UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended June 30,
2010





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 1,457,404 at
August 9, 2010.













EMCLAIRE
FINANCIAL CORP.





INDEX
TO QUARTERLY REPORT ON FORM 10-Q





PART I – FINANCIAL
    INFORMATIONItem
      1.
                                Interim
      Financial Statements (Unaudited)Consolidated
      Balance Sheets as ofJune
      30, 2010 and December 31, 2009
                                1Consolidated
      Statements of Operations for the threeand
      six months ended June 30, 2010 and 2009
                                2Consolidated
      Statements of Cash Flows for the sixmonths
      ended June 30, 2010 and 2009
                                3Consolidated
      Statements of Changes in Stockholders’Equity
      for the three and six months ended June 30, 2010 and 2009
                                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
                                27Item
      4T.
                                Controls
      and Procedures
                                28PART II – OTHER
  INFORMATIONItem
      1.
                                Legal
      Proceedings
                                28Item
      1A.
                                Risk
      Factors
                                28Item
      2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                28Item
      3.
                                Defaults
      Upon Senior Securities
                                29Item
      4.
                                (Removed
      and Reserved)
                                29Item
      5.
                                Other
      Information
                                29Item
      6.
                                Exhibits
                                29Signatures
                                
                                30








PART I - FINANCIAL
INFORMATION





Item 1.  Interim
Financial Statements





Emclaire
Financial Corp.


Consolidated
Balance Sheets (Unaudited)


As of
June 30, 2010 and December 31, 2009


(Dollar
amounts in thousands, except share data)





June 30,
                                          
                                          
                                          December 31,2010
                                          
                                          
                                          2009AssetsCash
      and due from banks
                                          
                                          $
                                          3,168
                                          
                                          
                                          $
                                          2,822Interest
      earning deposits with banks
                                          
                                          
                                          31,529
                                          
                                          
                                          
                                          36,130Cash
      and cash equivalents
                                          
                                          
                                          34,697
                                          
                                          
                                          
                                          38,952Securities
      available for sale, at fair value
                                          
                                          
                                          129,839
                                          
                                          
                                          
                                          105,243Loans
      receivable, net of allowance for loan losses of $3,298 and
      $3,202
                                          
                                          
                                          292,496
                                          
                                          
                                          
                                          292,615Federal
      bank stocks, at cost
                                          
                                          
                                          4,275
                                          
                                          
                                          
                                          4,125Bank-owned
      life insurance
                                          
                                          
                                          5,491
                                          
                                          
                                          
                                          5,388Accrued
      interest receivable
                                          
                                          
                                          1,591
                                          
                                          
                                          
                                          1,574Premises
      and equipment, net
                                          
                                          
                                          8,976
                                          
                                          
                                          
                                          9,170Goodwill
                                          
                                          
                                          3,664
                                          
                                          
                                          
                                          3,657Core
      deposit intangible
                                          
                                          
                                          2,281
                                          
                                          
                                          
                                          2,585Prepaid
      expenses and other assets
                                          
                                          
                                          3,840
                                          
                                          
                                          
                                          4,217Total
      Assets
                                          
                                          $
                                          487,150
                                          
                                          
                                          $
                                          467,526Liabilities and Stockholders'
      EquityLiabilities:Deposits:Non-interest
      bearing
                                          
                                          $
                                          75,979
                                          
                                          
                                          $
                                          67,033Interest
      bearing
                                          
                                          
                                          328,568
                                          
                                          
                                          
                                          318,292Total
      deposits
                                          
                                          
                                          404,547
                                          
                                          
                                          
                                          385,325Short-term
      borrowed funds
                                          
                                          
                                          5,000
                                          
                                          
                                          
                                          5,000Long-term
      borrowed funds
                                          
                                          
                                          35,000
                                          
                                          
                                          
                                          35,000Accrued
      interest payable
                                          
                                          
                                          729
                                          
                                          
                                          
                                          711Accrued
      expenses and other liabilities
                                          
                                          
                                          2,391
                                          
                                          
                                          
                                          4,456Total
      Liabilities
                                          
                                          
                                          447,667
                                          
                                          
                                          
                                          430,492Commitments
      and Contingent Liabilities
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Stockholders'
      Equity:Cumulative
      preferred stock, $1.00 par value, $7,500 liquidation
value,3,000,000
      shares authorized; 7,500 issued and outstanding
                                          
                                          
                                          7,439
                                          
                                          
                                          
                                          7,430Warrants
                                          
                                          
                                          88
                                          
                                          
                                          
                                          88Common
      stock, $1.25 par value, 12,000,000 shares authorized;1,559,421
      shares issued; 1,457,404 and 1,431,404 shares outstanding
                                          
                                          
                                          1,949
                                          
                                          
                                          
                                          1,949Additional
      paid-in capital
                                          
                                          
                                          14,766
                                          
                                          
                                          
                                          14,685Treasury
      stock, at cost; 102,017 and 128,017 shares
                                          
                                          
                                          (2,114
                                          )
                                          
                                          
                                          (2,653
                                          )Retained
      earnings
                                          
                                          
                                          16,766
                                          
                                          
                                          
                                          15,967Accumulated
      other comprehensive income (loss)
                                          
                                          
                                          589
                                          
                                          
                                          
                                          (432
                                          )Total
      Stockholders' Equity
                                          
                                          
                                          39,483
                                          
                                          
                                          
                                          37,034Total
      Liabilities and Stockholders' Equity
                                          
                                          $
                                          487,150
                                          
                                          
                                          $
                                          467,526





See
accompanying notes to consolidated financial statements.


1


Emclaire
Financial Corp.


Consolidated
Statements of Operations (Unaudited)


For the
three and six months ended June 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





For the three months ended
                                    
                                    
                                    For the six months endedJune 30,
                                    
                                    
                                    June 30,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009Interest
      and dividend income:Loans
      receivable, including fees
                                    
                                    $
                                    4,424
                                    
                                    
                                    $
                                    4,126
                                    
                                    
                                    $
                                    8,837
                                    
                                    
                                    $
                                    8,362Securities:Taxable
                                    
                                    
                                    732
                                    
                                    
                                    
                                    383
                                    
                                    
                                    
                                    1,340
                                    
                                    
                                    
                                    911Exempt
      from federal income tax
                                    
                                    
                                    282
                                    
                                    
                                    
                                    190
                                    
                                    
                                    
                                    546
                                    
                                    
                                    
                                    343Federal
      bank stocks
                                    
                                    
                                    11
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    22
                                    
                                    
                                    
                                    8Interest
      earning deposits with banks
                                    
                                    
                                    68
                                    
                                    
                                    
                                    87
                                    
                                    
                                    
                                    152
                                    
                                    
                                    
                                    176Total
      interest and dividend income
                                    
                                    
                                    5,517
                                    
                                    
                                    
                                    4,789
                                    
                                    
                                    
                                    10,897
                                    
                                    
                                    
                                    9,800Interest
      expense:Deposits
                                    
                                    
                                    1,407
                                    
                                    
                                    
                                    1,421
                                    
                                    
                                    
                                    2,833
                                    
                                    
                                    
                                    2,961Borrowed
      funds
                                    
                                    
                                    455
                                    
                                    
                                    
                                    389
                                    
                                    
                                    
                                    901
                                    
                                    
                                    
                                    799Total
      interest expense
                                    
                                    
                                    1,862
                                    
                                    
                                    
                                    1,810
                                    
                                    
                                    
                                    3,734
                                    
                                    
                                    
                                    3,760Net
      interest income
                                    
                                    
                                    3,655
                                    
                                    
                                    
                                    2,979
                                    
                                    
                                    
                                    7,163
                                    
                                    
                                    
                                    6,040Provision
      for loan losses
                                    
                                    
                                    225
                                    
                                    
                                    
                                    540
                                    
                                    
                                    
                                    353
                                    
                                    
                                    
                                    837Net
      interest income after provision for loan losses
                                    
                                    
                                    3,430
                                    
                                    
                                    
                                    2,439
                                    
                                    
                                    
                                    6,810
                                    
                                    
                                    
                                    5,203Noninterest
      income:Fees
      and service charges
                                    
                                    
                                    364
                                    
                                    
                                    
                                    382
                                    
                                    
                                    
                                    686
                                    
                                    
                                    
                                    721Commissions
      on financial services
                                    
                                    
                                    150
                                    
                                    
                                    
                                    169
                                    
                                    
                                    
                                    331
                                    
                                    
                                    
                                    252Title
      premiums
                                    
                                    
                                    24
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    42
                                    
                                    
                                    
                                    -Net
      gain on sale of available for sale securities
                                    
                                    
                                    301
                                    
                                    
                                    
                                    184
                                    
                                    
                                    
                                    400
                                    
                                    
                                    
                                    240Net
      gain on sale of loans
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4Earnings
      on bank-owned life insurance
                                    
                                    
                                    59
                                    
                                    
                                    
                                    57
                                    
                                    
                                    
                                    118
                                    
                                    
                                    
                                    114Other
                                    
                                    
                                    199
                                    
                                    
                                    
                                    127
                                    
                                    
                                    
                                    364
                                    
                                    
                                    
                                    308Total
      noninterest income
                                    
                                    
                                    1,097
                                    
                                    
                                    
                                    919
                                    
                                    
                                    
                                    1,941
                                    
                                    
                                    
                                    1,639Noninterest
      expense:Compensation
      and employee benefits
                                    
                                    
                                    1,777
                                    
                                    
                                    
                                    1,438
                                    
                                    
                                    
                                    3,607
                                    
                                    
                                    
                                    2,875Premises
      and equipment
                                    
                                    
                                    529
                                    
                                    
                                    
                                    443
                                    
                                    
                                    
                                    1,080
                                    
                                    
                                    
                                    925Intangible
      amortization expense
                                    
                                    
                                    152
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    304
                                    
                                    
                                    
                                    -Professional
      fees
                                    
                                    
                                    165
                                    
                                    
                                    
                                    261
                                    
                                    
                                    
                                    279
                                    
                                    
                                    
                                    434FDIC
      expense
                                    
                                    
                                    148
                                    
                                    
                                    
                                    229
                                    
                                    
                                    
                                    289
                                    
                                    
                                    
                                    273Other
                                    
                                    
                                    693
                                    
                                    
                                    
                                    525
                                    
                                    
                                    
                                    1,297
                                    
                                    
                                    
                                    1,011Total
      noninterest expense
                                    
                                    
                                    3,464
                                    
                                    
                                    
                                    2,896
                                    
                                    
                                    
                                    6,856
                                    
                                    
                                    
                                    5,518Income
      before income taxes
                                    
                                    
                                    1,063
                                    
                                    
                                    
                                    462
                                    
                                    
                                    
                                    1,895
                                    
                                    
                                    
                                    1,324Provision
      for income taxes
                                    
                                    
                                    220
                                    
                                    
                                    
                                    54
                                    
                                    
                                    
                                    370
                                    
                                    
                                    
                                    248Net
      income
                                    
                                    
                                    843
                                    
                                    
                                    
                                    408
                                    
                                    
                                    
                                    1,525
                                    
                                    
                                    
                                    1,076Accumulated
      preferred stock dividends and discount accretion
                                    
                                    
                                    98
                                    
                                    
                                    
                                    98
                                    
                                    
                                    
                                    196
                                    
                                    
                                    
                                    196Net
      income available to common stockholders
                                    
                                    $
                                    745
                                    
                                    
                                    $
                                    310
                                    
                                    
                                    $
                                    1,329
                                    
                                    
                                    $
                                    880Basic
      and diluted earnings per common share
                                    
                                    $
                                    0.52
                                    
                                    
                                    $
                                    0.22
                                    
                                    
                                    $
                                    0.93
                                    
                                    
                                    $
                                    0.61Average
      common shares outstanding
                                    
                                    
                                    1,432,261
                                    
                                    
                                    
                                    1,431,404
                                    
                                    
                                    
                                    1,431,835
                                    
                                    
                                    
                                    1,431,404





See
accompanying notes to consolidated financial statements.


2


Emclaire
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


For the
six months ended June 30, 2010 and 2009


(Dollar
amounts in thousands)





For the six months endedJune 30,2010
                  
                  
                  2009Cash
      flows from operating activitiesNet
      income
                  
                  $
                  1,525
                  
                  
                  $
                  1,076Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                  
                  
                  454
                  
                  
                  
                  400Provision
      for loan losses
                  
                  
                  353
                  
                  
                  
                  837Net
      amortization
                  
                  
                  105
                  
                  
                  
                  66Amortization
      of intangible assets and mortgage servicing rights
                  
                  
                  312
                  
                  
                  
                  8Realized
      gains on sales of available for sale securities, net
                  
                  
                  (400
                  )
                  
                  
                  (240
                  )Net
      gains on sales of loans
                  
                  
                  -
                  
                  
                  
                  (4
                  )Net
      losses on foreclosed real estate
                  
                  
                  25
                  
                  
                  
                  -Originations
      of loans sold
                  
                  
                  -
                  
                  
                  
                  (159
                  )Proceeds
      from the sale of loans
                  
                  
                  -
                  
                  
                  
                  163Restricted
      stock and stock option compensation
                  
                  
                  81
                  
                  
                  
                  56Increase
      in bank-owned life insurance, net
                  
                  
                  (103
                  )
                  
                  
                  (100
                  )(Increase)
      decrease in accrued interest receivable
                  
                  
                  (17
                  )
                  
                  
                  90Increase
      in prepaid expenses and other assets
                  
                  
                  (194
                  )
                  
                  
                  (500
                  )Increase
      (decrease) in accrued interest payable
                  
                  
                  18
                  
                  
                  
                  (109
                  )Decrease
      in accrued expenses and other liabilities
                  
                  
                  (2,065
                  )
                  
                  
                  (1,155
                  )Net
      cash provided by operating activities
                  
                  
                  94
                  
                  
                  
                  429Cash
      flows from investing activitiesLoan
      originations and principal collections, net
                  
                  
                  (439
                  )
                  
                  
                  (4,519
                  )Available
      for sale securities:Sales
                  
                  
                  13,796
                  
                  
                  
                  8,137Maturities,
      repayments and calls
                  
                  
                  54,361
                  
                  
                  
                  26,840Purchases
                  
                  
                  (90,765
                  )
                  
                  
                  (41,635
                  )Purchase
      of federal bank stocks
                  
                  
                  (150
                  )
                  
                  
                  (328
                  )Proceeds
      from the sale of foreclosed real estate
                  
                  
                  64
                  
                  
                  
                  77Purchases
      of premises and equipment
                  
                  
                  (260
                  )
                  
                  
                  (1,144
                  )Net
      cash used in investing activities
                  
                  
                  (23,393
                  )
                  
                  
                  (12,572
                  )Cash
      flows from financing activitiesNet
      increase in deposits
                  
                  
                  19,222
                  
                  
                  
                  5,253Net
      change in borrowings
                  
                  
                  -
                  
                  
                  
                  11,412Dividends
      paid
                  
                  
                  (588
                  )
                  
                  
                  (807
                  )Proceeds
      from the reissuance of treasury stock
                  
                  
                  410
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  19,044
                  
                  
                  
                  15,858Increase
      (decrease) in cash and cash equivalents
                  
                  
                  (4,255
                  )
                  
                  
                  3,715Cash
      and cash equivalents at beginning of period
                  
                  
                  38,952
                  
                  
                  
                  16,571Cash
      and cash equivalents at end of period
                  
                  $
                  34,697
                  
                  
                  $
                  20,286Supplemental
      information:Interest
      paid
                  
                  $
                  3,742
                  
                  
                  $
                  3,869Income
      taxes paid
                  
                  
                  385
                  
                  
                  
                  183Supplemental
      noncash disclosure:Transfers
      from loans to foreclosed real estate
                  
                  
                  51
                  
                  
                  
                  76





See
accompanying notes to consolidated financial statements.


3


Emclaire
Financial Corp.


Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)


For the
three and six months ended June 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





For the three months ended
                
                
                For the six months endedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Balance
      at beginning of period
                
                $
                37,730
                
                
                $
                36,173
                
                
                $
                37,034
                
                
                $
                36,123Net
      income
                
                
                843
                
                
                
                408
                
                
                
                1,525
                
                
                
                1,076Other
      comprehensive income (loss):Change
      in net unrealized gains (losses) on available for sale securities, net of
      taxes
                
                
                953
                
                
                
                (526
                )
                
                
                1,285
                
                
                
                (618
                )Less:
      reclassification adjustment for gains included in net income, net of
      taxes
                
                
                199
                
                
                
                121
                
                
                
                264
                
                
                
                158Other
      comprehensive income (loss)
                
                
                754
                
                
                
                (647
                )
                
                
                1,021
                
                
                
                (776
                )Total
      comprehensive income (loss)
                
                
                1,597
                
                
                
                (239
                )
                
                
                2,546
                
                
                
                300Stock
      compensation expense
                
                
                40
                
                
                
                32
                
                
                
                81
                
                
                
                56Dividends
      declared on preferred stock
                
                
                (94
                )
                
                
                (94
                )
                
                
                (188
                )
                
                
                (148
                )Dividends
      declared on common stock
                
                
                (200
                )
                
                
                (200
                )
                
                
                (400
                )
                
                
                (659
                )Reissuance
      of treasury stock (26,000 shares)
                
                
                410
                
                
                
                -
                
                
                
                410
                
                
                
                -Balance
      at end of period
                
                $
                39,483
                
                
                $
                35,672
                
                
                $
                39,483
                
                
                $
                35,672Common
      cash dividend per share
                
                $
                0.14
                
                
                $
                0.14
                
                
                $
                0.28
                
                
                $
                0.46





See
accompanying notes to consolidated financial statements.


4


Emclaire
Financial Corp.


Notes to
Consolidated Financial Statements (Unaudited)





1.
            Nature
      of Operations and Basis of
Presentation.





Emclaire
Financial Corp. (the “Corporation”) is a Pennsylvania company and 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 products and 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, 2009, as contained in the
Corporation’s 2009 Annual Report on Form 10-K filed with the SEC.





The
balance sheet at December 31, 2009 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 on securities.  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.





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 108,750 shares of
common stock and warrants to purchase 50,111 shares of common stock were not
included in computing diluted earnings per share because their cumulative
effects were not dilutive for the three and six month periods ended June 30,
2010 and 2009.


5


4.
            Securities.





The
following table summarizes the Corporation’s securities as of June 30, 2010 and
December 31, 2009:





(Dollar
      amounts in thousands)
                          
                          Amortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          Faircost
                          
                          
                          gains
                          
                          
                          losses
                          
                          
                          valueAvailable for sale:June
      30, 2010:U.S.
      Treasury and federal agency
                          
                          $
                          2,519
                          
                          
                          $
                          63
                          
                          
                          $
                          -
                          
                          
                          $
                          2,582U.S.
      government sponsored entities and agencies
                          
                          
                          63,223
                          
                          
                          
                          272
                          
                          
                          
                          -
                          
                          
                          
                          63,495Mortgage-backed
      securities: residential
                          
                          
                          29,041
                          
                          
                          
                          1,021
                          
                          
                          
                          -
                          
                          
                          
                          30,062Collateralized
      mortgage obligations: residential
                          
                          
                          2,023
                          
                          
                          
                          3
                          
                          
                          
                          (8
                          )
                          
                          
                          2,018State
      and political subdivisions
                          
                          
                          28,445
                          
                          
                          
                          899
                          
                          
                          
                          (30
                          )
                          
                          
                          29,314Equity
      securities
                          
                          
                          2,589
                          
                          
                          
                          -
                          
                          
                          
                          (221
                          )
                          
                          
                          2,368$
                          127,840
                          
                          
                          $
                          2,258
                          
                          
                          $
                          (259
                          )
                          
                          $
                          129,839December
      31, 2009:U.S.
      Treasury and federal agency
                          
                          $
                          2,976
                          
                          
                          $
                          25
                          
                          
                          $
                          -
                          
                          
                          $
                          3,001U.S.
      government sponsored entities and agencies
                          
                          
                          50,953
                          
                          
                          
                          113
                          
                          
                          
                          (269
                          )
                          
                          
                          50,797Mortgage-backed
      securities: residential
                          
                          
                          16,459
                          
                          
                          
                          109
                          
                          
                          
                          (38
                          )
                          
                          
                          16,530Collateralized
      mortgage obligations: residential
                          
                          
                          5,130
                          
                          
                          
                          4
                          
                          
                          
                          (4
                          )
                          
                          
                          5,130State
      and political subdivisions
                          
                          
                          26,271
                          
                          
                          
                          696
                          
                          
                          
                          -
                          
                          
                          
                          26,967Equity
      securities
                          
                          
                          3,003
                          
                          
                          
                          -
                          
                          
                          
                          (185
                          )
                          
                          
                          2,818$
                          104,792
                          
                          
                          $
                          947
                          
                          
                          $
                          (496
                          )
                          
                          $
                          105,243





The
following table summarizes scheduled maturities of the Corporation’s securities
as of June 30, 2010:





(Dollar
      amounts in thousands)
                          
                          Available
      for saleAmortized
                          
                          
                          Faircost
                          
                          
                          valueDue
      in one year or less
                          
                          $
                          201
                          
                          
                          $
                          205Due
      after one year through five years
                          
                          
                          58,962
                          
                          
                          
                          59,193Due
      after five through ten years
                          
                          
                          22,019
                          
                          
                          
                          22,666Due
      after ten years
                          
                          
                          44,069
                          
                          
                          
                          45,407No
      scheduled maturity
                          
                          
                          2,589
                          
                          
                          
                          2,368$
                          127,840
                          
                          
                          $
                          129,839





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


6


4.
            Securities
      (continued).





Information
pertaining to securities with gross unrealized losses as of June 30, 2010 and
December 31, 2009, aggregated by investment category and length of time that
individual securities have been in a continuous loss position,
follows:





(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
                  
                  
                  LossJune
      30,  2010:Collateralized
      mortgage obligations: residential
                  
                  $
                  906
                  
                  
                  $
                  (8
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  906
                  
                  
                  $
                  (8
                  )State
      and political subdivisions
                  
                  
                  2,640
                  
                  
                  
                  (30
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,640
                  
                  
                  
                  (30
                  )Equity
      securities
                  
                  
                  914
                  
                  
                  
                  (123
                  )
                  
                  
                  663
                  
                  
                  
                  (98
                  )
                  
                  
                  1,577
                  
                  
                  
                  (221
                  )$
                  4,460
                  
                  
                  $
                  (161
                  )
                  
                  $
                  663
                  
                  
                  $
                  (98
                  )
                  
                  $
                  5,123
                  
                  
                  $
                  (259
                  )December
      31, 2009:U.S.
      government sponsored entities and agencies
                  
                  $
                  32,716
                  
                  
                  $
                  (269
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  32,716
                  
                  
                  $
                  (269
                  )Mortgage-backed
      securities: residential
                  
                  
                  1,961
                  
                  
                  
                  (38
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,961
                  
                  
                  
                  (38
                  )Collateralized
      mortgage obligations: residential
                  
                  
                  1,275
                  
                  
                  
                  (2
                  )
                  
                  
                  910
                  
                  
                  
                  (2
                  )
                  
                  
                  2,185
                  
                  
                  
                  (4
                  )Equity
      securities
                  
                  
                  1,341
                  
                  
                  
                  (110
                  )
                  
                  
                  686
                  
                  
                  
                  (75
                  )
                  
                  
                  2,027
                  
                  
                  
                  (185
                  )$
                  37,293
                  
                  
                  $
                  (419
                  )
                  
                  $
                  1,596
                  
                  
                  $
                  (77
                  )
                  
                  $
                  38,889
                  
                  
                  $
                  (496
                  )





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, (3) whether the market decline
was affected by macroeconomic and (4) whether the Corporation has the intent to
sell the security or more likely than not will be required to sell the security
before its anticipated recovery.





There
were five equity and six debt securities in an unrealized loss position as
of June 30, 2010.  Equity securities owned by the Corporation consist
of common stock of various financial service providers.  These
investment securities are in an unrealized loss position as a result of recent
market volatility.  The Corporation does not invest in these
securities with the intent to sell them for a profit in the near term and
believes these securities have potential to appreciate in value over the
long-term, while providing for a reasonable dividend yield.  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 financial
position and near term prospects 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 the equity securities with unrealized losses as of
June 30, 2010 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-related
impairment of securities where it is likely that the Corporation will not
receive cash flows sufficient to recover the entire amortized cost 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 the debt securities with unrealized losses as of June 30, 2010 to
be other-than-temporarily impaired.


7


5.
            Loans
      Receivable.





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





(Dollar
      amounts in thousands)
                            
                            June 30,
                            
                            
                            December 31,2010
                            
                            
                            2009Mortgage
      loans on real estate:Residential
      first mortgages
                            
                            $
                            77,615
                            
                            
                            $
                            74,099Home
      equity loans and lines of credit
                            
                            
                            75,351
                            
                            
                            
                            77,284Commercial
      real estate
                            
                            
                            90,651
                            
                            
                            
                            89,952243,617
                            
                            
                            
                            241,335Other
      loans:Commercial
      business
                            
                            
                            39,573
                            
                            
                            
                            41,588Consumer
                            
                            
                            12,604
                            
                            
                            
                            12,89452,177
                            
                            
                            
                            54,482Total
      loans, gross
                            
                            
                            295,794
                            
                            
                            
                            295,817Less
      allowance for loan losses
                            
                            
                            3,298
                            
                            
                            
                            3,202Total
      loans, net
                            
                            $
                            292,496
                            
                            
                            $
                            292,615Nonaccrual
      loans
                            
                            $
                            3,237
                            
                            
                            $
                            2,359Loans
      90 days or more past due and still accruing
                            
                            
                            81
                            
                            
                            
                            59Total
      nonperforming loans
                            
                            $
                            3,318
                            
                            
                            $
                            2,418





Activity in the allowance for loan
losses for the three and six months ended June 30, 2010 and 2009 was as
follows:





(Dollar
      amounts in thousands)
                          
                          At or for the three months ended
                          
                          
                          At or for the six months endedJune 30,
                          
                          
                          June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Balance
      at the beginning of the period
                          
                          $
                          3,174
                          
                          
                          $
                          2,885
                          
                          
                          $
                          3,202
                          
                          
                          $
                          2,651Provision
      for loan losses
                          
                          
                          225
                          
                          
                          
                          540
                          
                          
                          
                          353
                          
                          
                          
                          837Charge-offs
                          
                          
                          (110
                          )
                          
                          
                          (501
                          )
                          
                          
                          (277
                          )
                          
                          
                          (572
                          )Recoveries
                          
                          
                          9
                          
                          
                          
                          11
                          
                          
                          
                          20
                          
                          
                          
                          19Balance
      at the end of the period
                          
                          $
                          3,298
                          
                          
                          $
                          2,935
                          
                          
                          $
                          3,298
                          
                          
                          $
                          2,935





Loans
individually considered impaired were as follows:





(Dollar
      amounts in thousands)
                                  
                                  June 30,
                                  
                                  
                                  December 31,2010
                                  
                                  
                                  2010Loans
      considered impaired:With
      no allocated allowance for loan losses
                                  
                                  $
                                  276
                                  
                                  
                                  $
                                  150With
      an allocated allowance for loan losses
                                  
                                  
                                  799
                                  
                                  
                                  
                                  590$
                                  1,075
                                  
                                  
                                  $
                                  740Amount
      of the allowance for loan losses allocated
                                  
                                  $
                                  140
                                  
                                  
                                  $
                                  128


8


6.
              Goodwill
      and Intangible Assets.
 
 The
following table summarizes the Corporation’s acquired goodwill and intangible
assets as of June 30, 2010 and December 31, 2009:
 
 (Dollar amounts in thousands)
                        
                        June 30, 2010
                        
                        
                        December 31, 2009Gross Carrying
                          Amount
                        
                        
                        Accumulated
                          Amortization
                        
                        
                        Gross Carrying
                          Amount
                        
                        
                        Accumulated
                          AmortizationGoodwill
                        
                        $
                        3,664
                        
                        
                        $
                        -
                        
                        
                        $
                        3,657
                        
                        
                        $
                        -Core
      deposit intangibles
                        
                        
                        4,027
                        
                        
                        
                        1,747
                        
                        
                        
                        4,027
                        
                        
                        
                        1,443Total
                        
                        $
                        7,691
                        
                        
                        $
                        1,747
                        
                        
                        $
                        7,684
                        
                        
                        $
                        1,443
 
 During
the third quarter of 2009, the Corporation recorded goodwill and a core deposit
intangible of $2.2 million and $2.8 million, respectively, associated with a
branch purchase transaction.  Goodwill is not amortized but is
evaluated for impairment on an annual basis or whenever events or changes in
circumstances indicate the carrying value may not be recoverable.  No
goodwill impairment charges were recorded during 2009 or in the first six months
of 2010.  The core deposit intangible asset is amortized using the
double declining balance method over a weighted average estimated life of nine
years and is not estimated to have a significant residual
value.  During the three and six month periods ending June 30, 2010,
the Corporation recorded intangible amortization expense totaling $152,000 and
$304,000, respectively.
 
 7.
              Employee Benefit
      Plans.
 
 The
Corporation maintains a defined contribution 401(k) Plan.  Eligible
employees participate by providing tax-deferred contributions up to 20% of
qualified compensation.  Employee contributions are vested at all
times.  The Corporation provides a matching contribution of up to 4%
of the participant’s salary.  Matching contributions for the six
months ended June 30, 2010 and 2009 amounted to $88,000 and $73,000,
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 three years of service.  Effective January 1, 2009, the
plan was closed to new participants.
 
 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 six months endedJune 30,
                          
                          
                          June 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Service
      cost
                          
                          $
                          73
                          
                          
                          $
                          62
                          
                          
                          $
                          146
                          
                          
                          $
                          124Interest
      cost
                          
                          
                          79
                          
                          
                          
                          75
                          
                          
                          
                          158
                          
                          
                          
                          150Expected
      return on plan assets
                          
                          
                          (79
                          )
                          
                          
                          (66
                          )
                          
                          
                          (159
                          )
                          
                          
                          (132
                          )Prior
      service costs
                          
                          
                          (8
                          )
                          
                          
                          (8
                          )
                          
                          
                          (16
                          )
                          
                          
                          (16
                          )Recognized
      net actuarial loss
                          
                          
                          27
                          
                          
                          
                          27
                          
                          
                          
                          55
                          
                          
                          
                          54Net
      periodic pension cost
                          
                          $
                          92
                          
                          
                          $
                          90
                          
                          
                          $
                          185
                          
                          
                          $
                          180
 
 The
Corporation previously disclosed in its financial statements for the year ended
December 31, 2009 that it expected to contribute $425,000 to its pension plan in
2010.  As of June 30, 2010, $425,000 has been
contributed.
  9
  8.
              Stock
      Compensation Plans.
 
 The
Corporation’s 2007 Stock Incentive Plan and Trust (the Plan), which is
shareholder-approved, permits the grant of restricted stock awards and 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 shall vest and become exercisable at the rate, to the
extent and subject to such limitations as may be specified by the
Corporation.  Compensation cost related to share-based payment
transactions must be recognized in the financial statements with measurement
based upon the fair value of the equity or liability instruments
issued.
 
 A summary
of option activity under the Plan as of June 30, 2010, and changes during the
period then ended is presented below:
 
 Weighted-AverageWeighted-Average
                        
                        
                        Aggregate
                        
                        
                        Remaining
      TermOptions
                        
                        
                        Exercise Price
                        
                        
                        Intrinsic Value
                        
                        
                        (in years)Outstanding
      as of January 1, 2010
                        
                        
                        96,250
                        
                        
                        $
                        24.79
                        
                        
                        $
                        -
                        
                        
                        
                        7.8Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      as of June 30, 2010
                        
                        
                        96,250
                        
                        
                        $
                        24.79
                        
                        
                        $
                        -
                        
                        
                        
                        7.3Exercisable
      as of June 30, 2010
                        
                        
                        74,000
                        
                        
                        $
                        26.00
                        
                        
                        $
                        -
                        
                        
                        
                        7.0
 
 A summary
of the status of the Corporation’s nonvested options as of June 30, 2010, and
changes during the period then ended is presented below:
 
 Weighted-AverageOptions
                      
                      
                      Grant-date Fair ValueNonvested
      at January 1, 2010
                      
                      
                      96,250
                      
                      
                      $
                      3.02Granted
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (74,000
                      )
                      
                      
                      3.39Forfeited
                      
                      
                      -
                      
                      
                      
                      -Nonvested
      as of June 30, 2010
                      
                      
                      22,250
                      
                      
                      $
                      1.80
 
 During
the six month period ended June 30, 2010, the Corporation granted 1,250
restricted stock awards with a face value of $17,000 based on the grant date
stock price of $13.60.  In addition, the Corporation granted 4,500
shares of restricted stock awards in 2008 and 6,750 shares of restricted stock
awards in 2009 with face values of $101,000 and $91,000, respectively based on
the grant date stock prices of $22.50 and $13.50,
respectively.  Restricted stock awards are 100% vested on the third
anniversary date of the grant.
 
 For the
six month period ended June 30, 2010 and 2009, the Corporation recognized
$81,000 and $56,000, respectively, in stock compensation expense.  As
of June 30, 2010, there was $154,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over the next three
years.
  10
  9.
              Fair
      Values of Financial Instruments.
 
 Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date.  There are three levels of inputs that may be
used to measure fair value.
 
 Level
1:  Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities.
 
 Level 2:  Quoted
prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the asset or
liability.
 
 Level 3:  Prices or
valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e. supported with little or no market
activity).
 
 An asset
or liability’s level is based on the lowest level of input that is significant
to the fair value measurement.
 
 The
following valuation techniques were used to measure fair value of assets in the
tables below:
 
 Available for sale securities– Fair value on available for sale securities is based upon quoted market
prices when available (Level 1).  If quoted market prices are not
available, fair values are measured utilizing independent valuation techniques
of identical or similar securities for which significant assumptions are derived
primarily from or corroborated by observable market data.  Third party
vendors compile prices from various sources and may determine the fair value of
identical or similar securities by using pricing models that consider observable
market data (Level 2).
 
 Impaired loans – Loans are
designated as impaired when, in the judgment of management based on current
information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected.  Most
of the Corporation’s loans are collateral dependent and, accordingly, fair value
is measured based on the estimated 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 (Level
3).  Upon management’s ongoing review, adjustments may be made to an
appraised value to reflect various factors such as the age of the appraisal,
known changes in the market or the collateral and management’s estimation of the
costs to sell.  As of June 30, 2010 and December 31, 2009, the fair
value consisted of loan balances of $799,000 and $590,000, respectively, net of
a valuation allowance of $140,000 and $128,000, respectively.  These
impaired loans consisted primarily of commercial real
estate.  Additional provision for loan losses of $62,000 was recorded
during the six months ended June 30, 2010.  Additional provision for
loan losses of $128,000 was recorded during the year ended December 31,
2009.
  11
  9.
              Fair
      Values of Financial Instruments
(continued).
 
 For
assets measured at fair value on a recurring basis, the fair value measurements
by level within the fair value hierarchy are as follows:
 
 (Dollar
      amounts in thousands)
                    
                    
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)Quoted
      Prices in
                    
                    
                    Significant
                    
                    
                    (Level
      3)Active
      Markets
                    
                    
                    Other
                    
                    
                    Significantfor
      Identical
                    
                    
                    Observable
                    
                    
                    UnobservableDescription
                    
                    Total
                    
                    
                    Assets
                    
                    
                    Inputs
                    
                    
                    InputsJune
      30, 2010:U.S.
      Treasury and federal agency
                    
                    $
                    2,582
                    
                    
                    $
                    -
                    
                    
                    $
                    2,582
                    
                    
                    $
                    -U.S.
      government sponsored entities and agencies
                    
                    
                    63,495
                    
                    
                    
                    -
                    
                    
                    
                    63,495
                    
                    
                    
                    -Mortgage-backed
      securities: residential
                    
                    
                    30,062
                    
                    
                    
                    -
                    
                    
                    
                    30,062
                    
                    
                    
                    -Collateralized
      mortgage obligations
                    
                    
                    2,018
                    
                    
                    
                    -
                    
                    
                    
                    2,018
                    
                    
                    
                    -State
      and political subdivision
                    
                    
                    29,314
                    
                    
                    
                    -
                    
                    
                    
                    29,314
                    
                    
                    
                    -Equity
      securities
                    
                    
                    2,368
                    
                    
                    
                    1,643
                    
                    
                    
                    725
                    
                    
                    
                    -$
                    129,839
                    
                    
                    $
                    1,643
                    
                    
                    $
                    128,196
                    
                    
                    $
                    -December
      31, 2009:U.S.
      government sponsored entities and agencies
                    
                    $
                    3,001
                    
                    
                    $
                    -
                    
                    
                    $
                    3,001
                    
                    
                    $
                    -Mortgage-backed
      securities: residential
                    
                    
                    50,797
                    
                    
                    
                    -
                    
                    
                    
                    50,797
                    
                    
                    
                    -Collateralized
      mortgage obligations
                    
                    
                    16,530
                    
                    
                    
                    -
                    
                    
                    
                    16,530
                    
                    
                    
                    -State
      and political subdivision
                    
                    
                    5,130
                    
                    
                    
                    -
                    
                    
                    
                    5,130
                    
                    
                    
                    -Corporate
      securities
                    
                    
                    26,967
                    
                    
                    
                    -
                    
                    
                    
                    26,967
                    
                    
                    
                    -Equity
      securities
                    
                    
                    2,818
                    
                    
                    
                    2,093
                    
                    
                    
                    725
                    
                    
                    
                    -$
                    105,243
                    
                    
                    $
                    2,093
                    
                    
                    $
                    103,150
                    
                    
                    $
                    -
 
 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
                
                
                InputsJune
      30, 2010:Impaired
      loans
                
                $
                659
                
                
                $
                -
                
                
                $
                -
                
                
                $
                659$
                659
                
                
                $
                -
                
                
                $
                -
                
                
                $
                659December
      31, 2009:Impaired
      loans
                
                $
                462
                
                
                $
                -
                
                
                $
                -
                
                
                $
                462$
                462
                
                
                $
                -
                
                
                $
                -
                
                
                $
                462
  12
  9.
              Fair
      Values of Financial Instruments
(continued).
 
 The
following table sets forth the carrying amount and fair value of the
Corporation’s financial instruments included in the consolidated balance sheet
as of June 30, 2010:
 
 (Dollar
      amounts in thousands)
                    
                    June 30, 2010
                    
                    
                    December 31, 2009Carrying amount
                    
                    
                    Fair value
                    
                    
                    Carrying amount
                    
                    
                    Fair valueFinancial
      assets:Cash
      and cash equivalents
                    
                    $
                    34,697
                    
                    
                    $
                    34,862
                    
                    
                    $
                    38,952
                    
                    
                    $
                    38,952Securities
                    
                    
                    129,839
                    
                    
                    
                    129,839
                    
                    
                    
                    105,243
                    
                    
                    
                    105,243Loans
      receivable, net
                    
                    
                    292,496
                    
                    
                    
                    302,220
                    
                    
                    
                    292,615
                    
                    
                    
                    298,197Federal
      bank stocks
                    
                    
                    4,275
                    
                    
                    
                    N/A
                    
                    
                    
                    4,125
                    
                    
                    
                    N/AAccrued
      interest receivable
                    
                    
                    1,591
                    
                    
                    
                    1,591
                    
                    
                    
                    1,574
                    
                    
                    
                    1,574Financial
      liabilities:Deposits
                    
                    
                    404,547
                    
                    
                    
                    410,800
                    
                    
                    
                    385,325
                    
                    
                    
                    389,443Borrowed
      funds
                    
                    
                    40,000
                    
                    
                    
                    43,966
                    
                    
                    
                    40,000
                    
                    
                    
                    43,258Accrued
      interest payable
                    
                    
                    729
                    
                    
                    
                    729
                    
                    
                    
                    711
                    
                    
                    
                    711Off-balance
      sheet commitments
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
 
 Management
uses its best judgment in estimating the fair value of the Corporation’s
financial instruments; however, there are inherent weaknesses in any estimation
technique.  Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Corporation could have realized in a sale transaction on the dates
indicated.  The estimated fair value amounts have been measured as of
the dates shown and have not been re-evaluated or updated for purposes of these
financial statements subsequent to those respective dates.
 
 This
information should not be interpreted as an estimate of the fair value of the
entire Corporation since a fair value calculation is only provided for a limited
portion of the Corporation’s assets and liabilities.  Due to a wide
range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Corporation’s disclosures and those of other
companies may not be meaningful.  The following methods and
assumptions were used to estimate fair values of the Corporation’s financial
instruments at June 30, 2010 and December 31, 2009:
 
 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.  It was not practicable to determine the fair
value of federal bank stocks due to restrictions placed on the stocks
transferability.
 
 Estimates
of the fair value of off-balance sheet items were not made because of the
short-term nature of these arrangements and the credit standing of the
counterparties.  Also, unfunded loan commitments relate principally to
variable rate commercial loans.  Therefore, the fair value of these
instruments is not material.
  13
  10.
              Adoption
      of New Accounting Standards.
 
 In
January 2010, the Financial Accounting Standards Board (FASB) issued guidance
increasing fair value disclosure and to clarify some existing disclosure
requirements about fair value measurement.  It requires separate
presentation of significant transfers into and out of Levels 1 and 2 of the fair
value hierarchy and disclosure of the reasons for such transfers.  It
will also require the presentation of purchases, sales, issuances and
settlements within Level 3 on a gross basis rather than a net
basis.  The amendments also clarify that disclosures should be
disaggregated by class of asset or liability and that disclosures about inputs
and valuation techniques should be provided for both recurring and non-recurring
fair value measurements.  These new disclosure requirements were
adopted by the Corporation during the current period, with the exception of the
requirement concerning gross presentation of Level 3 activity, which is
effective for fiscal years beginning after December 15, 2010.  With
respect to the portions of this amendment that were adopted during the current
period, the adoption of this standard did not have a significant impact on the
Corporation’s consolidated financial statements.  The Corporation
believes that the adoption of the remaining portion of this amendment will not
have a significant impact on the consolidated financial statements.
 
 In April
2010, the FASB issued guidance on the accounting for loan modifications when the
loan is part of a pool of loans accounted for as a single asset such as acquired
loans that have evidence of credit deterioration upon
acquisition.  This guidance addresses diversity in practice on whether
a loan that is part of a pool of loans accounted for as a single asset should be
removed from that pool upon a modification that would constitute a troubled debt
restructuring or remain in the pool after modification.  The guidance
also clarifies that modifications of loans that are accounted for within a pool
do not result in the removal of those loans from the pool even if the
modification of those loans would otherwise be considered a troubled debt
restructuring.  An entity will continue to be required to consider
whether the pool of assets in which the loan is included is impaired if the
expected cash flows for the pool change.  The amendments in this
update do not require any additional disclosures and are effective for
modifications of loans accounted for within pools occurring in the first interim
or annual period ending on or after July 15, 2010.  This guidance is
not expected to have a significant impact on the consolidated financial
statements.
 
 In July
2010, the FASB issued a statement which expands disclosures about credit quality
of financing receivables and allowance for credit losses.  The
standard will require the Corporation to expand disclosures about the credit
quality of loans and the related reserves against them.  The
additional disclosures will include details on past due loans, credit quality
indicators and modifications of loans.  The statement is effective for
interim and annual reporting periods after December 15, 2010.  The
Corporation will include these disclosures beginning with its December 31, 2010
consolidated financial statements.
  14
  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 six months ended June 30, 2010, compared to the
same periods in 2009 and should be read in conjunction with the Corporation’s
December 31, 2009 Annual Report on Form 10-K filed with the SEC and with the
accompanying consolidated financial statements and notes presented on pages 1
through 14 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.
 
 CHANGES
IN FINANCIAL CONDITION
 
 Total
assets increased $19.6 million or 4.2% to $487.2 million at June 30, 2010 from
$467.5 million at December 31, 2009.  This increase resulted from an
increase in securities of $24.6 million, partially offset by a decrease in cash
and cash equivalents of $4.3 million.  The net increase in the
Corporation’s assets was primarily funded by increases in customer
deposits.
 
 Total
liabilities increased $17.2 million or 4.0% to $447.7 million at June 30, 2010
from $430.5 million at December 31, 2009, while total stockholders’ equity
increased $2.5 million or 6.6% to $39.5 million at June 30, 2010 from $37.0
million at December 31, 2009.  The increase in total liabilities
resulted primarily from a $19.2 million or 5.0% increase in customer
deposits.  The increase in customer deposits consisted of an $8.9
million or 13.4% increase in noninterest bearing deposits and a $10.3 million or
3.2% increase in interest bearing deposits.
 
 RESULTS
OF OPERATIONS
 
 Comparison
of Results for the Three Month Period Ended June 30, 2010 and 2009
 
 General.  Net income
increased $435,000 to $843,000 for the three months ended June 30, 2010 from
$408,000 for the same period in 2009.  This $435,000 increase was the
result of increases in net interest income and noninterest income of $676,000
and $178,000, respectively, and a decrease in the provision for loan losses of
$315,000.  Partially offsetting these favorable items, noninterest
expense and the provision for income taxes increased $568,000 and $166,000,
respectively.
 
 Net interest
income.  Net interest income on a tax equivalent basis
increased $694,000 or 22.3% to $3.8 million for the three months ended June 30,
2010 from $3.1 million for the same period in 2009.  This net increase
can be attributed to an increase in tax equivalent interest income of $746,000,
partially offset by an increase in interest expense of $52,000.
 
 Interest
income.  Interest income on a tax equivalent basis increased
$746,000 or 15.2% to $5.7 million for the three months ended June 30, 2010,
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
federal bank stock dividends of $278,000, $479,000 and $8,000, respectively,
partially offset by a decrease in interest-earning deposits with banks of
$19,000.
  15
  Tax
equivalent interest earned on loans receivable increased $278,000 or 6.7% to
$4.5 million for the three months ended June 30, 2010, compared to $4.2 million
for the same period in 2009.  This increase resulted primarily from
average loans increasing $20.6 million or 7.5%, accounting for $312,000 in
additional loan interest income.  This increase can be attributed to
growth in the Corporation’s existing loan portfolio and loans acquired through
the third quarter 2009 purchase of the Titusville banking office from PNC
(formerly National City Bank).  Offsetting this favorable volume
increase, the average yield on loans receivable decreased 5 basis points to
6.06% for the three months ended June 30, 2010, versus 6.11% for the same period
in 2009, due to declining market interest rates, accounting for a $34,000
decrease in interest income.
 
 Tax
equivalent interest earned on securities increased $479,000 or 72.8% to $1.1
million for the three months ended June 30, 2010, compared to $658,000 for the
same period in 2009.  The average volume of securities increased $75.1
million, primarily as a result of the deployment of net cash received in the
branch purchase, accounting for a $688,000 increase in interest
income.  Offsetting this favorable volume increase, the average yield
on securities decreased 122 basis points to 3.48% for the three months ended
June 30, 2010, versus 4.70% for the same period in 2009, due primarily to
shorter-termed security purchases made in the third and fourth quarters of 2009
and first and second quarters of 2010 at market yields lower than the overall
average of the existing portfolio.  This unfavorable yield variance
accounted for a $209,000 decrease in interest income.
 
 Interest
earned on interest-earning deposit accounts decreased $19,000 or 21.8% to
$68,000 for the three months ended June 30, 2010 from $87,000 for the same
period in 2009.  The average volume of these assets increased $7.5
million, increasing interest income by $24,000.  Offsetting this
volume increase, the average yield on interest-earning deposit accounts
decreased 64 basis points to 0.90% for the three months ended June 30, 2010,
compared to 1.54% for the same period in the prior year, accounting for a
$43,000 decrease in interest income.
 
 Dividends
on federal bank stocks increased $8,000 to $11,000 for the three month period
ended June 30, 2010 from $3,000 for the same period in 2009.  The
average yield on these assets increased 75 basis points to 1.04% for the three
months ended June 30, 2010, compared to 0.29% for the same period the prior
year.
 
 Interest
expense.  Interest expense increased $52,000 or 2.9% to $1.9
million for the three months ended June 30, 2010 from $1.8 million for the same
period in 2009.  This increase in interest expense can be attributed
to an increase in interest incurred on borrowed funds of $66,000, partially
offset by a decrease in interest incurred on deposits of $14,000.
 
 Interest
expense incurred on deposits decreased $14,000 or 1.0% to $1.4 million for the
three months ended June 30, 2010 compared to $1.4 million for the same period in
2009.  The average cost of interest-bearing deposits decreased 64
basis points to 1.71% for the three months ended June 30, 2010, compared to
2.35% for the same period in 2009 causing a $445,000 decrease in interest
expense.  Partially offsetting this favorable rate variance, the
average volume of interest-bearing deposits increased $86.8 million or 35.8% to
$329.1 million for the three months ended June 30, 2010, compared to $242.3
million for the same period in 2009 causing a $431,000 increase in interest
expense.  This increase was primarily due to deposits assumed through
the aforementioned branch purchase.
 
 Interest
expense incurred on borrowed funds increased $66,000 or 17.0% to $455,000 for
the three months ended June 30, 2010, compared to $389,000 for the same period
in the prior year.  This increase can be attributed to an increase in
the average cost of borrowed funds of 71 basis points to 4.56% for the three
months ended June 30, 2010, compared to 3.85% for the same period in 2009
causing a $71,000 increase in interest expense.  This increase in the
average cost was due to higher short-term borrowing rates resulting from the
third quarter 2009 $5.0 million advance on a line of credit with a correspondent
bank.  The line of credit has a current rate of
4.75%.  Partially offsetting this unfavorable cost increase, the
average balance of short-term borrowed funds decreased $561,000 or 1.4% to $40.0
million for the three months ended June 30, 2010, compared to $40.6 million for
the same period in the prior year, causing a $5,000 decrease in interest
expense.  This volume decrease was related to a decrease in short-term
borrowings.
  16


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 June 30,2010
                                                                
                                                                
                                                                2009Average
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Yield
      /
                                                                
                                                                
                                                                Average
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Yield
      /Balance
                                                                
                                                                
                                                                Interest
                                                                
                                                                
                                                                Rate
                                                                
                                                                
                                                                Balance
                                                                
                                                                
                                                                Interest
                                                                
                                                                
                                                                RateInterest-earning assets:Loans,
      taxable
                                                                
                                                                $
                                                                287,822
                                                                
                                                                
                                                                $
                                                                4,360
                                                                
                                                                
                                                                
                                                                6.08
                                                                %
                                                                
                                                                $
                                                                257,198
                                                                
                                                                
                                                                $
                                                                4,009
                                                                
                                                                
                                                                
                                                                6.25
                                                                %Loans,
      tax exempt
                                                                
                                                                
                                                                6,638
                                                                
                                                                
                                                                
                                                                92
                                                                
                                                                
                                                                
                                                                5.56
                                                                %
                                                                
                                                                
                                                                16,624
                                                                
                                                                
                                                                
                                                                165
                                                                
                                                                
                                                                
                                                                3.98
                                                                %Total
      loans receivable
                                                                
                                                                
                                                                294,460
                                                                
                                                                
                                                                
                                                                4,452
                                                                
                                                                
                                                                
                                                                6.06
                                                                %
                                                                
                                                                
                                                                273,822
                                                                
                                                                
                                                                
                                                                4,174
                                                                
                                                                
                                                                
                                                                6.11
                                                                %Securities,
      taxable
                                                                
                                                                
                                                                102,702
                                                                
                                                                
                                                                
                                                                732
                                                                
                                                                
                                                                
                                                                2.86
                                                                %
                                                                
                                                                
                                                                39,329
                                                                
                                                                
                                                                
                                                                383
                                                                
                                                                
                                                                
                                                                3.91
                                                                %Securities,
      tax exempt
                                                                
                                                                
                                                                28,517
                                                                
                                                                
                                                                
                                                                405
                                                                
                                                                
                                                                
                                                                5.70
                                                                %
                                                                
                                                                
                                                                16,833
                                                                
                                                                
                                                                
                                                                275
                                                                
                                                                
                                                                
                                                                6.56
                                                                %Total
      securities
                                                                
                                                                
                                                                131,219
                                                                
                                                                
                                                                
                                                                1,137
                                                                
                                                                
                                                                
                                                                3.48
                                                                %
                                                                
                                                                
                                                                56,162
                                                                
                                                                
                                                                
                                                                658
                                                                
                                                                
                                                                
                                                                4.70
                                                                %Interest-earning
      deposits with banks
                                                                
                                                                
                                                                30,238
                                                                
                                                                
                                                                
                                                                68
                                                                
                                                                
                                                                
                                                                0.90
                                                                %
                                                                
                                                                
                                                                22,689
                                                                
                                                                
                                                                
                                                                87
                                                                
                                                                
                                                                
                                                                1.54
                                                                %Federal
      bank stocks
                                                                
                                                                
                                                                4,262
                                                                
                                                                
                                                                
                                                                11
                                                                
                                                                
                                                                
                                                                1.04
                                                                %
                                                                
                                                                
                                                                4,125
                                                                
                                                                
                                                                
                                                                3
                                                                
                                                                
                                                                
                                                                0.29
                                                                %Total
      interest-earning cash equivalents
                                                                
                                                                
                                                                34,500
                                                                
                                                                
                                                                
                                                                79
                                                                
                                                                
                                                                
                                                                0.92
                                                                %
                                                                
                                                                
                                                                26,814
                                                                
                                                                
                                                                
                                                                90
                                                                
                                                                
                                                                
                                                                1.35
                                                                %Total
      interest-earning assets
                                                                
                                                                
                                                                460,179
                                                                
                                                                
                                                                
                                                                5,668
                                                                
                                                                
                                                                
                                                                4.94
                                                                %
                                                                
                                                                
                                                                356,798
                                                                
                                                                
                                                                
                                                                4,922
                                                                
                                                                
                                                                
                                                                5.53
                                                                %Cash
      and due from banks
                                                                
                                                                
                                                                2,476
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2,173Other
      noninterest-earning assets
                                                                
                                                                
                                                                23,075
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                16,556Total
      Assets
                                                                
                                                                $
                                                                485,730
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                375,527Interest-bearing
    liabilities:Interest-bearing
      demand deposits
                                                                
                                                                $
                                                                172,816
                                                                
                                                                
                                                                $
                                                                232
                                                                
                                                                
                                                                
                                                                0.54
                                                                %
                                                                
                                                                $
                                                                116,495
                                                                
                                                                
                                                                $
                                                                259
                                                                
                                                                
                                                                
                                                                0.89
                                                                %Time
      deposits
                                                                
                                                                
                                                                156,324
                                                                
                                                                
                                                                
                                                                1,175
                                                                
                                                                
                                                                
                                                                3.01
                                                                %
                                                                
                                                                
                                                                125,829
                                                                
                                                                
                                                                
                                                                1,162
                                                                
                                                                
                                                                
                                                                3.70
                                                                %Total
      interest-bearing deposits
                                                                
                                                                
                                                                329,140
                                                                
                                                                
                                                                
                                                                1,407
                                                                
                                                                
                                                                
                                                                1.71
                                                                %
                                                                
                                                                
                                                                242,324
                                                                
                                                                
                                                                
                                                                1,421
                                                                
                                                                
                                                                
                                                                2.35
                                                                %Borrowed
      funds, short-term
                                                                
                                                                
                                                                5,000
                                                                
                                                                
                                                                
                                                                60
                                                                
                                                                
                                                                
                                                                4.81
                                                                %
                                                                
                                                                
                                                                5,561
                                                                
                                                                
                                                                
                                                                4
                                                                
                                                                
                                                                
                                                                0.30
                                                                %Borrowed
      funds, long-term
                                                                
                                                                
                                                                35,000
                                                                
                                                                
                                                                
                                                                395
                                                                
                                                                
                                                                
                                                                4.53
                                                                %
                                                                
                                                                
                                                                35,000
                                                                
                                                                
                                                                
                                                                385
                                                                
                                                                
                                                                
                                                                4.41
                                                                %Total
      borrowed funds
                                                                
                                                                
                                                                40,000
                                                                
                                                                
                                                                
                                                                455
                                                                
                                                                
                                                                
                                                                4.56
                                                                %
                                                                
                                                                
                                                                40,561
                                                                
                                                                
                                                                
                                                                389
                                                                
                                                                
                                                                
                                                                3.85
                                                                %Total
      interest-bearing liabilities
                                                                
                                                                
                                                                369,140
                                                                
                                                                
                                                                
                                                                1,862
                                                                
                                                                
                                                                
                                                                2.02
                                                                %
                                                                
                                                                
                                                                282,885
                                                                
                                                                
                                                                
                                                                1,810
                                                                
                                                                
                                                                
                                                                2.57
                                                                %Noninterest-bearing
      demand deposits
                                                                
                                                                
                                                                74,918
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                52,757
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Funding
      and cost of funds
                                                                
                                                                
                                                                444,058
                                                                
                                                                
                                                                
                                                                1,862
                                                                
                                                                
                                                                
                                                                1.68
                                                                %
                                                                
                                                                
                                                                335,642
                                                                
                                                                
                                                                
                                                                1,810
                                                                
                                                                
                                                                
                                                                2.16
                                                                %Other
      noninterest-bearing liabilities
                                                                
                                                                
                                                                3,463
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                3,882Total
      Liabilities
                                                                
                                                                
                                                                447,521
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                339,524Stockholders'
      Equity
                                                                
                                                                
                                                                38,209
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                36,003Total
      Liabilities and Stockholders' Equity
                                                                
                                                                $
                                                                485,730
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                375,527Net
      interest income
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                3,806
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                3,112Interest rate spread(difference betweenweighted
      average rate on interest-earning assets
      and interest-bearing liabilities)
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2.92
                                                                %
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2.96
                                                                %Net interest margin(net
      interest income as a percentage of average interest-earning
      assets)
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                3.32
                                                                %
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                3.50
                                                                %
  17
  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 volume (changes in volume multiplied by prior year rate), rate
(change in rate multiplied by prior year volume) 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 June 30,2010
      versus 2009Increase (Decrease) due toVolume
                      
                      
                      Rate
                      
                      
                      TotalInterest
      income:Loans
                      
                      $
                      312
                      
                      
                      $
                      (34
                      )
                      
                      $
                      278Securities
                      
                      
                      688
                      
                      
                      
                      (209
                      )
                      
                      
                      479Interest-earning
      deposits with banks
                      
                      
                      24
                      
                      
                      
                      (43
                      )
                      
                      
                      (19
                      )Federal
      bank stocks
                      
                      
                      -
                      
                      
                      
                      8
                      
                      
                      
                      8Total
      interest-earning assets
                      
                      
                      1,024
                      
                      
                      
                      (278
                      )
                      
                      
                      746Interest
      expense:Interest-bearing
      deposits
                      
                      
                      431
                      
                      
                      
                      (445
                      )
                      
                      
                      (14
                      )Borrowed
      funds
                      
                      
                      (5
                      )
                      
                      
                      71
                      
                      
                      
                      66Total
      interest-bearing liabilities
                      
                      
                      426
                      
                      
                      
                      (374
                      )
                      
                      
                      52Net
      interest income
                      
                      $
                      598
                      
                      
                      $
                      96
                      
                      
                      $
                      694
 
 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
quarter ended June 30, 2010 and 2009 is as follows:
  (Dollar
      amounts in thousands)
                              
                              At
      or for the three months endedJune
      30,2010
                              
                              
                              2009Balance
      at the beginning of the period
                              
                              $
                              3,174
                              
                              
                              $
                              2,885Provision
      for loan losses
                              
                              
                              225
                              
                              
                              
                              540Charge-offs
                              
                              
                              (110
                              )
                              
                              
                              (501
                              )Recoveries
                              
                              
                              9
                              
                              
                              
                              11Balance
      at the end of the period
                              
                              $
                              3,298
                              
                              
                              $
                              2,935Non-performing
      loans
                              
                              $
                              3,318
                              
                              
                              $
                              2,208Non-performing
      assets
                              
                              
                              3,453
                              
                              
                              
                              2,746Non-performing
      loans to total loans
                              
                              
                              1.12
                              %
                              
                              
                              0.81
                              %Non-performing
      assets to total assets
                              
                              
                              0.71
                              %
                              
                              
                              0.70
                              %Allowance
      for loan losses to total loans
                              
                              
                              1.11
                              %
                              
                              
                              1.08
                              %Allowance
      for loan losses to non-performing loans
                              
                              
                              99.40
                              %
                              
                              
                              132.94
                              %
  18
  The
provision for loan losses decreased $315,000 or 58.3% to $225,000 for the three
month period ended June 30, 2010 from $540,000 for the same period in the prior
year due to a decline in overall delinquency in the loan
portfolio.  At June 30, 2010, loans past due 30 days or more totaled
$4.2 million, compared to $7.7 million in delinquent loans at December 31,
2009.
 
 Nonperforming
loans increased $1.1 million to $3.3 million at June 30, 2010 from $2.2 million
at June 30, 2009 as a result of pressure on borrowers related to the prevailing
poor economic climate.  At June 30, 2010, nonperforming loans were
stable, increasing by $81,000 from $3.2 million at March 31, 2010.
 
 Noninterest
income.  Noninterest income increased $178,000 or 19.4% to $1.1
million during the three months ended June 30, 2010, compared to $919,000 during
the same period in the prior year.  This increase was primarily due to
increases in gains on the sale of securities and other noninterest income of
$117,000 and $72,000, respectively.  The Corporation recorded gains on
the sale of certain securities totaling $301,000 during the second quarter of
2010 compared to gains totaling $184,000 on the sale of investments during the
second quarter of 2009.  Other noninterest income increased primarily
due to an increase in ATM and point-of-sale interchange fee income of $69,000 to
$151,000 for the three months ended June 30, 2010, compared to $82,000 during
the same period in the prior year.
 
 Noninterest
expense.  Noninterest expense increased $568,000 or 19.6% to
$3.5 million during the three months ended June 30, 2010 compared to $2.9
million for the same period in 2009.  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 $339,000, $86,000, $152,000 and $168,000, respectively, partially offset by a
decrease in professional fees and FDIC expense of $96,000 and $81,000,
respectively.
 
 Compensation
and employee benefits increased $339,000 or 23.6% to $1.8 million for the three
months ended June 30, 2010 compared to $1.4 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 the reinstatement of the previously suspended incentive
programs.
 
 Premises
and equipment increased $86,000 or 19.4% to $529,000 for the three months ended
June 30, 2010, compared to $443,000 for the same period in the prior
year.  This increase was primarily related to the 2009 branch purchase
and increased fixed asset depreciation expenses.
 
 As a
result of the branch purchase, the Bank recognized $152,000 of core deposit
intangible amortization expense during the second quarter of
2010.  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 decreased $96,000 or 36.8% to $165,000 for the three months ended June 30,
2010, compared to $261,000 for the same period in the prior
year.  This decrease was primarily related to a decrease in legal and
consulting fees associated with the 2009 branch office purchase.
 
 FDIC
expense decreased $81,000 to $148,000 for the three months ended June 30, 2010,
compared to $229,000 for the same period in the prior year.  During
the second quarter of 2009, in addition to regular quarterly premiums, the
Corporation recorded $180,000 in FDIC expense for a special assessment which was
imposed on all FDIC insured depository institutions and collected on September
30, 2009.  Regular quarterly FDIC premiums for the second quarter of
2010 increased from the same quarter in the prior year as a result of the Bank’s
increased deposit base and increased base assessment rates applied to all FDIC
insured depository institutions.
 
 Other
noninterest expense increased $168,000 or 32.0% to $693,000 during the three
months ended June 30, 2010, compared to $525,000 for the same period in the
prior year.  This increase can be attributed primarily to costs
associated with operating an additional branch office.
  19
  Provision for income
taxes.  The provision for income taxes increased $166,000 to
$220,000 for the three months ended June 30, 2010 compared to $54,000 for the
same period in the prior year.  This increase was primarily related to
an increase in pre-tax income of $601,000 to $1.1 million for the three months
ended June 30, 2010, compared to $462,000 for the same period in
2009.  The effective tax rate increased to 20.7% for the three months
ended June 30, 2010, compared to 11.7% for the same period in
2009.  This higher effective tax rate resulted from a decreased
portion of pre-tax income having been generated from tax-exempt investment
securities and loans.  The difference between the statutory rate of
34% and the Corporation’s effective tax rate is due to tax-exempt income earned
on certain tax-free loans and securities and bank-owned life
insurance.
 
 Comparison
of Results for the Six Month Period Ended June 30, 2010 and 2009
 
 General.  Net income
increased $449,000 or 41.7% to $1.5 million for the six months ended June 30,
2010 from $1.1 million for the same period in 2009.  This increase was
the result of increases in net interest income and noninterest income of $1.1
million and $302,000, respectively, and a decrease in the provision for loan
losses of $484,000.  Partially offsetting these favorable items,
noninterest expense and the provision for income taxes increased $1.3 million
and $122,000, respectively.
 
 Net interest
income.  Net interest income on a tax equivalent basis
increased $1.2 million or 18.6% to $7.5 million for the six months ended June
30, 2010 from $6.3 million for the same period in 2009.  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 $27,000.
 
 Interest
income.  Interest income on a tax equivalent basis increased
$1.1 million or 11.4% to $11.2 million for the six months ended June 30, 2010,
compared to $10.0 million for the same period in the prior year.  This
increase can be attributed to increases in interest on loans, securities and
federal bank stock dividends of $437,000, $718,000 and $14,000, respectively,
partially offset by a decrease in interest-earning deposits with banks of
$24,000.
 
 Tax
equivalent interest earned on loans receivable increased $437,000 or 5.2% to
$8.9 million for the six months ended June 30, 2010, compared to $8.5 million
for the same period in 2009.  This increase resulted primarily from
average loans increasing $18.2 million or 6.6%, accounting for $550,000 in
additional loan interest income.  This increase can be attributed to
growth in the Corporation’s existing loan portfolio and loans acquired through
the third quarter 2009 purchase of the Titusville banking office from PNC
(formerly National City Bank).  Offsetting this favorable volume
increase, the average yield on loans receivable decreased 8 basis points to
6.08% for the six months ended June 30, 2010, versus 6.16% for the same period
in 2009, due to declining market interest rates, accounting for a $113,000
decrease in interest income.
 
 Tax
equivalent interest earned on securities increased $718,000 or 51.0% to $2.1
million for the six months ended June 30, 2010, compared to $1.4 million for the
same period in 2009.  The average volume of securities increased $64.8
million, primarily as a result of the deployment of net cash received in the
branch purchase, accounting for a $1.2 million increase in interest
income.  Offsetting this favorable volume increase, the average yield
on securities decreased 138 basis points to 3.48% for the six months ended June
30, 2010, versus 4.86% for the same period in 2009, due primarily to
shorter-termed security purchases made in the third and fourth quarters of 2009
and first and second quarters of 2010 at market yields lower than the overall
average of the existing portfolio.  This unfavorable yield variance
accounted for a $490,000 decrease in interest income.
 
 Interest
earned on interest-earning deposit accounts decreased $24,000 or 13.6% to
$152,000 for the six months ended June 30, 2010 from $176,000 for the same
period in 2009.  The average volume of these assets increased $6.9
million, increasing interest income by $46,000.  Offsetting this
volume increase, the average yield on interest-earning deposit accounts
decreased 54 basis points to 1.05% for the six months ended June 30, 2010,
compared to 1.59% for the same period in the prior year, accounting for a
$70,000 decrease in interest income.
 
 Dividends
on federal bank stocks increased $14,000 to $22,000 for the six month period
ended June 30, 2010 from $8,000 for the same period in 2009.  The
average yield on these assets increased 65 basis points to 1.06% for the six
months ended June 30, 2010, compared to 0.41% for the same period the prior
year.
  20
  Interest
expense.  Interest expense decreased $27,000 to $3.7 million
for the six months ended June 30, 2010 from $3.8 million for the same period in
2009.  This decrease in interest expense can be attributed to a
decrease in interest incurred on deposits of $128,000, partially offset by an
increase in interest incurred on borrowed funds of $101,000.
 
 Interest
expense incurred on deposits decreased $128,000 or 4.3% to $2.8 million for the
six months ended June 30, 2010 compared to $3.0 million for the same period in
2009.  The average cost of interest-bearing deposits decreased 73
basis points to 1.76% for the six months ended June 30, 2010, compared to 2.49%
for the same period in 2009 causing a $1.0 million decrease in interest
expense.  Partially offsetting this favorable rate variance, the
average volume of interest-bearing deposits increased $84.3 million or 35.1% to
$324.4 million for the six months ended June 30, 2010, compared to $240.0
million for the same period in 2009 causing an $874,000 increase in interest
expense.  This increase was primarily due to deposits assumed through
the aforementioned branch purchase.
 
 Interest
expense incurred on borrowed funds increased $101,000 or 12.6% to $901,000 for
the six months ended June 30, 2010, compared to $800,000 for the same period in
the prior year.  This increase can be attributed to an increase in the
average cost of borrowed funds of 121 basis points to 4.54% for the six months
ended June 30, 2010, compared to 3.33% for the same period in 2009 causing a
$257,000 increase in interest expense.  This increase in the average
cost was due to higher short-term borrowing rates resulting from the third
quarter 2009 $5.0 million advance on a line of credit with a correspondent
bank.  The line of credit has a current rate of
4.75%.  Partially offsetting this unfavorable cost increase, the
average balance of borrowed funds decreased $8.5 million or 17.5% to $40.0
million for the six months ended June 30, 2010, compared to $48.5 million for
the same period in the prior year, causing a $156,000 decrease in interest
expense.  This volume decrease was related to a decrease in short-term
borrowings.
  21




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





(Dollar amounts in thousands)
                                                
                                                Six months ended June 30,2010
                                                
                                                
                                                2009Average
                                                
                                                
                                                
                                                
                                                
                                                Yield /
                                                
                                                
                                                Average
                                                
                                                
                                                
                                                
                                                
                                                Yield /Balance
                                                
                                                
                                                Interest
                                                
                                                
                                                Rate
                                                
                                                
                                                Balance
                                                
                                                
                                                Interest
                                                
                                                
                                                RateInterest-earning assets:Loans,
      taxable
                                                
                                                $
                                                288,030
                                                
                                                
                                                $
                                                8,706
                                                
                                                
                                                
                                                6.10
                                                %
                                                
                                                $
                                                260,137
                                                
                                                
                                                $
                                                8,129
                                                
                                                
                                                
                                                6.30
                                                %Loans,
      tax exempt
                                                
                                                
                                                6,798
                                                
                                                
                                                
                                                188
                                                
                                                
                                                
                                                5.58
                                                %
                                                
                                                
                                                16,499
                                                
                                                
                                                
                                                328
                                                
                                                
                                                
                                                4.01
                                                %Total
      loans receivable
                                                
                                                
                                                294,828
                                                
                                                
                                                
                                                8,894
                                                
                                                
                                                
                                                6.08
                                                %
                                                
                                                
                                                276,636
                                                
                                                
                                                
                                                8,457
                                                
                                                
                                                
                                                6.16
                                                %Securities,
      taxable
                                                
                                                
                                                95,655
                                                
                                                
                                                
                                                1,340
                                                
                                                
                                                
                                                2.82
                                                %
                                                
                                                
                                                43,191
                                                
                                                
                                                
                                                911
                                                
                                                
                                                
                                                4.25
                                                %Securities,
      tax exempt
                                                
                                                
                                                27,546
                                                
                                                
                                                
                                                786
                                                
                                                
                                                
                                                5.75
                                                %
                                                
                                                
                                                15,257
                                                
                                                
                                                
                                                497
                                                
                                                
                                                
                                                6.57
                                                %Total
      securities
                                                
                                                
                                                123,201
                                                
                                                
                                                
                                                2,126
                                                
                                                
                                                
                                                3.48
                                                %
                                                
                                                
                                                58,448
                                                
                                                
                                                
                                                1,408
                                                
                                                
                                                
                                                4.86
                                                %Interest-earning
      deposits with banks
                                                
                                                
                                                29,307
                                                
                                                
                                                
                                                152
                                                
                                                
                                                
                                                1.05
                                                %
                                                
                                                
                                                22,379
                                                
                                                
                                                
                                                176
                                                
                                                
                                                
                                                1.59
                                                %Federal
      bank stocks
                                                
                                                
                                                4,194
                                                
                                                
                                                
                                                22
                                                
                                                
                                                
                                                1.06
                                                %
                                                
                                                
                                                3,962
                                                
                                                
                                                
                                                8
                                                
                                                
                                                
                                                0.41
                                                %Total
      interest-earning cash equivalents
                                                
                                                
                                                33,501
                                                
                                                
                                                
                                                174
                                                
                                                
                                                
                                                1.05
                                                %
                                                
                                                
                                                26,341
                                                
                                                
                                                
                                                184
                                                
                                                
                                                
                                                1.41
                                                %Total
      interest-earning assets
                                                
                                                
                                                451,530
                                                
                                                
                                                
                                                11,194
                                                
                                                
                                                
                                                5.00
                                                %
                                                
                                                
                                                361,425
                                                
                                                
                                                
                                                10,049
                                                
                                                
                                                
                                                5.61
                                                %Cash
      and due from banks
                                                
                                                
                                                2,317
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2,174Other
      noninterest-earning assets
                                                
                                                
                                                23,029
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                16,544Total
      assets
                                                
                                                $
                                                476,876
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                380,143Interest-bearing
    liabilities:Interest-bearing
      demand deposits
                                                
                                                $
                                                165,616
                                                
                                                
                                                $
                                                462
                                                
                                                
                                                
                                                0.56
                                                %
                                                
                                                $
                                                112,987
                                                
                                                
                                                $
                                                572
                                                
                                                
                                                
                                                1.02
                                                %Time
      deposits
                                                
                                                
                                                158,765
                                                
                                                
                                                
                                                2,371
                                                
                                                
                                                
                                                3.01
                                                %
                                                
                                                
                                                127,059
                                                
                                                
                                                
                                                2,389
                                                
                                                
                                                
                                                3.79
                                                %Total
      interest-bearing deposits
                                                
                                                
                                                324,381
                                                
                                                
                                                
                                                2,833
                                                
                                                
                                                
                                                1.76
                                                %
                                                
                                                
                                                240,046
                                                
                                                
                                                
                                                2,961
                                                
                                                
                                                
                                                2.49
                                                %Borrowed
      funds, long-term
                                                
                                                
                                                35,000
                                                
                                                
                                                
                                                782
                                                
                                                
                                                
                                                4.51
                                                %
                                                
                                                
                                                35,000
                                                
                                                
                                                
                                                772
                                                
                                                
                                                
                                                4.45
                                                %Borrowed
      funds, short-term
                                                
                                                
                                                5,001
                                                
                                                
                                                
                                                119
                                                
                                                
                                                
                                                4.80
                                                %
                                                
                                                
                                                13,473
                                                
                                                
                                                
                                                28
                                                
                                                
                                                
                                                0.42
                                                %Total
      borrowed funds
                                                
                                                
                                                40,001
                                                
                                                
                                                
                                                901
                                                
                                                
                                                
                                                4.54
                                                %
                                                
                                                
                                                48,473
                                                
                                                
                                                
                                                800
                                                
                                                
                                                
                                                3.33
                                                %Total
      interest-bearing liabilities
                                                
                                                
                                                364,382
                                                
                                                
                                                
                                                3,734
                                                
                                                
                                                
                                                2.07
                                                %
                                                
                                                
                                                288,519
                                                
                                                
                                                
                                                3,761
                                                
                                                
                                                
                                                2.63
                                                %Noninterest-bearing
      demand deposits
                                                
                                                
                                                71,436
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                51,542
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Funding
      and cost of funds
                                                
                                                
                                                435,818
                                                
                                                
                                                
                                                3,734
                                                
                                                
                                                
                                                1.73
                                                %
                                                
                                                
                                                340,061
                                                
                                                
                                                
                                                3,761
                                                
                                                
                                                
                                                2.23
                                                %Other
      noninterest-bearing liabilities
                                                
                                                
                                                3,200
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                4,048Total
      liabilities
                                                
                                                
                                                439,018
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                344,109Stockholders'
      equity
                                                
                                                
                                                37,858
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                36,032Total
      liabilities and stockholders' equity
                                                
                                                $
                                                476,876
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                380,141Net
      interest income
                                                
                                                
                                                
                                                
                                                
                                                $
                                                7,460
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                6,288Interest rate spread(difference between weighted average rate on interest-earning
      assets and interest-bearing liabilities)
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2.93
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                2.98
                                                %Net interest margin(net
      interest income as a percentage of average interest-earning
      assets)
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.33
                                                %
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3.51
                                                %




22


Analysis of Changes in Net Interest
Income.  The following table analyzes the changes in interest
income and interest expense in terms of: (1) changes in volume of
interest-earning assets and interest-bearing liabilities and (2) changes in
yields and rates.  The table reflects the extent to which changes in
the Corporation’s interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate), changes in
rate (change in rate multiplied by prior year volume) 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)
                  
                  Six months ended June 30,2010 versus 2009Increase (Decrease) due toVolume
                  
                  
                  Rate
                  
                  
                  TotalInterest
      income:Loans
                  
                  $
                  550
                  
                  
                  $
                  (113
                  )
                  
                  $
                  437Securities
                  
                  
                  1,208
                  
                  
                  
                  (490
                  )
                  
                  
                  718Interest-earning
      deposits with banks
                  
                  
                  46
                  
                  
                  
                  (70
                  )
                  
                  
                  (24
                  )Federal
      bank stocks
                  
                  
                  -
                  
                  
                  
                  14
                  
                  
                  
                  14Total
      interest-earning assets
                  
                  
                  1,804
                  
                  
                  
                  (659
                  )
                  
                  
                  1,145Interest
      expense:Deposits
                  
                  
                  874
                  
                  
                  
                  (1,002
                  )
                  
                  
                  (128
                  )Borrowed
      funds
                  
                  
                  (156
                  )
                  
                  
                  257
                  
                  
                  
                  101Total
      interest-bearing liabilities
                  
                  
                  718
                  
                  
                  
                  (745
                  )
                  
                  
                  (27
                  )Net
      interest income
                  
                  $
                  1,086
                  
                  
                  $
                  86
                  
                  
                  $
                  1,172




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
quarter ended June 30, 2010 and 2009 is as follows:





(Dollar amounts in thousands)
                      
                      At or for the six months endedJune 30,2010
                      
                      
                      2009Balance
      at the beginning of the period
                      
                      $
                      3,202
                      
                      
                      $
                      2,651Provision
      for loan losses
                      
                      
                      353
                      
                      
                      
                      837Charge-offs
                      
                      
                      (277
                      )
                      
                      
                      (572
                      )Recoveries
                      
                      
                      20
                      
                      
                      
                      19Balance
      at the end of the period
                      
                      $
                      3,298
                      
                      
                      $
                      2,935Non-performing
      loans
                      
                      $
                      3,318
                      
                      
                      $
                      2,208Non-performing
      assets
                      
                      
                      3,453
                      
                      
                      
                      2,746Non-performing
      loans to total loans
                      
                      
                      1.12
                      %
                      
                      
                      0.81
                      %Non-performing
      assets to total assets
                      
                      
                      0.71
                      %
                      
                      
                      0.70
                      %Allowance
      for loan losses to total loans
                      
                      
                      1.11
                      %
                      
                      
                      1.08
                      %Allowance
      for loan losses to non-performing loans
                      
                      
                      99.40
                      %
                      
                      
                      132.94
                      %




23


The
provision for loan losses decreased $484,000 or 57.8% to $353,000 for the six
month period ended June 30, 2010 from $837,000 for the same period in the prior
year due to a decline in overall delinquency in the loan
portfolio.  At June 30, 2010, loans past due 30 days or more totaled
$4.2 million, compared to $7.7 million in delinquent loans at December 31,
2009.





Nonperforming
loans increased $1.1 million to $3.3 million at June 30, 2010 from $2.2 million
at June 30, 2009 as a result of pressure on borrowers related to the prevailing
poor economic climate.  During the six month period ended June 30,
2010, nonperforming loans increased by $900,000 from $2.4 million at December
31, 2009.  This increase was due primarily to the addition of an
$811,000 credit relationship to nonaccrual status due to its recent
performance.





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 that 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.  As of June 30, 2010,
the Corporation’s classified and criticized assets amounted to $14.7 million,
with $7.7 million classified as substandard, $49,000 classified as doubtful and
$6.9 million identified as special mention.  As of March 31, 2010 and
December 31, 2009, the Corporation’s classified and criticized assets amounted
to $15.8 million and $16.6 million, respectively.  Included in
classified and criticized assets at June 30, 2010 are two separate loans
exhibiting credit deterioration impacting the ability of the borrowers to comply
with their present loan repayment terms.





The first
loan, with an outstanding balance of $3.0 million at June 30, 2010, was
originated 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 due to the seasonal business 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 June 30, 2010, 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 a loss on this loan.





The
second loan, with an outstanding balance of $2.2 million at June 30, 2010, 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 June 30, 2010, 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 a loss on this loan.


24


Noninterest
income.  Noninterest income increased $302,000 or 18.4% to $1.9
million during the six months ended June 30, 2010, compared to $1.6 million
during the same period in the prior year.  This increase was primarily
due to increases in gains on the sale of securities and commissions on financial
services.  The Corporation recorded gains on the sale of certain
securities totaling $400,000 during the first six months of 2010 compared to
gains totaling $240,000 on the sale of investments during the first six months
of 2009.  Commissions on financial services increased $79,000 due in
part to the addition of two financial services representatives during
2010.  In addition to these favorable variances, title premiums
increased $42,000 as the Corporation’s title company, which began operations in
2009, is now fully integrated and operational, and other noninterest income
increased $56,000 primarily due to an $148,000 increase in ATM and point-of-sale
interchange fee income.  Partially offsetting the increase in
interchange fee income, gains on the sale of bank assets decreased by $74,000 as
the Corporation realized a $74,000 gain on the sale of a bank assets in 2009 as
a result of the sale of a building acquired in connection with the 2008
acquisition of Elk County Savings and Loan Association.





Noninterest
expense.  Noninterest expense increased $1.3 million or 24.3%
to $6.9 million during the six months ended June 30, 2010 compared to $5.5
million for the same period in 2009.  This increase in noninterest
expense can be attributed to increases in compensation and employee benefits,
premises and equipment, intangible amortization, FDIC expense and other
noninterest expenses of $732,000, $155,000, $304,000, $16,000 and $286,000,
respectively, partially offset by a decrease in professional fees of
$155,000.





Compensation
and employee benefits increased $732,000 or 25.5% to $3.6 million for the six
months ended June 30, 2010 compared to $2.9 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 the reinstatement of the previously suspended incentive
programs.





Premises
and equipment increased $155,000 or 16.8% to $1.1 million for the six months
ended June 30, 2010, compared to $925,000 for the same period in the prior
year.  This increase was primarily related to the 2009 branch purchase
and increased fixed asset depreciation expenses.





Associated
with the branch purchase, the Bank recognized $304,000 of core deposit
intangible amortization expense during the first six months of
2010.  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 decreased $155,000 or 35.7% to $279,000 for the six months ended June 30,
2010, compared to $434,000 for the same period in the prior
year.  This decrease was primarily related to a decrease in legal and
consulting fees associated with the 2009 branch office purchase.





FDIC
expense increased $16,000 to $289,000 for the six months ended June 30, 2010,
compared to $273,000 for the same period in the prior year.  This
increase was the result of increases in the Bank’s deposit base and increased
base assessment rates applied to all FDIC insured depository
institutions.  During the six months ended June 30, 2009, in addition
to regular quarterly premiums, the Corporation recorded $180,000 in FDIC expense
for a special assessment which was imposed on all FDIC insured depository
institutions and collected on September 30, 2009.





Other
noninterest expense increased $286,000 or 28.3% to $1.3 million during the six
months ended June 30, 2010, compared to $1.0 million for the same period in the
prior year.  This increase can be attributed primarily to costs
associated with operating an additional branch office.





Provision for income
taxes.  The provision for income taxes increased $122,000 or
49.2% to $370,000 for the six months ended June 30, 2010 compared to $248,000
for the same period in the prior year.  This increase was primarily
related to the $571,000 increase in pre-tax income to $1.9 million for the six
months ended June 30, 2010, compared to $1.3 million for the same period in
2009.  The effective tax rate increased to 19.5% for the six months
ended June 30, 2010, compared to 18.7% for the same period in
2009.  This higher effective tax rate resulted from a decreased
portion of pre-tax income having been generated from tax-exempt investment
securities and loans.  The difference between the statutory rate of
34% and the Corporation’s effective tax rate is due to tax-exempt income earned
on certain tax-free loans and securities and bank-owned life
insurance.


25


LIQUIDITY





The
Corporation’s primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and Federal Reserve
and amortization and prepayments of outstanding loans and maturing
securities.  During the six months ended June 30, 2010, 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 $53.8 million, and standby letters of credit totaling $1.0
million.





At June
30, 2010, time deposits amounted to $153.7 million or 38.1% of the Corporation’s
total consolidated deposits, including approximately $50.8 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 discount
window.  At June 30, 2010, the Corporation’s borrowing capacity with
the FHLB, net of funds borrowed, was $126.2 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





The
Corporation’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and
follow general practices within the industry in which it
operates.  Application of these principles requires management to make
estimates or judgments that affect the amounts reported in the financial
statements and accompanying notes.  These estimates are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates or judgments.  Certain policies inherently have a greater
reliance on the use of estimates, and as such have a greater possibility of
producing results that could be materially different than originally
reported.  Estimates or judgments are necessary when assets and
liabilities are required to be recorded at fair value, when a decline in the
value of an asset not carried on the financial statements at fair value warrants
an impairment write-down or valuation reserve to be established or when an asset
or liability needs to be recorded contingent upon a future
event.  Carrying assets and liabilities at fair value inherently
results in more financial statement volatility.  The fair values and
the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by
third-party sources, when available.  When third-party information is
not available, valuation adjustments are estimated in good faith by management
primarily though the use of internal cash flow modeling techniques.





The most
significant accounting policies followed by the Corporation are presented in
Note 1 to the consolidated financial statements included in the Corporation’s
Annual Report on Form 10-K.  These policies, along with the
disclosures presented in the other financial statement notes provide information
on how significant assets and liabilities are valued in the financial statements
and how those values are determined.  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 has identified the following as critical
accounting policies.




26


Allowance for
loan losses.  The Corporation considers that the determination
of the allowance for loan losses involves a higher degree of judgment and
complexity than its other significant accounting policies.  The
balance in the allowance for loan losses is determined based on management’s
review and evaluation of the loan portfolio in relation to past loss experience,
the size and composition of the portfolio, current economic events and
conditions and other pertinent factors, including management’s assumptions as to
future delinquencies, recoveries and losses.  All of these factors may
be susceptible to significant change.  Among the many factors
affecting the allowance for loan losses, some are quantitative while others
require qualitative judgment.  Although management believes its
process for determining the allowance adequately considers all of the potential
factors that could potentially result in credit losses, the process includes
subjective elements and may be susceptible to significant change.  To
the extent actual outcomes differ from management’s estimates, additional
provisions for loan losses may be required that would adversely impact the
Corporation’s financial condition or earnings in future periods.





Other-than-temporary
impairment.  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, (3) the intent of the
Corporation to sell a security, and (4) whether it is more likely than not the
Corporation will have to sell the security before recovery of its cost
basis.





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.




27


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 June 30, 2010,  the Corporation’s interest-earning assets
maturing or repricing within one year totaled $145.9 million while the
Corporation’s interest-bearing liabilities maturing or repricing within one-year
totaled $144.8 million, providing an excess of interest-earning assets over
interest-bearing liabilities of $1.1 million.  At June 30, 2010,
the percentage of the Corporation’s liabilities to assets maturing or repricing
within one year was 99.2%.





For more
information, see “Market Risk Management” in the Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2009.





Item 4T.  Controls
and Procedures





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





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





As of
June 30, 2010, the Corporation carried out an evaluation, under the supervision
and with the participation of the Corporation’s management, including the
Corporation’s CEO and PAO, of the effectiveness of the design and operation of
the Corporation’s disclosure controls and procedures.  Based on the
foregoing, the Corporation’s CEO and PAO concluded that the Corporation’s
disclosure controls and procedures were effective.  There have been no
significant changes in the Corporation’s internal controls or in other factors
that could significantly affect the internal controls subsequent to the date the
Corporation completed its evaluation.





PART II - OTHER
INFORMATION





Item 1.  Legal
Proceedings





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





Item 1A.  Risk
Factors





There
have been no material changes from those risk factors previously disclosed in
the Corporation’s Annual Report on Form 10-K for the Fiscal Year Ended December
31, 2009, 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.





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





On June
28, 2010, the Corporation sold 26,000 shares of its common stock to The
Retirement Plan for Employees of the Farmers National Bank of Emlenton (the
“Plan”).  The shares of common stock were sold to the Plan for
aggregate proceeds of $409,500 or $15.75 per share.  The shares of
common stock were sold by the Corporation to the Plan in a private transaction
exempt from registration under Section 4(2) of The Securities Act of 1933, as
amended.  The proceeds of the sale will be used by the Corporation for
general corporate purposes.


28


Item 3.  Defaults
Upon Senior Securities





None.





Item 4.  (Removed
and Reserved)





Item 5.  Other
Information





(a)
            Not
      applicable.





(b)
            Not
      applicable.





Item
6.  Exhibits





Exhibit  3.2
            Amended
      and RestatedBy-Laws of
      Emclaire Financial Corp.Exhibit
      10.8
            Change
      in Control Agreement between Emclaire Financial Corp., the Farmers
      National Bank of Emlenton and certain executive officer, dated as of
      August 2, 2010.Exhibit
      31.1
            Rule
      13a-14(a) Certification of Principal Executive OfficerExhibit
      31.2
            Rule
      13a-14(a) Certification of Principal Accounting OfficerExhibit
      32.1
            CEO
      Certification Pursuant to 18 U.S.C. Section 1350Exhibit
      32.2
            CFO
      Certification Pursuant to 18 U.S.C. Section
1350




29


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:  August
      9, 2010
                By: /s/ William C. MarshWilliam
      C. MarshChairman
      of the Board,President
      and Chief Executive OfficerDate:  August
      9, 2010
                By: /s/ Amanda L. EnglesAmanda
      L. EnglesTreasurer
      and Principal Accounting
Officer




30