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 September
30, 2009





or





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





For the
transition period from _____________ to _____________





Commission
File Number:  000-18464





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   x     No    ̈





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





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





Large
accelerated filer  ̈
Accelerated filer  ̈
Non-accelerated filer  ̈
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    ̈      No   x





The
number of shares outstanding of the Registrant’s common stock was 1,431,404 at
November 2, 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 ofSeptember
      30, 2009 and December 31, 2008
                                                
                                                
                                                1Consolidated
      Statements of Operations for the three and ninemonths
      ended September 30, 2009 and 2008
                                                
                                                
                                                2Consolidated
      Statements of Cash Flows for the ninemonths
      ended September 30, 2009 and 2008
                                                
                                                
                                                3Consolidated
      Statements of Changes in Stockholders’Equity
      for the three and nine months ended September 30, 2009 and
      2008
                                                
                                                
                                                4Notes
      to Consolidated Financial Statements
                                                
                                                
                                                5Item
      2.
                                                Management’s
      Discussion and Analysisof
      Financial Condition and Results of Operations
                                                
                                                
                                                15Item
      3.
                                                Quantitative
      and Qualitative Disclosures About Market Risk
                                                
                                                
                                                29Item
      4T.
                                                Controls
      and Procedures
                                                
                                                
                                                29PART II – OTHER
  INFORMATIONItem
      1.
                                                Legal
      Proceedings
                                                
                                                
                                                30Item
      1A.
                                                Risk
      Factors
                                                
                                                
                                                30Item
      2.
                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                
                                                
                                                35Item
      3.
                                                Defaults
      Upon Senior Securities
                                                
                                                
                                                35Item
      4.
                                                Submission
      of Matters to a Vote of Security Holders
                                                
                                                
                                                35Item
      5.
                                                Other
      Information
                                                
                                                
                                                35Item
      6.
                                                Exhibits
                                                
                                                
                                                35Signatures
                                                
                                                
                                                36







PART I - FINANCIAL
INFORMATION





Item 1.  Interim
Financial Statements





Emclaire
Financial Corp. and Subsidiaries


Consolidated
Balance Sheets (Unaudited)


As of
September 30, 2009 and December 31, 2008


(Dollar
amounts in thousands, except share data)





September
      30,
                                    
                                    
                                    December
      31,2009
                                    
                                    
                                    2008AssetsCash
      and due from banks
                                    
                                    $
                                    2,635
                                    
                                    
                                    $
                                    4,292Interest
      earning deposits with banks
                                    
                                    
                                    44,943
                                    
                                    
                                    
                                    12,279Cash
      and cash equivalents
                                    
                                    
                                    47,578
                                    
                                    
                                    
                                    16,571Securities
      available for sale, at fair value
                                    
                                    
                                    83,684
                                    
                                    
                                    
                                    71,443Loans
      receivable, net of allowance for loan losses of $3,158 and
      $2,651
                                    
                                    
                                    298,608
                                    
                                    
                                    
                                    264,838Federal
      bank stocks, at cost
                                    
                                    
                                    4,125
                                    
                                    
                                    
                                    3,797Bank-owned
      life insurance
                                    
                                    
                                    5,336
                                    
                                    
                                    
                                    5,186Accrued
      interest receivable
                                    
                                    
                                    1,732
                                    
                                    
                                    
                                    1,519Premises
      and equipment, net
                                    
                                    
                                    9,299
                                    
                                    
                                    
                                    8,609Goodwill
                                    
                                    
                                    3,635
                                    
                                    
                                    
                                    1,422Core
      deposit intangible
                                    
                                    
                                    2,736
                                    
                                    
                                    
                                    -Prepaid
      expenses and other assets
                                    
                                    
                                    2,550
                                    
                                    
                                    
                                    2,279Total
      Assets
                                    
                                    $
                                    459,283
                                    
                                    
                                    $
                                    375,664Liabilities and Stockholders'
      EquityLiabilities:Deposits:Non-interest
      bearing
                                    
                                    $
                                    67,743
                                    
                                    
                                    $
                                    56,351Interest
      bearing
                                    
                                    
                                    310,343
                                    
                                    
                                    
                                    230,296Total
      deposits
                                    
                                    
                                    378,086
                                    
                                    
                                    
                                    286,647Short-term
      borrowed funds
                                    
                                    
                                    5,000
                                    
                                    
                                    
                                    13,188Long-term
      borrowed funds
                                    
                                    
                                    35,000
                                    
                                    
                                    
                                    35,000Accrued
      interest payable
                                    
                                    
                                    749
                                    
                                    
                                    
                                    761Accrued
      expenses and other liabilities
                                    
                                    
                                    2,953
                                    
                                    
                                    
                                    3,945Total
      Liabilities
                                    
                                    
                                    421,788
                                    
                                    
                                    
                                    339,541Commitments
      and Contingencies
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Stockholders'
      Equity:Preferred
      stock, $1.00 par value, 3,000,000 shares authorized;7,500 issued and
      outstanding
                                    
                                    
                                    7,426
                                    
                                    
                                    
                                    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
                                    
                                    
                                    14,651
                                    
                                    
                                    
                                    14,564Treasury
      stock, at cost; 128,017 shares
                                    
                                    
                                    (2,653
                                    )
                                    
                                    
                                    (2,653
                                    )Retained
      earnings
                                    
                                    
                                    15,793
                                    
                                    
                                    
                                    15,840Accumulated
      other comprehensive income (loss)
                                    
                                    
                                    241
                                    
                                    
                                    
                                    (1,077
                                    )Total
      Stockholders' Equity
                                    
                                    
                                    37,495
                                    
                                    
                                    
                                    36,123Total
      Liabilities and Stockholders' Equity
                                    
                                    $
                                    459,283
                                    
                                    
                                    $
                                    375,664





See
accompanying notes to consolidated financial statements.


1


Emclaire
Financial Corp. and Subsidiaries


Consolidated
Statements of Operations (Unaudited)


For the
three and nine months ended September 30, 2009 and 2008


(Dollar
amounts in thousands, except per share data)





For
      the three months ended
                                        
                                        
                                        For
      the nine months endedSeptember
      30,
                                        
                                        
                                        September
      30,2009
                                        
                                        
                                        2008
                                        
                                        
                                        2009
                                        
                                        
                                        2008Interest
      and dividend income:Loans
      receivable, including fees
                                        
                                        $
                                        4,279
                                        
                                        
                                        $
                                        4,059
                                        
                                        
                                        $
                                        12,641
                                        
                                        
                                        $
                                        11,916Securities:Taxable
                                        
                                        
                                        468
                                        
                                        
                                        
                                        550
                                        
                                        
                                        
                                        1,379
                                        
                                        
                                        
                                        1,339Exempt
      from federal income tax
                                        
                                        
                                        254
                                        
                                        
                                        
                                        159
                                        
                                        
                                        
                                        596
                                        
                                        
                                        
                                        482Federal
      bank stocks
                                        
                                        
                                        10
                                        
                                        
                                        
                                        26
                                        
                                        
                                        
                                        19
                                        
                                        
                                        
                                        82Interest
      earning deposits with banks
                                        
                                        
                                        101
                                        
                                        
                                        
                                        53
                                        
                                        
                                        
                                        277
                                        
                                        
                                        
                                        112Total
      interest and dividend income
                                        
                                        
                                        5,112
                                        
                                        
                                        
                                        4,847
                                        
                                        
                                        
                                        14,912
                                        
                                        
                                        
                                        13,931Interest
      expense:Deposits
                                        
                                        
                                        1,427
                                        
                                        
                                        
                                        1,650
                                        
                                        
                                        
                                        4,388
                                        
                                        
                                        
                                        4,776Borrowed
      funds
                                        
                                        
                                        433
                                        
                                        
                                        
                                        467
                                        
                                        
                                        
                                        1,232
                                        
                                        
                                        
                                        1,318Total
      interest expense
                                        
                                        
                                        1,860
                                        
                                        
                                        
                                        2,117
                                        
                                        
                                        
                                        5,620
                                        
                                        
                                        
                                        6,094Net
      interest income
                                        
                                        
                                        3,252
                                        
                                        
                                        
                                        2,730
                                        
                                        
                                        
                                        9,292
                                        
                                        
                                        
                                        7,837Provision
      for loan losses
                                        
                                        
                                        240
                                        
                                        
                                        
                                        140
                                        
                                        
                                        
                                        1,077
                                        
                                        
                                        
                                        285Net
      interest income after provision for loan losses
                                        
                                        
                                        3,012
                                        
                                        
                                        
                                        2,590
                                        
                                        
                                        
                                        8,215
                                        
                                        
                                        
                                        7,552Noninterest
      income:Fees
      and service charges
                                        
                                        
                                        382
                                        
                                        
                                        
                                        446
                                        
                                        
                                        
                                        1,104
                                        
                                        
                                        
                                        1,211Commissions
      on financial services
                                        
                                        
                                        75
                                        
                                        
                                        
                                        108
                                        
                                        
                                        
                                        327
                                        
                                        
                                        
                                        354Net
      loss on available for sale securities
                                        
                                        
                                        (691
                                        )
                                        
                                        
                                        (116
                                        )
                                        
                                        
                                        (451
                                        )
                                        
                                        
                                        (391
                                        )Net
      gain on sales of loans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        8Earnings
      on bank-owned life insurance
                                        
                                        
                                        57
                                        
                                        
                                        
                                        58
                                        
                                        
                                        
                                        171
                                        
                                        
                                        
                                        171Other
                                        
                                        
                                        189
                                        
                                        
                                        
                                        124
                                        
                                        
                                        
                                        497
                                        
                                        
                                        
                                        424Total
      noninterest income
                                        
                                        
                                        12
                                        
                                        
                                        
                                        620
                                        
                                        
                                        
                                        1,652
                                        
                                        
                                        
                                        1,777Noninterest
      expense:Compensation
      and employee benefits
                                        
                                        
                                        1,549
                                        
                                        
                                        
                                        1,261
                                        
                                        
                                        
                                        4,424
                                        
                                        
                                        
                                        3,961Premises
      and equipment
                                        
                                        
                                        472
                                        
                                        
                                        
                                        409
                                        
                                        
                                        
                                        1,396
                                        
                                        
                                        
                                        1,247Intangible
      amortization expense
                                        
                                        
                                        51
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        51
                                        
                                        
                                        
                                        -Professional
      fees
                                        
                                        
                                        299
                                        
                                        
                                        
                                        102
                                        
                                        
                                        
                                        733
                                        
                                        
                                        
                                        280FDIC
      expense
                                        
                                        
                                        104
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        377
                                        
                                        
                                        
                                        41Other
                                        
                                        
                                        780
                                        
                                        
                                        
                                        497
                                        
                                        
                                        
                                        1,792
                                        
                                        
                                        
                                        1,474Total
      noninterest expense
                                        
                                        
                                        3,255
                                        
                                        
                                        
                                        2,296
                                        
                                        
                                        
                                        8,773
                                        
                                        
                                        
                                        7,003Income
      (loss) before income taxes
                                        
                                        
                                        (231
                                        )
                                        
                                        
                                        914
                                        
                                        
                                        
                                        1,094
                                        
                                        
                                        
                                        2,326Provision
      for (benefit from) income taxes
                                        
                                        
                                        (221
                                        )
                                        
                                        
                                        198
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        510Net
      income (loss)
                                        
                                        
                                        (10
                                        )
                                        
                                        
                                        716
                                        
                                        
                                        
                                        1,067
                                        
                                        
                                        
                                        1,816Accumulated
      preferred stock dividends and discount accretion
                                        
                                        
                                        98
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        294
                                        
                                        
                                        
                                        -Net
      income (loss) to common stockholders
                                        
                                        $
                                        (108
                                        )
                                        
                                        $
                                        716
                                        
                                        
                                        $
                                        773
                                        
                                        
                                        $
                                        1,816Basic
      and diluted earnings per common share
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        0.56
                                        
                                        
                                        $
                                        0.54
                                        
                                        
                                        $
                                        1.43Average
      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
nine months ended September 30, 2009 and 2008


(Dollar
amounts in thousands)





For
      the nine months endedSeptember
      30,2009
                          
                          
                          2008Cash
      flows from operating activitiesNet
      income
                          
                          $
                          1,067
                          
                          
                          $
                          1,816Adjustments
      to reconcile net income to net cash providedby operating
      activities:Depreciation
      and amortization of premises and equipment
                          
                          
                          633
                          
                          
                          
                          518Provision
      for loan losses
                          
                          
                          1,077
                          
                          
                          
                          285Accretion
      of discounts
                          
                          
                          (77
                          )
                          
                          
                          (124
                          )Amortization
      of intangible assets and mortgage servicing rights
                          
                          
                          64
                          
                          
                          
                          13Amortization
      of deferred loan costs
                          
                          
                          204
                          
                          
                          
                          209Realized
      loss on available for sale securities, net
                          
                          
                          451
                          
                          
                          
                          391Net
      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
                          
                          
                          87
                          
                          
                          
                          83Earnings
      on bank-owned life insurance, net
                          
                          
                          (150
                          )
                          
                          
                          (150
                          )Gain
      on sale of premises and equipment
                          
                          
                          (16
                          )
                          
                          
                          -Increase
      in accrued interest receivable
                          
                          
                          (70
                          )
                          
                          
                          (8
                          )Increase
      in prepaid expenses and other assets
                          
                          
                          (846
                          )
                          
                          
                          (387
                          )Increase
      (decrease) in accrued interest payable
                          
                          
                          (12
                          )
                          
                          
                          70Increase
      (decrease) in accrued expenses and other liabilities
                          
                          
                          (992
                          )
                          
                          
                          2,493Net
      cash provided by operating activities
                          
                          
                          1,420
                          
                          
                          
                          5,199Cash
      flows from investing activitiesLoan
      originations and principal collections, net
                          
                          
                          (2,825
                          )
                          
                          
                          (21,716
                          )Available
      for sale securities:Sales
                          
                          
                          12,943
                          
                          
                          
                          -Maturities,
      repayments and calls
                          
                          
                          32,187
                          
                          
                          
                          61,518Purchases
                          
                          
                          (55,735
                          )
                          
                          
                          (67,664
                          )Purchase
      of federal bank stocks
                          
                          
                          (328
                          )
                          
                          
                          (228
                          )Proceeds
      from the sale of bank premises and equipment
                          
                          
                          203
                          
                          
                          
                          -Proceeds
      from the sale of foreclosed real estate
                          
                          
                          96
                          
                          
                          
                          -Net
      cash received in branch acquisition
                          
                          
                          54,923
                          
                          
                          
                          -Purchases
      of premises and equipment
                          
                          
                          (1,432
                          )
                          
                          
                          (771
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          40,032
                          
                          
                          
                          (28,861
                          )Cash
      flows from financing activitiesNet
      increase (decrease) in deposits
                          
                          
                          (1,156
                          )
                          
                          
                          34,089Net
      change in short-term borrowed funds
                          
                          
                          (8,188
                          )
                          
                          
                          7,860Dividends
      paid
                          
                          
                          (1,101
                          )
                          
                          
                          (1,217
                          )Net
      cash provided by (used by) financing activities
                          
                          
                          (10,445
                          )
                          
                          
                          40,732Net
      increase in cash and cash equivalents
                          
                          
                          31,007
                          
                          
                          
                          17,070Cash
      and cash equivalents at beginning of period
                          
                          
                          16,571
                          
                          
                          
                          10,483Cash
      and cash equivalents at end of period
                          
                          $
                          47,578
                          
                          
                          $
                          27,553Supplemental
      information:Interest
      paid
                          
                          $
                          5,632
                          
                          
                          $
                          6,024Income
      taxes paid
                          
                          
                          183
                          
                          
                          
                          270Supplemental
      noncash disclosure:Transfers
      from loans to foreclosed real estate
                          
                          
                          200
                          
                          
                          
                          130Summary
      of branch acquisition:Fair
      value of deposits assumed
                          
                          
                          92,596
                          
                          
                          
                          -Less:  Fair
      value of tangible assets acquired
                          
                          
                          32,673
                          
                          
                          
                          -Cash
      received in acquisition
                          
                          
                          54,923
                          
                          
                          
                          -Goodwill
      and other intangibles recorded
                          
                          $
                          5,000
                          
                          
                          $
                          -





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 nine months ended September 30, 2009 and 2008


(Dollar
amounts in thousands, except per share data)





For
      the three months ended
                        
                        
                        For
      the nine months endedSeptember
      30,
                        
                        
                        September
      30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Balance
      at beginning of period
                        
                        $
                        35,672
                        
                        
                        $
                        25,005
                        
                        
                        $
                        36,123
                        
                        
                        $
                        24,703Net
      income (loss)
                        
                        
                        (10
                        )
                        
                        
                        716
                        
                        
                        
                        1,067
                        
                        
                        
                        1,816Other
      comprehensive income (loss):Change
      in net unrealized gains (losses) on available for sale securities, net of
      taxes
                        
                        
                        1,638
                        
                        
                        
                        (43
                        )
                        
                        
                        1,021
                        
                        
                        
                        (263
                        )Less
      reclassification adjustment for gains (losses) included in net income, net
      of taxes
                        
                        
                        457
                        
                        
                        
                        76
                        
                        
                        
                        298
                        
                        
                        
                        257Other
      comprehensive income (loss)
                        
                        
                        2,095
                        
                        
                        
                        33
                        
                        
                        
                        1,319
                        
                        
                        
                        (6
                        )Total
      comprehensive income
                        
                        
                        2,085
                        
                        
                        
                        749
                        
                        
                        
                        2,386
                        
                        
                        
                        1,810Stock
      compensation expense
                        
                        
                        32
                        
                        
                        
                        31
                        
                        
                        
                        87
                        
                        
                        
                        83Dividends
      declared on preferred stock
                        
                        
                        (94
                        )
                        
                        
                        -
                        
                        
                        
                        (242
                        )
                        
                        
                        -Dividends
      declared on common stock
                        
                        
                        (200
                        )
                        
                        
                        (406
                        )
                        
                        
                        (859
                        )
                        
                        
                        (1,217
                        )Balance
      at end of period
                        
                        $
                        37,495
                        
                        
                        $
                        25,379
                        
                        
                        $
                        37,495
                        
                        
                        $
                        25,379Common
      cash dividend per share
                        
                        $
                        0.14
                        
                        
                        $
                        0.32
                        
                        
                        $
                        0.60
                        
                        
                        $
                        0.96





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 September 30, 2009 for items that should potentially be
recognized or disclosed in these financial statements.  The evaluation
was conducted through November 2, 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 94,000 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 nine month periods ended September
30, 2009 and 2008.


5


3.
            Branch
      Purchase.





On April
6, 2009, the Bank entered into a Purchase and Assumption Agreement with National
City Bank (National City) and PNC Financial Services Group, Inc. (PNC) where the
Bank agreed to acquire certain assets and assume certain liabilities of one
National City branch office located in Titusville, Pennsylvania.  The
Board of Governors of the Federal Reserve System and U.S. Department of Justice
required National City to divest of this and other branch locations in
connection with of its acquisition by PNC.





The
primary purpose of the Titusville branch acquisition was to expand the Bank’s
presence into a new market with demographics consistent with its current market
area.  The deposits assumed through the Titusville branch acquisition
have a favorable composition mix and the loans acquired currently present
limited risk since none of these loans are presently greater than thirty days
past due.  The Titusville branch acquisition is expected to result in
increased earnings and provide additional liquidity that has been used to payoff
certain short-term borrowings and to fund future loan and securities
growth.





On August
28, 2009, the Bank completed the Titusville branch acquisition and assumed $90.8
million of deposits and acquired $32.6 million of loans and $58.0 million in
cash, as well as certain fixed assets associated with the branch
office.  The Bank retained all existing employees of the
office.





The $90.8
million of deposits assumed in the branch acquisition consisted of,
approximately $47.9 million of certificates of deposit, or 53% of the deposits
assumed, $23.9 million of interest bearing checking, savings and money market
accounts, or 26% of the deposits assumed, and $19.0 million of non-interest
bearing accounts, or 21% of the deposits assumed.  The interest rates
on interest bearing checking, savings and money market accounts were adjusted to
the Bank’s current deposit rates.  The interest rates and maturities
on the certificates of deposit were assumed at stated contractual
terms.  Also at the closing of the acquisition, the Bank assumed the
obligations under the Titusville branch property lease.





In
connection with the assumption of deposits, the Bank recorded a core deposit
intangible of $2.8 million.  This asset represents the value ascribed
to the long-term value of the core deposits acquired.  Fair value was
determined using a third-party valuation expert specializing in estimating fair
values of core deposit intangibles.  The fair value was derived using
an industry standard financial instrument present value
methodology.  All-in costs and runoff balances by year were discounted
by comparable term Federal Home Loan Bank (FHLB) advance rates, used as an
alternative cost of funds measure.  This intangible asset will be
amortized on a double declining balance method of amortization over a weighted
average estimated life of nine years.  The core deposit intangible
asset is not estimated to have a significant residual value.





The $32.6
million of loans acquired consisted of approximately $20.3 million of home
equity loans, or 63% of the loans acquired, $9.9 million of commercial loans, or
30% of the loans acquired and $2.4 million of consumer loans, or 7% of the loans
acquired.  Of the loans acquired, approximately 50% are fixed rate
loans and 50% are variable rate loans.  The Bank did not acquire any
subprime loans and generally did not receive any loans that had a delinquency
status of greater than 30 days as of the date of closing.





The
Bank’s payment of the 3.4% premium on the assumed deposits and the purchase
price for the acquired loans and other assets of the Titusville branch office
was made through a reduction of the cash received from National City to fund the
deposits assumed by the Bank.  Net of this premium paid, the Bank
received a cash settlement amount of approximately $54.9 million from National
City.





In
connection with the branch acquisition, the Bank recorded goodwill of $2.2
million.  Goodwill represents the excess of the total purchase price
paid for the Titusville branch over the fair value of the assets acquired, net
of the fair value of the liabilities assumed.  The entire amount of
goodwill will be tax deductible and amortized over 15 years for income tax
purposes.  Goodwill will be evaluated for possible impairment at least
annually, and more frequently, if events and circumstances indicate that the
asset might be impaired.


6


3.
            Branch
      Purchase (continued).





The
following unaudited pro forma consolidated balance sheet has been derived from
the Corporation’s consolidated balance sheet as of June 30, 2009, adjusted to
give effect to the branch acquisition that was completed August 28, 2009, as
though such transactions had occurred on June 30, 2009.  The unaudited
pro forma consolidated balance sheet is not necessarily indicative of the
financial position that would have been achieved had the transactions reflected
therein occurred on such date.  The unaudited pro forma consolidated
balance sheet does not purport to project the Corporation’s consolidated balance
sheet for any future period.




(Dollar amounts in
      thousands)
              
              
              
              
              Assets
    Acquired
              
              
              
              
              
              
              
              
              EmclaireEmclaire
              
              
              and
    Liabilities
              
              
              Acquisition
              
              
              
              
              
              Financial
    CorpFinancial
    Corp
              
              
              Assumed (1)
              
              
              Adjustments
              
              
              
              
              
              Pro FormaAssets:Cash and cash
      equivalents
              
              $
              20,286
              
              
              $
              58,017
              
              
              $
              (3,094
              )
              
              
              (2
              )
              
              $
              75,209Securities available for sale, at
      fair value
              
              
              77,241
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              77,241Loans receivable, net of allowance
      for loan losses
              
              
              268,293
              
              
              
              32,553
              
              
              
              (101
              )
              
              
              (3
              )
              
              
              300,745Premises and equipment,
      net
              
              
              9,353
              
              
              
              78
              
              
              
              -
              
              
              
              
              
              
              
              9,431Goodwill
              
              
              1,422
              
              
              
              -
              
              
              
              2,213
              
              
              
              (4
              )
              
              
              3,635Other intangible
      assets
              
              
              -
              
              
              
              -
              
              
              
              2,787
              
              
              
              (5
              )
              
              
              2,787Prepaid expenses and other
      assets
              
              
              14,019
              
              
              
              143
              
              
              
              -
              
              
              
              
              
              
              
              14,162$
              390,614
              
              
              $
              90,791
              
              
              $
              1,805
              
              
              
              
              
              
              $
              483,210Liabilities and Stockholders'
      Equity:DepositsNon-interest
      bearing
              
              $
              54,128
              
              
              $
              18,974
              
              
              $
              -
              
              
              
              
              
              
              $
              73,102Interest
      bearing
              
              
              237,772
              
              
              
              71,817
              
              
              
              1,805
              
              
              
              (6
              )
              
              
              311,394Borrowed
    funds
              
              
              59,600
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              59,600Accrued expenses and other
      liabilities
              
              
              3,442
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              3,442354,942
              
              
              
              90,791
              
              
              
              1,805
              
              
              
              
              
              
              
              447,538Total stockholders'
      equity
              
              
              35,672
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              35,672$
              390,614
              
              
              $
              90,791
              
              
              $
              1,805
              
              
              
              
              
              
              $
              483,210
  (1)
              Represents the assets acquired and
      liabilities assumed in the branch office
      acquisition.  Historical financial statements are not provided
      because separate, audited financial
      statements of the acquired branch were never prepared.  In
      addition, the acquired branch was not operated as a stand-alone business entity and
      was only one of numerous branches formerly operated by National
      City.(2)
              Represents a deposit premium paid
      of approximately 3.4% of the average daily balance of the assumed deposits
      for the thirty calendar day period ending on and including the second
      business day prior to the closing
    date.(3)
              The purchase accounting adjustment
      on loans relates to the fair value adjustment that includes an interest
      rate component and a credit adjustment for estimated lifetime
      losses.(4)
              The goodwill adjustment relates to
      the recording of acquired assets and assumed liabilities at fair
      value.(5)
              Represents the estimated fair
      value of the core deposit intangible asset (approximately 6.5% of core
      deposits) associated with deposits assumed. The core deposit intangible is
      being amortized using the double declining balance method of amortization
      over nine years.(6)
              The purchase accounting adjustment
      on deposits relates to the fair value adjustment of the certificates of
      deposit.













4.
            Securities.





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





(Dollar
      amounts in thousands)
                        
                        Amortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        Faircost
                        
                        
                        gains
                        
                        
                        losses
                        
                        
                        valueAvailable for sale:September
      30, 2009:U.S.
      Treasury securities
                        
                        $
                        2,975
                        
                        
                        $
                        58
                        
                        
                        $
                        -
                        
                        
                        $
                        3,033U.S.
      Government agencies and related entities
                        
                        
                        22,955
                        
                        
                        
                        183
                        
                        
                        
                        (19
                        )
                        
                        
                        23,119Mortgage-backed
      securities
                        
                        
                        26,002
                        
                        
                        
                        688
                        
                        
                        
                        (18
                        )
                        
                        
                        26,672Municipal
      securities
                        
                        
                        26,520
                        
                        
                        
                        971
                        
                        
                        
                        -
                        
                        
                        
                        27,491Equity
      securities
                        
                        
                        3,003
                        
                        
                        
                        459
                        
                        
                        
                        (93
                        )
                        
                        
                        3,369$
                        81,455
                        
                        
                        $
                        2,359
                        
                        
                        $
                        (130
                        )
                        
                        $
                        83,684December
      31, 2008:U.S.
      Government agencies and related entities
                        
                        $
                        19,985
                        
                        
                        $
                        139
                        
                        
                        $
                        (47
                        )
                        
                        $
                        20,077Mortgage-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




7


4.
            Securities
      (continued).





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





(Dollar
      amounts in thousands)
                      
                      Available
      for saleAmortized
                      
                      
                      Faircost
                      
                      
                      valueDue
      in one year or less
                      
                      $
                      134
                      
                      
                      $
                      135Due
      after one year through five years
                      
                      
                      19,870
                      
                      
                      
                      20,102Due
      after five through ten years
                      
                      
                      22,106
                      
                      
                      
                      22,590Due
      after ten years
                      
                      
                      36,343
                      
                      
                      
                      37,488No
      scheduled maturity
                      
                      
                      3,003
                      
                      
                      
                      3,369$
                      81,455
                      
                      
                      $
                      83,684





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.





The
following table presents the gross unrealized losses on investments, aggregated
by investment category and length of time that individual securities have been
in a continuous unrealized loss position, at September 30, 2009 and December 31,
2008:





(Dollar
      amounts in thousands)
                      
                      Less
      than 12 Months
                      
                      
                      12
      Months or More
                      
                      
                      TotalFair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      UnrealizedDescription
      of Securities
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      LossSeptember
      30, 2009:U.S.
      Government agencies and related entities
                      
                      $
                      1,979
                      
                      
                      $
                      (19
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      1,979
                      
                      
                      $
                      (19
                      )Mortgage-backed
      securities
                      
                      
                      2,238
                      
                      
                      
                      (9
                      )
                      
                      
                      3,461
                      
                      
                      
                      (9
                      )
                      
                      
                      5,699
                      
                      
                      
                      (18
                      )Municipal
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Corporate
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Equity
      securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      668
                      
                      
                      
                      (93
                      )
                      
                      
                      668
                      
                      
                      
                      (93
                      )$
                      4,217
                      
                      
                      $
                      (28
                      )
                      
                      $
                      4,129
                      
                      
                      $
                      (102
                      )
                      
                      $
                      8,346
                      
                      
                      $
                      (130
                      )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) whether the Corporation
intends to sell an impaired security and if it is more likely than not that the
Corporation will be required to sell the security before the recovery of its
amortized cost basis.  Additional considerations are given depending
on whether the security is an equity security or debt security, which are
discussed below.





After
evaluation of the securities portfolio, management determined that
other-than-temporary impairments existed on three financial institution equity
securities.  The impairment of these securities was considered to be
other-than-temporary due to continued concerns related to the financial
condition and near-term prospects of the issuers, economic conditions of the
financial services industry and deteriorating market values.  These
securities were written down to their fair market values as of September 30,
2009.  The resulting impairment losses of $898,000 were recognized in
earnings during the three and nine month periods ended September 30,
2009.  During the three and nine month periods ended September 30,
2008, the Corporation recognized $116,000 and $391,000, respectively, of
other-than-temporary impairment charges related to the write down of Fannie Mae
and Freddie Mac stocks.


8


4.
            Securities
      (continued).





The
following table presents information related to the Corporation’s gains and
losses on the sales of equity and debt securities, and losses recognized for the
other-than-temporary impairment of investments:





(Dollar
      amounts in thousands)
                    
                    Gross Realized
                    
                    
                    Gross Realized
                    
                    
                    Other-than-temporary
                    
                    
                    Net GainsGains
                    
                    
                    Losses
                    
                    
                    Impairment Losses
                    
                    
                    (Losses)Three
      months ended September 30, 2009:Equity
      securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (898
                    )
                    
                    $
                    (898
                    )Debt
      securities
                    
                    
                    207
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    207$
                    207
                    
                    
                    $
                    -
                    
                    
                    $
                    (898
                    )
                    
                    $
                    (691
                    )Three
      months ended September 30, 2008:Equity
      securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (116
                    )
                    
                    $
                    (116
                    )Debt
      securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (116
                    )
                    
                    $
                    (116
                    )Nine
      months ended September 30, 2009:Equity
      securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (898
                    )
                    
                    $
                    (898
                    )Debt
      curitie
                    
                    
                    447
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    447$
                    447
                    
                    
                    $
                    -
                    
                    
                    $
                    (898
                    )
                    
                    $
                    (451
                    )Nine
      months ended September 30, 2008:Equity
      securities
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (391
                    )
                    
                    $
                    (391
                    )Debt
      securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (391
                    )
                    
                    $
                    (391
                    )





After
recognizing the impairment charges on the aforementioned equity securities,
there were four additional equity and six debt securities in an unrealized loss
position as of September 30, 2009.  For investments in equity
securities, in addition to the general factors mentioned above for determining
whether the decline in market value is other-than-temporary, the analysis of
whether an equity security is other-than-temporarily impaired includes a review
of the profitability and capital adequacy and all information available to
determine the credit quality of each issuer.  Based on that
evaluation, and given that the Corporation’s current intention is not to sell
any impaired securities and it is more likely than not it will not be required
to sell these securities before the recovery of its amortized cost basis, the
Corporation does not consider those four equity securities with unrealized
losses as of September 30, 2009 to be other-than-temporarily
impaired.





For debt
securities, an additional and critical component of the evaluation for
other-than-temporary impairment is the identification of credit impaired
securities where it is likely that the Corporation will not receive cash flows
sufficient to recover the entire amortized costs basis of the
security.  Based on that evaluation and other general considerations,
and given that the Corporation’s current intention is not to sell any impaired
securities and it is more likely than not it will not be required to sell these
securities before the recovery of its amortized cost basis, the Corporation does
not consider those six debt securities with unrealized losses as of September
30, 2009 to be other-than-temporarily impaired.


9


5.
            Loans
      Receivable.





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





(Dollar
      amounts in thousands)
                              
                              September
      30,
                              
                              
                              December
      31,2009
                              
                              
                              2008Mortgage
      loans on real estate:Residential
      first mortgages
                              
                              $
                              72,125
                              
                              
                              $
                              74,130Home
      equity loans and lines of credit
                              
                              
                              77,342
                              
                              
                              
                              57,454Commercial
      real estate
                              
                              
                              90,249
                              
                              
                              
                              85,689239,716
                              
                              
                              
                              217,273Other
      loans:Commercial
      business
                              
                              
                              48,545
                              
                              
                              
                              40,787Consumer
                              
                              
                              13,505
                              
                              
                              
                              9,42962,050
                              
                              
                              
                              50,216Total
      loans, gross
                              
                              
                              301,766
                              
                              
                              
                              267,489Less
      allowance for loan losses
                              
                              
                              3,158
                              
                              
                              
                              2,651Total
      loans, net
                              
                              $
                              298,608
                              
                              
                              $
                              264,838Nonaccrual
      loans
                              
                              $
                              2,488
                              
                              
                              $
                              870Loans
      90 days or more past due and still accruing
                              
                              
                              40
                              
                              
                              
                              141Total
      nonperforming loans
                              
                              $
                              2,528
                              
                              
                              $
                              1,011





6.
            Goodwill
      and Intangible Assets.





The
following table summarizes the Corporation’s acquired goodwill and intangible
assets as of September 30, 2009 and December 31, 2008:





(Dollar
      amounts in thousands)
                    
                    September 30, 2009
                    
                    
                    December 31, 2008Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      Amortization
                    
                    
                    Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      AmortizationGoodwill
                    
                    $
                    3,635
                    
                    
                    $
                    -
                    
                    
                    $
                    1,422
                    
                    
                    $
                    -Core
      deposit intangibles
                    
                    
                    4,027
                    
                    
                    
                    1,291
                    
                    
                    
                    1,240
                    
                    
                    
                    1,240Other
      customer relationship intangibles
                    
                    
                    20
                    
                    
                    
                    20
                    
                    
                    
                    20
                    
                    
                    
                    20Total
                    
                    $
                    7,682
                    
                    
                    $
                    1,311
                    
                    
                    $
                    2,682
                    
                    
                    $
                    1,260





During
the three and nine month periods ended September 30, 2009, the Corporation
recorded goodwill and a core deposit intangible of $2.2 million and $2.8
million, respectively, related to the aforementioned Titusville branch purchase
that was completed on August 28, 2009.  The core deposit intangible is
being amortized using the double declining balance method of amortization over
nine years.  During the three and nine month periods ended September
30, 2009, the Corporation recorded $51,000 of intangible amortization expense
related to the core deposit intangible.





7.
            Deposits.





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





(Dollar amounts in
    thousands)
                      
                      September 30, 2009
                      
                      
                      December 31, 2008Type of accounts
                      
                      Amount
                      
                      
                      %
                      
                      
                      Amount
                      
                      
                      %Non-interest
      bearing deposits
                      
                      $
                      67,743
                      
                      
                      
                      17.9
                      %
                      
                      $
                      56,351
                      
                      
                      
                      19.7
                      %Interest
      bearing demand deposits
                      
                      
                      143,309
                      
                      
                      
                      37.9
                      %
                      
                      
                      106,042
                      
                      
                      
                      37.0
                      %Time
      deposits
                      
                      
                      167,034
                      
                      
                      
                      44.2
                      %
                      
                      
                      124,254
                      
                      
                      
                      43.3
                      %$
                      378,086
                      
                      
                      
                      100.0
                      %
                      
                      $
                      286,647
                      
                      
                      
                      100.0
                      %




10





8.
            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 September 30, 2009, $81,000 will
expire within the next seven months, $1.2 million will automatically renew
within the next twelve months and $241,000 will automatically renew within
thirteen to forty-one 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
September 30, 2009 for guarantees under standby letters of credit issued is not
material.





9.
            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 nine
months ended September 30, 2009 and 2008 amounted to $111,000 and $113,000,
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:





(Dollar
      amounts in thousands)
                            
                            For
      the three months ended
                            
                            
                            For
      the nine months ended
                            
                            
                            Year
      endedSeptember 30,
                            
                            
                            September 30,
                            
                            
                            December 31,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2008Service
      cost
                            
                            $
                            76
                            
                            
                            $
                            73
                            
                            
                            $
                            200
                            
                            
                            $
                            199
                            
                            
                            $
                            233Interest
      cost
                            
                            
                            61
                            
                            
                            
                            71
                            
                            
                            
                            211
                            
                            
                            
                            213
                            
                            
                            
                            285Expected
      return on plan assets
                            
                            
                            (61
                            )
                            
                            
                            (79
                            )
                            
                            
                            (193
                            )
                            
                            
                            (237
                            )
                            
                            
                            (305
                            )Prior
      service costs
                            
                            
                            (7
                            )
                            
                            
                            (8
                            )
                            
                            
                            (23
                            )
                            
                            
                            (24
                            )
                            
                            
                            (31
                            )Recognized
      net actuarial loss
                            
                            
                            2
                            
                            
                            
                            4
                            
                            
                            
                            56
                            
                            
                            
                            12
                            
                            
                            
                            19Net
      periodic pension cost
                            
                            $
                            71
                            
                            
                            $
                            61
                            
                            
                            $
                            251
                            
                            
                            $
                            163
                            
                            
                            $
                            201




The
expected rate of return on plan assets was 7.75% for the periods ended September
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 September 30,
2009, $350,000 has been contributed.


11


10.
            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’s (FASB) Accounting Standards Codification (ASC)
Topic 718, Compensation –
Stock Compensation(Topic 718),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 nine-month periods
ended September 30, 2009 and 2008, the Corporation recognized $87,000 and
$83,000, respectively, in stock compensation expense.





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





Weighted-AverageWeighted-Average
                    
                    
                    Aggregate
                    
                    
                    Remaining
      TermOptions
                    
                    
                    Exercise Price
                    
                    
                    Intrinsic Value
                    
                    
                    (in years)Outstanding
      at the beginning of the year
                    
                    
                    94,000
                    
                    
                    $
                    25.66
                    
                    
                    $
                    -
                    
                    
                    
                    8.7Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    4,500
                    
                    
                    
                    26.00
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      as of September 30, 2009
                    
                    
                    89,500
                    
                    
                    $
                    25.64
                    
                    
                    $
                    -
                    
                    
                    
                    8.0Exercisable
      as of September 30, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -





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





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




In
addition to the options listed in the preceding tables, the Corporation has
granted 4,500 shares of restricted stock awards with a face value of $101,000
based on the grant date stock price of $22.50.  These restricted stock
awards are 100% vested on the third anniversary date of the grant.





As of
September 30, 2009, there was $149,000 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 1.0 year.





11.
            Fair
      Values of Financial Instruments.





Effective
January 1, 2008, the Corporation adopted FASB ASC Topic 820, Fair Value Measurements and
Disclosures (Topic 820), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements.  Topic 820 applies to other accounting
pronouncements that require or permit fair value measurements.


12





11.
            Fair
      Values of Financial Instruments
(continued).





Topic 820
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 Topic 820 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).





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)
                  
                  
                  
                  
                  (Level
      1)
                  
                  
                  (Level
      2)Quoted
      Prices in
                  
                  
                  Significant
                  
                  
                  (Level
      3)Active
      Markets
                  
                  
                  Other
                  
                  
                  Significantfor
      Identical
                  
                  
                  Observable
                  
                  
                  UnobservableDescription
                  
                  Total
                  
                  
                  Assets
                  
                  
                  Inputs
                  
                  
                  InputsSeptember
      30, 2009:Securities
      available for sale
                  
                  $
                  83,684
                  
                  
                  $
                  2,644
                  
                  
                  $
                  81,040
                  
                  
                  $
                  -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)
                      
                      
                      
                      
                      (Level
      1)
                      
                      
                      (Level
      2)Quoted
      Prices in
                      
                      
                      Significant
                      
                      
                      (Level
      3)Active
      Markets
                      
                      
                      Other
                      
                      
                      Significantfor
      Identical
                      
                      
                      Observable
                      
                      
                      UnobservableDescription
                      
                      Total
                      
                      
                      Assets
                      
                      
                      Inputs
                      
                      
                      InputsSeptember
      30, 2009:Impaired
      loans
                      
                      $
                      418
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      418Repossessions
                      
                      
                      268
                      
                      
                      
                      -
                      
                      
                      
                      268
                      
                      
                      
                      -$
                      686
                      
                      
                      $
                      -
                      
                      
                      $
                      268
                      
                      
                      $
                      418December
      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 determined by a third
party pricing service using quoted prices for identical instruments or similar
instruments.  In some instances, the fair value of certain securities
cannot be determined using these techniques due to the lack of relevant market
data.  As such, these securities are valued using an alternative
technique utilizing other observable inputs and are classified within Level 2 of
the fair value hierarchy.


13




11.
            Fair
      Values of Financial Instruments
(continued).





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 September 30, 2009
the fair value consists of loan balances of $865,000, net of a valuation
allowance of $447,000.  Additional provision for loan losses of
$447,000 was recorded during the nine months ended September 30,
2009.





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.





Topic 820
also establishes requirements for the disclosure of all non-financial assets and
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) effective for fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years.  At
September 30, 2009, the only non-financial assets or liabilities carried at fair
value, measured on a recurring or non-recurring basis were
repossessions.





Under
FASB ACS Topic 825, Financial
Instruments (Topic 825) the Corporation is required to disclose the
estimated fair value of its financial instrument assets and liabilities
including those subject to the requirements of Topic 820.  The
estimated fair values and carrying values of all financial statement instruments
covered by Topic 820 and Topic 825 at September 30, 2009 were as
follows:





(Dollar
      amounts in thousands)
                    
                    September 30, 2009
                    
                    
                    December 31, 2008Carrying amount
                    
                    
                    Fair value
                    
                    
                    Carrying amount
                    
                    
                    Fair valueFinancial
      assets:Cash
      and cash equivalents
                    
                    $
                    47,578
                    
                    
                    $
                    47,578
                    
                    
                    $
                    16,571
                    
                    
                    $
                    16,571Securities
                    
                    
                    83,684
                    
                    
                    
                    83,684
                    
                    
                    
                    71,443
                    
                    
                    
                    71,443Loans
      receivable, net
                    
                    
                    298,608
                    
                    
                    
                    307,068
                    
                    
                    
                    264,838
                    
                    
                    
                    272,662Federal
      bank stocks
                    
                    
                    4,125
                    
                    
                    
                    4,125
                    
                    
                    
                    3,797
                    
                    
                    
                    3,797Accrued
      interest receivable
                    
                    
                    1,732
                    
                    
                    
                    1,732
                    
                    
                    
                    1,519
                    
                    
                    
                    1,519Financial
      liabilities:Deposits
                    
                    
                    378,086
                    
                    
                    
                    383,004
                    
                    
                    
                    286,647
                    
                    
                    
                    290,533Borrowed
      funds
                    
                    
                    40,000
                    
                    
                    
                    43,433
                    
                    
                    
                    48,188
                    
                    
                    
                    52,510Accrued
      interest payable
                    
                    
                    749
                    
                    
                    
                    749
                    
                    
                    
                    761
                    
                    
                    
                    761Off-balance
      sheet commitments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -





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 September 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.


14


12.
            Effect
      of Recently Issued Accounting
Standards.





In April 2009, the FASB issued ASC 320,Recognition and
Presentation of Other-Than-Temporary-Impairment(Topic 320).  This topic
changes existing guidance for determining whether an impairment is
other-than-temporary to debt securities and replaces the existing requirement
that management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert it does not
have the intent to sell the security and it is more likely than not it will not
have to sell the security before recovery of its cost basis.  Declines
in fair value of securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses.  The amount of impairment
related to other factors is recognized in other comprehensive
income.  Topic 320 is effective for interim and annual periods ending
after June 15, 2009.  The new provisions required are included in Note
4 – Securities.





In June
2009, the FASB issued ASU
2009-01, Generally
Accepted Accounting Principles – FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (Topic
105).  The Codification is the recognized source of authoritative U.S.
generally accepted accounting principles applicable to all public and non-public
non-governmental entities, superseding existing FASB, AICPA, EITF and related
literature.  All other accounting literature is considered
non-authoritative.  The Codification is effective for interim or
annual reporting periods ending after September 15, 2009.  We have
made the appropriate changes to GAAP references in our financial
statements.





In August
2009, the FASB issued ASU
2009-05, Fair Value
Measurements and Disclosures (Topic 820).  This topic affirms
that the objective of fair value when the market for an asset is not active is
the price that would be received to sell the asset in an orderly transaction and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active.  It also requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the
evidence.  Topic 820 is effective for financial statements beginning
October 1, 2009 and is not expected to affect the Corporation’s 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 three and nine months ended September 30, 2009, compared
to the same periods 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 15 of this Form 10-Q.





This form
10-Q, including the financial statements and related notes, contains forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act.  These forward
looking statements represent plans, estimates, objectives, goals, guidelines,
expectations, intentions, projections and statements of our beliefs concerning
future events, business plans, objectives, expected operating results and the
assumptions upon which those statements are based.  Forward looking
statements include without limitation, any statement that may predict, forecast,
indicate or imply future results, performance or achievements, and are typically
identified with words such as “may,” “could,” “should,” “will,” “would,”
“believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” or words or
phrases of similar meaning.  We caution that the forward looking
statements are based largely on our expectations and are subject to a number of
known and unknown risks and uncertainties that are subject to change based on
factors which are, in many instances, beyond our control.  Actual
results, performances or achievements could differ materially from those
contemplated, expressed or implied by the forward looking
statements.  Therefore, we caution you not to place undue reliance on
our forward looking information and statements.  Except as required by
applicable law or regulation, we will not update the forward looking statements
to reflect actual results or changes in factors affecting the forward looking
statements.


15




OVERVIEW





The
Corporation reported a net loss of $10,000 and net income of $1.1 million for
the three and nine month periods ended September 30, 2009, respectively, as
compared to net income of $716,000 and $1.8 million, respectively, for the same
periods in 2008.  The decrease in the Corporation’s net income
resulted primarily from the following:





·
            Net
      interest income increased primarily due to an increase in interest earned
      on loans resulting from the Bank’s loan growth during the latter part of
      2008 and to date in 2009.  The Bank’s loan growth is
      attributable to:


o
            The
      fourth quarter 2008 acquisition of Elk County Savings and Loan Association
      (ECSLA) which added $7.3 million to the Corporation’s loan
      portfolio.  The acquired portfolio consisted primarily of
      residential first mortgage loans;


o
            The
      Corporation extending three, one-year tax anticipation notes to local
      municipalities totaling $11.5 million during the first quarter of 2009;
      and


o
            The
      third quarter 2009 Titusville branch purchase in which the Corporation
      acquired, on a fair value basis, $32.5 million in loans, consisting
      primarily of home equity loans and lines of credit and, to a much lesser
      extent, commercial business loans and lines of
  credit.


·
            The
      provision for loan losses increased as a result of continued loan growth
      and pressure on borrowers related to the prevailing poor national economic
      conditions.  The Corporation continues to maintain sound overall
      asset quality.  Delinquencies and foreclosures are higher than
      in prior periods, but remain well below the level of national averages and
      peer banks.


·
            Noninterest
      income decreased primarily due to other-than-temporary impairment charges
      recorded at September 30, 2009 on three financial institution equity
      securities.  These securities were written down to their fair
      market values and the resulting impairment losses of $898,000 were
      recognized in earnings during the third quarter of
  2009.


·
            Noninterest
      expense increased primarily due to costs associated with the Titusville
      branch purchase.  These costs included legal, project
      management, data conversion and valuation services, printing and mailing
      costs of required disclosure materials, customer check replacement and
      other conversion costs.  In addition, regular quarterly FDIC
      insurance premiums have increased substantially and in the second quarter
      of 2009, the Bank recorded a $178,000 charge due to a special assessment
      which was assessed on all FDIC insured depository institutions and
      collected on September 30, 2009.


·
            The
      provision for income taxes decreased as a result of decreased pre-tax
      income.





During
the nine month period ended September 30, 2009, the Corporation experienced
asset growth of 22.3% as total assets increased $83.6 million to $459.3 million
at September 30, 2009 from $375.7 million at December 31, 2008.  This
asset growth was primarily attributable to the Titusville branch purchase in
which the Bank assumed $92.6 million in deposits in exchange for $32.5 million
in loans, $54.9 million in net cash, and certain fixed assets of the branch
office.  The Bank paid a premium of 3.4% on deposits
assumed.  For additional information about the Titusville branch
purchase, see note 3 to the financial statements titled "Branch Purchase."
beginning on page 6.





CHANGES
IN FINANCIAL CONDITION





Total
assets increased $83.6 million or 22.3% to $459.2 million at September 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 $31.0 million, $12.2 million and $33.8 million,
respectively.  The net increase in the Corporation’s assets was
primarily due to the aforementioned branch purchase during the third quarter of
2009.





Total
liabilities increased $82.2 million or 24.2% to $421.8 million at September 30,
2009 from $339.5 million at December 31, 2008, while total stockholders’ equity
increased $1.4 million or 3.8% to $37.5 million at September 30, 2009 from $36.1
million at December 31, 2008.  The increase in total liabilities was
primarily due to an increase in deposits as a result of the aforementioned
branch purchase during the third quarter of 2009.  The increase in
equity was primarily related to an increase in unrealized gains on available for
sale securities.




16




RESULTS
OF OPERATIONS





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





General.  The
Corporation recorded a net loss of $10,000 for the three months ended September
30, 2009 compared to net income of $716,000 for the same period in
2008.  This $726,000 decrease was the result of increases in the
provision for loan losses and noninterest expense of $100,000 and $959,000,
respectively, and a decrease in noninterest income of $609,000, partially offset
by an increase in net interest income of $522,000, and a decrease in the
provision for income taxes of $419,000.





Net interest
income.  Net interest income on a tax equivalent basis
increased $604,000 or 21.3% to $3.4 million for the three months ended September
30, 2009 from $2.8 million for the same period in 2008.  This net
increase can be attributed to an increase in tax equivalent interest income of
$323,000 and a decrease in interest expense of $281,000.





Interest
income.  Interest income on a tax equivalent basis increased
$323,000 or 6.5% to $5.3 million for the three months ended September 30, 2009,
compared to $4.9 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 $237,000, $54,000 and $48,000,
respectively, partially offset by a decrease in dividends on federal bank stocks
of $16,000.





Tax
equivalent interest earned on loans receivable increased $237,000 or 5.8% to
$4.3 million for the three months ended September 30, 2009, compared to $4.1
million for the same period in 2008.  This increase resulted primarily
from average loans increasing $34.8 million or 14.0%, accounting for $547,000 in
additional loan interest income.  This increase can be attributed to
growth in the Corporation’s existing loan portfolio and loans acquired through
the aforementioned branch office purchase.  Offsetting this favorable
volume increase, the yield on loans receivable decreased 49 basis points to
6.07% for the three months ended September 30, 2009, versus 6.56% for the same
period in 2008, due to a decline in market interest rates, accounting for a
$310,000 decrease in interest income.





Tax
equivalent interest earned on securities increased $54,000 or 6.9% to $834,000
for the three months ended September 30, 2009, compared to $780,000 for the same
period in 2008.  The average volume of securities increased $14.3
million, primarily as a result of the partial deployment of net cash received in
the branch purchase, accounting for a $160,000 increase in interest
income.  Offsetting this favorable volume increase, the average yield
on securities decreased 62 basis points to 4.22% for the three months ended
September 30, 2009, versus 4.84% for the same period in 2008, due to declining
market interest rates.  This unfavorable yield variance accounted for
a $106,000 decrease in interest income.





Interest
earned on interest-earning deposit accounts increased $48,000 or 90.6% to
$101,000 for the three months ended September 30, 2009 from $53,000 for the same
period in 2008.  The average volume of these assets increased $34.6
million, due primarily to cash received from the branch purchase not yet
deployed into higher-yielding assets, increasing interest income by
$99,000.  Offsetting this volume increase, the average yield on
interest-earning deposit accounts decreased 151 basis points to 0.93% for the
three months ended September 30, 2009, compared to 2.44% for the same period in
the prior year, accounting for a $51,000 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 $16,000 or 60.4% to $10,000 for the three month
period ended September 30, 2009 from $26,000 for the same period in
2008.  The average yield on these assets decreased 259 basis points to
0.99% for the three months ended September 30, 2009, compared to 3.58% for the
same period the prior year, as dividend payments from the Federal Home Loan Bank
of Pittsburgh (FHLB) have been suspended since December 2008.





Interest
expense.  Interest expense decreased $281,000 or 13.3% to $1.8
million for the three months ended September 30, 2009 from $2.1 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
$223,000 and $58,000, respectively.





17




Interest
expense incurred on deposits decreased $223,000 or 13.5% to $1.4 million for the
three months ended September 30, 2009 compared to $1.7 million for the same
period in 2008.  The cost of interest-bearing deposits decreased 82
basis points to 2.15% for the three months ended September 30, 2009, compared to
2.97% for the same period in 2008 causing a $503,000 decrease in interest
expense.  This decrease was a result of the continuous downward trend
in deposit market rates during late 2008 and 2009.  Partially
offsetting this favorable rate variance, the average volume of interest-bearing
deposits increased $42.2 million or 19.1% to $263.0 million for the three months
ended September 30, 2009, compared to $220.8 million for the same period in 2008
causing a $280,000 increase in interest expense.  This increase was
primarily due to the deposits assumed through the aforementioned branch
purchase.




Interest
expense incurred on borrowed funds decreased $58,000 or 12.3% to $409,000 for
the three months ended September 30, 2009, compared to $467,000 for the same
period in the prior year.  This decrease can be attributed to a
decrease in the cost of borrowed funds of 156 basis points to 2.49% for the
three months ended September 30, 2009, compared to 4.05% for the same period in
2008 causing a $216,000 decrease in interest expense.  This cost
decrease was a result of lower short-term borrowing rates given the low rate
environment during the second half of 2008 and 2009.  Partially
offsetting this favorable cost decrease, the average balance of borrowed funds
increased $19.4 million or 42.3% to $65.3 million for the three months ended
September 30, 2009, compared to $45.9 million for the same period in the prior
year, causing a $158,000 decrease in interest expense.  This volume
increase was related to an increase in short-term borrowings as the Bank
borrowed from the Federal Reserve’s Term Auction Facility to fund investment
purchases in the second and third quarters of 2009 in anticipation of cash to be
received in connection with the branch purchase.




18




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.





(Dollar
      amounts in thousands)
                                                                                      
                                                                                      Three
      months ended September 30,2009
                                                                                      
                                                                                      
                                                                                      2008Average
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Yield
      /
                                                                                      
                                                                                      
                                                                                      Average
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Yield
      /Balance
                                                                                      
                                                                                      
                                                                                      Interest
                                                                                      
                                                                                      
                                                                                      Rate
                                                                                      
                                                                                      
                                                                                      Balance
                                                                                      
                                                                                      
                                                                                      Interest
                                                                                      
                                                                                      
                                                                                      RateInterest-earning
      assets:Loans,
      taxable
                                                                                      
                                                                                      $
                                                                                      267,848
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,169
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.18
                                                                                      %
                                                                                      
                                                                                      $
                                                                                      241,985
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,995
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.57
                                                                                      %Loans,
      tax exempt
                                                                                      
                                                                                      
                                                                                      14,870
                                                                                      
                                                                                      
                                                                                      
                                                                                      155
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.14
                                                                                      %
                                                                                      
                                                                                      
                                                                                      5,919
                                                                                      
                                                                                      
                                                                                      
                                                                                      92
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.15
                                                                                      %Total
      loans receivable
                                                                                      
                                                                                      
                                                                                      282,718
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,324
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.07
                                                                                      %
                                                                                      
                                                                                      
                                                                                      247,904
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,087
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.56
                                                                                      %Securities,
      taxable
                                                                                      
                                                                                      
                                                                                      53,813
                                                                                      
                                                                                      
                                                                                      
                                                                                      468
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.45
                                                                                      %
                                                                                      
                                                                                      
                                                                                      50,196
                                                                                      
                                                                                      
                                                                                      
                                                                                      550
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.36
                                                                                      %Securities,
      tax exempt
                                                                                      
                                                                                      
                                                                                      24,623
                                                                                      
                                                                                      
                                                                                      
                                                                                      366
                                                                                      
                                                                                      
                                                                                      
                                                                                      5.90
                                                                                      %
                                                                                      
                                                                                      
                                                                                      13,914
                                                                                      
                                                                                      
                                                                                      
                                                                                      230
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.58
                                                                                      %Total
      securities
                                                                                      
                                                                                      
                                                                                      78,436
                                                                                      
                                                                                      
                                                                                      
                                                                                      834
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.22
                                                                                      %
                                                                                      
                                                                                      
                                                                                      64,110
                                                                                      
                                                                                      
                                                                                      
                                                                                      780
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.84
                                                                                      %Interest-earning
      deposits with banks
                                                                                      
                                                                                      
                                                                                      43,277
                                                                                      
                                                                                      
                                                                                      
                                                                                      101
                                                                                      
                                                                                      
                                                                                      
                                                                                      0.93
                                                                                      %
                                                                                      
                                                                                      
                                                                                      8,644
                                                                                      
                                                                                      
                                                                                      
                                                                                      53
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.44
                                                                                      %Federal
      bank stocks
                                                                                      
                                                                                      
                                                                                      4,125
                                                                                      
                                                                                      
                                                                                      
                                                                                      10
                                                                                      
                                                                                      
                                                                                      
                                                                                      0.99
                                                                                      %
                                                                                      
                                                                                      
                                                                                      2,892
                                                                                      
                                                                                      
                                                                                      
                                                                                      26
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.58
                                                                                      %Total
      interest-earning cash equivalents
                                                                                      
                                                                                      
                                                                                      47,402
                                                                                      
                                                                                      
                                                                                      
                                                                                      111
                                                                                      
                                                                                      
                                                                                      
                                                                                      0.93
                                                                                      %
                                                                                      
                                                                                      
                                                                                      11,536
                                                                                      
                                                                                      
                                                                                      
                                                                                      79
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.72
                                                                                      %Total
      interest-earning assets
                                                                                      
                                                                                      
                                                                                      408,556
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,269
                                                                                      
                                                                                      
                                                                                      
                                                                                      5.12
                                                                                      %
                                                                                      
                                                                                      
                                                                                      323,550
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,946
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.08
                                                                                      %Cash
      and due from banks
                                                                                      
                                                                                      
                                                                                      2,189
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      5,935Other
      noninterest-earning assets
                                                                                      
                                                                                      
                                                                                      19,093
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      15,082Total
      Assets
                                                                                      
                                                                                      $
                                                                                      429,838
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      $
                                                                                      344,567Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                                      
                                                                                      $
                                                                                      127,857
                                                                                      
                                                                                      
                                                                                      $
                                                                                      245
                                                                                      
                                                                                      
                                                                                      
                                                                                      0.76
                                                                                      %
                                                                                      
                                                                                      $
                                                                                      95,121
                                                                                      
                                                                                      
                                                                                      $
                                                                                      355
                                                                                      
                                                                                      
                                                                                      
                                                                                      1.48
                                                                                      %Time
      deposits
                                                                                      
                                                                                      
                                                                                      135,129
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,182
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.47
                                                                                      %
                                                                                      
                                                                                      
                                                                                      125,711
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,295
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.10
                                                                                      %Total
      interest-bearing deposits
                                                                                      
                                                                                      
                                                                                      262,986
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,427
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.15
                                                                                      %
                                                                                      
                                                                                      
                                                                                      220,832
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,650
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.97
                                                                                      %Borrowed
      funds, short-term
                                                                                      
                                                                                      
                                                                                      30,297
                                                                                      
                                                                                      
                                                                                      
                                                                                      12
                                                                                      
                                                                                      
                                                                                      
                                                                                      0.16
                                                                                      %
                                                                                      
                                                                                      
                                                                                      10,894
                                                                                      
                                                                                      
                                                                                      
                                                                                      72
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.63
                                                                                      %Borrowed
      funds, long-term
                                                                                      
                                                                                      
                                                                                      35,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      397
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.50
                                                                                      %
                                                                                      
                                                                                      
                                                                                      35,000
                                                                                      
                                                                                      
                                                                                      
                                                                                      395
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.49
                                                                                      %Total
      borrowed funds
                                                                                      
                                                                                      
                                                                                      65,297
                                                                                      
                                                                                      
                                                                                      
                                                                                      409
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.49
                                                                                      %
                                                                                      
                                                                                      
                                                                                      45,894
                                                                                      
                                                                                      
                                                                                      
                                                                                      467
                                                                                      
                                                                                      
                                                                                      
                                                                                      4.05
                                                                                      %Total
      interest-bearing liabilities
                                                                                      
                                                                                      
                                                                                      328,283
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,836
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.22
                                                                                      %
                                                                                      
                                                                                      
                                                                                      266,726
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,117
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.16
                                                                                      %Noninterest-bearing
      demand deposits
                                                                                      
                                                                                      
                                                                                      61,490
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      50,064
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Funding
      and cost of funds
                                                                                      
                                                                                      
                                                                                      389,773
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,836
                                                                                      
                                                                                      
                                                                                      
                                                                                      1.87
                                                                                      %
                                                                                      
                                                                                      
                                                                                      316,790
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,117
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.66
                                                                                      %Other
      noninterest-bearing liabilities
                                                                                      
                                                                                      
                                                                                      3,905
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,723Total
      Liabilities
                                                                                      
                                                                                      
                                                                                      393,678
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      319,513Stockholders'
      Equity
                                                                                      
                                                                                      
                                                                                      36,160
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      25,054Total
      Liabilities and Stockholders' Equity
                                                                                      
                                                                                      $
                                                                                      429,838
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      $
                                                                                      344,567Net
      interest income
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,433
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      $
                                                                                      2,829Interest
      rate spread(difference between
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.90
                                                                                      %
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.92
                                                                                      %weighted
      average rate on interest-earningassets
      and interest-bearing liabilities)Net
      interest margin(net interest
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.33
                                                                                      %
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      3.48
                                                                                      %income
      as a percentage of averageinterest-earning
      assets)




19




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.





(Dollar
      amounts in thousands)
                  
                  Three
      months ended September 30,2009
      versus 2008Increase
      (Decrease) due toVolume
                  
                  
                  Rate
                  
                  
                  TotalInterest
      income:Loans
                  
                  $
                  547
                  
                  
                  $
                  (310
                  )
                  
                  $
                  237Securities
                  
                  
                  160
                  
                  
                  
                  (106
                  )
                  
                  
                  54Interest-earning
      deposits with banks
                  
                  
                  99
                  
                  
                  
                  (51
                  )
                  
                  
                  48Federal
      bank stocks
                  
                  
                  8
                  
                  
                  
                  (24
                  )
                  
                  
                  (16
                  )Total
      interest-earning assets
                  
                  
                  814
                  
                  
                  
                  (491
                  )
                  
                  
                  323Interest
      expense:Interest-bearing
      deposits
                  
                  
                  280
                  
                  
                  
                  (503
                  )
                  
                  
                  (223
                  )Borrowed
      funds
                  
                  
                  158
                  
                  
                  
                  (216
                  )
                  
                  
                  (58
                  )Total
      interest-bearing liabilities
                  
                  
                  438
                  
                  
                  
                  (719
                  )
                  
                  
                  (281
                  )Net
      interest income
                  
                  $
                  376
                  
                  
                  $
                  228
                  
                  
                  $
                  604





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 September 30, 2009 and 2008 is as follows:





(Dollar
      amounts in thousands)
                    
                    At
      or for the three months endedSeptember
      30,2009
                    
                    
                    2008Balance
      at the beginning of the period
                    
                    $
                    2,935
                    
                    
                    $
                    2,301Provision
      for loan losses
                    
                    
                    240
                    
                    
                    
                    140Charge-offs
                    
                    
                    (18
                    )
                    
                    
                    (86
                    )Recoveries
                    
                    
                    1
                    
                    
                    
                    8Balance
      at the end of the period
                    
                    $
                    3,158
                    
                    
                    $
                    2,363Non-performing
      loans
                    
                    $
                    2,528
                    
                    
                    $
                    783Non-performing
      assets
                    
                    
                    2,956
                    
                    
                    
                    797Non-performing
      loans to total loans
                    
                    
                    0.84
                    %
                    
                    
                    0.31
                    %Non-performing
      assets to total assets
                    
                    
                    0.64
                    %
                    
                    
                    0.22
                    %Allowance
      for loan losses to total loans
                    
                    
                    1.05
                    %
                    
                    
                    0.93
                    %Allowance
      for loan losses to non-performing loans
                    
                    
                    124.91
                    %
                    
                    
                    301.79
                    %




20




The
provision for loan losses increased $100,000 to $240,000 for the three month
period ended September 30, 2009 from $140,000 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, charge-offs, increases in non-performing loans and loan growth
in general.





Classified
Assets.Regulations applicable to
insured institutions require the classification of problem assets as
“substandard,” “doubtful,” or “loss” depending upon the existence of certain
characteristics as discussed below.  A category designated “special
mention” must also be maintained for assets currently not requiring the above
classification but having potential weakness or risk characteristics that could
result in future problems.  An asset is classified as substandard if
not adequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any.  A substandard asset is
characterized by the distinct possibility that the Corporation will sustain some
loss if the deficiencies are not corrected.  Assets classified as
doubtful have all the weaknesses inherent in those classified as
substandard.  In addition, these weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable or improbable. Assets classified as loss are
considered uncollectible and of such little value their continuance as assets is
not warranted.





The
Corporation’s classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by
management.  Valuation allowances represent loss allowances that have
been established to recognize the inherent risk associated with lending
activities.  When the Corporation classifies a problem asset as a
loss, the portion of the asset deemed uncollectible is charged off
immediately.





The
Corporation regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Corporation’s policy and applicable regulations.  Included in
classified and criticized assets at September 30, 2009 are two separate large
loans which have certain credit problems potentially impacting the ability of
the borrowers to comply with their present loan repayment terms on a timely
basis.





The first
loan, with an outstanding balance of $3.2 million at September 30, 2009, was
originated primarily for the construction of a hotel, restaurant and retail
plaza secured by such property, the borrower’s personal residence, a separate
residence and a separate farm.  The hotel, restaurant and retail plaza
are complete and operational.  However, cash flows from operations
have not been constant and are impacted by the seasonal nature of the
hotel.  In addition, the borrower does not have other liquid sources
of cash flow.  As a result, the borrower has listed substantial real
estate holdings for sale.  Pending such sales, the Bank anticipates
that the relationship may continue to have cash flow issues which may impact the
timely payment of principal and interest to the Bank.  At September
30, 2009, the loan was current but identified as special
mention.  Ultimately, due to the estimated value of the borrower’s
significant real estate holdings, the Bank does not currently expect to incur
any significant loss on this loan.





The
second loan, with an outstanding balance of $2.3 million at September 30, 2009,
is a consumer installment loan for the purpose of the consolidating various
personal debts.  This loan is secured by a lien on the primary
residence of the first borrower discussed above, an assigned life insurance
policy and the assignment of patent royalty income.  Due to business
difficulties and decreased royalty income, payments on the loan have not always
been timely.  At September 30, 2009, the loan was performing but was
classified substandard.  As a result of the estimated value of the
lien on the property owned by the first borrower, the estimated cash flow of
royalty income and the borrower’s business prospects, the Bank does not
currently expect to incur any significant loss on this loan.





Noninterest
income.  Noninterest income decreased $608,000 to $12,000
during the three months ended September 30, 2009, compared to $620,000 during
the same period in the prior year.  This decrease was primarily due to
impairment charges of $898,000 recorded in the third quarter of 2009 on three
financial institution equity securities, partially offset by investment security
gains totaling $207,000 recognized during the same time period.  The
Corporation recorded impairment charges of $116,000 in the third quarter of 2008
on Fannie Mae and Freddie Mac stocks.




21




Noninterest
expense.  Noninterest expense increased $959,000 or 41.8% to
$3.3 million during the three months ended September 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, intangible amortization and other noninterest expenses
of $288,000, $63,000, $51,000 and $557,000, respectively.





Compensation
and employee benefits increased $288,000 or 22.8% to $1.5 million for the three
months ended September 30, 2009 compared to $1.3 million for the same period in
the prior year.  This increase can be primarily attributed to normal
salary and wage increases, staff added in connection with the 2009 branch
purchase and higher costs associated with the Corporation’s pension
plan.  Although compensation and employee benefits increased, the same
period of last year was lower than normal as a result of Corporation reversing
all previously accrued incentive expense as of September 30. 2008.





Premises
and equipment increased $63,000 or 15.4% to $472,000 for the three months ended
September 30, 2009, compared to $409,000 for the same period in the prior
year.  This increase was primarily related to increased depreciation
expense resulting from projects and improvements implemented during late 2008
and 2009.  In addition, the Corporation began realizing normal
operating costs associated with the Titusville branch office.





Associated
with the branch purchase, the Bank recognized $51,000 of core deposit intangible
amortization expense during the third quarter of 2009.  Further
discussion related to goodwill and intangible assets related to the branch
office purchase can be found in the “Notes to Consolidated Financial Statements”
beginning on page 5.





Professional
fees increased $197,000 to $299,000 for the three months ended September 30,
2009, compared to $102,000 for the same period in the prior
year.  This increase was primarily due to legal fees, project
management fees and conversion assistance costs associated with the branch
purchase.





FDIC
expense increased $77,000 to $104,000 for the three months ended September 30,
2009, compared to $27,000 for the same period in the prior year.  This
was the result of increases in base assessment rates for FDIC insurance
premiums.





Other
noninterest expense increased $283,000 or 56.9% to $780,000 during the three
months ended September 30, 2009, compared to $497,000 for the same period in the
prior year.  This increase was primarily due to conversion costs
associated with the branch office purchase.





Provision for income
taxes.  The Corporation recorded a benefit from income taxes of
$221,000 for the three months ended September 30, 2009, compared to a provision
for income taxes of $198,000 for the same period in the prior
year.  This $419,000 decrease can primarily be attributed to a
reduction in pre-tax income of $1.1 million.





Comparison
of Results for the Nine Month Periods Ended September 30, 2009 and
2008





General.  Net income
decreased $749,000 or 41.2% to $1.1 million for the nine months ended September
30, 2009 compared to $1.8 million the same period in 2008.  This
decrease was the result of increases in the provision for loan losses and
noninterest expense of $792,000 and $1.8 million, respectively, and a decrease
in noninterest income of $125,000, partially offset by an increase in net
interest income of $1.5 million and a decrease in the provision for income taxes
of $483,000.





Net interest
income.  Net interest income on a tax equivalent basis
increased $1.6 million or 19.4% to $9.7 million for the nine months ended
September 30, 2009 from $8.1 million for the same period in
2008.  This net increase can be attributed to an increase in tax
equivalent interest income of $1.1 million and a decrease in interest expense of
$497,000.




22




Interest
income.  Interest income on a tax equivalent basis increased
$1.1 million or 7.6% to $15.3 million for the nine months ended September 30,
2009, compared to $14.2 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 $778,000, $203,000
and $165,000, respectively, partially offset by a decrease in dividends on
federal bank stocks of $63,000.





Tax
equivalent interest earned on loans receivable increased $778,000 or 6.5% to
$12.8 million for the nine months ended September 30, 2009, compared to $12.0
million for the same period in 2008.  This increase resulted primarily
from average loans increasing $37.9 million or 15.8%, accounting for $1.8
million in additional loan interest income.  This increase can be
attributed to growth in the Corporation’s existing loan portfolio and loans
acquired through the aforementioned branch purchase.  Offsetting this
volume increase, the yield on loans receivable decreased 53 basis points to
6.13% for the nine months ended September 30, 2009, versus 6.66% for the same
period in 2008, due to a decline in market interest rates, accounting for a $1.0
million decrease in interest income.





Tax
equivalent interest earned on securities increased $203,000 or 10.0% to $2.2
million for the nine months ended September 30, 2009, compared to $2.0 million
for the same period in 2008.  The average volume of securities
increased $10.0 million or 18.1%, primarily due to securities purchased in
connection with the branch purchase, accounting for a $351,000 increase in
interest income.  Offsetting this volume increase, the average yield
on securities decreased 33 basis points to 4.60% for the nine months ended
September 30, 2009, versus 4.93% for the same period in 2008, due to declining
market interest rates.  This unfavorable yield variance accounted for
a $148,000 decrease in interest income.





Interest
earned on interest-earning deposit accounts increased $165,000 to $277,000 for
the nine months ended September 30, 2009 from $112,000 for the same period in
2008.  The average volume of these assets increased $23.0 million,
primarily from the investment of funds in certificates of deposit with other
FDIC-insured financial institutions and cash received in the branch office
purchase, increasing interest income by $238,000.  Offsetting this
volume increase, the average yield on interest-earning deposit accounts
decreased 109 basis points to 1.26% for the nine months ended September 30,
2009, compared to 2.35% for the same period in the prior year, accounting for a
$73,000 decrease in interest income.  This yield decrease was a result
of the continued low interest rate environment during late 2008 and
2009.





Dividends
on federal bank stocks decreased $63,000 or 76.8% to $19,000 for the nine month
period ended September 30, 2009 from $82,000 for the same period in
2008.  The average yield on these assets decreased 336 basis points to
0.63% for the nine months ended September 30, 2009, compared to 4.00% for the
same period the prior year, as dividend payments from the Federal Home Loan Bank
of Pittsburgh (FHLB) have been suspended since December 2008.





Interest
expense.  Interest expense decreased $497,000 or 8.2% to $5.6
million for the nine months ended September 30, 2009 compared to $6.1 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
$388,000 and $109,000, respectively.





Interest
expense incurred on deposits decreased $388,000 or 8.1% to $4.4 million for the
nine months ended September 30, 2009 compared $4.8 million for the same period
in 2008.  The cost of interest-bearing deposits decreased 71 basis
points to 2.37% for the nine months ended September 30, 2009, compared to 3.08%
for the same period in 2008 causing a $1.2 million decrease in interest
expense.  This rate decrease was primarily due to the continued
decline in market interest rates during late 2008 and 2009.  Partially
offsetting this favorable rate variance, the average volume of interest-bearing
deposits increased $40.6 million or 19.6% to $247.6 million for the nine months
ended September 30, 2009, compared to $207.0 million for the same period in 2008
causing an $837,000 increase in interest expense primarily due to deposits
assumed through the branch purchase in 2009.





23




Interest
expense incurred on borrowed funds decreased $109,000 or 8.3% to $1.2 million
for the nine months ended September 30, 2009, compared to $1.3 million 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 114 basis points to
2.98% for the nine months ended September 30, 2009, compared to 4.12% for the
same period in 2008 causing a $414,000 decrease in interest
expense.  This cost decrease was a result of a decrease in short-term
borrowing rates in 2009.  Partially offsetting this cost decrease, the
average volume of borrowed funds increased $11.5 million or 26.8% to $54.2
million for the nine months ended September 30, 2009, compared to $42.7 million
for the same period in 2008 causing a $305,000 increase in interest
expense.  This volume increase was primarily related to an increase in
short-term borrowings utilized to fund certain investment security purchases in
anticipation of cash to be received in connection with the branch
purchase.




24




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.





(Dollar
      amounts in thousands)
                                                                  
                                                                  Nine
      months ended September 30,2009
                                                                  
                                                                  
                                                                  2008Average
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Yield
      /
                                                                  
                                                                  
                                                                  Average
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Yield
      /Balance
                                                                  
                                                                  
                                                                  Interest
                                                                  
                                                                  
                                                                  Rate
                                                                  
                                                                  
                                                                  Balance
                                                                  
                                                                  
                                                                  Interest
                                                                  
                                                                  
                                                                  RateInterest-earning
      assets:Loans,
      taxable
                                                                  
                                                                  $
                                                                  262,630
                                                                  
                                                                  
                                                                  $
                                                                  12,298
                                                                  
                                                                  
                                                                  
                                                                  6.26
                                                                  %
                                                                  
                                                                  $
                                                                  234,642
                                                                  
                                                                  
                                                                  $
                                                                  11,722
                                                                  
                                                                  
                                                                  
                                                                  6.67
                                                                  %Loans,
      tax exempt
                                                                  
                                                                  
                                                                  15,950
                                                                  
                                                                  
                                                                  
                                                                  483
                                                                  
                                                                  
                                                                  
                                                                  4.05
                                                                  %
                                                                  
                                                                  
                                                                  6,024
                                                                  
                                                                  
                                                                  
                                                                  281
                                                                  
                                                                  
                                                                  
                                                                  6.24
                                                                  %Total
      loans receivable
                                                                  
                                                                  
                                                                  278,580
                                                                  
                                                                  
                                                                  
                                                                  12,781
                                                                  
                                                                  
                                                                  
                                                                  6.13
                                                                  %
                                                                  
                                                                  
                                                                  240,666
                                                                  
                                                                  
                                                                  
                                                                  12,003
                                                                  
                                                                  
                                                                  
                                                                  6.66
                                                                  %Securities,
      taxable
                                                                  
                                                                  
                                                                  46,777
                                                                  
                                                                  
                                                                  
                                                                  1,379
                                                                  
                                                                  
                                                                  
                                                                  3.94
                                                                  %
                                                                  
                                                                  
                                                                  40,970
                                                                  
                                                                  
                                                                  
                                                                  1,339
                                                                  
                                                                  
                                                                  
                                                                  4.37
                                                                  %Securities,
      tax exempt
                                                                  
                                                                  
                                                                  18,404
                                                                  
                                                                  
                                                                  
                                                                  861
                                                                  
                                                                  
                                                                  
                                                                  6.26
                                                                  %
                                                                  
                                                                  
                                                                  14,201
                                                                  
                                                                  
                                                                  
                                                                  698
                                                                  
                                                                  
                                                                  
                                                                  6.57
                                                                  %Total
      securities
                                                                  
                                                                  
                                                                  65,181
                                                                  
                                                                  
                                                                  
                                                                  2,240
                                                                  
                                                                  
                                                                  
                                                                  4.60
                                                                  %
                                                                  
                                                                  
                                                                  55,171
                                                                  
                                                                  
                                                                  
                                                                  2,037
                                                                  
                                                                  
                                                                  
                                                                  4.93
                                                                  %Interest-earning
      deposits with banks
                                                                  
                                                                  
                                                                  29,373
                                                                  
                                                                  
                                                                  
                                                                  277
                                                                  
                                                                  
                                                                  
                                                                  1.26
                                                                  %
                                                                  
                                                                  
                                                                  6,374
                                                                  
                                                                  
                                                                  
                                                                  112
                                                                  
                                                                  
                                                                  
                                                                  2.35
                                                                  %Federal
      bank stocks
                                                                  
                                                                  
                                                                  4,017
                                                                  
                                                                  
                                                                  
                                                                  19
                                                                  
                                                                  
                                                                  
                                                                  0.63
                                                                  %
                                                                  
                                                                  
                                                                  2,721
                                                                  
                                                                  
                                                                  
                                                                  82
                                                                  
                                                                  
                                                                  
                                                                  4.00
                                                                  %Total
      interest-earning cash equivalents
                                                                  
                                                                  
                                                                  33,390
                                                                  
                                                                  
                                                                  
                                                                  296
                                                                  
                                                                  
                                                                  
                                                                  1.19
                                                                  %
                                                                  
                                                                  
                                                                  9,095
                                                                  
                                                                  
                                                                  
                                                                  194
                                                                  
                                                                  
                                                                  
                                                                  2.84
                                                                  %Total
      interest-earning assets
                                                                  
                                                                  
                                                                  377,151
                                                                  
                                                                  
                                                                  
                                                                  15,317
                                                                  
                                                                  
                                                                  
                                                                  5.43
                                                                  %
                                                                  
                                                                  
                                                                  304,932
                                                                  
                                                                  
                                                                  
                                                                  14,234
                                                                  
                                                                  
                                                                  
                                                                  6.24
                                                                  %Cash
      and due from banks
                                                                  
                                                                  
                                                                  2,178
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  5,578Other
      noninterest-earning assets
                                                                  
                                                                  
                                                                  17,392
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  14,762Total
      assets
                                                                  
                                                                  $
                                                                  396,721
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  325,272Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                  
                                                                  $
                                                                  117,940
                                                                  
                                                                  
                                                                  $
                                                                  817
                                                                  
                                                                  
                                                                  
                                                                  0.93
                                                                  %
                                                                  
                                                                  $
                                                                  87,077
                                                                  
                                                                  
                                                                  $
                                                                  949
                                                                  
                                                                  
                                                                  
                                                                  1.46
                                                                  %Time
      deposits
                                                                  
                                                                  
                                                                  129,667
                                                                  
                                                                  
                                                                  
                                                                  3,571
                                                                  
                                                                  
                                                                  
                                                                  3.68
                                                                  %
                                                                  
                                                                  
                                                                  119,933
                                                                  
                                                                  
                                                                  
                                                                  3,827
                                                                  
                                                                  
                                                                  
                                                                  4.26
                                                                  %Total
      interest-bearing deposits
                                                                  
                                                                  
                                                                  247,607
                                                                  
                                                                  
                                                                  
                                                                  4,388
                                                                  
                                                                  
                                                                  
                                                                  2.37
                                                                  %
                                                                  
                                                                  
                                                                  207,010
                                                                  
                                                                  
                                                                  
                                                                  4,776
                                                                  
                                                                  
                                                                  
                                                                  3.08
                                                                  %Borrowed
      funds, long-term
                                                                  
                                                                  
                                                                  35,000
                                                                  
                                                                  
                                                                  
                                                                  1,169
                                                                  
                                                                  
                                                                  
                                                                  4.46
                                                                  %
                                                                  
                                                                  
                                                                  35,000
                                                                  
                                                                  
                                                                  
                                                                  1,177
                                                                  
                                                                  
                                                                  
                                                                  4.49
                                                                  %Borrowed
      funds, short-term
                                                                  
                                                                  
                                                                  19,186
                                                                  
                                                                  
                                                                  
                                                                  40
                                                                  
                                                                  
                                                                  
                                                                  0.28
                                                                  %
                                                                  
                                                                  
                                                                  7,728
                                                                  
                                                                  
                                                                  
                                                                  141
                                                                  
                                                                  
                                                                  
                                                                  2.44
                                                                  %Total
      borrowed funds
                                                                  
                                                                  
                                                                  54,186
                                                                  
                                                                  
                                                                  
                                                                  1,209
                                                                  
                                                                  
                                                                  
                                                                  2.98
                                                                  %
                                                                  
                                                                  
                                                                  42,728
                                                                  
                                                                  
                                                                  
                                                                  1,318
                                                                  
                                                                  
                                                                  
                                                                  4.12
                                                                  %Total
      interest-bearing liabilities
                                                                  
                                                                  
                                                                  301,793
                                                                  
                                                                  
                                                                  
                                                                  5,597
                                                                  
                                                                  
                                                                  
                                                                  2.48
                                                                  %
                                                                  
                                                                  
                                                                  249,738
                                                                  
                                                                  
                                                                  
                                                                  6,094
                                                                  
                                                                  
                                                                  
                                                                  3.26
                                                                  %Noninterest-bearing
      demand deposits
                                                                  
                                                                  
                                                                  54,855
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  48,041
                                                                  
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  -Funding and cost of funds
                                                                  
                                                                  
                                                                  356,648
                                                                  
                                                                  
                                                                  
                                                                  5,597
                                                                  
                                                                  
                                                                  
                                                                  2.10
                                                                  %
                                                                  
                                                                  
                                                                  297,779
                                                                  
                                                                  
                                                                  
                                                                  6,094
                                                                  
                                                                  
                                                                  
                                                                  2.73
                                                                  %Other
      noninterest-bearing liabilities
                                                                  
                                                                  
                                                                  3,998
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2,525Total
      liabilities
                                                                  
                                                                  
                                                                  360,646
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  300,304Stockholders'
      equity
                                                                  
                                                                  
                                                                  36,075
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  24,968Total
      liabilities and stockholders' equity
                                                                  
                                                                  $
                                                                  396,721
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  325,272Net
      interest income
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  9,720
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  8,140Interest
      rate spread(difference between
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2.95
                                                                  %
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  2.98
                                                                  %weighted
      average rate on interest-earningassets
      and interest-bearing liabilities)Net
      interest margin(net interest
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  3.45
                                                                  %
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  3.57
                                                                  %income
      as a percentage of averageinterest-earning
      assets)




25




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.





(Dollar
      amounts in thousands)
                  
                  Nine
      months ended September 30,2009
      versus 2008Increase
      (Decrease) due toVolume
                  
                  
                  Rate
                  
                  
                  TotalInterest
      income:Loans
                  
                  $
                  1,790
                  
                  
                  $
                  (1,012
                  )
                  
                  $
                  778Securities
                  
                  
                  351
                  
                  
                  
                  (148
                  )
                  
                  
                  203Interest-earning
      deposits with banks
                  
                  
                  238
                  
                  
                  
                  (73
                  )
                  
                  
                  165Federal
      bank stocks
                  
                  
                  27
                  
                  
                  
                  (90
                  )
                  
                  
                  (63
                  )Total
      interest-earning assets
                  
                  
                  2,406
                  
                  
                  
                  (1,323
                  )
                  
                  
                  1,083Interest
      expense:Deposits
                  
                  
                  837
                  
                  
                  
                  (1,225
                  )
                  
                  
                  (388
                  )Borrowed
      funds
                  
                  
                  305
                  
                  
                  
                  (414
                  )
                  
                  
                  (109
                  )Total
      interest-bearing liabilities
                  
                  
                  1,142
                  
                  
                  
                  (1,639
                  )
                  
                  
                  (497
                  )Net
      interest income
                  
                  $
                  1,264
                  
                  
                  $
                  316
                  
                  
                  $
                  1,580





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
nine months ended September 30, 2009 and 2008 and the year ended December 31,
2008 is as follows:





(Dollar
amounts in thousands)


At or for the nine months ended
                  
                  
                  At
      or for the
                    year
      endedSeptember
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008
                  
                  
                  2008Balance
      at the beginning of the period
                  
                  $
                  2,651
                  
                  
                  $
                  2,157
                  
                  
                  $
                  2,157Allowance
      for loan losses of ECSLA
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  206Provision
      for loan losses
                  
                  
                  1,077
                  
                  
                  
                  285
                  
                  
                  
                  500Charge-offs
                  
                  
                  (590
                  )
                  
                  
                  (113
                  )
                  
                  
                  (252
                  )Recoveries
                  
                  
                  20
                  
                  
                  
                  34
                  
                  
                  
                  40Balance
      at the end of the period
                  
                  $
                  3,158
                  
                  
                  $
                  2,363
                  
                  
                  $
                  2,651Non-performing
      loans
                  
                  $
                  2,528
                  
                  
                  $
                  783
                  
                  
                  
                  1,011Non-performing
      assets
                  
                  
                  2,956
                  
                  
                  
                  797
                  
                  
                  
                  1,061Non-performing
      loans to total loans
                  
                  
                  0.84
                  %
                  
                  
                  0.31
                  %
                  
                  
                  0.38
                  %Non-performing
      assets to total assets
                  
                  
                  0.64
                  %
                  
                  
                  0.22
                  %
                  
                  
                  0.28
                  %Allowance
      for loan losses to total loans
                  
                  
                  1.05
                  %
                  
                  
                  0.93
                  %
                  
                  
                  0.99
                  %Allowance
      for loan losses to non-performing loans
                  
                  
                  124.91
                  %
                  
                  
                  301.79
                  %
                  
                  
                  262.22
                  %




26




The
provision for loan losses increased $792,000 to $1.1 million for the nine month
period ended September 30, 2009 from $285,000 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, charge-offs, increases in non-performing loans and the
aforementioned loan growth.





Classified
Assets.For
discussion regarding the Corporation’s classified assets as of September 30,
2009, refer to the “Comparison of Results for the Three Month Periods Ended
September 30, 2009 and 2008,” beginning on page 17.





Noninterest
income.  Noninterest income decreased $125,000 or 7.0% to $1.7
million during the nine months ended September 30, 2009, compared to $1.8
million during the same period in the prior year.  This decrease can
primarily be attributed to impairment charges of $898,000 recorded on three
financial institution equity securities in 2009, partially offset by gains
realized on the sale of investments totaling $447,000 in 2009.  During
the same period in 2008, the Corporation recorded impairment charges of $391,000
on Fannie Mae and Freddie Mac stocks.  Also contributing to the
decrease in noninterest income during the nine months ended September 30, 2009
was a decrease in customer fees and service charges of $107,000 primarily due to
a decrease in overdrafts charges.





Noninterest
expense.  Noninterest expense increased $1.8 million or 25.3%
to $8.8 million during the nine months ended September 30, 2009 compared to $7.0
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, intangible amortization and other noninterest expenses
of $463,000, $149,000, $51,000 and $1.1 million, respectively.





Compensation
and employee benefits increased $463,000 or 11.7% to $4.4 million for the nine
months ended September 30, 2009 compared to $4.0 million for the same period in
2008.  This increase can be attributed primarily to normal salary and
wage increases, staff added in connection with the Grove City, Pennsylvania
branch opened in April of 2008 and the branch purchase in August of 2009 and
higher costs associated with the Corporation’s pension plan.





Premises
and equipment increased $149,000 or 12.0% to $1.4 for the nine months ended
September 30, 2009, compared to $1.2 million for the same period in the prior
year.  This increase was primarily related to the addition of branch
offices in 2008 and 2009 and increased depreciation expense related to projects
and initiatives implemented during late 2008 and 2009.





Associated
with the branch office, the Bank recognized $51,000 of core deposit intangible
amortization expense during the nine month period ended September 30,
2009.  Further discussion related to goodwill and intangible assets
related to the branch office purchase can be found in the “Notes to Consolidated
Financial Statements” beginning on page 5.





Professional
fees increased $453,000 to $733,000 for the nine months ended September 30,
2009, compared to $280,000 for the same period in the prior
year.  This increase was primarily due to legal fees, project
management fees and conversion assistance costs associated with the branch
purchase.





FDIC
expense increased $336,000 to $377,000 for the nine months ended September 30,
2009, compared to $41,000 for the same period in the prior year.  This
was the result of increases in base assessment rates for FDIC insurance
premiums and a special assessment that was assessed on all FDIC insured
depository institutions in 2009.  The special assessment totaled
$178,000 and was recognized during the second quarter of 2009.





Other
noninterest expense increased $318,000 or 21.6% to $1.8 million during the nine
months ended September 30, 2009, compared to $1.5 million for the same period in
the prior year.  This increase was primarily due to conversion costs
related to the branch purchase.





Provision for income
taxes.  The provision for income taxes decreased $483,000 or
94.7% to $27,000 for the nine months ended September 30, 2009, compared to
$510,000 for the same period in the prior year.  This decrease can
primarily be attributed to a decrease in pre-tax income of $1.2
million.




27




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 nine months ended September 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 $55.0 million, and standby letters of credit totaling $1.5
million.





At
September 30, 2009, time deposits amounted to $167.0 million or 44.2% of the
Corporation’s total consolidated deposits, including approximately $54.2 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.





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 September 30, 2009, the Corporation’s
borrowing capacity with the FHLB, net of funds borrowed, was $115.8
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.




28




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.





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.





Assumptions
about the timing and variability of cash flows are critical in gap
analysis.  Particularly important are the assumptions driving mortgage
prepayments and the expected attrition of the core deposits
portfolios.  These assumptions are based on the Corporation’s
historical experience, industry standards and 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 September 30, 2009,  the Corporation’s interest-earning
assets maturing or repricing within one year totaled $140.2 million while the
Corporation’s interest-bearing liabilities maturing or repricing within one-year
totaled $129.2 million, providing an excess of interest-bearing assets over
interest-earning liabilities of $11.0 million.  At September 30, 2009,
the percentage of the Corporation’s liabilities to assets maturing or repricing
within one year was 92.2%.





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.




29




As of
September 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





In
addition to the other information contained this Quarterly Report on Form 10-Q,
the following risk factors represent material updates and additions to the
risk factor previously disclosed in the Corporation’s Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 2008, as filed with the Securities
and Exchange Commission.  Additional risks not presently known to us, or
that we currently deem immaterial, may also adversely affect our business,
financial condition or results of operations.  Further, to the
extent that any of the information contained in this Quarterly Report on
Form 10-Q constitutes forward-looking statements, the risk factors
set forth below also are cautionary statements identifying important
factors that could cause our actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of
us.





Deterioration
of economic conditions in our geographic market area could hurt our
business.





We are
located in western Pennsylvania and our loans are concentrated in Butler,
Clarion, Crawford, Jefferson and Venango Counties, Pennsylvania. Although we
have diversified our loan portfolio into other Pennsylvania counties, and to a
very limited extent, into other states, the vast majority of our loans remain
concentrated in the three primary counties. As a result of this geographic
concentration, our financial results depend largely upon economic and real
estate market conditions in these areas. Deterioration in economic or real
estate market conditions in our primary market areas could have a material
adverse impact on the quality of our loan portfolio, the demand for our products
and services, and our financial condition and results of operations.
Non-performing loans increased from $1.0 million or 0.28% of total assets
at December 31, 2008 to $2.5 million or 0.55% of total assets at
September 30, 2009.





Our
financial condition and results of operations would be adversely affected if our
allowance for loan losses is not sufficient to absorb actual losses or if we are
required to increase our allowance for loan losses.





We have
established an allowance for loan losses that we believe is adequate to offset
probable losses on our existing loans. However, experience in the banking
industry indicates that a portion of our loans will become delinquent, that some
of our loans may only be partially repaid or may never be repaid and we may
experience other losses for reasons beyond our control. Despite our underwriting
criteria and historical experience, we may be particularly susceptible to losses
due to: (1) the geographic concentration of our loans; (2) the
concentration of higher risk loans, such as commercial real estate and
commercial business loans; and (3) our lack of experience with the loans
acquired in the Titusville branch acquisition. As a result, we may not be able
to maintain our current levels of nonperforming assets and charge-offs. Although
we believe that our allowance for loan losses is maintained at a level adequate
to absorb any inherent losses in our loan portfolio, these estimates of loan
losses are necessarily subjective and their accuracy depends on the outcome of
future events. If we need to make significant and unanticipated increases in our
loss allowance in the future, our results of operations and financial condition
would be materially adversely affected at that time.




30




Economic
conditions and increased uncertainty in the financial markets could adversely
affect our ability to accurately assess the allowance for credit losses. Our
ability to assess the creditworthiness of our customers or to estimate the
values of our assets and collateral for loans will be reduced if the models and
approaches we use become less predictive of future behaviors, valuations,
assumptions or estimates. We estimate losses inherent in our loan portfolio, the
adequacy of our allowance for loan losses and the values of certain assets by
using estimates based on difficult, subjective, and complex judgments, including
estimates as to the effects of economic conditions and how these economic
conditions might affect the ability of our borrowers to repay their loans or the
value of assets.





Further declines
in the value of certain investment securities could require
write-downs, which would reduce our earnings.





At September 30,
2009, our investment portfolio included $3.4 million of securities in other
financial institutions held by us.  After our third quarter
evaluation of our investment portfolio, we determined that
other-than-temporary impairments existed on three financial institution equity
securities.  The impairment of these securities were considered to be
other-than-temporary due to continued concerns related to the financial
condition and near-term prospects of the three financial
institutions, economic conditions of the financial services industry and
deteriorating market values.  These securities were written down to
their fair market values as of September 30, 2009 and resulted
in impairment losses of $898,000  that we recognized for
the three and nine month period ended September 30, 2009.  A
number of factors or combinations of factors could cause us to conclude in one
or more future reporting periods that an unrealized loss that exists with
respect to one or more of these securities or other financial
institution securities will constitute an impairment that is other-than
temporary.  These factors include, but are not limited to, failure to make
scheduled interest or dividend payments, an increase in the severity of the
unrealized loss on a particular security, an increase in the continuous duration
of the unrealized loss without an improvement in value or changes in market
conditions and/or industry or issuer specific factors that would render us
unable to forecast a full recovery in value. 
Additional other-than-temporary impairment write-downs could reduce our
earnings.





We
hold certain intangible assets that could be classified as impaired in the
future. If these assets are considered to be either partially or fully impaired
in the future, our earnings and the book values of these assets would
decrease.





We are
required to test our goodwill and core deposit intangible assets for impairment
on a periodic basis. The impairment testing process considers a variety of
factors, including the current market price of our common shares, the estimated
net present value of our assets and liabilities and information concerning the
terminal valuation of similarly situated insured depository institutions. It is
possible that future impairment testing could result in a partial or full
impairment of the value of our goodwill or core deposit intangible assets, or
both. If an impairment determination is made in a future reporting period, our
earnings and the book value of these intangible assets will be reduced by the
amount of the impairment.





Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.





Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, and other sources, could have a substantial negative effect on our
liquidity. Our access to funding sources in amounts adequate to finance our
activities on terms that are acceptable to us could be impaired by factors that
affect us specifically or the financial services industry or economy in general.
Factors that could negatively impact our access to liquidity sources include a
decrease in the level of our business activity as a result of a downturn in the
markets in which our loans are concentrated, adverse regulatory action against
us, or our inability to attract and retain deposits. Our ability to borrow could
be impaired by factors that are not specific to us, such a disruption in the
financial markets or negative views and expectations about the prospects for the
financial services industry in light of recent turmoil faced by banking
organizations and the unstable credit markets.




31




Our
continued growth depends on our ability to meet minimum regulatory capital
levels. Growth and shareholder returns may be adversely affected if sources of
capital are not available to help us meet them.





As we
grow, we will have to maintain our regulatory capital levels at or above the
required minimum levels. If earnings do not meet our current estimates, if we
incur unanticipated losses or expenses, or if we grow faster than expected, we
may need to obtain additional capital sooner than expected, through borrowing,
additional issuances of debt or equity securities, or otherwise. If we do not
have continued access to sufficient capital, we may be required to reduce our
level of assets or reduce our rate of growth in order to maintain regulatory
compliance. Under those circumstances net income and the rate of growth of net
income may be adversely affected. Additional issuances of equity securities
could have a dilutive effect on existing shareholders.





There
can be no assurance that recent legislation and regulatory actions taken by the
federal government will help stabilize the financial system in the United
States.





Several
pieces of federal legislation have been enacted, and the U.S. Treasury, the
Federal Reserve, the FDIC, and other federal agencies have enacted numerous
programs, policies and regulations to address the current liquidity and credit
crises. These measures include the Emergency Economic Stimulus Act of 2008
("EESA"), the American Reinvestment and Recovery Act of 2009 ("ARRA), and the
numerous programs, including the TARP Capital Purchase Program (the "CPP"),
expanded deposit insurance coverage, enacted thereunder. In addition, the
Secretary of the U.S. Treasury has proposed fundamental changes to the
regulation of financial institutions, markets and products.





We cannot
predict the actual effects of EESA, the ARRA, the proposed regulatory reform
measures and various governmental, regulatory, monetary and fiscal initiatives
which have been and may be enacted on the financial markets, on us and the Bank.
The terms and costs of these activities, or the failure of these actions to help
stabilize the financial markets, asset prices, market liquidity and a
continuation or worsening of current financial market and economic conditions
could materially and adversely affect our business, financial condition, results
of operations, and the trading prices of our securities.


We expect
to face increased regulation of our industry, including as a result of EESA, the
ARRA and related initiatives by the federal government. Compliance with such
regulations may increase our costs and limit our ability to pursue business
opportunities.





We
are subject to additional uncertainties, and potential additional regulatory or
compliance burdens, as a result of our participation in the CPP.





We
accepted an investment of $7.5 million from the U.S. Treasury under the
CPP. The Stock Purchase Agreement we (and all other participating institutions)
entered into with the U.S. Treasury, provides that the U.S. Treasury
may unilaterally amend the agreement to the extent required to comply with any
changes after the execution in applicable federal statutes. As a result of this
provision, the U.S. Treasury and Congress may impose additional
requirements or restrictions on us and the Bank in respect of reporting,
compliance, corporate governance, executive or employee compensation, dividend
payments, stock repurchases, lending or other business practices, capital
requirements or other matters. We may be required to expend additional resources
in order to comply with these requirements. Such additional requirements could
impair our ability to compete with institutions that are not subject to the
restrictions because they did not accept an investment from the U.S. Treasury.
To the extent that additional restrictions or limitations on employee
compensation are imposed, such as those contained in ARRA and the regulations
issued in June 2009, we may be less competitive in attracting and retaining
successful incentive compensation based lenders and customer relations
personnel, or senior executive officers.





Additionally,
the ability of Congress to utilize the amendment provisions to effect political
or public relations goals could result in our being subjected to additional
burdens as a result of public perceptions of issues relating to the largest
banks, and which are not applicable to community oriented institutions such as
us. We may be disadvantaged as a result of these uncertainties.




32




As a
result of the issuance of the Series A Preferred Stock to the U.S.
Treasury, we are required to comply with certain restrictions on executive and
employee compensation included in the EESA, as amended. Certain of these
provisions could limit the amount and the tax deductibility of compensation we
pay to our executive officers, and could have an adverse affect on our ability
to compete for and retain employees and senior executive officers.





We
may fail to realize the cost savings and revenue enhancements we estimate from
the acquisition of the Titusville branch office.





On
August 28, 2009, the Bank completed the acquisition of the full-service
branch office of National City Bank, a national banking association and
wholly-owned subsidiary of The PNC Financial Services Group, Inc., located
in Titusville, Pennsylvania. This transaction was completed pursuant to the
Purchase and Assumption Agreement entered into on April 6, 2009. The
success of the Titusville branch acquisition will depend, in part, on our
ability to realize the estimated cost savings and revenue enhancements from
adding a new market area to the business of the Bank. While we believe that
these cost savings and revenue enhancement estimates are achievable, it is
possible that the potential cost savings and revenue enhancements could turn out
to be more difficult to achieve than we anticipated. Our estimates depend on our
ability to integrate the business of the Titusville branch in a manner that
permits those cost savings and revenue enhancements to be realized. Our ability
to realize increases in revenue will depend, in part, on our ability to retain
customers and employees, and to capitalize on existing relationships for the
provision of additional products and services. If our estimates turn out to be
incorrect or we are not able to successfully integrate the Titusville branch,
the anticipated cost savings and increased revenues may not be realized fully or
at all, or may take longer to realize than expected.





Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.





FDIC
insurance premiums have increased substantially in 2009 already, and we expect
to pay significantly higher FDIC premiums in the future. A large number of bank
failures has significantly depleted the deposit insurance fund and reduced the
ratio of reserves to insured deposits. The FDIC adopted a revised risk-based
deposit insurance assessment schedule on February 27, 2009, which raised
deposit insurance premiums. On May 22, 2009, the FDIC also implemented a
five basis point special assessment of each insured depository institution's
assets minus Tier 1 capital as of June 30, 2009, but no more than 10
basis points times the institution's assessment base for the second quarter of
2009, which was collected on September 30, 2009. Additional special
assessments may be imposed by the FDIC in the future, including a possible
additional assessment in 2009. We participate in the FDIC's Temporary Liquidity
Guarantee Program, or TLG, for noninterest-bearing transaction deposit accounts.
Banks that participate in the TLG's noninterest-bearing transaction account
guarantee will pay the FDIC an annual assessment of 10 basis points on the
amounts in such accounts above the amounts covered by FDIC deposit insurance. To
the extent that these TLG assessments are insufficient to cover any loss or
expenses arising from the TLG program, the FDIC is authorized to impose an
emergency special assessment on all FDIC-insured depository institutions. The
FDIC has authority to impose charges for the TLG program upon depository
institution holding companies, as well. The TLG is scheduled to end
December 31, 2009, but the FDIC has proposed extending TLG to June 30,
2010, but charging a higher fee to banks that elect to participate in the
extension. These changes will cause our deposit insurance expense to increase.
These actions could significantly increase our noninterest expense in 2009 and
for the foreseeable future.





On
September 28, 2009, the FDIC proposed to recapitalize the Deposit Insurance
Fund by requiring insured institutions to prepay their insurance premiums for
the quarter ending December 31, 2009 and for the years ending
December 31, 2010, 2011 and 2012. The proposed prepayment would be due
December 30, 2009. The FDIC further proposed that assessments for the years
ending December 31, 2011 and 2012 would increase by three basis points, and
would be based upon assumed increases in insured deposits of 5% annually through
2012. An increase in assessment rates will result in a further increase in our
FDIC general insurance premium expense, and the prepayment of insurance premiums
will increase our non-earning assets.


33


Changes
in interest rates and other factors beyond our control could have an adverse
impact on our financial performance and results.





By
nature, all financial institutions are impacted by changing interest rates.
Among other issues, changes in interest rates may affect the
following:





·
            the
      demand for new loans;


·
            the
      value of our interest-earning
assets;


·
            prepayment
      speeds experienced on various asset classes, particularly residential
      mortgage loans;


·
            credit
      profiles of existing borrowers;


·
            rates
      received on loans and securities;


·
            our
      ability to obtain and retain deposits in connection with other available
      investment alternatives; and


·
            rates
      paid on deposits and borrowings.





Significant
fluctuations in interest rates may have an adverse effect upon our financial
condition and results of operations. The rates that we earn on our assets and
the rates that we pay on our liabilities are generally fixed for a contractual
period of time. We, like many financial institutions, have liabilities that
generally have shorter contractual maturities than our assets. This imbalance
can create significant earnings volatility, because market interest rates change
over time. In a period of rising interest rates, the interest income earned on
our assets may not increase as rapidly as the interest paid on our liabilities.
In a period of declining interest rates, the interest income earned on our
assets may decrease more rapidly than the interest paid on our
liabilities.





In
addition, changes in interest rates can also affect the average life of our
loans and mortgage-backed and related securities. A reduction in interest rates
results in increased prepayments of loans and mortgage-backed and related
securities, as borrowers refinance their debt in order to reduce their borrowing
cost. This causes reinvestment risk. This means that we may not be able to
reinvest prepayments at rates that are comparable to the rates we earned on the
prepaid loans or securities.





There
are increased risks involved with commercial real estate and commercial business
and consumer lending activities.





Our
lending activities include loans secured by commercial real estate. Commercial
real estate lending generally is considered to involve a higher degree of risk
than single-family residential lending due to a variety of factors, including
generally larger loan balances and the dependency on successful operation of the
project for repayment. Our lending activities also include commercial business
loans to small to medium businesses, which generally are secured by various
equipment, machinery and other corporate assets, and a wide variety of consumer
loans, including home equity and second mortgage loans, automobile loans and
unsecured loans. Although commercial business loans and consumer loans generally
have shorter terms and higher interest rates than mortgage loans, they generally
involve more risk than mortgage loans because of the nature of, or in certain
cases the absence of, the collateral which secures such loans.





In
addition, we have a concentration of higher balance commercial real estate and
commercial business loans with a limited number of borrowers in our market area.
As a result, we have a greater risk of a significant loss due to such
concentration and a greater risk of loan defaults in the event of an economic
downturn in our market area as adverse economic changes may have a negative
effect on the ability of our borrowers to make timely repayment of their
loans.


34


Strong
competition within our market area may limit our growth and
profitability.





Competition
in the banking and financial services industry is intense. In our market area,
we compete with commercial banks, savings institutions, mortgage brokerage
firms, credit unions, finance companies, and other financial intermediaries
operating locally and elsewhere. Some of our competitors have greater name
recognition and market presence that benefits them in attracting business and
offer certain services that we do not provide. In addition, larger competitors
may be able to price loans and deposits more aggressively than we do, which
could affect our ability to grow and remain profitable on a long term basis. Our
profitability depends upon our continued ability to successfully compete in our
market area.





Government
regulation will significantly affect the Bank's business, and may result in
higher costs and lower shareholder returns.





The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. We are subject to extensive regulation, supervision and
examination by federal, state and local governmental authorities, including the
Federal Reserve Board and the Office of the Comptroller of the Currency. The
burden imposed by federal and state regulations puts banks at a competitive
disadvantage compared to less regulated competitors such as finance companies,
mortgage banking companies and leasing companies. Changes in the laws,
regulations and regulatory practices affecting the banking industry may increase
our costs of doing business or otherwise adversely affect us and create
competitive advantages for others. Regulations affecting banks and financial
services companies undergo continuous change, and we cannot predict the ultimate
effect of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may
also affect our ability to attract deposits and other funding sources, make
loans and investments, and achieve satisfactory interest spreads.





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





None.





Item 5.  Other
Information





(a)
            On
      October 29, 2009, the Corporation received approval to list its common
      stock on the NASDAQ Capital Market under the symbol “EMCF.” The Company’s
      common stock is scheduled to be listed on the NASDAQ Capital Market
      beginning on November 6, 2009.





On
October 21, 2009, the Corporation’s board of directors amended its by-laws to
provide for the issuance of stock in uncertificated form, which was not
expressly authorized in the by-laws prior to the amendment. This amendment to
the by-laws was made in order to comply with the requirements of The NASDAQ
Stock Market relating to eligibility of the registrant’s common stock, which has
received approval to list its common stock on the NASDAQ Capital Market, for
participation in the Direct Registration System maintained by the Depository
Trust Company.





(b)
            Not
      applicable.





Item
6.  Exhibits





Exhibit  3.2
            Amended
      and RestatedBy-Laws of
      Emclaire Financial Corp.


Exhibit
    31.1
            Rule
      13a-14(a) Certification of Principal Executive
  Officer


Exhibit
    31.2
            Rule
      13a-14(a) Certification of Principal Accounting
  Officer


Exhibit
    32.1
            CEO
      Certification Pursuant to 18 U.S.C. Section
1350


Exhibit
    32.2
            CFO
      Certification Pursuant to 18 U.S.C. Section
1350


35


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 SUBSIDIARIES





Date:  November
      3, 2009
                        By:
                        /s/ William C. MarshWilliam
      C. MarshChairman
      of the Board,President
      and Chief Executive OfficerDate:  November
      3, 2009
                        By:
                        /s/ Amanda L. EnglesAmanda
      L. EnglesTreasurer
      and Principal Accounting
Officer




36