EMYB 10-Q Quarterly Report Sept. 30, 2017

EMBASSY BANCORP, INC.

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10-Q 1 emyb-20170930x10q.htm 10-Q EMYB-2017_0930 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017 OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________________ TO __________________

Commission file number 000-53528


Embassy Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Pennsylvania	26-3339011
(State of incorporation)	(I.R.S. Employer Identification No.)

One Hundred Gateway Drive, Suite 100 Bethlehem, PA	18017
(Address of principal executive offices)	(Zip Code)

(610) 882-8800
(Registrant’s Telephone Number)

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
Emerging growth company ☐

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

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

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


COMMON STOCK
Number of shares outstanding as of November 3 , 2017	($1.00 Par Value)	7,458,999
	(Title Class)	(Outstanding Shares)

Embassy Bancorp, Inc.

Table of Contents


Part I – Financial Information	3

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

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

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	39

Item 4 – Controls and Procedures	39

Part II - Other Information	40

Item 1 - Legal Proceedings	40

Item 1A - Risk Factors	40

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3 - Defaults Upon Senior Securities	40

Item 4 – Mine Safety Disclosures	40

Item 5 - Other Information	40

Item 6 - Exhibits	41

Embassy Bancorp, Inc.

Part I – Financial Information

Item 1 – Fi nan cial Statements

Consolidated Balance Sheets (Unaudited)



	September 30,		December 31,
ASSETS	2017		2016
	(In Thousands, Except Share Data)
Cash and due from banks	$	20,373	$	14,574
Interest bearing demand deposits with banks		18,447		8,644
Federal funds sold		1,000		1,000
Cash and Cash Equivalents		39,820		24,218
Securities available for sale		96,396		85,598
Restricted investment in bank stock		583		624
Loans receivable, net of allowance for loan losses of $6,850 in 2017; $6,517 in 2016		831,179		792,598
Premises and equipment, net of accumulated depreciation		1,937		2,109
Bank owned life insurance		13,030		12,728
Accrued interest receivable		1,833		1,749
Other real estate owned		427		480
Other assets		4,067		4,129
Total Assets	$	989,272	$	924,233
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	134,808	$	117,208
Interest bearing		758,403		716,176
Total Deposits		893,211		833,384
Securities sold under agreements to repurchase		10,195		11,889
Accrued interest payable		781		813
Other liabilities		5,561		4,869
Total Liabilities		909,748		850,955
Stockholders' Equity:
Common stock, $1 par value; authorized 20,000,000 shares;
2017 issued 7,459,449 shares; outstanding 7,443,902 shares;
2016 issued 7,452,462 shares; outstanding 7,443,472 shares;		7,475		7,453
Surplus		24,977		24,603
Retained earnings		46,520		41,344
Accumulated other comprehensive income (loss)		747		(24)
Treasury stock, at cost: 15,547 and 8,990 shares at September 30, 2017 and
December 31, 2016 , respectively		(195)		(98)
Total Stockholders' Equity		79,524		73,278
Total Liabilities and Stockholders' Equity	$	989,272	$	924,233

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Income (Unaudited)



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

	2017		2016		2017			2016

	(In Thousands, Except Per Share Data)
INTEREST INCOME
Loans receivable, including fees	$	8,075	$	7,137	$	23,369	$	20,837
Securities, taxable		246		205		639		605
Securities, non-taxable		323		295		983		864
Federal funds sold, and other		117		26		218		108
Total Interest Income		8,761		7,663		25,209		22,414
INTEREST EXPENSE
Deposits		1,094		1,004		3,173		2,823
Securities sold under agreements to repurchase		3		3		9		10
Short-term borrowings		-		-		9		31
Long-term borrowings		-		-		-		5
Total Interest Expense		1,097		1,007		3,191		2,869
Net Interest Income		7,664		6,656		22,018		19,545
PROVISION FOR LOAN LOSSES		320		165		735		420
Net Interest Income after Provision for Loan Losses		7,344		6,491		21,283		19,125
OTHER NON-INTEREST INCOME
Credit card processing fees		444		442		1,370		1,285
Other service fees		219		199		647		534
Bank owned life insurance		115		114		302		243
Gain on sale of securities, net		19		350		19		350
Gain on sale of other real estate owned		5		(12)		16		3
Impairment on other real estate owned		-		-		-		(80)
Total Other Non-Interest Income		802		1,093		2,354		2,335
OTHER NON-INTEREST EXPENSES
Salaries and employee benefits		2,177		2,000		6,529		5,921
Occupancy and equipment		665		671		1,963		2,027
Data processing		493		411		1,424		1,191
Credit card processing		406		415		1,266		1,213
Advertising and promotion		381		368		1,047		1,063
Professional fees		149		179		453		456
FDIC insurance		124		112		377		320
Insurance		14		16		45		44
Loan & real estate		62		70		185		180
Charitable contributions		169		155		595		541
Other real estate owned expenses		23		26		43		83
Other		330		338		956		1,011
Total Other Non-Interest Expenses		4,993		4,761		14,883		14,050

Income before Income Taxes		3,153		2,823		8,754		7,410
INCOME TAX EXPENSE		920		816		2,536		2,131
Net Income	$	2,233	$	2,007	$	6,218	$	5,279

BASIC EARNINGS PER SHARE	$	0.30	$	0.27	$	0.84	$	0.71

DILUTED EARNINGS PER SHARE	$	0.30	$	0.27	$	0.83	$	0.71

DIVIDENDS PER SHARE	$	0.14	$	0.13	$	0.14	$	0.13

See notes to consolidated financial statements

Embassy Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,
	2017			2016

		(In Thousands)
Net Income	$		2,233	$		2,007
Change in Accumulated Other Comprehensive Income:
Unrealized holding loss on securities available for sale		(162)			(212)
Less: reclassification adjustment for realized gains		(19)			(350)
		(181)			(562)
Income tax effect		62			191
Net unrealized loss		(119)			(371)
Other comprehensive loss, net of tax			(119)			(371)
Comprehensive Income	$		2,114	$		1,636



	Nine Months Ended September 30,
	2017			2016

		(In Thousands)

Net Income	$		6,218	$		5,279
Change in Accumulated Other Comprehensive Income:
Unrealized holding gain on securities available for sale		1,188			845
Less: reclassification adjustment for realized gains		(19)			(350)
		1,169			495
Income tax effect		(398)			(168)
Net unrealized gain		771			327
Other comprehensive gain, net of tax			771			327
Comprehensive Income	$		6,989	$		5,606

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2017 and 2016



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

	(In Thousands, Except Share Data)
BALANCE - DECEMBER 31, 2015	$	7,408	$	24,299	$	35,158	$	1,236	$	-	$	68,101
Net income		-		-		5,279		-		-		5,279
Other comprehensive income, net of tax		-		-		-		327		-		327
Dividend declared, $.13 per share		-		-		(962)		-		-		(962)
Compensation expense recognized on stock options		-		21		-		-		-		21
Common stock grants to directors, 5,934 shares		5		57		-		-		-		62
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $211		-		34		-		-		-		34
Purchase treasury stock, 8,990 shares at $10.85 per share										(98)		(98)
Shares issued under Dividend Reinvestment and Stock Purchase Plan, 19,776 shares		20		191		-		-		-		211
BALANCE - SEPTEMBER 30, 2016	$	7,433	$	24,602	$	39,475	$	1,563	$	(98)	$	72,975

BALANCE - DECEMBER 31, 2016	$	7,453	$	24,603	$	41,344	$	(24)	$	(98)	$	73,278
Net income		-		-		6,218		-		-		6,218
Other comprehensive income, net of tax		-		-		-		771		-		771
Dividend declared, $.14 per share		-		-		(1,042)		-		-		(1,042)
Compensation expense recognized on stock options		-		5		-		-		-		5
Common stock grants to directors, 5,156 shares		5		63		-		-		-		68
Compensation expense recognized on
stock grants, net of unearned compensation
expense of $379		-		72		-				-		72
Shares issued under employee stock purchase plan, 2,820 shares		3		38								41
Purchase treasury stock, 6,557 shares at $14.80 per share		-		-		-		-		(97)		(97)
Shares issued under Dividend Reinvestment and Stock Purchase Plan, 14,091 shares		14		196								210
BALANCE - SEPTEMBER 30, 2017	$	7,475	$	24,977	$	46,520	$	747	$	(195)	$	79,524

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2017		2016

	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,218	$	5,279
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		735		420
Amortization of deferred loan costs		55		93
Depreciation and amortization		494		557
Net amortization of investment security premiums and discounts		203		208
Stock compensation expense		77		55
Net realized gain on sale of other real estate owned		(16)		(3)
Impairment on other real estate owned		-		80
Income on bank owned life insurance		(302)		(243)
Net realized gain on sale of securities available for sale		(19)		(350)
(Increase) decrease in accrued interest receivable		(84)		33
(Increase) decrease in other assets		(336)		197
(Decrease) increase in accrued interest payable		(32)		256
Increase in other liabilities		776		535
Net Cash Provided by Operating Activities		7,769		7,117
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale		(36,348)		(28,506)
Maturities, calls and principal repayments of securities available for sale		11,615		8,608
Proceeds from sales of securities available for sale		14,920		7,751
Net increase in loans		(39,371)		(65,929)
Net redemption of restricted investment in bank stock		41		1,640
Proceeds from sale of other real estate owned		53		141
Purchases of premises and equipment		(322)		(480)
Net Cash Used in Investing Activities		(49,412)		(76,775)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		59,827		141,493
Net decrease in securities sold under agreements to repurchase		(1,694)		(18,691)
Proceeds from Employee Stock Purchase Plan		41		-
Decrease in short-term borrowed funds		-		(39,306)
Payments of long-term borrowed funds		-		(3,820)
Acquisition of treasury stock		(97)		(98)
Proceeds from Dividend Reinvestment Plan		210		211
Dividends paid		(1,042)		(962)
Net Cash Provided by Financing Activities		57,245		78,827
Net Increase in Cash and Cash Equivalents		15,602		9,169
CASH AND CASH EQUIVALENTS - BEGINNING		24,218		19,526
CASH AND CASH EQUIVALENTS - ENDING	$	39,820	$	28,695

SUPPLEMENTARY CASH FLOWS INFORMATION
Interest paid	$	3,223	$	2,601
Income taxes paid	$	2,530	$	1,984
Other real estate sold through bank financing	$	-	$	523
Deferral of gain from sale of other real estate sold through bank financing	$	16	$	3
Other real estate acquired in settlement of loans	$	-	$	41

See notes to consolidated financial statements.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Basis of Presentation

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

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

The accompanying unaudited financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“US GAAP”) for interim financial information and in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31 , 201 7 .

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, 2016 , included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 201 7 .

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2017 through the date these consolidated financial statements were issued .

Certain amounts in the 201 6 financial statements may have been reclassified to conform to 201 7 presentation. These reclassifications had no effect on 201 6 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, 2016 .

Note 3 – Stockholders’ Equity

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

Note 4 – Stock Incentive Plan and Employee Stock Purchase Plan

Stock Incentive Plan:

At the Company’s annual meeting on June 16, 2010, the shareholders approved the Embassy Bancorp, Inc. 2010 Stock Incentive Plan (the “SIP”). The SIP authorizes the Board of Directors, or a committee authorized by the Board of Directors, to award a stock based incentive to (i) designated officers (including officers who are directors) and other designated employees at the Company and its subsidiaries, and (ii) non-employee members of the Board of Directors and advisors and consultants to the Company and its subsidiaries. The SIP provides for stock based incentives in the form of incentive stock options as provided in Section 422 of the Internal Revenue Code of 1986, non-qualified stock options, stock appreciation rights, restricted stock and deferred stock awards. The term of the option, the amount of time for the option to vest after grant, if any, and other terms and limitations will be determined at the time of grant. Options granted under the SIP may not have an exercise period that is more than ten years from the time the option

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

is granted. At inception, the aggregate number of shares available for issuance under the SIP was 500,000 . The SIP provides for appropriate adjustments in the number and kind of shares available for grant or subject to outstanding awards under the SIP to avoid dilution in the event of merger, stock splits, stock dividends or other changes in the capitalization of the Company. The SIP expires on June 15, 2020. At September 30, 2017 , there were 293,622 shares available for issuance under the SIP.

The Company grants shares of restricted stock, under the SIP, to certain members of its Board of Directors as compensation for their services, in accordance with the Company’s Non-employee Directors Compensation program adopted in October 2010. The Company also grants restricted stock to certain officers under individual agreements with these officers. Some of these restricted stock awards vest immediately, while the remainder vest over three to nine service years. Management recognizes compensation expense for the fair value of the restricted stock awards on a straight-line basis over the requisite service period. Since inception of the plan and through the period ended September 30, 2017 , there have been 90,135 a wards granted. No awards were granted during the three months ended September 30, 2017 and 2016. During the nine months ended September 30, 2017 and 2016 there were 5,156 and 5,934 awards granted, respectively. During the three months ended September 30, 2017 and 2016 the Company recognized $24 thousand and $12 thousand, respectively, in compensation expense fo r the restricted stock awards. During the nine months ended September 30, 2017 and 2016 the Company recognized $72 thousand and $34 thousand, respectively, in compensation expense fo r the restricted stock awards.

In December 2016, January 2014, February 2013 and 2012, the Company granted stock options to purchase 4,227 , 29,663 , 29,742 and 52,611 shares of stock to certain executive officers under individual agreements and/or in accordance with their respective employment agreements. No stock options were granted in 2017 or 2015. Stock compensation expense related to these options was $2 thousand and $6 thousand for the three months ended September 30, 2017 and 201 6 , respectively. Stock compensation expense related to these options was $5 thousand and $21 thousand for the nine months ended September 30, 2017 and 201 6 , respectively. At September 30, 2017 , approximately $10 thousand unrecognized cost related to these stock options granted in 2016 will be recognized over the next 2.22 years , respectively. The fair value of the options granted in 2016, 2014, 2013 and 2012 was determined with the following weighted average assumptions: dividend yield of 1.03% in 2016 and 0.00% in 2014, 2013 and 2012, respectively, risk free interest rate of 2.35% , 2.30% , 1.34% and 1.43% , respectively, expected life of 6.0 years, 6.0 years, 6.0 years and 7.5 years, respectively, and expected volatility of 25.58% , 28.93% , 28.79% and 31.10% , respectively. The weighted average fair value of options granted in 2016, 2014, 2013 and 2012 was $3.28 , $2.46 , $2.14 and $2.56 per share, respectively.

Employee Stock Purchase Plan:

On January 1, 2017, the Company implemented the Embassy Bancorp, Inc. Employee Stock Purchase Plan, which was approved by the Company’s shareholders at the annual meeting held on June 16, 2016. Under the plan, each employee of the Company and its subsidiaries who is employed on an offering date and customarily is scheduled to work at least twenty (20) hours per week and more than five (5) months in a calendar year is eligible to participate. The purchase price for shares purchased under the plan shall initially equal 95% of the fair market value of such shares on the date of purchase. The purchase price may be adjusted from time to time by the Board of Directors; provided, however, that the discount to fair market value shall not exceed 15% . The Company has authorized 350,000 shares of its common stock for the plan , of which 2,820 shares have been issued as of September 30, 2017 .

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 5 – Other Comprehensive Income (Loss)

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

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



	Three Months Ended September 30,
	2017								2016

	(In Thousands)

	Before		Tax			Net of			Before			Tax			Net of
	Tax		Effect			Tax			Tax			Effect			Tax
Change in accumulated other comprehensive income :
Unrealized holding loss on securities available for sale	$	(162)		$	56		$	(106)		$	(212)		$	72		$	(140)
Reclassification adjustments for gains on securities transactions included in net income (A),(B)		(19)			6			(13)			(350)			119			(231)
Total change in other comprehensive income	$	(181)		$	62		$	(119)		$	(562)		$	191		$	(371)



	Nine Months Ended September 30,
	2017						2016

	(In Thousands)
	Before		Tax		Net of		Before		Tax		Net of
	Tax		Effect		Tax		Tax		Effect		Tax
Change in accumulated other comprehensive income:
Unrealized holding gains on securities available for sale	$	1,188	$	(404)	$	784	$	845	$	(287)	$	558
Reclassification adjustments for gains on securities transactions included in net income (A),(B)		(19)		6		(13)		(350)		119		(231)
Total change in other comprehensive income	$	1,169	$	(398)	$	771	$	495	$	(168)	$	327

Realized gains on securities transactions included in gain on sales of securities, net, in the accompanying Consolidated Statements of Income.

Tax effect included in income tax expense in the accompanying Consolidated Statements of Income.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

A summary of the realized gains on securities available for sale , net of tax, for the three and nine months ended September 30, 2017 and 2016 are as follows:



	Three Months Ended
	September 30,
		2017		2016

		(In Thousands)
Securities available for sale:
Realized gains on securities transactions	$	(19)	$	(350)
Income taxes		6		119
Net of tax	$	(13)	$	(231)



	Nine Months Ended
	September 30,
		2017		2016

		(In Thousands)
Securities available for sale:
Realized gains on securities transactions	$	(19)	$	(350)
Income taxes		6		119
Net of tax	$	(13)	$	(231)

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



	Securities
	Available
	for Sale
Three Months Ended September 30, 2017 and 2016	(In Thousands)
Balance June 30, 2017	$	866
Other comprehensive loss before reclassifications		(106)
Amounts reclassified from accumulated other comprehensive income		(13)
Net other comprehensive loss during the period		(119)
Balance September 30, 2017	$	747

Balance June 30, 2016	$	1,934
Other comprehensive loss before reclassifications		(140)
Amounts reclassified from accumulated other comprehensive income		(231)
Net other comprehensive loss during the period		(371)
Balance September 30, 2016	$	1,563



Nine Months Ended September 30, 2017 and 2016
Balance January 1, 2017	$	(24)
Other comprehensive income before reclassifications		784
Amounts reclassified from accumulated other comprehensive income		(13)
Net other comprehensive income during the period		771
Balance September 30, 2017	$	747

Balance January 1, 2016	$	1,236
Other comprehensive income before reclassifications		558
Amounts reclassified from accumulated other comprehensive income		(231)
Net other comprehensive income during the period		327
Balance September 30, 2016	$	1,563

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

No te 6 – Basic and Diluted Earnings per Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

	(Dollars In Thousands, Except Share and Per Share Data)
Net income	$	2,233	$	2,007	$	6,218	$	5,279

Weighted average shares outstanding		7,444,231		7,413,697		7,445,997		7,412,861
Dilutive effect of potential common shares, stock options		57,076		35,645		57,038		34,948
Diluted weighted average common shares outstanding		7,501,307		7,449,342		7,503,035		7,447,809

Basic earnings per share	$	0.30	$	0.27	$	0.84	$	0.71
Diluted earnings per share	$	0.30	$	0.27	$	0.83	$	0.71

Stock options of 4,227 were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2017 . There were no stock options not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2016 .

Note 7 – Guarantees

The Company, through the Bank, does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees suppo rting these commitments. The Company had $4.9 million of standby letters of credit outstanding as of September 30, 2017 . The approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $3. 6 million. Management does not consider the current amount of the liability as of September 30, 2017 for guarantees under standby letters of credit issued to be material .

Note 8 – Short-term and Long-term Borrowings

Securities sold under agreements to repurchase, federal funds purchased and FHLB short term advances generally represent overnight or less than twelve month borrowings. Long term advances from the FHLB are for periods of twelve months or more and are generally less than sixty months . The Bank has an agreement with the FHLB which allows for borrowings up to a percentage of qualifying assets. At September 30, 2017 , the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $ 487.5 million. This borrowing capacity with the FHLB includes a line of credit of $ 150.0 million. There were no short-term or long -term FHLB advances outstanding as of September 30, 2017 and December 31, 2016 . All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the Atlantic Community Bankers Bank (“ACBB”) of $ 10.0 million , of which none was outstanding at September 30, 2017 and December 31, 2016 . Advance s from this line are unsecured.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 9 – Securities Available For Sale

At September 30, 2017 and December 31, 2016 , respectively, the amortized cost and approximate fair values of securities available-for-sale were as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

	(In Thousands)
September 30, 2017 :
U.S. Government agency obligations	$	14,053	$	4	$	(29)	$	14,028
Municipal bonds		37,357		1,359		(247)		38,469
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		43,855		226		(182)		43,899
Total	$	95,265	$	1,589	$	(458)	$	96,396

December 31, 2016 :
U.S. Government agency obligations	$	32,581	$	12	$	(105)	$	32,488
Municipal bonds		38,410		1,161		(763)		38,808
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		14,645		114		(457)		14,302
Total	$	85,636	$	1,287	$	(1,325)	$	85,598

The amortized cost and fair value of securities as of September 30, 2017 , by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without any penalties.



		Amortized		Fair
		Cost		Value

	(In Thousands)
Due in one year or less	$	9,249	$	9,268
Due after one year through five years		12,073		12,297
Due after five years through ten years		7,409		7,629
Due after ten years		22,679		23,303
		51,410		52,497
U.S. Government Sponsored Enterprise (GSE) - Mortgage-backed securities - residential		43,855		43,899
	$	95,265	$	96,396

Gross gains of $19 thousand and $350 thousand were realized on the sales of securities for the three and nine months ended September 30, 2017 and 2016, respectively. There were no gross losses on the sales of securities during the three and nine months ended September 30, 2017 and 2016.

Securities with a carrying value of $ 85.9 milli on and $71.8 million at September 30, 2017 and December 31, 2016 , respectively, were subject to agreements to repurchase, pledged to secure public deposits, or pledged for other purpose s required or permitted by law.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016 , respectively:



		Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

September 30, 2017 :	(In Thousands)
U.S. Government agency obligations	$	7,024	$	(9)	$	2,997	$	(20)	$	10,021	$	(29)
Municipal bonds		2,588		(21)		6,401		(226)		8,989		(247)
U.S. Government Sponsored Enterprise		25,685		(182)		-		-		25,685		(182)
(GSE) - Mortgage -backed securities -
residential
Total Temporarily Impaired Securities	$	35,297	$	(212)	$	9,398	$	(246)	$	44,695	$	(458)

December 31, 2016 :
U.S. Government agency obligations	$	20,388	$	(105)	$	-	$	-	$	20,388	$	(105)
Municipal bonds		8,595		(763)		-		-		8,595		(763)
U.S. Government Sponsored Enterprise		13,206		(457)		-		-		13,206		(457)
(GSE) - Mortgage -backed securities -
residential
Total Temporarily Impaired Securities	$	42,189	$	(1,325)	$	-	$	-	$	42,189	$	(1,325)

The Company had thirty-three (3 3 ) securities in an unrealized loss position at September 30, 2017 . The unrealized losses are due only to market rate fluctuations. As of September 30, 2017 , 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. Non e of the individual losses are material .

Note 10 – Restricted Investment in Bank Stock

Restricted investments in bank stock consist of FHL Bank of Pittsburgh (“FHLB”) stock and Atlantic Community Bankers Bank (“ACBB”) stock. The restricted stocks are carried at cost. Federal law requires a member institution of the FHLB to hold stock of its district FHLB according to a predetermined formula. There were no stock repurchases during the three months ended September 30, 2017 and $1.3 million stock repurchased during the nine months ended September 30, 2017 . The Bank had $87 thousand and $2.2 million stock repurchased during the three and nine months ended September 30, 2016, respectively. There were no stock purchases for the three months ending September 30, 2017 and 2016. S tock purchases of $1.3 million and $537 thousand were made during the nine months ended September 30, 2017 and 2016, respectively. Dividend payments of $ 5 thousand and $11 thousand were received during the three and nine months ended September 30, 2017 and $4 thousand and $45 thousand were received during the three and nine months ended September 30, 2016 , respectively.

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

Based upon its evaluation of the foregoing criteria, management believes no impairment charge is necessary related to the FHLB or ACBB stock as of September 30, 2017 .

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 11 – Loans Receivable and Credit Quality

The following table presents the composition of loans receivable at September 30, 2017 and December 31, 2016 , respectively:



	September 30, 2017			December 31, 2016
			Percentage of			Percentage of
	Balance		total Loans	Balance		total Loans

		(Dollars in Thousands)

Commercial real estate	$	333,331	39.79%	$	321,730	40.27%
Commercial construction		34,536	4.12%		28,606	3.58%
Commercial		39,862	4.76%		39,045	4.89%
Residential real estate		428,951	51.21%		408,872	51.17%
Consumer		978	0.12%		718	0.09%
Total loans		837,658	100.00%		798,971	100.00%
Unearned origination fees		371			144
Allowance for loan losses		(6,850)			(6,517)
	$	831,179		$	792,598

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of September 30, 2017 and December 31, 2016 , respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

September 30, 2017		(In Thousands)
Commercial real estate	$	327,832	$	-	$	5,499	$	-	$	333,331
Commercial construction		34,221		-		315		-		34,536
Commercial		39,862		-		-		-		39,862
Residential real estate		428,113		-		838		-		428,951
Consumer		978		-		-		-		978
Total	$	831,006	$	-	$	6,652	$	-	$	837,658

December 31, 2016
Commercial real estate	$	315,579	$	20	$	6,131	$	-	$	321,730
Commercial construction		28,291		-		315		-		28,606
Commercial		38,916		29		100		-		39,045
Residential real estate		407,787		-		1,085		-		408,872
Consumer		718		-		-		-		718
Total	$	791,291	$	49	$	7,631	$	-	$	798,971

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes information in regards to impaired loans by loan portfolio class as of September 30, 2017 and December 31, 2016 , respectively:


							Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
September 30, 2017		(In Thousands)
With no related allowance recorded:
Commercial real estate	$	5,453	$	5,453			$	5,517	$	55	$	6,730	$	167
Commercial construction		315		315				315		3		315		8
Commercial		-		-				-		-		50		-
Residential real estate		838		1,105				909		1		1,191		4
Consumer		-		-				-		-		-		-
With an allowance recorded:
Commercial real estate	$	2,020	$	2,284	$	40	$	2,006	$	7	$	1,003	$	17
Commercial construction		-		-		-		-		-		-		-
Commercial		246		246		39		247		3		255		8
Residential real estate		1,207		1,207		235		1,213		4		1,009		13
Consumer		-		-		-		-		-		-		-
Total:
Commercial real estate	$	7,473	$	7,737	$	40	$	7,523	$	62	$	7,733	$	184
Commercial construction		315		315		-		315		3		315		8
Commercial		246		246		39		247		3		305		8
Residential real estate		2,045		2,312		235		2,122		5		2,200		17
Consumer		-		-		-		-		-		-		-
	$	10,079	$	10,610	$	314	$	10,207	$	73	$	10,553	$	217
December 31, 2016
With no related allowance recorded:
Commercial real estate	$	8,159	$	8,463							$	5,924	$	255
Commercial construction		315		315								565		19
Commercial		100		160								50		2
Residential real estate		1,516		1,723								1,050		23
Consumer		-		-								-		-
With an allowance recorded:
Commercial real estate	$	-	$	-	$	-					$	-	$	-
Commercial construction		-		-		-						-		-
Commercial		279		279		64						263		12
Residential real estate		811		811		232						914		5
Consumer		-		-		-						-		-
Total:
Commercial real estate	$	8,159	$	8,463	$	-					$	5,924	$	255
Commercial construction		315		315		-						565		19
Commercial		379		439		64						313		14
Residential real estate		2,327		2,534		232						1,964		28
Consumer		-		-		-						-		-
	$	11,180	$	11,751	$	296					$	8,766	$	316

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



	September 30, 2017		December 31, 2016

	(In Thousands)
Commercial real estate	$	-	$	180
Commercial construction		-		-
Commercial		-		100
Residential real estate		689		874
Consumer		-		-
Total	$	689	$	1,154

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2017 and December 31, 2016 , respectively:


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

September 30, 2017	(In Thousands)
Commercial real estate	$	2,265	$	570	$	204	$	3,039	$	330,292	$	333,331	$	204
Commercial construction		-		-		-		-		34,536		34,536		-
Commercial		-		162		-		162		39,700		39,862		-
Residential real estate		397		135		635		1,167		427,784		428,951		-
Consumer		-		2		-		2		976		978		-
Total	$	2,662	$	869	$	839	$	4,370	$	833,288	$	837,658	$	204

December 31, 2016
Commercial real estate	$	123	$	-	$	180	$	303	$	321,427	$	321,730	$	-
Commercial construction		-		-		-		-		28,606		28,606		-
Commercial		196		-		100		296		38,749		39,045		-
Residential real estate		595		155		929		1,679		407,193		408,872		55
Consumer		-		-		-		-		718		718		-
Total	$	914	$	155	$	1,209	$	2,278	$	796,693	$	798,971	$	55

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables detail the activity in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 :



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

Allowance for loan losses	(In Thousands)
Three Months Ending September 30, 2017
Beginning Balance - June 30, 2017	$	2,154	$	473	$	493	$	3,370	$	27	$	244	$	6,761
Charge-offs		(108)		-		-		(123)		-		-		(231)
Recoveries		-		-		-		-		-		-		-
Provisions		146		(49)		48		182		(10)		3		320
Ending Balance - September 30, 2017	$	2,192	$	424	$	541	$	3,429	$	17	$	247	$	6,850

Nine Months Ending September 30, 2017
Beginning Balance - December 31, 2016	$	2,349	$	516	$	423	$	2,937	$	15	$	277	$	6,517
Charge-offs		(108)		-		(122)		(185)		-		-		(415)
Recoveries		13		-		-		-		-		-		13
Provisions		(62)		(92)		240		677		2		(30)		735
Ending Balance - September 30, 2017	$	2,192	$	424	$	541	$	3,429	$	17	$	247	$	6,850

Three Months Ending September 30, 2016
Beginning Balance - June 30, 2016	$	2,178	$	427	$	418	$	2,787	$	30	$	439	$	6,279
Charge-offs		-		-		(75)		(129)		-		-		(204)
Recoveries		-		-		-		-		-		-		-
Provisions		22		30		20		196		(2)		(101)		165
Ending Balance - September 30, 2016	$	2,200	$	457	$	363	$	2,854	$	28	$	338	$	6,240

Nine Months Ending September 30, 2016
Beginning Balance - December 31, 2015	$	2,132	$	294	$	402	$	2,529	$	29	$	682	$	6,068
Charge-offs		(35)		-		(75)		(138)		-		-		(248)
Recoveries		-		-		-		-		-		-		-
Provisions		103		163		36		463		(1)		(344)		420
Ending Balance - September 30, 2016	$	2,200	$	457	$	363	$	2,854	$	28	$	338	$	6,240

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables represent the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at September 30, 2017 and December 31, 2016 :



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

	(In Thousands)
September 30, 2017
Allowance for Loan Losses
Ending Balance	$	2,192	$	424	$	541	$	3,429	$	17	$	247	$	6,850
Ending balance: individually evaluated for impairment	$	40	$	-	$	39	$	235	$	-	$	-	$	314
Ending balance: collectively evaluated for impairment	$	2,152	$	424	$	502	$	3,194	$	17	$	247	$	6,536

Loans receivables:
Ending balance	$	333,331	$	34,536	$	39,862	$	428,951	$	978			$	837,658
Ending balance: individually evaluated for impairment	$	7,473	$	315	$	246	$	2,045	$	-			$	10,079
Ending balance: collectively evaluated for impairment	$	325,858	$	34,221	$	39,616	$	426,906	$	978			$	827,579

December 31, 2016
Allowance for Loan Losses
Ending Balance	$	2,349	$	516	$	423	$	2,937	$	15	$	277	$	6,517
Ending balance: individually evaluated for impairment	$	-	$	-	$	64	$	232	$	-	$	-	$	296
Ending balance: collectively evaluated for impairment	$	2,349	$	516	$	359	$	2,705	$	15	$	277	$	6,221

Loans receivables:
Ending balance	$	321,730	$	28,606	$	39,045	$	408,872	$	718			$	798,971
Ending balance: individually evaluated for impairment	$	8,159	$	315	$	379	$	2,327	$	-			$	11,180
Ending balance: collectively evaluated for impairment	$	313,571	$	28,291	$	38,666	$	406,545	$	718			$	787,791

Beginning with the allowance for loan losses calculation of April 30, 2017, management updated the historical loss factors for each pool, which includes, but is not limited to, an average of the Company’s historical net charge-off ratio for five prior years and year to date, this has been reduced to four prior years and year to date as of the April 30, 2017 calculation , to m aintain an adequate reserve . The updates were based on management’s best judgement using relevant information available at the time of the evaluation and are supported through documentation in a narrative accompanying the allowance for loan loss calculation.

Troubled Debt Restructurings

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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 TDR ’ s outstanding:



	Accrual Loans		Non-Accrual Loans		Total Modifications

September 30, 2017	(In Thousands)
Commercial real estate	$	3,024	$	-	$	3,024
Commercial construction		260		-		260
Commercial		246		-		246
Residential real estate		1,207		53		1,260
Consumer		-		-		-
	$	4,737	$	53	$	4,790

December 31, 2016
Commercial real estate	$	3,078	$	-	$	3,078
Commercial construction		260		-		260
Commercial		250		-		250
Residential real estate		1,243		-		1,243
Consumer		-		-		-
	$	4,831	$	-	$	4,831

As of September 30, 2017 , no available commitments were outstanding on TDRs.

There were no newly restructured loans that occurred during the three and nine months ended September 30, 2016 . The following table presents newly restructured loans that occurred during the three and nine months ended September 30, 2017.



	Number of Loans	Pre-Modification Outstanding Balance		Post- Modification Outstanding Balance

	(Dollars In Thousands)
Three Months Ending September 30, 2017
Residential real estate	2	$	122	$	53
	2	$	122	$	53

Nine Months Ending September 30, 2017
Residential real estate	2	$	122	$	53
	2	$	122	$	53

The residential loans above were restructured through a payment modification and had no impairment reserve recorded in the allowance for loan loss for the three and nine months ending September 30, 2017.

There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety days or more past due) during the three and nine months ended September 30, 2017 and 2016 .

Note 12 – Fair Value Measurements

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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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 c urrent 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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy utilized at September 30, 2017 and December 31, 2016 , respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total

		(In Thousands)
U.S. Government agency obligations	$	-	$	14,028	$	-	$	14,028
Municipal bonds		-		38,469		-		38,469
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		43,899		-		43,899
September 30, 2017 Securities available for sale	$	-	$	96,396	$	-	$	96,396

U.S. Government agency obligations	$	-	$	32,488	$	-	$	32,488
Municipal bonds		-		38,808		-		38,808
U.S. Government Sponsored Enterprise (GSE) -
Mortgage-backed securities - residential		-		14,302		-		14,302
December 31, 2016 Securities available for sale	$	-	$	85,598	$	-	$	85,598

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2017 and December 31, 2016 , respectively, are as follows:



		(Level 1)		(Level 2)
		Quoted		Significant		(Level 3)
		Prices in Active		Other		Significant
		Markets for		Observable		Unobservable
Description	Identical Assets		Inputs		Inputs		Total
		(In Thousands)
September 30, 2017 Impaired loans (1)	$	-	$	-	$	3,159	$	3,159
September 30, 2017 Other real estate owned (1)	$	-	$	-	$	427	$	427
December 31, 2016 Impaired loans (1)	$	-	$	-	$	794	$	794
December 31, 2016 Other real estate owned (1)	$	-	$	-	$	480	$	480

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

Impaired loans are those that are accounted for under existing FASB guidance , in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the

properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

At September 30, 2017 , of the impaired loans h aving an aggregate balance of $10.1 million, $6.6 million did not require a valuation allowance because the value of the collateral, including estimated selling costs, securing the loan was determined to meet or exceed the balance owed on the loan. Of the remaining $ 3.5 million in impaired loans, an aggregate valuation allowance of $ 314 thousand was required to reflect what was determined to be a shortfall in the value of the collateral as compared to the balance on such loans.

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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



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

		(Dollars In Thousands)
September 30, 2017:
Impaired loans	$	3,159	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to -25% (-24.2%)
				Liquidation expenses (3)	0% to - 10% (-7.6%)
Other real estate owned	$	427	Listings, Letters of Intent	Liquidation expenses (3)	-5% (-5%)
			& Third Party Evaluations (4)
December 31, 2016:
Impaired loans	$	794	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to -25% (-24.8%)
				Liquidation expenses (3)	0% to -10.0% (-7.5%)
Other real estate owned	$	480	Listings, Letters of Intent	Liquidation expenses (3)	-5% (-5%)
			& Third Party Evaluations (4)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include Level 3 inputs which are not identifiable.

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.

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.

Fair value is determined by listings, letters of intent or third-party evaluations.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2017 and December 31, 2016 :

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.

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Restricted Investment in Bank Stock (Carried at Cost)

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

Accrued Interest Receivable and Payable (Carried at Cost)

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

Deposit Liabilities (Carried at Cost)

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

Securities Sold Under Agreements to Repurchase, Federal Funds Purchased and Short-Term Borrowings (Carried at Cost)

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

Long-Term Borrowings (Carried at Cost)

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

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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. Such amounts are not material.

The estimated fair values of the Company’s financial instruments were as follows at September 30, 2017 and December 31, 2016 :



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

	(In Thousands)
September 30, 2017:
Financial assets:
Cash and cash equivalents	$	39,820	$	39,820	$	39,820	$	-	$	-
Interest bearing time deposits		-		-		-		-		-
Securities available-for-sale		96,396		96,396		-		96,396		-
Loans receivable, net of allowance		831,179		828,267		-		-		828,267
Restricted investments in bank stock		583		583		-		583		-
Accrued interest receivable		1,833		1,833		-		1,833		-
Financial liabilities:
Deposits		893,211		893,006		-		893,006		-
Securities sold under agreements to
repurchase and federal funds purchased		10,195		10,190		-		10,190		-
Short-term borrowings		-		-		-		-		-
Long-term borrowings		-		-		-		-		-
Accrued interest payable		781		781		-		781		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

December 31, 2016:
Financial assets:
Cash and cash equivalents	$	24,218	$	24,218	$	24,218	$	-	$	-
Interest bearing time deposits		-		-		-		-		-
Securities available-for-sale		85,598		85,598		-		85,598		-
Loans receivable, net of allowance		792,598		790,326		-		-		790,326
Restricted investments in bank stock		624		624		-		624		-
Accrued interest receivable		1,749		1,749		-		1,749		-
Financial liabilities:
Deposits		833,384		833,627		-		833,627		-
Securities sold under agreements to
repurchase and federal funds purchased		11,889		11,886		-		11,886		-
Short-term borrowings		-		-		-		-		-
Long-term borrowings		-		-		-		-		-
Accrued interest payable		813		813		-		813		-
Off-balance sheet financial instruments:
Commitments to grant loans		-		-		-		-		-
Unfunded commitments under lines of credit		-		-		-		-		-
Standby letters of credit		-		-		-		-		-

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 13 – Offsetting Assets and Liabilities

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

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

The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of September 30, 2017 and December 31, 2016 :



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

		(In Thousands)
September 30, 2017
Repurchase Agreements:
Corporate Institutions	$	10,195	$	-	$	10,195	$	(10,195)	$	-	$	-

December 31, 2016
Repurchase Agreements:
Corporate Institutions	$	11,889	$	-	$	11,889	$	(11,889)	$	-	$	-

As of September 30, 2017 and December 31, 2016 , the fair value of securities pledged was $1 3 .3 million and $14.5 million , respectively.

Note 1 4 – Deposits

The components of deposits at September 30, 2017 and December 31, 2016 are as follows:



	September 30, 2017		December 31, 2016
	(In Thousands)

Demand, non-interest bearing	$	134,808	$	117,208
Demand, NOW and money market, interest bearing		114,157		97,687
Savings		505,783		488,701
Time, $100 and over		99,444		89,020
Time, other		39,019		40,768
Total deposits	$	893,211	$	833,384

Embassy Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 5 – New Accounting Standards

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company will adopt this ASU on January 1, 2018. The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods. The Company has not yet determined which application method it will use . This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, the Company does not expect it to have a material impact on the consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income and interest expense. However, the Company does believe the new standard will result in new disclosure requirements. The Company currently is in the process of reviewing contracts to assess the impact of the new guidance on its service offerings that are in the scope of the guidance, included in non-interest income . The recognition and measurement of certain non-interest income items such as gain on seller financed real estate owned sales and deposit related fees, could be affected. The Company does not expect this ASU to have material impact on the Company’s consolidated financial statements when adopted.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will supersede the current lease requirements in Topic 840. The ASU requires lessees to recognize a right of use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of income. Currently, leases are classified as either capital or operating, with only capital leases recognized on the balance sheet. The reporting of lease related expenses in the statements of operations and cash flows will be generally consistent with the current guidance. The new guidance will be effective for the Company in 2019 . Once effective, the standard will be applied using a modified retrospective transition method to the beginning of the earliest period presented. The Company is currently assessing the impact this new standard will have on its consolidated financial statements.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. This guidance is effective for the Company in 2021 . The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations, however due to the significant differences in the revised guidance from existing U.S. GAAP, the implementation of this guidance may result in material changes to the Company’s accounting for credit losses on financial instruments.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)” (“ASU 2017-08”). ASU 2017-08 will amend the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for the Company in 2019. Early application is permitted for any interim period. The Company is currently assessing the impact this new standard will have on its consolidated financial statements.

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

This discussion and analysis provides an overview of the financial condition and results of operations of Embassy Bancorp, Inc. (the “Company”) as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 , 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, 2016 , 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, 2016 . 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 (v) other external developments which could materially affect the Company’s business and operations.

OVERVIEW

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

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

The Company’s assets increased $ 65.0 million from $ 924.2 million at December 31, 2016 to $ 989.3 million at September 30, 2017 . The C ompany's deposits grew $ 59.8 million from $833.4 million at December 31, 2016 to $ 893.2 million at September 30, 2017 . The significant growth in deposits resulted primarily from recent mergers in the Company’s market area, customers migrating to local community banks, and through a concentrated effort to expand customer relationships. During the same period, loans receivable, net of allowance for loan losses, increased $ 38.6 million from $792. 6 million at December 31, 2016 to $ 831.2 million at September 30, 201 7 . 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 increased lending activity, as the Company expands its presence in the market and continues to

become more widely known. The past and current economic conditions have created s lower demand for loans by credit-worthy customers. The lending staff has been active in contacting new prospects and promoting the Company’s name in the community. Management believes that this will translate into continued growth of a portfolio of quality loans and core deposit relationships, although there can be no assurance of this. The Company continues to monitor interest rate exposure of its interest bearing assets and liabilities and believes that it is well positioned for any future market rate adjustments.

Net income for the three months ended September 30, 2017 was $2.2 million compared to net income for the three months ended September 30, 2016 of $2.0 million, an increase of $ 226 thousand, or 11.3 %. Net income for the nine months ended September 30, 2017 was $ 6.2 million compared to net income for the nine months ended September 30, 2016 of $ 5.3 million, an increase of $ 939 thousand, or 17 .8%. Diluted earnings per share increased to $ 0.83 for the nine months ended September 30, 2017 , as compared to $ 0.71 for the nine months ended September 30, 2016 . The difference in net income for the nine months ended September 30, 2017 and September 30, 2016 resulted, in part, from an increase in interest income due to the Company’s growing loan portfolio and a slight increase in non-interest income due to the expansion of the Company’s customer base, offset by interest expense from the growth in deposits, an increase in provision for loan losses and a $331 thousand decrease in gain on the sale of securities.

RESULTS OF OPERATIONS

Net Interest Income

Total interest income for the three months ended September 30, 2017 and 2016 totaled $ 8.8 million and $7.7 million, respectively. Average earning assets were $ 959.6 million for the three months ended September 30, 2017 as compared to $ 845.5 million for the three months ended September 30, 2016 . The tax equivalent yield on average earning assets was 3.71% for the third quarter of 2017 compared to 3.70% for the third quarter of 2016 .

Total interest expense for the three months ended September 30, 2017 increased $ 90 thousand to $ 1.1 million as compared to $ 1.0 million for the three months ended September 30, 2016. A verage interest bearing liabilities were $ 772.7 million for the three months ended September 30, 2017 compared to $ 693.8 million for the three months ended September 30, 2016 . The yield on average interest bearing liabilities was 0.56% and 0.58% for the third quarter of 2017 and 2016 , respectively .

Net interest income for the three months ended September 30, 2017 was $ 7.7 million compared to $ 6.7 million for the three months ended September 30, 2016 . The improvement in net interest income for the three months ended September 30, 2017 is a result of the growth in t he loan portfolio, the investment portfolio and in the interest bearing deposits with banks, offset by growth in savings, certificates of deposit and interest bearing deposits. The Company’s net interest margin for the three months ended September 30, 2017 increased three (3) basis points to 3.25% as compared to 3.22% for the three months ended September 30, 2016. The increase in the net interest margin is due primarily to the rate increase on taxable investment s and interest bearing deposits with banks and a slight shift in the deposit mix to lower yielding interest bearing deposits, offset by a rate decrease in non-taxable investments and a rate increase in certificate of deposits.

Total interest income for the nine months ended September 30, 2017 and 2016 totaled $25.2 million and $22.4 million, respectively. Average earning assets were $934.9 million for the nine months ended September 30, 2017 compared to $820.9 million for the nine months ended September 30, 2016 . The tax equivalent yield on average earning assets was 3.69% for the nine months ended September 30, 2017 compared to 3.74% for the nine months ended September 30, 2016 .

Total interest expense for the nine months ended September 30, 2017 increased $322 thousand to $3.2 million as compared to $2.9 million for the nine months ended September 30, 2016. Average interest bearing liabilities were $759.3 million for the nine months ended September 30, 2017 compared to $677.8 million for the nine months ended September 30, 2016 . The yield on average interest bearing liabilities was 0.56% and 0.57% f or the nine months ended September 30, 2017 and 2016, respectively.

Net interest income for the nine months ended September 30, 2017 was $22.0 million as compared to $19.5 million for the nine months ended September 30, 2016 . The improvement in net interest income for the nine months ended September 30, 2017 is a result of the growth in the loan portfolio, the investment portfolio , in the interest bearing deposits with banks, and a decrease in securities sold under agreements to repurchase balances and FHLB borrowings, offset by growth in savings, certificates of deposit and interest bearing deposits. The Company’s net interest margin for the nine months ended September 30, 2017 decreased three (3 ) basis points to 3.24% as compared to 3.27% for the nine months ended September 30, 2016 . The decrease in the net interest margin is due primarily to the decrease in loan and non-taxable investment rates and increase in certificate of deposit rates associated with the current market conditions, offset by the decrease in securities sold under agreements to repurchase balances and FHLB borrowings and coupled with the significant growth in the loan, investments, interest bearing deposits, savings and certificate of deposit balances. During this difficult interest rate environment, the Company continued to grow and attract deposits and loans at competitive rates.

The table below sets forth average balances and corresponding yields for the corresponding periods ended September 30, 2017 and 2016 , respectively:

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (quarter to date)


	Three Months Ended September 30,
	2017			2016
			Tax			Tax
	Average		Equivalent	Average		Equivalent
	Balance	Interest	Yield (1)	Balance	Interest	Yield (1)

	(Dollars In Thousands)
ASSETS
Loans - taxable	$ 822,338	$ 8,005	3.86%	$ 728,302	$ 7,063	3.86%
Loans - non-taxable	9,052	70	4.65%	9,632	74	4.63%
Investment securities - taxable	53,882	246	1.83%	56,140	205	1.47%
Investment securities - non-taxable	38,557	323	5.04%	32,781	295	5.42%
Federal funds sold	1,000	3	1.21%	1,000	1	0.47%
Interest bearing deposits with banks	34,755	114	1.30%	17,665	25	0.56%
TOTAL INTEREST EARNING ASSETS	959,584	8,761	3.71%	845,520	7,663	3.70%
Less allowance for loan losses	(6,805)			(6,311)
Other assets	35,520			38,435
TOTAL ASSETS	$ 988,299			$ 877,644

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits, NOW and money market	$ 119,052	$ 28	0.09%	$ 77,094	$ 17	0.09%
Savings	505,938	621	0.49%	483,423	597	0.49%
Certificates of deposit	137,567	445	1.28%	123,954	390	1.25%
Securities sold under agreements to repurchase, and short & long-term borrowings	10,176	3	0.12%	9,308	3	0.13%
TOTAL INTEREST BEARING LIABILITIES	772,733	1,097	0.56%	693,779	1,007	0.58%

Non-interest bearing demand deposits	129,107			99,881
Other liabilities	7,670			7,383
Stockholders' equity	78,789			76,601
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 988,299			$ 877,644

Net interest income		$ 7,664			$ 6,656
Net interest spread			3.15%			3.12%
Net interest margin			3.25%			3.22%

(1)

The above reflects the average rates earned or paid stated on an FTE basis assuming a 34% tax rate.

Distribution of Assets, Liabilities and Stockholders’ Equity:

Interest Rates and Interest Differential (year to date)


	Nine Months Ended September 30,

	2017			2016

			Tax			Tax
	Average		Equivalent	Average		Equivalent
	Balance	Interest	Yield (1)	Balance	Interest	Yield (1)

	(Dollars In Thousands)
ASSETS
Loans - taxable	$ 808,896	$ 23,161	3.83%	$ 709,148	$ 20,614	3.88%
Loans - non-taxable	9,107	208	4.63%	9,691	223	4.66%
Investment securities - taxable	52,669	639	1.62%	52,209	605	1.55%
Investment securities - non-taxable	38,386	983	5.19%	31,660	864	5.52%
Federal funds sold	899	7	1.02%	850	3	0.47%
Interest bearing deposits with banks	24,949	211	1.13%	17,335	105	0.81%
TOTAL INTEREST EARNING ASSETS	934,906	25,209	3.69%	820,893	22,414	3.74%
Less allowance for loan losses	(6,661)			(6,224)
Other assets	35,190			36,592
TOTAL ASSETS	$ 963,435			$ 851,261

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits,
NOW and money market	$ 110,136	$ 75	0.09%	$ 73,998	$ 47	0.08%
Savings	503,455	1,838	0.49%	459,611	1,687	0.49%
Certificates of deposit	133,703	1,260	1.26%	119,325	1,089	1.22%
Securities sold under agreements to repurchase, and short & long-term borrowings	11,964	18	0.20%	24,867	46	0.25%
TOTAL INTEREST BEARING LIABILITIES	759,258	3,191	0.56%	677,801	2,869	0.57%

Non-interest bearing demand deposits	120,477			93,533
Other liabilities	6,710			6,387
Stockholders' equity	76,990			73,540
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 963,435			$ 851,261

Net interest income		$ 22,018			$ 19,545
Net interest spread			3.13%			3.17%
Net interest margin			3.24%			3.27%

(1)

The above reflects the average rates earned or paid stated on an FTE basis assuming a 34% tax rate.

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 management considers 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. Such loans may also be classified as impaired and/or restructured. For loans that are further classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

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

For the three months ended September 30, 2017 , the provision for loan losses was $320 thousand, as compared to $165 thousand for the same period ended September 30, 2016 , due to loan growth, charge-offs and change in the qualitative factors . In the three months ended September 30, 2017 , there were charge-offs in the amount of $ 231 thousand and no recoveries, as compared to charge-offs of $204 thousand and no recoveries for the three months ended September 30, 2016. For the nine months ended September 30, 2017, the provision for loan losses was $735 thousand, as compared to $420 thousand for the same period ended September 30, 2016 , due to loan growth, charge-offs and change in the qualitative factors . F or the nine months ended September 30, 2017 , there were charge-offs in the amount of $ 415 thousand and recoveries of $13 thousand, as compared to $248 thousand in charge offs and no recoveries for the nine months ended September 30, 2016 . The allowance for loan losses is $ 6.9 million as of September 30, 2017 , which is 0.82% of outstanding loans, compared to $ 6.2 million or 0.83% of outstanding loans as of September 30, 2016 . At December 31, 2016 , the allowance for loan losses was $6.5 million, which represented 0.82% of total outstanding loans. Based principally on economic conditions, asset quality, and loan-loss experience, including that of comparable institutions in the Bank’s market area, the allowance is believed to be adequate to absorb any losses inherent in the portfolio. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate, or that material increases will not be necessary should the quality of the loans deteriorate. The Bank has not participated in any sub-prime lending activity.

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



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

	(In Thousands)
Loans receivable at end of period	$	837,658	$	756,074	$	837,658	$	756,074
Allowance for loan losses:
Balance, beginning	$	6,761	$	6,279	$	6,517	$	6,068
Provision for loan losses		320		165		735		420
Loans charged off:
Commercial real estate		(108)		-		(108)		(35)
Commercial construction		-		-		-		-
Commercial		-		(75)		(122)		(75)
Residential real estate		(123)		(129)		(185)		(138)
Consumer		-		-		-		-
Total loans charged off		(231)		(204)		(415)		(248)
Recoveries of loans previously charged off:
Commercial real estate		-		-		13		-
Commercial construction		-		-		-		-
Commercial		-		-		-		-
Residential real estate		-		-		-		-
Consumer		-		-		-		-
Total recoveries		-		-		13		-
Net charge offs		(231)		(204)		(402)		(248)
Balance at end of period	$	6,850	$	6,240	$	6,850	$	6,240
Allowance for loan losses to loans receivable at end of period		0.82%		0.83%		0.82%		0.83%

Non-interest Income

Total non-interest income was $ 802 thousand for the three months ended September 30, 2017 compared to $1.1 million for the same period in 2016 . The decrease is due primarily to a $19 thousand gain on the sale of securities for the quarter ending September 30, 2017, compared to $350 thousand gain for the same period in 201 6 ; offset by an increase in other service fees of $ 20 thousand due to growth in the deposit customer base and a gain of $5 thousand in the sale of other real estate owned for the quarter ending September 30, 2017, compared to a loss of $12 thousand for the same period in 2016.

Total non-interest income was $ 2.4 million for the nine months ended September 30, 2017 compared to $ 2.3 million for the same period in 2016. The increase is due primarily to an increase of $ 59 thousand in income associated with bank owned life insurance, an increase of $85 thousand in credit card processing fees due to growth in the Bank’s credit card and merchant processing customer base, an increase in other service fees of $ 113 thousand due to growth in the deposit customer base and no impairment losses on other real estate owned, compared to $80 thousand in impairment losses on other real estate owned in the nine months ending September 30, 2016; offset by a decrease of $331 thousand in gain on the sale of securities.

Non-interest Expense

Non-interest expenses increased $2 32 thousand from $4. 8 million for the three months ended September 30, 2016 to $ 5.0 million for the same period ended September 30, 2017. The increase is due to: an increase of $1 77 thousand in sa laries and employee benefits due to annual salary and benefit increases and an increase of $ 82 thousand in d ata processing mainly due to the Company’s expanding customer base ; offset by a decrease of $3 0 thousand in professional fees primarily due to a decrease in legal fees.

Non-interest expenses increased $833 thousand from $14.1 million for the nine months ended September 30, 2016 to $14.9 million for the same period ended September 30, 2017 . The increase is due to: an increase of $608 thousand in salary and employee benefits due to annual salary and benefit increase s ; an increase of $ 233 thousand in data processing mainly due to the Company’s growth ; an increase of $ 53 thousand in credit card processing due to increased transaction volume; an increase of $ 57 thousand in FDIC insurance expense due to growth in deposits; and an increase of $54 thousand in charitable contributions due to EITC contributions; offset by a decrease of $ 64 thousand in occupancy and equipment expense, a decrease of $ 40 thousand in other real estate owned expenses and a decrease of $ 55 thousand in other 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 September 30, 2017 totaled $ 920 thousand, or 29.2% of income before taxes. The provision for income taxes for the three months ended September 30, 2016 totaled $ 816 thousand, or 28.9% of income before taxes. The provision for income taxes for the nine months ended September 30, 2017 totaled $ 2.5 million, or 29.0% of income before taxes. The provision for income taxes for the nine months ended September 30, 2016 totaled $ 2.1 million, or 28.8% of income before taxes. The slight increase in the tax rate is primarily the result of the change in the mix of taxable and tax free loans and investments.

The Company uses currently enacted tax rates to value deferred tax assets and liabilities. The current Administration and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in U.S. corporate income tax rates. If corporate tax rates were reduced, management expects the Company would record an initial charge against earnings to lower the carrying amount of the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.

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 issu ed by FHLMC or FNMA, and non-taxable municipal bonds. The Bank holds no high-risk securities or derivatives as of September 30, 2017 . The Bank has not made any investments in non-U.S. government agency mortgage backed securities or sub-prime loans.

Total securities at September 30, 2017 were $96.4 million compared to $85.6 million at December 31, 2016 . The increase in the investment portfolio is the result of the purchase of eight ( 8 ) mortgage-backed securities totaling $ 31.4 million, the purchase of eight (8 ) municipal obligations totaling $ 4.9 million, and an increase in unrealized gains, offset by pay downs on mortgage-backed securities, maturities , calls, the sale of eleven (11) U.S. government agency bonds totaling $11.4 million, the sale of two (2) municipal obligations totaling $1.0 million, and the sale of four (4) taxable municipal obligations totaling $2.5 million . The carrying value of the securities portfolio as of September 30, 2017 includes a net unrealized gain of $1. 1 million, which is recorded as accumulated other comprehensive income in stockholders’ equity net of income tax effect. This compares to a net unrealized loss of $38 thousand at December 31, 2016 . The current unrealized gain position of the securities portfolio is due to changes in market rates since purchase. No securities are deemed to be other than temporarily impaired.

Loans

The loan portfolio comprises a major component of the Bank’s earning assets. All of the Bank’s loans are to domestic borrowers. Total net loans at September 30, 2017 increased $38.6 million to $831.2 million from $792.6 million at December 31, 2016 . The loan-to-deposit ratio decreased from 96% at December 31, 2016 to 94% at September 30, 2017 . The Bank’s loan portfolio at September 30, 2017 was comprised of residential real estate and consumer loans of $429.9 million, an increase of $20.3 million from December 31, 2016 , and commercial loans of $407.7 million, an increase of $18.3 million from December 31, 2016 . 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 $333 thousand to $6.9 million at September 30, 2017 compared to $6.5 million at December 31, 2016 . At September 30, 2017 and December 31, 2016 , the allowance for loan losses represented 0.82%, r espectively, 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 the Bank and comparable institutions in the Bank’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses.

At September 30, 2017 , December 31, 2016 , and September 30, 2016 aggregate balances on non-performing loans equaled $5.6 million, $6.0 million and $5.9 million, respectively, representing 0.67% , 0.76% and 0.78% of total loans at September 30, 2017 , December 31, 2016 and September 30, 2016 , 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 that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) for the nine months ended September 30, 2017 . The Company had two (2) foreclosed assets in the amount of $4 27 thousand as of September 30, 2017 , of which none is residential real

estate. At September 30, 2017 and December 31, 2016 the Company had $ 635 thousand and $482 thousand, respectively, in recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure.

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



		September 30,			December 31,			September 30,
		2017			2016			2016

	(In Thousands)
Non-accrual - commercial	$	-		$	280		$	280
Non-accrual - consumer		689			874			717
Restructured loans, accruing interest and less than 90 days past due		4,737			4,831			4,643
Loans past due 90 or more days, accruing interest		204			55			238
Total nonperforming loans		5,630			6,040			5,878
Foreclosed assets		427			480			521
Total nonperforming assets	$	6,057		$	6,520		$	6,399
Nonperforming loans to total loans at period-end		0.67	%		0.76	%		0.78	%
Nonperforming assets to total assets		0.61	%		0.71	%		0.72	%

Premises and Equipment

Company premises and equipment, net of accumulated depreciation, decreased $ 172 thousand from December 31, 2016 to September 30, 2017 . This decrease is due primarily to depreciation on existing premises and equipment, offset by increases related to purchases.

Deposits

Total deposits at September 30, 2017 increased $ 59.8 million to $ 893.2 million from $ 833.4 million at December 31, 2016. D e mand, NOW and money market deposits increased $ 34.1 million, time deposits increased $ 8.7 million, and savings deposits increased $ 17.1 million. The Company continues to see deposit growth driven by a variety of factors including but not limited to, population growth, local bank mergers and consolidations, the accessibility of location , relationship building and the overall effort of the Company personnel.

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 $ 39.8 million at September 30, 2017 , compared to $ 24.2 million at December 31, 2016 . The $ 15.6 million increase in cash and cash equivalents was primarily due to growth in deposits, offset by growth in the loan and investment portfolio.

Additional asset liquidity sources include principal and interest payments from the investment security and loan portfolios. Long-term liquidity needs may be met by selling unpledged securities available for sale, selling loans or raising additional capital. At September 30, 2017 , the Company had $ 96.4 million of available for sale securities. Securities with carrying values of approximately $ 85.9 million and $71.8 million at September 30, 2017 and December 31, 2016 , respectively, were pledged as collateral to secure securities sold under agreements to repurchase, public deposits, and for other purposes required or permitted by law.

At September 30, 2017 , the Bank had a maximum borrowing capacity for short-term and long-term advances of approximately $ 487.5 million. This borrowing capacity with the FHLB includes a line of credit of $150.0 million. There were no short-term or long-term FHLB advances outstanding as of September 30, 2017 and December 31, 2016 . All FHLB borrowings are secured by qualifying assets of the Bank.

The Bank has a federal funds line of credit with the ACBB of $10.0 million, of which none was outstanding at September 30, 2017 and December 31, 2016 . Advances from this line are unsecured.

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 $ 106.9 million at September 30, 2017 . At September 30, 2017 the Company also had letters of credit outstanding of $4. 9 million. 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 $79.5 million as of September 30, 2017 , representing a net increase of $ 6.2 million from December 31, 2016 . The increase in capital was primarily the result of the net income of $ 6.2 million, an increase of $ 771 thousand in unrealized gains on available for sale securities, offset by dividends declared of $1.0 million and the purchase of treasury stock of $97 thousand .

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

The regulations require that banks maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and Tier I capital to average assets (as defined). As of September 30, 2017 , the Bank met the minimum requirements. In addition, the Bank’s capital ratios exceeded the amounts required to be considered “well capitalized” as defined in the regulations.

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



Consolidated Bank

	September 30, 2017			December 31, 2016

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	78,494		$	73,061
Tier II, allowable portion of allowance for loan losses		6,850			6,517
Total capital	$	85,344		$	79,578

Common equity tier 1 capital ratio		11.4	%		11.2	%
Tier I risk based capital ratio		11.4	%		11.2	%
Total risk based capital ratio		12.4	%		12.2	%
Tier I leverage ratio		7.9	%		8.0	%

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

In July 2013, the FDIC and the Federal Reserve approved a new rule that substantially amended the regulatory risk based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which became effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The revised minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. In January 2016, the capital conservation buffer requirement started being phased in at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

In addition to the risk-based capital guidelines, the federal banking regulators established minimum leverage ratio (Tier 1 capital to total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies which have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 4%.

The capital ratios to be considered “well capitalized” under the new capital rules are: common equity of 6.5%, Tier 1 leverage of 5%, Tier 1 risk-based capital of 8%, and Total Risk-Based capital of 10%.

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



Consolidated Corporation

	September 30, 2017			December 31, 2016

	(Dollars In Thousands)
Tier I, common stockholders' equity	$	78,777		$	73,302
Tier II, allowable portion of allowance for loan losses		6,850			6,517
Total capital	$	85,627		$	79,819

Common equity tier 1 capital ratio		11.5	%		11.2	%
Tier I risk based capital ratio		11.5	%		11.2	%
Total risk based capital ratio		12.5	%		12.2	%
Tier I leverage ratio		8.0	%		8.1	%

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4 – Controls and Procedures

The term “disclosure controls and procedures” is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017 , and they have concluded that, as of this date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

There were no significant changes to our internal controls over financial reporting or in the other factors that could significantly affect our internal controls over financial reporting during the quarter ended September 30, 2017 , including any corrective actions with regard to significant deficiencies and material weakness.

Part II - Other Information

Item 1 - Legal Proceedings

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

Item 1A - Risk Factors

Not Applicable.

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

Not Applicable.

Item 3 - Defaults Upon Senior Securities

Not Applicable.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 - Other Information

None.

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 August 12, 2016).
	3.2		Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's
			Form 10-Q filed on August 12, 2016).
	11.1		The statement regarding computation of per share earnings required by this exhibit is contained in Note 6
			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.
	101.1		Interactive Data Files (XBRL)

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

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)

Dated: November 13 , 2017	By:	/s/ David M. Lobach, Jr.
		David M. Lobach, Jr.
		President and Chief Executive Officer


Dated: November 13 , 2017	By:	/s/ Judith A. Hunsicker
		Judith A. Hunsicker
		Senior Executive Vice President,
		Chief Operating Officer, Secretary and
		Chief Financial Officer

EXHIBIT INDEX



	Exhibit
	Number		Description
	3.1		Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of Registrant's
			Form 10-Q filed on August 12, 2016).
	3.2		Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's
			Form 10-Q filed on August 12, 2016).
	11.1		The statement regarding computation of per share earnings required by this exhibit is contained in Note 6
			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.
	101.1		Interactive Data Files (XBRL)

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

TABLE OF CONTENTS

Part I Item 1 Fi Note 1 Basis Of Presentation Note 2 - Summary Of Significant Accounting Policies Note 3 Stockholders Equity Note 4 Stock Incentive Plan Note 5 Other Comprehensive Income (loss)Note 7 Guarantees Note 8 Short-term and Long-term Borrowings Note 9 Securities Available For Sale Note 10 Restricted Investment in Bank Stock Note 11 Loans Receivable and Credit Quality Note 12 Fair Value Measurements Note 13 Offsetting Assets and Liabilities Note 1 4 Deposits Note 1 5 New Accounting Standards Item 2 Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3 Quantitative and Qualitative Disclosures About Market Risk Item 4 Controls and Procedures Part II - Other Information Item 1 - Legal Proceedings Item 1A - Risk Factors Item 2 - Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 - Defaults Upon Senior Securities Item 4 Mine Safety Disclosures Item 5 - Other Information Item 6 - Exhibits

Exhibits

3.1 Articles of Incorporation as amended (conformed) (Incorporated by reference to Exhibit 3.1 of Registrant's 3.2 Amended and Restated By-Laws (conformed) (Incorporated by reference to Exhibit 3.2 of Registrant's 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

EMYB 10-Q Quarter ended Sept. 30, 2017

Exhibits