UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012 OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____________________ TO __________________

Commission file number 000-1449794

Embassy Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	26-3339011
(State of incorporation)	(I.R.S. Employer Identification No.)
One Hundred Gateway Drive, Suite 100 Bethlehem, PA	18017
(Address of principal executive offices)	(Zip Code)

(610) 882-8800

(Issuer’s Telephone Number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

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

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

COMMON STOCK
Number of shares outstanding as of May 10, 2012	($1.00 Par Value)	7,179,892
	(Title Class)	(Outstanding Shares)

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	25
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	33
Item 4 – Controls and Procedures	33
Part II - Other Information	34
Item 1 - Legal Proceedings	34
Item 1A - Risk Factors	34
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3 - Defaults Upon Senior Securities	34
Item 4 – Mine Safety Disclosures	34
Item 5 - Other Information	34
Item 6 - Exhibits	34
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

2

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Financial Statements

Consolidated Balance Sheets (Unaudited)

	March 31,			December 31,
ASSETS	2012			2011
	(In Thousands, Except Share and Per Share Data)
Cash and due from banks	$	12,342		$	12,039
Interest bearing demand deposits with banks		54,296			33,605
Federal funds sold		275			491
Cash and Cash Equivalents		66,913			46,135
Interest bearing time deposits		7,707			7,698
Securities available for sale		99,481			92,110
Restricted investment in bank stock		1,561			1,641
Loans receivable, net of allowance for loan losses of $4,346 in 2012; $4,215 in 2011		431,901			419,126
Premises and equipment, net of accumulated depreciation		2,252			2,095
Accrued interest receivable		1,755			1,568
Other real estate owned		2,969			3,388
Other assets		2,304			1,719
Total Assets	$	616,843		$	575,480
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	39,283		$	38,386
Interest bearing		486,611			443,389
Total Deposits		525,894			481,775
Securities sold under agreements to repurchase		28,986			33,953
Long-term borrowings		12,986			13,086
Accrued interest payable		448			582
Other liabilities		2,900			1,751
Total Liabilities		571,214			531,147
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares; 2012 issued 7,180,245 shares; outstanding 7,179,892 shares; 2011 issued 7,171,551 shares; outstanding 7,171,198 shares;		7,180			7,171
Surplus		22,927			22,872
Retained earnings		13,075			11,905
Accumulated other comprehensive income		2,450			2,388
Treasury stock, at cost, 353 shares		(3	)		(3	)
Total Stockholders' Equity		45,629			44,333
Total Liabilities and Stockholders' Equity	$	616,843		$	575,480

See notes to consolidated financial statements.

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Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

	Three Months Ended March 31,
	2012			2011
INTEREST INCOME	(In Thousands, Except Per Share Data)
Loans receivable, including fees	$	5,307		$	5,066
Securities, taxable		328			471
Securities, non-taxable		313			245
Federal funds sold, and other		28			6
Interest on time deposits		27			31
Total Interest Income		6,003			5,819
INTEREST EXPENSE
Deposits		1,003			1,013
Securities sold under agreements to repurchase and federal funds purchased		26			59
Long-term borrowings		178			184
Total Interest Expense		1,207			1,256
Net Interest Income		4,796			4,563
PROVISION FOR LOAN LOSSES		130			165
Net Interest Income after Provision for Loan Losses		4,666			4,398
OTHER INCOME
Credit card processing fees		286			228
Other service fees		105			94
Loss on sale of other real estate owned		(8	)		-
Impairment on other real estate owned		(100	)		-
Total Other Income		283			322
OTHER EXPENSES
Salaries and employee benefits		1,488			1,390
Occupancy and equipment		602			554
Data processing		267			215
Credit card processing		249			217
Advertising and promotion		188			192
Professional fees		107			80
FDIC insurance		87			172
Insurance		12			13
Loan department		49			45
Charitable contributions		142			119
Other real estate owned		26			42
Other		135			131
Total Other Expenses		3,352			3,170
Income before Income Taxes		1,597			1,550
INCOME TAX EXPENSE		427			436
Net Income	$	1,170		$	1,114
BASIC EARNINGS PER SHARE	$	0.16		$	0.16
DILUTED EARNINGS PER SHARE	$	0.16		$	0.15

See notes to consolidated financial statements.

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Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,
	2012						2011
	(In Thousands)
Net Income				$	1,170					$	1,114
Other comprehensive income:
Unrealized holding gains on securities available for sale		94						755
Less: reclassification adjustment for realized gains (losses)		-						-
		94						755
Income tax effect		(32	)					(257	)
Net unrealized gains		62						498
Other comprehensive income:						62						498
Comprehensive Income					$	1,232					$	1,612

See notes to consolidated financial statements.

5

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2012 and 2011

	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock			Total
	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2010		7,157		22,303		6,976		296		(3	)		36,729
Net income						1,114							1,114
Net change in unrealized gain on securities available for sale, net of reclassification adjustment and income tax effects								498					498
BALANCE - MARCH 31, 2011	$	7,157	$	22,303	$	8,090	$	794	$	(3	)	$	38,341
BALANCE - DECEMBER 31, 2011	$	7,171	$	22,872	$	11,905	$	2,388	$	(3	)	$	44,333
Net income		-		-		1,170		-		-			1,170
Net change in unrealized gain on securities available for sale, net of reclassification adjustment and income tax effects		-		-		-		62		-			62
													-
Exercise of stock options, 702 shares		1		2		-		-		-			3
Compensation expense recognized on stock options		-		5		-		-		-			5
Common stock grants to directors, 7,992 shares		8		48		-		-		-			56
BALANCE - MARCH 31, 2012	$	7,180	$	22,927	$	13,075	$	2,450	$	(3	)	$	45,629

See notes to consolidated financial statements.

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Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2012			2011
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,170		$	1,114
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		130			165
Accretion of deferred loan costs		(7	)		(26	)
Depreciation and amortization		164			155
Net amortization of securities premiums and discounts		95			86
Loss on sale of other real estate owned		8			-
Stock compensation expense		5			-
Impairment on other real estate owned		100			-
Increase in accrued interest receivable		(187	)		(148	)
Increase in other assets		(585	)		(152	)
Decrease in accrued interest payable		(134	)		(284	)
Increase in other liabilities		1,173			717
Net Cash Provided by Operating Activities		1,932			1,627
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(8,570	)		(2,880	)
Maturities, calls and principal repayments of securities available for sale		1,198			4,805
Net increase in loans		(12,898	)		7,889
Redemption of restricted investment in bank stock		80			99
Net (purchases) maturities of interest bearing time deposits		(9	)		737
Proceeds from sale of other real estate owned		311			-
Purchases of premises and equipment		(321	)		(81	)
Net Cash Provided by (Used in) Investing Activities		(20,209	)		10,569
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		44,119			11,104
Net decrease in securities sold under agreements to repurchase and federal funds purchased		(4,967	)		(7,684	)
Payment of long-term borrowed funds		(100	)		-
Proceeds from the exercise of stock options		3			-
Net Cash Provided by Financing Activities		39,055			3,420
Net Increase in Cash and Cash Equivalents		20,778			15,616
CASH AND CASH EQUIVALENTS - BEGINNING		46,135			19,643
CASH AND CASH EQUIVALENTS - ENDING	$	66,913		$	35,259
SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	1,341		$	1,540
Income taxes paid	$	750		$	-

See notes to consolidated financial statements.

7

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

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, 2011, included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2012.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2012 through the date these consolidated financial statements were issued.

Certain amounts in the 2011 financial statements have been reclassified to conform to 2012 presentation. These reclassifications had no effect on 2011 net income.

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, 2011.

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.

8

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 4 – Stock Incentive Plan

Stock Incentive Plan:

At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”).  The SIP authorizes the Board of Directors, or a committee authorized by the Board of Directors, to award a stock based incentive to (i) designated officers (including officers who are directors) and other designated employees at the Company and its subsidiaries, and (ii) non-employee members of the Board of Directors and advisors and consultants to the Company and its subsidiaries.  The 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.

The aggregate number of shares available for issuance under the SIP is 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 2012, the Company granted 7,992 shares of restricted stock to certain members of its Board of Directors as compensation for their service in 2011 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, 2011.  In February 2012, the Company also granted stock options to purchase 52,611 shares of stock to certain executive officers in accordance with their respective employment agreements.  Stock compensation expense related to these options was $5,000 for the three months ended March 31, 2012.  At March 31, 2012, approximately $130 thousand unrecognized cost related to these stock options will be recognized over the next 2.9 years.

Note 5 – Basic and Diluted Earnings per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period, as adjusted for stock dividends and splits. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustments to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

	Three Months Ended March 31,
	2012		2011
	(Dollars In Thousands, except per share data)
Net income	$	1,170	$	1,114
Weighted average shares outstanding		7,176		7,157
Dilutive effect of potential common shares, stock options		28		33
Diluted weighted average common shares outstanding		7,204		7,190
Basic earnings per share	$	0.16	$	0.16
Diluted earnings per share	$	0.16	$	0.15

Stock options of 122,200 and 132,906 were not considered in computing diluted earnings per common share for the three months ended March 31, 2012 and 2011, respectively, because they are not dilutive to earnings.

9

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 6 – Guarantees

The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Company had $­4.4 million of standby letters of credit outstanding as of March 31, 2012. The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $4.3 million. Management does not consider the current amount of the liability as of March 31, 2012 for guarantees under standby letters of credit issued to be material.

Note 7 – Short-term and Long-term Borrowings

Securities sold under agreements to repurchase, federal funds purchased and Federal Home Loan Bank of Pittsburgh (“FHLB”) short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for proceeds of twelve months or more and are generally less than sixty months. The Bank has an agreement with the FHLB which allows for borrowings up to a percentage of qualifying assets. At March 31, 2012, the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $201.5 million, of which $7.9 million were outstanding in 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, 2011. There were no short-term advances outstanding at March 31, 2012 and December 31, 2011. 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 March 31, 2012 and December 31, 2011. 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 March 31, 2012 and December 31, 2011, the outstanding balance was $5.1 million and $5.2 million, respectively. Advances from these lines of credit are secured by 833,333 shares of Bank common stock. Under the terms of the loan agreement, the Bank is required to remain well capitalized. The proceeds of the loan were primarily used for the holding company’s investment in the Bank, thus providing additional capital to support the Bank’s growth.

Note 8 – Securities Available For Sale

At March 31, 2012 and December 31, 2011, respectively, the amortized cost and fair values of securities available-for-sale were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
March 31, 2012
U.S Government agency obligations	$	33,326	$	290	$	-		$	33,616
Municipal bonds		45,971		2,862		(107	)		48,726
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		11,960		668		-			12,628
Corporate bonds		4,512		73		(74	)		4,511
Total	$	95,769	$	3,893	$	(181	)	$	99,481
December 31, 2011:
U.S Government agency obligations	$	33,399	$	297	$	(7	)	$	33,689
Municipal bonds		37,415		2,633		-			40,048
U.S. Government Sponsored Enterprise (GSE)
Mortgage-backed securities - residential		13,164		677		-			13,841
Corporate bonds		4,514		91		(73	)		4,532
Total	$	88,492	$	3,698	$	(80	)	$	92,110

10

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 8 – Securities Available For Sale (Continued)

The amortized cost and fair value of securities as of March 31, 2012, 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	$	15,334	$	15,383
Due after one year through five years		25,136		25,494
Due after five years through ten years		15,534		16,205
Due after ten years		27,805		29,771
		83,809		86,853
U.S. GSE - Mortgage-backed securities - residential		11,960		12,628
	$	95,769	$	99,481

There were no sales of securities for the three months ended March 31, 2012 and 2011.

Securities with a carrying value of $41.5 and $47.7 million at March 31, 2012 and December 31, 2011, respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purposes required or permitted by law.

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011, respectively:

	Less Than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In Thousands)
March 31, 2012
Municipal bonds	$	5,710	$	(107	)	$	-	$	-	$	5,710	$	(107	)
Corporate Bonds		1,922		(74	)		-		-		1,922		(74	)
Total Temporarily Impaired Securities	$	7,632	$	(181	)	$	-	$	-	$	7,632	$	(181	)
December 31, 2011:
U.S. Government agency obligations	$	2,007	$	(7	)	$	-	$	-	$	2,007	$	(7	)
Corporate Bonds		1,922		(73	)		-		-		1,922		(73	)
Total Temporarily Impaired Securities	$	3,929	$	(80	)	$	-	$	-	$	3,929	$	(80	)

The Company had ten (10) securities in an unrealized loss position at March 31, 2012. The unrealized losses are due only to interest rate fluctuations. As of March 31, 2012, 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.

11

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 9 – 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 will be made on a quarterly basis if conditions warrant such repurchases.  During 2011 and 2010, the FHLB conducted a limited excess capital stock repurchase based upon positive quarterly net income.  Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases.  In February 2012, the FHLB announced that dividend payments would resume in 2012.

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 stock as of March 31, 2012.

Note 10 – Loans Receivable and Credit Quality

The following table presents the composition of loans receivable at March 31, 2012 and December 31, 2011, respectively:

	March 31, 2012						December 31, 2011
				Percentage of						Percentage of
	Balance			Total Loans			Balance			Total Loans
	(In Thousands)
Commercial real estate	$	174,022			39.87	%	$	171,792			40.56	%
Commercial construction		14,867			3.41	%		13,414			3.17	%
Commercial		28,537			6.54	%		26,879			6.35	%
Residential real estate		217,719			49.87	%		210,361			49.65	%
Consumer		1,360			0.31	%		1,140			0.27	%
Gross loans		436,505			100.00	%		423,586			100.00	%
Unearned origination (fees) costs		(258	)					(245	)
Allowance for loan losses		(4,346	)					(4,215	)
	$	431,901					$	419,126

12

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weakness identified), substandard (well defined weakness) and doubtful (unlikely to be paid in full) within the Company's internal risk rating system as of March 31, 2012 and December 31, 2011, respectively:

March 31, 2012	Pass		Special Mention		Substandard		Doubtful		Total
	(In Thousands)
Commercial real estate	$	166,765	$	861	$	6,396	$	-	$	174,022
Commercial construction		10,543		-		4,324		-		14,867
Commercial		28,276		193		68		-		28,537
Residential real estate		216,687		280		705		47		217,719
Consumer		1,360		-		-		-		1,360
Total	$	423,631	$	1,334	$	11,493	$	47	$	436,505
December 31, 2011:
Commercial real estate	$	163,828	$	865	$	7,099	$	-	$	171,792
Commercial construction		9,090		-		4,324		-		13,414
Commercial		26,612		194		73		-		26,879
Residential real estate		209,810		282		269		-		210,361
Consumer		1,140		-		-		-		1,140
Total	$	410,480	$	1,341	$	11,765	$	-	$	423,586

13

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

The following table summarizes information in regards to impaired loans by loan portfolio class as of March 31, 2012 and December 31, 2011, respectively:

March 31, 2012:	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(In Thousands)
Commercial real estate	$	5,766	$	5,766			$	6,790	$	86
Commercial construction		4,324		4,324				4,149		30
Commercial		308		357				335		3
Residential real estate		315		315				433		3
Consumer		-		-				-		-
With an allowance recorded:
Commercial real estate	$	2,098	$	2,098	$	272	$	1,384	$	52
Commercial construction		-		-		-		-		-
Commercial		4		4		1		30		1
Residential real estate		717		717		86		359		1
Consumer		-		-		-		-		-
Total:
Commercial real estate	$	7,864	$	7,864	$	272	$	8,174	$	138
Commercial construction		4,324		4,324		-		4,149		30
Commercial		312		361		1		364		4
Residential real estate		1,032		1,032		86		792		4
Consumer		-		-		-		-		-
	$	13,532	$	13,581	$	359	$	13,480	$	176
December 31, 2011:
With no related allowance recorded:	$	7,814	$	7,863			$	5,787	$	492
Commercial real estate		3,974		3,974				3,360		156
Commercial construction		362		362				363		15
Commercial		552		552				498		24
Residential real estate		-		-				-		-
Consumer
With an allowance recorded:	$	670	$	670	$	107	$	463	$	42
Commercial real estate		-		-		-		-		-
Commercial construction		55		55		19		61		4
Commercial		-		-		-		-		-
Residential real estate		-		-		-		-		-
Consumer
Total:	$	8,484	$	8,533	$	107	$	6,250	$	534
Commercial real estate		3,974		3,974		-		3,360		156
Commercial construction		417		417		19		424		19
Commercial		552		552		-		498		24
Residential real estate		-		-		-		-		-
Consumer	$	13,427	$	13,476	$	126	$	10,532	$	733

14

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2012 and December 31, 2011, respectively:

	March 31,		December 31,
	2012		2011
	(In Thousands)
Commercial real estate	$	2,391	$	1,869
Commercial construction		-		-
Commercial		-		-
Residential real estate		82		-
Consumer		-		-
Total	$	2,473	$	1,869

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of March 31, 2012 and December 31, 2011, respectively:

March 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
	(In Thousands)
Commercial real estate	$	651	$	96	$	2,391	$	3,109	$	170,884	$	174,022	$	-
Commercial construction		260		2,910		-		3,170		11,697		14,867		-
Commercial		464		-		-		492		28,073		28,537		-
Residential real estate		195		47		35		277		217,442		217,719		-
Consumer		20		-		-		20		1,340		1,360		-
Total	$	1,590	$	3,053	$	2,426	$	7,068	$	429,436	$	436,505	$	-
December 31, 2011:
Commercial real estate	$	300	$	1,222	$	2,074	$	3,596	$	168,196	$	171,792	$	205
Commercial construction		-		1,412		-		1,412		12,002		13,414		-
Commercial		-		-		61		61		26,818		26,879		61
Residential real estate		-		269		-		269		210,092		210,361		-
Consumer		22		-		-		22		1,118		1,140		-
Total	$	322	$	2,903	$	2,135	$	5,360	$	418,226	$	423,586	$	266

15

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

The following tables detail the activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011:

	Commercial Real Estate			Commercial Construction			Commercial			Residential Real Estate			Consumer			Unallocated			Total
Allowance for credit losses	(In Thousands)
Three months ending March 31, 2011:
Beginning Balance - December 31, 2010	$	1,014		$	443		$	325		$	1,309		$	35		$	583		$	3,709
Charge-offs		(68	)		-			-			(25	)		-			-			(93	)
Recoveries		-			-			4			-			4			-			8
Provisions		382			(51	)		(6	)		48			(2	)		(206	)		165
Ending balance - March 31, 2011	$	1,328		$	392		$	323		$	1,332		$	37		$	377		$	3,789
Three months ending March 31, 2012:
Beginning Balance - December 31, 2011	$	1,264		$	352		$	423		$	1,691		$	40		$	445		$	4,215
Charge-offs		(3	)		-			-			-			-			-			(3	)
Recoveries		-			-			-			4			-			-			4
Provisions		382			39			(60	)		53			(1	)		(283	)		130
Ending balance - March 31, 2012	$	1,643		$	391		$	363		$	1,748		$	39		$	162		$	4,346

16

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

The following tables represent the allocation of the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at March 31, 2012 and December 31, 2011.

	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total
March 31, 2012:
Allowance for Loan Losses
Ending Balance	$	1,643	$	391	$	363	$	1,748	$	39	$	162	$	4,346
Ending balance: individually evaluated for impairment	$	272	$	-	$	1	$	86	$	-	$	-	$	359
Ending balance: collectively evaluted for impairment	$	1,371	$	391	$	362	$	1,662	$	39	$	162	$	3,987
Loans receivables:
Ending balance	$	174,022	$	14,867	$	28,537	$	217,719	$	1,360			$	436,505
Ending balance: individually evaluted  for impairment	$	7,864	$	4,324	$	312	$	1,032	$	-			$	13,532
Ending balance: collectively evaluated for impairment	$	166,158	$	10,543	$	28,225	$	216,687	$	1,360			$	422,973
December 31, 2011:
Allowance for Loan Losses
Ending Balance	$	1,264	$	352	$	43	$	1,691	$	40	$	445	$	4,215
Ending balance: individually evaluated for impairment	$	107	$	-	$	19	$	-	$	-	$	-	$	126
Ending balance: collectively evaluted for impairment	$	1,157	$	352	$	404	$	1,691	$	40	$	445	$	4,089
Loans receivables:
Ending balance	$	171,792	$	13,414	$	26,879	$	210,361	$	1,140			$	423,586
Ending balance: individually evaluted  for impairment	$	8,484	$	3,974	$	417	$	552	$	-			$	13,427
Ending balance: collectively evaluated for impairment	$	163,308	$	9,440	$	26,462	$	209,809	$	1,140			$	410,159

17

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 10 – Loans Receivable and Credit Quality (Continued)

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.

The following table presents TDRs outstanding as of March 31, 2012:

	March 31, 2012
	Accrual Loans		Non-Accrual Loans		Total Modifications
	(In Thousands)
Commercial real estate	$	4,680	$	-	$	4,680
Commercial construction		2,808		-		2,808
Commercial		205		-		205
Residential real estate		830		-		830
Consumer		-		-		-
	$	8,523	$	-	$	8,523

As of March 31, 2012, no available commitments were outstanding on TDRs.

The following tables present newly restructured loans that occurred during the three months ended March 31, 2012, respectively:

	Number of Loans		Pre-Modification Outstanding Balance		Post-Modification Outstanding Balance
Three months ended March 31, 2012:	(Dollars in Thousands)
Commercial real estate		1	$	607	$	607
Residential real estate		1		670		670
		2	$	1,277	$	1,277

Of the TDRs described above, two loans required an impairment reserve of $149 thousand recorded in the allowance for loan losses for the three months ended March 31, 2012.

There were no loans that were classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) during the three month period ended March 31, 2012.

18

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Fair Value Measurements

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

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

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.

19

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Fair Value Measurements (Continued)

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and December 31, 2011, respectively, are as follows:

Description	(Level 1) Quoted Prices in Active Markets for I dentical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs		Total
	(In Thousands)
U.S. Government agency obligations	$	-	$	33,616	$	-	$	33,616
Municipal Bonds		-		48,726		-		48,726
U.S. GSE - Mortgage-backed securities - residential		-		12,628		-		12,628
Corporate bonds		-		4,511		-		4,511
March 31, 2012 Securities available for sale	$	-	$	99,481	$	-	$	99,481
U.S. Government agency obligations	$	-	$	33,689	$	-	$	33,689
Municipal Bonds		-		40,048		-		40,048
U.S. GSE - Mortgage-backed securities - residential		-		13,841		-		13,841
Corporate bonds		-		4,532		-		4,532
December 31, 2011 Securities available for sale	$	-	$	92,110	$	-	$	92,110

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2012 and December 31, 2011, 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)
March 31, 2012 Impaired loans	$	-	$	-	$	2,460	$	2,460
March 31, 2012 Other real estate owned	$	-	$	-	$	2,969	$	2,969
December 31, 2011 Impaired loans	$	-	$	-	$	599	$	599
December 31, 2011 Other real estate owned	$	-	$	-	$	3,388	$	3,388

 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 March 31, 2012, of the impaired loans having an aggregate balance of $13.5 million, $10.7 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 $2.8 million in impaired loans, an aggregate valuation allowance of $359 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.

20

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – 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)
March 31, 2012 Impaired loans	2,460	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to -25% (-21.5%)
			Liquidation expenses (3)	-10% (-10%)
March 31, 2012 Other real estate owned
	2,969	Pending agreement of sale (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 a pending agreements of sale.

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 March 31, 2012 and December 31, 2011:

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.

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.

21

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Fair Value Measurements (Continued)

Restricted Investment in Bank Stock (Carried at Cost)

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

Accrued Interest Receivable and Payable (Carried at Cost)

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

Deposit Liabilities (Carried at Cost)

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

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

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

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.

22

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Fair Value Measurements (Continued)

The estimated fair values of the Company’s financial instruments were as follows at March 31, 2012 and December 31, 2011:

	March 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)
Financial assets:
Cash and cash equivalents	$	66,913	$	66,913	$	66,913	$	-	$	-
Interest bearing time deposits		7,707		7,789		-		7,789		-
Securities available-for-sale		99,481		99,481		-		99,481		-
Loans receivable, net of allowance		431,901		437,682		-		-		437,682
Restricted investment in bank stock		1,561		1,561		1,561		-		-
Accrued interest receivable		1,755		1,755		1,755		-		-
Financial liabilities:
Deposits		525,894		526,674		459,556		67,118		-
Securities sold under agreements to repurchase and federal funds purchased		28,986		28,988		28,988		-		-
Long-term borrowings		12,986		13,322		-		-		13,322
Accrued interest payable		448		448		448		-		-
Off-balance sheet finanacial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

	December 31, 2011
	Carrying		Fair Value
	Amount		Estimate
	(In Thousands)
Financial assets:
Cash and cash equivalents	$	46,135	$	46,135
Interest bearing time deposits		7,698		7,720
Securities available-for-sale		92,110		92,110
Loans receivable, net of allowance		419,126		427,861
Restricted investments in bank stock		1,641		1,641
Accrued interest receivable		1,568		1,568
Financial liabilities:
Deposits		481,775		482,344
Securities sold under agreements to  repurchase and federal funds purchased		33,953		33,955
Long-term borrowings		13,086		13,422
Accrued interest payable		582		582
Off-balance sheet finanacial instruments:
Commitments to grant loans		-		-
Unfunded commitments under lines of credit		-		-
Standby letters of credit		-		-

23

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 12 – New Accounting Standards

ASU 2011-04 (Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs)

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This update amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The Update clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The Update also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The Update also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this Update is effective for interim and annual periods beginning after December 15, 2011. Early adoption was not permitted.  The company adopted this update on January 1, 2012 and the new disclosures are included in Note 11.

ASU 2011-05 (Comprehensive Income: Presentation of Comprehensive Income)

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  The provisions of this update amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The Update prohibits the presentation of the components of comprehensive income in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate statements of net income and other comprehensive income. Under previous GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this Update were effective for fiscal years and interim periods beginning after December 31, 2011 for public entities.  The Company adopted this update on January 1, 2012, and the new Consolidated Statements of Comprehensive Income is included in these financial statements.

24

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

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of March 31, 2012 and for the three month periods ended March 31, 2012 and 2011, 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, 2011, 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, 2011. 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 grew $41.4 million from $575.5 million at December 31, 2011 to $616.8 million at March 31, 2012 due to the increase in cash and cash equivalents, loans, and the securities portfolio which were offset slightly by a decrease in foreclosed real estate.

Net income for the three months ended March 31, 2012 was $1.2 million compared to a net income for the three months ended March 31, 2011 of $1.1 million.  Loans receivable, net of the allowance for loan losses, increased $12.8 million to $431.9 million at March 31, 2012 from $419.1 million at December 31, 2011. 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, although there can be no assurance of this.

25

RESULTS OF OPERATIONS

Net Interest Income

Total interest income for the three months ended March 31, 2012 increased by $184 thousand to $6.0 million, as compared to $5.8 million for the three months ended March 31, 2011, due to the increase in average earning assets offset by a decrease in the yield on earning assets.  Average earning assets were $584.1 million for the three months ended March 31, 2012 compared to $498.1 million for the three months ended March 31, 2011. The tax equivalent yield on average earning assets was 4.26% for the first quarter of 2012 compared to 4.84% for the first quarter of 2011.

Total interest expense for the three months ended March 31, 2012 decreased $49 thousand to $1.2 million as compared to $1.3 million for the three months ended March 31, 2011, primarily due to decreases in deposit rates and the mix of deposits, as the Bank has become less reliant on higher cost certificate of deposits. Average interest bearing liabilities were $515.5 million for the three months ended March 31, 2012 compared to $447.1 million for the three months ended March 31, 2011.  The yield on average interest bearing liabilities was 0.94% for the first quarter of 2012 compared to 1.14% for the first quarter of 2011. 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 March 31, 2012 was $4.8 million compared to $4.6 million for the three months ended March 31, 2011. The improvement in net interest income for the three months ended March 31, 2012 is a result of decreases in the interest expense associated with deposits and other borrowed funds, and an increase in interest income associated with the increased volume of earning assets, offset by a reduction in rates received on interest earning assets. The Company’s net interest margin for the three months ended March 31, 2012 decreased thirty-nine (39) basis points to 3.43% as compared to 3.82% for the three months ended March 31, 2011, due to the current interest rate environment, including the decreased cost of deposits and borrowed funds offset by the competitive interest rate pressure of lending.

26

Below are tables which set forth average balances and corresponding yields for the corresponding three month periods ended March 31, 2012 and March 31, 2011, respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)

	Three Months Ended March 31,
	2012								2011
						Tax								Tax
	Average					Equivalent			Average					Equivalent
	Balance			Interest		Yield			Balance			Interest		Yield
	(Dollars In Thousands)
ASSETS
Loans - taxable	$	426,302		$	5,270		4.97	%	$	383,434		$	5,042		5.33	%
Loans - non-taxable		3,767			37		5.99	%		2,480			24		5.84	%
Investment securities - taxable		63,180			328		2.09	%		66,789			471		2.82	%
Investment securities - non-taxable		32,400			313		5.89	%		25,593			245		5.74	%
Federal funds sold		2,565			1		0.16	%		4,427			2		0.18	%
Time deposits		7,702			27		1.41	%		7,807			31		1.61	%
Interest bearing deposits with banks		48,208			27		0.23	%		7,529			4		0.22	%
TOTAL INTEREST EARNING ASSETS		584,124			6,003		4.26	%		498,059			5,819		4.84	%
Less allowance for loan losses		(4,267	)							(3,772	)
Other assets		22,697								23,355
TOTAL ASSETS	$	602,554							$	517,642
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits, NOW and money market	$	51,397		$	22		0.17	%	$	38,141		$	23		0.24	%
Savings		349,268			740		0.85	%		250,599			580		0.94	%
Certificates of deposit		70,353			241		1.38	%		97,631			410		1.70	%
Securities sold under agreements to repurchase, federal funds purchased and long-term borrowings		44,483			204		1.84	%		60,733			243		1.62	%
TOTAL INTEREST BEARING LIABILITIES		515,501			1,207		0.94	%		447,104			1,256		1.14	%
Non-interest bearing demand deposits		37,221								30,748
Other liabilities		3,690								2,321
Stockholders' equity		46,142								37,469
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	602,554							$	517,642
Net interest income				$	4,796							$	4,563
Net interest spread							3.32	%							3.70	%
Net interest margin							3.43	%							3.82	%

27

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 March 31, 2012, management has provisioned for loan losses of $130 thousand, as compared to $165 thousand, for the same period ended March 31, 2011.  In the first three months of 2012, prior year interest in the amount of $3 thousand was charged off on three loans when the loans were placed on non-accrual.  There were no principal charge-offs on loans, however principal in the amount of $4 thousand was recovered on one loan.  The allowance for loan losses is $4.3 million as of March 31, 2012, which is 1.00% of outstanding loans, compared to $3.8 million or 1.00% of outstanding loans as of March 31, 2011. At December 31, 2011, the allowance for loan losses of $4.2 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.

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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:

	March 31
	2012			2011
	(In Thousands)
Total loans receivable at end of period	$	436,247		$	380,217
Allowance for loan losses:
Balance, beginning	$	4,215		$	3,709
Provision for loan losses		130			165
Loans charged off		(3	)		(93	)
Recoveries		4			8
Balance at end of period	$	4,346		$	3,789
Allowance for loan losses to loans receivable at end of period		1.00	%		1.00	%

Non-interest Income

Total non-interest income was $283 thousand for the three month period ended March 31, 2012 compared to $322 thousand for the same period in 2011.  The decrease is primarily due to the loss incurred on the sale of other real estate owned and the impairment on other real estate owned, offset by the growth in the Bank’s credit card and merchant processing customer base.

Non-interest Expense

Non-interest expenses increased $182 thousand or 6% from $3.2 million for the three months ended March 31, 2011 to $3.4 million for the same period ended March 31, 2012. The increase is due to: an increase of $98 thousand in salary and employee benefits, the majority of which are in conjunction with increased branch staffing and salary adjustments; an increase of $32 thousand in credit card expense due to an increase in volume; an increase of $48 thousand in occupancy and equipment; an increase of $52 thousand in data processing; an increase of $23 thousand in charitable contributions; an increase of $27 thousand in professional services, an increase of $4 thousand in loan and real estate expenses and an increase in other operating expenses of $4 thousand; offset by a decrease of $4 thousand advertising expense, a decrease of $86 thousand in insurance expense and a decrease of $16 thousand in other real estate owned expenses.

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

Income Taxes

The provision for income taxes for the three months ended March 31, 2012 totaled $427 thousand, or 26.7% of income before taxes. The provision for income taxes for the three months ended March 31, 2011 totaled $436 thousand, or 28.1%. The decrease in the tax rate is a result of an increase in tax-free investments and loans, offset to a lesser extent by an increase in taxable loans.

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 March 31, 2012. The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

29

Total securities at March 31, 2012 were $99.5 million compared to $92.1 million at December 31, 2011. The increase in the investment portfolio is the result of purchases of Municipal and U.S. GSEs, offset by principal payments on U.S. GSEs.  The carrying value of the securities portfolio as of March 31, 2012 includes a net unrealized gain of $3.7 million, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized gain of $3.6 million at December 31, 2011. The current unrealized gain position of the securities portfolio is due to the changes in market rates since December 31, 2011. No securities are deemed to be other than temporarily impaired.

Restricted investments in bank stock consists of FHLB stock and ACBB stock. Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula. The restricted stocks are carried at cost. The Company had $1.5 million of FHLB stock and $40 thousand of ACBB stock as of March 31, 2012.

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 will be made on a quarterly basis if conditions warrant such purchases.  During 2012 and 2011, FHLB of Pittsburgh conducted a limited excess capital stock repurchase based upon positive net income results. In connection with this program, the Bank had stock at a carrying value of $80 thousand repurchased during the three month period ended March 31, 2012, and $98 thousand repurchased during the same period in 2011.  Any future capital stock repurchases are expected to be made on a quarterly basis if conditions warrant such repurchases.

Management evaluates the restricted stock for impairment in accordance with ASC Topic 942, “Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.” 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 FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB or ACBB restricted stock as of March 31, 2012.

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 March 31, 2012 increased $12.8 million to $431.9 million from $419.1 million at December 31, 2011. The loan to deposit ratio decreased slightly from 87.0% at December 31, 2011 to 82.1% at March 31, 2012. The Bank’s loan portfolio at March 31, 2012 was comprised of residential real estate and consumer loans of $219.1 million, an increase of $7.6 million from December 31, 2011, and commercial loans of $217.4 million, an increase of $5.3 million from December 31, 2011.  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 $130 thousand to $4.3 million at March 31, 2012 from $4.2 million at December 31, 2011. At March 31, 2012 and December 31, 2011, the allowance for loan losses represented 1.00% 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.

30

At March 31, 2012, aggregate balances on non-performing loans equaled $11.0 million compared to $9.4 million at December 31, 2011 and $6.4 million at March 31, 2011, representing 2.52%, 2.22% and 1.68% of total loans at March 31, 2012, December 31, 2011 and March 31, 2011, 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 were no loans classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) during the three months ending March 31, 2012.  The Company has one foreclosed asset in the amount of $3.0 million as of March 31, 2012, as compared to two foreclosed assets at December 31, 2011 in the amount of $3.4 million.  The net change is a result of the sale of one asset with a write-down of $9 thousand and net proceeds of $310 thousand, along with a $100 thousand write-down on the remaining foreclosed asset.  The details for non-performing loans are included in the following table (dollars in thousands):

	March 31,			December 31,			March 31,
	2012			2011			2011
	(Dollars in Thousands)
Non-accrual - commercial	$	2,391		$	1,869		$	2,305
Non-accrual - consumer		82			-			356
Restructured loans (still accruing interest)		8,523			7,264			3,348
Loans past due 90 or more days, accruing interest		-			265			361
Total nonperforming loans		10,996			9,398			6,370
Foreclosed assets		2,969			3,388			3,069
Total nonperforming assets	$	13,965		$	12,786		$	9,439
Nonperforming loans to total loans at period-end		2.52	%		2.22	%		1.68	%
Nonperforming assets to total assets		2.26	%		2.22	%		1.82	%
Total Loans		436,247			423,421			380,217
Total Assets		616,843			575,480			519,349

 Premises and Equipment

Company premises and equipment, net of accumulated depreciation, increased $157 thousand from December 31, 2011 to March 31, 2012. This increase is due primarily to the leasehold improvements placed in service in January 2012 due to the lease expansion addendum detailed below, offset by depreciation on existing premises and equipment.

On May 4, 2012, the Bank entered into a lease renewal and modification agreement (the “Agreement”) with Red Bird Associates, LLC (“Red Bird”) providing for an extension of the term of the lease of the Bank’s principal office located at 100 Gateway Drive in Bethlehem, Pennsylvania (the “Lease”).   The agreement provides for an additional five year term.  The new term continues through February 28, 2017 and is subject to a 2.0% increase on March 1 of each year.  The agreement further provides coterminous terms and options to the original lease agreement for Suite 100, the first lease expansion agreement for Suite 200, and the second lease expansion addendum for Suite 210 of the Gateway office building.  As disclosed in the Company’s definitive proxy statement filed with the SEC on April 27, 2012, Red Bird is a real estate holding company owned by six Directors of the Company, as well as Judith A. Hunsicker, Senior Executive Vice President and Chief Operating and Financial Officer.  Prior to its execution, the terms of the Agreement, including the rental amount, were determined by a majority of the disinterested Directors to be no less favorable to the Bank than the terms then prevailing in the relevant market.

 Deposits

Total deposits at March 31, 2012 increased $44.1 million to $525.9 million from $481.8 million at December 31, 2011. Savings deposits increased by $34.7 million and demand deposits increased by $19.8 million, while time deposits decreased $9.9 million. The significant growth in savings and demand deposits is attributed to successful promotions, as well as migration from time deposits.

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 $66.9 million at March 31, 2012, compared to $46.1 million at December 31, 2011.

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 March 31, 2012, the Company had $99.5 million of available for sale securities. Securities with carrying values of approximately $41.5 million and $47.7 million at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

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The Bank also has borrowing capacity with the FHLB of approximately $201.5 million, of which $7.9 million was outstanding in long-term loans at March 31, 2012 and December 31, 2011.  This borrowing capacity with the FHLB includes a line of credit for $25 million, of which there is no balance outstanding as of March 31, 2012.   All of the long-term loans mature in 2013.  There were no short-term advances outstanding at March 31, 2012 and December 31, 2011. 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 March 31, 2012.   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 $5.1 million was outstanding at March 31, 2012. 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 $79.3 million at March 31, 2012. The Company also has letters of credit outstanding of $4.4 million at March 31, 2012. 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 $45.6 million as of March 31, 2012, representing a net increase of $1.3 million from December 31, 2011.  The increase in capital was a result of the net income of $1.2 million and the increase in unrealized holding gains on available for sale securities of $62 thousand, the exercise of stock options totaling $3 thousand, compensation expense recognized on stock options in the amount of $5 thousand and $56 thousand attributable to issuance of stock grants.

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 March 31, 2012, 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:

	March 31,			December 31,
	2012			2011
	(Dollars In Thousands)
Tier I, common stockholders' equity	$	47,785		$	46,648
Tier II, allowable portion of allowance for loan losses		4,346			4,215
Total capital	$	52,131		$	50,863
Tier I risk based capital ratio		12.9	%		12.7	%
Total risk based capital ratio		14.1	%		13.8	%
Tier I leverage ratio		7.9	%		8.3	%

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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:

	March 31,			December 31,
	2012			2011
	(Dollars In Thousands)
Tier I, common stockholders' equity	$	43,179		$	41,945
Tier II, allowable portion of allowance for loan losses		4,346			4,215
Total capital	$	47,525		$	46,160
Tier I risk based capital ratio		11.7	%		11.4	%
Total risk based capital ratio		12.8	%		12.6	%
Tier I leverage ratio		7.2	%		7.4	%

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 March 31, 2012, and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended March 31, 2012, including any corrective actions with regard to significant deficiencies and material weakness.

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Part II - Other Information

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

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.

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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: May 15, 2012		David M. Lobach, Jr.
		President and Chief Executive Officer
Dated: May 15, 2012	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		Senior Executive Vice President,
		Chief Operating Officer, Secretary and
		Chief Financial Officer

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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.*

* 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.

36