UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





S
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES


EXCHANGE
ACT OF 1934





For the
fiscal year endedDecember
31, 2008


or


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


For the
transition period from _____________________ to __________________





Commission
file number 000-1449794





Embassy
      Bancorp, Inc.(Exact
      name of registrant as specified in its charter)Pennsylvania
                26-3339011(State
      of incorporation)
                (I.R.S.
      Employer Identification No.)One
      Hundred Gateway Drive, Suite 100
                  Bethlehem,
      PA
                18017(Address
      of principal executive offices)
                (Zip
      Code)(610)
      882-8800(Issuer’s
      Telephone Number)





Securities
registered under Section 12(b) of the Exchange Act:





None
              None(Title
      of each class)
              (Name
      of each exchange on which
registered)





Securities
registered under section 12(g) of the Exchange Act:





Common
Stock, Par Value $1.00 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of The Securities Act. Yes £   No
S





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.      Yes
£   No
S





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 S  No
£





Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K S.







1




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange
Act.


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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 or the Exchange Act.)


Yes £  No
S





The
aggregate market value of the registrant’s common stock held by non-affiliates
at June 30, 2008, the registrant’s most recently completed second fiscal
quarter, was $43,471,850.








APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.


Yes £  No
£                                Not applicable.





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)


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




COMMON
STOCK
 Number
      of shares outstanding as of March 26, 2009
                    ($1
      Par Value)
                    6,892,420(Title
      Class)
                    (Outstanding
      Shares)





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s proxy statement for the annual meeting of shareholders to be
held on June 18, 2009 are incorporated by reference into Part III of this
report.  The proxy statement will be filed with the SEC within 120
days of December 31, 2008.


2


Tableof Contents





Part
      I
                    PageNumberItem
      1
                    Business
                    4Item
      1A
                    Risk Factors
                    10Item
      1B
                    Unresolved Staff Comments
                    10Item
      2
                    Properties
                    10Item
      3
                    Legal Proceedings
                    11Item
      4
                    Submission of Matters to a Vote of Security
      Holders
                    11Part
      IIItem
      5
                    Market for Registrant’s Common Equity and Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                    12Item
      6
                    Selected Financial Data
                    12Item
      7
                    Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                    13Item
      7A
                    Quantitative and Qualitative Disclosures About Market
      Risk
                    27Item
      8
                    Consolidated Financial Statements and Supplementary
      Data
                    28Report of Independent Registered Public Accounting
      Firm
                    29Consolidated Balance Sheets
                    30Consolidated Statements of Income
                    31Consolidated Statements of Stockholders’
    Equity
                    32Consolidated Statements of Cash Flows
                    33Notes to Financial Statements
                    34Item
      9
                    Changes In and Disagreements with Accountants on Accounting and
      Financial Disclosure
                    62Item
      9A (T)
                    Controls and Procedures
                    62Item
      9B
                    Other Information
                    62Part
      IIIItem
      10
                    Directors, Executive Officers and Corporate
      Governance
                    63Item
      11
                    Executive Compensation
                    63Item
      12
                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                    63Item
      13
                    Certain Relationships and Related Transactions, and Director
      Independence
                    63Item
      14
                    Principal Accountant Fees and Services
                    63Part
      IVItem
      15
                    Exhibits and Financial Statement Schedules
                    64Signatures
                    65Index
      of ExhibitsEX
      – 23
                    Consent
      of Beard Miller Company LLC
                    67EX
      – 31.1
                    Certification
      of Chief Executive Officer
                    68EX
      – 31.2
                    Certification
      of Chief Financial Officer
                    69EX
      – 32
                    Certification
      Pursuant to 18 U.S.C. 1350 and Section 906 of Sarbanes-Oxley Act of
      2002
                    70


3
 Table of Contents




PART I





Item1.  BUSINESS.





General





Embassy
Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008
and registered as a bank holding company pursuant to section 3(a)(1) of the Bank
Holding Company Act  of 1956, as amended (the “BHC Act”) and section
225.15 of Regulation Y.  The Company was formed for purposes of
acquiring Embassy Bank For The Lehigh Valley (the "Bank") in connection
with the reorganization of the Bank into a bank holding company structure, which
reorganization was consummated on November 11, 2008.  Accordingly, the
Company owns all of the capital stock of the Bank, giving the organization more
flexibility in meeting its capital needs as the Company continues to
grow.  As such, the consolidated financial statements contained herein
include the accounts of the Company and the Bank.





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





Mission





The
Company provides a traditional range of financial products and services to meet
the depository and credit needs of individual consumers, small and medium sized
businesses and professionals in its market area.  As a locally owned
and operated community bank, there is a strong focus on service that is highly
personalized, efficient and responsive to local needs. It is the intention of
the Company to deliver its products and services with the care and
professionalism expected of a community bank and with a special dedication to
personalized service. To create this environment, the Company employs a
well-trained, highly motivated staff, all with previous banking experience, and
interested in building quality client relationships using state-of-the-art
delivery systems and client service facilities. The Company’s senior management
has extensive banking experience.  The Company’s goal is to serve the
financial needs of its clients and provide a profitable return to its investors,
consistent with safe and sound banking practices.




The
Company focuses on establishing and retaining customer relationships by offering
a broad range of financial services, competitively-priced and delivered in a
responsive manner.  Correspondent relationships are utilized where it
is cost beneficial. The specific objectives of the Company are: 1) to provide
individuals, professionals and local businesses with the highest standard of
relationship banking in the local market; 2) to attract deposits and loans by
offering state of the art products and services with competitive pricing; 3) to
provide a reasonable return to shareholders on capital invested; and 4) to
attract, train and retain a happy, motivated and team oriented group of banking
professionals dedicated to meeting the Company’s objectives.





Market
“Niche”





The
Company provides the traditional array of commercial banking products and
services emphasizing one-on-one delivery to consumers and businesses located in
Lehigh and Northampton Counties in Pennsylvania.  In the Company’s
primary market area, which is dominated by offices of large statewide, regional
and interstate banking institutions, banking services that are furnished in a
friendly and courteous manner with a timely response to customer needs fill a
“niche” that arises due to the loss of local institutions through merger and
acquisitions.





Deposits





The
Company offers the latest in small business cash management services to help
local companies better manage their cash flow, in order for the Company to
attract and retain stable deposit relationships.  The expertise and
experience of the Company’s management coupled with the latest technology
accessed through third party providers enables the Company to maximize the
growth of business-related deposits.


4
 Table of Contents




As for
consumers, deposit growth is driven by a variety of factors including, but not
limited to, population growth, bank and non-bank competition, increase in
household income, interest rates, accessibility of location and the sales
efforts of Company personnel.  Time deposits can be attracted and/or
increased by paying an interest rate higher than that offered by competitors,
but they are the most costly type of deposit.  The most profitable
type of deposits are non-interest bearing demand (checking) accounts which can
be attracted by offering free checking.  However, both high interest
rates and free checking accounts generate certain expenses for a bank and the
desire to increase deposits must be balanced with the need to be
profitable.  The deposit services of the Company are generally
comprised of demand deposits, savings deposits, money market deposits, time
deposits and Individual Retirement Accounts.





Loans





The loan
portfolio of the Company consists primarily of variable-rate and fixed-rate
loans, with a significant concentration in commercial-purpose transactions and
consumer home equity loans.  While most credit facilities are
appropriately collateralized, major emphasis is placed upon the financial
condition of the borrower and evaluating the borrower’s cash flow versus debt
service requirements.  The familiarity of the Company’s management
team and members of the Company’s Loan Committee with prospective local
borrowers enables the Company to better evaluate the character, integrity and
creditworthiness of the prospective borrowers.





Loan
growth is driven by customer demand, which in turn is influenced by individual
and business indebtedness and consumer demand for goods.  A performing
loan is a loan which is being repaid according to its original terms and is the
most desirable type of loan that a bank seeks to make.  Again, a
balancing act is required for the Company inasmuch as loaning money will always
entail some risk. Without loaning money, however, a bank cannot generate enough
earnings to be profitable.  The risk involved in each loan must,
therefore, be carefully evaluated before the loan is made.  The
interest rate at which the loan is made should always reflect the risk factors
involved, including the term of the loan, the value of collateral, if any, the
reliability of the projected source of repayment and the amount of the loan
requested.  Credit quality will always be the Company’s most important
factor.





The
Company has not been involved in any “sub-prime” mortgage lending and has not
purchased or invested in any securities backed by or which include sub-prime
loans.





Small
Business Loans





The
Company is generally targeting businesses with annual revenues of less than $20
million.  These customers tend to be ignored by the larger
institutions and have felt the most negative effects of the recent bank
consolidations.  The Company offers responsiveness, flexibility and
local decision making for loan applications of small business owners thereby
eliminating delays caused by non-local management.  The Company
participates in programs offered through Local, State and Federal programs and
may participate in Small Business Administration (SBA) programs.








Consumer
Lending





The
Company offers its retail customer base a product line of consumer loan services
including secured and unsecured personal loans, home equity loans, lines of
credit and auto loans.





Residential
Mortgage Loans





The
Company offers a range of specialty home equity mortgage products at competitive
rates.  The Company seeks to capitalize on its policy of closing loans
in a time frame that will meet the needs of its borrowers.  The
Company’s loan officers call upon accountants, financial planners, attorneys and
others to generate loan applications.





Commercial
Mortgage/Construction Loans





The
Company originates various types of loans secured by real estate, including, to
a limited extent, construction loans. The Company’s loan officers call upon
accountants, financial planners, attorneys and others to generate loan
applications. The loan officers endeavor to work closely with real estate
developers, individual builders and attorneys to offer construction loan
services to the residential real estate market as well as to owners of
owner-occupied commercial and investment properties.  Construction
loans are priced at floating rates geared to current market rates. Upon
completion of construction, these loans may be converted into permanent
commercial and residential loans. Construction lending is expected to constitute
a minor portion of the Company’s loan portfolio.


5
 Table of Contents


In some
cases, the Company originates loans larger than its lending limit and enters
into participation arrangements for those loans with other banks.





As an
independent community bank, the Company serves the special needs of legal,
medical, accounting, financial service providers and other
professionals.  Lines of credit, term loans and demand loans are
tailored to meet the needs of the Company’s customers in the professional
community.  In addition to the usual criteria for pricing
credit-related products, the Company takes into consideration the overall
customer relationship to establish credit pricing.  Deposit
relationships in demand, savings, money market, and certificate accounts are
considered in loan pricing along with the credit worthiness of the
borrower.





Other
Services





To
further attract and retain customer relationships, the Company provides or will
provide the standard array of financial services expected of a community bank,
which include the following:





Treasurer
      Checks
                Payroll
      Tax DepositsCertified
      Checks
                Safe
      Deposit BoxesGift
      Checks
                Night
      DepositoryWire
      Transfers
                Bond
      Coupon RedemptionsSavings
      Bonds Sales & Redemptions
                Bank
      by MailCredit/Debit
      Card, Merchant Processing
                Automated
      Teller MachineDirect
      Deposit/ACH
                On-Line
      Banking and Bill PayCash
      Management Services
                Commercial
      Credit CardsEscrow
      Management Services





Fee
Income





Fee
Income is non-interest related.  The Company earns fee income by
charging customers for banking services, merchant processing, treasurer’s
checks, overdrafts, wire transfers, bond coupon redemptions, check orders as
well as other deposit and loan related fees.





Community
Reinvestment Act





The
Community Reinvestment Act of 1977 (“CRA”) is designed to create a system for
bank regulatory agencies to evaluate a depository institution’s record in
meeting the credit needs of its community.  The Company had its last
CRA compliance examination in 2003 and received a “satisfactory”
rating.





The
Company’s Directors and Officers are committed to reaching out to the community
in which they live and work. The personal, business and community rewards for
helping local residents and businesses are numerous. The Board is dedicated to
recognizing an ongoing commitment and understanding of the Company’s
responsibility under the Community Reinvestment Act.  The Company is
committed to providing access to credit and deposit products for all members of
the communities that it serves.





Service
Area





The
Company draws its primary deposits and business from areas immediately
surrounding its principal office in Hanover Township, Pennsylvania and its
branch offices in South Whitehall Township, Lower Macungie Township and the City
of Bethlehem, Pennsylvania, as well as the remainder of Lehigh and Northampton
Counties in Pennsylvania.


6
 Table of Contents


Bank
Premises





The
Company leases 7,747 square feet of space on the ground floor of a commercial
office building located at 100 Gateway Drive, Hanover Township,
Pennsylvania.  This location is on Route 512, approximately one block
North of Route 22, adjacent to the existing Best Western/Hampton Inn Complex.
The Company has improved the interior of the leased premises for its use
including the construction of a vault, teller cabinets, drive-in window unit, an
automated teller machine, night depository, executive offices, lobby, exterior
signing and the like. The initial term of the lease is for ten (10) years at a
monthly base rent of $13,045 for the initial three (3) years and increasing by
3% each year thereafter.  The Company has an option to renew this
lease for five additional five-year (5) periods.





In
November 2002, an investment group comprised of certain members of the Board of
Directors of the Company and its executive officers agreed to purchase the
office building in which the Company’s offices are located.   The
former owner of the building is unrelated to the Company or any of the members
of the investment group.  The building was purchased subject to all
outstanding leases, including the Company’s lease described
above.  The lease terms for the Company’s lease were negotiated at
arms length with the former owner in 2001.





By lease
amendment dated January 1, 2005, the Company leased 4,349 square feet of
additional space on the second floor of the building for the remaining term of
the existing lease at a monthly base rent of $6,523.50 or $18.00 per square foot
per year, subject to a tenant improvement allowance of $44,512.50.





In April,
2004, the Company occupied a new branch office on Tilghman Street, Allentown,
Pennsylvania, which constituted its second location.  This office
occupies approximately 3,584 square feet of space at a beginning base monthly
rent of $6,421.33 per month or $21.50 per square foot per year.  This
branch office includes a vault, teller cabinets, drive-in window, loan offices
and all other fixtures and improvements necessary for branch
operations.





In July
2005, the Company entered into a ground lease agreement for a branch location on
Cedar Crest Boulevard in Allentown. The ground lease commenced in
2007.  A building is currently under construction on the site and is
expected to be completed by the third quarter of 2009.  Subsequent to
December 31, 2008, the Company committed to a lease agreement for this fifth
branch which will terminate the ground lease agreement.  The new lease
qualifies as an operating lease in accordance with FASB Statement No. 13
“Accounting for Leases.”





In
October 2005, the Company entered into a lease for a branch office on Hamilton
Boulevard in Trexlertown. This office occupies approximately 4,000 square feet
of space at a beginning base rent of $8,333.33 per month or $25.00 per square
foot per year.  The lease commenced in January 2007 and the branch
opened in April 2007.





On March
17, 2006, the Company entered into a lease for a branch office at West Broad St.
in Bethlehem, a property owned and to be leased from a director of the
Company.  The Company leases approximately 2,918 square feet of space
at a beginning base rent of $3,750 per month or $15.42 per square foot per
year.   The Company believes the lease terms are comparable to
those which would be entered into with an unrelated party. The lease commenced
and the branch opened in September 2006.





In June
2008, the Company entered into a commercial lease agreement for a potential
branch location on Route 378 in Lower Saucon Township, which is expected to open
in 2009.  The new lease qualifies as an operating lease in accordance
with FASB Statement No. 13 “Accounting for Leases.”




Subsequent
to December 31, 2008, the Company entered into a land lease agreement for a
branch location on Corriere Road and Route 248 in
Lower Nazareth Township.  The agreement is contingent upon
completing proper due diligence of the site, including title, survey, and
environmental matters, planning and zoning approvals, and proper banking
regulatory approvals.




7
 Table of Contents




The
Company pays certain additional expenses of occupying these spaces including,
but not necessarily limited to, real estate taxes, insurance, utilities and
repairs.  The Company is obligated under the leases to maintain the
premises in good order, condition and repair.




Employees





As of
December 31, 2008, the Company had a total of 53 employees of which 48 were
full-time employees.





Competition





The
banking business is highly competitive.  The Company competes with
local banks as well as numerous regionally based commercial banks, all of which
have assets, capital and lending limits larger than those of the
Company.  The Company competes with savings banks, savings and loan
associations, money market funds, insurance companies, stock brokerage firms,
regulated small loan companies, credit unions and with the issuers of commercial
paper and other securities.





Among the
advantages many of the Company’s competitors have over the Company are larger
asset and capital bases, the ability to finance wide-ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand.  Many competitors offer certain services such as trust
services and international banking that will not be offered directly by the
Company and, by virtue of their greater capital, most competitors will have
substantially higher lending limits than those of the Company.





Segments





The
Company acts as an independent community financial services provider and offers
traditional banking and related financial services to individual, business and
government customers.  The Company offers a full array of commercial
and retail financial services, including the taking of time, savings and demand
deposits; the making of commercial, consumer and home equity loans; and the
providing of other financial services.





Management
does not separately allocate expenses, including the cost of funding loan
demand, between commercial and retail operations of the Company.  As
such, discrete financial information is not available and segment reporting
would not be meaningful.





Seasonality





Management
does not feel that the deposits or the business of the Company are seasonal in
nature.  Deposit and loan generation may, however, vary with local and
national economic and market conditions but should not have a material effect on
planning and policy making.





Supervision
and Regulation





The Bank
is a state-chartered bank organized under Pennsylvania law.  Its
banking operations are subject toregulation, supervision
and examination by the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking.  The Bank is not a member of the
Federal Reserve System.





The
Company is subject to the provisions of the Bank Holding Company Act of 1956, as
amended, and is registered pursuant to its provisions.  The Company is
subject to the reporting requirements of the Federal Deposit Insurance
Corporation (the “FDIC”); and the Company, together with its subsidiary, is
subject to examination by the FDIC.  The Federal Deposit Insurance Act
limits the amount of credit that a member bank may extend to its affiliates, and
the amount of its funds that it may invest in or lend on the collateral of the
securities of its affiliates.





The
Company elected to become a Bank Holding Company in 2008 as provided under Title
I of the Gramm-Leach-Bliley Act (the “Act”).  The Act provides a
regulatory framework for regulation through the bank holding company, which has
the Board of Governors of the Federal Reserve System as its umbrella
regulator.  The Gramm-Leach-Bliley Act requires “satisfactory” or
higher Community Reinvestment Act compliance for insured depository institutions
and their bank holding companies in order for them to engage in new financial
activities.  The Act provides a federal right to privacy of non-public
personal information of individual customers.


8
 Table of Contents


The
Company is subject to the Sarbanes-Oxley Act of 2002 (“SOX”).  SOX was
enacted to address corporate and accounting fraud.  SOX adopts new
standards of corporate governance and imposes additional requirements on the
board of directors and management of public companies.  SOX law also
requires that the chief executive officer and chief financial officer certify
the accuracy of periodic reports filed with the Securities and Exchange
Commission (“SEC”).  Pursuant to Section 404 of SOX (“SOX 404”), the
Company is required to furnish a report by its management on internal controls
over financial reporting, identify any material weaknesses in its internal
controls over financial reporting and assert that such internal controls are
effective.  The Company implemented and completed an exhaustive
process to achieve compliance with SOX 404 during 2007 and has continued to be
in compliance during 2008.  The Company must maintain effective
internal controls which require an on-going commitment by management and the
Company’s Audit Committee.  The process has and will continue to
require substantial resources in both financial costs and human
capital.





The Bank
is a member of the Deposit Insurance Fund (the “DIF”), which is administered by
the FDIC. Deposit accounts at the Bank are insured by the FDIC, generally up to
a maximum of $100,000 for each separately insured depositor and up to a maximum
of $250,000 for self-directed retirement accounts. However, the FDIC increased
the deposit insurance available on all deposit accounts to $250,000, effective
until December 31, 2009.




The FDIC
imposes an assessment against all depository institutions for deposit insurance.
This assessment is based on the risk category of the institution and, prior to
2009, ranged from 5 to 43 basis points of the institution’s deposits. On
October 7, 2008, as a result of decreases in the reserve ratio of the DIF,
the FDIC issued a proposed rule establishing a Restoration Plan for the DIF. The
rulemaking proposed that, effective January 1, 2009, assessment rates would
increase uniformly by 7 basis points for the first quarter 2009 assessment
period. The rulemaking proposed to alter the way in which the FDIC’s risk-based
assessment system differentiates for risk and set new deposit insurance
assessment rates, effective April 1, 2009. Under the proposed rule, the
FDIC would first establish an institution’s initial base assessment rate. This
initial base assessment rate would range, depending on the risk category of the
institution, from 10 to 45 basis points. The FDIC would then adjust the
initial base assessment (higher or lower) to obtain the total base assessment
rate. The adjustment to the initial base assessment rate would be based upon an
institution’s levels of unsecured debt, secured liabilities, and brokered
deposits. The total base assessment rate would range from 7 to 77.5 basis
points of the institution’s deposits. On February 27, 2009, the FDIC
published a final rule raising the current deposit insurance assessment rates
uniformly for all institutions by seven basis points (to a range from 12 to
45 basis points) for the second quarter of 2009. This action also changed
the way that the FDIC’s assessment system differentiates for risk and extended
the time frame to restore the DIF from 5 years to 7 years and imposes
a special assessment on insured institutions of 20 basis points, payable
September 30, 2009. The ruling also allows the FDIC to impose an emergency
assessment of 10 basis points after June 30, 2009 if necessary to
maintain public confidence in federal deposit insurance.




Insurance
of deposits may be terminated by the FDIC upon a finding that an institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The Company currently does not know of any
practice, condition or violation that might lead to termination of the Company’s
deposit insurance.




In
addition to the FDIC assessments, the Financing Corporation (“FICO”) is
authorized to impose and collect, with the approval of the Federal Deposit
Insurance Corporation, assessments for anticipated payments, issuance costs and
custodial fees on bonds issued by the FICO in the 1980’s to recapitalize the
former Federal Savings and Loan Insurance Corporation. The bonds issued by the
FICO are due to mature in 2017 through 2019. For the quarter ended
December 31, 2008, the annualized FICO assessment was equal to
1.10 basis points for each $100 in domestic deposits maintained at an
institution.


9
 Table of Contents


Impact
of Monetary Policies





The
profitability of the banking business depends in large part on interest rate
differentials.  In general, the difference between the interest rate
paid by the Company on its deposits and its other borrowings, and the interest
rate received by the Company on loans extended to its customers and securities
held in the Company’s portfolio, comprises the major portion of the Company’s
earnings.  In addition, the Company generates revenues by assessing
fees on its services; to the extent the competitive market will allow such
fees.





The Bank
is a member of the Federal Home Loan Bank System (“FHLBanks”), which consists of
12 regional Federal Home Loan Banks, and is subject to supervision and
regulation by the Federal Housing Finance Board.  The FHLBanks provide
a central credit facility primarily for member institutions.  The
Bank, as a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), is
required to acquire and hold shares of capital stock in the FHLB in an amount
equal to: 1) not less than 4.5% and not more than 6.0% of its outstanding FHLB
loans and 2) at least a certain percentage of its unused borrowing capacity, not
to exceed 1.5%.





The
banking industry in the United States, which primarily is comprised of
commercial banks, mutual and capital stock savings and loan associations, mutual
and capital stock savings banks, credit unions, and bank and savings and loan
holding companies, is part of the broader financial services
industry.  This industry also includes insurance companies, mutual
funds, and the brokerage industry.  In recent years, intense market
demands and economic pressures have eroded once clearly defined industry
classifications and have forced banking institutions to diversify their
services, increase returns on deposits and become more cost effective as a
result of competition with one another and with new types of financial services
companies, including non-bank competitors.





The
present bank regulatory scheme has and continues to undergo significant change,
both as it affects the banking industry and as it affects competition between
banks and non-bank financial institutions.  There have been
significant regulatory, statutory and case law changes in the bank merger and
acquisition area, in the products and services banks can offer, and in the
non-banking activities in which bank holding companies can
engage.  Banks are now actively competing with non-bank financial
institutions such as money market funds and investment bankers.  It is
not possible to assess what impact these regulatory changes will have on the
Company.





The
earnings and growth of the Company and of the banking industry as a whole will
be affected not only by general domestic and foreign economic conditions, but
also by the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board.  The Federal Reserve Board
affects the national economy by its open market operations in United States
government securities, limitations upon savings and time deposit interest rates,
and adjustments to the discount and reserve retention rates applicable to
borrowings by banks which are members of the Federal Reserve
System.  These actions of the Federal Reserve Board influence the
growth of bank loans, investments, and deposits and affect interest rates
charged on loans and paid on deposits.  The nature and impact of any
future changes in monetary policies cannot be predicted but may, in any event,
have a material effect on the Company.





Item1A.  RISK FACTORS.





Not
applicable.





Item1B. UNRESOLVED STAFF COMMENTS.





Not
applicable.





Item2.   PROPERTIES.





Embassy
Bancorp, Inc. and its subsidiary occupy four full-service banking offices in the
Lehigh Valley:


·
            Hanover
      Township, Northampton County (administrative
  offices)


·
            City
      of Bethlehem, Lehigh County


10
 Table of Contents




·
            South
      Whitehall Township, Lehigh County


·
            Lower
      Macungie Township, Lehigh County





The
administrative and operations offices of the Company and its subsidiary are
located at its 100 Gateway Drive, Bethlehem, Hanover Township
location.  The following departments are located at that
office:


·
            Executive
      offices;


·
            Commercial
      and consumer lending operations;


·
            Marketing;


·
            Human
      resources;


·
            Deposit
      accounting;


·
            Data
      processing;


·
            And
      corporate accounting.





Reference
is made to “Bank Premises” in Item 1 above for more information relating to the
locations and the leases associated with each of the Company’s
offices.





Item3.   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.


Item4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES HOLDERS.





Not
applicable.


11
 Table of Contents




PART II





Item5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS  AND
      ISSUER PURCHASES OF EQUITY
SECURITIES.





(a)
              Market
      Information.  There is no public trading market for the
      Company’s securities.





(b)
            As
      of March 26, 2009, there are approximately 1,557 owners of record of the
      Common Stock.





(c)
            The
      Company has paid no cash dividends on its Common Stock and does not
      anticipate the payment of cash dividends in the foreseeable
      future.As
      a general matter, cash available for dividend distribution to shareholders
      of the Company must initially come from dividends paid to the Company by
      the Bank.  As a result, legal restrictions on the payment of
      dividends by the Bank affects the ability of the Company to pay
      dividends.  The Pennsylvania Banking Code of 1965, as amended,
      provides that cash dividends may be paid from accumulated net earnings
      (retained earnings) as long as minimum capital requirements are
      met.  The Bank does not currently have retained earnings.

                
                Additionally,
      the Federal Reserve has indicated that a “small bank holding company” such
      as the Company, is not expected to pay corporate dividends until such time
      as its debt to equity ratio is 1:1 or less and its bank subsidiaries are
      otherwise well-managed, well-capitalized, and not under any supervisory
      order.  The Company’s debt to equity ratio currently exceeds the
      aforementioned 1:1 ratio.





(d)
            The
      following table sets forth information as of December 31, 2008 concerning
      compensation plans or arrangements under which the Common Stock of the
      Company is authorized for issuance:





Number
      of Shares to be issued upon exercise of out- standing
    options
                  
                  
                  Weighted
      average exercise price of outstanding options
                  
                  
                  Number
      of Shares remaining available for future issuanceEquity
      Compensation Plans and Individual Employment Agreements*
                  
                  
                  909,674
                  
                  
                  $
                  3.79
                  
                  
                  
                  403,892





*The
Company’s 2001 Stock Option Plan has been approved by its
shareholders.  There are no other equity compensation plans other than
individual stock option commitments contained in the employment agreements of
the Company’s Chief Executive and Chief Operating Officers. These agreements
provide for a minimum annual award of options to purchase that number of shares
determined by dividing 30% of the individual’s salary by the current market
value of the Common Stock on the date the options are
granted.  Pursuant to those employment agreements, certain options
under the 2001 Stock Option Plan have been issued and may be issued in the
future. Reference is made to Note 12 of the Notes to Financial Statements for a
description of the 2001 Stock Option Plan.





(e)
            Sales
      of Securities.


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 reorgnized 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.




(f)
            Repurchase
      of Equity Securities.





On
December 17, 2008 the Company purchased 353 shares of its common stock at $9.73
per share from an individual shareholder.





Item6.
            SELECTED
      FINANCIAL DATA.





Not
applicable.


12
 Table of Contents




Item7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      OF EMBASSY BANCORP, INC.





This
discussion and analysis provides an overview of the consolidated financial
condition and results of operations of the Company for the years ended December
31, 2008 and 2007.  This discussion should be read in conjunction with
the consolidated financial statements and notes to consolidated financial
statements appearing elsewhere in this report.





Forward-looking
Statements





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





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





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





Critical
Accounting Policies





Note 1 to
the Company’s financial statements lists significant accounting policies used in
the development and presentation of its financial statements.  This
discussion and analysis, the significant accounting policies, and other
financial statement disclosures identify and address key variables and other
qualitative and quantitative factors that are necessary for an understanding and
evaluation of the Company and its results of operations.





The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require the Company to
make estimates and assumptions. The Company believes that its determination of
the allowance for loan losses involves a higher degree of judgment and
complexity than the Company’s other significant accounting
policies.  Further, these estimates can be materially impacted by
changes in market conditions or the actual or perceived financial condition of
the Company’s borrowers, subjecting the Company to significant volatility of
earnings.





The
allowance for loan losses is established through the provision for loan losses,
which is a charge against earnings. Provision for loan losses is made to reserve
for estimated probable losses on loans.  The allowance for loan losses
is a significant estimate and is regularly evaluated by the Company for adequacy
by taking into consideration factors such as changes in the nature and volume of
the loan portfolio, trends in actual and forecasted credit quality, including
delinquency, charge-off and bankruptcy rates, and current economic conditions
that may affect a borrower’s ability to pay.  The use of different
estimates of assumptions could produce different provision for loan
losses.  For additional discussion concerning the Company’s allowance
for loan losses and related matters, see “Provision for Loan Losses” and
“Allowance for Loan Losses.”


13
 Table of Contents


Deferred
taxes are provided on the liability method whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
net operating loss carryforwards and their tax basis.  Deferred tax
assets are reduced by a valuations allowance when, in the opinion of management,
it is more likely than not that some portion of the deferred tax assets will not
be realized.  Based upon the level of historical taxable income and
projections for future taxable income over periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share Based Payment.  Statement No. 123(R)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements over the period that an employee provides
service in exchange for the award.  Statement No. 123(R) requires that
companies that utilized the minimum value method under Statement No. 123 adopt
the new fair value accounting prospectively for new or modified grants on or
after January 1, 2006.  Prospective adoption means that awards granted
in earlier fiscal years continue to be accounted for using the existing
accounting, typically APB Opinion No. 25.  For the years ended
December 31, 2008 and 2007, there were no stock options granted.





GENERAL





Embassy
Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008
and registered as a bank holding company pursuant to section 3(a)(1) of the Bank
Holding Company Act  of 1956, as amended (the “BHC Act”) and section
225.15 of Regulation Y.  The Company was formed for purposes of
acquiring Embassy Bank For The Lehigh Valley in connection with the
reorganization of the Bank into a bank holding company structure, which
reorganization was consummated on November 11, 2008.  Accordingly, the
Company owns all of the capital stock of the Bank, giving the organization more
flexibility in meeting its capital needs as the Company continues to
grow.  As such, the consolidated financial statements contained herein
include the accounts of the Company and the Bank.





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





OVERVIEW





The
Company’s assets grew $57.1 million from $334.0 million at December 31, 2007 to
$391.1 million at December 31, 2008.  The Company’s deposits grew
$41.0 million from $266.6 million at December 31, 2007 to $307.6 million at
December 31, 2008.  During the same period, loans receivable, net of
the allowance for loan losses, increased $42.3 million to $316.6 million at
December 31, 2008 from $274.3 million at December 31, 2007.  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 becomes more widely known.  The lending staff has been
active in contacting new prospects and promoting the Company’s name in the
community.  Management believes that this will translate into
continued growth of a portfolio of quality loans, although there can be no
assurance of this.





The
Company reported net income of $1,186,000 for the year ended December 31, 2008
as compared to net income of $1,530,000 for the year ended December 31,
2007.  For year ended December 31, 2007, $1,241,000 of the net income
was due to the income tax benefit of the net change in the valuation allowance
on deferred taxes.





RESULTS
OF OPERATIONS





Net
Interest Income and Net Interest Margin





Net
interest income is the difference between income on assets and the cost of funds
supporting those assets.  Earning assets are composed primarily of
loans and investments; interest-bearing deposits and borrowings make up the cost
of funds.  Non-interest bearing deposits and capital are other
components representing funding sources.  Changes in the volume and
mix of assets and funding sources, along with the changes in yields earned and
rates paid, determine changes in net interest income.


14
 Table of Contents




2008
Compared to 2007





Total
interest income for the year ended December 31, 2008 was $20,664,000 compared to
$18,809,000 for the year ended December 31, 2007.  Total interest
expense for the year ended December 31, 2008 was $11,060,000 compared to
$11,763,000 for the year ended December 31, 2007.  The increase in
interest income is due to growth in loan balances as well as investment
securities.  The decrease in interest expense is due to the lower
interest rate environment.  Net interest income increased to
$9,604,000 for the year ended December 31, 2008 compared to $7,046,000 for the
year ended December 31, 2007.





Generally,
changes in net interest income are measured by net interest rate spread and net
interest margin.  Interest spread is the mathematical difference
between the average interest earned on earning assets and interest paid on
interest bearing liabilities.  Interest margin represents the net
interest yield on earning assets and is derived by dividing net interest income
by average earning assets.  In a mature financial institution the
interest margin gives a reader better indicators of asset earning results when
compared to peer groups or industry standards.





The
Company’s net interest margin for the year ended December 31, 2008 was 2.73%
compared to 2.32% for the year ended December 31, 2007.  The increase
in the margin is due primarily to the increase in loan balances as well as
current market conditions which have significantly reduced deposit account rates
and had a lesser impact on loan rates.  During this difficult market
environment, the Company continued to grow and attract deposits and loans at
competitive rates.





The
following table includes the average balances, interest income and expense and
the average rates earned and paid for assets and liabilities for the periods
presented.  All average balances are daily average
balances.


15
 Table of Contents


Average
Balances, Rates and Interest Income and Expense


Year Ended December 31,
2008
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Year Ended December 31,
2007
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Year Ended December 31,
2006AverageBalance
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Interest
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Yield
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          AverageBalance
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Interest
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Yield
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          AverageBalance
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Interest
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Yield(Dollars
      In Thousands)ASSETSTotal
      loans
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          300,162
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          18,272
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.09
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          253,573
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          16,350
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.45
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          206,595
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          12,824
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.21
                                                                                                                                                                          %Investment
      securities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          48,763
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,346
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.81
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          47,514
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,305
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.85
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          43,300
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,958
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.52
                                                                                                                                                                          %Federal
      funds sold
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,807
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          29
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.60
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,905
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          149
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.13
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,316
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          119
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.14
                                                                                                                                                                          %Time
      deposits
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          311
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          12
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.86
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -Interest
      bearing deposits with banks
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          502
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.00
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          105
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.76
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          114
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.39
                                                                                                                                                                          %TOTAL
      INTEREST EARNING ASSETS
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          351,545
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          20,664
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.88
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          304,097
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          18,809
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.19
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          252,325
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          14,906
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.91
                                                                                                                                                                          %Less
      allowance for loan losses
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (2,706
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (2,489
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (2,061
                                                                                                                                                                          )Other
      assets
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          8,921
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          7,719
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6,396TOTAL
      ASSETS
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          357,760
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          309,327
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          256,660LIABILITIES
      AND STOCKHOLDERS' EQUITYInterest
      bearing demand deposits, NOW and money market
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          36,299
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          712
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.96
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          55,596
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          1,707
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.07
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          58,924
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          1,815
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.08
                                                                                                                                                                          %Savings
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          73,833
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,229
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.02
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          18,146
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          639
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.52
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4,536
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          48
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.06
                                                                                                                                                                          %Certificates
      of deposit
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          152,557
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6,374
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.18
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          161,550
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          8,029
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.97
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          137,707
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6,101
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.43
                                                                                                                                                                          %Securities
      sold under agreements to repurchase and other borrowings
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          47,807
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,745
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.65
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          30,454
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,388
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.56
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          16,370
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          754
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.61
                                                                                                                                                                          %TOTAL
      INTEREST BEARING LIABILITIES
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          310,496
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          11,060
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.56
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          265,746
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          11,763
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.43
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          217,537
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          8,718
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.01
                                                                                                                                                                          %Non-interest
      bearing demand deposits
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          15,102
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          14,465
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          15,207Other
      liabilities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,720
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,653
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,491Stockholders'
      equity
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          28,442
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          25,463
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          21,425TOTAL
      LIABILITIES ANDSTOCKHOLDERS'
      EQUITY
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          357,760
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          309,327
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          256,660Net
      interest income
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          9,604
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          7,046
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          6,188Net
      interest spread
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.32
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.76
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.90
                                                                                                                                                                          %Net
      interest margin
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.73
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.32
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.45
                                                                                                                                                                          %
 16
 Table of Contents


The table
below demonstrates the relative impact on net interest income of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in rates earned and paid by the Company on such assets and
liabilities.


2008
      vs. 2007
                                                                                            
                                                                                            
                                                                                            2007
      vs. 2006Increase
      (decrease) due to changes in:
                                                                                            
                                                                                            
                                                                                            Increase
      (decrease) due to changes in:(In
      Thousands)Volume
                                                                                            
                                                                                            
                                                                                            Rate
                                                                                            
                                                                                            
                                                                                            Total
                                                                                            
                                                                                            
                                                                                            Volume
                                                                                            
                                                                                            
                                                                                            Rate
                                                                                            
                                                                                            
                                                                                            TotalInterest-earning
      assets:Total
      loans
                                                                                            
                                                                                            $
                                                                                            3,004
                                                                                            
                                                                                            
                                                                                            $
                                                                                            (1,082
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            1,922
                                                                                            
                                                                                            
                                                                                            $
                                                                                            2,916
                                                                                            
                                                                                            
                                                                                            $
                                                                                            610
                                                                                            
                                                                                            
                                                                                            $
                                                                                            3,526Investment
      securities
                                                                                            
                                                                                            
                                                                                            61
                                                                                            
                                                                                            
                                                                                            
                                                                                            (20
                                                                                            )
                                                                                            
                                                                                            
                                                                                            41
                                                                                            
                                                                                            
                                                                                            
                                                                                            191
                                                                                            
                                                                                            
                                                                                            
                                                                                            155
                                                                                            
                                                                                            
                                                                                            
                                                                                            346Federal
      funds sold
                                                                                            
                                                                                            
                                                                                            (56
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (64
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (120
                                                                                            )
                                                                                            
                                                                                            
                                                                                            30
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            30Time
      Deposits
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            12
                                                                                            
                                                                                            
                                                                                            
                                                                                            12
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Interest
      bearing deposits with banks
                                                                                            
                                                                                            
                                                                                            19
                                                                                            
                                                                                            
                                                                                            
                                                                                            (19
                                                                                            )
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -Total
      net change in income oninterest-earning
    assets
                                                                                            
                                                                                            
                                                                                            3,028
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,173
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,855
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,137
                                                                                            
                                                                                            
                                                                                            
                                                                                            765
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,902Interest-bearing
      liabilities:Interest
      bearing demand deposits, NOW and money market
                                                                                            
                                                                                            
                                                                                            (592
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (403
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (995
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (102
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (5
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (107
                                                                                            )Savings
                                                                                            
                                                                                            
                                                                                            1,961
                                                                                            
                                                                                            
                                                                                            
                                                                                            (371
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,590
                                                                                            
                                                                                            
                                                                                            
                                                                                            144
                                                                                            
                                                                                            
                                                                                            
                                                                                            447
                                                                                            
                                                                                            
                                                                                            
                                                                                            591Certificates
      of deposit
                                                                                            
                                                                                            
                                                                                            (447
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,208
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,655
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,056
                                                                                            
                                                                                            
                                                                                            
                                                                                            872
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,928Total
      deposits
                                                                                            
                                                                                            
                                                                                            922
                                                                                            
                                                                                            
                                                                                            
                                                                                            (1,982
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (1,060
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,098
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,314
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,412Securities
      sold under agreements to repurchase and other borrowings
                                                                                            
                                                                                            
                                                                                            791
                                                                                            
                                                                                            
                                                                                            
                                                                                            (434
                                                                                            )
                                                                                            
                                                                                            
                                                                                            357
                                                                                            
                                                                                            
                                                                                            
                                                                                            649
                                                                                            
                                                                                            
                                                                                            
                                                                                            (16
                                                                                            )
                                                                                            
                                                                                            
                                                                                            633Total
      net change in expense oninterest-bearing
      liabilities
                                                                                            
                                                                                            
                                                                                            1,713
                                                                                            
                                                                                            
                                                                                            
                                                                                            (2,416
                                                                                            )
                                                                                            
                                                                                            
                                                                                            (703
                                                                                            )
                                                                                            
                                                                                            
                                                                                            1,747
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,298
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,045Change
      in net interest income
                                                                                            
                                                                                            $
                                                                                            1,315
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,243
                                                                                            
                                                                                            
                                                                                            $
                                                                                            2,558
                                                                                            
                                                                                            
                                                                                            $
                                                                                            1,390
                                                                                            
                                                                                            
                                                                                            $
                                                                                            (533
                                                                                            )
                                                                                            
                                                                                            $
                                                                                            857





Provision
for Loan Losses





The
provision for loan losses represents the expense recognized to fund the
allowance for loan losses.  This amount is based on many factors that
reflect management’s assessment of the risk in its loan
portfolio.  Those factors include economic conditions and trends, the
value and adequacy of collateral, volume and mix of the portfolio, performance
of the portfolio, and internal loan processes of the Company.





For the
year ended December 31, 2008, the provision for loan losses was $429,000
compared to $390,000 for the year ended December 31, 2007.  The
allowance for loan losses as of December 31, 2008 was $2,932,000, which
represents 0.92% of outstanding loans at December 31, 2008, which is comparable
to the prior year-end of $2,503,000 representing 0.90% of outstanding
loans.  Based principally on current economic conditions, perceived
asset quality, loan-loss experience of comparable institutions in the Company’s
market area, the allowance is believed to be adequate.  The increase
in the percentage of allowance for loan losses to outstanding loans between
December 31, 2007 and December 31, 2008 was primarily due to an increase in loan
volume.





Non-interest
Income





Non-interest
income is derived from the Company’s operations and represents primarily service
charge income and fees on deposit relationships.  Non-interest income
also may include net gains and losses from the sale of available for sale
securities.  Total non-interest income was $661,000 for the year ended
December 31, 2008 compared to $460,000 for the year ended December 31,
2007.  This increase in non-interest income is due to increased
service fees from the increase in the number of deposit accounts as well as an
increase in merchant credit card processing services.  There were no
sales of securities in 2008 and 2007.  As the account base grows and
the Company matures and develops additional sources of fee income; non-interest
income will be a contributor to the overall profitability of the
Company.


17
 Table of Contents




Non-interest
Expense





Non-interest
expenses represent the normal operating expenses of the
Company.  These expenses include salaries, employee benefits,
occupancy, equipment, data processing, advertising and other expenses related to
the overall operation of the Company.





Non-interest
expenses for the year ended December 31, 2008 were $7,992,000, compared to
$6,827,000 for the year ended December 31, 2007.  The largest
component increase was in salaries and benefits, which increased $505,000 or 15%
due primarily to staff additions, increases in annual salaries and employee
insurance benefits.  At December 31, 2008, the Company had fifty-one
full-time equivalent employees compared to forty-nine full-time equivalent
employees at December 31, 2007.  Occupancy and equipment expense
increased $108,000 or 9% due to the addition of the new branch expenses,
additions, maintenance and repairs of computer equipment, and software expenses.
Data processing costs increased $130,000 or 25% due to increased volume of
accounts and enhanced network support services.  Advertising and
marketing expense increased $54,000 or 12% due to product promotions and our
image campaign within the community. Professional fees increased $50,000 or 19%
due to increased costs and expansion of primarily third party auditing,
regulatory and consulting services.  FDIC insurance expense was
$159,000 for the year ended December 31, 2008 compared to $146,000 for the ended
December 31, 2007. Credit card expense increased $158,000 or 76% due to
increased volume.  Other expenses increased $147,000 or 18% due to the
Company’s growth.





A
breakdown of other non-interest expenses is included in the statements of income
in the Consolidated Financial Statements.





Income
Taxes




The
provision for income taxes was $658 thousand at December 31, 2008 compared to no
provision at December 31, 2007, due to the utilization of net operating loss
carryforwards.  Due to recognition of its deferred taxes at December
31, 2007, the Company had an income tax benefit of $1,241,000 for the year ended
December 31, 2007.  Based upon the level of historical taxable income
and projections for future taxable income over periods in which the deferred
taxes are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.




FINANCIAL
CONDITION





Securities





The
Company’s securities portfolio is 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 Company 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.  The Company holds no high-risk securities or
derivatives as of December 31, 2008.





The
Company’s securities portfolio was $54,251,000 at December 31, 2008, a
$4,755,000 increase from securities of $49,496,000 at December 31, 2007. The
Company’s securities have increased due to purchases in the amount of
$11,237,000 offset by investment principal pay-downs and
maturities.  The carrying value of the securities portfolio as of
December 31, 2008 includes a net unrealized gain of $1,477,000 as compared to a
net unrealized gain of $115,000 as of December 31, 2007, which is recorded to
accumulated other comprehensive income in stockholders’ equity.  This
increase in the unrealized gain is due to the changes in market interest rates
from 2007 to 2008, and therefore no securities are deemed to be other than
temporarily impaired.


18
 Table of Contents




The
following table sets forth the composition of the securities portfolio at fair
value as of December 31, 2008, 2007, 2006, 2005, and 2004.




2008
                                                
                                                
                                                2007
                                                
                                                
                                                2006
                                                
                                                
                                                2005
                                                
                                                
                                                2004(In
      Thousands)U.S.
      Treasury and agency obligations
                                                
                                                $
                                                11,697
                                                
                                                
                                                $
                                                11,146
                                                
                                                
                                                $
                                                10,767
                                                
                                                
                                                $
                                                10,766
                                                
                                                
                                                $
                                                2,008Mortgage-backed
      securities
                                                
                                                
                                                37,108
                                                
                                                
                                                
                                                34,494
                                                
                                                
                                                
                                                28,510
                                                
                                                
                                                
                                                27,760
                                                
                                                
                                                
                                                31,449Taxable
      municipal securities
                                                
                                                
                                                5,446
                                                
                                                
                                                
                                                3,856
                                                
                                                
                                                
                                                3,820
                                                
                                                
                                                
                                                3,781
                                                
                                                
                                                
                                                -Total
      Securities Available for Sale
                                                
                                                $
                                                54,251
                                                
                                                
                                                $
                                                49,496
                                                
                                                
                                                $
                                                43,097
                                                
                                                
                                                $
                                                42,307
                                                
                                                
                                                $
                                                33,457


The
following table presents the maturities and average weighted yields of the debt
securities portfolio as of December 31, 2008.   Maturities of
mortgage-backed securities are based on estimated life.  Yields are
based on amortized cost.





Securities
by Maturities
 (Amortized
Cost)
 
 1
      year or Less
                                                                            
                                                                            
                                                                            1-5
      Years
                                                                            
                                                                            
                                                                            5-10
      Years
                                                                            
                                                                            
                                                                            Over
      10 Years
                                                                            
                                                                            
                                                                            TotalAverage
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Average
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Average
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            Average
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            AverageAmount
                                                                            
                                                                            
                                                                            Yield
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Yield
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Yield
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Yield
                                                                            
                                                                            
                                                                            Amount
                                                                            
                                                                            
                                                                            Yield(Dollars
      In Thousands)U.S.
      Government agency obligations
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            9,975
                                                                            
                                                                            
                                                                            
                                                                            4.42
                                                                            %
                                                                            
                                                                            $
                                                                            992
                                                                            
                                                                            
                                                                            
                                                                            4.70
                                                                            %
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            10,967
                                                                            
                                                                            
                                                                            
                                                                            4.44
                                                                            %Taxable
      Municipal securities
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            2,535
                                                                            
                                                                            
                                                                            
                                                                            4.68
                                                                            %
                                                                            
                                                                            $
                                                                            2,950
                                                                            
                                                                            
                                                                            
                                                                            5.21
                                                                            %
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            5,485
                                                                            
                                                                            
                                                                            
                                                                            4.96
                                                                            %Mortgage-backed
      securities
                                                                            
                                                                            $
                                                                            1,944
                                                                            
                                                                            
                                                                            
                                                                            4.26
                                                                            %
                                                                            
                                                                            $
                                                                            24,610
                                                                            
                                                                            
                                                                            
                                                                            4.76
                                                                            %
                                                                            
                                                                            $
                                                                            9,183
                                                                            
                                                                            
                                                                            
                                                                            5.54
                                                                            %
                                                                            
                                                                            $
                                                                            585
                                                                            
                                                                            
                                                                            
                                                                            4.92
                                                                            %
                                                                            
                                                                            $
                                                                            36,322
                                                                            
                                                                            
                                                                            
                                                                            4.93
                                                                            %Total
      Debt Securities
                                                                            
                                                                            $
                                                                            1,944
                                                                            
                                                                            
                                                                            
                                                                            4.26
                                                                            %
                                                                            
                                                                            $
                                                                            37,120
                                                                            
                                                                            
                                                                            
                                                                            4.66
                                                                            %
                                                                            
                                                                            $
                                                                            13,125
                                                                            
                                                                            
                                                                            
                                                                            5.40
                                                                            %
                                                                            
                                                                            $
                                                                            585
                                                                            
                                                                            
                                                                            
                                                                            4.92
                                                                            %
                                                                            
                                                                            $
                                                                            52,774
                                                                            
                                                                            
                                                                            
                                                                            4.83
                                                                            %
 19
 Table of Contents


Loans





The
following table sets forth information on the composition of the loan portfolio
by type at December 31, 2008, 2007, 2006, 2005, and 2004.  All of the
Company’s loans are to domestic borrowers.




December
      31, 2008
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  December
      31, 2007
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  December
      31, 2006Percentage
      of
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Percentage
      of
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Percentage
      ofBalance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  total
      Loans
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Balance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  total
      Loans
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Balance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  total
      Loans(Dollars
      In Thousands)Commercial
      real estate
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  148,881
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  46.62
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  125,021
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  45.21
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  101,737
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  43.21
                                                                                                                                                                                  %Commercial
      construction
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6,886
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2.16
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,969
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.07
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  6,183
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2.63
                                                                                                                                                                                  %Commercial
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  24,096
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  7.55
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  22,583
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  8.17
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  21,578
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  9.17
                                                                                                                                                                                  %Home
      equity
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  136,739
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  42.82
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  123,774
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  44.75
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  103,895
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  44.14
                                                                                                                                                                                  %Consumer
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,726
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.85
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,216
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.80
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,006
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.85
                                                                                                                                                                                  %Gross
      loans
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  319,328
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  100.00
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  276,563
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  100.00
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  235,399
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  100.00
                                                                                                                                                                                  %Unearned
      origination costs
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  252
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  253
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  194$
                                                                                                                                                                                  319,580
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  276,816
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  235,593December
      31, 2005
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  December
      31, 2004Percentage
      of
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Percentage
      ofBalance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  total
      Loans
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  Balance
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  total
      Loans(Dollars
      in Thousands)Commercial
      real estate
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  77,854
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  43.46
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  47,435
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  41.87
                                                                                                                                                                                  %Commercial
      construction
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  2,626
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.47
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,079
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.95
                                                                                                                                                                                  %Commercial
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  16,906
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  9.44
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  15,058
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  13.29
                                                                                                                                                                                  %Home
      equity
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  80,726
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  45.07
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  48,292
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  42.63
                                                                                                                                                                                  %Consumer
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,003
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  0.56
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1,431
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  1.26
                                                                                                                                                                                  %Gross
      loans
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  179,115
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  100.00
                                                                                                                                                                                  %
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  113,295
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  100.00
                                                                                                                                                                                  %Unearned
      origination costs
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  207
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  169$
                                                                                                                                                                                  179,322
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  
                                                                                                                                                                                  $
                                                                                                                                                                                  113,464
 20
 Table of Contents


The
following table shows the maturities of the commercial loan portfolio and the
sensitivity of such loans to interest rate fluctuations at December 31,
2008.




One
      year orLess
                                          
                                          
                                          After
      One YearThrough
      Five Years
                                          
                                          
                                          After
      FiveYears
                                          
                                          
                                          Total(In
      Thousands)Commercial
      real estate
                                          
                                          $
                                          24,002
                                          
                                          
                                          $
                                          84,019
                                          
                                          
                                          $
                                          40,860
                                          
                                          
                                          $
                                          148,881Commercial
      construction
                                          
                                          
                                          3,108
                                          
                                          
                                          
                                          3,778
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,886Commercial
                                          
                                          
                                          10,282
                                          
                                          
                                          
                                          11,469
                                          
                                          
                                          
                                          2,345
                                          
                                          
                                          
                                          24,096$
                                          37,392
                                          
                                          
                                          $
                                          99,266
                                          
                                          
                                          $
                                          43,205
                                          
                                          
                                          $
                                          179,863Fixed
      Rates
                                          
                                          $
                                          9,527
                                          
                                          
                                          $
                                          90,375
                                          
                                          
                                          $
                                          41,545
                                          
                                          
                                          $
                                          141,447Variable
      Rates
                                          
                                          
                                          27,865
                                          
                                          
                                          
                                          8,891
                                          
                                          
                                          
                                          1,660
                                          
                                          
                                          
                                          38,416$
                                          37,392
                                          
                                          
                                          $
                                          99,266
                                          
                                          
                                          $
                                          43,205
                                          
                                          
                                          $
                                          179,863




Credit
Risk and Loan Quality





In its lending activities, the Company
seeks to develop sound credit relationships with customers who will grow with
the Company.  There has not been an effort to rapidly build the
portfolio and earnings at the sacrifice of asset quality.  The
philosophy of seeking quality credits and building relationships while possibly
forgoing income opportunities will continue.





The
Company’s loan policy establishes tiered lending authorities to individual
officers of the Company, the Loan Committee and the Board of
Directors.  At December 31, 2008, the Company had two loans delinquent
beyond ninety days for $818,000 to one borrower, as compared to no loans
delinquent beyond ninety days at December 31, 2007, three loans delinquent, two
to the same borrower for $206,000 at December 31, 2006, one loan delinquent for
$102,000 at December 31, 2005 and no loans delinquent at December 31,
2004.  At December 31, 2008 and 2007, the Company had no loans on
non-accrual status compared to two loans on non-accrual status for $205,000 at
December 31, 2006 and no loans on non-accrual status at years ending 2005 and
2004.  At December 31, 2008, the Company had no loans charged off for
the year compared to two loans totaling $313,000 charged off for the year ending
2007, and no loans charged off at years ending 2006, 2005, and
2004.  It is the Company’s policy to discontinue the accrual of
interest when a loan is specifically determined to be impaired or when principal
or interest is delinquent for 90 days or more. A loan may remain on accrual
status if it is in the process of collection and is either guaranteed or well
secured.  The Company has had no other real estate owned as acquired
through foreclosure.





Allowance
for Loan Losses





Based
upon current economic conditions, the composition of the loan portfolio and loan
loss experience of comparable institutions in the Company’s market areas, an
allowance for loan losses has been provided at 0.92% of outstanding
loans.  Based on its knowledge of the portfolio and current economic
conditions, management believes that as of December 31, 2008, the allowance is
adequate to absorb reasonably anticipated losses.  As of December 31,
2008, there were no loans where information known to management caused
management to have serious doubts as to the ability of the borrower to comply
with the current repayment terms.


21
 Table of Contents




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:




December
      31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005
                                            
                                            
                                            2004(In
      Thousands)Loans
      receivable at end of year
                                            
                                            $
                                            319,580
                                            
                                            
                                            $
                                            276,816
                                            
                                            
                                            $
                                            235,593
                                            
                                            
                                            $
                                            179,322
                                            
                                            
                                            $
                                            113,464Allowance
      for loan losses:Balance,
      beginning
                                            
                                            $
                                            2,503
                                            
                                            
                                            $
                                            2,426
                                            
                                            
                                            $
                                            1,782
                                            
                                            
                                            $
                                            1,198
                                            
                                            
                                            $
                                            805Provision
      for loan losses
                                            
                                            
                                            429
                                            
                                            
                                            
                                            390
                                            
                                            
                                            
                                            644
                                            
                                            
                                            
                                            584
                                            
                                            
                                            
                                            393Loans
      charged off
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (313
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Recoveries
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Balance
      at end of year
                                            
                                            $
                                            2,932
                                            
                                            
                                            $
                                            2,503
                                            
                                            
                                            $
                                            2,426
                                            
                                            
                                            $
                                            1,782
                                            
                                            
                                            $
                                            1,198Allowance
      for loan losses to loans receivable at end of year
                                            
                                            
                                            0.92
                                            %
                                            
                                            
                                            0.90
                                            %
                                            
                                            
                                            1.03
                                            %
                                            
                                            
                                            0.99
                                            %
                                            
                                            
                                            1.06
                                            %


The
following table details the allocation of the allowance for loan losses to the
various categories. While allocations have been established for particular loan
categories, management considers the entire allowance to be available to absorb
losses in any category.






Allocation
      of the Allowance for Loan LossesDecember
                                                                                                      
                                                                                                      
                                                                                                      %
      of Gross
                                                                                                      
                                                                                                      
                                                                                                      December
                                                                                                      
                                                                                                      
                                                                                                      %
      of Gross
                                                                                                      
                                                                                                      
                                                                                                      December
                                                                                                      
                                                                                                      
                                                                                                      %
      of Gross
                                                                                                      
                                                                                                      
                                                                                                      December
                                                                                                      
                                                                                                      
                                                                                                      %
      of Gross
                                                                                                      
                                                                                                      
                                                                                                      December
                                                                                                      
                                                                                                      
                                                                                                      %
      of Gross2008
                                                                                                      
                                                                                                      
                                                                                                      Loans
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      Loans
                                                                                                      
                                                                                                      
                                                                                                      2006
                                                                                                      
                                                                                                      
                                                                                                      Loans
                                                                                                      
                                                                                                      
                                                                                                      2005
                                                                                                      
                                                                                                      
                                                                                                      Loans
                                                                                                      
                                                                                                      
                                                                                                      2004
                                                                                                      
                                                                                                      
                                                                                                      Loans(In
      Thousands)Commercial
      real estate
                                                                                                      
                                                                                                      $
                                                                                                      1,563
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      41.53
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      1,257
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      40.29
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      1,041
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      38.35
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      713
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      43.46
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      438
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      41.87
                                                                                                      %Commercial
      construction
                                                                                                      
                                                                                                      
                                                                                                      101
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.15
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      47
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.07
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      91
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      2.59
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      60
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.47
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      36
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.95
                                                                                                      %Commercial
                                                                                                      
                                                                                                      
                                                                                                      639
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      12.60
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      623
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      13.03
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      806
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      14.04
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      611
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      9.44
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      411
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      13.29
                                                                                                      %Home
      equity
                                                                                                      
                                                                                                      
                                                                                                      595
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      42.79
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      530
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      44.33
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      461
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      44.15
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      382
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      45.07
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      296
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      42.63
                                                                                                      %Consumer
                                                                                                      
                                                                                                      
                                                                                                      34
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.93
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      46
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.28
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      27
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.85
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      16
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      0.56
                                                                                                      %
                                                                                                      
                                                                                                      
                                                                                                      17
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1.26
                                                                                                      %Total
      Allowance for Loan Losses
                                                                                                      
                                                                                                      $
                                                                                                      2,932
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      2,503
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      2,426
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      1,782
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %
                                                                                                      
                                                                                                      $
                                                                                                      1,198
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      100.00
                                                                                                      %






Deposits





The
Company, as growth continues, expects that the principal sources of its funds
will be deposits, consisting of demand deposits, NOW accounts, money market
accounts, savings accounts, and certificates of deposit from the local market
areas surrounding the Company’s office. These accounts provide the Company with
a source of fee income and a relatively stable source of funds.





Total
deposits at December 31, 2008 were $307,570,000, an increase of $40,929,000, or
15.35%, over total deposits of $266,641,000 as of December 31,
2007.


22
 Table of Contents





The
following table reflects the Company’s deposits by category for the periods
indicated.  All deposits are domestic deposits.




December
      31, 2008
                              
                              
                              December
      31, 2007
                              
                              
                              December
      31, 2006(In
      Thousands)Demand,
      non-interest bearing
                              
                              $
                              16,194
                              
                              
                              $
                              15,150
                              
                              
                              $
                              15,855Demand
      and money market, interest bearing
                              
                              
                              31,437
                              
                              
                              
                              46,095
                              
                              
                              
                              64,179Savings
                              
                              
                              103,863
                              
                              
                              
                              37,489
                              
                              
                              
                              4,597Time,
      $100 and over
                              
                              
                              65,344
                              
                              
                              
                              59,421
                              
                              
                              
                              57,805Time,
      other
                              
                              
                              90,732
                              
                              
                              
                              108,486
                              
                              
                              
                              95,706Total
      deposits
                              
                              $
                              307,570
                              
                              
                              $
                              266,641
                              
                              
                              $
                              238,142


The
following table sets forth the average balance of the Company’s deposits and the
average rates paid on those deposits for the years ended December 31, 2008,
2007, and 2006.






Years
      Ended December 312008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2006Average
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      AverageAmount
                                                      
                                                      
                                                      Rate
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Rate
                                                      
                                                      
                                                      Amount
                                                      
                                                      
                                                      Rate(In
      Thousands)Demand
      and money market, interest bearing
                                                      
                                                      $
                                                      36,299
                                                      
                                                      
                                                      
                                                      1.96
                                                      %
                                                      
                                                      $
                                                      55,596
                                                      
                                                      
                                                      
                                                      3.07
                                                      %
                                                      
                                                      $
                                                      58,924
                                                      
                                                      
                                                      
                                                      3.08
                                                      %Savings
                                                      
                                                      
                                                      73,833
                                                      
                                                      
                                                      
                                                      3.02
                                                      %
                                                      
                                                      
                                                      18,146
                                                      
                                                      
                                                      
                                                      3.52
                                                      %
                                                      
                                                      
                                                      4,536
                                                      
                                                      
                                                      
                                                      1.06
                                                      %Certificates
      of deposit
                                                      
                                                      
                                                      152,557
                                                      
                                                      
                                                      
                                                      4.18
                                                      %
                                                      
                                                      
                                                      161,550
                                                      
                                                      
                                                      
                                                      4.97
                                                      %
                                                      
                                                      
                                                      137,707
                                                      
                                                      
                                                      
                                                      4.43
                                                      %Total
      interest bearing deposits
                                                      
                                                      
                                                      262,689
                                                      
                                                      
                                                      
                                                      3.55
                                                      %
                                                      
                                                      
                                                      235,292
                                                      
                                                      
                                                      
                                                      4.41
                                                      %
                                                      
                                                      
                                                      201,167
                                                      
                                                      
                                                      
                                                      3.96
                                                      %Non-interest
      bearing demand deposits
                                                      
                                                      
                                                      15,102
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      14,465
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      15,207Total
                                                      
                                                      $
                                                      277,791
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      249,757
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      216,374




The
following table displays the maturities and the amounts of the Company’s
certificates of deposit of $100,000 or more as of December 31,
2008.




December
      31, 2008(In
      Thousands)3
      months or less
                      
                      $
                      19,122Over
      3 through 6 months
                      
                      
                      16,352Over
      6 through 12 months
                      
                      
                      24,040Over
      12 months
                      
                      
                      5,830Total
                      
                      $
                      65,344


Liquidity





Liquidity
is a measure of 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, Federal funds sold and short-term securities.  There are other
sources of liquidity that are available to the Company.


23
 Table of Contents





The Bank
has borrowing capacity with the FHLB of Pittsburgh of approximately $193.9
million of which $21.8 million was outstanding at December 31, 2008, all of
which are long term.  The Bank also has a line of credit with the FHLB
of Pittsburgh and the Atlantic Central Bankers Bank of approximately $25.0
million and $6.0 million, respectively of which none was outstanding at December
31, 2008.  Advances from the Federal Home Loan Bank line are secured
by qualifying assets of the Bank and advances from the Atlantic Central Bankers
Bank line are unsecured.  The Company has a line of credit with
Univest National Bank and Trust Company, of which $1.4 million was outstanding
at December 31, 2008.  This line of credit is secured by 500,000
shares of Bank stock.





Because
of the composition of the Company’s balance sheet, its strong capital base,
deposit growth, and borrowing capacity, the Company remains well positioned with
respect to liquidity.  While it is desirable to be liquid, it has the
effect of a lower interest margin. The majority of funds are invested in loans;
however a sizeable portion is invested in investment securities that generally
carry a lower yield.





Contractual
Obligations





The
following table represents the Company’s contractual obligations to make future
payments as of December 31, 2008:




Less
      Than
                                                                  
                                                                  
                                                                  1-3
                                                                  
                                                                  
                                                                  4-5
                                                                  
                                                                  Over
      51
      Year
                                                                  
                                                                  
                                                                  Years
                                                                  
                                                                  
                                                                  Years
                                                                  
                                                                  
                                                                  Years
                                                                  
                                                                  
                                                                  Total(In
      Thousands)Time
      deposits
                                                                  
                                                                  $
                                                                  134,687
                                                                  
                                                                  
                                                                  $
                                                                  19,674
                                                                  
                                                                  
                                                                  $
                                                                  1,715
                                                                  
                                                                  
                                                                  $
                                                                  -
                                                                  
                                                                  
                                                                  $
                                                                  156,076Long-term
      borrowings
                                                                  
                                                                  
                                                                  3,277
                                                                  
                                                                  
                                                                  
                                                                  10,598
                                                                  
                                                                  
                                                                  
                                                                  9,287
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  23,162Operating
      leases
                                                                  
                                                                  
                                                                  650
                                                                  
                                                                  
                                                                  
                                                                  1,720
                                                                  
                                                                  
                                                                  
                                                                  1,332
                                                                  
                                                                  
                                                                  
                                                                  4,613
                                                                  
                                                                  
                                                                  
                                                                  8,315Total
                                                                  
                                                                  $
                                                                  138,614
                                                                  
                                                                  
                                                                  $
                                                                  31,992
                                                                  
                                                                  
                                                                  $
                                                                  12,334
                                                                  
                                                                  
                                                                  $
                                                                  4,613
                                                                  
                                                                  
                                                                  $
                                                                  187,553


Off-Balance
Sheet Arrangements





The
Company’s 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 commitments consist of un-funded loans and
lines of credit and letters of credit made under the same standards as
on-balance sheet instruments.  These off balance sheet arrangements at
December 31, 2008 totaled $47,240,000.  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
believes that any amounts actually drawn upon can be funded in the normal course
of operations.




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
the availability of capital resources.




24
 Table of Contents


Capital
Resources and Adequacy





Embassy
Bancorp, Inc. (the “Company”) is a Pennsylvania corporation organized in 2008
and registered as a bank holding company pursuant to section 3(a)(1) of the Bank
Holding Company Act  of 1956, as amended (the “BHC Act”) and section
225.15 of Regulation Y.  The Company was formed for purposes of
acquiring Embassy Bank For The Lehigh Valley in connection with the
reorganization of the Bank into a bank holding company structure, which
reorganization was consummated on November 11, 2008.  Accordingly, the
Company owns all of the capital stock of the Bank, giving the organization more
flexibility in meeting its capital needs as the Company continues to
grow.  As such, the consolidated financial statements contained herein
include the accounts of the Company and the Bank.




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




The
Federal Reserve Board approved a final rule in February 2006 that expands the
definition of a small bank holding company (“BHC”) under the Board’s Small Bank
Holding Company Policy Statement and the Board’s risk-based and leverage capital
guidelines for bank holding companies.  In its revisions to the Policy
Statement, the Federal Reserve Board has raised the small BHC asset size
threshold from $150 million to $500 million and amended the related qualitative
criteria for determining eligibility as a small BHC for the purposes of the
policy statement and the capital guidelines.  The policy statement
facilitates the transfer of ownership of small community banks by permitting
debt levels at small BHCs that are higher than what would typically be permitted
for larger BHCs.  Because small BHCs may, consistent with the policy
statement, operate at a level of leverage that generally is inconsistent with
the capital guidelines, the capital guidelines provide an exemption for small
BHCs.  Based on the ruling, Embassy Bancorp, Inc. meets the
eligibility criteria of a small BHC and is exempt from regulatory capital
requirements administered by the federal banking agencies.




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




December
      31, 2008
                            
                            
                            December
      31, 2007(Dollars
      in Thousands)Tier
      I, common stockholders' equity
                            
                            $
                            30,705
                            
                            
                            $
                            27,408Tier
      II, allowable portion of allowance for loan losses
                            
                            
                            2,932
                            
                            
                            
                            2,503Total
      capital
                            
                            $
                            33,637
                            
                            
                            $
                            29,911Tier
      I risk based capital ratio
                            
                            
                            10.7
                            %
                            
                            
                            11.0
                            %Total
      risk based capital ratio
                            
                            
                            11.7
                            %
                            
                            
                            12.0
                            %Tier
      I leverage ratio
                            
                            
                            8.1
                            %
                            
                            
                            8.4
                            %





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





At
December 31, 2008, the Bank exceeded the minimum regulatory capital requirements
necessary to be considered a “well capitalized” financial institution under
applicable federal regulations.





Interest
Rate Risk Management





A
principal objective of the Company’s asset/liability management policy is to
minimize the Company’s exposure to changes in interest rates by an ongoing
review of the maturity and repricing of interest-earning assets and
interest-bearing liabilities.  The Asset Liability Committee (ALCO
Committee) of the Board of Directors oversees this review, which establishes
policies to control interest rate sensitivity.  Interest rate
sensitivity is the volatility of a company’s earnings resulting from a movement
in market interest rates.  The Company monitors rate sensitivity in
order to reduce vulnerability to interest rate fluctuations while maintaining
adequate capital levels and acceptable levels of liquidity.  The
Company’s asset/liability management policy, along with monthly financial
reports, supplies management with guidelines to evaluate and manage rate
sensitivity.


25
 Table of Contents




GAP, a
measure of the difference in volume between interest bearing assets and interest
bearing liabilities, is a means of monitoring the sensitivity of a financial
institution to changes in interest rates.  The chart below provides an
indicator of the rate sensitivity of the Company.  NOW and Savings
accounts are slotted by their respective estimated decay rates.  The
Company is liability sensitive, which means that if interest rates fall,
interest income will fall slower than interest expense and net interest income
will likely increase.  If interest rates rise, interest income will
rise slower than interest expense and net interest income will likely
decrease.




0-3
                      
                      
                      4-12
                      
                      
                      1-3
                      
                      
                      4-5
                      
                      
                      Over
      5Months
                      
                      
                      Months
                      
                      
                      Years
                      
                      
                      Years
                      
                      
                      Years
                      
                      
                      Total(In
      Thousands)Interest-earning
      assetsFederal
      funds sold and interest-bearing deposits
                      
                      $
                      5,289
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      5,289Investment
      securities
                      
                      
                      5,867
                      
                      
                      
                      9,525
                      
                      
                      
                      23,459
                      
                      
                      
                      9,010
                      
                      
                      
                      8,465
                      
                      
                      
                      56,326Loans,
      gross
                      
                      
                      68,261
                      
                      
                      
                      57,923
                      
                      
                      
                      104,516
                      
                      
                      
                      61,041
                      
                      
                      
                      27,839
                      
                      
                      
                      319,580Total
      interest-earning assets
                      
                      
                      79,417
                      
                      
                      
                      67,448
                      
                      
                      
                      127,975
                      
                      
                      
                      70,051
                      
                      
                      
                      36,304
                      
                      
                      
                      381,195Interest-bearing
      liabilitiesNOW
      and money market accounts
                      
                      
                      31,437
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,437Savings
                      
                      
                      103,863
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      103,863Certificates
      of deposit
                      
                      
                      37,678
                      
                      
                      
                      97,009
                      
                      
                      
                      19,674
                      
                      
                      
                      1,715
                      
                      
                      
                      -
                      
                      
                      
                      156,076Other
      Borrowed Funds
                      
                      
                      -
                      
                      
                      
                      3,278
                      
                      
                      
                      9,119
                      
                      
                      
                      10,765
                      
                      
                      
                      -
                      
                      
                      
                      23,162Repurchase
      agreements and federal funds purchased
                      
                      
                      25,769
                      
                      
                      
                      250
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      26,019Total
      interest-bearing liabilities
                      
                      
                      198,747
                      
                      
                      
                      100,537
                      
                      
                      
                      28,793
                      
                      
                      
                      12,480
                      
                      
                      
                      -
                      
                      
                      
                      340,557GAP
                      
                      $
                      (119,330
                      )
                      
                      $
                      (33,089
                      )
                      
                      $
                      99,182
                      
                      
                      $
                      57,571
                      
                      
                      $
                      36,304
                      
                      
                      $
                      40,638CUMULATIVE
      GAP
                      
                      $
                      (119,330
                      )
                      
                      $
                      (152,419
                      )
                      
                      $
                      (53,237
                      )
                      
                      $
                      4,334
                      
                      
                      $
                      40,638GAP
      TO INTEREST EARNING ASSETS
                      
                      
                      -31.30
                      %
                      
                      
                      -8.68
                      %
                      
                      
                      26.02
                      %
                      
                      
                      15.10
                      %
                      
                      
                      9.52
                      %CUMULATIVE
      GAP TO INTEREST EARNING ASSETS
                      
                      
                      -31.30
                      %
                      
                      
                      -39.98
                      %
                      
                      
                      -13.97
                      %
                      
                      
                      1.14
                      %
                      
                      
                      10.66
                      %
 26
 Table of Contents


Based on
a twelve-month forecast of the balance sheet, the following table sets forth our
interest rate risk profile at December 31, 2008.  For income
simulation purposes, NOW and savings accounts are repriced quarterly. The impact
on net interest income, illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by the assumptions.




Percentage
      ChangeChange
      in Interest Rates
                    
                    in
      Net Interest IncomeDown
      100 basis points
                    
                    
                    5.7
                    %Down
      200 basis points
                    
                    
                    8.0
                    %Up
      100 basis points
                    
                    
                    -6.0
                    %Up
      200 basis points
                    
                    
                    -11.6
                    %





Return
on Assets and Equity





The
return on average assets for 2008 was 0.33%; the return on average equity for
the same period was 4.17%; and the ratio of average shareholders’ equity to
average total assets was 7.95%.




The
return on average assets for 2007 was 0.49%; the return on average equity for
the same period was 6.01%; and the ratio of average shareholders’ equity to
average total assets was 8.23%.





Effects
of Inflation





The
majority of assets and liabilities of the Company are monetary in nature, and
therefore, differ greatly from most commercial and industrial companies that
have significant investments in fixed assets or inventories.  The
precise impact of inflation upon the Company is difficult to
measure.  Inflation may affect the borrowing needs of consumers,
thereby impacting the growth rate of the Company’s assets.  Inflation
may also affect the general level of interest rates, which can have a direct
bearing on the Company.





Item7A
            Quantitative
      and Qualitative Disclosures about Market
Risks





Not
Applicable.




27
 Table of Contents


Item8 Financial Statements and Supplementary Data








Table of
Contents




PageNumberReport
      of Independent Registered Public Accounting Firm
                  29Consolidated
      Balance Sheets
                  30Consolidated
      Statements of Income
                  31Consolidated
      Statements of Stockholders’ Equity
                  32Consolidated
      Statements of Cash Flows
                  33Notes
      to Financial Statements
                  34
 28
 Table of Contents


Reportof Independent Registered Public Accounting
Firm




To the
Board of Directors and Stockholders


Embassy
Bancorp, Inc.




We have
audited the accompanying consolidated balance sheets of Embassy Bancorp Inc. and
its subsidiary, Embassy Bank for the Lehigh Valley, (collectively the “Company’)
as of December 31, 2008 and 2007, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 2008.  The Company’s management is
responsible for these consolidated financial statements.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2008 and 2007, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.











Beard
Miller Company LLP


Allentown,
Pennsylvania


March 30,
2009


29
 Table of Contents




EmbassyBancorp,
Inc.


Consolidated
Balance Sheets




December
      31,ASSETS
                                                    
                                                    2008
                                                    
                                                    
                                                    2007(In
      Thousands, Except Share and Per Share Data)Cash
      and due from banks
                                                    
                                                    $
                                                    8,459
                                                    
                                                    
                                                    $
                                                    3,360Interest
      bearing demand deposit with bank
                                                    
                                                    
                                                    20
                                                    
                                                    
                                                    
                                                    2Federal
      funds sold
                                                    
                                                    
                                                    3,575
                                                    
                                                    
                                                    
                                                    -Cash
      and Cash Equivalents
                                                    
                                                    
                                                    12,054
                                                    
                                                    
                                                    
                                                    3,362Interest
      bearing time deposits
                                                    
                                                    
                                                    1,694
                                                    
                                                    
                                                    
                                                    -Securities
      available for sale
                                                    
                                                    
                                                    54,251
                                                    
                                                    
                                                    
                                                    49,496Restricted
      investment in bank stock
                                                    
                                                    
                                                    2,075
                                                    
                                                    
                                                    
                                                    1,509Loans
      receivable, net of allowance for loan losses of $2,932 in 2008; $2,503 in
      2007
                                                    
                                                    
                                                    316,648
                                                    
                                                    
                                                    
                                                    274,313Premises
      and equipment, net of depreciation
                                                    
                                                    
                                                    2,231
                                                    
                                                    
                                                    
                                                    2,462Deferred
      income taxes
                                                    
                                                    
                                                    335
                                                    
                                                    
                                                    
                                                    1,202Accrued
      interest receivable
                                                    
                                                    
                                                    1,197
                                                    
                                                    
                                                    
                                                    1,138Other
      assets
                                                    
                                                    
                                                    598
                                                    
                                                    
                                                    
                                                    536Total
      Assets
                                                    
                                                    $
                                                    391,083
                                                    
                                                    
                                                    $
                                                    334,018LIABILITIES AND STOCKHOLDERS'
      EQUITYLiabilities:Deposits:Non-interest
      bearing
                                                    
                                                    $
                                                    16,194
                                                    
                                                    
                                                    $
                                                    15,150Interest
      bearing
                                                    
                                                    
                                                    291,376
                                                    
                                                    
                                                    
                                                    251,491Total
      Deposits
                                                    
                                                    
                                                    307,570
                                                    
                                                    
                                                    
                                                    266,641Securities
      sold under agreements to repurchase and federal funds
      purchased
                                                    
                                                    
                                                    26,019
                                                    
                                                    
                                                    
                                                    17,965Short-term
      borrowings
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    6,093Long-term
      borrowings
                                                    
                                                    
                                                    23,162
                                                    
                                                    
                                                    
                                                    10,396Accrued
      interest payable
                                                    
                                                    
                                                    2,563
                                                    
                                                    
                                                    
                                                    4,117Other
      liabilities
                                                    
                                                    
                                                    1,398
                                                    
                                                    
                                                    
                                                    533Total
      Liabilities
                                                    
                                                    
                                                    360,712
                                                    
                                                    
                                                    
                                                    305,745Stockholders'
      Equity:Common
      stock, $1 par value; authorized 10,000,000 shares; issued 6,890,742
      shares; outstanding 2008 6,890,389 shares; 2007 6,885,915
      shares
                                                    
                                                    
                                                    6,891
                                                    
                                                    
                                                    
                                                    6,886Surplus
                                                    
                                                    
                                                    22,787
                                                    
                                                    
                                                    
                                                    22,775Accumulated
      deficit
                                                    
                                                    
                                                    (278
                                                    )
                                                    
                                                    
                                                    (1,464
                                                    )Accumulated
      other comprehensive income
                                                    
                                                    
                                                    974
                                                    
                                                    
                                                    
                                                    76Treasury
      Stock, at cost, 2008 353 Shares
                                                    
                                                    
                                                    (3
                                                    )
                                                    
                                                    
                                                    -Total
      Stockholders' Equity
                                                    
                                                    
                                                    30,371
                                                    
                                                    
                                                    
                                                    28,273Total
      Liabilities and Stockholders' Equity
                                                    
                                                    $
                                                    391,083
                                                    
                                                    
                                                    $
                                                    334,018





See
notes to consolidated financial statements.


30
 Table of Contents


EmbassyBancorp,
Inc.


Consolidated
Statements of Income


Years
      Ended December 31,2008
                                                            
                                                            
                                                            2007(In
      Thousands, Except Per Share Data)INTEREST
      INCOMELoans
      receivable, including fees
                                                            
                                                            $
                                                            18,272
                                                            
                                                            
                                                            $
                                                            16,350Securities,
      taxable
                                                            
                                                            
                                                            2,346
                                                            
                                                            
                                                            
                                                            2,305Federal
      funds sold
                                                            
                                                            
                                                            29
                                                            
                                                            
                                                            
                                                            149Interest
      on time deposits
                                                            
                                                            
                                                            12
                                                            
                                                            
                                                            
                                                            -Other
                                                            
                                                            
                                                            5
                                                            
                                                            
                                                            
                                                            5Total
      Interest Income
                                                            
                                                            
                                                            20,664
                                                            
                                                            
                                                            
                                                            18,809INTEREST
      EXPENSEDeposits
                                                            
                                                            
                                                            9,315
                                                            
                                                            
                                                            
                                                            10,375Securities
      sold under agreements to repurchase and federal funds
      purchased
                                                            
                                                            
                                                            663
                                                            
                                                            
                                                            
                                                            727Short-term
      borrowings
                                                            
                                                            
                                                            410
                                                            
                                                            
                                                            
                                                            398Long-term
      borrowings
                                                            
                                                            
                                                            672
                                                            
                                                            
                                                            
                                                            263Total
      Interest Expense
                                                            
                                                            
                                                            11,060
                                                            
                                                            
                                                            
                                                            11,763Net
      Interest Income
                                                            
                                                            
                                                            9,604
                                                            
                                                            
                                                            
                                                            7,046PROVISION
      FOR LOAN LOSSES
                                                            
                                                            
                                                            429
                                                            
                                                            
                                                            
                                                            390Net
      Interest Income afterProvision for Loan
      Losses
                                                            
                                                            
                                                            9,175
                                                            
                                                            
                                                            
                                                            6,656OTHER
      INCOMECredit
      card processing fees
                                                            
                                                            
                                                            381
                                                            
                                                            
                                                            
                                                            211Other
      service fees
                                                            
                                                            
                                                            280
                                                            
                                                            
                                                            
                                                            249Total
      Other Income
                                                            
                                                            
                                                            661
                                                            
                                                            
                                                            
                                                            460OTHER
      EXPENSESSalaries
      and employee benefits
                                                            
                                                            
                                                            3,792
                                                            
                                                            
                                                            
                                                            3,287Occupancy
      and equipment
                                                            
                                                            
                                                            1,268
                                                            
                                                            
                                                            
                                                            1,160Data
      processing
                                                            
                                                            
                                                            642
                                                            
                                                            
                                                            
                                                            512Credit
      card processing
                                                            
                                                            
                                                            366
                                                            
                                                            
                                                            
                                                            208Advertising
      and promotion
                                                            
                                                            
                                                            501
                                                            
                                                            
                                                            
                                                            447Professional
      fees
                                                            
                                                            
                                                            315
                                                            
                                                            
                                                            
                                                            265FDIC
      insurance
                                                            
                                                            
                                                            159
                                                            
                                                            
                                                            
                                                            146Insurance
                                                            
                                                            
                                                            66
                                                            
                                                            
                                                            
                                                            53Loan
      department
                                                            
                                                            
                                                            80
                                                            
                                                            
                                                            
                                                            107Charitable
      Contributions
                                                            
                                                            
                                                            236
                                                            
                                                            
                                                            
                                                            175Other
                                                            
                                                            
                                                            567
                                                            
                                                            
                                                            
                                                            467Total
      Other Expenses
                                                            
                                                            
                                                            7,992
                                                            
                                                            
                                                            
                                                            6,827Income
      before Income Taxes
                                                            
                                                            
                                                            1,844
                                                            
                                                            
                                                            
                                                            289INCOME
      TAX EXPENSE (BENEFIT)
                                                            
                                                            
                                                            658
                                                            
                                                            
                                                            
                                                            (1,241
                                                            )Net
      Income
                                                            
                                                            $
                                                            1,186
                                                            
                                                            
                                                            $
                                                            1,530BASIC
      EARNINGS PER SHARE
                                                            
                                                            $
                                                            0.17
                                                            
                                                            
                                                            $
                                                            0.23DILUTED
      EARNINGS PER SHARE
                                                            
                                                            $
                                                            0.16
                                                            
                                                            
                                                            $
                                                            0.21


See notes to consolidated
financial statements.





31
 Table of Contents


EmbassyBancorp,
Inc.


Consolidated
Statements of Stockholders’ Equity


Years
Ended December 31, 2008 and 2007




AccumulatedOtherCommon
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      Comprehensive
                                                      
                                                      
                                                      TreasuryStock
                                                      
                                                      
                                                      Surplus
                                                      
                                                      
                                                      Deficit
                                                      
                                                      
                                                      Income
      (Loss)
                                                      
                                                      
                                                      Stock
                                                      
                                                      
                                                      Total(In
      Thousands, Except Share and Per Share Data)BALANCE
      - DECEMBER 31, 2006
                                                      
                                                      $
                                                      6,629
                                                      
                                                      
                                                      $
                                                      20,758
                                                      
                                                      
                                                      $
                                                      (2,994
                                                      )
                                                      
                                                      $
                                                      (745
                                                      )
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      23,648Comprehensive
      income:Net
      income
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,530
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,530Net
      change in unrealized loss on securities available for sale, net of income
      tax
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      821
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      821Total
      Comprehensive Income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,351Exercise
      of stock options, 35,436 shares
                                                      
                                                      
                                                      35
                                                      
                                                      
                                                      
                                                      67
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      102Sale
      of 221,537 shares of common stock at $10 per share, net of offering costs
      of $43
                                                      
                                                      
                                                      222
                                                      
                                                      
                                                      
                                                      1,950
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      2,172BALANCE
      - DECEMBER 31, 2007
                                                      
                                                      $
                                                      6,886
                                                      
                                                      
                                                      $
                                                      22,775
                                                      
                                                      
                                                      $
                                                      (1,464
                                                      )
                                                      
                                                      $
                                                      76
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      28,273Comprehensive
      income:Net
      income
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,186
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      1,186Net
      change in unrealized gain on securities available for sale, net of income
      tax
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      898
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      898Total
      Comprehensive Income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2,084Exercise
      of stock options, 4,827 shares
                                                      
                                                      
                                                      5
                                                      
                                                      
                                                      
                                                      12
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      17Purchase
      treasury stock, 353 shares at $9.73 per share
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (3
                                                      )
                                                      
                                                      
                                                      (3
                                                      )BALANCE
      - DECEMBER 31, 2008
                                                      
                                                      $
                                                      6,891
                                                      
                                                      
                                                      $
                                                      22,787
                                                      
                                                      
                                                      $
                                                      (278
                                                      )
                                                      
                                                      $
                                                      974
                                                      
                                                      
                                                      $
                                                      (3
                                                      )
                                                      
                                                      $
                                                      30,371


See notes to consolidated financial
statements.




32
 Table of Contents





EmbassyBancorp,
Inc.


Consolidated
Statements of Cash Flows


Years
      Ended December 31,2008
                                
                                
                                2007(In
      Thousands)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income
                                
                                $
                                1,186
                                
                                
                                $
                                1,530Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                                
                                
                                429
                                
                                
                                
                                390Amortization
      of deferred loan costs
                                
                                
                                171
                                
                                
                                
                                120Depreciation
      and amortization
                                
                                
                                407
                                
                                
                                
                                383Net
      accretion of investment security premiums and discounts
                                
                                
                                (42
                                )
                                
                                
                                (26
                                )Deferred
      income taxes
                                
                                
                                403
                                
                                
                                
                                (1,241
                                )Increase
      in accrued interest receivable
                                
                                
                                (59
                                )
                                
                                
                                (117
                                )Increase
      in other assets
                                
                                
                                (62
                                )
                                
                                
                                (85
                                )(Decrease)
      Increase in accrued interest payable
                                
                                
                                (1,554
                                )
                                
                                
                                1,016Increase
      in other liabilities
                                
                                
                                865
                                
                                
                                
                                27Net
      Cash Provided by Operating Activities
                                
                                
                                1,744
                                
                                
                                
                                1,997CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of securities available for sale
                                
                                
                                (11,237
                                )
                                
                                
                                (11,962
                                )Maturities,
      calls and principal repayments of securities available for
      sale
                                
                                
                                7,886
                                
                                
                                
                                6,449Net
      increase in loans
                                
                                
                                (42,935
                                )
                                
                                
                                (41,536
                                )Increase
      in restricted investment in bank stock
                                
                                
                                (566
                                )
                                
                                
                                (97
                                )Purchases
      of interest bearing time deposits
                                
                                
                                (1,694
                                )
                                
                                
                                -Purchases
      of premises and equipment
                                
                                
                                (176
                                )
                                
                                
                                (839
                                )Net
      Cash Used in Investing Activities
                                
                                
                                (48,722
                                )
                                
                                
                                (47,985
                                )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      increase in deposits
                                
                                
                                40,929
                                
                                
                                
                                28,499Net
      increase in securities sold under agreements to repurchase and federal
      funds purchased
                                
                                
                                8,054
                                
                                
                                
                                4,165Decrease in
      short-term borrowed funds
                                
                                
                                (6,093
                                )
                                
                                
                                (6,842
                                )Proceeds
      from long-term borrowed funds
                                
                                
                                12,766
                                
                                
                                
                                10,396Proceeds
      from issuance of common stock
                                
                                
                                -
                                
                                
                                
                                2,172Proceeds
      from the exercise of stock options
                                
                                
                                17
                                
                                
                                
                                102Acquisition
      of treasury stock
                                
                                
                                (3
                                )
                                
                                
                                -Net
      Cash Provided by Financing Activities
                                
                                
                                55,670
                                
                                
                                
                                38,492Net
      Increase (Decrease) in Cash and Cash Equivalents
                                
                                
                                8,692
                                
                                
                                
                                (7,496
                                )CASH
      AND CASH EQUIVALENTS - BEGINNING
                                
                                
                                3,362
                                
                                
                                
                                10,858CASH
      AND CASH EQUIVALENTS - ENDING
                                
                                $
                                12,054
                                
                                
                                $
                                3,362SUPPLEMENTARY
      CASH FLOWS INFORMATIONInterest
      paid
                                
                                $
                                12,614
                                
                                
                                $
                                10,747Income
      Taxes paid
                                
                                $
                                19
                                
                                
                                $
                                -




See notes to consolidated financial
statements.




33
 Table of Contents





EmbassyBancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies




Principles
of Consolidation and Nature of Operations




The
consolidated financial statements include the accounts of Embassy Bancorp, Inc.
and its wholly owned subsidiary, Embassy Bank For the Lehigh Valley
(collectively the “Company”).  All intercompany accounts and
transactions have been eliminated in consolidation. Embassy Bancorp, Inc. (the
“Holding Company”) is a Pennsylvania corporation organized on November 11, 2008
and registered as a bank holding company pursuant to section 3(a)(1) of the Bank
Holding Company Act  of 1956, as amended (the “BHC Act”) and section
225.15 of Regulation Y.  It owns all of the capital stock of Embassy
Bank For the Lehigh Valley (the “Bank”), giving the Bank more flexibility in
meeting its capital needs as the Bank continues to grow.  Stockholders
of the Bank exchanged each share of common stock of the Bank for one share of
common stock of the Holding Company.  The transaction was accounted
for in a manner similar to the pooling-of-interests method of
accounting.  Accordingly, the financial information relating to the
periods prior to November 11, 2008 are reported under the name of Embassy
Bancorp, Inc.  The Company, as a holding company, is subject to
regulations of the Federal Reserve Board.




The Bank
was incorporated as a bank in Pennsylvania on May 11, 2001 and opened its doors
on November 6, 2001.  The Bank 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 market area.  As
a state chartered bank, the Bank is subject to regulation by the Pennsylvania
Department of Banking and the FDIC.




Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, and the valuation of deferred tax assets.




Concentrations
of Credit Risk




Most of
the Company’s activities are with customers located in the Lehigh Valley
area of Pennsylvania.  Note 2 discusses the types of securities
in which the Company invests.  The concentrations of credit by type of
loan are set forth in Note 3.  The Company does not have any
significant concentrations to any one specific industry or customer, with the
exception of lending activity to a broad range of lessors of residential and
non-residential real estate within the Lehigh Valley.  Although
the Company has a diversified loan portfolio, its debtors’ ability to honor
their contracts is influenced by the region’s economy.




Presentation
of Cash Flows




For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest-bearing demand deposits with bank, and
federal funds sold.  Generally, federal funds are purchased or sold
for less than one week periods.




Securities




Securities
classified as available for sale are those securities that the Company intends
to hold for an indefinite period of time but not necessarily to
maturity.  Securities available for sale are carried at fair
value.  Any decision to sell a security classified as available for
sale would be based on various factors, including significant movement in
interest rates, changes in maturity mix of the Company’s assets and liabilities,
liquidity needs, regulatory capital considerations and other similar
factors.  Unrealized gains and losses are reported as increases or
decreases in other comprehensive income.  Realized gains or losses,
determined on the basis of the cost of the specific securities sold, are
included in earnings.  Premiums and discounts are recognized in
interest income using the interest method over the terms of the
securities.




34
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Declines
in the fair value of available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses.  In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.




Restricted
Investments in Bank Stock




Restricted
investments in bank stock consists of Federal Home Loan Bank stock (FHLB) and
Atlantic Central Bankers Bank stock.  Federal law requires a member
institution of the FHLB to hold stock of its district FHLB according to a
predetermined formula.  The restricted stocks are carried at
cost.




In
December 2008, the FHLB of Pittsburgh notified member banks that it was
suspending dividend payments and the repurchase of capital stock.  The
Company had $2,035,000 of FHLB stock as of December 31, 2008.





Management
evaluates the restricted stock for impairment in accordance with Statement of
Position (SOP) 01-6, “Accounting by Certain Entities (Including Entities With
Trade Receivables) That Lend to or Finance the Activities of
Others.”  Management’s determination of whether these investments are
impaired is based on their assessment of the ultimate recoverability of their
cost rather than by recognizing temporary declines in value.  The
determination of whether a decline affects the ultimate recoverability of their
cost is influenced by criteria such as (1) the significance of the decline in
net assets of the FHLB as compared to the capital stock amount for the FHLB and
the length of time this situation has persisted, (2) commitments by the FHLB to
make payments required by law or regulation and the level of such payments in
relation to the operating performance of the FHLB, and (3) the impact of
legislative and regulatory changes on institutions and, accordingly, on the
customer base of the FHLB.





Management
believes no impairment charge is necessary related to the FHLB as of December
31, 2008.




Loans
Receivable




Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs.  Interest income is accrued on the unpaid principal
balance.  Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the yield (interest
income) of the related loans.  The Company is generally amortizing
these amounts over the contractual life of the loan.




The
accrual of interest is discontinued when the contractual payment of principal or
interest has become 90 days past due or management has serious doubts about
further collectibility of principal or interest, even though the loan is
currently performing.  A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued
in prior years is charged against the allowance for loan
losses.  Interest received on nonaccrual loans generally is either
applied against principal or reported as interest income, according to
management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.




Allowance
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.




35
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




The
allowance for loan losses is maintained at a level considered 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 specific, general and unallocated
components.  The specific component relates to loans that are
classified as doubtful, substandard or special mention.  For such
loans that are also 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.  The
general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors.  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 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.




Premises
and Equipment




Premises
and equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the following estimated useful lives
of the related assets; furniture, fixtures and equipment for five to ten years,
leasehold improvements for ten to fifteen years, computer equipment and data
processing software for three to five years, and automobiles for five
years.




Transfers
of Financial Assets




Transfers
of financial assets, including sales of loan participations, are accounted for
as sales, when control over the assets has been surrendered.  Control
over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.




Advertising
Costs




The
Company follows the policy of charging the costs of advertising to expense as
incurred.




36
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




Income
Taxes




Deferred
income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences.  Temporary
differences are the differences between the reported amounts of assets and
liabilities and net operating loss carry forwards and their tax
basis.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion of
the deferred tax assets will not be realized.  Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.




Earnings
per Share




Basic
earnings per share represents net income divided by the weighted-average common
shares outstanding during the period, as adjusted for stock
splits.  Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares (stock
options) had been issued.  The following table sets forth the
computations of basic and diluted earnings per share for the years ended
December 31, 2008 and 2007:




2008
                    
                    
                    2007(Dollars
      In Thousands, Except Share and Per Share Data)Net
      income
                    
                    $
                    1,186
                    
                    
                    $
                    1,530Weighted
      average shares outstanding
                    
                    
                    6,888,942
                    
                    
                    
                    6,789,360Dilutive
      effect of potential common shares, stock options
                    
                    
                    436,664
                    
                    
                    
                    460,069Diluted
      weighted average common shares outstanding
                    
                    
                    7,325,606
                    
                    
                    
                    7,249,429Basic
      earnings per share
                    
                    $
                    0.17
                    
                    
                    $
                    0.23Diluted
      earnings per share
                    
                    $
                    0.16
                    
                    
                    $
                    0.21


Employee
Benefit Plan




The
Company has a 401(k) Plan (the “Plan”) for employees.  All employees
are eligible to participate after they have attained the age of 21 and have also
completed 12 consecutive months of service during which at least 1,000 hours of
service are completed.  The employees may contribute up to the maximum
percentage allowable by law of their compensation to the Plan, and the Company
provides a match of fifty percent of the first 8% percent to eligible
participating employees.  Full vesting in the Plan is prorated equally
over a four-year period.  The Company’s contributions to the Plan for
the years ended December 31, 2008 and 2007 were $74,000 and $65,000,
respectively.




Off-Balance
Sheet Financial Instruments




In the
ordinary course of business, the Company has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit.  Such financial instruments are recorded in the balance sheet
when they are funded.




37
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




Comprehensive
Income




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




The
components of other comprehensive income are as follows for the years ended
December 31, 2008 and 2007:




2008
                        
                        
                        2007(In
      Thousands)Unrealized
      holding gains on available for sale securities
                        
                        $
                        1,362
                        
                        
                        $
                        860Less
      reclassification adjustment for realized gains (losses)
                        
                        
                        -
                        
                        
                        
                        -1,362
                        
                        
                        
                        860Tax
      effect
                        
                        
                        (464
                        )
                        
                        
                        (39
                        )Net
      unrealized gains
                        
                        $
                        898
                        
                        
                        $
                        821


Segment
Reporting




The
Company acts as an independent, community, financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers.  The Company offers a full array of
commercial and retail financial services, including the taking of time, savings
and demand deposits; the making of commercial, consumer and home equity loans;
and the provision of other financial services.




Management
does not separately allocate expenses, including the cost of funding loan
demand, between the commercial and retail operations of the
Company.  As such, discrete financial information is not available and
segment reporting would not be meaningful.




Stock-Based
Compensation




Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share Based
Payment.  Statement No. 123(R) requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides service in exchange for the
award.  Statement No. 123(R) requires that companies that utilized the
minimum value method under Statement No. 123 adopt the new fair value accounting
prospectively for new or modified grants on or after January 1,
2006.  Prospective adoption means that awards granted in earlier
fiscal years continue to be accounted for using the existing accounting,
typically APB Opinion No. 25.  For the years ended December 31, 2008
and 2007, there were no stock options granted.




New
Accounting Standards





In March
2008, the FASB issued Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(Statement 161).  Statement 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  Statement 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 has been
applied, and the impact that hedges have


38
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




New
Accounting Standards (Continued)




on an
entity’s financial position, financial performance, and cash
flows.  Statement 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged.
The Company believes that this new pronouncement will have an immaterial impact
on the Company’s consolidated financial statements in future
periods.





In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions.” This
FSP addresses the issue of whether or not these transactions should be viewed as
two separate transactions or as one "linked" transaction. The FSP includes a
"rebuttable presumption" that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. The FSP will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
The Company believes that this new pronouncement will have an immaterial impact
on the Company’s consolidated financial statements in future
periods.





In
September 2006, the FASB reached consensus on the guidance provided by Emerging
Issues Task Force Issue 06-4 (EITF 06-4) "Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements.”  The guidance is applicable to endorsement split-dollar
life insurance arrangements, whereby the employer owns and controls the
insurance policies that are associated with a postretirement benefit. EITF 06-4
requires that for a split-dollar life insurance arrangement within the scope of
the Issue, an employer should recognize a liability for future benefits in
accordance with FASB No. 106 (if, in substance, a postretirement benefit plan
exists) or, Accounting Principles Board Opinion No. 12 (if the arrangement is,
in substance, an individual deferred compensation contract) based on the
substantive agreement with the employee. The Company adopted this standard on
January 1, 2008 and such adoption did not have an effect on the financial
statements.





FASB
Statement No. 157 “Fair Value Measurements” defines fair value, establishes a
framework for measuring the fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements (see Note 17 –
Fair Value of Financial Instruments).





FASB
Statement No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities – Including an Amendment of FASB Statement No. 115” permits entities
to choose to measure eligible items at fair value at specified election dates.
The Company did not elect to apply this statement to any items in the year ended
December 31, 2008.




FASB
Statement No. 141 (R) “Business Combinations” was issued in December of 2007.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after
December 15, 2008. This new pronouncement will impact the Company’s accounting
for business combinations completed beginning January 1, 2009.





FASB
Statement No. 160 “Noncontrolling Interests in Consolidated Financial
Statements—an amendment of ARB No. 51” was issued in December of 2007. This
Statement establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective as of the beginning of a company’s fiscal year
beginning after December 15, 2008. The Company believes that this new
pronouncement will have an immaterial impact on the Company’s consolidated
financial statements in future periods.


39
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




New
Accounting Standards (Continued)




Staff
Accounting Bulletin No. 110 (SAB 110) amends and replaces Question 6 of
Section D.2 of Topic 14,“Share-Based Payment,” of the Staff Accounting Bulletin series. Question
6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use
of the “simplified” method in developing an estimate of expected term of “plain
vanilla” share options and allows usage of the “simplified” method for share
option grants prior to December 31, 2007. SAB 110 allows public companies
which do not have historically sufficient experience to provide a reasonable
estimate to continue use of the “simplified” method for estimating the expected
term of “plain vanilla” share option grants after December 31,
2007.  The Company adopted SAB 110 on January 1, 2008 and it did
not have an effect on the consolidated financial statements.





Staff
Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded at
Fair Value Through Earnings" expresses the views of the staff regarding written
loan commitments that are accounted for at fair value through earnings under
generally accepted accounting principles. To make the staff's views consistent
with current authoritative accounting guidance, the SAB revises and rescinds
portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments."  Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company adopted SAB 109 on January 1, 2008 and it did not have an effect on
the consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”  This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements.  This Statement is effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles.”  The Company believes
that this new pronouncement will have an immaterial impact on the Company’s
consolidated financial statements in future periods.





In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.”  This FSP clarifies that all outstanding
unvested share-based payment awards that contain rights to non-forfeitable
dividends participate in undistributed earnings with common
shareholders.  Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied.  This FSP is effective for fiscal years
beginning after December 15, 2008.  The Company believes that this new
pronouncement will have an immaterial impact on the Company’s consolidated
financial statements in future periods.





In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF
07-5).  EITF 07-5 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions.  It also clarifies the
impact of foreign currency denominated strike prices and market-based employee
stock option valuation instruments on the evaluation.  EITF 07-5 is
effective for fiscal years beginning after December 15, 2008.  The
Company is currently evaluating the potential impact the new pronouncement will
have on its consolidated financial statements.


40
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Note
1 - Summary of Significant Accounting Policies (Continued)




New
Accounting Standards (Continued)




In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4).  FSP 133-1 and FIN
45-4 amends and enhances disclosure requirements for sellers of credit
derivatives and financial guarantees.  It also clarifies that the
disclosure requirements of SFAS No. 161 are effective for quarterly periods
beginning after November 15, 2008, and fiscal years that include those
periods.  FSP 133-1 and FIN 45-4 is effective for reporting periods
(annual or interim) ending after November 15, 2008.  The
implementation of this standard did not have a material impact on the Company’s
consolidated financial position and results of operations.





In
September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for
Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF
08-5).  EITF 08-5 provides guidance for measuring liabilities issued
with an attached third-party credit enhancement (such as a
guarantee).  It clarifies that the issuer of a liability with a
third-party credit enhancement should not include the effect of the credit
enhancement in the fair value measurement of the liability.  EITF 08-5
is effective for the first reporting period beginning after December 15,
2008.  The Company believes that this new pronouncement will have an
immaterial impact on the Company’s consolidated financial statements in future
periods.





In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R), “Consolidation of
Variable Interest Entities”, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial assets to the qualifying SPE. The disclosures required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency
to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting periods (annual or interim) ending after December 15, 2008. The
implementation of these standards did not have a material impact on the
Company’s consolidated financial position and results of
operations.





In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment of
Guidance of EITF Issue No. 99-20” (FSP EITF 99-20-1). FSP EITF 99-20-1 amends
the impairment guidance in EITF Issue No. 99-20, “Recognition
of Interest Income and Impairment on Purchased Beneficial Interests and
Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets”, to achieve more consistent determination of whether an
other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and
emphasizes the objective of an other-than-temporary impairment assessment and
the related disclosure requirements in SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities”, and other related guidance. FSP EITF
99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted. The
implementation of these standards did not have a material impact on the
Company’s consolidated financial position and results of
operations.


41
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
1 - Summary of Significant Accounting Policies (Continued)




New
Accounting Standards (Continued)




In
November 2008, the SEC released a proposed roadmap regarding the potential use
by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (IFRS). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board (“IASB”). Under the proposed roadmap, the Company may be
required to prepare financial statements in accordance with IFRS as early as
2014. The SEC will make a determination in 2011 regarding the mandatory adoption
of IFRS. The Company is currently assessing the impact that this potential
change would have on its consolidated financial statements, and it will continue
to monitor the development of the potential implementation of IFRS.





In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 08-6, “Equity Method Investment Accounting Considerations”.
EITF 08-6 clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. EITF 08-6 is effective
for fiscal years beginning after December 15, 2008, with early adoption
prohibited. The Company believes that this new pronouncement will have an
immaterial impact on the Company’s consolidated financial statements in future
periods.





42
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements


Note
2 - Securities Available for Sale


The
amortized cost and approximate fair values of securities available for sale are
as follows:




Amortized
                  Cost
              
              
              Gross
                  Unrealized
                  Gains
              
              
              Gross
                  Unrealized
                  Losses
              
              
              Fair
                  Value(In
      Thousands)December
      31, 2008U.S.
      Government agency securities
              
              $
              10,967
              
              
              $
              730
              
              
              $
              -
              
              
              $
              11,697Taxable
      municipal bonds
              
              
              5,485
              
              
              
              26
              
              
              
              (65
              )
              
              
              5,446Mortgage-backed
      securities
              
              
              36,322
              
              
              
              800
              
              
              
              (14
              )
              
              
              37,108$
              52,774
              
              
              $
              1,556
              
              
              $
              (79
              )
              
              $
              54,251December
      31, 2007U.S.
      Government agency securities
              
              $
              10,955
              
              
              $
              191
              
              
              $
              -
              
              
              $
              11,146Taxable
      municipal bonds
              
              
              3,909
              
              
              
              -
              
              
              
              (53
              )
              
              
              3,856Mortgage-backed
      securities
              
              
              34,517
              
              
              
              255
              
              
              
              (278
              )
              
              
              34,494$
              49,381
              
              
              $
              446
              
              
              $
              (331
              )
              
              $
              49,496





The
amortized cost and fair value of securities as of December 31, 2008 by
contractual maturity are shown below.  Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.




Amortized Cost
                
                
                Fair Value(In
      Thousands)Due
      in less than one year
                
                $
                -
                
                
                $
                -Due
      in one to five years
                
                
                12,510
                
                
                
                13,130Due
      in five to ten years
                
                
                3,942
                
                
                
                4,013Mortgage-backed
      securities
                
                
                36,322
                
                
                
                37,108$
                52,774
                
                
                $
                54,251





There
were no sales of securities during 2008 and 2007.




43
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
2 - Securities Available for Sale (Continued)




The
following table shows the Company’s investments’ gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at December 31,
2008 and 2007:




Less
      than 12 Months
              
              
              12
      Months or More
              
              
              TotalFair
                  Value
              
              
              Unrealized
      Losses
              
              
              Fair
                  Value
              
              
              Unrealized
      Losses
              
              
              Fair
                  Value
              
              
              Unrealized
      Losses(In
      Thousands)December
      31, 2008Taxable
      municipal bonds
              
              $
              2,346
              
              
              $
              (65
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              2,346
              
              
              $
              (65
              )Mortgage-backed
      securities
              
              
              3,719
              
              
              
              (14
              )
              
              
              -
              
              
              
              -
              
              
              
              3,719
              
              
              
              (14
              )$
              6,065
              
              
              $
              (79
              )
              
              $
              -
              
              
              $
              -
              
              
              $
              6,065
              
              
              $
              (79
              )December
      31, 2007Taxable
      municipal bonds
              
              $
              2,966
              
              
              $
              (25
              )
              
              $
              890
              
              
              $
              (28
              )
              
              $
              3,856
              
              
              $
              (53
              )Mortgage-backed
      securities
              
              
              5,483
              
              
              
              (14
              )
              
              
              12,326
              
              
              
              (264
              )
              
              
              17,809
              
              
              
              (278
              )$
              8,449
              
              
              $
              (39
              )
              
              $
              13,216
              
              
              $
              (292
              )
              
              $
              21,665
              
              
              $
              (331
              )





The
Company had 16 securities in an unrealized loss position at the end of December
31, 2008.  Unrealized losses detailed above relate to taxable
municipal and mortgage-backed securities and the decline in fair value is due
only to interest rate fluctuations.  As the Company has the intent and
ability to hold such investments until maturity or market price recovery, no
securities are deemed to be other than temporarily impaired.  None of
the individual unrealized losses are significant.




Securities
with carrying values of approximately $34,752,000 and $28,607,000 at December
31, 2008 and 2007, respectively, were pledged as collateral to secure securities
sold under agreements to repurchase, public deposits, and for other purposes
required or permitted by law.




44
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Note
3 - Loans Receivable




The
composition of loans receivable at December 31, 2008 and 2007 is as
follows:




2008
                    
                    
                    2007(In
      Thousands)Commercial
      real estate
                    
                    $
                    148,881
                    
                    
                    $
                    125,021Commercial
      construction
                    
                    
                    6,886
                    
                    
                    
                    2,969Commercial
                    
                    
                    24,096
                    
                    
                    
                    22,583Home
      equity
                    
                    
                    136,739
                    
                    
                    
                    123,774Consumer
                    
                    
                    2,726
                    
                    
                    
                    2,216Total
      Loans
                    
                    
                    319,328
                    
                    
                    
                    276,563Unearned
      net loan origination costs
                    
                    
                    252
                    
                    
                    
                    253Allowance
      for Loan Losses
                    
                    
                    (2,932
                    )
                    
                    
                    (2,503
                    )$
                    316,648
                    
                    
                    $
                    274,313


Note
4 - Allowance for Loan Losses




The
changes in the allowance for loan losses for the years ended December 31, 2008
and 2007 are as follows:




2008
                                      
                                      
                                      2007(In
      Thousands)Allowance
      for loan losses:Balance,
      beginning
                                      
                                      $
                                      2,503
                                      
                                      
                                      $
                                      2,426Provision
      for loan losses
                                      
                                      
                                      429
                                      
                                      
                                      
                                      390Loans
      charged off
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (313
                                      )Recoveries
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Balance
      at end of year
                                      
                                      $
                                      2,932
                                      
                                      
                                      $
                                      2,503Allowance
      for loan losses to loans receivable at end of year
                                      
                                      
                                      0.92
                                      %
                                      
                                      
                                      0.90
                                      %







There was
no recorded investment in impaired loans at December 31, 2008 and
2007.  The Company had no other impaired loans for the year ended
December 31, 2008. The Company had two impaired loans in 2007 which were charged
off in 2007.  No interest income was recognized in 2007 for the time
the loans were impaired during 2007. No impaired loan allowance was required at
December 31, 2008 and 2007.




As of
December 31, 2008 and 2007, the Company had no non-accrual
loans.  The Company had $818,000 in loans to one borrower that were
past due 90 days or more and still accruing interest at December 31, 2008,
but which management expects will eventually be paid in full, and none at
December 31, 2007.  The Company charged off no loans in
2008.




45
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
5 - Bank Premises and Equipment




The
components of premises and equipment at December 31, 2008 and 2007 are as
follows:




2008
                
                
                2007(In
      Thousands)Furniture,
      fixtures and equipment
                
                $
                1,206
                
                
                $
                1,206Leasehold
      improvements
                
                
                1,528
                
                
                
                1,528Computer
      equipment and data processing software
                
                
                640
                
                
                
                573Automobiles
                
                
                92
                
                
                
                65Construction
      in progress
                
                
                320
                
                
                
                2543,787
                
                
                
                3,626Accumulated
      depreciation
                
                
                (1,556
                )
                
                
                (1,164
                )$
                2,231
                
                
                $
                2,462




Note
6 - Deposits




The
components of deposits at December 31, 2008 and 2007 are as
follows:




2008
                            
                            
                            2007(In
      Thousands)Demand,
      non-interest bearing
                            
                            $
                            16,194
                            
                            
                            $
                            15,150Demand,
      interest bearing-NOWand
      Money market
                            
                            
                            31,437
                            
                            
                            
                            46,095Savings
                            
                            
                            103,863
                            
                            
                            
                            37,489Time,
      $100 and over
                            
                            
                            65,344
                            
                            
                            
                            59,421Time,
      other
                            
                            
                            90,732
                            
                            
                            
                            108,486Total
      deposits
                            
                            $
                            307,570
                            
                            
                            $
                            266,641




At
December 31, 2008, the scheduled maturities of time deposits are as follows
(in thousands):




2009
                    
                    $
                    134,6872010
                    
                    
                    9,7902011
                    
                    
                    9,8842012
                    
                    
                    8882013
                    
                    
                    827$
                    156,076


46
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
7 - Securities Sold under Agreements to Repurchase and Federal Funds
Purchased




Securities
sold under agreements to repurchase and federal funds purchased generally mature
within a few days from the transaction date.  Securities sold under
agreements to repurchase are reflected at the amount of cash received in
connection with the transaction.  Securities sold under these
agreements are retained under the Company’s control at its safekeeping
agent.  The Company may be required to provide additional collateral
based on the fair value of the underlying securities.  Information
concerning securities sold under agreements to repurchase for the years ended
December 31, 2008 and 2007 is summarized as follows:




2008
                
                
                2007(Dollars
      in Thousands)Balance
      outstanding at December 31
                
                $
                26,019
                
                
                $
                17,965Weighted
      average interest rate at the end of the year
                
                
                2.68
                %
                
                
                4.28
                %Average
      daily balance during the year
                
                $
                21,037
                
                
                $
                16,913Weighted
      average interest rate during the year
                
                
                3.10
                %
                
                
                4.22
                %Maximum
      month-end balance during the year
                
                $
                26,019
                
                
                $
                21,248




Note
8 – Short-term and Long-term Borrowings




The
Company’s maximum borrowing capacity with the Federal Home Loan Bank was
$193,938,000.  The Company had no short-term borrowings outstanding
with the Federal Home Loan Bank at December 31, 2008 and $6,093,000 at
December 31, 2007 and long-term borrowings outstanding with the Federal
Home Loan Bank totaling $21,762,000 at December 31, 2008 and $10,396,000 at
December 31, 2007.




The
Company has a line of credit with Univest National Bank and Trust Company
totaling $6,000,000.  As of December 31, 2008 the outstanding balance
was $1,400,000.  Advances from this line of credit are secured by
500,000 shares of Embassy Bank for the Lehigh Valley stock.  Interest
on the borrowing is a fixed rate of 7.5%.  The loan matures in
November 2013.  Under the terms of the loan agreement, the Bank is
required to remain well capitalized.




The
Company also has an open line of credit with Federal Home Loan Bank totaling
$25,000,000.  The Company had no borrowings outstanding at December
31, 2008 and 2007, respectively for this credit line.  Advances from
the Federal Home Loan Bank are secured by qualifying assets of the
Company.




The
Company has a federal fund line of credit facility with the Atlantic Central
Bankers Bank totaling $6,000,000.  The Company had no borrowings
outstanding at December 31, 2008 and $3,375,000 at December 31,
2007.  Advances on this line are unsecured.




47
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
8 – Short-term and Long-term Borrowings (Continued)




The
components of long-term borrowings with the Federal Home Loan Bank at December
31, 2008 and 2007 are as follows (in thousands):




2008
                    
                    
                    2007Maturity
      Date
                    
                    Interest
      Rate
                    
                    
                    Outstanding
                    
                    
                    Interest
      Rate
                    
                    
                    OutstandingApril
      2009
                    
                    
                    4.27
                    %
                    
                    $
                    1,850
                    
                    
                    
                    4.27
                    %
                    
                    $
                    1,850August
      2009
                    
                    
                    4.80
                    %
                    
                    
                    1,428
                    
                    
                    
                    4.80
                    %
                    
                    
                    1,428January
      2010
                    
                    
                    3.50
                    %
                    
                    
                    2,000
                    
                    
                    
                    -
                    
                    
                    
                    -May
      2010
                    
                    
                    4.75
                    %
                    
                    
                    7,118
                    
                    
                    
                    4.75
                    %
                    
                    
                    7,118January
      2012
                    
                    
                    3.23
                    %
                    
                    
                    1,479
                    
                    
                    
                    -
                    
                    
                    
                    -June
      2013
                    
                    
                    3.86
                    %
                    
                    
                    4,834
                    
                    
                    
                    -
                    
                    
                    
                    -August
      2013
                    
                    
                    3.98
                    %
                    
                    
                    3,052
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    21,762
                    
                    
                    
                    
                    
                    
                    $
                    10,396




The
components of short-term borrowings with the Federal Home Loan Bank at December
31, 2008 and 2007 are as follows (in thousands):




2008
                      
                      
                      2007Maturity
      Date
                      
                      Interest
      Rate
                      
                      
                      Outstanding
                      
                      
                      Interest
      Rate
                      
                      
                      OutstandingSeptember
      2008
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      4.78
                      %
                      
                      $
                      6,093





Note
9 - Lease Commitments




The
Company has a ten-year operating lease agreement for its main banking office,
which commenced in June 2002.  The Company has the option to extend
the lease agreement for five additional five-year periods.  An
addendum to this lease commenced in the second quarter 2005 for additional
space.  The Company is also required to pay a monthly fee for its
portion of certain operating expenses, including real estate taxes, insurance,
utilities, maintenance and repairs in addition to the base rent.




In
November 2002, an investment group comprised of related parties of the Company
(executive officers and directors) agreed to purchase the office building in
which the Company leases office space as described above.  The
purchase was consummated on January 10, 2003.  The initial lease
terms for the Company’s lease were negotiated at arm’s length with the former
owner in 2001.  There were no modifications or amendments to the terms
of that lease agreement by the new owners.  The lease terms for the
additional space in 2005 are comparable to similarly outfitted space in the
Company’s market.




The
Company has a five-year operating lease agreement for its Tilghman Street site,
which commenced in April 2004.  The Company has the option to extend
the lease agreement for four additional five-year periods.  The
Company is also required to pay a monthly fee for its portion of certain
operating expenses, including real estate taxes, insurance, utilities,
maintenance and repairs in addition to the base rent.




In March
2006, the Company entered into a lease agreement with a related party of the
Company (director) for a five-year operating lease agreement for its West Broad
Street site, which commenced in September 2006.  The Company
has




48
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
9 - Lease Commitments (Continued)




the
option to extend the lease agreement for four additional five-year periods and a
final renewal option of four years, eleven months.




In July
2005, the Company entered into a ground lease agreement for a branch location on
Cedar Crest Boulevard in Allentown, which commenced in 2007.  A
building is currently under construction on the site and is expected to be
completed by the third quarter of 2009.  Subsequent to December 31,
2008, the Company committed to a lease agreement for this fifth branch location
which will terminate the ground lease. The new lease is included in the minimum
lease payment schedule.




In
October 2005, the Company entered into a seven year operating lease agreement
for its Hamilton Boulevard branch location in Trexlertown, which commenced in
January 2007.  The Company has the option to extend the lease
agreement for one additional five-year period and a final renewal option of four
years, ten months.  The Company is also required to pay a monthly fee
for its portion of certain operating expenses, including real estate taxes,
insurance, utilities, maintenance and repairs in addition to the base
rent.




In June
2008, the Company entered into a commercial lease agreement for a potential
branch location on Route 378 in Lower Saucon Township, which is
expected to open in 2009.




Subsequent
to December 31, 2008, the Company entered into a land lease agreement for a
branch location on Corriere Road and Route 248 in
Lower Nazareth Township.  The agreement is contingent upon
completing proper due diligence of the site, including title, survey, and
environmental matters, planning and zoning approvals, and proper banking
regulatory approvals.




Future
minimum lease payments by year and in the aggregate, under all lease agreements,
are as follows (in thousands):




Related
      Parties
                    
                    
                    Third
      Parties
                    
                    
                    Total2009
                    
                    $
                    298
                    
                    
                    $
                    352
                    
                    
                    $
                    6502010
                    
                    
                    298
                    
                    
                    
                    562
                    
                    
                    
                    8602011
                    
                    
                    298
                    
                    
                    
                    562
                    
                    
                    
                    8602012
                    
                    
                    156
                    
                    
                    
                    563
                    
                    
                    
                    7192013
                    
                    
                    45
                    
                    
                    
                    568
                    
                    
                    
                    613Thereafter
                    
                    
                    120
                    
                    
                    
                    4,493
                    
                    
                    
                    4,613$
                    1,215
                    
                    
                    $
                    7,100
                    
                    
                    $
                    8,315


Total
rent expense was $578,000 and $558,000 for the years ended December 31, 2008 and
2007, respectively.  Rent expense to related parties was $306,000 and
$306,000 for the years ended December 31, 2008 and 2007.  Rent expense
to third parties was $272,000 and $252,000 for the years ended December 31, 2008
and 2007, respectively.




Note
10 - Employment Agreements




Employment
agreements between the Company and the Company’s Chief Executive Officer and
Chief Operating Officer provide minimum annual salary, maximum bonuses, minimum
stock options and change of control provisions.  In addition, the
terms of both employment agreements automatically renew annually for five year
periods until each executive reaches the age of seventy (70).  Upon
resignation after a change in the control of the Company, as defined in the
agreement, the individual will receive monetary compensation in the amount set
forth in the agreement.




49
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
10 - Employment Agreements (Continued)




Employment
agreement terms between the Company and the Company’s Executive Vice President
(“the EVP”) providing change of control provisions were renegotiated on February
20, 2009.  The Boards of Directors of the Company
approved the execution of an amended and restated employment agreement (the
“Agreement”) with the EVP of the Company, in order to provide for enhanced
change in control provisions, and to replace the employment agreement dated July
16, 2004, between the EVP and the Bank, as subsequently amended on December 17,
2006 (the “Prior Agreement”).  The Agreement provides for a three year
term, with successive annual automatic one year extensions, such that there is
never less than three years remaining on the Agreement, at such salary and
bonuses as shall be agreed between the EVP and the Company.




Note
11 - Stockholders’ Equity




All
historical share and per share information has been retroactively adjusted for
the effect of all stock splits declared by the Bank, including the three-for-two
stock split declared October 26, 2007.




On
December 26, 2006, the Bank commenced the sale of 300,000 shares of its common
stock at $10 per share.  The shares were offered through January 31,
2007 exclusively to existing shareholders and thereafter to the general
public.  In May 2007, the Bank extended the offering to August 31,
2007.  As of August 31, 2007, the Bank sold 221,537 shares of its
common stock and incurred $43 thousand in stock issuance costs and the offering
was closed.




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 reorgnized 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
12 - Stock Option Plan




In 2001,
the Company adopted the 2001 Option Plan.  The Plan authorizes the
Board of Directors to grant options to officers, other employees and directors
of the Company.  In 2004, the shareholders voted to increase the
number of shares for which options may be granted to 1,518,750, as adjusted for
the stock splits in 2004, 2005 and 2007.  The shares granted under the
Plan to directors are non-qualified options.  The shares granted under
the Plan to officers and other employees are “incentive stock options,” and are
subject to the limitations under Section 422 of the Internal Revenue
Code.  Shares subject to options under the Plan may be either from
authorized but unissued shares of the Company or shares purchased in the open
market.




All
options granted under the Plan are subject to vesting requirements of not less
than three years and the term shall not exceed ten years.  The
exercise price of the options granted shall be the fair market value of a share
of common stock at the time of the grant.




50
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Note
12 - Stock Option Plan (Continued)




All
number of options and weighted average exercise prices have been adjusted for
the stock splits in 2004, 2005, and 2007.  Transactions under the plan
are summarized as follows:




Number
      of Options
                
                
                Weighted
      Average
                    Exercise
      PriceOutstanding,
      December 31, 2006
                
                
                953,554
                
                
                $
                3.77Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (35,436
                )
                
                
                2.88Forfeited
                
                
                (300
                )
                
                
                10.00Outstanding,
      December 31, 2007
                
                
                917,818
                
                
                $
                3.81Granted
                
                
                -
                
                
                
                -Exercised
                
                
                (4,827
                )
                
                
                3.29Forfeited
                
                
                (3,317
                )
                
                
                8.27Outstanding,
      December 31, 2008
                
                
                909,674
                
                
                $
                3.79Exercisable,
      December 31, 2008
                
                
                909,674
                
                
                $
                3.79




Stock
options outstanding at December 31, 2008 are exercisable at prices ranging
from $2.84 to $10.00 a share.  The weighted-average remaining
contractual life of options outstanding and exercisable at December 31, 2008 is
2.72 years. The weighted-average remaining contractual life of options
outstanding and exercisable at December 31, 2007 is 3.73 and 3.64 years,
respectively.  At December 31, 2008, the aggregate intrinsic value of
options outstanding and exercisable was $5,421,705.  For the years
ending December 31, 2008 and 2007, the aggregate intrinsic value of options
exercised was $32,411 and $252,170, respectively.




The
following table summarizes information about the range of exercise prices for
stock options outstanding at December 31, 2008:




Range
      of Exercise Price
                
                
                Weighted
      Average Exercise Price
                
                
                Number
      Outstanding
                
                
                Weighted
      Average Remaining Contractual Life (Years)
                
                
                Number
      Exercisable$   
      2.00 to $3.00
                
                
                $
                2.84
                
                
                
                674,587
                
                
                
                2.03
                
                
                
                674,587$   
      3.00 to $4.00
                
                
                
                3.91
                
                
                
                97,028
                
                
                
                3.52
                
                
                
                97,028$   
      6.00 to $7.00
                
                
                
                6.40
                
                
                
                62,695
                
                
                
                5.00
                
                
                
                62,695$ 
      9.00 to $10.00
                
                
                
                10.00
                
                
                
                75,364
                
                
                
                6.00
                
                
                
                75,364909,674
                
                
                
                
                
                
                
                909,674


51
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
13 - Federal Income Taxes




The
components of income tax expense (benefit) for the years ended December 31, 2008
and 2007 are as follows:




2008
                
                
                2007(In
      Thousands)Current
                
                $
                255
                
                
                $
                98Deferred
                
                
                403
                
                
                
                (214
                )Benefit
      of reduction in deferred tax asset valuation allowance
                
                
                -
                
                
                
                (1,125
                )$
                658
                
                
                $
                (1,241
                )




A
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax benefit included in the statement of income for the years ended
December 31, 2008 and 2007 is as follows (in thousands):




2008
                      
                      
                      2007(In
      Thousands)Federal
      income tax at statutory rate
                      
                      $
                      627
                      
                      
                      $
                      98Change
      in valuation allowance
                      
                      
                      -
                      
                      
                      
                      (1,353
                      )Other
                      
                      
                      31
                      
                      
                      
                      14$
                      658
                      
                      
                      $
                      (1,241
                      )




In July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement 109,
Accounting for Income Taxes.  FIN 48 is effective for fiscal years
beginning after December 15, 2006.  The Company adopted FIN 48 as of
January 1, 2007 and has evaluated its tax positions.  A tax position
is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur.  The amount recognized is the largest amount of tax
benefit that has a likelihood of being realized on examination of more than 50
percent.  For tax positions not meeting the “more likely than not”
test, no tax benefit is recorded.  Under the “more likely than not”
threshold guidelines, the Company believes no significant uncertain tax
positions exist, either individually or in the aggregate, that would give rise
to the non-recognition of an existing tax benefit.  As of January 1,
2007, January 1, 2008, and December 31, 2008 the Company had no material
unrecognized tax benefits or accrued interest and penalties.  The
Company’s policy is to account for interest as a component of interest expense
and penalties as a component of other expense.  The Company is subject
to U.S. federal income tax.  The Company is no longer subject to
examination by U.S. Federal taxing authorities for years before
2004.




52
 Table of Contents





Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
13 – Federal Income Taxes (Continued)




The
components of the net deferred tax asset at December 31, 2008 and 2007 are as
follows:




2008
                
                
                2007(In
      Thousands)Deferred
      tax assets:Allowance
      for loan losses
                
                $
                963
                
                
                $
                840Net
      operating loss carryforwards
                
                
                -
                
                
                
                545Contributions
      carryforward
                
                
                191
                
                
                
                220Other
                
                
                122
                
                
                
                68Total
      Deferred Tax Assets
                
                
                1,276
                
                
                
                1,673Deferred
      tax liabilities:Premises
      and equipment
                
                
                48
                
                
                
                92Prepaid
      assets
                
                
                168
                
                
                
                136Stock
      options
                
                
                86
                
                
                
                -Cash
      basis conversion
                
                
                136
                
                
                
                204Unrealized
      gain on securities available for sale
                
                
                503
                
                
                
                39Total
      Deferred Tax Liabilities
                
                
                941
                
                
                
                471Net
      Deferred Tax Asset
                
                $
                335
                
                
                $
                1,202





Based
upon the level of historical taxable income and projections for future taxable
income over periods in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the benefits
of these deductible differences.




Note
14 - Transactions with Executive Officers, Directors and Principal
Stockholders




The
Company has had, and may be expected to have in the future, banking transactions
in the ordinary course of business with its executive officers, directors,
principal stockholders, their immediate families and affiliated companies
(commonly referred to as related parties), on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.




Related
parties were indebted to the Company for loans totaling $7,044,000 and
$7,091,000 at December 31, 2008 and 2007, respectively.  During 2008,
loans totaling $1,388,000 were disbursed and loan repayments totaled
$1,435,000.




Fees paid
to related parties for legal services for the years ended December 31, 2008 and
2007, were approximately $24,000 and $41,000, respectively.  The
Company leases its main banking office from an investment group comprised of
related parties and its West Broad Street office also from a related party as
described in Note 9.




Note
15 - Financial Instruments with Off-Balance Sheet Risk




The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and letters of credit.  Such commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheets.




The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.


53
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
15 - Financial Instruments with Off-Balance Sheet Risk (Continued)




At
December 31, 2008 and 2007, the following financial instruments were outstanding
whose contract amounts represent credit risk:




2008
                
                
                2007(In
      Thousands)Commitments
      to grant loans, fixed
                
                $
                311
                
                
                $
                2,631Commitments
      to grant loans, variable
                
                
                300
                
                
                
                4,974Unfunded
      commitments under lines of credit, fixed
                
                
                886
                
                
                
                2,353Unfunded
      commitments under lines of credit, variable
                
                
                43,000
                
                
                
                30,058Standby
      letters of credit
                
                
                2,743
                
                
                
                1,960$
                47,240
                
                
                $
                41,976





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.  Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.  The
Company evaluates each customer’s credit worthiness on a case-by-case
basis.  The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management’s credit
evaluation.  Collateral held varies but may include personal or
commercial real estate, accounts receivable, inventory and
equipment.




Outstanding
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party.  The
majority of these standby letters of credit expire within the next twelve
months.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan
commitments.  The Company requires collateral supporting these letters
of credit as deemed necessary.  The maximum undiscounted exposure
related to these commitments at December 31, 2008 and 2007 was $2,743,000 and
$1,960,000, respectively, and the approximate value of underlying
collateral upon liquidation that would be expected to cover this maximum
potential exposure was $2,698,000 and $1,925,000, respectively. The current
amount of the liability as of December 31, 2008 and 2007 for guarantees under
standby letters of credit issued is not material.




Note
16 - Regulatory Matters




The
Company is required to maintain cash reserve balances in vault cash and with the
Federal Reserve Bank.  As of December 31, 2008, the Company had a
$495,000 minimum reserve balance, which was covered by vault cash.




The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies.  Failure to meet the minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements.  Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank’s assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices.  The Bank’s
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors.




54
 Table of Contents





Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
16 – Regulatory Matters (Continued)




Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets and of Tier 1
capital to average assets.  Management believes, as of
December 31, 2008, that the Company meets all capital adequacy requirements
to which it is subject.




As of
December 31, 2008, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action.  To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table below.  There are no
conditions or events since that notification that management believes have
changed the Bank’s category.




The
Bank’s actual capital amounts and ratios at December 31, 2008 and 2007 are
presented below:




Actual
              
              
              For
      Capital Adequacy Purposes
              
              
              To
      be Well Capitalized under Prompt Corrective Action
      ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollar
      Amounts in Thousands)December
      31, 2008:Total
      capital (to risk-weighted assets)
              
              $
              33,637
              
              
              
              11.7
              %
              
              $
              3 22,917
              
              
              
              ≥8.0
              %
              
              $
              3 28,646
              
              
              
              ≥10.0
              %Tier
      1 capital (to risk-weighted assets)
              
              
              30,705
              
              
              
              10.7
              
              
              
              3 11,459
              
              
              
              34.0
              
              
              
              3 17,188
              
              
              
              ≥6.0Tier
      1 capital (to average assets)
              
              
              30,705
              
              
              
              8.1
              
              
              
              3 15,260
              
              
              
              34.0
              
              
              
              3 19,075
              
              
              
              ≥
      5.0December
      31, 2007:Total
      capital (to risk-weighted assets)
              
              $
              29,911
              
              
              
              12.0
              %
              
              $
              3 19,874
              
              
              
              ≥8.0
              %
              
              $
              324,843
              
              
              
              ≥10.0
              %Tier
      1 capital (to risk-weighted assets)
              
              
              27,408
              
              
              
              11.0
              
              
              
              3   9,937
              
              
              
              34.0
              
              
              
              3 14,906
              
              
              
              ≥ 6.0Tier
      1 capital (to average assets)
              
              
              27,408
              
              
              
              8.4
              
              
              
              3 13,135
              
              
              
              34.0
              
              
              
              3 16,418
              
              
              
              ≥ 5.0





The Bank
is subject to certain restrictions on the amount of dividends that it may
declare due to regulatory considerations.  The Pennsylvania Banking
Code provides that cash dividends may be declared and paid only out of
accumulated net earnings.




The
Federal Reserve Board approved a final rule in February 2006 that expands the
definition of a small bank holding company (“BHC”) under the Board’s Small Bank
Holding Company Policy Statement and the Board’s risk-based and leverage capital
guidelines for bank holding companies.  In its revisions to the Policy
Statement, the Federal Reserve Board has raised the small BHC asset size
threshold from $150 million to $500 million and amended the related qualitative
criteria for determining eligibility as a small BHC for the purposes of the
policy statement and the capital guidelines.  The policy statement
facilitates the transfer of ownership of small community banks by permitting
debt levels at small BHCs that are higher than what would typically be permitted
for larger BHCs.  Because small BHCs may, consistent with the policy
statement, operate at a level of leverage that generally is inconsistent with
the capital guidelines, the capital guidelines provide an exemption for small
BHCs.  Based on the ruling, Embassy Bancorp, Inc. meets the
eligibility criteria of a small BHC and is exempt from regulatory capital
requirements administered by the federal banking agencies.




55
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
17 - Fair Value of Financial Instruments




Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique.  Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated.  The estimated fair value amounts have been measured as of
their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates.  As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements.  SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements.  The
Company adopted SFAS 157 effective for its fiscal year beginning January 1,
2008.




In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years.  As such, the Company only partially
adopted the provisions of SFAS 157, and will begin to account and report for
non-financial assets and liabilities in 2009.  In October 2008, the
FASB issued FASB Staff Position 157-3,Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active
(“FSP 157-3”), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market.  FSP 157-3 is effective immediately and
applies to the Company’s December 31, 2008 consolidated financial
statements.  The adoption of SFAS 157 and FSP 157-3 had no
impact on the amounts reported in the consolidated financial statements.




The
primary effect of SFAS 157 on the Company was to expand the required disclosures
pertaining to the methods used to determine fair values.




SFAS 157
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 SFAS 157 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.




56
 Table of Contents





Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Note
17 - Fair Value of Financial Instruments (Continued)




For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows (in thousands):




December 31,
      2008
                        
                        
                        (Level
      1)
                          Quoted
      Prices in Active Markets for Identical Assets
                        
                        
                        (Level
      2)
                          Significant
                          Other
                          Observable
                          Inputs
                        
                        
                        (Level
      3)
                          Significant
                          Unobservable
                          InputsSecurities
      available for sale
                        
                        $
                        54,251
                        
                        
                        $
                        -0-
                        
                        
                        $
                        54,251
                        
                        
                        $
                        -0-





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 December 31, 2008 and 2007:




Cash
and Cash Equivalents (Carried at Cost)




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




Interest
Bearing Time Deposits (Carried at Cost)




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




Securities
(Carried at Fair Value)




The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices.  For certain securities which are not
traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments
are generally based on available market evidence (Level 3).  In the
absence of such evidence, management’s best estimate is
used.  Management’s best estimate consists of both internal and
external support on certain Level 3 investments.  Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) were used to support fair values of certain
Level 3 investments.




Loans
Receivable (Carried at Cost)




The fair
values of loans are estimated using discounted cash flow analyses, 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, 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.




57
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
17 - Fair Value of Financial Instruments (Continued)




Impaired
Loans (Generally Carried at Fair Value)




Impaired
loans are those that are accounted for under FASB Statement No. 114,Accounting by Creditors for
Impairment of a Loan(“SFAS 114”),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.  There were no impaired loans at December 31, 2008
and 2007, respectively.




Restricted
Investment in Bank Stock (Carried at Cost)




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




Accrued
Interest Receivable and Payable (Carried at Cost)




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




Deposit
Liabilities (Carried at Cost)




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




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




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




Short-Term
Borrowings (Carried at Cost)




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




Long-Term
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.




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.




58
 Table of Contents





Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
17 - Fair Value of Financial Instruments (Continued)




Off-Balance
Sheet Financial Instruments (Disclosed at Cost)





The
estimated fair values of the Company’s financial instruments were as follows at
December 31, 2008 and 2007.




December 31,
      2008
                      
                      
                      December 31,
      2007Carrying
                        Amount
                      
                      
                      Fair
                        Value
                      
                      
                      Carrying
                        Amount
                      
                      
                      Fair
                        Value(In
      Thousands)Financial
      assets:Cash
      and cash equivalents
                      
                      $
                      12,054
                      
                      
                      $
                      12,054
                      
                      
                      $
                      3,362
                      
                      
                      $
                      3,362Interest
      bearing time deposits
                      
                      
                      1,694
                      
                      
                      
                      1,694
                      
                      
                      
                      -
                      
                      
                      
                      -Securities
      available-for-sale
                      
                      
                      54,251
                      
                      
                      
                      54,251
                      
                      
                      
                      49,496
                      
                      
                      
                      49,496Restricted
      investments in bank stock
                      
                      
                      2,075
                      
                      
                      
                      2,075
                      
                      
                      
                      1,509
                      
                      
                      
                      1,509Loans
      receivable, net of allowance
                      
                      
                      316,648
                      
                      
                      
                      321,814
                      
                      
                      
                      274,313
                      
                      
                      
                      268,893Accrued
      interest receivable
                      
                      
                      1,197
                      
                      
                      
                      1,197
                      
                      
                      
                      1,138
                      
                      
                      
                      1,138Financial
      liabilities:Deposits
                      
                      
                      307,570
                      
                      
                      
                      316,726
                      
                      
                      
                      266,641
                      
                      
                      
                      264,651Securities
      sold under agreements to repurchase and federal funds
      purchased
                      
                      
                      26,019
                      
                      
                      
                      26,019
                      
                      
                      
                      17,965
                      
                      
                      
                      17,965Short-term
      borrowings
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      6,093
                      
                      
                      
                      6,093Long-term
      borrowings
                      
                      
                      23,162
                      
                      
                      
                      24,203
                      
                      
                      
                      10,396
                      
                      
                      
                      10,596Accrued
      interest payable
                      
                      
                      2,563
                      
                      
                      
                      2,563
                      
                      
                      
                      4,117
                      
                      
                      
                      4,117Off
      –balance sheet financial instruments:Commitments
      to grant loans
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Unfunded
      commitments under lines of credit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Standby
      letters of credit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -


59
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements




Note
18 – Parent Company Only Financial





Condensed
financial information pertaining only to the parent company, Embassy Bancorp
Inc., is as follows:





BALANCE
SHEETS





December 31,2008(In
      Thousands)ASSETSCash
                                            
                                            $
                                            100Other
      assets
                                            
                                            
                                            7Investment
      in subsidiary
                                            
                                            
                                            30,703Total
      Assets
                                            
                                            $
                                            30,810LIABILITIES AND STOCKHOLDERS’
      EQUITYLong-term
      borrowings
                                            
                                            $
                                            1,400Other
      liabilities
                                            
                                            
                                            15Stockholders’
      equity
                                            
                                            
                                            29,395Total
      Liabilities and Stockholders’ Equity
                                            
                                            $
                                            30,810STATEMENT
      OF INCOMEYear
      EndedDecember 31, 2008(In
      Thousands)Interest
      expense on borrowings
                                            
                                            $
                                            (1
                                            )Other
      expenses
                                            
                                            
                                            (6
                                            )Undistributed
      net income of banking subsidiary
                                            
                                            
                                            1,191Income
      before income taxes
                                            
                                            
                                            1,844Income
      tax expense
                                            
                                            
                                            (658
                                            )Net
      income
                                            
                                            $
                                            1,186


60
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Note
18 – Parent Company Only Financial (Continued)





STATEMENT
OF CASH FLOWS





Year
      EndedDecember 31, 2008(In
      Thousands)Cash Flows from Operating
      Activities:Net
      income
                  
                  $
                  1,186Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      change in other assets and liabilities
                  
                  
                  8Equity
      in undistributed net income of banking subsidiary
                  
                  
                  (1,191
                  )Net
      Cash Provided by Operating Activities
                  
                  3Cash
      Flows from Investing Activities:Capital
      contribution to banking subsidiary
                  
                  
                  (1,317
                  )Net
      Cash Used in Investing Activities
                  
                  
                  (1,317
                  )Cash
      Flows from Financing Activities:Proceeds
      from long-term borrowings
                  
                  
                  1,400Proceeds
      from exercise of stock options
                  
                  
                  17Purchase
      of treasury stock
                  
                  
                  (3
                  )Net
      Cash Provided by Financing Activities
                  
                  
                  1,414Net
      Increase in Cash
                  
                  
                  100Cash
      – Beginning
                  
                  -Cash
      - Ending
                  
                  $
                  100


61
 Table of Contents




Embassy
      Bancorp, Inc.Notes
      to Consolidated Financial
Statements





Item9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





Item9A.
            (T)  CONTROLS
      AND PROCEDURES.





(a)
            Evaluation
      of disclosure controls and
procedures.





The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.  Based upon their evaluation of
those controls and procedures as of December 31, 2008, the Chief Executive and
Chief Financial Officers of the Company concluded that the Company’s disclosure
controls and procedures were adequate.





(b)
            Management’s
      Report on Internal Control Over Financial
  Reporting.





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934.  Under the supervision and
with the participation of the principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our
control over financial reporting based on the Internal Control- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on our evaluation under the framework, management has
concluded that our internal control over financial reporting was effective as of
December 31, 2008.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  The Company’s internal control over financial
reporting was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





(c)
            Changes
      in Internal Controls Over Financial
Reporting.





There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the final fiscal quarter of the year to which this report
relates that have materially affected, or are reasonably likely to materially
affect the Company’s internal control over financial reporting.





Item9B.
            OTHER
      INFORMATION.





None.


62
 Table of Contents


PART III





Item10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





The
information required by Part III, Item 10 has been omitted. Such information is
incorporated herein by reference to a definitive proxy statement to be filed
with the SEC within 120 days of December 31, 2008 in connection with the
Company’s annual meeting of shareholders to be held on June 18,
2009.





Item11.
            EXECUTIVE
      COMPENSATION.





The
information required by Part III, Item 11 has been omitted. Such information is
incorporated herein by reference to a definitive proxy statement to be filed
with the SEC within 120 days of December 31, 2008 in connection with the
Company’s annual meeting of shareholders to be held on June 18,
2009.





Item12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.





The
information required by Part III, Item 12 has been omitted. Such information is
incorporated herein by reference to a definitive proxy statement to be filed
with the SEC within 120 days of December 31, 2008 in connection with the
Company’s annual meeting of shareholders to be held on June 18,
2009.





Item13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





The
information required by Part III, Item 13 has been omitted. Such information is
incorporated herein by reference to a definitive proxy statement to be filed
with the SEC within 120 days of December 31, 2008 in connection with the
Company’s annual meeting of shareholders to be held on June 18,
2009.





Item14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.





The
following fees were incurred by the Company for 2008 and 2007:




2008
                    
                    
                    2007Audit
      fees (1)
                    
                    $
                    63,699
                    
                    
                    $
                    58,799Audit-related
      fees (2)
                    
                    
                    1,500
                    
                    
                    
                    2,278Tax
      fees (3)
                    
                    
                    6,561
                    
                    
                    
                    6,259All
      other fees
                    
                    
                    --
                    
                    
                    
                    --$
                    71,000
                    
                    
                    $
                    67,336





(1)
            Includes
      professional services rendered for the audit of the Company’s annual
      financial statements and review of financial statements included in Forms
      10-Q, or services normally provided in connection with statutory and
      regulatory, including out-of-pocket
expenses.


(2)
            Assurance
      and related services reasonably related to the performance of the audit or
      review of financial statements include the
      following:  assistance with regulatory filing requirements, and
      consultations on accounting
applications.


(3)
            Tax
      fees include the following:  preparation of state and federal
      tax returns.





These
fees were approved in accordance with the Company’s Audit Committee’s
policy.


63
 Table of Contents




PART IV





Item15.   EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.





(a)
            Financial
      Statement Schedules can be found under Item 8 of this
    report.





(b)
            Exhibits
      required by Item 601 of Regulation
S-K:




ExhibitNumber
                        
                        Description2.1
                        
                        Holding
      Company Plan of Merger and Reorganization dated April 18,
      2008.3.1
                        
                        Articles
      of Incorporation (Incorporated by reference to Exhibit 1 of Registrant’s
      Form 8-A filed on December 11, 2008).3.2
                        
                        By-Laws
      (Incorporated by reference to Exhibit 2 of Registrant’s Form 8-A filed on
      December 11, 2008).10.1
                        
                        2001
      Stock Option Plan.10.2
                        
                        Lease
      Agreement for the Rte. 512 Bethlehem Office.10.3
                        
                        Lease
      Agreement dated October 21, 2005 for Hamilton Blvd. and Mill Creek Rd.,
      Lower Macungie Township, Pennsylvania.10.4
                        
                        Lease
      Addendum for additional space in the Rte. 512, Bethlehem
      Office.10.5
                        
                        Lease
      Agreement dated March 11, 2009 for Cedar Crest Blvd., Allentown,
      Pennsylvania.10.6
                        
                        Lease
      Agreement for Tilghman Street location.10.7
                        
                        Lease
      Agreement dated March 17, 2006 for 925 West Broad St, Bethlehem
      PA.10.8
                        
                        Lease
      Agreement dated June 17, 2008 for 5828 Old Bethlehem Pike, Center Valley,
      PA.10.9
                        
                        Lease
      Agreement dated March 19, 2009 for Corriere Road and Route 248 in Lower
      Nazareth Township, PA.10.10
                        
                        Employment
      Agreement – D. Lobach, dated January 1, 2006.10.11
                        
                        Employment
      Agreement – J. Hunsicker, dated January 1, 2006.10.12
                        
                        Employment
      Agreement – J. Bartholomew, dated February 20, 2009.10.13
                        
                        Supplemental
      Executive Retirement Plan dated January 5, 2009, for David M.
      Lobach.10.14
                        
                        Supplemental
      Executive Retirement Plan dated January 5, 2009, for Judith A.
      Hunsicker.10.15
                        
                        Supplemental
      Executive Retirement Plan dated January 5, 2009 for James R.
      Bartholomew.11.1
                        
                        The
      statement regarding computation of per share earnings required by this
      exhibit is contained in Note 5 to the financial statements captions “Basic
      and Diluted Earnings Per Share.”14.1
                        
                        Code
      of Conduct (Ethics).23.
                        
                        Consent
      of Beard Miller Company LLP31.1
                        
                        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.


64
 Table of Contents




SIGNATURES





Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed in its behalf by
the undersigned, thereunto duly authorized.








EMBASSY
      BANCORP, INC.By
                  /s/ David M. Lobach Jr.David
      M. Lobach, Jr.Dated:
      March 30, 2009
                  
                  President
      and Chief Executive OfficerDated:
      March 30, 2009
                  By
                  /s/ Judith A. HunsickerJudith
      A. HunsickerSenior
      Executive Vice President, Chief OperatingOfficer,
      Secretary and Chief Financial Officer


65
 Table of Contents




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.








Dated:
      March 30, 2009
              /s/ Geoffrey F. BoyerGeoffrey
      F. Boyer, DirectorDated:
      March 30, 2009
              /s/ John B. Brew Jr.John
      B. Brew, Jr., DirectorDated:
      March 30, 2009
              /s/ Robert P. DadayRobert
      P. Daday, DirectorDated:
      March 30, 2009
              /s/ John G. EnglessonJohn
      G. Englesson, DirectorDated:
      March 30, 2009
              /s/ Elmer D. GatesElmer
      D. Gates, Director and Chairman of the BoardDated:
      March 30, 2009
              /s/ M. Bernadette HollandM.
      Bernadette Holland, DirectorDated:
      March 30, 2009
              /s/ Fredric C. JacobsFredric
      C. Jacobs, DirectorDated:
      March 30, 2009
              /s/ Bernard M. LesavoyBernard
      M. Lesavoy, DirectorDated:
      March 30, 2009
              /s/ David M. Lobach Jr.David
      M. Lobach, Jr., DirectorDated:
      March 30, 2009
              /s/ John C. PittmanJohn
      C. Pittman, DirectorDated:
      March 30, 2009
              /s/ Frank BankoFrank
      Banko, DirectorDated:
      March 30, 2009
              /s/ John T. YurconicJohn
      T. Yurconic, Director






66