UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
One)


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


For the
quarterly period ended June 30,
2009





or




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


For the
transition period from _____________ to _____________





Commission
File Number: 000-18464





EMCLAIRE
FINANCIAL CORP.


(Exact
name of registrant as specified in its charter)





Pennsylvania
            
            25-1606091(State
      or other jurisdiction of incorporation or organization)
            
            (IRS
      Employer Identification No.)





612
      Main Street, Emlenton, Pennsylvania
            
            16373(Address
      of principal executive offices)
            
            (Zip
      Code)





(724)
867-2311


(Registrant’s
telephone number)







(Former
name, former address and former fiscal year, if changed since last
report)





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 such filing requirements for the past 90 days. Yes xNo o





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes oNo o





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





Large
accelerated filer o Accelerated filero Non-accelerated filero Smaller
reporting company x





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


Yes oNox





The
number of shares outstanding of the Registrant’s common stock was 1,431,404 at
August 14, 2009.










EMCLAIRE
FINANCIAL CORP.





INDEX
TO QUARTERLY REPORT ON FORM 10-Q





PART I – FINANCIAL
      INFORMATIONItem
      1.
            
            Interim
      Financial Statements (Unaudited)Consolidated
      Balance Sheets as of June 30, 2009 and December 31, 2008
            
            1Consolidated
      Statements of Income for the three and six months ended June 30, 2009 and
      2008
            
            2Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2009 and 2008
            
            3Consolidated
      Statements of Changes in Stockholders’ Equity for the three and six months
      ended June 30, 2009 and 2008
            
            4Notes
      to Consolidated Financial Statements
            
            5Item
      2.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            15Item
      3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            25Item
      4T.
            
            Controls
      and Procedures
            
            26PART II – OTHER
      INFORMATIONItem
      1.
            
            Legal
      Proceedings
            
            26Item
      1A.
            
            Risk
      Factors
            
            26Item
      2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            27Item
      3.
            
            Defaults
      Upon Senior Securities
            
            27Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            27Item
      5.
            
            Other
      Information
            
            27Item
      6.
            
            Exhibits
            
            27Signatures
            
            
            
            28










PART I - FINANCIAL
INFORMATION





Item 1. Interim Financial
Statements





Emclaire
Financial Corp. and Subsidiaries


Consolidated
Balance Sheets (Unaudited)


As of
June 30, 2009 and December 31, 2008


(Dollar
amounts in thousands, except share data)




June
      30,
            
            
            December
      31,2009
            
            
            2008AssetsCash
      and due from banks
            
            $
            2,367
            
            
            $
            4,292Interest
      earning deposits with banks
            
            
            17,919
            
            
            
            12,279Cash
      and cash equivalents
            
            
            20,286
            
            
            
            16,571Securities
      available for sale, at fair value
            
            
            77,241
            
            
            
            71,443Loans
      receivable, net of allowance for loan losses of $2,935 and
      $2,651
            
            
            268,293
            
            
            
            264,838Federal
      bank stocks, at cost
            
            
            4,125
            
            
            
            3,797Bank-owned
      life insurance
            
            
            5,286
            
            
            
            5,186Accrued
      interest receivable
            
            
            1,429
            
            
            
            1,519Premises
      and equipment, net
            
            
            9,353
            
            
            
            8,609Goodwill
            
            
            1,422
            
            
            
            1,422Prepaid
      expenses and other assets
            
            
            3,179
            
            
            
            2,279Total
      Assets
            
            $
            390,614
            
            
            $
            375,664Liabilities and
      Stockholders' EquityLiabilities:Deposits:Non-interest
      bearing
            
            $
            54,128
            
            
            $
            56,351Interest
      bearing
            
            
            237,772
            
            
            
            230,296Total
      deposits
            
            
            291,900
            
            
            
            286,647Short-term
      borrowed funds
            
            
            24,600
            
            
            
            13,188Long-term
      borrowed funds
            
            
            35,000
            
            
            
            35,000Accrued
      interest payable
            
            
            652
            
            
            
            761Accrued
      expenses and other liabilities
            
            
            2,790
            
            
            
            3,945Total
      Liabilities
            
            
            354,942
            
            
            
            339,541Commitments
      and Contingencies
            
            
            -
            
            
            
            -Stockholders'
      Equity:Preferred
      stock, $1.00 par value, 3,000,000 shares authorized; 7,500 issued and
      outstanding
            
            
            7,421
            
            
            
            7,412Warrants
            
            
            88
            
            
            
            88Common
      stock, $1.25 par value, 12,000,000 shares authorized; 1,559,421 shares
      issued; 1,431,404 shares outstanding
            
            
            1,949
            
            
            
            1,949Additional
      paid-in capital
            
            
            14,619
            
            
            
            14,564Treasury
      stock, at cost; 128,017 shares
            
            
            (2,653
            )
            
            
            (2,653
            )Retained
      earnings
            
            
            16,101
            
            
            
            15,840Accumulated
      other comprehensive loss
            
            
            (1,853
            )
            
            
            (1,077
            )Total
      Stockholders' Equity
            
            
            35,672
            
            
            
            36,123Total
      Liabilities and Stockholders' Equity
            
            $
            390,614
            
            
            $
            375,664





See
accompanying notes to consolidated financial statements.




1




Emclaire
Financial Corp. and Subsidiaries


Consolidated
Statements of Income (Unaudited)


For the
three and six months ended June 30, 2009 and 2008


(Dollar
amounts in thousands, except per share data)





For
      the three months
            
            
            For
      the six monthsended
      June 30,
            
            
            ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      and dividend income:Loans
      receivable, including fees
            
            $
            4,126
            
            
            $
            3,929
            
            
            $
            8,362
            
            
            $
            7,858Securities:Taxable
            
            
            383
            
            
            
            412
            
            
            
            911
            
            
            
            789Exempt
      from federal income tax
            
            
            190
            
            
            
            161
            
            
            
            343
            
            
            
            323Federal
      bank stocks
            
            
            3
            
            
            
            25
            
            
            
            8
            
            
            
            55Interest-earning
      deposits with banks
            
            
            87
            
            
            
            36
            
            
            
            176
            
            
            
            59Total
      interest and dividend income
            
            
            4,789
            
            
            
            4,563
            
            
            
            9,800
            
            
            
            9,084Interest
      expense:Deposits
            
            
            1,421
            
            
            
            1,554
            
            
            
            2,961
            
            
            
            3,126Borrowed
      funds
            
            
            389
            
            
            
            445
            
            
            
            799
            
            
            
            851Total
      interest expense
            
            
            1,810
            
            
            
            1,999
            
            
            
            3,760
            
            
            
            3,977Net
      interest income
            
            
            2,979
            
            
            
            2,564
            
            
            
            6,040
            
            
            
            5,107Provision
      for loan losses
            
            
            540
            
            
            
            85
            
            
            
            837
            
            
            
            145Net
      interest income after provision for loan losses
            
            
            2,439
            
            
            
            2,479
            
            
            
            5,203
            
            
            
            4,962Noninterest
      income:Fees
      and service charges
            
            
            382
            
            
            
            407
            
            
            
            721
            
            
            
            765Commissions
      on financial services
            
            
            169
            
            
            
            127
            
            
            
            252
            
            
            
            245Net
      gain (loss) on available for sale securities
            
            
            184
            
            
            
            (275
            )
            
            
            240
            
            
            
            (275
            )Net
      gain (loss) on sales of loans
            
            
            -
            
            
            
            (6
            )
            
            
            4
            
            
            
            8Earnings
      on bank-owned life insurance
            
            
            57
            
            
            
            57
            
            
            
            114
            
            
            
            113Other
            
            
            127
            
            
            
            186
            
            
            
            308
            
            
            
            301Total
      noninterest income
            
            
            919
            
            
            
            496
            
            
            
            1,639
            
            
            
            1,157Noninterest
      expense:Compensation
      and employee benefits
            
            
            1,438
            
            
            
            1,283
            
            
            
            2,875
            
            
            
            2,700Premises
      and equipment
            
            
            443
            
            
            
            418
            
            
            
            925
            
            
            
            839Other
            
            
            1,015
            
            
            
            592
            
            
            
            1,718
            
            
            
            1,169Total
      noninterest expense
            
            
            2,896
            
            
            
            2,293
            
            
            
            5,518
            
            
            
            4,708Income
      before provision for income taxes
            
            
            462
            
            
            
            682
            
            
            
            1,324
            
            
            
            1,411Provision
      for income taxes
            
            
            54
            
            
            
            141
            
            
            
            248
            
            
            
            311Net
      income
            
            
            408
            
            
            
            541
            
            
            
            1,076
            
            
            
            1,100Accumulated
      preferred stock dividends and discount accretion
            
            
            98
            
            
            
            -
            
            
            
            196
            
            
            
            -Net
      income available to common shareholders
            
            $
            310
            
            
            $
            541
            
            
            $
            880
            
            
            $
            1,100Basic
      and diluted earnings per common share
            
            $
            0.22
            
            
            $
            0.43
            
            
            $
            0.61
            
            
            $
            0.87Average
      common shares outstanding
            
            
            1,431,404
            
            
            
            1,267,835
            
            
            
            1,431,404
            
            
            
            1,267,835Dilutive
      shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -




See
accompanying notes to consolidated financial statements.




2




Emclaire
Financial Corp. and Subsidiaries


Condensed
Consolidated Statements of Cash Flows (Unaudited)


For the
six months ended June 30, 2009 and 2008


(Dollar
amounts in thousands)




For
      the six monthsended
      June 30,2009
            
            
            2008Cash
      flows from operating activitiesNet
      income
            
            $
            1,076
            
            
            $
            1,100Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
            
            
            400
            
            
            
            342Provision
      for loan losses
            
            
            837
            
            
            
            145Amortization
      of premiums and (accretion of discounts), net
            
            
            (70
            )
            
            
            (84
            )Amortization
      of intangible assets and mortgage servicing rights
            
            
            8
            
            
            
            5Amortization
      of deferred loan costs
            
            
            136
            
            
            
            156Realized
      (gain) loss on available for sale securities, net
            
            
            (240
            )
            
            
            275Net
      gains on sales of loans
            
            
            (4
            )
            
            
            (8
            )Originations
      of loans sold
            
            
            (159
            )
            
            
            (1,263
            )Proceeds
      from the sale of loans
            
            
            163
            
            
            
            1,261Restricted
      stock and stock option compensation
            
            
            56
            
            
            
            52Earnings
      on bank-owned life insurance, net
            
            
            (100
            )
            
            
            (99
            )Decrease
      in accrued interest receivable
            
            
            90
            
            
            
            74Decrease
      (increase) in prepaid expenses and other assets
            
            
            (500
            )
            
            
            22Decrease
      in accrued interest payable
            
            
            (109
            )
            
            
            (18
            )Decrease
      in accrued expenses and other liabilities
            
            
            (1,155
            )
            
            
            (297
            )Net
      cash provided by operating activities
            
            
            429
            
            
            
            1,663Cash
      flows from investing activitiesLoan
      originations and principal collections, net
            
            
            (4,519
            )
            
            
            (12,331
            )Available
      for sale securities:Sales
            
            
            8,137
            
            
            
            -Maturities,
      repayments and calls
            
            
            26,840
            
            
            
            45,440Purchases
            
            
            (41,635
            )
            
            
            (55,708
            )Purchase
      of federal bank stocks
            
            
            (328
            )
            
            
            (187
            )Proceeds
      from the sale of foreclosed real estate
            
            
            77
            
            
            
            -Purchases
      of premises and equipment
            
            
            (1,144
            )
            
            
            (454
            )Net
      cash used in investing activities
            
            
            (12,572
            )
            
            
            (23,240
            )Cash
      flows from financing activitiesNet
      increase in deposits
            
            
            5,253
            
            
            
            14,771Net
      increase in short-term borrowed funds
            
            
            11,412
            
            
            
            8,251Dividends
      paid
            
            
            (807
            )
            
            
            (811
            )Net
      cash provided by financing activities
            
            
            15,858
            
            
            
            22,211Net
      increase in cash and cash equivalents
            
            
            3,715
            
            
            
            634Cash
      and cash equivalents at beginning of period
            
            
            16,571
            
            
            
            10,483Cash
      and cash equivalents at end of period
            
            $
            20,286
            
            
            $
            11,117Supplemental
      information:Interest
      paid
            
            $
            3,869
            
            
            $
            3,995Income
      taxes paid
            
            
            183
            
            
            
            180Supplemental
      noncash disclosure:Transfers
      from loans to foreclosed real estate
            
            
            76
            
            
            
            44





See
accompanying notes to consolidated financial statements.




3




Emclaire
Financial Corp. and Subsidiaries


Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)


For the
three and six months ended June 30, 2009 and 2008


(Dollar
amounts in thousands, except per share data)





For
      the three months
            
            
            For
      the six monthsended
      June 30,
            
            
            ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Balance
      at beginning of period
            
            $
            36,173
            
            
            $
            25,086
            
            
            $
            36,123
            
            
            $
            24,703Net
      income
            
            
            408
            
            
            
            541
            
            
            
            1,076
            
            
            
            1,100Other
      comprehensive loss:Change
      in net unrealized gains (losses) on available for sale securities, net of
      taxes
            
            
            (526
            )
            
            
            (429
            )
            
            
            (618
            )
            
            
            (221
            )Less
      reclassification adjustment for gains (losses) included in net income, net
      of taxes
            
            
            (121
            )
            
            
            182
            
            
            
            (158
            )
            
            
            182Other
      comprehensive loss
            
            
            (647
            )
            
            
            (247
            )
            
            
            (776
            )
            
            
            (39
            )Total
      comprehensive income (loss)
            
            
            (239
            )
            
            
            294
            
            
            
            300
            
            
            
            1,061Stock
      compensation expense
            
            
            32
            
            
            
            31
            
            
            
            56
            
            
            
            52Dividends
      declared on preferred stock
            
            
            (94
            )
            
            
            -
            
            
            
            (148
            )
            
            
            -Dividends
      declared on common stock
            
            
            (200
            )
            
            
            (406
            )
            
            
            (659
            )
            
            
            (811
            )Balance
      at end of period
            
            $
            35,672
            
            
            $
            25,005
            
            
            $
            35,672
            
            
            $
            25,005Common
      cash dividend per share
            
            $
            0.14
            
            
            $
            0.32
            
            
            $
            0.46
            
            
            $
            0.64





See
accompanying notes to consolidated financial statements.




4




Emclaire
Financial Corp. and Subsidiaries


Notes to
Consolidated Financial Statements (Unaudited)





1.
            Nature
      of Operations and Basis of
Presentation.





Emclaire
Financial Corp. (the “Corporation”) is a Pennsylvania company organized as the
holding company of Farmers National Bank of Emlenton (the “Bank”) and Emclaire
Settlement Services, LLC (the “Title Company”). The Corporation provides a
variety of financial services to individuals and businesses through its offices
in western Pennsylvania. Its primary deposit products are checking, savings and
certificate of deposit accounts and its primary lending products are residential
and commercial mortgages, commercial business and consumer loans.





The
consolidated financial statements include the accounts of the Corporation and
its wholly owned subsidiaries, the Bank and the Title Company. All significant
intercompany transactions and balances have been eliminated in preparing the
consolidated financial statements.





The
accompanying unaudited consolidated financial statements for the interim periods
include all adjustments, consisting of normal recurring accruals, which are
necessary, in the opinion of management, to fairly reflect the Corporation’s
consolidated financial position and results of operations. Additionally, these
consolidated financial statements for the interim periods have been prepared in
accordance with instructions for the Securities and Exchange Commission’s
(SEC’s) Form 10-Q and Article 10 of Regulation S-X and therefore do not include
all information or footnotes necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America (GAAP). For
further information, refer to the audited consolidated financial statements and
footnotes thereto for the year ended December 31, 2008, as contained in the
Corporation’s 2008 Annual Report on Form 10-K filed with the SEC.





The
balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all the information and footnotes
required by GAAP for complete financial statements.





The
preparation of financial statements, in conformity with GAAP, requires
management to make estimates and assumptions that affect the reported amounts in
the consolidated financial statements and accompanying notes. 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, fair value of financial instruments, goodwill,
the valuation of deferred tax assets and other than temporary impairment
charges. The results of operations for interim quarterly or year to date periods
are not necessarily indicative of the results that may be expected for the
entire year or any other period. Certain amounts previously reported may have
been reclassified to conform to the current year’s financial statement
presentation.





The
Corporation has evaluated events and transactions occurring subsequent to the
balance sheet date of June 30, 2009 for items that should potentially be
recognized or disclosed in these financial statements. The evaluation was
conducted through August 14, 2009, the date these financial statements were
issued.




2.
            Earnings
      per Common Share.




Basic
earnings per common share (EPS) excludes dilution and is computed by dividing
net income available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Corporation. Options and
restricted stock awards of 89,500 shares of common stock and warrants to
purchase 50,111 shares of common stock were not included in computing diluted
earnings per share because their cumulative effects were not dilutive for the
three and six month periods ended June 30, 2009 and 2008.




5




3.
            Branch
      Purchase.


On April
6, 2009, the Corporation entered into a Purchase and Assumption Agreement with
PNC Financial Services Group, Inc. (PNC) and National City Bank (National City)
to acquire certain assets and assume certain liabilities of National City’s
full-service branch office located in Titusville, Pennsylvania. As part of the
agreement, the Bank will assume approximately $90 million in deposits in
exchange for approximately $35 million in loans, cash, and certain fixed assets
of the branch office. The Bank has agreed to pay a premium of 3.4% of deposits
assumed based on the average balance of deposits during a pre-determined period
leading up to the transaction closing date. The proposed branch office
acquisition is subject to customary closing conditions, including receipt of
applicable regulatory approvals. The Corporation intends to consummate the
transaction during the third quarter of 2009. The transaction is expected to be
accretive to the Corporation’s earnings in the fourth quarter of
2009.




4.
            Securities.





The
Corporation’s securities as of the respective dates are summarized as
follows:





Amortized
            
            
            Unrealized
            
            
            Unrealized
            
            
            Fair(Dollar amounts in
      thousands)
            
            cost
            
            
            gains
            
            
            losses
            
            
            valueAvailable for
      sale:June
      30, 2009:U.S.
      Treasury securities
            
            $
            2,973
            
            
            $
            18
            
            
            $
            -
            
            
            $
            2,991U.S.
      Government agencies and related entities
            
            
            19,454
            
            
            
            96
            
            
            
            (63
            )
            
            
            19,487Mortgage-backed
      securities
            
            
            32,991
            
            
            
            628
            
            
            
            (51
            )
            
            
            33,568Municipal
      securities
            
            
            18,866
            
            
            
            175
            
            
            
            (316
            )
            
            
            18,725Equity
      securities
            
            
            3,901
            
            
            
            -
            
            
            
            (1,431
            )
            
            
            2,470$
            78,185
            
            
            $
            917
            
            
            $
            (1,861
            )
            
            $
            77,241December
      31, 2008:U.S.
      Treasury securities
            
            $
            19,985
            
            
            $
            139
            
            
            $
            (47
            )
            
            $
            20,077U.S.
      Government agencies and related entitiesMortgage-backed
      securities
            
            
            29,806
            
            
            
            586
            
            
            
            (12
            )
            
            
            30,380Municipal
      securities
            
            
            13,543
            
            
            
            270
            
            
            
            (5
            )
            
            
            13,808Corporate
      securities
            
            
            3,984
            
            
            
            -
            
            
            
            -
            
            
            
            3,984Equity
      securities
            
            
            3,893
            
            
            
            -
            
            
            
            (699
            )
            
            
            3,194$
            71,211
            
            
            $
            995
            
            
            $
            (763
            )
            
            $
            71,443




The
following table summarizes scheduled maturities of the Corporation’s securities
as of June 30, 2009:





Available
      for saleAmortized
            
            
            Fair(Dollar
      amounts in thousands)
            
            cost
            
            
            valueDue
      in one year or less
            
            $
            165
            
            
            $
            167Due
      after one year through five years
            
            
            14,957
            
            
            
            15,017Due
      after five through ten years
            
            
            18,272
            
            
            
            18,183Due
      after ten years
            
            
            40,890
            
            
            
            41,404No
      scheduled maturity
            
            
            3,901
            
            
            
            2,470$
            78,185
            
            
            $
            77,241




Expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.




6





Information
pertaining to securities with gross unrealized losses at June 30, 2009 and
December 31, 2008, aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:




4.
            Securities
      (continued).


Less
      than 12 Months
            
            
            12
      Months or More
            
            
            Total(Dollar
      amounts in thousands)
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            UnrealizedDescription
      of Securities
            
            Value
            
            
            Loss
            
            
            Value
            
            
            Loss
            
            
            Value
            
            
            LossJune
      30, 2009:U.S.
      Government agencies and related entities
            
            $
            3,931
            
            
            $
            (63
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            3,931
            
            
            $
            (63
            )Mortgage-backed
      securities
            
            
            4,698
            
            
            
            (20
            )
            
            
            4,198
            
            
            
            (31
            )
            
            
            8,896
            
            
            
            (51
            )Municipal
      securities
            
            
            10,009
            
            
            
            (316
            )
            
            
            -
            
            
            
            -
            
            
            
            10,009
            
            
            
            (316
            )Corporate
      securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            2,246
            
            
            
            (1,431
            )
            
            
            2,246
            
            
            
            (1,431
            )$
            18,638
            
            
            $
            (399
            )
            
            $
            6,444
            
            
            $
            (1,462
            )
            
            $
            25,082
            
            
            $
            (1,861
            )December
      31, 2008:U.S.
      Government agencies and related entities
            
            $
            6,452
            
            
            $
            (47
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            6,452
            
            
            $
            (47
            )Mortgage-backed
      securities
            
            
            9,185
            
            
            
            (12
            )
            
            
            -
            
            
            
            -
            
            
            
            9,185
            
            
            
            (12
            )Municipal
      securities
            
            
            2,352
            
            
            
            (5
            )
            
            
            -
            
            
            
            -
            
            
            
            2,352
            
            
            
            (5
            )Corporate
      securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      securities
            
            
            -
            
            
            
            -
            
            
            
            3,128
            
            
            
            (699
            )
            
            
            3,128
            
            
            
            (699
            )$
            17,989
            
            
            $
            (64
            )
            
            $
            3,128
            
            
            $
            (699
            )
            
            $
            21,117
            
            
            $
            (763
            )




Management
evaluates securities for other than temporary impairment at least on a quarterly
basis, and more frequently when economic, market or other concerns warrant such
evaluation. Consideration is given to: (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
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.





As of
June 30, 2009, there were 35 debt and 7 equity securities in an unrealized loss
position. These unrealized losses are considered to be temporary
impairments. A decline in the value of the debt securities is due only to
interest rate fluctuations, rather than erosion of quality. As a result, the
payment of contractual cash flows, including principal repayment, is not at
risk. As management has the intent and ability to hold these investments until
market recovery or maturity, none of the unrealized losses on debt securities
are deemed to be other than temporary.





Equity
securities owned by the Corporation consist of common stock of various financial
service providers that have traditionally been high-performing stocks. However,
as a result of recent market volatility in financial stocks, the fair values of
most of the stocks held were “under water” as of June 30, 2009, and as such,
could have been considered impaired. The Corporation does not invest in these
securities with the intent to sell them for a profit in the near-term.
Management believes these securities will appreciate in value over the
long-term. In addition, stocks can be cyclical and will experience some down
periods. Historically, bank stocks have sustained cyclical losses followed by
periods of substantial gains. Based on these circumstances and the Corporation’s
intent to hold these securities and its belief it will not be required to sell
these securities before recovery occurs, the Corporation does not consider these
investments to be other than temporarily impaired at June 30, 2009.




7




5.
            Loans
      Receivable.


The Corporation’s loans receivable as
of the respective dates are summarized as follows:





June
      30,
            
            
            December
      31,(Dollar
      amounts in thousands)
            
            2009
            
            
            2008Mortgage
      loans on real estate:Residential
      first mortgages
            
            $
            71,578
            
            
            $
            74,130Home
      equity loans and lines of credit
            
            
            56,921
            
            
            
            57,454Commercial
      real estate
            
            
            88,632
            
            
            
            85,689217,131
            
            
            
            217,273Other
      loans:Commercial
      business
            
            
            43,565
            
            
            
            40,787Consumer
            
            
            10,532
            
            
            
            9,42954,097
            
            
            
            50,216Total
      loans, gross
            
            
            271,228
            
            
            
            267,489Less
      allowance for loan losses
            
            
            2,935
            
            
            
            2,651Total
      loans, net
            
            $
            268,293
            
            
            $
            264,838





6.
            Deposits.





The Corporation’s deposits as of the
respective dates are summarized as follows:





(Dollar
      amounts in thousands)
            
            June
      30, 2009
            
            
            December
      31, 2008Type
      of accounts
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Non-interest
      bearing deposits
            
            $
            54,128
            
            
            
            18.6
            %
            
            $
            56,351
            
            
            
            19.7
            %Interest
      bearing demand deposits
            
            
            118,603
            
            
            
            40.6
            %
            
            
            106,042
            
            
            
            37.0
            %Time
      deposits
            
            
            119,169
            
            
            
            40.8
            %
            
            
            124,254
            
            
            
            43.3
            %$
            291,900
            
            
            
            100.0
            %
            
            $
            286,647
            
            
            
            100.0
            %




7.
            Guarantees.





The
Corporation does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party. Of these letters of
credit at June 30, 2009, $81,000 will expire within the next ten months,
$721,000 will automatically renew within the next twelve months and $241,000
will automatically renew within thirteen to nineteen months. The Corporation,
generally, holds collateral and/or personal guarantees supporting these
commitments. Management believes that the proceeds obtained through a
liquidation of collateral and the enforcement of guarantees would be sufficient
to cover the potential amount of future payments required under the
corresponding guarantees. The credit risk involved in issuing letters of credit
is essentially the same as those that are involved in extending loan facilities
to customers. The current amount of the liability as of June 30, 2009 for
guarantees under standby letters of credit issued is not material.




8





8.
            Employee Benefit
      Plans.





The
Corporation maintains a defined contribution 401(k) Plan. Eligible employees
participate by providing tax-deferred contributions up to 20% of qualified
compensation. Employee contributions are vested at all times. The Corporation
provides a matching contribution of up to 4% of the participant’s salary.
Matching contributions for the six months ended June 30, 2009 and 2008 amounted
to $73,000 and $76,000, respectively.





The
Corporation provides pension benefits for eligible employees through a defined
benefit pension plan. Substantially all full-time employees participate in
the retirement plan on a non-contributing basis and are fully vested after five
years of service.





The
Corporation uses December 31 as the measurement date for its plans.





The
components of the periodic pension cost are as follows:





For
      the three months ended
            
            
            For
      the six months ended
            
            
            Year
      endedJune
      30,
            
            
            June
      30,
            
            
            December
      31,(Dollar
      amounts in thousands)
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2008Service
      cost
            
            $
            62
            
            
            $
            63
            
            
            $
            124
            
            
            $
            126
            
            
            $
            233Interest
      cost
            
            
            75
            
            
            
            71
            
            
            
            150
            
            
            
            142
            
            
            
            285Expected
      return on plan assets
            
            
            (66
            )
            
            
            (79
            )
            
            
            (132
            )
            
            
            (158
            )
            
            
            (305
            )Prior
      service costs
            
            
            (8
            )
            
            
            (8
            )
            
            
            (16
            )
            
            
            (16
            )
            
            
            (31
            )Recognized
      net actuarial loss
            
            
            27
            
            
            
            4
            
            
            
            54
            
            
            
            8
            
            
            
            19Net
      periodic pension cost
            
            $
            90
            
            
            $
            51
            
            
            $
            180
            
            
            $
            102
            
            
            $
            201




The
expected rate of return on plan assets was 7.75% for the periods ended June 30,
2009 and 2008. The Corporation previously disclosed in its financial statements
for the year ended December 31, 2008 that it expected to contribute $350,000 to
its pension plan in 2009. As of June 30, 2009, $350,000 has been
contributed.




9.
            Stock
      Compensation Plans.





In May
2007, the Corporation adopted the 2007 Stock Incentive Plan and Trust. Under the
Plan, the Corporation may grant options to its directors, officers and employees
for up to 177,496 shares of common stock. Incentive stock options, non-incentive
or compensatory stock options and share awards may be granted under the Plan.
The exercise price of each option shall at least equal the market price of a
share of common stock on the date of grant and have a contractual term of ten
years. Options and restricted stock awards shall vest and become exercisable at
the rate, to the extent and subject to such limitations as may be specified by
the Corporation. The Corporation accounts for its stock compensation plans in
accordance with the Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)),which requires
that compensation cost related to share-based payment transactions be recognized
in the financial statements with measurement based upon the fair value of the
equity or liability instruments issued. For the six-month periods ended June 30,
2009 and 2008, the Corporation recognized $56,000 and $52,000, respectively, in
stock compensation expense.




9




9.
            Stock
      Compensation Plans (continued).





A summary
of option activity under the Plan as of June 30, 2009, and changes during the
period then ended is presented below:





Options
            
            
            Weighted-Average
              Exercise
      Price
            
            
            Aggregate
              Intrinsic
      Value
            
            
            Weighted-Average
              Remaining
      Term
              (in
      years)Outstanding
      at the beginning of the year
            
            
            94,000
            
            
            $
            25.66
            
            
            
            
            
            
            8.7Granted
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            -Forfeited
            
            
            4,500
            
            
            
            26.00
            
            
            
            
            
            
            -Outstanding
      as of June 30, 2009
            
            
            89,500
            
            
            $
            25.64
            
            
            $
            -
            
            
            
            8.2Exercisable
      as of June 30, 2009
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            -





A summary
of the status of the Corporation’s nonvested shares as of June 30, 2009, and
changes during the period then ended is presented below:





Options
            
            
            Weighted-Average
              Grant-date
      Fair ValueNonvested
      at the beginning of the year
            
            
            94,000
            
            
            $
            3.13Granted
            
            
            -
            
            
            
            -Vested
            
            
            -
            
            
            
            -Forfeited
            
            
            4,500
            
            
            
            3.39Nonvested
      as of June 30, 2009
            
            
            89,500
            
            
            $
            3.12




As of
June 30, 2009, there was $180,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over an average period of 1.2
years.




10.
            Fair
      Values of Financial Instruments.





Effective
January 1, 2008, the Corporation adopted FASB SFAS 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.





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
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.




10




10.
            Fair
      Values of Financial Instruments
(continued).





For
assets measured at fair value on a recurring basis, the fair value measurements
by level within the fair value hierarchy are as follows:





(Dollar
      amounts in thousands)
              Description
            
            Total
            
            
            (Level
      1)
              Quoted
      Prices in
              Active
      Markets
              for
      Identical
              Assets
            
            
            (Level
      2)
              Significant
              Other
              Observable
              Inputs
            
            
            (Level
      3)
              Significant
              Unobservable
              InputsJune
      30, 2009:Securities
      available for sale
            
            $
            77,241
            
            
            $
            2,470
            
            
            $
            74,770
            
            
            $
            -December
      31, 2008:Securities
      available for sale
            
            $
            71,443
            
            
            $
            3,194
            
            
            $
            68,249
            
            
            $
            -




For
assets measured at fair value on a non-recurring basis, the fair value
measurements by level within the fair value hierarchy are as
follows:




(Dollar
      amounts in thousands)
              Description
            
            Total
            
            
            (Level
      1)
              Quoted
      Prices in
              Active
      Markets
              for
      Identical
              Assets
            
            
            (Level
      2)
              Significant
              Other
              Observable
              Inputs
            
            
            (Level
      3)
              Significant
              Unobservable
              InputsJune
      30, 2009:Impaired
      loans
            
            $
            112
            
            
            $
            -
            
            
            $
            -
            
            
            $
            112Repossessions
            
            
            484
            
            
            
            -
            
            
            
            484
            
            
            
            -$
            596
            
            
            $
            -
            
            
            $
            484
            
            
            $
            112December
      31, 2008:Impaired
      loans
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Repossessions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -$
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -




The
following valuation techniques were used to measure fair value of assets in the
tables above:





Available for sale securities– Fair value on available for sale securities were based upon a market
approach. Prices for securities that are fixed income instruments that are not
quoted on an exchange, but are traded in active markets, are obtained through
third party data service providers or dealer market participants which the
Corporation has historically transacted both purchases and sales of investment
securities. As of June 30, 2009, all fair values on available for sale
securities were based on prices obtained from these sources and were based on
actual market quotations for each specific security.





Impaired loans – Fair value
on impaired loans is measured using the estimate fair market value of the
collateral less the estimate costs to sell. Fair value of the loan’s collateral
is typically determined by appraisals or independent valuation. Management’s
ongoing review of appraisal information may result in additional discounts or
adjustments to valuation based upon more recent market sales activity or more
current appraisal information derived from properties of similar type and/or
locale. As of June 30, 2009 the fair value consists of a loan balance of
$133,000, net of a valuation allowance of $21,000. Additional provision for loan
losses of $21,000 was recorded during the six months ended June 30,
2009.




11





10.
            Fair
      Values of Financial Instruments
(continued).





Repossessions –Fair value on
repossessed assets is measured using the estimate fair market value of the asset
less the estimate costs to sell. Fair value of the asset is typically determined
by appraisals or independent valuation.





Effective
January 1, 2009, the Corporation adopted FSP 157-2, Effective Date of FASB Statement No.
157(FSP 157-2), which delayed 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.
At June 30, 2009, the Corporation had no non-financial assets or liabilities
carried at fair value, measured on a recurring or non-recurring
basis.





Under
SFAS 107, the Corporation is required to disclose the estimated fair value of
its financial instrument assets and liabilities including those subject to the
requirements of SFAS 157. The estimated fair values and carrying values of all
financial statement instruments covered by SFAS 157 and SFAS 107 at June 30,
2009 were as follows:





June
      30, 2009
            
            
            December
      31, 2008(Dollar
      amounts in thousands)
            
            Carrying
      amount
            
            
            Fair
      value
            
            
            Carrying
      amount
            
            
            Fair
      valueFinancial
      assets:Cash
      and cash equivalents
            
            $
            20,286
            
            
            $
            20,286
            
            
            $
            16,571
            
            
            $
            16,571Securities
            
            
            77,241
            
            
            
            77,241
            
            
            
            71,443
            
            
            
            71,443Loans
      receivable, net
            
            
            268,293
            
            
            
            274,349
            
            
            
            264,838
            
            
            
            272,662Federal
      bank stocks
            
            
            4,125
            
            
            
            4,125
            
            
            
            3,797
            
            
            
            3,797Accrued
      interest receivable
            
            
            1,429
            
            
            
            1,429
            
            
            
            1,519
            
            
            
            1,519Financial
      liabilities:Deposits
            
            
            291,900
            
            
            
            294,357
            
            
            
            286,647
            
            
            
            290,533Borrowed
      funds
            
            
            59,600
            
            
            
            59,597
            
            
            
            48,188
            
            
            
            52,510Accrued
      interest payable
            
            
            652
            
            
            
            652
            
            
            
            761
            
            
            
            761




This
information should not be interpreted as an estimate of the fair value of the
entire Corporation since a fair value calculation is only provided for a limited
portion of the Corporation’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 Corporation’s disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate fair values of the Corporation’s financial instruments at June 30,
2009 and December 31, 2008:





Carrying
amount is the estimated fair value for cash and cash equivalents, securities,
federal bank stocks, accrued interest receivable and payable, demand deposits,
borrowed funds, and variable rate loans or deposits that reprice frequently and
fully. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair value of debt is based on current rates for similar financing. The
fair value of off-balance sheet items is based on the current fees or cost that
would be charged to enter into or terminate such arrangements and is not
material.




12




11.
            Effect
      of Recently Issued Accounting
Standards.





In April
2008, the FASB issued FASB Staff Position (FSP) SFAS No. 142-3, Determination of the Useful Life of
Intangible Assets(FSP 142-3). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets(SFAS 142). The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R) and other GAAP. This FSP is effective for financial statements
issued for fiscal years and interim periods beginning after December 15, 2008,
and interim periods within those fiscal years. This FSP did not affect the
Corporation’s consolidated financial statements.





In June
2008, the FASB ratified Emerging Issues Task Force (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 became effective for fiscal years
beginning after December 15, 2008. EITF 07-5 did not affect the Corporation’s
consolidated financial statements.





In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment Accounting
Considerations (EITF 08-6). EITF 08-6 clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. EITF 08-6 became effective for fiscal years beginning after
December 15, 2008. EITF 08-6 did not affect the Corporation’s consolidated
financial statements.





In April 2009, the FASB issued FSP No.
107-1 and APB 28-1,Interim Disclosures
about Fair Value of Financial Instruments(FSP107-1 and APB 28-1).FSP 107-1 and APB 28-1 amends FASB SFAS
107,Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements.This FSP also amends APB Opinion
No.28,Interim Financial
Reporting, to require
those disclosures in summarized financial information at interim reporting
periods. This FSP is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15,
2009.An entity early adopting FSP FAS 107-1
and APB 28-1 must also early adopt FSP FAS 157-4,Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly(FSP
157-4),and FSP FAS 115-2 and FAS 124-2,Recognition and
Presentation of Other-Than-Temporary Impairments(FSP 115-2 and FAS 124-2).The Corporation adopted
this pronouncement effective for the quarter ended June 30, 2009. The adoption
of this pronouncement did not affect the Corporation’s consolidated financial
statements.





In April
2009, the FASB issued FSP 115-2 and FAS 124-2. FSP 115-2 and FAS 124-2 clarifies
the interaction of the factors that should be considered when determining
whether a debt security is other than temporarily impaired. For debt
securities, management must assess whether (a) it has the intent to sell the
security and (b) it is more likely than not that it will be required to sell the
security prior to its anticipated recovery. These steps are done before
assessing whether the entity will recover the cost basis of the
investment. Previously, this assessment required management to assert it
has both the intent and the ability to hold a security for a period of time
sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other than temporary impairment. This change does not affect
the need to forecast recovery of the value of the security through either cash
flows or market price.




13





11.
            Effect
      of Recently Issued Accounting Standards
  (continued).





In
instances when a determination is made that an other than temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP 115-2 and FAS 124-2 changes the presentation and
amount of the other than temporary impairment recognized in the income
statement. The


other
than temporary impairment is separated into (a) the amount of the total
other-than-temporary impairment related to a decrease in cash flows expected to
be collected from the debt security (the credit loss) and (b) the amount of the
total other than temporary impairment related to all other factors. The amount
of the total other than temporary impairment related to the credit loss is
recognized in earnings. The amount of the total other than temporary
impairment related to all other factors is recognized in other comprehensive
income.





This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP 115-2 and FAS 124-2 must also early
adopt FSP 157-4,Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly. The Corporation adopted this pronouncement effective for
the quarter ended June 30, 2009. The adoption of this pronouncement did not
affect the Corporation’s consolidated financial statements.





In April
2009, the FASB issued FSP 157-4. FASB SFAS 157, Fair Value Measurement(SFAS 157), defines
fair value as the price that would be received to sell the asset or transfer the
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under
current market conditions. FSP 157-4 provides additional guidance on
determining when the volume and level of activity for the asset or liability has
significantly decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.





FSP 157-4
provides a list of factors that a reporting entity should evaluate to determine
whether there has been a significant decrease in the volume and level of
activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been
a significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with SFAS 157.





This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. The FSP provides
a list of circumstances that may indicate that a transaction is not
orderly. A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair
value.





This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP 157-4 must also early adopt FSP 115-2
and FAS 124-2. The Corporation adopted this standard effective for the
quarter ended June 30, 2009. The adoption of this pronouncement did not affect
the Corporation’s consolidated financial statements.




14





11.
            Effect
      of Recently Issued Accounting Standards
  (continued).





In May
2009, the FASB issued FASB Statement No. 165, Subsequent Events, (SFAS
165). SFAS 165 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, SFAS 165 defines the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or apply the requirements to interim or annual
financial periods ending after June 15, 2009. The Corporation adopted SFAS 165
with regard to our interim financial period ending June 30, 2009. This statement
did not affect the Corporation’s consolidated financial statements.





In June
2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162, (SFAS 168). SFAS 168 replaces SFAS
No. 162, The Hierarchy of
Generally Accepted Accounting Principles, to establish the FASB Accounting Standards
Codificationas the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with generally accepted accounting
principles in the United States. SFAS 168 is effective for interim and annual
periods ending after September 15, 2009. The Corporation does not expect the
adoption of this standard to have an impact on its consolidated financial
statements.





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





This
section discusses the consolidated financial condition and results of operations
of Emclaire Financial Corp. and its wholly owned subsidiaries, the Bank and the
Title Company, for the six months ended June 30, 2009 compared to the same
period in 2008 and should be read in conjunction with the Corporation’s December
31, 2008 Annual Report on Form 10-K filed with the SEC and with the accompanying
consolidated financial statements and notes presented on pages 1 through 13 of
this Form 10-Q.





The
Private Securities Litigation Reform Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
“believes,” “anticipates,” “contemplates” and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Those risks and uncertainties include changes in interest
rates, the ability to control costs and expenses and general economic
conditions. The Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such
statements.




15





CHANGES
IN FINANCIAL CONDITION





Total
assets increased $15.0 million or 4.0% to $390.6 million at June 30, 2009 from
$375.7 million at December 31, 2008. This increase resulted from increases in
cash and cash equivalents, securities and loans receivable, net of allowance for
loan losses, of $3.7 million, $5.8 million and $3.5 million, respectively. The
net increase in the Corporation’s assets was primarily funded by increases in
customer deposits and borrowed funds.





Total
liabilities increased $15.4 million or 4.5% to $354.9 million at June 30, 2009
from $339.5 million at December 31, 2008, while total stockholders’ equity
decreased to $35.7 million at June 30, 2009 from $36.1 million at December 31,
2008. The increase in total liabilities resulted primarily from increases in
customer deposits and borrowed funds of $5.3 million and $11.4 million,
respectively.





RESULTS
OF OPERATIONS





Comparison
of Results for the Three Month Periods Ended June 30, 2009 and 2008





General. Net income decreased
$133,000 or 24.6% to $408,000 for the three months ended June 30, 2009 from
$541,000 for the same period in 2008. This decrease was the result of increases
in the provision for loan losses and noninterest expense of $455,000 and
$603,000, respectively, partially offset by increases in net interest income and
noninterest income of $415,000 and $423,000, respectively, and a decrease in the
provision for income taxes of $87,000.





Net interest income. Net
interest income on a tax equivalent basis increased $448,000 or 16.8% to $3.1
million for the three months ended June 30, 2009 from $2.7 million for the same
period in 2008. This net increase can be attributed to an increase in tax
equivalent interest income of $259,000 and a decrease in interest expense of
$189,000.





Interest income. Interest
income on a tax equivalent basis increased $259,000 or 5.6% to $4.9 million for
the three months ended June 30, 2009, compared to $4.7 million for the same
period in the prior year. This increase can be attributed to increases in
interest on loans, securities and interest-earning deposits with banks of
$217,000, $13,000 and $51,000, respectively, partially offset by a decrease in
dividends on federal bank stocks of $22,000.





Tax
equivalent interest earned on loans receivable increased $217,000 or 5.5% to
$4.2 million for the three months ended June 30, 2009, compared to $4.0 million
for the same period in 2008. This increase resulted primarily from average loans
increasing $33.1 million or 13.7%, accounting for $518,000 in additional loan
interest income. This increase can be attributed to growth in the Corporation’s
commercial loan portfolios and loans acquired through the merger of Elk County
Savings and Loan Association (ECSLA) in the fourth quarter of 2008. Offsetting
this volume increase, the yield on loans receivable decreased 50 basis points to
6.11% for the three months ended June 30, 2009, versus 6.61% for the same period
in 2008, due to a decline in market interest rates, accounting for a $301,000
decrease in interest income.





Tax
equivalent interest earned on securities increased $13,000 or 2.0% to $658,000
for the three months ended June 30, 2009, compared to $645,000 for the same
period in 2008. The average volume of securities increased $1.9 million,
primarily through municipal bond purchases, accounting for a $22,000 increase in
interest income. Offsetting this volume increase, the average yield on
securities decreased 8 basis points to 4.70% for the three months ended June 30,
2009, versus 4.78% for the same period in 2008, due to declining market interest
rates. This unfavorable yield variance accounted for a $9,000 decrease in
interest income.





Interest
earned on interest-earning deposit accounts increased $51,000 to $87,000 for the
three months ended June 30, 2009 from $36,000 for the same period in 2008. The
average volume of these assets increased $16.9 million, due in part to
investments made in certificates of deposit with other financial institutions,
increasing interest income by $62,000. Offsetting this volume increase, the
average yield on interest-earning deposit accounts decreased 49 basis points to
1.54% for the three months ended June 30, 2009, compared to 2.03% for the same
period in the prior year, accounting for an $11,000 decrease in interest income.
This yield decrease was a result of the continued low interest rate environment
during 2008 and 2009.





Dividends
on federal bank stocks decreased $22,000 or 88.0% to $3,000 for the three month
period ended June 30, 2009 from $25,000 for the same period in 2008. The average
yield on these assets decreased 337 basis points to 0.29% for the three months
ended June 30, 2009, compared to 3.66% for the same period the prior year, due
to the Federal Home Loan Bank of Pittsburgh (FHLB) suspending the payment of
dividends as announced in late December 2008.




16





Interest expense. Interest
expense decreased $189,000 or 9.5% to $1.8 million for the three months ended
June 30, 2009 from $2.0 million for the same period in 2008. This decrease in
interest expense can be attributed to a decrease in interest incurred on
deposits and borrowed funds of $133,000 and $56,000, respectively.





Interest
expense incurred on deposits decreased $133,000 or 8.6% to $1.4 million for the
three months ended June 30, 2009 compared $1.6 million for the same period in
2008. The cost of interest-bearing deposits decreased 71 basis points to 2.35%
for the three months ended June 30, 2009, compared to 3.06% for the same period
in 2008 causing a $392,000 decrease in interest expense. This decrease was a
result of the continuous downward trend in deposit market rates during 2008 and
2009. Partially offsetting this favorable rate variance, the average volume of
interest-bearing deposits increased $37.9 million or 18.6% to $242.3 million for
the three months ended June 30, 2009, compared to $204.4 million for the same
period in 2008 causing a $259,000 increase in interest expense. Contributing to
the increase in deposits was the acquisition of ECSLA in the fourth quarter of
2008 and the addition of a branch office in Grove City, Pennsylvania in the
second quarter of 2008.





Interest
expense incurred on borrowed funds decreased $56,000 or 12.6% to $389,000 for
the three months ended June 30, 2009, compared to $445,000 for the same period
in the prior year. This decrease in interest expense can be attributed to a
decrease in the average balance of borrowed funds of $3.7 million or 8.4% to
$40.6 million for the three months ended June 30, 2009, compared to $44.3
million for the same period in the prior year, causing a $37,000 decrease in
interest expense. This volume decrease was related to the reduced need for
short-term funding in light of current deposit levels. Also contributing to the
decrease in interest expense, the cost of borrowed funds decreased 19 basis
points to 3.85% for the three months ended June 30, 2009, compared to 4.04% for
the same period in 2008 causing a $19,000 decrease in interest expense. This
cost decrease was a result of the low rate environment during the second half of
2008 and 2009.




17





Average Balance Sheet and Yield/Rate
Analysis. The following table sets forth, for the periods indicated,
information concerning the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amounts of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, interest rate spread and the net interest
margin earned on average interest-earning assets. For purposes of this table,
average loan balances include non-accrual loans and exclude the allowance for
loan losses and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt loans and securities (tax-exempt for federal
income tax purposes) are shown on a fully tax equivalent basis. The information
is based on average daily balances during the periods presented.





Three
      months ended June 30,2009
            
            
            2008Average
            
            
            
            
            
            Yield
      /
            
            
            Average
            
            
            
            
            
            Yield
      /(Dollar
      amounts in thousands)
            
            Balance
            
            
            Interest
            
            
            Rate
            
            
            Balance
            
            
            Interest
            
            
            RateInterest-earning
      assets:Loans,
      taxable
            
            $
            257,198
            
            
            $
            4,009
            
            
            
            6.25
            %
            
            $
            234,664
            
            
            $
            3,865
            
            
            
            6.62
            %Loans,
      tax exempt
            
            
            16,624
            
            
            
            165
            
            
            
            3.98
            %
            
            
            6,072
            
            
            
            92
            
            
            
            6.12
            %Total
      loans receivable
            
            
            273,822
            
            
            
            4,174
            
            
            
            6.11
            %
            
            
            240,736
            
            
            
            3,957
            
            
            
            6.61
            %Securities,
      taxable
            
            
            39,329
            
            
            
            383
            
            
            
            3.91
            %
            
            
            39,934
            
            
            
            412
            
            
            
            4.15
            %Securities,
      tax exempt
            
            
            16,833
            
            
            
            275
            
            
            
            6.56
            %
            
            
            14,332
            
            
            
            233
            
            
            
            6.54
            %Total
      securities
            
            
            56,162
            
            
            
            658
            
            
            
            4.70
            %
            
            
            54,266
            
            
            
            645
            
            
            
            4.78
            %Interest-earning
      deposits with banks
            
            
            22,689
            
            
            
            87
            
            
            
            1.54
            %
            
            
            7,148
            
            
            
            36
            
            
            
            2.03
            %Federal
      bank stocks
            
            
            4,125
            
            
            
            3
            
            
            
            0.29
            %
            
            
            2,751
            
            
            
            25
            
            
            
            3.66
            %Total
      interest-earning cash equivalents
            
            
            26,814
            
            
            
            90
            
            
            
            1.35
            %
            
            
            9,899
            
            
            
            61
            
            
            
            2.48
            %Total
      interest-earning assets
            
            
            356,798
            
            
            
            4,922
            
            
            
            5.53
            %
            
            
            304,901
            
            
            
            4,663
            
            
            
            6.15
            %Cash
      and due from banks
            
            
            2,173
            
            
            
            
            
            
            
            
            
            
            
            5,569Other
      noninterest-earning assets
            
            
            16,556
            
            
            
            
            
            
            
            
            
            
            
            14,590Total
      Assets
            
            $
            375,527
            
            
            
            
            
            
            
            
            
            
            $
            325,060Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            116,495
            
            
            
            259
            
            
            
            0.89
            %
            
            $
            87,112
            
            
            
            311
            
            
            
            1.44
            %Time
      deposits
            
            
            125,829
            
            
            
            1,162
            
            
            
            3.70
            %
            
            
            117,290
            
            
            
            1,243
            
            
            
            4.26
            %Total
      interest-bearing deposits
            
            
            242,325
            
            
            
            1,421
            
            
            
            2.35
            %
            
            
            204,402
            
            
            
            1,554
            
            
            
            3.06
            %Borrowed
      funds, short-term
            
            
            5,561
            
            
            
            4
            
            
            
            0.30
            %
            
            
            9,291
            
            
            
            53
            
            
            
            2.29
            %Borrowed
      funds, long-term
            
            
            35,000
            
            
            
            385
            
            
            
            4.41
            %
            
            
            35,000
            
            
            
            392
            
            
            
            4.50
            %Total
      borrowed funds
            
            
            40,561
            
            
            
            389
            
            
            
            3.85
            %
            
            
            44,291
            
            
            
            445
            
            
            
            4.04
            %Total
      interest-bearing liabilities
            
            
            282,885
            
            
            
            1,810
            
            
            
            2.57
            %
            
            
            248,693
            
            
            
            1,999
            
            
            
            3.23
            %Noninterest-bearing
      demand deposits
            
            
            52,757
            
            
            
            -
            
            
            
            -
            
            
            
            48,878
            
            
            
            -
            
            
            
            -Funding
      and cost of funds
            
            
            335,643
            
            
            
            1,810
            
            
            
            2.16
            %
            
            
            297,571
            
            
            
            1,999
            
            
            
            2.70
            %Other
      noninterest-bearing liabilities
            
            
            3,882
            
            
            
            
            
            
            
            
            
            
            
            2,466Total
      Liabilities
            
            
            339,524
            
            
            
            
            
            
            
            
            
            
            
            300,037Stockholders'
      Equity
            
            
            36,003
            
            
            
            
            
            
            
            
            
            
            
            25,023Total
      Liabilities and Stockholders' Equity
            
            $
            375,527
            
            
            
            
            
            
            
            
            
            
            $
            325,060Net
      interest income
            
            
            
            
            
            $
            3,112
            
            
            
            
            
            
            
            
            
            
            $
            2,664Interest rate spread(difference between weighted average rate on interest-earning
      assets and interest-bearing liabilities)
            
            
            
            
            
            
            
            
            
            
            2.96
            %
            
            
            
            
            
            
            
            
            
            
            2.92
            %Net interest margin(net
      interest income as a percentage of average interest-earning
      assets)
            
            
            
            
            
            
            
            
            
            
            3.50
            %
            
            
            
            
            
            
            
            
            
            
            3.51
            %




18




Analysis of Changes in Net Interest
Income. The following table analyzes the changes in interest income and
interest expense in terms of: (1) changes in volume of interest-earning assets
and interest-bearing liabilities and (2) changes in yields and rates. The table
reflects the extent to which changes in the Corporation’s interest income and
interest expense are attributable to changes in rate (change in rate multiplied
by prior year volume), changes in volume (changes in volume multiplied by prior
year rate) and changes attributable to the combined impact of volume/rate
(change in rate multiplied by change in volume). The changes attributable to the
combined impact of volume/rate are allocated on a consistent basis between the
volume and rate variances. Changes in interest income on loans and securities
reflect the changes in interest income on a fully tax equivalent
basis.





Three
      months ended June 30,
              2009
      versus 2008
              Increase
      (Decrease) due to(Dollar
      amounts in thousands)
            
            Volume
            
            
            Rate
            
            
            TotalInterest
      income:Loans
            
            $
            518
            
            
            $
            (301
            )
            
            $
            217Securities
            
            
            22
            
            
            
            (9
            )
            
            
            13Interest-earning
      deposits with banks
            
            
            62
            
            
            
            (11
            )
            
            
            51Federal
      bank stocks
            
            
            9
            
            
            
            (31
            )
            
            
            (22
            )Total
      interest-earning assets
            
            
            611
            
            
            
            (352
            )
            
            
            259Interest
      expense:Interest-bearing
      deposits
            
            
            259
            
            
            
            (392
            )
            
            
            (133
            )Borrowed
      funds
            
            
            (37
            )
            
            
            (19
            )
            
            
            (56
            )Total
      interest-bearing liabilities
            
            
            222
            
            
            
            (411
            )
            
            
            (189
            )Net
      interest income
            
            $
            389
            
            
            $
            59
            
            
            $
            448





Provision for loan losses. The
Corporation records provisions for loan losses to maintain a level of total
allowance for loan losses that management believes, to the best of its
knowledge, covers all known and inherent losses that are both probable and
reasonably estimable at each reporting date. Management considers historical
loss experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectability of the
loan portfolio.





Information
pertaining to the allowance for loan losses and non-performing assets for the
quarters ended June 30, 2009 and 2008 is as follows:





At
      or for the three months endedJune
      30,(Dollar
      amounts in thousands)
            
            2009
            
            
            2008Balance
      at the beginning of the period
            
            $
            2,885
            
            
            $
            2,218Provision
      for loan losses
            
            
            540
            
            
            
            85Charge-offs
            
            
            (501
            )
            
            
            (17
            )Recoveries
            
            
            11
            
            
            
            15Balance
      at the end of the period
            
            $
            2,935
            
            
            $
            2,301Non-performing
      loans
            
            $
            2,208
            
            
            $
            986Non-performing
      assets
            
            
            2,746
            
            
            
            1,030Non-performing
      loans to total loans
            
            
            0.81
            %
            
            
            0.40
            %Non-performing
      assets to total assets
            
            
            0.70
            %
            
            
            0.31
            %Allowance
      for loan losses to total loans
            
            
            1.08
            %
            
            
            0.94
            %Allowance
      for loan losses to non-performing loans
            
            
            132.94
            %
            
            
            233.37
            %




19




The
provision for loan losses increased $455,000 to $540,000 for the three month
period ended June 30, 2009 from $85,000 for the same period in the prior year.
This increase was attributable to management’s estimates of the impact on the
loan portfolio of credit defaults related to the continued economic climate, the
elevated level of charge-offs and the aforementioned loan growth.





Noninterest income.
Noninterest income increased $423,000 or 85.3% to $919,000 during the three
months ended June 30, 2009, compared to $496,000 during the same period in the
prior year. This increase was the result of gains of $184,000 recorded on the
sale of investment securities in 2009 compared to impairment charges of $275,000
recorded in 2008 related to certain marketable equity securities, increased
commissions earned on financial services and the addition of title premium
income in 2009 related to the Corporation’s newly formed title company in late
2008. Partially offsetting these favorable items was a decrease in customer
service fee income.





Noninterest expense.
Noninterest expense increased $603,000 or 26.3% to $2.9 million during the three
months ended June 30, 2009 compared to $2.3 million for the same period in 2008.
This increase in noninterest expense can be attributed to increases in
compensation and employee benefits, premises and equipment and other noninterest
expenses of $155,000, $25,000 and $423,000, respectively.





Compensation
and employee benefits increased $155,000 or 12.1% to $1.4 million for the three
months ended June 30, 2009 compared to $1.3 million for the same period in the
prior year. This increase can be attributed to the addition of personnel
associated with the Grove City, Pennsylvania branch office opened in the second
quarter of 2008 and general salary and wage increases.





Premises
and equipment increased $25,000 or 6.0% to $443,000 for the three months ended
June 30, 2009, compared to $418,000 for the same period in the prior year. This
increase was primarily related to costs associated with the aforementioned
branch office opening.





Other
noninterest expense increased $423,000 or 71.5% to $1.0 million during the three
months ended June 30, 2009, compared to $592,000 for the same period in the
prior year. This increase was primarily due to an increase in professional fees
associated with the Bank’s proposed purchase of a branch office in Titusville,
Pennsylvania and increased federal deposit insurance expense due to an increase
in the deposit insurance premium rate schedule, a five basis point special
assessment which was assessed on all FDIC insured depository institutions to be
collected on September 30, 2009, and the absence of deposit insurance credits in
2009 that reduced costs for 2008.





Provision for income taxes.
The provision for income taxes decreased $87,000 or 61.7% to $54,000 for the
three months ended June 30, 2009, compared to $141,000 for the same period in
the prior year. This decrease was due to lower pre-tax income and a lower
effective tax rate in 2009 compared to 2008.





Comparison
of Results for the Six Month Periods Ended June 30, 2009 and 2008





General. Net income decreased
$24,000 or 2.2% to $1.1 million for the six months ended June 30, 2009 compared
to the same period in 2008. This decrease was the result of increases in the
provision for loan losses and noninterest expense of $692,000 and $810,000,
respectively, partially offset by increases in net interest income and
noninterest income of $933,000 and $482,000, respectively, and a decrease in the
provision for income taxes of $63,000.





Net interest income. Net
interest income on a tax equivalent basis increased $978,000 or 18.4% to $6.3
million for the six months ended June 30, 2009 from $5.3 million for the same
period in 2008. This net increase can be attributed to an increase in tax
equivalent interest income of $761,000 and a decrease in interest expense of
$217,000.





Interest income. Interest
income on a tax equivalent basis increased $761,000 or 8.2% to $10.0 million for
the six months ended June 30, 2009, compared to $9.3 million for the same period
in the prior year. This increase can be attributed to increases in interest on
loans, securities and interest-earning deposits with banks of $540,000, $151,000
and $117,000, respectively, partially offset by a decrease in dividends on
federal bank stocks of $47,000.




20





Tax
equivalent interest earned on loans receivable increased $540,000 or 6.8% to
$8.5 million for the six months ended June 30, 2009, compared to $7.9 million
for the same period in 2008. This increase resulted primarily from average loans
increasing $39.4 million or 16.6%, accounting for $1.2 million in additional
loan interest income. This increase can be attributed to growth in the
Corporation’s commercial loan portfolios and loans acquired through the merger
of ECSLA in the fourth quarter of 2008. Offsetting this volume increase, the
yield on loans receivable decreased 55 basis points to 6.16% for the six months
ended June 30, 2009, versus 6.71% for the same period in 2008, due to a decline
in market interest rates, accounting for a $702,000 decrease in interest
income.





Tax
equivalent interest earned on securities increased $151,000 or 12.0% to $1.4
million for the six months ended June 30, 2009, compared to $1.3 million for the
same period in 2008. The average volume of securities increased $7.8 million or
15.4%, primarily through U.S. Government agency and mortgage-backed security
purchases, accounting for an $189,000 increase in interest income. Offsetting
this volume increase, the average yield on securities decreased 13 basis points
to 4.86% for the six months ended June 30, 2009, versus 4.99% for the same
period in 2008, due to declining market interest rates. This unfavorable yield
variance accounted for a $38,000 decrease in interest income.





Interest
earned on interest-earning deposit accounts increased $117,000 to $176,000 for
the six months ended June 30, 2009 from $59,000 for the same period in 2008. The
average volume of these assets increased $18.5 million, primarily due to
investments made in certificates of deposit with other financial institutions,
increasing interest income by $140,000. Offsetting this volume increase, the
average yield on interest-earning deposit accounts decreased 67 basis points to
1.59% for the six months ended June 30, 2009, compared to 2.26% for the same
period in the prior year, accounting for a $23,000 decrease in interest income.
This yield decrease was a result of the continued low interest rate environment
during 2008 and 2009.





Dividends
on federal bank stocks decreased $47,000 or 85.5% to $8,000 for the six month
period ended June 30, 2009 from $55,000 for the same period in 2008. The average
yield on these assets decreased 379 basis points to 0.41% for the six months
ended June 30, 2009, compared to 4.20% for the same period the prior year, due
to the FHLB suspending the payment of dividends as announced in late December
2008.





Interest expense. Interest
expense decreased $217,000 or 5.5% to $3.8 million for the six months ended June
30, 2009 compared to $4.0 million for the same period in 2008. This decrease in
interest expense can be attributed to a decrease in interest incurred on
deposits and borrowed funds of $165,000 and $52,000, respectively.





Interest
expense incurred on deposits decreased $165,000 or 5.3% to $3.0 million for the
six months ended June 30, 2009 compared $3.1 million for the same period in
2008. The cost of interest-bearing deposits decreased 65 basis points to 2.49%
for the six months ended June 30, 2009, compared to 3.14% for the same period in
2008 causing a $726,000 decrease in interest expense. This rate decrease was
primarily due to the continued decline in market interest rates during the
second half of 2008 and 2009. Partially offsetting this favorable rate variance,
the average volume of interest-bearing deposits increased $40.0 million or 20.0%
to $240.0 million for the six months ended June 30, 2009, compared to $200.0
million for the same period in 2008 causing a $561,000 increase in interest
expense. The acquisition of ECSLA and the opening of the Grove City,
Pennsylvania branch office in 2008 contributed to the increase in
deposits.





Interest
expense incurred on borrowed funds decreased $52,000 or 6.1% to $799,000 for the
six months ended June 30, 2009, compared to $851,000 for the same period in the
prior year. This decrease in interest expense can be attributed to a decrease in
the cost of borrowed funds of 81 basis points to 3.33% for the six months ended
June 30, 2009, compared to 4.14% for the same period in 2008 causing an $185,000
decrease in interest expense. This cost decrease was a result of the overall low
cost to borrow in late 2008 and 2009. Partially offsetting this cost decrease,
the average volume of borrowed funds increased $7.2 million or 17.3% to $48.5
million for the six months ended June 30, 2009, compared to $41.3 million for
the same period in 2008 causing a $133,000 increase in interest expense. This
volume increase was primarily related to an increase in short-term borrowings
utilized to fund certain investment security purchases.




21




Average Balance Sheet and Yield/Rate
Analysis. The following table sets forth, for the periods indicated,
information concerning the total dollar amounts of interest income from
interest-earning assets and the resulting average yields, the total dollar
amounts of interest expense on interest-bearing liabilities and the resulting
average costs, net interest income, interest rate spread and the net interest
margin earned on average interest-earning assets. For purposes of this table,
average loan balances include non-accrual loans and exclude the allowance for
loan losses and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt loans and securities (tax-exempt for federal
income tax purposes) are shown on a fully tax equivalent basis. The information
is based on average daily balances during the periods presented.





Six
      months ended June 30,2009
            
            
            2008Average
            
            
            
            
            
            Yield
      /
            
            
            Average
            
            
            
            
            
            Yield
      /Dollar
      amounts in thousands)
            
            Balance
            
            
            Interest
            
            
            Rate
            
            
            Balance
            
            
            Interest
            
            
            RateInterest-earning
      assets:Loans,
      taxable
            
            $
            260,137
            
            
            $
            8,129
            
            
            
            6.30
            %
            
            $
            231,135
            
            
            $
            7,727
            
            
            
            6.72
            %Loans,
      tax exempt
            
            
            16,499
            
            
            
            328
            
            
            
            4.01
            %
            
            
            6,078
            
            
            
            190
            
            
            
            6.29
            %Total
      loans receivable
            
            
            276,636
            
            
            
            8,457
            
            
            
            6.16
            %
            
            
            237,213
            
            
            
            7,917
            
            
            
            6.71
            %Securities,
      taxable
            
            
            43,191
            
            
            
            911
            
            
            
            4.25
            %
            
            
            36,296
            
            
            
            789
            
            
            
            4.37
            %Securities,
      tax exempt
            
            
            15,257
            
            
            
            497
            
            
            
            6.57
            %
            
            
            14,346
            
            
            
            468
            
            
            
            6.56
            %Total
      securities
            
            
            58,448
            
            
            
            1,408
            
            
            
            4.86
            %
            
            
            50,642
            
            
            
            1,257
            
            
            
            4.99
            %Interest-earning
      deposits with banks
            
            
            22,379
            
            
            
            176
            
            
            
            1.59
            %
            
            
            5,249
            
            
            
            59
            
            
            
            2.26
            %Federal
      bank stocks
            
            
            3,962
            
            
            
            8
            
            
            
            0.41
            %
            
            
            2,635
            
            
            
            55
            
            
            
            4.20
            %Total
      interest-earning cash equivalents
            
            
            26,341
            
            
            
            184
            
            
            
            1.41
            %
            
            
            7,884
            
            
            
            114
            
            
            
            2.91
            %Total
      interest-earning assets
            
            
            361,424
            
            
            
            10,049
            
            
            
            5.61
            %
            
            
            295,739
            
            
            
            9,288
            
            
            
            6.32
            %Cash
      and due from banks
            
            
            2,174
            
            
            
            
            
            
            
            
            
            
            
            5,399Other
      noninterest-earning assets
            
            
            16,544
            
            
            
            
            
            
            
            
            
            
            
            14,601Total
      assets
            
            $
            380,143
            
            
            
            
            
            
            
            
            
            
            $
            315,739Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            112,987
            
            
            
            572
            
            
            
            1.02
            %
            
            $
            83,035
            
            
            
            594
            
            
            
            1.44
            %Time
      deposits
            
            
            127,059
            
            
            
            2,389
            
            
            
            3.79
            %
            
            
            117,014
            
            
            
            2,532
            
            
            
            4.35
            %Total
      interest-bearing deposits
            
            
            240,046
            
            
            
            2,961
            
            
            
            2.49
            %
            
            
            200,049
            
            
            
            3,126
            
            
            
            3.14
            %Borrowed
      funds, long-term
            
            
            35,000
            
            
            
            772
            
            
            
            4.45
            %
            
            
            35,000
            
            
            
            782
            
            
            
            4.49
            %Borrowed
      funds, short-term
            
            
            13,473
            
            
            
            28
            
            
            
            0.42
            %
            
            
            6,319
            
            
            
            69
            
            
            
            2.20
            %Total
      borrowed funds
            
            
            48,473
            
            
            
            799
            
            
            
            3.33
            %
            
            
            41,319
            
            
            
            851
            
            
            
            4.14
            %Total
      interest-bearing liabilities
            
            
            288,520
            
            
            
            3,760
            
            
            
            2.63
            %
            
            
            241,368
            
            
            
            3,977
            
            
            
            3.31
            %Noninterest-bearing
      demand deposits
            
            
            51,542
            
            
            
            -
            
            
            
            -
            
            
            
            47,018
            
            
            
            -
            
            
            
            -Funding
      and cost of funds
            
            
            340,062
            
            
            
            3,760
            
            
            
            2.23
            %
            
            
            288,386
            
            
            
            3,977
            
            
            
            2.77
            %Other
      noninterest-bearing liabilities
            
            
            4,048
            
            
            
            
            
            
            
            
            
            
            
            2,428Total
      liabilities
            
            
            344,110
            
            
            
            
            
            
            
            
            
            
            
            290,814Stockholders'
      equity
            
            
            36,032
            
            
            
            
            
            
            
            
            
            
            
            24,925Total
      liabilities and stockholders' equity
            
            $
            380,143
            
            
            
            
            
            
            
            
            
            
            $
            315,739Net
      interest income
            
            
            
            
            
            $
            6,288
            
            
            
            
            
            
            
            
            
            
            $
            5,311Interest rate spread(difference between weighted average rate on interest-earning
      assets and interest-bearing liabilities)
            
            
            
            
            
            
            
            
            
            
            2.98
            %
            
            
            
            
            
            
            
            
            
            
            3.01
            %Net interest margin(net
      interest income as a percentage of average interest-earning
      assets)
            
            
            
            
            
            
            
            
            
            
            3.51
            %
            
            
            
            
            
            
            
            
            
            
            3.61
            %




22




Analysis of Changes in Net Interest
Income. The following table analyzes the changes in interest income and
interest expense in terms of: (1) changes in volume of interest-earning assets
and interest-bearing liabilities and (2) changes in yields and rates. The table
reflects the extent to which changes in the Corporation’s interest income and
interest expense are attributable to changes in rate (change in rate multiplied
by prior year volume), changes in volume (changes in volume multiplied by prior
year rate) and changes attributable to the combined impact of volume/rate
(change in rate multiplied by change in volume). The changes attributable to the
combined impact of volume/rate are allocated on a consistent basis between the
volume and rate variances. Changes in interest income on loans and securities
reflect the changes in interest income on a fully tax equivalent
basis.





Six
      months ended June 30,
              2009
      versus 2008
              Increase
      (Decrease) due to(Dollar
      amounts in thousands)
            
            Volume
            
            
            Rate
            
            
            TotalInterest
      income:Loans
            
            $
            1,242
            
            
            $
            (702
            )
            
            $
            540Securities
            
            
            189
            
            
            
            (38
            )
            
            
            151Interest-earning
      deposits with banks
            
            
            140
            
            
            
            (23
            )
            
            
            117Federal
      bank stocks
            
            
            19
            
            
            
            (66
            )
            
            
            (47
            )Total
      interest-earning assets
            
            
            1,590
            
            
            
            (829
            )
            
            
            761Interest
      expense:Deposits
            
            
            561
            
            
            
            (726
            )
            
            
            (165
            )Borrowed
      funds
            
            
            133
            
            
            
            (185
            )
            
            
            (52
            )Total
      interest-bearing liabilities
            
            
            694
            
            
            
            (911
            )
            
            
            (217
            )Net
      interest income
            
            $
            896
            
            
            $
            82
            
            
            $
            978




Provision for loan losses. The
Corporation records provisions for loan losses to maintain a level of total
allowance for loan losses that management believes, to the best of its
knowledge, covers all known and inherent losses that are both probable and
reasonably estimable at each reporting date. Management considers historical
loss experience, the present and prospective financial condition of borrowers,
current conditions (particularly as they relate to markets where the Corporation
originates loans), the status of non-performing assets, the estimated underlying
value of the collateral and other factors related to the collectability of the
loan portfolio.





Information
pertaining to the allowance for loan losses and non-performing assets for the
quarters ended June 30, 2009 and 2008 is as follows:





At
      or for the six months
              endedJune
      30,
            
            
            At
      or for the year ended
              December
      31,(Dollar amounts in
      thousands)
            
            2009
            
            
            2008
            
            
            2008Balance
      at the beginning of the period
            
            $
            2,651
            
            
            $
            2,157
            
            
            $
            2,157Allowance
      for loan losses of ECSLA
            
            
            -
            
            
            
            -
            
            
            
            206Provision
      for loan losses
            
            
            837
            
            
            
            145
            
            
            
            500Charge-offs
            
            
            (572
            )
            
            
            (27
            )
            
            
            (252
            )Recoveries
            
            
            19
            
            
            
            26
            
            
            
            40Balance
      at the end of the period
            
            $
            2,935
            
            
            $
            2,301
            
            
            $
            2,651Non-performing
      loans
            
            $
            2,208
            
            
            $
            986
            
            
            
            1,011Non-performing
      assets
            
            
            2,746
            
            
            
            1,030
            
            
            
            1,061Non-performing
      loans to total loans
            
            
            0.81
            %
            
            
            0.40
            %
            
            
            0.38
            %Non-performing
      assets to total assets
            
            
            0.70
            %
            
            
            0.31
            %
            
            
            0.28
            %Allowance
      for loan losses to total loans
            
            
            1.08
            %
            
            
            0.94
            %
            
            
            0.99
            %Allowance
      for loan losses to non-performing loans
            
            
            132.94
            %
            
            
            233.37
            %
            
            
            262.22
            %




23




The
provision for loan losses increased $692,000 to $837,000 for the six month
period ended June 30, 2009 from $145,000 for the same period in the prior year.
This increase was attributable to management’s estimates of the impact on the
loan portfolio of credit defaults related to the continued economic climate, the
increased level of charge-offs and the aforementioned loan growth.





Noninterest income.
Noninterest income increased $482,000 or 41.7% to $1.6 million during the six
months ended June 30, 2009, compared to $1.2 million during the same period in
the prior year. This increase can primarily be attributed to gains of $240,000
recorded on the sale of investment securities in 2009 compared to impairment
charges of $275,000 recorded in 2008 related to the deterioration of certain
marketable equity securities. Also, commissions earned on financial services and
title company revenue were higher in 2009 due to increased activity. Partially
offsetting these items was a decrease in customer service fees.





Noninterest expense.
Noninterest expense increased $811,000 or 17.2% to $5.5 million during the six
months ended June 30, 2009 compared to $4.7 million for the same period in 2008.
This increase in noninterest expense can be attributed to an increase in
compensation and employee benefits, premises and equipment and other noninterest
expenses of $175,000, $86,000 and $549,000, respectively.





Compensation
and employee benefits increased $175,000 or 6.5% to $2.9 million for the six
months ended June 30, 2009 compared to $2.7 million for the same period in 2008.
This increase can be attributed primarily to the addition of personnel
associated with the 2008 Grove City, Pennsylvania branch office opening and
normal salary and wage increases.





Premises
and equipment increased $86,000 or 10.3% to $925,000 for the six months ended
June 30, 2009, compared to $839,000 for the same period in the prior year. This
increase was primarily related to added costs associated with the aforementioned
branch office opening as well as higher than normal winter maintenance
costs.





Other
noninterest expense increased $549,000 or 47.0% to $1.7 million during the six
months ended June 30, 2009, compared to $1.2 million for the same period in the
prior year. This increase was primarily associated with an increase in
professional fees related to the Bank’s proposed purchase of a branch office in
Titusville, PA and increased federal deposit insurance expense due to an
increase in the deposit insurance premium rate schedule, a five basis point
special assessment which was assessed on all FDIC insured depository
institutions to be collected on September 30, 2009, and the absence of deposit
insurance credits in 2009 that reduced costs for 2008.





Provision for income taxes.
The provision for income taxes decreased $63,000 or 20.3% to $248,000 for the
six months ended June 30, 2009, compared to $311,000 for the same period in the
prior year. This decrease was a result of lower pre-tax income and a lower
effective tax rate in 2009 versus 2008.





LIQUIDITY





The
Corporation’s primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and Federal Reserve
and amortization and prepayments of outstanding loans and maturing securities.
During the six months ended June 30, 2009, the Corporation used its sources of
funds primarily to fund loan originations and security purchases. As of such
date, the Corporation had outstanding loan commitments, including undisbursed
loans and amounts available under credit lines, totaling $24.9 million, and
standby letters of credit totaling $1.0 million.





At June
30, 2009, time deposits amounted to $119.2 million or 40.8% of the Corporation’s
total consolidated deposits, including approximately $35.4 million of which are
scheduled to mature within the next year. Management of the Corporation believes
it has adequate resources to fund all of its commitments, all of its commitments
will be funded as required by related maturity dates and based upon past
experience and current pricing policies it can adjust the rates of time deposits
to retain a substantial portion of maturing liabilities.




24




Aside
from liquidity available from customer deposits or through sales and maturities
of securities, the Corporation has alternative sources of funds such as a term
borrowing capacity from the FHLB and the Federal Reserve’s Term Auction Facility
and Discount Window. At June 30, 2009, the Corporation’s borrowing capacity with
the FHLB, net of funds borrowed, was $151.3 million.





Management
is not aware of any conditions, including any regulatory recommendations or
requirements, which would adversely impact its liquidity or its ability to meet
funding needs in the ordinary course of business.





CRITICAL
ACCOUNTING POLICIES





Management
views critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions and where changes in
those estimates and assumptions could have a significant impact on the financial
statements. Management currently views the determination of the allowance for
loan losses and the evaluation of securities for other than temporary impairment
as critical accounting policies.





The
allowance for loan losses provides for an estimate of probable losses in the
loan portfolio. In determining the appropriate level of the allowance for loan
losses, the loan portfolio is separated into risk-rated and homogeneous pools.
Migration analysis/historical loss rates, adjusted for relevant trends, have
been applied to these pools. Qualitative adjustments are then applied to the
portfolio to allow for quality of lending policies and procedures, national and
local economic and business conditions, changes in the nature and volume of the
portfolio, experience, ability and depth of lending management, changes in the
trends, volumes and severity of past due, non-accrual and classified loans and
loss and recovery trends, quality of the Corporation’s loan review system,
concentrations of credit, and external factors. The methodology used to
determine the adequacy of the Corporation’s allowance for loan losses is
comprehensive and meets regulatory and accounting industry standards for
assessing the allowance, however, it is still an estimate. Loan losses are
charged against the allowance while recoveries of amounts previously charged-off
are credited to the allowance. Loan loss provisions are charged against current
earnings based on management’s periodic evaluation and review of the factors
indicated above.





Management
evaluates securities for other than temporary impairment at least on a quarterly
basis, and more frequently when economic, market or other concerns warrant such
evaluation. Consideration is given to: (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) whether the Corporation has the intent
or need to sell an investment prior to recovery or maturity.





Item 3.Quantitative and Qualitative
Disclosures About Market Risk





Market
risk for the Corporation consists primarily of interest rate risk exposure and
liquidity risk. Since virtually all of the interest-earning assets and
interest-bearing liabilities are at the Bank, virtually all of the interest rate
risk and liquidity risk lies at the Bank level. The Bank is not subject to
currency exchange risk or commodity price risk, and has no trading portfolio,
and therefore, is not subject to any trading risk. In addition, the Bank does
not participate in hedging transactions such as interest rate swaps and caps.
Changes in interest rates will impact both income and expense recorded and also
the market value of long-term interest-earning assets and interest-bearing
liabilities. Interest rate risk and liquidity risk management is performed at
the Bank level. Although the Bank has a diversified loan portfolio, loans
outstanding to individuals and businesses depend upon the local economic
conditions in the immediate trade area.





One of
the primary functions of the Corporation’s asset/liability management committee
is to monitor the level to which the balance sheet is subject to interest rate
risk. The goal of the asset/liability committee is to manage the relationship
between interest rate sensitive assets and liabilities, thereby minimizing the
fluctuations in the net interest margin, which achieves consistent growth of net
interest income during periods of changing interest rates.




25





Interest
rate sensitivity is the result of differences in the amounts and repricing dates
of the Bank’s rate sensitive assets and rate sensitive liabilities. These
differences, or interest rate repricing “gap”, provide an indication of the
extent that the Corporation’s net interest income is affected by future changes
in interest rates. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities
and is considered negative when the amount of interest rate-sensitive
liabilities exceeds the amount of interest rate-sensitive assets. Generally,
during a period of rising interest rates, a negative gap would adversely affect
net interest income while a positive gap would result in an increase in net
interest income. Conversely, during a period of falling interest rates, a
negative gap would result in an increase in net interest income and a positive
gap would adversely affect net interest income. The closer to zero that gap is
maintained, generally, the lesser the impact of market interest rate changes on
net interest income.





Based on
certain assumptions provided by a federal regulatory agency, which management
believes most accurately represents the sensitivity of the Corporation’s assets
and liabilities to interest rate changes, at June 30, 2009, the
Corporation’s interest-earning assets maturing or repricing within one year
totaled $124.6 million while the Corporation’s interest-bearing liabilities
maturing or repricing within one-year totaled $140.0 million, providing an
excess of interest-bearing liabilities over interest-earning assets of
$15.4 million. At June 30, 2009, the percentage of the Corporation’s assets
to liabilities maturing or repricing within one year was 89.0%.





For more
information, see “Market Risk Management” in the Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2008.





Item 4T. Controls and
Procedures





The
Corporation maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Corporation’s Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Corporation’s management, including its
Chief Executive Officer (CEO) and Principal Accounting Officer (PAO), as
appropriate, to allow timely decisions regarding required disclosure based on
the definition of “disclosure controls and procedures” in Rule
13a-15(e).





There has
been no change made in the Corporation’s internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the Corporation’s internal control
over financial reporting.





As of
June 30, 2009, the Corporation carried out an evaluation, under the supervision
and with the participation of the Corporation’s management, including the
Corporation’s CEO and PAO, of the effectiveness of the design and operation of
the Corporation’s disclosure controls and procedures. Based on the foregoing,
the Corporation’s CEO and PAO concluded that the Corporation’s disclosure
controls and procedures were effective. There have been no significant changes
in the Corporation’s internal controls or in other factors that could
significantly affect the internal controls subsequent to the date the
Corporation completed its evaluation.





PART II - OTHER
INFORMATION





Item 1. Legal
Proceedings





The
Corporation is involved in various legal proceedings occurring in the ordinary
course of business. It is the opinion of management, after consultation with
legal counsel, that these matters will not materially affect the Corporation’s
consolidated financial position or results of operations.





Item 1A. Risk
Factors





There
have been no material changes in the Corporation’s risk factors from those
previously disclosed in the 2008 Form 10-K.




26





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





None.





Item 3. Defaults Upon Senior
Securities





None.





Item 4. Submission of
Matters to a Vote of Security Holders




(a)
            The
      annual meeting of stockholders of the Corporation was held April 22, 2009.
      Of 1,431,404 common shares eligible to vote, 1,091,425 or 76.2% were voted
      in person or by proxy.





(b)
            The
      following Class B directors were elected for a three year term expiring in
      2012:





Name
            
            Shares
      For
            
            
            Shares
      WithheldRonald
      L. Ashbaugh
            
            
            987,094
            
            
            
            104,331George
      W. Freeman
            
            
            950,837
            
            
            
            140,588William
      C. Marsh
            
            
            1,077,172
            
            
            
            14,253Brian
      C. McCarrier
            
            
            1,077,891
            
            
            
            13,534





In
addition to the above listed individuals, the following persons continue to
serve as directors: David L. Cox, James M. Crooks, Mark A. Freemer, Robert L.
Hunter and John B. Mason.





The
recommendation of the Board of Directors to ratify the appointment of Beard
Miller Company LLP as the Corporation’s independent auditors, as described in
the proxy statement for the annual meeting was approved with 1,080,414 shares in
favor, 7,990 shares against and 3,021 shares abstained.





The
recommendation of the Board of Directors to approve the compensation of the
Corporation’s executives, as detailed in the proxy statement for the annual
meeting was approved with 930,066 shares in favor, 132,815 shares against and
28,544 shares abstained.





Item 5. Other
Information





(a)
            Not
      applicable.





(b)
            Not
      applicable.





Item 6.
Exhibits





Exhibit
      31.1
            
            Rule
      13a-14(a) Certification of Principal Executive OfficerExhibit
      31.2
            
            Rule
      13a-14(a) Certification of Principal Accounting OfficerExhibit
      32.1
            
            CEO
      Certification Pursuant to 18 U.S.C. Section 1350Exhibit
      32.2
            
            CFO
      Certification Pursuant to 18 U.S.C. Section
1350




27




Signatures





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






EMCLAIRE
      FINANCIAL CORP. AND SUBSIDIARIESDate:
      August 14, 2009
              By:
              /s/ William C.
      MarshWilliam
      C. MarshChairman
      of the Board,President
      and Chief Executive Officer


Date:
      August 14, 2009
              By:
              /s/ Amanda L.
      EnglesAmanda
      L. EnglesTreasurer
      and Principal Accounting Officer
  28