30, 2013. These lines of credit are secured by 833,333 shares of Bank common stock.

The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or capital resources.

Off-Balance Sheet Arrangements

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk. These off-balance sheet arrangements consist of unfunded loans and commitments, as well as lines of credit made under the same standards as on-balance sheet instruments. These unused commitments totaled $95.0 million at September 30, 2013. The Company also has letters of credit outstanding of $5.0 million at September 30, 2013. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company. Management is of the opinion that the Company’s liquidity is sufficient to meet its anticipated needs.

Capital Resources and Adequacy

Total stockholders’ equity was $52.2 million as of September 30, 2013, representing a net increase of $2.1 million from December 31, 2012. The increase in capital was primarily the result of the net income of $3.8 million, offset by a decrease in unrealized holding gains on available for sale securities of $1.8 million and a dividend declared in the amount of $362 thousand.

The Company and the Bank are subject to various regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that could have a material effect on the consolidated financial statements.

The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of September 30, 2013, the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

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



	September 30, 2013			December 31, 2012

	(Dollars In Thousands)

Tier I, common stockholders' equity	$	55,026		$	52,046
Tier II, allowable portion of allowance for loan losses		5,291			5,147

Total capital	$	60,317		$	57,193

Tier I risk based capital ratio		11.9	%		12.1	%

Total risk based capital ratio		13.0	%		13.3	%

Tier I leverage ratio		8.5	%		8.0	%

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

The Federal banking regulators have adopted risk-based capital guidelines for bank holding companies. Currently, the required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be Tier I capital, consisting principally of common shareholders’ equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder (Tier II capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance.

In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier I capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

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




	September 30, 2013			December 31, 2012

	(Dollars In Thousands)

Tier I, common stockholders' equity	$	51,707		$	47,745
Tier II, allowable portion of allowance for loan losses		5,291			5,147

Total capital	$	56,998		$	52,892

Tier I risk based capital ratio		11.2	%		11.1	%

Total risk based capital ratio		12.3	%		12.3	%

Tier I leverage ratio		7.9	%		7.3	%

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weighted (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional constraints will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, defined tax assets and minority interest. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank and the Company on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4 – Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended September 30, 2013, including any corrective actions with regard to significant deficiencies and material weakness.

Part II - Other Information

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

Not Applicable

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

Not Applicable

Item 3 - Defaults Upon Senior Securities

Not Applicable.

Item 4 – Mine Safety Disclosures

Not Applicable

Item 5 - Other Information

Not Applicable.

Item 6 - Exhibits



	Exhibit
	Number		Description
	3.1		Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of
			Registrant’s Form 10-Q filed on May 14, 2010).
	3.2		By-Laws (Incorporated by reference to Exhibit 2 of Registrant’s Form 8-A filed on December 11, 2008).
	11.1		The statement regarding computation of per share earnings required by this exhibit is contained in Note 5
			to the financial statements under the caption “Basic and Diluted Earnings Per Share.”
	31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
	31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
	32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350
			of the Sarbanes-Oxley Act of 2002.

The following Exhibits are being furnished* as part of this report:

No.	Description
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.*

______________________

*These interactive data files are being furnished as part of this Quarterly Report, and, in accordance with Rule 402 of Regulation S-T, shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		EMBASSY BANCORP, INC.
		(Registrant)

	By:	/s/ David M. Lobach, Jr.
Dated: November 13, 2013		David M. Lobach, Jr.
		President and Chief Executive Officer



Dated: November 13, 2013	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		Senior Executive Vice President,
		Chief Operating Officer, Secretary and
		Chief Financial Officer

EXHIBIT INDEX



	Exhibit
	Number		Description
	3.1		Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of
			Registrant’s Form 10-Q filed on May 14, 2010).
	3.2		By-Laws (Incorporated by reference to Exhibit 2 of Registrant’s Form 8-A filed on December 11, 2008).
	11.1		The statement regarding computation of per share earnings required by this exhibit is contained in Note 5
			to the financial statements under the caption “Basic and Diluted Earnings Per Share.”
	31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
	31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
	32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 1350
			of the Sarbanes-Oxley Act of 2002.

The following Exhibits are being furnished* as part of this report:

No.	Description
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema Document.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.*
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document.*

______________________