UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)


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





For the
quarterly period ended September
30, 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
November 12, 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 of September 30, 2010 and December 31,
    2009
                    1Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2010 and 2009
                    2Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2010 and
      2009
                    3Consolidated
      Statements of Changes in Stockholders’ Equity for the three and nine
      months ended September 30, 2010 and 2009
                    4Notes
      to Consolidated Financial Statements
                    5Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    15Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    27Item
      4.
                    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


As of
September 30, 2010 (Unaudited) and December 31, 2009


(Dollar
amounts in thousands, except per share data)





September
      30,
                    
                    
                    December
      31,2010
                    
                    
                    2009AssetsCash
      and due from banks
                    
                    $
                    2,919
                    
                    
                    $
                    2,822Interest
      earning deposits with banks
                    
                    
                    17,479
                    
                    
                    
                    36,130Cash
      and cash equivalents
                    
                    
                    20,398
                    
                    
                    
                    38,952Securities
      available for sale, at fair value
                    
                    
                    129,564
                    
                    
                    
                    105,243Loans
      receivable, net of allowance for loan losses of $3,457 and
      $3,202
                    
                    
                    297,854
                    
                    
                    
                    292,615Federal
      bank stocks, at cost
                    
                    
                    4,275
                    
                    
                    
                    4,125Bank-owned
      life insurance
                    
                    
                    5,543
                    
                    
                    
                    5,388Accrued
      interest receivable
                    
                    
                    1,589
                    
                    
                    
                    1,574Premises
      and equipment, net
                    
                    
                    8,859
                    
                    
                    
                    9,170Goodwill
                    
                    
                    3,664
                    
                    
                    
                    3,657Core
      deposit intangible
                    
                    
                    2,140
                    
                    
                    
                    2,585Prepaid
      expenses and other assets
                    
                    
                    3,687
                    
                    
                    
                    4,217Total
      Assets
                    
                    $
                    477,573
                    
                    
                    $
                    467,526Liabilities and Stockholders'
      EquityLiabilities:Deposits:Non-interest
      bearing
                    
                    $
                    74,971
                    
                    
                    $
                    67,033Interest
      bearing
                    
                    
                    328,684
                    
                    
                    
                    318,292Total
      deposits
                    
                    
                    403,655
                    
                    
                    
                    385,325Short-term
      borrowed funds
                    
                    
                    5,000
                    
                    
                    
                    5,000Long-term
      borrowed funds
                    
                    
                    25,000
                    
                    
                    
                    35,000Accrued
      interest payable
                    
                    
                    680
                    
                    
                    
                    711Accrued
      expenses and other liabilities
                    
                    
                    2,667
                    
                    
                    
                    4,456Total
      Liabilities
                    
                    
                    437,002
                    
                    
                    
                    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
                    
                    
                    7,443
                    
                    
                    
                    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
                    
                    
                    14,788
                    
                    
                    
                    14,685Treasury
      stock, at cost; 102,017 and 128,017 shares
                    
                    
                    (2,114
                    )
                    
                    
                    (2,653
                    )Retained
      earnings
                    
                    
                    17,425
                    
                    
                    
                    15,967Accumulated
      other comprehensive income (loss)
                    
                    
                    992
                    
                    
                    
                    (432
                    )Total
      Stockholders' Equity
                    
                    
                    40,571
                    
                    
                    
                    37,034Total
      Liabilities and Stockholders' Equity
                    
                    $
                    477,573
                    
                    
                    $
                    467,526





See
accompanying notes to consolidated financial statements.


1


Emclaire
Financial Corp.


Consolidated
Statements of Operations (Unaudited)


For the
three and nine months ended September 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





For
      the three months ended
                  
                  
                  For
      the nine months endedSeptember
      30,
                  
                  
                  September
      30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Interest
      and dividend income:Loans
      receivable, including fees
                  
                  $
                  4,505
                  
                  
                  $
                  4,279
                  
                  
                  $
                  13,342
                  
                  
                  $
                  12,641Securities:Taxable
                  
                  
                  642
                  
                  
                  
                  468
                  
                  
                  
                  1,982
                  
                  
                  
                  1,379Exempt
      from federal income tax
                  
                  
                  299
                  
                  
                  
                  254
                  
                  
                  
                  845
                  
                  
                  
                  596Federal
      bank stocks
                  
                  
                  10
                  
                  
                  
                  10
                  
                  
                  
                  32
                  
                  
                  
                  19Interest
      earning deposits with banks
                  
                  
                  63
                  
                  
                  
                  101
                  
                  
                  
                  214
                  
                  
                  
                  277Total
      interest and dividend income
                  
                  
                  5,519
                  
                  
                  
                  5,112
                  
                  
                  
                  16,415
                  
                  
                  
                  14,912Interest
      expense:Deposits
                  
                  
                  1,328
                  
                  
                  
                  1,427
                  
                  
                  
                  4,161
                  
                  
                  
                  4,388Borrowed
      funds
                  
                  
                  415
                  
                  
                  
                  433
                  
                  
                  
                  1,316
                  
                  
                  
                  1,232Total
      interest expense
                  
                  
                  1,743
                  
                  
                  
                  1,860
                  
                  
                  
                  5,477
                  
                  
                  
                  5,620Net
      interest income
                  
                  
                  3,776
                  
                  
                  
                  3,252
                  
                  
                  
                  10,938
                  
                  
                  
                  9,292Provision
      for loan losses
                  
                  
                  113
                  
                  
                  
                  240
                  
                  
                  
                  465
                  
                  
                  
                  1,077Net
      interest income after provision for loan losses
                  
                  
                  3,663
                  
                  
                  
                  3,012
                  
                  
                  
                  10,473
                  
                  
                  
                  8,215Noninterest
      income:Fees
      and service charges
                  
                  
                  340
                  
                  
                  
                  382
                  
                  
                  
                  1,026
                  
                  
                  
                  1,104Commissions
      on financial services
                  
                  
                  212
                  
                  
                  
                  75
                  
                  
                  
                  542
                  
                  
                  
                  327Title
      premiums
                  
                  
                  36
                  
                  
                  
                  18
                  
                  
                  
                  78
                  
                  
                  
                  31Net
      gain (loss) on sale of available for sale securities
                  
                  
                  629
                  
                  
                  
                  (691
                  )
                  
                  
                  1,029
                  
                  
                  
                  (451
                  )Net
      gain on sale of loans
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4Earnings
      on bank-owned life insurance
                  
                  
                  60
                  
                  
                  
                  57
                  
                  
                  
                  178
                  
                  
                  
                  171Other
                  
                  
                  196
                  
                  
                  
                  171
                  
                  
                  
                  560
                  
                  
                  
                  466Total
      noninterest income
                  
                  
                  1,473
                  
                  
                  
                  12
                  
                  
                  
                  3,413
                  
                  
                  
                  1,652Noninterest
      expense:Compensation
      and employee benefits
                  
                  
                  1,755
                  
                  
                  
                  1,549
                  
                  
                  
                  5,361
                  
                  
                  
                  4,424Premises
      and equipment
                  
                  
                  526
                  
                  
                  
                  472
                  
                  
                  
                  1,605
                  
                  
                  
                  1,396Intangible
      amortization expense
                  
                  
                  141
                  
                  
                  
                  51
                  
                  
                  
                  445
                  
                  
                  
                  51Professional
      fees
                  
                  
                  134
                  
                  
                  
                  299
                  
                  
                  
                  413
                  
                  
                  
                  733FDIC
      expense
                  
                  
                  158
                  
                  
                  
                  104
                  
                  
                  
                  447
                  
                  
                  
                  377Other
                  
                  
                  1,190
                  
                  
                  
                  780
                  
                  
                  
                  2,488
                  
                  
                  
                  1,792Total
      noninterest expense
                  
                  
                  3,904
                  
                  
                  
                  3,255
                  
                  
                  
                  10,759
                  
                  
                  
                  8,773Income
      (loss) before income taxes
                  
                  
                  1,232
                  
                  
                  
                  (231
                  )
                  
                  
                  3,127
                  
                  
                  
                  1,094Provision
      for (benefit from) income taxes
                  
                  
                  271
                  
                  
                  
                  (221
                  )
                  
                  
                  641
                  
                  
                  
                  27Net
      income (loss)
                  
                  
                  961
                  
                  
                  
                  (10
                  )
                  
                  
                  2,486
                  
                  
                  
                  1,067Preferred
      stock dividends and discount accretion
                  
                  
                  98
                  
                  
                  
                  98
                  
                  
                  
                  294
                  
                  
                  
                  294Net
      income (loss) available to common stockholders
                  
                  $
                  863
                  
                  
                  $
                  (108
                  )
                  
                  $
                  2,192
                  
                  
                  $
                  773Basic
      and diluted earnings (loss) per common share
                  
                  $
                  0.59
                  
                  
                  $
                  (0.08
                  )
                  
                  $
                  1.52
                  
                  
                  $
                  0.54Average
      common shares outstanding
                  
                  
                  1,457,404
                  
                  
                  
                  1,431,404
                  
                  
                  
                  1,440,452
                  
                  
                  
                  1,431,404





See
accompanying notes to consolidated financial statements.


2


Emclaire
Financial Corp.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


For the
nine months ended September 30, 2010 and 2009


(Dollar
amounts in thousands)





For
      the nine months endedSeptember 30,2010
                      
                      
                      2009Cash
      flows from operating activitiesNet
      income
                      
                      $
                      2,486
                      
                      
                      $
                      1,067Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
                      
                      
                      682
                      
                      
                      
                      633Provision
      for loan losses
                      
                      
                      465
                      
                      
                      
                      1,077Net
      amortization
                      
                      
                      146
                      
                      
                      
                      127Amortization
      of intangible assets and mortgage servicing rights
                      
                      
                      460
                      
                      
                      
                      64Realized
      (gains) losses on sales of available for sale securities,
    net
                      
                      
                      (1,029
                      )
                      
                      
                      451Net
      gains on sales of loans
                      
                      
                      -
                      
                      
                      
                      (4
                      )Net
      losses on foreclosed real estate
                      
                      
                      25
                      
                      
                      
                      -Gain
      on sale of premises and equipment
                      
                      
                      -
                      
                      
                      
                      (16
                      )Originations
      of loans sold
                      
                      
                      -
                      
                      
                      
                      (159
                      )Proceeds
      from the sale of loans
                      
                      
                      -
                      
                      
                      
                      163Restricted
      stock and stock option compensation
                      
                      
                      103
                      
                      
                      
                      87Increase
      in bank-owned life insurance, net
                      
                      
                      (155
                      )
                      
                      
                      (150
                      )Increase
      in accrued interest receivable
                      
                      
                      (15
                      )
                      
                      
                      (70
                      )Increase
      in prepaid expenses and other assets
                      
                      
                      (145
                      )
                      
                      
                      (846
                      )Decrease
      in accrued interest payable
                      
                      
                      (31
                      )
                      
                      
                      (12
                      )Decrease
      in accrued expenses and other liabilities
                      
                      
                      (1,791
                      )
                      
                      
                      (992
                      )Net
      cash provided by operating activities
                      
                      
                      1,201
                      
                      
                      
                      1,420Cash
      flows from investing activitiesLoan
      originations and principal collections, net
                      
                      
                      (6,084
                      )
                      
                      
                      (2,825
                      )Available
      for sale securities:Sales
                      
                      
                      37,808
                      
                      
                      
                      12,943Maturities,
      repayments and calls
                      
                      
                      98,612
                      
                      
                      
                      32,187Purchases
                      
                      
                      (157,488
                      )
                      
                      
                      (55,735
                      )Purchase
      of federal bank stocks
                      
                      
                      (150
                      )
                      
                      
                      (328
                      )Proceeds
      from the sale of bank premises and equipment
                      
                      
                      -
                      
                      
                      
                      203Proceeds
      from the sale of foreclosed real estate
                      
                      
                      64
                      
                      
                      
                      96Net
      cash received in branch acquisition
                      
                      
                      -
                      
                      
                      
                      54,923Purchases
      of premises and equipment
                      
                      
                      (371
                      )
                      
                      
                      (1,432
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      (27,609
                      )
                      
                      
                      40,032Cash
      flows from financing activitiesNet
      increase (decrease) in deposits
                      
                      
                      18,330
                      
                      
                      
                      (1,156
                      )Proceeds
      from advance on line of credit
                      
                      
                      -
                      
                      
                      
                      5,000Repayments
      on Federal Home Loan Bank advances
                      
                      
                      (10,000
                      )
                      
                      
                      (13,188
                      )Dividends
      paid
                      
                      
                      (886
                      )
                      
                      
                      (1,101
                      )Proceeds
      from the reissuance of treasury stock
                      
                      
                      410
                      
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      7,854
                      
                      
                      
                      (10,445
                      )Increase
      (decrease) in cash and cash equivalents
                      
                      
                      (18,554
                      )
                      
                      
                      31,007Cash
      and cash equivalents at beginning of period
                      
                      
                      38,952
                      
                      
                      
                      16,571Cash
      and cash equivalents at end of period
                      
                      $
                      20,398
                      
                      
                      $
                      47,578Supplemental
      information:Interest
      paid
                      
                      $
                      5,507
                      
                      
                      $
                      5,632Income
      taxes paid
                      
                      
                      550
                      
                      
                      
                      183Supplemental
      noncash disclosure:Transfers
      from loans to foreclosed real estate
                      
                      
                      155
                      
                      
                      
                      200Summary
      of branch acquisition:Fair
      value of deposits assumed
                      
                      
                      -
                      
                      
                      
                      92,596Less:  Fair
      value of tangible assets acquired
                      
                      
                      -
                      
                      
                      
                      32,673Cash
      received in acquisition
                      
                      
                      -
                      
                      
                      
                      54,923Goodwill
      and other intangibles recorded
                      
                      $
                      -
                      
                      
                      $
                      5,000





See
accompanying notes to consolidated financial statements.


3


Emclaire
Financial Corp.


Consolidated
Statements of Changes in Stockholders’ Equity (Unaudited)


For the
three and nine months ended September 30, 2010 and 2009


(Dollar
amounts in thousands, except per share data)





For
      the three months ended
                
                
                For
      the nine months endedSeptember 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Balance
      at beginning of period
                
                $
                39,483
                
                
                $
                35,672
                
                
                $
                37,034
                
                
                $
                36,123Net
      income (loss)
                
                
                961
                
                
                
                (10
                )
                
                
                2,486
                
                
                
                1,067Other
      comprehensive income:Change
      in net unrealized gains on available for sale securities, net of
      taxes
                
                
                818
                
                
                
                1,638
                
                
                
                2,103
                
                
                
                1,021Less:
      reclassification adjustment for gains (losses) included in net income, net
      of taxes
                
                
                415
                
                
                
                (457
                )
                
                
                679
                
                
                
                (298
                )Other
      comprehensive income
                
                
                403
                
                
                
                2,095
                
                
                
                1,424
                
                
                
                1,319Total
      comprehensive income
                
                
                1,364
                
                
                
                2,085
                
                
                
                3,910
                
                
                
                2,386Stock
      compensation expense
                
                
                22
                
                
                
                32
                
                
                
                103
                
                
                
                87Dividends
      declared on preferred stock
                
                
                (94
                )
                
                
                (94
                )
                
                
                (281
                )
                
                
                (242
                )Dividends
      declared on common stock
                
                
                (204
                )
                
                
                (200
                )
                
                
                (605
                )
                
                
                (859
                )Reissuance
      of treasury stock (26,000 shares)
                
                
                -
                
                
                
                -
                
                
                
                410
                
                
                
                -Balance
      at end of period
                
                $
                40,571
                
                
                $
                37,495
                
                
                $
                40,571
                
                
                $
                37,495Common
      cash dividend per share
                
                $
                0.14
                
                
                $
                0.14
                
                
                $
                0.42
                
                
                $
                0.60





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, real estate owned, 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.


5


2.
            Earnings
      per Common Share (continued).





(Dollar amounts in thousands, except for per share amounts)
                                              
                                              For the three months ended
                                              
                                              
                                              For the nine months endedSeptember 30,
                                              
                                              
                                              September 30,2010
                                              
                                              
                                              2009
                                              
                                              
                                              2010
                                              
                                              
                                              2009Earnings
      per share - basicNet
      income (loss)
                                              
                                              $
                                              961
                                              
                                              
                                              $
                                              (10
                                              )
                                              
                                              $
                                              2,486
                                              
                                              
                                              $
                                              1,067Preferred
      stock dividends and discount accretion
                                              
                                              
                                              98
                                              
                                              
                                              
                                              98
                                              
                                              
                                              
                                              294
                                              
                                              
                                              
                                              294Net
      income (loss) available to common stockholders
                                              
                                              $
                                              863
                                              
                                              
                                              $
                                              (108
                                              )
                                              
                                              $
                                              2,192
                                              
                                              
                                              $
                                              773Average
      common shares outstanding
                                              
                                              
                                              1,457,404
                                              
                                              
                                              
                                              1,431,404
                                              
                                              
                                              
                                              1,440,452
                                              
                                              
                                              
                                              1,431,404Basic
      earnings (loss) per common share
                                              
                                              $
                                              0.59
                                              
                                              
                                              $
                                              (0.08
                                              )
                                              
                                              $
                                              1.52
                                              
                                              
                                              $
                                              0.54Earnings
      per share - dilutedNet
      income (loss) available to common stockholders
                                              
                                              $
                                              863
                                              
                                              
                                              $
                                              (108
                                              )
                                              
                                              $
                                              2,192
                                              
                                              
                                              $
                                              773Average
      common shares outstanding
                                              
                                              
                                              1,457,404
                                              
                                              
                                              
                                              1,431,404
                                              
                                              
                                              
                                              1,440,452
                                              
                                              
                                              
                                              1,431,404Add:
      Dilutive effects of assumed exercises of stock options
                                              
                                              
                                              2,331
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,722
                                              
                                              
                                              
                                              -Average
      shares and dilutive potential common shares
                                              
                                              
                                              1,459,735
                                              
                                              
                                              
                                              1,431,404
                                              
                                              
                                              
                                              1,442,174
                                              
                                              
                                              
                                              1,431,404Diluted
      earnings (loss) per common share
                                              
                                              $
                                              0.59
                                              
                                              
                                              $
                                              (0.08
                                              )
                                              
                                              $
                                              1.52
                                              
                                              
                                              $
                                              0.54Stock
      options, restricted stock awards and warrants not considered in computing
      diluted earnings per share because they were antidilutive
                                              
                                              
                                              145,111
                                              
                                              
                                              
                                              157,611
                                              
                                              
                                              
                                              145,111
                                              
                                              
                                              
                                              157,611





3.
            Securities.





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





(Dollar amounts in thousands)
                    
                    Amortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    Faircost
                    
                    
                    gains
                    
                    
                    losses
                    
                    
                    valueAvailable for sale:September
      30, 2010:U.S.
      Treasury and federal agency
                    
                    $
                    1,977
                    
                    
                    $
                    29
                    
                    
                    $
                    -
                    
                    
                    $
                    2,006U.S.
      government sponsored entities and agencies
                    
                    
                    72,202
                    
                    
                    
                    327
                    
                    
                    
                    (2
                    )
                    
                    
                    72,527Mortgage-backed
      securities: residential
                    
                    
                    18,204
                    
                    
                    
                    806
                    
                    
                    
                    -
                    
                    
                    
                    19,010Collateralized
      mortgage obligations: residential
                    
                    
                    1,365
                    
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    1,368State
      and political subdivisions
                    
                    
                    30,619
                    
                    
                    
                    1,566
                    
                    
                    
                    (9
                    )
                    
                    
                    32,176Equity
      securities
                    
                    
                    2,588
                    
                    
                    
                    -
                    
                    
                    
                    (111
                    )
                    
                    
                    2,477$
                    126,955
                    
                    
                    $
                    2,731
                    
                    
                    $
                    (122
                    )
                    
                    $
                    129,564December
      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


6


3.
            Securities
      (continued).





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





(Dollar amounts in thousands)
                                      Available for saleAmortized
                                      
                                      Faircost
                                      
                                      valueDue
      in one year or less
                                      $
                                      -
                                      
                                      $
                                      -Due
      after one year through five years
                                      
                                      54,392
                                      
                                      
                                      54,616Due
      after five through ten years
                                      
                                      31,788
                                      
                                      
                                      32,629Due
      after ten years
                                      
                                      18,618
                                      
                                      
                                      19,464No
      scheduled maturity
                                      
                                      2,588
                                      
                                      
                                      2,477Mortgage-backed
      securities and collateralized mortgage obligations
                                      
                                      19,569
                                      
                                      
                                      20,378$
                                      126,955
                                      
                                      $
                                      129,564





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.





Information
pertaining to securities with gross unrealized losses as of September 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
                  
                  
                  LossSeptember
      30,  2010:U.S.
      government sponsored entities and agencies
                  
                  $
                  1,098
                  
                  
                  $
                  (2
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,098
                  
                  
                  $
                  (2
                  )Mortgage-backed
      securities: residential
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Collateralized
      mortgage obligations: residential
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -State
      and political subdivisions
                  
                  
                  1,511
                  
                  
                  
                  (9
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,511
                  
                  
                  
                  (9
                  )Equity
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  650
                  
                  
                  
                  (111
                  )
                  
                  
                  650
                  
                  
                  
                  (111
                  )$
                  2,609
                  
                  
                  $
                  (11
                  )
                  
                  $
                  650
                  
                  
                  $
                  (111
                  )
                  
                  $
                  3,259
                  
                  
                  $
                  (122
                  )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 conditions and (4) whether the Corporation has the
intent to sell the debt security or more likely than not will be required to
sell the debt security before its anticipated recovery.


7


3.
            Securities
      (continued).





There
were four equity and five debt securities in an unrealized loss position as
of September 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 and depressed pricing of the financial services
sector.  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 as the financial
services sector recovers, 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 other information available to determine the financial
position and near term prospects of each issuer.  The results of
analyzing the aforementioned metrics and financial fundamentals suggest recovery
of amortized cost as the sector improves.  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 September 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 September 30, 2010
to be other-than-temporarily impaired.





4.
            Loans
      Receivable.





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





(Dollar amounts in thousands)
                                
                                September 30,
                                
                                
                                December 31,2010
                                
                                
                                2009Mortgage
      loans on real estate:Residential
      first mortgages
                                
                                $
                                80,389
                                
                                
                                $
                                74,099Home
      equity loans and lines of credit
                                
                                
                                75,688
                                
                                
                                
                                77,284Commercial
      real estate
                                
                                
                                92,021
                                
                                
                                
                                89,952248,098
                                
                                
                                
                                241,335Other
      loans:Commercial
      business
                                
                                
                                39,699
                                
                                
                                
                                41,588Consumer
                                
                                
                                13,514
                                
                                
                                
                                12,89453,213
                                
                                
                                
                                54,482Total
      loans, gross
                                
                                
                                301,311
                                
                                
                                
                                295,817Less
      allowance for loan losses
                                
                                
                                3,457
                                
                                
                                
                                3,202Total
      loans, net
                                
                                $
                                297,854
                                
                                
                                $
                                292,615Nonaccrual
      loans
                                
                                $
                                3,093
                                
                                
                                $
                                2,359Loans
      90 days or more past due and still accruing
                                
                                
                                118
                                
                                
                                
                                59Total
      nonperforming loans
                                
                                $
                                3,211
                                
                                
                                $
                                2,418


8


4.
            Loans
      Receivable (continued).





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





(Dollar amounts in thousands)
                  
                  At or for the three months ended
                  
                  
                  At or for the nine months endedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Balance
      at the beginning of the period
                  
                  $
                  3,298
                  
                  
                  $
                  2,935
                  
                  
                  $
                  3,202
                  
                  
                  $
                  2,651Provision
      for loan losses
                  
                  
                  113
                  
                  
                  
                  240
                  
                  
                  
                  465
                  
                  
                  
                  1,077Charge-offs
                  
                  
                  (104
                  )
                  
                  
                  (18
                  )
                  
                  
                  (381
                  )
                  
                  
                  (590
                  )Recoveries
                  
                  
                  150
                  
                  
                  
                  1
                  
                  
                  
                  171
                  
                  
                  
                  20Balance
      at the end of the period
                  
                  $
                  3,457
                  
                  
                  $
                  3,158
                  
                  
                  $
                  3,457
                  
                  
                  $
                  3,158





Loans
individually considered impaired were as follows:





(Dollar amounts in thousands)
                        
                        September 30,
                        
                        
                        December 31,2010
                        
                        
                        2009Loans
      considered impaired:With
      no allocated allowance for loan losses
                        
                        $
                        572
                        
                        
                        $
                        150With
      an allocated allowance for loan losses
                        
                        
                        1,564
                        
                        
                        
                        590$
                        2,136
                        
                        
                        $
                        740Amount
      of the allowance for loan losses allocated
                        
                        $
                        449
                        
                        
                        $
                        128





5.
            Goodwill
      and Intangible Assets.





The
following table summarizes the Corporation’s acquired goodwill and intangible
assets as of September 30, 2010 and December 31, 2009:





(Dollar amounts in thousands)
                  
                  September 30, 2010
                  
                  
                  December 31, 2009Gross Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Gross Carrying
                    Amount
                  
                  
                  Accumulated
                    AmortizationGoodwill
                  
                  $
                  3,664
                  
                  
                  $
                  -
                  
                  
                  $
                  3,657
                  
                  
                  $
                  -Core
      deposit intangibles
                  
                  
                  4,027
                  
                  
                  
                  1,888
                  
                  
                  
                  4,027
                  
                  
                  
                  1,443Total
                  
                  $
                  7,691
                  
                  
                  $
                  1,888
                  
                  
                  $
                  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 nine
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 nine month periods ending September 30,
2010, the Corporation recorded intangible amortization expense totaling $141,000
and $445,000, respectively.


9





6.
            Employee Benefit
      Plans.





The
Corporation maintains a defined contribution 401(k) Plan.  Eligible
employees participate by providing tax-deferred contributions up to 20% of
qualified compensation.  Employee contributions are vested at all
times.  The Corporation provides a matching contribution of up to 4%
of the participant’s salary.  Matching contributions for the nine
months ended September 30, 2010 and 2009 amounted to $133,000 and $111,000,
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 nine months endedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Service
      cost
                    
                    $
                    73
                    
                    
                    $
                    76
                    
                    
                    $
                    219
                    
                    
                    $
                    200Interest
      cost
                    
                    
                    79
                    
                    
                    
                    61
                    
                    
                    
                    237
                    
                    
                    
                    211Expected
      return on plan assets
                    
                    
                    (79
                    )
                    
                    
                    (61
                    )
                    
                    
                    (238
                    )
                    
                    
                    (193
                    )Prior
      service costs
                    
                    
                    (8
                    )
                    
                    
                    (7
                    )
                    
                    
                    (23
                    )
                    
                    
                    (23
                    )Recognized
      net actuarial loss
                    
                    
                    2
                    
                    
                    
                    2
                    
                    
                    
                    57
                    
                    
                    
                    56Net
      periodic pension cost
                    
                    $
                    67
                    
                    
                    $
                    71
                    
                    
                    $
                    252
                    
                    
                    $
                    251





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 September 30, 2010, $425,000 has been
contributed.





7.
            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 September 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 September 30, 2010
                    
                    
                    96,250
                    
                    
                    $
                    24.79
                    
                    
                    $
                    -
                    
                    
                    
                    7.1Exercisable
      as of September 30, 2010
                    
                    
                    74,000
                    
                    
                    $
                    26.00
                    
                    
                    $
                    -
                    
                    
                    
                    6.7


10


7.
            Stock
      Compensation Plans (continued).





During
the nine month period ended September 30, 2010, the Corporation granted 1,250
and 1,000 restricted stock awards with a face value of $17,000 and $16,050,
respectively, based on the grant date stock prices of $13.60 and $16.05,
respectively.  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
nine month period ended September 30, 2010 and 2009, the Corporation recognized
$103,000 and $87,000, respectively, in stock compensation expense.  As
of September 30, 2010, there was $148,000 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.





8.
            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 September 30, 2010 and December 31, 2009, the
fair value consisted of loan balances of $1.6 million and $590,000,
respectively, net of a valuation allowance of $449,000 and $128,000,
respectively.  These impaired loans consisted primarily of commercial
real estate.  Additional provision for loan losses of $413,000 was
recorded during the nine months ended September 30, 2010.  Additional
provision for loan losses of $128,000 was recorded during the year ended
December 31, 2009.


11


8.
            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
                  
                  
                  InputsSeptember
      30, 2010:U.S.
      Treasury and federal agency
                  
                  $
                  2,006
                  
                  
                  $
                  -
                  
                  
                  $
                  2,006
                  
                  
                  $
                  -U.S.
      government sponsored entities and agencies
                  
                  
                  72,527
                  
                  
                  
                  -
                  
                  
                  
                  72,527
                  
                  
                  
                  -Mortgage-backed
      securities: residential
                  
                  
                  19,010
                  
                  
                  
                  -
                  
                  
                  
                  19,010
                  
                  
                  
                  -Collateralized
      mortgage obligations
                  
                  
                  1,368
                  
                  
                  
                  -
                  
                  
                  
                  1,368
                  
                  
                  
                  -State
      and political subdivision
                  
                  
                  32,176
                  
                  
                  
                  -
                  
                  
                  
                  32,176
                  
                  
                  
                  -Equity
      securities
                  
                  
                  2,477
                  
                  
                  
                  1,752
                  
                  
                  
                  725
                  
                  
                  
                  -$
                  129,564
                  
                  
                  $
                  1,752
                  
                  
                  $
                  127,813
                  
                  
                  $
                  -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
                        
                        
                        InputsSeptember
      30, 2010:Impaired
      loans
                        
                        $
                        1,115
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,115$
                        1,115
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,115December
      31, 2009:Impaired
      loans
                        
                        $
                        462
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        462$
                        462
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        462


12


8.
            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 September 30, 2010:





(Dollar amounts in thousands)
                  
                  September 30, 2010
                  
                  
                  December 31, 2009Carrying amount
                  
                  
                  Fair value
                  
                  
                  Carrying amount
                  
                  
                  Fair valueFinancial
      assets:Cash
      and cash equivalents
                  
                  $
                  20,398
                  
                  
                  $
                  20,398
                  
                  
                  $
                  38,952
                  
                  
                  $
                  38,952Securities
                  
                  
                  129,564
                  
                  
                  
                  129,564
                  
                  
                  
                  105,243
                  
                  
                  
                  105,243Loans
      receivable, net
                  
                  
                  297,854
                  
                  
                  
                  304,788
                  
                  
                  
                  292,615
                  
                  
                  
                  298,197Federal
      bank stocks
                  
                  
                  4,275
                  
                  
                  
                  N/A
                  
                  
                  
                  4,125
                  
                  
                  
                  N/AAccrued
      interest receivable
                  
                  
                  1,589
                  
                  
                  
                  1,589
                  
                  
                  
                  1,574
                  
                  
                  
                  1,574Financial
      liabilities:Deposits
                  
                  
                  403,655
                  
                  
                  
                  411,392
                  
                  
                  
                  385,325
                  
                  
                  
                  389,443Borrowed
      funds
                  
                  
                  30,000
                  
                  
                  
                  33,883
                  
                  
                  
                  40,000
                  
                  
                  
                  43,258Accrued
      interest payable
                  
                  
                  680
                  
                  
                  
                  680
                  
                  
                  
                  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 September 30, 2010 and December 31, 2009:





Carrying
amount is the estimated fair value for cash and cash equivalents, securities,
accrued interest receivable and payable, demand deposits, short-term 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


9.
            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 nine months ended September 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 $10.0 million or 2.2% to $477.6 million at September 30, 2010
from $467.5 million at December 31, 2009.  This increase resulted
primarily from an increase in securities and loans of $24.3 million and $5.2
million, respectively, partially offset by a decrease in cash and cash
equivalents of $18.6 million.  The net increase in the Corporation’s
assets was primarily funded by increases in customer deposits.





Total
liabilities increased $6.5 million or 1.5% to $437.0 million at September 30,
2010 from $430.5 million at December 31, 2009, while total stockholders’ equity
increased $3.5 million or 9.6% to $40.6 million at September 30, 2010 from $37.0
million at December 31, 2009.  The increase in total liabilities
resulted primarily from a $18.3 million or 4.8% increase in customer deposits,
partially offset by a decrease in borrowed funds of $10.0
million.  The increase in customer deposits consisted of a $7.9
million or 11.8% increase in noninterest bearing deposits and a $10.4 million or
3.3% increase in interest bearing deposits.





At
September 30, 2010, the Bank was considered well capitalized under the
regulatory framework for prompt corrective action with a Tier 1 leverage ratio,
Tier 1 risk-based capital ratio and total risk-based capital ratio of 7.79%,
13.38% and 14.64%, respectively, compared to 7.48%, 12.38% and 13.54%,
respectively, at December 31, 2009.





RESULTS
OF OPERATIONS





Comparison
of Results for the Three Month Period Ended September 30, 2010 and
2009





General.  Net income
increased $971,000 to $961,000 for the three months ended September 30, 2010
from a net loss of $10,000 for the same period in 2009.  This $971,000
increase was the result of increases in net interest income and noninterest
income of $524,000 and $1.5 million, respectively, and a decrease in the
provision for loan losses of $127,000.  Partially offsetting these
favorable items, noninterest expense and the provision for income taxes
increased $649,000 and $492,000, respectively.





Net interest
income.  Net interest income on a tax equivalent basis
increased $524,000 or 15.4% to $3.9 million for the three months ended September
30, 2010 from $3.4 million for the same period in 2009.  This net
increase can be attributed to an increase in tax equivalent interest income of
$407,000 and a decrease in interest expense of $117,000.


15


Interest
income.  Interest income on a tax equivalent basis increased
$407,000 or 7.7% to $5.7 million for the three months ended September 30, 2010,
compared to $5.3 million for the same period in the prior year.  This
increase can be attributed to increases in interest on loans and securities of
$207,000 and $238,000, respectively, partially offset by a decrease in
interest-earning deposits with banks of $38,000.





Tax
equivalent interest earned on loans receivable increased $207,000 or 4.8% to
$4.5 million for the three months ended September 30, 2010, compared to $4.3
million for the same period in 2009.  This increase resulted primarily
from average loans increasing $15.4 million or 5.5%, accounting for $235,000 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 4 basis points to
6.03% for the three months ended September 30, 2010, versus 6.07% for the same
period in 2009.  This unfavorable yield variance accounted for a
$28,000 decrease in interest income.





Tax
equivalent interest earned on securities increased $238,000 or 28.5% to $1.1
million for the three months ended September 30, 2010, compared to $834,000 for
the same period in 2009.  The average balance of securities increased
$50.8 million, primarily as a result of the deployment of net cash received in
the 2009 branch purchase, accounting for a $452,000 increase in interest
income.  Offsetting this favorable volume increase, the average yield
on securities decreased 93 basis points to 3.29% for the three months ended
September 30, 2010, versus 4.22% for the same period in 2009, due primarily to
the deployment of cash received from the 2009 branch purchase and U.S.
government agency calls into shorter-termed investment securities at market
yields lower than the overall average of the existing portfolio.  This
unfavorable yield variance accounted for a $214,000 decrease in interest
income.





Interest
earned on interest-earning deposit accounts decreased $38,000 or 37.6% to
$63,000 for the three months ended September 30, 2010 from $101,000 for the same
period in 2009.  The average balance of these assets decreased $15.8
million primarily due to the deployment of cash into higher yielding assets,
decreasing interest income by $36,000.  In addition to this volume
decrease, the average yield on interest-earning deposit accounts decreased 2
basis points to 0.91% for the three months ended September 30, 2010, compared to
0.93% for the same period in the prior year, accounting for a $2,000 decrease in
interest income.





Interest
expense.  Interest expense decreased $117,000 or 6.3% to $1.7
million for the three months ended September 30, 2010 from $1.9 million for the
same period in 2009.  This decrease in interest expense can be
attributed to a decrease in interest incurred on deposits and borrowed funds of
$99,000 and $18,000, respectively.





Interest
expense incurred on deposits decreased $99,000 or 6.9% to $1.3 million for the
three months ended September 30, 2010 compared to $1.4 million for the same
period in 2009.  The average cost of interest-bearing deposits
decreased 54 basis points to 1.61% for the three months ended September 30,
2010, compared to 2.15% for the same period in 2009 causing a $408,000 decrease
in interest expense.  This decrease was primarily due to deposits
repricing during 2010 in the overall low interest-rate
environment.  Partially offsetting this favorable rate variance, the
average balance of interest-bearing deposits increased $65.2 million or 24.8% to
$328.2 million for the three months ended September 30, 2010, compared to $263.0
million for the same period in 2009 causing a $309,000 increase in interest
expense.  This increase was primarily due to deposits assumed through
the aforementioned 2009 branch purchase.





Interest
expense incurred on borrowed funds decreased $18,000 or 4.2% to $415,000 for the
three months ended September 30, 2010, compared to $433,000 for the same period
in the prior year.  The average balance of borrowed funds decreased
$29.4 million or 45.0%, accounting for a $249,000 decrease in interest
expense.  Partially offsetting this favorable volume variance, the
average cost of borrowed funds increased 195 basis points to 4.58% for the three
months ended September 30, 2010, compared to 2.63% for the same period in 2009,
causing a $231,000 increase in interest expense.  Both the decrease in
volume and increase in rate were primarily related to the Bank obtaining
short-term borrowed funds in the second and third quarters of 2009 from the
Federal Reserve’s Term Auction Facility (TAF) and subsequently repaying such
funds by the end of the third quarter in 2009.


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 September 30,2010
                                                  
                                                  
                                                  2009Average
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Yield /
                                                  
                                                  
                                                  Average
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  Yield /Balance
                                                  
                                                  
                                                  Interest
                                                  
                                                  
                                                  Rate
                                                  
                                                  
                                                  Balance
                                                  
                                                  
                                                  Interest
                                                  
                                                  
                                                  RateInterest-earning
      assets:Loans,
      taxable
                                                  
                                                  $
                                                  292,578
                                                  
                                                  
                                                  $
                                                  4,446
                                                  
                                                  
                                                  
                                                  6.03
                                                  %
                                                  
                                                  $
                                                  267,848
                                                  
                                                  
                                                  $
                                                  4,169
                                                  
                                                  
                                                  
                                                  6.18
                                                  %Loans,
      tax exempt
                                                  
                                                  
                                                  5,588
                                                  
                                                  
                                                  
                                                  85
                                                  
                                                  
                                                  
                                                  6.03
                                                  %
                                                  
                                                  
                                                  14,870
                                                  
                                                  
                                                  
                                                  155
                                                  
                                                  
                                                  
                                                  4.14
                                                  %Total
      loans receivable
                                                  
                                                  
                                                  298,166
                                                  
                                                  
                                                  
                                                  4,531
                                                  
                                                  
                                                  
                                                  6.03
                                                  %
                                                  
                                                  
                                                  282,718
                                                  
                                                  
                                                  
                                                  4,324
                                                  
                                                  
                                                  
                                                  6.07
                                                  %Securities,
      taxable
                                                  
                                                  
                                                  98,925
                                                  
                                                  
                                                  
                                                  642
                                                  
                                                  
                                                  
                                                  2.57
                                                  %
                                                  
                                                  
                                                  53,813
                                                  
                                                  
                                                  
                                                  468
                                                  
                                                  
                                                  
                                                  3.45
                                                  %Securities,
      tax exempt
                                                  
                                                  
                                                  30,307
                                                  
                                                  
                                                  
                                                  430
                                                  
                                                  
                                                  
                                                  5.63
                                                  %
                                                  
                                                  
                                                  24,623
                                                  
                                                  
                                                  
                                                  366
                                                  
                                                  
                                                  
                                                  5.90
                                                  %Total
      securities
                                                  
                                                  
                                                  129,232
                                                  
                                                  
                                                  
                                                  1,072
                                                  
                                                  
                                                  
                                                  3.29
                                                  %
                                                  
                                                  
                                                  78,436
                                                  
                                                  
                                                  
                                                  834
                                                  
                                                  
                                                  
                                                  4.22
                                                  %Interest-earning
      deposits with banks
                                                  
                                                  
                                                  27,458
                                                  
                                                  
                                                  
                                                  63
                                                  
                                                  
                                                  
                                                  0.91
                                                  %
                                                  
                                                  
                                                  43,277
                                                  
                                                  
                                                  
                                                  101
                                                  
                                                  
                                                  
                                                  0.93
                                                  %Federal
      bank stocks
                                                  
                                                  
                                                  4,275
                                                  
                                                  
                                                  
                                                  10
                                                  
                                                  
                                                  
                                                  0.93
                                                  %
                                                  
                                                  
                                                  4,125
                                                  
                                                  
                                                  
                                                  10
                                                  
                                                  
                                                  
                                                  0.99
                                                  %Total
      interest-earning cash equivalents
                                                  
                                                  
                                                  31,733
                                                  
                                                  
                                                  
                                                  73
                                                  
                                                  
                                                  
                                                  0.91
                                                  %
                                                  
                                                  
                                                  47,402
                                                  
                                                  
                                                  
                                                  111
                                                  
                                                  
                                                  
                                                  0.93
                                                  %Total
      interest-earning assets
                                                  
                                                  
                                                  459,131
                                                  
                                                  
                                                  
                                                  5,676
                                                  
                                                  
                                                  
                                                  4.90
                                                  %
                                                  
                                                  
                                                  408,556
                                                  
                                                  
                                                  
                                                  5,269
                                                  
                                                  
                                                  
                                                  5.12
                                                  %Cash
      and due from banks
                                                  
                                                  
                                                  2,553
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2,189Other
      noninterest-earning assets
                                                  
                                                  
                                                  22,194
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  19,093Total
      Assets
                                                  
                                                  $
                                                  483,878
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  429,838Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                  
                                                  $
                                                  174,670
                                                  
                                                  
                                                  $
                                                  192
                                                  
                                                  
                                                  
                                                  0.44
                                                  %
                                                  
                                                  $
                                                  127,857
                                                  
                                                  
                                                  $
                                                  245
                                                  
                                                  
                                                  
                                                  0.76
                                                  %Time
      deposits
                                                  
                                                  
                                                  153,512
                                                  
                                                  
                                                  
                                                  1,136
                                                  
                                                  
                                                  
                                                  2.94
                                                  %
                                                  
                                                  
                                                  135,129
                                                  
                                                  
                                                  
                                                  1,182
                                                  
                                                  
                                                  
                                                  3.47
                                                  %Total
      interest-bearing deposits
                                                  
                                                  
                                                  328,182
                                                  
                                                  
                                                  
                                                  1,328
                                                  
                                                  
                                                  
                                                  1.61
                                                  %
                                                  
                                                  
                                                  262,986
                                                  
                                                  
                                                  
                                                  1,427
                                                  
                                                  
                                                  
                                                  2.15
                                                  %Borrowed
      funds, short-term
                                                  
                                                  
                                                  5,000
                                                  
                                                  
                                                  
                                                  61
                                                  
                                                  
                                                  
                                                  4.84
                                                  %
                                                  
                                                  
                                                  30,297
                                                  
                                                  
                                                  
                                                  36
                                                  
                                                  
                                                  
                                                  0.47
                                                  %Borrowed
      funds, long-term
                                                  
                                                  
                                                  30,914
                                                  
                                                  
                                                  
                                                  354
                                                  
                                                  
                                                  
                                                  4.54
                                                  %
                                                  
                                                  
                                                  35,000
                                                  
                                                  
                                                  
                                                  397
                                                  
                                                  
                                                  
                                                  4.50
                                                  %Total
      borrowed funds
                                                  
                                                  
                                                  35,914
                                                  
                                                  
                                                  
                                                  415
                                                  
                                                  
                                                  
                                                  4.58
                                                  %
                                                  
                                                  
                                                  65,297
                                                  
                                                  
                                                  
                                                  433
                                                  
                                                  
                                                  
                                                  2.63
                                                  %Total
      interest-bearing liabilities
                                                  
                                                  
                                                  364,096
                                                  
                                                  
                                                  
                                                  1,743
                                                  
                                                  
                                                  
                                                  1.90
                                                  %
                                                  
                                                  
                                                  328,283
                                                  
                                                  
                                                  
                                                  1,860
                                                  
                                                  
                                                  
                                                  2.25
                                                  %Noninterest-bearing
      demand deposits
                                                  
                                                  
                                                  76,124
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  61,490
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Funding
      and cost of funds
                                                  
                                                  
                                                  440,220
                                                  
                                                  
                                                  
                                                  1,743
                                                  
                                                  
                                                  
                                                  1.57
                                                  %
                                                  
                                                  
                                                  389,773
                                                  
                                                  
                                                  
                                                  1,860
                                                  
                                                  
                                                  
                                                  1.89
                                                  %Other
      noninterest-bearing liabilities
                                                  
                                                  
                                                  3,607
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3,905Total
      Liabilities
                                                  
                                                  
                                                  443,827
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  393,678Stockholders'
      Equity
                                                  
                                                  
                                                  40,051
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  36,160Total
      Liabilities and Stockholders' Equity
                                                  
                                                  $
                                                  483,878
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  429,838Net
      interest income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  3,933
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  3,409Interest rate
      spread(difference between weighted average rate on
      interest-earning assets and interest-bearing
      liabilities)
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3.00
                                                  %
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  2.87
                                                  %Net interest
      margin(net interest income as a percentage of average
      interest-earning assets)
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3.40
                                                  %
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  3.31
                                                  %


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 September 30,2010 versus 2009Increase (Decrease) due toVolume
                
                
                Rate
                
                
                TotalInterest
      income:Loans
                
                $
                235
                
                
                $
                (28
                )
                
                $
                207Securities
                
                
                452
                
                
                
                (214
                )
                
                
                238Interest-earning
      deposits with banks
                
                
                (36
                )
                
                
                (2
                )
                
                
                (38
                )Federal
      bank stocks
                
                
                0
                
                
                
                0
                
                
                
                0Total
      interest-earning assets
                
                
                651
                
                
                
                (244
                )
                
                
                407Interest
      expense:Interest-bearing
      deposits
                
                
                309
                
                
                
                (408
                )
                
                
                (99
                )Borrowed
      funds
                
                
                (249
                )
                
                
                231
                
                
                
                (18
                )Total
      interest-bearing liabilities
                
                
                60
                
                
                
                (177
                )
                
                
                (117
                )Net
      interest income
                
                $
                591
                
                
                $
                (67
                )
                
                $
                524





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 September 30, 2010 and 2009 is as follows:





(Dollar amounts in thousands)
                  
                  At or for the three months endedSeptember 30,2010
                  
                  
                  2009Balance
      at the beginning of the period
                  
                  $
                  3,298
                  
                  
                  $
                  2,935Provision
      for loan losses
                  
                  
                  113
                  
                  
                  
                  240Charge-offs
                  
                  
                  (104
                  )
                  
                  
                  (18
                  )Recoveries
                  
                  
                  150
                  
                  
                  
                  1Balance
      at the end of the period
                  
                  $
                  3,457
                  
                  
                  $
                  3,158Non-performing
      loans
                  
                  $
                  3,211
                  
                  
                  $
                  2,528Non-performing
      assets
                  
                  
                  3,450
                  
                  
                  
                  2,956Non-performing
      loans to total loans
                  
                  
                  1.07
                  %
                  
                  
                  0.84
                  %Non-performing
      assets to total assets
                  
                  
                  0.72
                  %
                  
                  
                  0.64
                  %Allowance
      for loan losses to total loans
                  
                  
                  1.15
                  %
                  
                  
                  1.05
                  %Allowance
      for loan losses to non-performing loans
                  
                  
                  107.66
                  %
                  
                  
                  124.91
                  %


18




The
provision for loan losses decreased $127,000 or 52.9% to $113,000 for the three
month period ended September 30, 2010 from $240,000 for the same period in the
prior year. The decrease in the provision was primarily the result of a
substantial recovery of a commercial credit charged-off in 2009.  The
recovery led to an improvement in the Corporation’s historical loss experience
which resulted in a decrease in the amount of allowance allocated to loans that
are not considered classified assets.  This was offset by an increase
in specific allocations for impaired loans totaling $309,000 for the three month
period ended September 30, 2010.





Nonperforming
loans increased $683,000 to $3.2 million at September 30, 2010 from $2.5 million
at September 30, 2009.  The increase in nonperforming loans was
primarily due to the addition of an $811,000 credit relationship placed on
nonaccrual status due to delinquency.  The Corporation has determined
the loan is impaired and has allocated $256,000 in specific reserves at
September 30, 2010.  The decrease in the allowance for loan losses to
nonperforming loans from 124.91% at September 30, 2009 to 107.66% at September
30, 2010 was a result of the aforementioned increase in nonperforming loans
primarily related to this one credit relationship offset by the improvement in
historical loss experience which resulted in a decrease in the overall allowance
for loan losses.  During the three months ended September 30, 2010,
nonperforming loans were stable, decreasing by $107,000 to $3.2 million from
$3.3 million at June 30, 2010.





Noninterest
income.  Noninterest income increased $1.5 million to $1.5
million during the three months ended September 30, 2010, compared to $12,000
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 of $1.3 million and $137,000, respectively.  The Corporation
recorded gains on the sale of securities totaling $629,000 during the third
quarter of 2010 associated with the execution of a deleverage strategy where
gains from the sale of securities were used to offset prepayment penalties of
$557,000 assessed on the early retirement of $10.0 million of long-term, Federal
Home Loan Bank (FHLB) debt.  Conversely, during the same period in the
prior year, the Corporation  recognized losses totaling $691,000
associated with impairment charges recorded on certain marketable equity
securities.  In addition, commissions on financial services increased
$137,000 to $212,000 for the three months ended September 30, 2010, compared to
$75,000 during the same period in the prior year, due in part to the addition of
two financial representatives in 2010.





Noninterest
expense.  Noninterest expense increased $649,000 or 19.9% to
$3.9 million during the three months ended September 30, 2010 compared to $3.3
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 $206,000, $54,000, $90,000 $54,000 and $410,000,
respectively, partially offset by a decrease in professional fees of
$165,000.





Compensation
and employee benefits increased $206,000 or 13.3% to $1.8 million for the three
months ended September 30, 2010 compared to $1.5 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 $54,000 or 11.4% to $526,000 for the three months ended
September 30, 2010, compared to $472,000 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 third quarter 2009 branch purchase, the Bank recognized $141,000
of core deposit intangible amortization expense during the third 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 $165,000 or 55.2% to $134,000 for the three months ended
September 30, 2010, compared to $299,000 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 $54,000 to $158,000 for the three months ended September 30,
2010, compared to $104,000 for the same period in the prior
year.  Regular quarterly FDIC premiums for the third 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.


19


Other
noninterest expense increased $410,000 or 52.6% to $1.2 million during the three
months ended September 30, 2010, compared to $780,000 for the same period in the
prior year.  This increase can be attributed primarily to prepayment
penalties totaling $557,000 assessed in connection with the early retirement of
$10.0 million of FHLB long term borrowings in the third quarter of 2010,
partially offset by higher printing and other costs in 2009 associated with the
third quarter branch office purchase.





Provision for income
taxes.  The provision for income taxes increased $492,000 to
$271,000 for the three months ended September 30, 2010 compared to a tax benefit
of $221,000 for the same period in the prior year.  This increase was
primarily related to an increase in pre-tax income of $1.5 million to $1.2
million for the three months ended September 30, 2010, compared to a net loss of
$231,000 for the same period in 2009.  The effective tax rate
increased for the three months ended September 30, 2010, compared to the same
period in 2009 as a result of 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 Nine Month Period Ended September 30, 2010 and
2009





General.  Net income
increased $1.4 million to $2.5 million for the nine months ended September 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 $1.6
million and $1.8 million, respectively, and a decrease in the provision for loan
losses of $612,000.  Partially offsetting these favorable items,
noninterest expense and the provision for income taxes increased $2.0 million
and $614,000, respectively.





Net interest
income.  Net interest income on a tax equivalent basis
increased $1.7 million or 17.5% to $11.4 million for the nine months ended
September 30, 2010 from $9.7 million for the same period in
2009.  This net increase can be attributed to an increase in tax
equivalent interest income of $1.6 million and a decrease in interest expense of
$144,000.





Interest
income.  Interest income on a tax equivalent basis increased
$1.6 million or 10.1% to $16.9 million for the nine months ended September 30,
2010, compared to $15.3 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 $644,000, $958,000 and
$13,000, respectively, partially offset by a decrease in interest-earning
deposits with banks of $63,000.





Tax
equivalent interest earned on loans receivable increased $645,000 or 5.0% to
$13.4 million for the nine months ended September 30, 2010, compared to $12.8
million for the same period in 2009.  This increase resulted primarily
from average loans increasing $17.4 million or 6.2%, accounting for $789,000 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 6 basis points to
6.07% for the nine months ended September 30, 2010, versus 6.13% for the same
period in 2009, due to declining market interest rates, accounting for a
$144,000 decrease in interest income.





Tax
equivalent interest earned on securities increased $958,000 or 42.8% to $3.2
million for the nine months ended September 30, 2010, compared to $2.2 million
for the same period in 2009.  The average balance of securities
increased $60.1 million or 92.2%, primarily as a result of the deployment of net
cash received in the branch purchase, accounting for a $1.6 million increase in
interest income.  Offsetting this favorable volume increase, the
average yield on securities decreased 119 basis points to 3.41% for the nine
months ended September 30, 2010, versus 4.60% 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 $691,000 decrease in interest
income.





Interest
earned on interest-earning deposit accounts decreased $63,000 or 22.7% to
$214,000 for the nine months ended September 30, 2010 from $277,000 for the same
period in 2009.  The average balance of these assets decreased
$693,000, decreasing interest income by $6,000.  Also contributing to
this volume decrease, the average yield on interest-earning deposit accounts
decreased 25 basis points to 1.00% for the nine months ended September 30, 2010,
compared to 1.26% for the same period in the prior year, accounting for a
$57,000 decrease in interest income.


20


Dividends
on federal bank stocks increased $13,000 to $32,000 for the nine month period
ended September 30, 2010 from $19,000 for the same period in
2009.  The average balance of these assets increased $205,000 or 5.1%
to $4.2 million for the nine months ended September 30, 2010 from $4.0 million
for the same period in 2009, accounting for a $1,000 increase in interest
income.  The average yield on these assets increased 38 basis points
to 1.01% for the nine months ended September 30, 2010, compared to 0.63% for the
same period the prior year, accounting for a $12,000 increase in interest
income.





Interest
expense.  Interest expense decreased $143,000 or 2.5% to $5.5
million for the nine months ended September 30, 2010 from $5.6 million for the
same period in 2009.  This decrease in interest expense can be
attributed to a decrease in interest incurred on deposits of $227,000, partially
offset by an increase in interest incurred on borrowed funds of
$84,000.





Interest
expense incurred on deposits decreased $227,000 or 5.2% to $4.2 million for the
nine months ended September 30, 2010 compared to $4.4 million for the same
period in 2009.  The average cost of interest-bearing deposits
decreased 66 basis points to 1.71% for the nine months ended September 30, 2010,
compared to 2.37% for the same period in 2009 causing a $1.4 million decrease in
interest expense.  Partially offsetting this favorable rate variance,
the average balance of interest-bearing deposits increased $78.0 million or
31.5% to $325.7 million for the nine months ended September 30, 2010, compared
to $247.6 million for the same period in 2009 causing a $1.2 million increase in
interest expense.  This increase was primarily due to deposits assumed
through the aforementioned branch purchase.





Interest
expense incurred on borrowed funds increased $84,000 or 6.8% to $1.3 million for
the nine months ended September 30, 2010, compared to $1.2 million for the same
period in the prior year.  This increase can be attributed to an
increase in the average cost of borrowed funds of 151 basis points to 4.55% for
the nine months ended September 30, 2010, compared to 3.04% for the same period
in 2009 causing a $502,000 increase in interest expense.  This
increase in the average cost for the nine months ended September 30, 2010 was
due to higher short-term borrowing rates resulting from a $5.0 million advance
on a line of credit with a correspondent bank in the third quarter of
2009.  The line of credit has a current rate of
4.75%.  Partially offsetting this unfavorable cost increase, the
average balance of borrowed funds decreased $15.5 million or 28.7% to $38.6
million for the nine months ended September 30, 2010, compared to $54.2 million
for the same period in the prior year, causing a $418,000 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)
                                      
                                      Nine months ended September 30,2010
                                      
                                      
                                      2009Average
                                      
                                      
                                      
                                      
                                      
                                      Yield /
                                      
                                      
                                      Average
                                      
                                      
                                      
                                      
                                      
                                      Yield /Balance
                                      
                                      
                                      Interest
                                      
                                      
                                      Rate
                                      
                                      
                                      Balance
                                      
                                      
                                      Interest
                                      
                                      
                                      RateInterest-earning
      assets:Loans,
      taxable
                                      
                                      $
                                      289,555
                                      
                                      
                                      $
                                      13,153
                                      
                                      
                                      
                                      6.07
                                      %
                                      
                                      $
                                      262,630
                                      
                                      
                                      $
                                      12,298
                                      
                                      
                                      
                                      6.26
                                      %Loans,
      tax exempt
                                      
                                      
                                      6,391
                                      
                                      
                                      
                                      273
                                      
                                      
                                      
                                      5.71
                                      %
                                      
                                      
                                      15,950
                                      
                                      
                                      
                                      483
                                      
                                      
                                      
                                      4.05
                                      %Total
      loans receivable
                                      
                                      
                                      295,946
                                      
                                      
                                      
                                      13,426
                                      
                                      
                                      
                                      6.07
                                      %
                                      
                                      
                                      278,580
                                      
                                      
                                      
                                      12,781
                                      
                                      
                                      
                                      6.13
                                      %Securities,
      taxable
                                      
                                      
                                      96,780
                                      
                                      
                                      
                                      1,982
                                      
                                      
                                      
                                      2.74
                                      %
                                      
                                      
                                      46,777
                                      
                                      
                                      
                                      1,379
                                      
                                      
                                      
                                      3.94
                                      %Securities,
      tax exempt
                                      
                                      
                                      28,473
                                      
                                      
                                      
                                      1,216
                                      
                                      
                                      
                                      5.71
                                      %
                                      
                                      
                                      18,404
                                      
                                      
                                      
                                      861
                                      
                                      
                                      
                                      6.26
                                      %Total
      securities
                                      
                                      
                                      125,253
                                      
                                      
                                      
                                      3,198
                                      
                                      
                                      
                                      3.41
                                      %
                                      
                                      
                                      65,181
                                      
                                      
                                      
                                      2,240
                                      
                                      
                                      
                                      4.60
                                      %Interest-earning
      deposits with banks
                                      
                                      
                                      28,680
                                      
                                      
                                      
                                      214
                                      
                                      
                                      
                                      1.00
                                      %
                                      
                                      
                                      29,373
                                      
                                      
                                      
                                      277
                                      
                                      
                                      
                                      1.26
                                      %Federal
      bank stocks
                                      
                                      
                                      4,222
                                      
                                      
                                      
                                      32
                                      
                                      
                                      
                                      1.01
                                      %
                                      
                                      
                                      4,017
                                      
                                      
                                      
                                      19
                                      
                                      
                                      
                                      0.63
                                      %Total
      interest-earning cash equivalents
                                      
                                      
                                      32,902
                                      
                                      
                                      
                                      246
                                      
                                      
                                      
                                      1.00
                                      %
                                      
                                      
                                      33,390
                                      
                                      
                                      
                                      296
                                      
                                      
                                      
                                      1.19
                                      %Total
      interest-earning assets
                                      
                                      
                                      454,101
                                      
                                      
                                      
                                      16,870
                                      
                                      
                                      
                                      4.97
                                      %
                                      
                                      
                                      377,151
                                      
                                      
                                      
                                      15,317
                                      
                                      
                                      
                                      5.43
                                      %Cash
      and due from banks
                                      
                                      
                                      2,396
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,178Other
      noninterest-earning assets
                                      
                                      
                                      22,719
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      17,392Total
      assets
                                      
                                      $
                                      479,216
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      396,721Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                      
                                      $
                                      168,659
                                      
                                      
                                      $
                                      654
                                      
                                      
                                      
                                      0.52
                                      %
                                      
                                      $
                                      117,940
                                      
                                      
                                      $
                                      817
                                      
                                      
                                      
                                      0.93
                                      %Time
      deposits
                                      
                                      
                                      156,996
                                      
                                      
                                      
                                      3,506
                                      
                                      
                                      
                                      2.99
                                      %
                                      
                                      
                                      129,667
                                      
                                      
                                      
                                      3,571
                                      
                                      
                                      
                                      3.68
                                      %Total
      interest-bearing deposits
                                      
                                      
                                      325,655
                                      
                                      
                                      
                                      4,161
                                      
                                      
                                      
                                      1.71
                                      %
                                      
                                      
                                      247,607
                                      
                                      
                                      
                                      4,388
                                      
                                      
                                      
                                      2.37
                                      %Borrowed
      funds, long-term
                                      
                                      
                                      33,645
                                      
                                      
                                      
                                      1,136
                                      
                                      
                                      
                                      4.51
                                      %
                                      
                                      
                                      35,000
                                      
                                      
                                      
                                      1,169
                                      
                                      
                                      
                                      4.46
                                      %Borrowed
      funds, short-term
                                      
                                      
                                      5,000
                                      
                                      
                                      
                                      180
                                      
                                      
                                      
                                      4.81
                                      %
                                      
                                      
                                      19,186
                                      
                                      
                                      
                                      63
                                      
                                      
                                      
                                      0.44
                                      %Total
      borrowed funds
                                      
                                      
                                      38,645
                                      
                                      
                                      
                                      1,316
                                      
                                      
                                      
                                      4.55
                                      %
                                      
                                      
                                      54,186
                                      
                                      
                                      
                                      1,232
                                      
                                      
                                      
                                      3.04
                                      %Total
      interest-bearing liabilities
                                      
                                      
                                      364,300
                                      
                                      
                                      
                                      5,477
                                      
                                      
                                      
                                      2.01
                                      %
                                      
                                      
                                      301,793
                                      
                                      
                                      
                                      5,620
                                      
                                      
                                      
                                      2.49
                                      %Noninterest-bearing
      demand deposits
                                      
                                      
                                      73,013
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      54,855
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Funding
      and cost of funds
                                      
                                      
                                      437,313
                                      
                                      
                                      
                                      5,477
                                      
                                      
                                      
                                      1.67
                                      %
                                      
                                      
                                      356,648
                                      
                                      
                                      
                                      5,620
                                      
                                      
                                      
                                      2.11
                                      %Other
      noninterest-bearing liabilities
                                      
                                      
                                      3,307
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,998Total
      liabilities
                                      
                                      
                                      440,620
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      360,646Stockholders'
      equity
                                      
                                      
                                      38,596
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      36,075Total
      liabilities and stockholders' equity
                                      
                                      $
                                      479,216
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      396,721Net
      interest income
                                      
                                      
                                      
                                      
                                      
                                      $
                                      11,393
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      9,697Interest
      rate spread(difference between weighted average rate on
      interest-earning assets and interest-bearing
      liabilities)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.96
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2.94
                                      %Net
      interest margin(net interest income as a percentage of average
      interest-earning assets)
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.35
                                      %
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3.44
                                      %


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)
                
                Nine months ended September 30,2010 versus 2009Increase (Decrease) due toVolume
                
                
                Rate
                
                
                TotalInterest
      income:Loans
                
                $
                789
                
                
                $
                (144
                )
                
                $
                645Securities
                
                
                1,649
                
                
                
                (691
                )
                
                
                958Interest-earning
      deposits with banks
                
                
                (6
                )
                
                
                (57
                )
                
                
                (63
                )Federal
      bank stocks
                
                
                1
                
                
                
                12
                
                
                
                13Total
      interest-earning assets
                
                
                2,433
                
                
                
                (880
                )
                
                
                1,553Interest
      expense:Deposits
                
                
                1,178
                
                
                
                (1,405
                )
                
                
                (227
                )Borrowed
      funds
                
                
                (418
                )
                
                
                502
                
                
                
                84Total
      interest-bearing liabilities
                
                
                760
                
                
                
                (903
                )
                
                
                (143
                )Net
      interest income
                
                $
                1,673
                
                
                $
                23
                
                
                $
                1,696





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





Information
pertaining to the allowance for loan losses and non-performing assets for the
nine months ended September 30, 2010 and 2009 is as follows:





(Dollar amounts in thousands)
                  
                  At or for the nine months endedSeptember 30,2010
                  
                  
                  2009Balance
      at the beginning of the period
                  
                  $
                  3,202
                  
                  
                  $
                  2,651Provision
      for loan losses
                  
                  
                  465
                  
                  
                  
                  1,077Charge-offs
                  
                  
                  (381
                  )
                  
                  
                  (590
                  )Recoveries
                  
                  
                  171
                  
                  
                  
                  20Balance
      at the end of the period
                  
                  $
                  3,457
                  
                  
                  $
                  3,158Non-performing
      loans
                  
                  $
                  3,211
                  
                  
                  $
                  2,528Non-performing
      assets
                  
                  
                  3,450
                  
                  
                  
                  2,956Non-performing
      loans to total loans
                  
                  
                  1.07
                  %
                  
                  
                  0.84
                  %Non-performing
      assets to total assets
                  
                  
                  0.72
                  %
                  
                  
                  0.64
                  %Allowance
      for loan losses to total loans
                  
                  
                  1.15
                  %
                  
                  
                  1.05
                  %Allowance
      for loan losses to non-performing loans
                  
                  
                  107.66
                  %
                  
                  
                  124.91
                  %


23


The
provision for loan losses decreased $612,000 or 56.8% to $465,000 for the nine
month period ended September 30, 2010 from $1.1 million for the same period in
the prior year.  Net charge-offs for the nine months ended September
30, 2010 were $210,000, compared to $570,000 for the same period ending
September 30, 2009. The decrease in the provision was primarily the result of a
decline in overall delinquency in the loan portfolio and a substantial recovery
of a commercial credit charged-off in 2009.  The recovery led to an
improvement in the Corporation’s historical loss experience which resulted in a
decrease in the amount of allowance allocated to loans that are not considered
classified assets.  This was offset by an increase in specific
allocations for impaired loans totaling $321,000 for the nine month period ended
September 30, 2010.  At September 30, 2010, loans past due 30 days or
more totaled $4.5 million, compared to $7.7 million in delinquent loans at
December 31, 2009.





Nonperforming
loans increased $683,000 to $3.2 million at September 30, 2010 from $2.5 million
at September 30, 2009.  During the nine month period ended September
30, 2010, nonperforming loans increased by $800,000 from $2.4 million at
December 31, 2009.  This increase was due primarily to the addition of
an $811,000 credit relationship placed on nonaccrual status due to
delinquency.  The Corporation has determined the loan is impaired and
has allocated $256,000 in specific reserves at September 30,
2010.  The decrease in the allowance for loan losses to nonperforming
loans from 124.91% at September 30, 2009 to 107.66% at September 30, 2010 was a
result of the aforementioned increase in nonperforming loans related primarily
to this one credit relationship offset by improvements in the Corporation’s
historical loss experience which resulted in a decrease in the overall allowance
for loan losses.





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 September 30,
2010, the Corporation’s classified and criticized assets amounted to $14.5
million, with $7.5 million classified as substandard, $44,000 classified as
doubtful and $6.9 million identified as special mention.  As of June
30, 2010 and December 31, 2009, the Corporation’s classified and criticized
assets amounted to $14.7 million and $16.6 million,
respectively.  Included in classified and criticized assets at
September 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 September 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 to
obtain cash to support this loan.  Pending such sales, the Bank
anticipates that the relationship may continue to have cash flow issues which
may impact the timely payment of principal and interest to the
Bank.  At September 30, 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.


24





The
second loan, with an outstanding balance of $2.2 million at September 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 September 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.





Noninterest
income.  Noninterest income increased $1.8 million or to $3.4
million during the nine months ended September 30, 2010, compared to $1.7
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 $1.0 million during the first nine months of 2010
compared to losses totaling $451,000 on the sale of investments during the first
nine months of 2009.  Commissions on financial services increased
$215,000 due in part to the addition of two financial services representatives
during 2010.  In addition to these favorable variances, title premiums
increased $47,000 and other noninterest income increased $94,000 primarily due
to an $189,000 increase in ATM point-of-sale interchange fee income, partially
offset by gains recorded on the sale of assets in 2009 totaling
$90,000.





Noninterest
expense.  Noninterest expense increased $2.0 million or 22.6%
to $10.8 million during the nine months ended September 30, 2010 compared to
$8.8 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 $937,000, $209,000, $394,000, $70,000 and
$696,000, respectively, partially offset by a decrease in professional fees of
$320,000.





Compensation
and employee benefits increased $937,000 or 21.2% to $5.4 million for the nine
months ended September 30, 2010 compared to $4.4 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 $209,000 or 15.0% to $1.6 million for the nine months
ended September 30, 2010, compared to $1.4 million 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 $445,000 of core deposit
intangible amortization expense during the first nine 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 $320,000 or 43.7% to $413,000 for the nine months ended September
30, 2010, compared to $733,000 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 $70,000 to $447,000 or 18.6% for the nine months ended
September 30, 2010, compared to $377,000 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 nine months ended September 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 $696,000 or 38.8% to $2.5 million during the nine
months ended September 30, 2010, compared to $1.8 million for the same period in
the prior year.  This increase can be attributed primarily to costs
associated with operating an additional branch office.


25





Provision for income
taxes.  The provision for income taxes increased $614,000 to
$641,000 for the nine months ended September 30, 2010 compared to $27,000 for
the same period in the prior year.  This increase was primarily
related to the $2.0 million increase in pre-tax income to $3.1 million for the
nine months ended September 30, 2010, compared to $1.1 million for the same
period in 2009.  The effective tax rate increased to 20.5% for the
nine months ended September 30, 2010, compared to 2.5% 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.





LIQUIDITY





The
Corporation’s primary sources of funds generally have been deposits obtained
through the offices of the Bank, borrowings from the FHLB and Federal Reserve
and amortization and prepayments of outstanding loans and maturing
securities.  During the nine months ended September 30, 2010, the
Corporation used its sources of funds primarily to fund loan originations and
security purchases.  As of September 30, 2010, the Corporation had
outstanding loan commitments, including undisbursed loans and amounts available
under credit lines, totaling $47.7 million, and standby letters of credit
totaling $1.0 million.





At
September 30, 2010, time deposits amounted to $152.6 million or 37.8% of the
Corporation’s total consolidated deposits, including approximately $50.3 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 September 30, 2010, the Corporation’s borrowing capacity
with the FHLB, net of funds borrowed, was $142.9 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.


26





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.





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 September 30, 2010,  the Corporation’s interest-earning
assets maturing or repricing within one year totaled $158.5 million while the
Corporation’s interest-bearing liabilities maturing or repricing within one-year
totaled $149.8 million, providing an excess of interest-earning assets over
interest-bearing liabilities of $8.7 million.  At September 30, 2010,
the percentage of the Corporation’s liabilities to assets maturing or repricing
within one year was 94.5%.





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 4.  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
September 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





None.


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


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


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


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


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:  November
      12, 2010
                        By:
                        /s/ William C. MarshWilliam
      C. MarshChairman
      of the Board,President
      and Chief Executive OfficerDate:  November
      12, 2010
                        By:
                        /s/ Amanda L. EnglesAmanda
      L. EnglesPrincipal
      Accounting
Officer


30